UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2020
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___
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Franklin Covey Co.
(Exact name of registrant as specified in its charter)
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Utah
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1-11107
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87-0401551
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(State or other jurisdiction of incorporation or organization)
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(Commission File No.)
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(IRS Employer Identification No.)
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2200 West Parkway Boulevard
Salt Lake City, Utah 84119-2331
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 817-1776
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Trading
Symbol
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Name of Each Exchange on Which Registered
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Common Stock, $.05 Par Value
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FC
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 Website, 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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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Large Accelerated Filer
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Accelerated Filer
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Non-accelerated Filer
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Smaller Reporting Company
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Emerging growth company
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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 ☑
As of February 28, 2020, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $378.2 million, which was based upon the closing price of $31.45 per share as reported by the New York
Stock Exchange.
As of October 31, 2020, the Registrant had 14,025,413 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders, which is scheduled to be held on January 22, 2021, are incorporated by reference in Part III of this Form 10-K.
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Franklin Covey Co.
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Business
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Risk Factors
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10
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Unresolved Staff Comments
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19
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Properties
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Legal Proceedings
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Mine Safety Disclosures
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Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
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Selected Financial Data
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23
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Quantitative and Qualitative Disclosures About Market Risk
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43
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Financial Statements and Supplementary Data
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45
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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91
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Controls and Procedures
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Other Information
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Directors, Executive Officers and Corporate Governance
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Executive Compensation
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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93
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Certain Relationships and Related Transactions, and Director Independence
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94
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Principal Accountant Fees and Services
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95
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Exhibits and Financial Statement Schedules
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Form 10-K Summary
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Disclosure Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), and such forward-looking statements involve risks and uncertainties. Statements about future sales, costs, margins, cost savings, foreign currency exchange rates, earnings, earnings per share, cash flows, plans, objectives,
expectations, growth, profitability, or recovery from the COVID-19 pandemic are forward-looking statements based on management’s estimates, assumptions, and projections. Words such as “could,” “may,” “will,” “should,” “likely,” “anticipates,”
“expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and variations on such words, including similar expressions, are used to identify these forward-looking statements. These forward-looking statements are only predictions, subject
to risks and uncertainties, and actual results could differ materially from those discussed in this, and other reports, filed with the Securities and Exchange Commission (SEC) and elsewhere. Forward-looking statements are not guarantees of future
performance and involve risks, uncertainties, and assumptions that are difficult to predict. Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to, the factors
discussed under the section of this report entitled “Risk Factors.”
Forward-looking statements in this report are based on management’s current views and assumptions regarding future events and speak only as of the date when made. Franklin Covey Co. undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise, except as required by federal securities laws.
In this Annual Report on Form 10-K, unless the context requires otherwise, the terms “the Company,” “Franklin Covey,” “us,” we,” and “our” refer to Franklin Covey Co. and its subsidiaries.
General Information
Franklin Covey is a global company focused on organizational performance improvement. Our mission is to “enable greatness in people and organizations everywhere,” and our global structure is designed to help individuals and organizations
achieve sustained superior performance through changes in human behavior. From the foundational work of Dr. Stephen R. Covey in leadership and personal effectiveness, and Hyrum W. Smith in productivity and time management, we have developed deep
expertise that extends to helping organizations and individuals achieve lasting behavioral change. We believe that our clients are able to utilize our content and offerings to create cultures whose hallmarks are high-performing, collaborative
individuals, led by effective, trust building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.
The Company was incorporated in 1983 under the laws of the state of Utah, and we merged with the Covey Leadership Center in 1997 to form Franklin Covey Co. Our consolidated net sales for the fiscal year ended August 31, 2020 totaled $198.5
million and our shares of common stock are traded on the New York Stock Exchange (NYSE) under the ticker symbol “FC.”
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.
Business Development
Our business is currently structured around two divisions, the Enterprise Division and the Education Division. The Enterprise Division consists of our Direct Office and International Licensee segments and is focused on selling our offerings to
corporations, governments, not-for-profits, and other related organizations. Franklin Covey offerings delivered through the Enterprise Division are designed to help organizations and individuals achieve their own great results. Our Education
Division is centered around the principles found in the Leader in Me and is dedicated to helping educational institutions build cultures that will produce great results, including increased student
performance, improved school culture, and increased parental and teacher involvement.
During 2016, we introduced the All Access Pass (AAP), which we believe is a ground-breaking subscription service that allows our clients unlimited access to our content through an electronic portal. We believe the AAP is a revolutionary and
innovative way to deliver our content to clients of various sizes, including large, multinational organizations, in a flexible and cost-effective manner. Clients may utilize complete offerings such as The 7
Habits of Highly Effective People and The 5 Choices to Extraordinary Productivity, or use individual concepts from any of our well-known offerings to create a custom solution to fit their
organizational or individual training needs. Since the introduction of the All Access Pass, we have invested in additional implementation specialists to provide our clients with the direction necessary to create meaningful impact journeys using
our tools and content. An impact journey is a customized plan to utilize the content and offerings on the AAP to achieve a client’s specific goals and to provide them with the keys to obtain maximum value from the pass. We have also translated
All Access Pass materials into numerous additional languages, which allows the AAP to be used effectively by multinational entities and provides for greater international sales opportunities. The AAP is primarily sold through our Enterprise
Division.
In our Education Division, we have launched the Leader in Me membership, which provides access to the Leader in Me online service, and authorizes use of Franklin
Covey’s proprietary intellectual property. The Leader in Me online service provides access to student leadership guides, leadership lessons, illustrated leadership stories, and a variety of other resources
to enable an educational institution to effectively implement and utilize the Leader in Me program. We believe that the tools and resources available through the Leader in Me membership will provide measurable results that are designed to develop student leadership, improve school culture, and increase academic proficiency.
We believe that continued investments in personnel, content, and technological innovation are key to subscription service renewals and the future growth of our offerings.
In addition to the internal development of our offerings as previously described, we have sought to grow our sales through acquisitions of businesses and content licenses, and opening new international offices. Over previous years, these
activities have included the following:
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License of “Multipliers” Leadership Content – During late fiscal 2019, we obtained a license to develop and sell leadership offerings based on the bestselling book Multipliers by Liz Wiseman. We launched the new programs based on Multipliers content in August 2020. The initial term of this license will expire on August 31,
2029.
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New Offices in Germany, Switzerland, and Austria – During fiscal 2019, we acquired the former independent licensee that provided services in these countries and transitioned the
operations into directly owned offices. We believe that we will be able to significantly grow our business in these countries through this acquisition.
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Impact of COVID-19 on Franklin Covey
COVID-19 was first identified in China during December 2019, and subsequently declared a pandemic by the World Health Organization. Since its discovery, COVID-19 has surfaced in nearly all regions of the world and has produced travel
restrictions and business slowdowns or shutdowns in affected areas. As a result, COVID-19 has impacted our business globally, including our licensees, through office, government, and school closures. In particular, these closures impacted our
third and fourth quarters of fiscal 2020 as described throughout this Annual Report on Form 10-K for fiscal 2020.
After strong financial performance during the first two quarters of fiscal 2020, our financial results in the third and fourth quarters of fiscal 2020 were adversely impacted by the COVID-19 pandemic. We closed our corporate offices and
restricted travel to protect the health and safety of our associates and clients in an effort to slow the spread of the pandemic. Our international direct offices also followed the same pattern of closures and restrictions on associate travel and
delivery of our offerings. These actions, and similar steps taken by most of our clients, resulted in decreased sales during the third and fourth quarters as previously scheduled onsite events, client-facilitated presentations, and coaching days
were postponed or canceled.
However, during the widespread closure of offices, schools, and other gathering places, we accelerated our connection and engagement with clients through the use of our digital delivery systems, including the All Access Pass in the Enterprise
Division and the Leader in Me subscription service in the Education Division. Our subscription service clients are able to access content and programs from remote locations, which allows continued
engagement of personnel and students during long periods of displacement from normal working or classroom conditions. To be successful in our industry, it is important to create effective learning environments for our clients and students, and we
believe our previous investments in digital and remote delivery modalities are key to surviving and then thriving in the current environment. According to the Training magazine 2020 Training Industry
Report, most companies expect to retain at least some aspects of remote learning after the COVID-19 pandemic is over. We believe our ability to deliver content and offerings over a broad array of modalities to suit a client’s needs will prove to
be a valuable strategic advantage, and we believe these capabilities will accelerate our recovery from the effects of the pandemic and will generate increased opportunities in future periods.
Franklin Covey Services and Offerings
We operate globally with one common brand and a business model designed to enable us to provide clients around the world with the same high level of service. To achieve this high level of service we have sales and support associates in various
locations around the United States and Canada, and operate wholly owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria. In foreign locations where we do not have a directly owned office, we may
contract with independent licensee partners who deliver our content and provide services in 150 other countries and territories around the world.
Our mission is to “enable greatness in people and organizations everywhere,” and we believe that we are experts at solving certain pervasive, intractable problems, each of which requires a change in human behavior. We seek to consistently
deliver world-class content with the broadest and deepest distribution capabilities through the most flexible content delivery modalities. We believe these characteristics distinguish us from our competitors as follows:
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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.
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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.
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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 countries not covered by a directly owned office. This capability allows us to deliver content to a wide range of
customers, from large multinational corporations to smaller local entities.
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We hold ourselves responsible for and measure ourselves by our clients’ achievement of transformational results. 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.
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.
Our Industry and Clients
According to the Training magazine 2020 Training Industry Survey, the total size of the U.S. training industry is estimated to be $82.5 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.
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. Based upon our annual sales, 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:
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Quality of offerings, services, and solutions
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Skills and capabilities of people
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Innovative training and consulting services combined with effective products
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Ability to add value to client operations
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Reputation and client references
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Pricing
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Availability of appropriate resources
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Global reach and scale
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Branding and name recognition in our marketplace
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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 AAP and Leader in Me membership, digital presentations hosted by live presenters, live presentations by
our own training consultants, live presentations though Company certified client-employed facilitators, intellectual property licensing, other 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.
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.
Our 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 640 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 220 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.
Our Products and Sustainability
We offer training materials and related accessories in either digital or paper formats. Our printed training materials are primarily comprised of paper, which we believe is a renewable and sustainable resource. 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. Our training materials are primarily warehoused and distributed from an independent warehouse facility located in Des Moines, Iowa.
Human Capital
Our mission is to enable greatness in people and organizations everywhere. To fulfill that mission and successfully implement our strategy, we must attract, develop, and retain highly qualified associates
for each role in the organization. Our goal is to have every employee feel they are a valued member of a winning team doing meaningful work in an environment of trust. To accomplish this goal, we are
focused on attracting, developing, and retaining talent while looking through the lens of diversity, equity, and inclusion in each area. The following is a description of our efforts to manage human capital within our organization.
Attracting Talent
Our recruiting team and hiring managers begin with the creation of detailed job descriptions, containing clearly outlined skills and experience, necessary for success in each role. We believe these steps are essential to effectively interview for
identifiable skillsets and not just “personality fits.” We have historically attracted “mission driven” people who care deeply about making a difference in the world. Our recruiting and hiring efforts cast a wide net when looking for candidates by
partnering with many groups and agencies including, alumni organizations, multiple diversity job boards, diversity career fairs, the Utah Governor’s Committee on Employment of People with Disabilities and Business Relations, and ElevatHER – an
organization designed to promote women in leadership. Through these efforts, from June 1, 2019 through May 31, 2020, which are the annual dates of our Affirmative Action Plan year, over 71 percent of our new hires were women. Currently, over 64
percent of our employee population are women and over 76 percent of our promotions during this same time period were women.
We also remain steadfast in our commitment to being an Affirmative Action Employer and have an objective to increase the population of our Black, Indigenous, and People of Color (BIPOC) employees. In an effort to increase the population of BIPOC
employees, we have expanded our recruitment efforts. We hope to increase the number of BIPOC applicants to ensure we are hiring the most qualified people while increasing our diversity. We are also actively engaged in ensuring that out employee
promotions are fair and equitable.
Developing Talent
We currently have approximately 940 associates, nearly all of whom are full-time employees, around the world who are dedicated to providing the best service possible for our clients. The diverse and global makeup of our workforce allows us to
serve a variety of clients with different needs on a worldwide basis. We believe that creating an environment which encourages continual learning and development is essential for us to maintain a high level of service and to achieve our goal to have
every employee feel they are a valued member of a winning team doing meaningful work in an environment of trust. Franklin Covey is one of the premier training and consulting organizations in the world, and
we develop and deliver various offerings, including leadership and individual effectiveness, to clients around the globe. Our associates have unlimited access to our content and training through the All Access Pass, where they are able to experience
the same high-quality solutions available to our clients. During their first year, we encourage new associates to participate in our foundational offering, The 7 Habits of Highly Effective People, which is
used as the cultural operating system for our organization. We are currently delivering our new Unconscious Bias training to our associates. This program is designed to strengthen organizations by promoting
the inclusion of various viewpoints from the natural talents and abilities of its people regardless of race, sexual orientation, gender, religion, or other differences.
In the event an employee is struggling with reaching their goals or producing the results required of their role, a thoughtful and thorough performance plan is created and implemented by their manager and our Chief People Officer. The intent of
the performance plan is to help the associate recalibrate and bring their performance up to expectations. Through this transparent coaching process, struggling employees have been able to learn how to improve their performance and become engaged,
successful contributors in their role. We believe this process strengthens our associate base while reducing the cost of finding and training new associates.
Retaining Talent
The war for talent is real, and talented people are always in high demand. During the period of June 1, 2019 through May 31, 2020, our employee turnover rate in the United States and Canada was 10.7 percent, which we believe is reasonable for our
industry and the make-up of our workforce. To retain our associates, we believe it is critical to continually focus on making sure our employees are highly engaged and feel valued. We address these retention efforts in a number of ways, including
training our leaders in our solution entitled, The 6 Critical Practices for Leading a Team. Our employee retention practices include holding consistent, effective one-on-one interviews, where leaders
regularly take time to connect with their employees, and to understand what is working well for them and what is not working so well. Based on these interviews, leaders are encouraged to “clear the path” of those things which may be holding the
employee back. We are also focused on creating a culture of feedback, where feedback for both leaders and employees is a normal and helpful part of how work gets done. We believe these efforts are key to creating an atmosphere of continuous
improvement.
Our compensation plans are audited periodically to confirm ongoing pay equity. We provide a generous personal time off benefit as well as a flexible and inclusive holiday schedule, reflecting the diversity of our workforce and the celebration of
various cultural and religious affiliations. We also offer 100% salary continuance for up to 12 weeks in a rolling 12-month period, for qualifying medical leaves, and provide many other “employee minded” benefits.
Our focus on human capital has been a hallmark of FranklinCovey for decades, understanding that people truly are a company’s most valuable asset, and that culture is an organization’s ultimate competitive advantage. In 2017, our Organization and
Compensation Committee determined to make Talent Stewardship a standing agenda item at committee meetings. The committee is actively involved in helping to determine best practices and implement new and innovative ways to help us continually improve
in attracting, developing, and retaining top talent for Franklin Covey.
Information About Our Executive Officers
On November 7, 2019, we appointed Paul S. Walker as President and Chief Operating Officer of Franklin Covey Co. and on November 1, 2020, Scott J. Miller transitioned from his role as Executive Vice-President of Thought Leadership to that of an
independent contractor and senior advisor to the Company’s thought leadership and marketing operations. Each of the executive officers of Franklin Covey Co. listed below served with the described responsibilities throughout the fiscal year ended
August 31, 2020:
M. Sean Covey, 56, currently serves as President of the Franklin Covey Education Division, and has led the growth of this Division from its infancy to its status today. The Education
Division works with thousands of education entities throughout the world in Higher Education and the K-12 market. Mr. Covey previously ran the Franklin Covey international licensee network and has been an Executive Officer since September 2008.
Sean also served as the Executive Vice President of Innovations from 2003 to 2018, where he led the development of many of the Company’s offerings, including the The 4 Disciplines of Execution and The Leader in Me. Prior to 2006, Sean ran the Franklin Covey retail chain of stores. Previous to Franklin Covey, Sean worked for the Walt Disney Company, Trammel Crow Ventures, and Deloitte & Touche
Consulting. Mr. Covey is also a New York Times best-selling author and has authored or coauthored several books, including The 4 Disciplines of Execution and the international bestseller The 7 Habits of Highly Effective Teens. Sean graduated from Brigham Young University with a Bachelor’s degree in English and earned an MBA from Harvard Business School.
Colleen Dom, 58, was appointed to be the Executive Vice-President of Operations in September 2013. Ms. Dom began her career with the Company in 1985 and served as the first “Client
Service Coordinator,” providing service and seminar support for some of the Company’s very first clients. Prior to her appointment as an Executive Vice President, Ms. Dom served as Vice President of Domestic Operations since 1997 where she had
responsibility for the Company’s North American operations, including client support, supply chain, and feedback operations. During her time at Franklin Covey Co., Colleen has been instrumental in creating and implementing systems and processes
that have supported the Company’s strategic objectives and has more than 35 years of experience in client services, sales support, operations, management, and supply chain. Due to her valuable understanding of the Company’s global operations, Ms.
Dom has been responsible for numerous key assignments that have enhanced client support, optimized operations, and built capabilities for future growth. Prior to joining the Company, Colleen worked in retail management and in the financial
investment industry.
C. Todd Davis, 63, is an Executive Vice President and Chief People Officer, and has been an Executive Officer since September 2008. Todd has over 30 years of experience in training,
training development, sales and marketing, human resources, coaching, and executive recruiting. He has been with Franklin Covey for the past 24 years. Previously, Mr. Davis was a Director of our Innovations Group where he led the development of
core offerings including The 7 Habits of Highly Effective People – Signature Program. Todd also worked for several years as our Director of Recruitment and was responsible for attracting, hiring, and
retaining top talent for the organization. Prior to joining Franklin Covey, Mr. Davis worked in the medical industry for 9 years where he recruited physicians and medical executives along with marketing physician services to hospitals and clinics
throughout the country. Todd is the author of The Wall Street Journal’s best-selling book, Get Better: 15 Proven Practices to Build Effective Relationships at Work and co-author of The Wall Street Journal’s
best-selling book, Everyone Deserves A Great Manager – The 6 Critical Practices for Leading A Team.
Scott J. Miller, 52, is the Executive Vice-President of Thought Leadership at Franklin Covey. Mr. Miller, who has been with the Company for 24 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, 45, is beginning his twenty-first year with Franklin Covey Co. Today, Mr. Walker serves as the Company’s President and Chief Operating Officer. Paul began his career
with the Company in 2000 in the role of business developer, and quickly moved to become a Client Partner and then an Area Director. In 2007, Mr. Walker became General Manager of the North America Central Region. In 2014, Paul assumed responsibility
for the Company’s United Kingdom operations in addition to his role as General Manager of the Central Region. In 2016, Mr. Walker relocated to the Company’s Salt Lake City, Utah headquarters where, prior to his current role, he served as Executive
Vice President Global Sales and Delivery and as President of the Company’s Enterprise Division. Mr. Walker graduated from Brigham Young University with a Bachelor of Arts in Communications.
Robert A. Whitman, 67, has served as Chairman of the Board of Directors since June 1999 and as 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, 67, 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 40 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.
Our business environment, current domestic and international economic conditions, ongoing impacts from the COVID-19 pandemic, 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 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.
COVID-19 Pandemic Risks
Our results of operations have been adversely affected and could be materially impacted in the future by the COVID-19, or coronavirus, pandemic.
The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption during fiscal 2020. The extent to which the COVID-19 pandemic impacts our business, operations, and financial results will depend on
numerous evolving factors that we may not be able to accurately predict, including: the duration, scope, and severity of the pandemic; the ability to create effective vaccines and effective therapeutic treatments; governmental, business, and
individuals’ actions that have been taken, and continue to be taken, in response to the pandemic; the impact of the pandemic on worldwide economic activity and actions taken in response; the effect on our clients, including educational
institutions, and client demand for our services; our ability to sell and provide our services and solutions, including the impact of travel restrictions and from people working from home; the ability of our clients to pay for our services on a
timely basis or at all; the ability to maintain sufficient liquidity and to access credit and capital markets as needed; and any closure of our offices. Any of these events, or related conditions, could cause or contribute to the risks and
uncertainties described in this section of our Annual Report and could materially adversely affect our business, financial condition, results of operations, cash flows, and stock price.
Training Industry and Related Risks
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.
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.
We have only a limited ability to protect our intellectual property rights, which are important to our success.
Our financial success is partially dependent on our ability to protect our proprietary offerings and other intellectual property. The existing laws of some countries in which we provide services might offer only limited protection of our
intellectual property rights. To protect our intellectual property, we rely upon a combination of confidentiality policies, nondisclosure and other contractual arrangements, as well as copyright and trademark laws. The steps we take in this
regard may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property
rights, especially in foreign jurisdictions.
The loss of proprietary content or the unauthorized use of our intellectual property may create greater competition, loss of revenue, adverse publicity, and may limit our ability to reuse that intellectual property for other clients. Any
limitation on our ability to provide a service or solution could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future engagements.
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 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:
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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.
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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. Findings from
an audit may result in our being required to prospectively adjust previously agreed upon rates for our work, which may affect our future margins.
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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.
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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.
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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.
Cybersecurity and Information Technology Risks
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.
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 provided a mechanism for
companies to transfer data from European Union member states to the U.S. On July 16, 2020, the Court of Justice of the European Union (the Court of Justice) invalidated the E.U.-U.S. Privacy Shield Framework on the grounds that the Privacy Shield
failed to offer adequate protections to E.U. personal data transferred to the United States. On August 10, 2020, the U.S. Department of Commerce and the European Commission announced new discussions to evaluate the potential for an enhanced
E.U.-U.S. Privacy Shield framework to comply with the July 16 judgment of the Court of Justice. 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 have 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 was effective 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.
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.
Liquidity and Capital Resource Risks
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 2019 Credit Facility and subsequent modifications, 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 owed on the credit agreement. 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:
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Develop new services, programs, or offerings
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Take advantage of opportunities, including business acquisitions
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Respond to competitive pressures
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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.
Public Company Risks
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 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:
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Fluctuations in our quarterly results of operations and cash flows
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Increased overall market volatility
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Variations between our actual financial results and market expectations
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Changes in our key balances, such as cash and cash equivalents
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Currency exchange rate fluctuations
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Unexpected asset impairment charges
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Increased or decreased analyst coverage
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These factors may have an adverse effect upon our stock price in the future.
General Business Risks
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.
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:
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Restrictions on the movement of cash
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Burdens of complying with a wide variety of national and local laws, including tax laws
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The absence in some jurisdictions of effective laws to protect our intellectual property rights
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Political instability
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Currency exchange rate fluctuations
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Longer payment cycles
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Price controls or restrictions on exchange of foreign currencies
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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.
Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and violation of these regulations could harm our business.
Because we provide services to clients in many countries, we are subject to numerous, and sometimes conflicting, regulations on matters as diverse as import/export controls, content requirements, trade restrictions, tariffs, taxation,
sanctions, government affairs, internal and disclosure control obligations, data privacy, and labor relations. Violations of these regulations in the conduct of our business could result in fines, criminal sanctions against us or our officers,
prohibitions on doing business, and damage to our reputation. Violations of these regulations in connection with the performance of our obligations to our clients also could result in liability for monetary damages, fines, unfavorable publicity,
and allegations by our clients that we have not performed our contractual obligations. Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws may be insufficient to protect our rights.
In many parts of the world, including countries in which we operate, practices in the local business community might not conform to international business standards and could violate anticorruption regulations, including the United States
Foreign Corrupt Practices Act, which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have policies and procedures to ensure legal and regulatory compliance, our employees, licensee
operators, and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, including fines and suspension or disqualification from United States federal
procurement contracting, any of which could have an adverse effect on our business.
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.
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.
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.
None.
As of August 31, 2020, 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 administration, 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.
U.S./Canada Sales Office
Columbus, Ohio
International Sales Offices
Banbury, England
Tokyo, Japan
China: Beijing, Shanghai, Guangzhou, and Shenzhen
From time to time, we are the subject of certain legal actions, which we consider routine to our business activities. At August 31, 2020, 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.
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, 2020 or 2019. 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, 2020, we had 14,025,413 shares of common stock outstanding, which were held by 523 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 2020.
On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $40.0 million of our outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does
not have an expiration date. Through August 31, 2020, we have purchased 5,000 shares of our common stock for $0.2 million under the terms of this Board approved plan.
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. We have 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, 2015 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 or 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.
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.
|
August 31,
|
2020(1)
|
2019
|
2018
|
2017(2)
|
2016
|
|||||||||||||||
|
In thousands, except per-share data
|
||||||||||||||||||||
|
Income Statement Data:
|
||||||||||||||||||||
|
Net sales
|
$
|
198,456
|
$
|
225,356
|
$
|
209,758
|
$
|
185,256
|
$
|
200,055
|
||||||||||
|
Gross profit
|
145,370
|
159,314
|
148,289
|
122,667
|
133,154
|
|||||||||||||||
|
Income (loss) from operations
|
3,058
|
2,655
|
(3,366
|
)
|
(8,880
|
)
|
13,849
|
|||||||||||||
|
Income (loss) before income taxes
|
796
|
592
|
(5,520
|
)
|
(10,909
|
)
|
11,911
|
|||||||||||||
|
Income tax benefit (provision)
|
(10,231
|
)
|
(1,615
|
)
|
(367
|
)
|
3,737
|
(4,895
|
)
|
|||||||||||
|
Net income (loss)
|
(9,435
|
)
|
(1,023
|
)
|
(5,887
|
)
|
(7,172
|
)
|
7,016
|
|||||||||||
|
Earnings (loss) per share:
|
||||||||||||||||||||
|
Basic and diluted
|
$
|
(.68
|
)
|
$
|
(.07
|
)
|
$
|
(.43
|
)
|
$
|
(.52
|
)
|
$
|
.47
|
||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Total current assets
|
$
|
101,664
|
$
|
119,340
|
$
|
100,163
|
$
|
91,835
|
$
|
89,741
|
||||||||||
|
Other long-term assets
|
15,611
|
10,039
|
12,935
|
16,005
|
13,713
|
|||||||||||||||
|
Total assets
|
205,437
|
224,913
|
213,875
|
210,731
|
190,871
|
|||||||||||||||
|
Long-term obligations
|
51,056
|
46,690
|
50,936
|
53,158
|
48,511
|
|||||||||||||||
|
Total liabilities
|
145,984
|
142,899
|
133,375
|
125,666
|
97,156
|
|||||||||||||||
|
Shareholders’ equity
|
59,453
|
82,014
|
80,500
|
85,065
|
93,715
|
|||||||||||||||
|
Cash flows from operating activities
|
$
|
27,563
|
$
|
30,452
|
$
|
16,861
|
$
|
17,357
|
$
|
32,665
|
||||||||||
_______________________
|
(1)
|
Our fiscal 2020 financial results were impacted by the COVID-19 pandemic, which adversely impacted sales during our third and fourth quarters as governments and individuals implemented measures to slow the
spread of the virus, including widespread shut downs of economies, businesses, and schools. We reevaluated our deferred tax assets during fiscal 2020. Because of cumulative pre-tax losses over the past three fiscal years, combined with
the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance that it is more-likely-than-not that
insufficient taxable income will be available to realize all of our deferred tax assets before they expire, primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards. Accordingly, we added $11.3
million to the valuation allowances on our deferred tax assets in fiscal 2020. For more information on our income taxes, refer to the notes to our financial statements found in Item 8 of this report on Form 10-K.
|
|
(2)
|
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.
|
The following management’s discussion and analysis is intended to provide a summary of the principal factors affecting the results of operations, liquidity and capital resources, contractual obligations, and the critical accounting policies of
Franklin Covey Co. (also referred to as we, us, our, the Company, and Franklin Covey) and subsidiaries. This discussion and analysis should be read together with the accompanying consolidated financial statements and related notes contained in
Item 8 of this Annual Report on Form 10-K (Form 10-K) and the Risk Factors discussed in Item 1A of this Form 10-K. Forward-looking statements in this discussion are qualified by the cautionary statement under the heading “Safe Harbor Statement
Under the Private Securities Litigation Reform Act Of 1995” contained later in Item 7 of this Form 10-K.
Non-GAAP Measures
This management’s discussion and analysis includes the concepts of adjusted earnings before interest, income taxes, depreciation, and amortization (Adjusted EBITDA) and “constant currency,” which are non-GAAP measures. We define Adjusted EBITDA
as net income or loss excluding the impact of interest expense, income taxes, intangible asset amortization, depreciation, stock-based compensation expense, and certain other items such as adjustments to the fair value of expected contingent
consideration liabilities arising from business acquisitions. Constant currency is a non-GAAP financial measure that removes the impact of fluctuations in foreign currency exchange rates and is calculated by translating the current period’s
financial results at the same average exchange rates in effect during the prior year and then comparing this amount to the prior year.
We reference these non-GAAP financial measures in our decision making because they provide supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and we believe they
provide investors with greater transparency to evaluate operational activities and financial results. For a reconciliation of our segment Adjusted EBITDA to net loss, a comparable GAAP measure, please refer to Note 16 Segment Information to our consolidated financial statements as presented in Item 8 of this Form 10-K.
EXECUTIVE SUMMARY
General Overview
Franklin Covey Co. is a global company focused on individual and organizational performance improvement. Our mission is to “enable greatness in people and organizations everywhere,” and our worldwide resources are organized to help individuals
and organizations achieve sustained superior performance through changes in human behavior. We believe that our content and services create the connection between capabilities and results. We believe that our clients are able to utilize our
content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.
In the training and consulting marketplace, we believe there are three important characteristics that distinguish us from our competitors.
|
1.
|
World Class Content – Our content is principle-centered and based on natural laws of human behavior and effectiveness. When our content is applied consistently in an
organization, we believe the culture of that organization will change to enable the organization to achieve their own great purposes. Our offerings are designed to build new skillsets, establish new mindsets, and provide enabling
toolsets.
|
|
2.
|
Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including: the All Access Pass, the Leader
in Me membership, and other intellectual property licenses, digital online learning, on-site training, training led through certified facilitators, blended learning, and organization-wide transformational processes, including
consulting and coaching. We believe our investments in digital delivery modalities over the past few years have enabled us to deliver our content to clients in a high-quality learning environment whether those clients are working
remotely or in a centralized location.
|
|
3.
|
Global Capability – We have sales professionals in the United States and Canada who serve clients in the private sector, in government,
and in educational institutions; wholly owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria; and we contract with independent licensee partners who deliver our content and provide services
in 150 countries and territories around the world.
|
We hold ourselves responsible for and measure ourselves by our clients’ achievement of transformational results.
We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of
Highly Effective People, The Speed of Trust, Multipliers, and The 4 Disciplines of Execution, and proprietary
content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, Leadership, and Education. We believe that our offerings help individuals, teams, and entire organizations transform their results
through achieving systematic, sustainable, and measurable changes in human behavior. Our offerings are described in further detail at www.franklincovey.com. The information contained in, or that can be accessed through, our website does
not constitute a part of this annual report, and the descriptions found therein should not be viewed as a warranty or guarantee of results.
Our fiscal year ends on August 31, and unless otherwise indicated, fiscal 2020, fiscal 2019, and fiscal 2018 refer to the twelve-month periods ended August 31, 2020, 2019, 2018, and so forth.
Impact of COVID-19 Pandemic on Fiscal 2020
COVID-19 was first identified in China during December 2019, and subsequently declared a pandemic by the World Health Organization. Since its discovery, COVID-19 has surfaced in nearly all regions around the world and has resulted in
government-imposed travel restrictions and business slowdowns or shutdowns in affected areas. As a result, COVID-19 has impacted our business globally, including our licensees, through office and school closures. In particular, these closures
impacted our third and fourth quarters of fiscal 2020 as described throughout this Annual Report on Form 10-K for fiscal 2020.
After strong financial performance during the first two quarters of fiscal 2020, our financial results in the third and fourth quarters of fiscal 2020 were adversely impacted by the COVID-19 pandemic and the resulting closure of offices and
educational institutions throughout the United States and in the countries where we operate direct offices and contract with licensee partners to deliver our offerings. We closed our corporate offices and restricted travel to protect the health
and safety of our associates and clients in an effort to slow the spread of the pandemic. Our international direct offices also followed the same pattern of closures and restrictions on associate travel and delivery of our offerings. These
actions, and similar steps taken by most of our clients, resulted in decreased sales during the third and fourth quarters as previously scheduled onsite events, client-facilitated presentations, and coaching days were postponed or canceled.
Despite the difficult economic environment in the second half of fiscal 2020, we were pleased with the continued strength of our subscription sales and the quick pivot to delivering content live-online and through our other digital modalities.
Our subscription service clients are able to access content and programs from remote locations, which allows continued engagement of personnel and students during long periods of displacement from normal working or classroom conditions. To be
successful in our industry, it is important to create effective learning environments for our clients and students, and we believe our previous investments in digital and remote delivery modalities are key to surviving and then thriving in the
current environment. According to the Training magazine 2020 Training Industry Report, most companies expect to retain at least some aspects of remote learning after the COVID-19 pandemic is over. We
believe our ability to deliver content and offerings over a broad array of modalities to suit a client’s needs will prove to be a valuable strategic advantage, and we believe these capabilities will accelerate our recovery from the effects of the
pandemic and will generate increased opportunities in future periods. However, our recovery from the COVID-19 pandemic is dependent upon a number of factors, many of which are not within our control, such as the timing of re-opening national,
state, and local economies; continuing effects of the pandemic on client operations; and other governmental responses to address the impacts of the pandemic. We will continue to monitor these developments and their actual and potential impacts on
our financial position, results of operations, and liquidity.
On March 27, 2020, in response to COVID-19, the United States government enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The CARES Act is a relief package consisting of various stimulus measures, such as tax
payment deferrals, various business incentives, and makes certain technical corrections to the U.S. Tax Cuts and Jobs Act of 2017. While beneficial to the economy and business overall, the enactment of the CARES Act and similar legislation in
other countries throughout the world did not have a material impact on our fiscal 2020 consolidated financial statements.
Financial Overview
Our fiscal 2020 financial results are a tale of two halves. After strong financial performance during the first two quarters of fiscal 2020, our financial results in the third and fourth quarters of fiscal 2020 were adversely impacted by the
COVID-19 pandemic. Financial results in the first two quarters of fiscal 2020 showed strong growth in revenues, operating results, and cash flows over the prior year. Consolidated sales through February 29, 2020 grew 8 percent, with Enterprise
Division sales increasing $5.0 million, or 6 percent, and Education Division revenues increasing $1.9 million, or 10 percent, compared with the prior year. Cash flows from operating activities increased 30 percent over the first two quarters of
fiscal 2019. Then, as the COVID-19 outbreak expanded in March 2020 and developed into a global pandemic, most of the world’s governments enacted strict measures to prevent people from gathering or meeting in person. While we were able to continue
to deliver content through our digital modalities and recognize subscription revenues, the in-person meeting restrictions had a significant impact on all of our segment operations during the third and fourth quarters of fiscal 2020 as our clients
transitioned to remote learning environments and previously scheduled training and coaching events were postponed or canceled.
Although the second half of fiscal 2020 was a difficult economic environment, our revenues were favorably impacted by the continued strength of our subscription business, including the All Access Pass (AAP) in the Enterprise Division and the Leader in Me membership in the Education Division. Throughout the pandemic, our AAP sales have been strong and resilient as new pass sales and multi-year contract sales increased over the prior year. During
the third and fourth quarters of fiscal 2020, All Access Pass sales grew 15 percent compared with the prior year. All Access Pass revenue retention remained strong and was over 90 percent for fiscal 2020. Following the initial impact of the
pandemic, our U.S.\Canada and governmental clients quickly transitioned to our digital delivery options, and by July our booking pace for add-on coaching and services was equal to that achieved in the prior year and then exceeded last year’s pace
through August. We remain optimistic that sales and revenue retention for All Access Pass subscription sales, and the booking pace for AAP-related add-on services will continue to be strong in future periods. Our China and Japan direct offices
and many of our licensee partners had just started to sell the All Access Pass and had not developed a strong base of subscription revenue at the onset of the pandemic. These operations were highly dependent on the delivery of in-person training
and stay-at-home restrictions made it necessary to reschedule nearly all of their training and coaching events. As a result, sales declined disproportionately at these operations compared with our U.S./Canada operations. However, these foreign
offices are beginning to recover and we are optimistic that international momentum will continue to rebuild in fiscal 2021. We were also encouraged by the performance of the Education Division in the third and fourth quarters of fiscal 2020.
Despite the significant uncertainties in educational funding as a result of the pandemic, nearly 2,200 schools renewed their Leader in Me memberships (a higher number than in fiscal 2019) and the Company
added 320 new schools to the Leader in Me program. We believe this performance from the Education Division was remarkable in the current education and economic environment.
Our subscription revenue grew 16 percent in fiscal 2020 compared with the prior year. At August 31, 2020, we had $68.9 million of deferred revenue compared with $65.8 million at August 31, 2019. Consolidated deferred revenue reported above at
August 31, 2020 and August 31, 2019 includes $2.2 million and $3.6 million, respectively, of deferred revenue that was classified as long-term based on expected recognition. At August 31, 2020, our unbilled deferred revenue grew 32 percent to
$39.6 million compared with $29.9 million at the end of fiscal 2019. At August 31, 2020, our deferred subscription revenue plus unbilled deferred subscription revenue totaled $100.2 million. Unbilled deferred revenue represents business that is
contracted, but unbilled and therefore excluded from our balance sheet.
The following table sets forth our consolidated net sales by division and by reportable segment for the fiscal years indicated (in thousands):
|
YEAR ENDED
AUGUST 31,
|
2020
|
%
change
|
2019
|
%
change
|
2018
|
|||||||||||||||
|
Enterprise Division:
|
||||||||||||||||||||
|
Direct offices
|
$
|
139,780
|
(11)
|
|
$
|
157,754
|
8
|
$
|
145,890
|
|||||||||||
|
International licensees
|
8,451
|
(34)
|
|
12,896
|
(3)
|
|
13,226
|
|||||||||||||
|
148,231
|
(13)
|
|
170,650
|
7
|
159,116
|
|||||||||||||||
|
Education Division
|
43,405
|
(11)
|
|
48,880
|
8
|
45,272
|
||||||||||||||
|
Corporate and other
|
6,820
|
17
|
5,826
|
8
|
5,370
|
|||||||||||||||
|
Consolidated sales
|
$
|
198,456
|
(12)
|
|
$
|
225,356
|
7
|
$
|
209,758
|
|||||||||||
Gross profit consists of net sales less the cost of services provided or the cost of goods sold. Our cost of sales includes the direct costs of delivering content onsite at client locations, including presenter costs, materials used in the
production of training products and related assessments, assembly, manufacturing labor costs, and freight. Gross profit may be affected by, among other things, the mix of services sold to clients, prices of materials, labor rates, changes in
product discount levels, and freight costs. Consolidated cost of sales in fiscal 2020 totaled $53.1 million compared with $66.0 million in fiscal 2019. The decrease was primarily due to decreased sales in fiscal 2020 resulting from the COVID-19
pandemic as described above. Our gross profit for the fiscal year ended August 31, 2020 was $145.4 million, compared with $159.3 million in fiscal 2019. Our gross margin, which is gross profit as a percent of sales, increased to 73.3 percent
compared with 70.7 percent primarily due to increased subscription and digital delivery revenues when compared with the prior year.
Our operating expenses in fiscal 2020 decreased $14.3 million compared with fiscal 2019. The decrease was primarily due to a $10.6 million decrease in selling, general, and administrative (SG&A) expenses, and a $5.4 million decrease in
stock-based compensation expense. These decreases were partially offset by $1.6 million of restructuring costs. Decreased SG&A expense was primarily related to decreased variable compensation such as commissions, bonuses, and incentives;
decreased travel and entertainment; decreased contingent consideration liability expense; and cost savings from various areas of the Company’s operations in response to the pandemic-related reduction in sales. We reevaluate our stock-based
compensation instruments at each reporting date. Due to the adverse impact of COVID-19 and uncertainties related to the expected recovery, we determined that certain tranches of previously granted performance awards would not vest prior to their
expiration. Based on our analyses, we reversed previously recognized stock-based compensation expense for these tranches during the third quarter of fiscal 2020, which resulted in a $0.6 million net credit to stock-based compensation for the
year. During the fourth quarter of fiscal 2020 we restructured certain areas of our operations to reflect changes in our strategy and client needs. The restructuring costs totaled $1.6 million, which were comprised of severance costs for impacted
personnel.
Our fiscal 2020 income from operations improved to $3.1 million compared with $2.7 million in fiscal 2019. Fiscal 2020 pre-tax income was $0.8 million compared with $0.6 million in fiscal 2019, reflecting the items noted above.
Our effective income tax rate for fiscal 2020 was approximately 1,284 percent compared with an effective tax rate of approximately 273 percent in fiscal 2019. The increased effective tax rate in fiscal 2020 was primarily due to $11.3 million
of additional income tax expense from an increase in the valuation allowance against our deferred income tax assets, which was partially offset by a tax benefit resulting from the exercise of stock options by our CEO and CFO. Our near break-even
pre-tax income during fiscal years 2020 and 2019 greatly amplified the effect of non-temporary items on our effective tax rate in those years.
Net loss for the year ended August 31, 2020 was $(9.4) million, or $(.68) per share, compared with a loss of $(1.0) million, or $(.07) per share, in fiscal 2019. Our Adjusted EBITDA in fiscal 2020 totaled $14.3 million compared with $20.6
million in fiscal 2019, reflecting the above-noted factors. In constant currency, our fiscal 2020 Adjusted EBITDA was $14.7 million.
Further details regarding these items can be found in the comparative analysis of fiscal 2020 with fiscal 2019 as discussed within this management’s discussion and analysis.
Our liquidity, financial position, and capital resources remained strong during fiscal 2020. At August 31, 2020, we had $27.1 million of cash, with no borrowings on our $15.0 million revolving credit facility, compared with $27.7 million of
cash at August 31, 2019. Cash flows from operating activities remained strong and totaled $27.6 million for fiscal 2020. For further information regarding our liquidity and cash flows, refer to the Liquidity and Capital Resources discussion found
in this management’s discussion and analysis.
For a discussion of the results of operations and changes in financial condition for fiscal 2019 compared with fiscal 2018, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our
fiscal 2019 Form 10-K, which was filed with the United States Securities and Exchange Commission on November 14, 2019.
Key Growth Objectives
As economies and businesses reopen and recover from the COVID-19 pandemic, we are optimistic that opportunities for growth and expansion will return both domestically and internationally. In addition to recovery from the pandemic, we believe
the following key factors will drive our growth in fiscal 2021 and beyond:
|
•
|
Best in Class Content and Solutions – We believe that our offerings are based on best-in-class content driven by best-selling books and world-class thought leadership. Our
content is focused on performance improvement through behavior-changing outcome oriented training. These offerings are designed to build great and enduring organizations, build winning cultures, promote execution on major strategic
initiatives, build leaders at all levels of an organization, and increase the individual and interpersonal effectiveness of people. Our vision is to profoundly impact the way billions of people throughout the world live, work, and
achieve their own great purposes. We believe ongoing investment in our existing and new content will allow us to achieve this vision.
|
|
•
|
New Subscription Service Sales and the Renewal of Existing Client Contracts – Prior to the onset of the COVID-19 pandemic, we invested heavily in digital delivery of our
content through our All Access Pass and Leader in Me subscription services. These digital delivery platforms allow our content and offerings to be accessible at scale in a wide variety of
organizations and schools, and provide compelling value propositions to our clients. As organizations implement and utilize the content on the AAP and schools realize the benefits of the Leader in Me
program, we believe that we create durable strategic relationships with our clients that encourage the renewal of subscription contracts. We are focused on building strategic relationships with both new and existing clients to provide
new subscription sales opportunities and renewal or expansion of existing subscription services with current clients.
|
|
•
|
Expand our Global Reach and Distribution – We are focused on consistently increasing the number of new client partners, consultants, coaches, and implementation specialists
to increase our global reach and sales opportunities. We have recently opened direct offices in Germany, Switzerland, and Austria, and we continue to seek out strong international licensees who can adapt and deliver our offerings in
diverse geographic and cultural regions. We believe our existing client partner model is a key driver of future growth as new client partners on average break even during their first year and make significant contributions to sales
growth thereafter. At August 31, 2020, we had 254 client partners compared with 245 at the end of fiscal 2019.
|
|
•
|
Most Impactful Thought Leadership – We believe that our offerings address some of the most significant challenges that organizations and individuals face. However, we are not
comfortable resting on past successes and we seek to engage individuals who can provide timely and impactful thought leadership on a variety of topics. Over the past couple of years we have released six new bestselling books, including Get Better, Everyone Deserves a Great Manager, and Leading Loyalty. During fiscal 2020 we developed and released new
offerings based on the bestselling book Multipliers, by Liz Wiseman. We also released a new offering entitled Unconscious Bias and will be releasing a
new book to support this offering in early fiscal 2021. To increase the visibility of our thought leadership, we have increased the number of books that we publish each year and we have significantly expanded our presence in podcasts,
relevant white papers, and digital media. We believe our ongoing efforts to strengthen our thought leadership will provide added opportunities in the training marketplace.
|
Other key factors that influence our operating results include: the number of organizations that are active customers; the number of people trained within those organizations; the continuation or renewal of existing services contracts,
especially subscription renewals; the availability of budgeted training spending at our clients and prospective clients, which, in certain content categories, can be significantly influenced by general economic conditions; client satisfaction with
our offerings and services; the number and productivity of our international licensee operations; and our ability to manage operating costs necessary to develop and provide meaningful offerings and related products to our clients.
Results of Operations
The following table sets forth, for the fiscal years indicated, the percentage of total sales represented by the line items through income or loss before income taxes in our consolidated statements of operations. This table should be read in
conjunction with the accompanying discussion and analysis, the consolidated financial statements, and the related notes to the consolidated financial statements (amounts in percentages).
|
YEAR ENDED
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Sales
|
100.0
|
100.0
|
100.0
|
|||||||||
|
Cost of sales
|
26.7
|
29.3
|
29.3
|
|||||||||
|
Gross profit
|
73.3
|
70.7
|
70.7
|
|||||||||
|
Selling, general, and administrative
|
65.5
|
62.4
|
65.9
|
|||||||||
|
Stock-based compensation
|
(0.3
|
)
|
2.1
|
1.4
|
||||||||
|
Restructuring costs
|
0.8
|
-
|
-
|
|||||||||
|
Depreciation
|
3.4
|
2.8
|
2.4
|
|||||||||
|
Amortization
|
2.3
|
2.2
|
2.6
|
|||||||||
|
Total operating expenses
|
71.7
|
69.5
|
72.3
|
|||||||||
|
Income (loss) from operations
|
1.6
|
1.2
|
(1.6
|
)
|
||||||||
|
Interest income
|
0.0
|
0.0
|
0.0
|
|||||||||
|
Interest expense
|
(1.2
|
)
|
(1.0
|
)
|
(1.2
|
)
|
||||||
|
Discount accretion on related party receivables
|
-
|
0.1
|
0.2
|
|||||||||
|
Income (loss) before income taxes
|
0.4
|
0.3
|
(2.6
|
)
|
||||||||
FISCAL 2020 COMPARED WITH FISCAL 2019 RESULTS OF OPERATIONS
Enterprise Division
Direct Offices Segment
The Direct Office segment includes our sales personnel that serve clients in the United States and Canada; our directly owned international offices in Japan, China, the United Kingdom, Australia, Germany, Switzerland, and Austria; our government
services office; and other groups such as our coaching operations and books and audio media sales. The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
|
Year Ended
August 31, 2020
|
% of
Sales
|
Year Ended
August 31, 2019
|
% of
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
139,780
|
100.0
|
$
|
157,754
|
100.0
|
$
|
(17,974
|
)
|
|||||||||||
|
Cost of sales
|
31,636
|
22.6
|
40,999
|
26.0
|
(9,363
|
)
|
||||||||||||||
|
Gross profit
|
108,144
|
77.4
|
116,755
|
74.0
|
(8,611
|
)
|
||||||||||||||
|
SG&A expenses
|
90,450
|
64.7
|
97,300
|
61.7
|
(6,850
|
)
|
||||||||||||||
|
Adjusted EBITDA
|
$
|
17,694
|
12.7
|
$
|
19,455
|
12.3
|
$
|
(1,761
|
)
|
|||||||||||
Sales. Our Direct Office segment had a strong start to fiscal 2020 in the first and second quarters of the fiscal year. For the first two quarters of fiscal 2020, our U.S./Canada sales grew by $4.0
million, or 9 percent; government sales increased by $1.2 million, or 18 percent; and international direct office revenue grew by $0.3 million, or two percent, despite the early closure of our offices in China at the onset of COVID-19. During the
third and fourth quarters of fiscal 2020, our Direct Office segment sales were adversely impacted by the COVID-19 pandemic and restrictions on in-person training and gatherings. However, sales of the Company’s AAP subscription service remained
strong and increased 15 percent in the third and fourth quarters of fiscal 2020 compared with the prior year, and revenue retention remained above 90 percent for fiscal 2020. We were very encouraged by sales of the All Access Pass in the second
half of fiscal 2020 as clients were able to successfully utilize the digital delivery options available through the AAP. Our foreign direct offices were significantly impacted by the COVID-19 pandemic as each of our foreign offices were closed for
portions of the third and fourth quarters as mandated by their national governments. As previously mentioned, our China and Japan offices had just started to sell AAP and had not built a significant base of deferred subscription revenue. As a
result, these offices were highly impacted by the closure of offices and restrictions on in-person gatherings and were a disproportionate share of the Direct Office decreased sales. For fiscal 2020, our foreign direct office sales decreased $10.8
million or 28 percent, compared with the prior year and foreign exchange rates had a $0.3 million unfavorable impact on our direct office sales during the fiscal year. We anticipate the events of fiscal 2020 will accelerate our Direct Offices’
transition to the All Access Pass in future periods, especially in China and Japan. While we are optimistic about the future of our direct office channel and AAP revenues, our future financial performance is highly dependent upon economic recovery
from the COVID-19 pandemic and the opening of national and regional economies.
Gross Profit. Gross profit decreased due to sales activity during fiscal 2020 as described above. Direct Office gross margin increased primarily due to the mix of services and products sold during
fiscal 2020, which featured increased subscription sales as a percent of total sales and decreased onsite and facilitator sales.
SG&A Expenses. Direct Office operating expenses decreased primarily due to reduced variable associate costs, including commissions, incentives, and bonuses on lower sales and reduced travel costs
during the second half of the year. These reductions were partially offset by associate costs from new sales and support personnel during the year. Foreign exchange rates had a $0.1 million adverse impact on our direct office segment operating
results during fiscal 2020.
International Licensees Segment
In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations
for the periods indicated (in thousands):
|
Year Ended
August 31, 2020
|
% of
Sales
|
Year Ended
August 31, 2019
|
% of
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
8,451
|
100.0
|
$
|
12,896
|
100.0
|
$
|
(4,445
|
)
|
|||||||||||
|
Cost of sales
|
1,772
|
21.0
|
2,665
|
20.7
|
(893
|
)
|
||||||||||||||
|
Gross profit
|
6,679
|
79.0
|
10,231
|
79.3
|
(3,552
|
)
|
||||||||||||||
|
SG&A expenses
|
4,273
|
50.6
|
4,159
|
32.3
|
114
|
|||||||||||||||
|
Adjusted EBITDA
|
$
|
2,406
|
28.4
|
$
|
6,072
|
47.0
|
$
|
(3,666
|
)
|
|||||||||||
Sales. International licensee revenues are primarily comprised of royalty revenues received from our licensee partners. For fiscal 2020, our licensee revenues were impacted by the COVID-19 pandemic,
which significantly reduced sales in the second half of the year as many licensee countries enacted economic and social restrictions that prohibited in-person presentations. Prior to the full onset of the pandemic, our international licensee
royalty revenue during the first two quarters of fiscal 2020 increased by $0.2 million compared with the prior year. Many of our international licensees had just started to sell the All Access Pass at the onset of the pandemic and did not have a
substantial base of deferred subscription revenue as these operations were primarily dependent upon live onsite training and coaching. Due to the benefits of the All Access Pass, including its digital delivery platform and high revenue retention
rates, we believe that our licensees will accelerate their transition to the All Access Pass in future periods, which we believe will provide significant benefits for our licensee partners and their clients.
Gross Profit. Gross profit decreased due to an overall decrease in licensee revenues during fiscal 2020 as described above. Licensee gross margin remained strong
in fiscal 2020 and was consistent with the prior year.
SG&A Expenses. International licensee SG&A expenses increased primarily due to additional bad debt expense related to expected collection issues in the wake of the COVID-19 pandemic. Foreign
exchange rates had an insignificant impact on our licensee sales and results of operations during fiscal 2020.
Education Division
Our Education Division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed Leader in Me program.
The following comparative information is for our Education Division in the periods indicated (in thousands):
|
Year Ended
August 31, 2020
|
% of
Sales
|
Year Ended
August 31, 2019
|
% of
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
43,405
|
100.0
|
$
|
48,880
|
100.0
|
$
|
(5,475
|
)
|
|||||||||||
|
Cost of sales
|
16,306
|
37.6
|
18,507
|
37.9
|
(2,201
|
)
|
||||||||||||||
|
Gross profit
|
27,099
|
62.4
|
30,373
|
62.1
|
(3,274
|
)
|
||||||||||||||
|
SG&A expenses
|
27,189
|
62.6
|
26,820
|
54.9
|
369
|
|||||||||||||||
|
Adjusted EBITDA
|
$
|
(90
|
)
|
(0.2)
|
|
$
|
3,553
|
7.3
|
$
|
(3,643
|
)
|
|||||||||
Sales. Growth in our Education Division during the first half of fiscal 2020 was offset by decreased sales during the third and fourth quarters, which are generally the busiest months for our Education
Division, resulting from the COVID-19 pandemic. Despite the significant headwinds faced by educational institutions during the third and fourth quarters as schools closed, teaching moved online, and budgets were constrained, nearly 2,200 existing
Leader in Me schools renewed their Leader in Me subscriptions (a number higher than in fiscal 2019) and 320 new schools became Leader
in Me schools. We believe these were remarkable achievements in the current education and economic environment. During fiscal 2020, Leader in Me subscription revenues increased 11 percent
compared with the prior year and our coaches delivered two percent more coaching days as clients pivoted to live on-line delivery of these days. Although pandemic-related issues slowed the growth of new schools entering into Leader in Me agreements in fiscal 2020, we are optimistic that continued demand for the Leader in Me program will drive sales growth in future periods. As of August 31,
2020, the Leader in Me program is used in over 4,200 schools and in over 50 countries.
Gross Profit. Education segment cost of sales and gross profit decreased primarily due to sales activity as previously described. Education Division gross margin remained strong at 62.4 percent and was
consistent with the prior year’s 62.1 percent.
SG&A Expenses. Education division SG&A expense increased primarily due to investments in additional sales and sales-related personnel in late fiscal 2019 and early fiscal 2020 to fuel growth that
was eventually dampened by the continuing COVID-19 pandemic, and increased bad debt expense. These increased costs were partially offset by reduced travel and commission expense resulting from travel restrictions and reduced revenues. Education
Division results of operations were adversely impacted by $0.2 million of unfavorable exchange rates compared with the prior year.
Other Expenses
Restructuring Costs – During the fourth quarter of fiscal 2020 we restructured certain information technology, corporate operational, and marketing functions. We incurred $1.6 million
of severance costs related to these restructuring activities. At August 31, 2020, we had $1.2 million of remaining accrued restructuring costs, which are expected to be paid during fiscal 2021.
Depreciation – Depreciation expense increased $0.3 million compared with fiscal 2019 primarily due to the addition of new assets and investments
in technology during fiscal 2020 and in prior years. Based on previous property and equipment acquisitions, and expected capital additions during fiscal 2021, we expect depreciation expense will total approximately $6.5 million in fiscal 2021.
Amortization – Our amortization expense decreased $0.4 million compared with the prior year primarily due to the full amortization of certain intangible assets. We expect the
amortization of intangible assets will total approximately $4.5 million during fiscal 2021.
Income Taxes
Our effective income tax rate for fiscal 2020 was approximately 1,284 percent compared with an effective tax rate of approximately 273 percent in fiscal 2019. The increased effective tax rate in fiscal 2020 was primarily due to $11.3 million of
additional income tax expense from an increase in the valuation allowance against our deferred income tax assets, which was partially offset by the tax benefit resulting from the exercise of stock options by our CEO and CFO. Our near break-even
pre-tax income during fiscal years 2020 and 2019 greatly amplified the effect of non-temporary items on our effective tax rate in those years.
Although we paid $2.1 million in cash for income taxes during fiscal 2020, we anticipate that our total cash paid for income taxes over the coming three to five years will be less than our total income tax provision as we utilize available net
operating loss carryforwards and other deferred income tax assets.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated financial data for the fiscal years ended August 31, 2020 and 2019. The quarterly consolidated financial data reflects, in the opinion of management, all normal and
recurring adjustments necessary to fairly present the results of operations for such periods. Results of any one or more quarters are not necessarily indicative of continuing trends (in thousands, except for per-share amounts).
|
YEAR ENDED AUGUST 31, 2020 (unaudited)
|
||||||||||||||||
|
November 30
|
February 29
|
May 31
|
August 31
|
|||||||||||||
|
Net sales
|
$
|
58,613
|
$
|
53,745
|
$
|
37,105
|
$
|
48,994
|
||||||||
|
Gross profit
|
42,029
|
38,666
|
26,821
|
37,854
|
||||||||||||
|
Selling, general, and administrative
|
39,399
|
36,221
|
24,150
|
29,636
|
||||||||||||
|
Restructuring costs
|
-
|
-
|
-
|
1,636
|
||||||||||||
|
Depreciation
|
1,619
|
1,653
|
1,652
|
1,739
|
||||||||||||
|
Amortization
|
1,170
|
1,170
|
1,164
|
1,102
|
||||||||||||
|
Income (loss) from operations
|
(159
|
)
|
(378
|
)
|
(145
|
)
|
3,741
|
|||||||||
|
Income (loss) before income taxes
|
(760
|
)
|
(922
|
)
|
(748
|
)
|
3,226
|
|||||||||
|
Net income (loss)
|
(544
|
)
|
1,097
|
(10,968
|
)
|
980
|
||||||||||
|
Net income (loss) per share:
|
||||||||||||||||
|
Basic and diluted
|
$
|
(.04
|
)
|
$
|
.08
|
$
|
(.79
|
)
|
$
|
.07
|
||||||
|
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
|
|||||||||
In normal operating years, our fourth quarter 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 from increased sales that typically occur during that quarter resulting 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. Quarterly fluctuations may also be affected by other factors including the introduction of new offerings, pandemics and other natural disasters, business acquisitions, the addition
of new organizational customers, and the elimination of underperforming offerings.
For more information on our quarterly results of operations, refer to our quarterly reports on Form 10-Q as filed with the SEC. Our quarterly reports for the periods indicated are available free of charge at www.sec.gov.
LIQUIDITY AND CAPITAL RESOURCES
Introduction
Our cash balance at August 31, 2020 totaled $27.1 million, with no borrowings on our $15.0 million revolving credit facility. Of our $27.1 million in cash at August 31, 2020, $12.2 million was held outside the U.S. by our foreign subsidiaries.
We routinely repatriate cash from our foreign subsidiaries and consider cash generated from foreign activities a key component of our overall liquidity position. Our primary sources of liquidity are cash flows from the sale of services in the
normal course of business and available proceeds from our credit facility. Our primary uses of liquidity include payments for operating activities, capital expenditures (including curriculum development), debt payments, contingent consideration
payments from the prior acquisition of businesses, working capital expansion, and purchases of our common stock.
The following table summarizes our cash flows from operating, investing, and financing activities for the past three years (in thousands):
|
YEAR ENDED AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Total cash provided by (used for):
|
||||||||||||
|
Operating activities
|
$
|
27,563
|
$
|
30,452
|
$
|
16,861
|
||||||
|
Investing activities
|
(11,865
|
)
|
(6,873
|
)
|
(10,634
|
)
|
||||||
|
Financing activities
|
(16,557
|
)
|
(5,932
|
)
|
(4,679
|
)
|
||||||
|
Effect of exchange rates on cash
|
297
|
(101
|
)
|
(319
|
)
|
|||||||
|
Increase (decrease) in cash and cash equivalents
|
$
|
(562
|
)
|
$
|
17,546
|
$
|
1,229
|
|||||
Our Current Credit Agreement
On August 7, 2019, we entered into a new credit agreement (the 2019 Credit Agreement) with our existing lender, which replaced the amended and restated credit agreement, dated March 2011. The 2019 Credit Agreement provides up to $25.0 million
in term loans and a $15.0 million revolving line of credit, which expires in August 2024. Upon entering into the 2019 Credit Agreement, we borrowed $20.0 million through a term loan and used the proceeds to repay all indebtedness under the
Original Credit Agreement. During November 2019, we borrowed the remaining $5.0 million term loan available on the 2019 Credit Agreement.
In anticipation of potential covenant compliance issues associated with the COVID-19 pandemic and the uncertainty of the economic recovery, on July 8, 2020, we entered into the First Modification Agreement to the 2019 Credit Agreement. The
primary purpose of the First Modification Agreement is to provide temporary alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. These new covenants consist of the following:
|
1.
|
Minimum Liquidity – We must maintain consolidated minimum liquidity of not less than $13.0 million from August 31, 2020 through February 28, 2021 and $8.0 million at May 31, 2021.
|
|
2.
|
Minimum Adjusted EBITDA – We must maintain rolling four-quarter Adjusted EBITDA not less than the amount set forth below at the end of the specified quarter (in thousands).
|
|
QUARTER ENDING
|
AMOUNT
|
|||
|
August 31, 2020
|
$
|
11,000
|
||
|
November 30, 2020
|
8,500
|
|||
|
February 28, 2021
|
5,000
|
|||
|
May 31, 2021
|
15,000
|
|||
Adjusted EBITDA for purposes of this calculation is not the same as generally reported by the Company in its quarterly earnings. The amounts in the table above exclude amortization of capitalized development costs
which is classified in cost of sales.
|
3.
|
Capital Expenditures – We may not make capital expenditures, including capitalized development costs, in an amount exceeding $8.5 million in aggregate for any fiscal year.
|
In addition to the new financial covenants described above, we are prohibited from making certain restricted payments, including dividend payments on our common stock and open-market purchases of our common stock until we have been in compliance
with the previously existing financial covenants for two consecutive quarters.
In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the 2019 Credit Agreement. At
August 31, 2020, we believe that we were in compliance with the terms and covenants applicable to the 2019 Credit Agreement and the First Modification Agreement.
The previously existing financial covenants on the 2019 Credit Agreement, which include (i) a Funded Indebtedness to Adjusted EBITDAR Ratio of less than 3.00 to 1.00; (ii) a Fixed Charge Coverage ratio not less than 1.15 to 1.00; (iii) an annual
limit on capital expenditures (excluding capitalized curriculum development costs) of $8.0 million; and (iv) consolidated accounts receivable of not less than 150% of the aggregate amount of the outstanding borrowings on the revolving line of
credit, the undrawn amount of outstanding letters of credit, and the amount of unreimbursed letter of credit disbursements remain in effect except for the quarterly periods covered by the First Modification Agreement.
In addition to our term loan obligations, we have a long-term lease on our corporate campus that is accounted for as a financing obligation. For further information on our leasing obligations, refer to the notes to our consolidated financial
statements as presented in Item 8 of this report on Form 10-K.
The following discussion is a description of the primary factors affecting our cash flows and their effects upon our liquidity and capital resources during the fiscal year ended August 31, 2020.
Cash Flows from Operating Activities
Our primary source of cash from operating activities was the sale of services and products to our customers in the normal course of business. The primary uses of cash for operating activities were payments for selling, general, and
administrative expenses, payments for direct costs necessary to conduct training programs, payments to suppliers for materials used in training manuals sold, and to fund working capital needs. For the fiscal year ended August 31, 2020, our cash
provided by operating activities was $27.6 million compared with $30.5 million in fiscal 2019. The decrease was primarily due to changes in working capital balances during fiscal 2020. Our collection of accounts receivable remained strong during
fiscal 2020, despite the COVID-19 pandemic, and provided a significant amount of cash to support operations, pay our obligations, and make critical investments. Although we defer the recognition of AAP and other subscription revenues over the
lives of the underlying contracts, we invoice the annual contract amount and collect the associated receivable at the inception of the agreement.
Cash Flows from Investing Activities and Capital Expenditures
Our cash used for investing activities during the fiscal year ended August 31, 2020 totaled $11.9 million. The primary uses of cash for investing activities included additional investments in the development of our offerings, purchases of
property and equipment in the normal course of business, and the purchase of a note receivable from a bank used as consideration for an amended license agreement with FC Organizational Products (FCOP).
We spent $5.1 million during fiscal 2020 on the development of various content and offerings. During fiscal 2020 we developed additional offerings for our Education Division and leadership content based on the best-selling book Multipliers, by Liz Wiseman. The new Multipliers content was launched in August 2020. We believe continued investment in our content and offerings is critical to our
future success and we anticipate that our capital spending for curriculum development will total $4.5 million during fiscal 2021.
Our purchases of property and equipment totaled $4.2 million in fiscal 2020, and consisted primarily of computer hardware, new furnishings to replace assets destroyed by a flood at our corporate headquarters, software, and leasehold improvements
on leased office space. Our previous and ongoing investments in our digital delivery modalities, including the AAP and Leader in Me subscription services proved valuable as many of our clients have moved
to remote workplaces due to the COVID-19 pandemic. We will continue to invest in hardware and software to improve our digital delivery modalities, and currently anticipate that our purchases of property and equipment will total approximately $2.8
million in fiscal 2021.
In November 2019, we purchased $2.6 million of notes payable from a bank that were the obligations of FCOP. We exchanged $3.2 million of receivables from FCOP, including the note payable purchased from the bank, to modify the term and royalty
provisions of a long-term licensing agreement that is expected to increase our cash flows over the duration of the license agreement. The licensing arrangement was assumed by Franklin Planner Corp., a new unrelated entity that purchased
substantially all of the assets of FCOP in November 2019 (Refer to Note 17 to our consolidated financial statements for more information).
Cash Flows from Financing Activities
During the fiscal year ended August 31, 2020, we used $16.6 million of net cash for financing activities. Our primary uses of financing cash during fiscal 2020 included $14.0 million for purchases of our common stock for treasury, $7.3 million
for principal payments on our term loans and financing obligation, and $1.3 million of cash used to pay contingent consideration liabilities from previous business acquisitions. These uses of cash were partially offset by proceeds from a $5.0
million term loan which was available on our 2019 Credit Agreement, and $1.0 million of proceeds from participants in our employee stock purchase plan.
In December 2019, we purchased 284,608 shares of our common stock from Knowledge Capital for $10.1 million prior to the distribution of Knowledge Capital assets to its investors. This purchase of shares from Knowledge Capital was completed
under a separate Board of Directors authorization and is not included in the November 15, 2019 authorized purchase plan described below. We also purchased 109,896 shares of our common stock that were withheld for statutory income taxes on
stock-based compensation instruments, primarily stock options, which were exercised during fiscal 2020. These withheld shares were valued at the market price on the date that the shares were distributed to participants. The total fair value of
the withheld shares was $3.7 million.
On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $40.0 million of the Company’s outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase
plan does not have an expiration date. Our uses of financing cash during fiscal 2021 are expected to include required payments on our term loans and financing obligation, contingent consideration payments from previous business acquisitions, and
may include purchases of our common stock for treasury. However, the timing and amount of common stock purchases is dependent on a number of factors, including available resources, and we are not obligated to make purchases of our common stock
during any future period.
Sources of Liquidity
We expect to meet our projected capital expenditures, repay amounts borrowed on our 2019 Credit Agreement, service our existing financing obligation, and meet other working capital requirements during fiscal 2021 from current cash balances,
future cash flows from operating activities, and available borrowings from our revolving line of credit. 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 and other financing alternatives, if necessary, for these expenditures. At August 31, 2020, we had $15.0 million of available borrowing capacity on our revolving line of credit. Our 2019 Credit Agreement expires
in August 2024 and we expect to renew and amend the 2019 Credit Agreement on a regular basis to maintain the long-term borrowing capacity 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. The COVID-19 pandemic has created uncertainty in capital markets, which may limit our ability to access liquidity on terms favorable to us, or at all.
We believe that our existing cash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be sufficient for us to maintain our operations over the next 12 months. However, our
ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, our ability to contain costs, levels of capital expenditures, collection of accounts
receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new offerings or technology by our competitors. We will continue to monitor
our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements. However, there can be no assurance such financing alternatives will be
available to us on acceptable terms, or at all.
Contractual Obligations
We have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. Required contractual payments
primarily consist of repayment of term loan obligations; lease payments on our corporate headquarters campus (reported as a financing obligation); short-term purchase obligations for inventory items and other products and services used in the
ordinary course of business; expected contingent consideration payments from business acquisitions; and minimum lease payments. At August 31, 2020, our expected payments on these obligations over the next five fiscal years and thereafter are as
follows (in thousands):
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
|
||||||||||||||||||||||||
|
Contractual Obligations
|
2021
|
2022
|
2023
|
2024
|
2025
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Term loans payable to bank(1)
|
$
|
5,605
|
$
|
5,430
|
$
|
5,255
|
$
|
5,080
|
$
|
-
|
$
|
-
|
$
|
21,370
|
||||||||||||||
|
Required lease payments on corporate campus
|
3,798
|
3,874
|
3,952
|
4,031
|
3,301
|
-
|
18,956
|
|||||||||||||||||||||
|
Purchase obligations
|
4,761
|
-
|
-
|
-
|
-
|
-
|
4,761
|
|||||||||||||||||||||
|
Jhana contingent consideration payments(2)
|
845
|
998
|
1,128
|
381
|
-
|
-
|
3,352
|
|||||||||||||||||||||
|
Minimum operating lease payments
|
751
|
208
|
121
|
97
|
87
|
14
|
1,278
|
|||||||||||||||||||||
|
RGP contingent consideration payments(2)
|
816
|
-
|
-
|
-
|
-
|
-
|
816
|
|||||||||||||||||||||
|
Total expected contractual
obligation payments
|
$
|
16,576
|
$
|
10,510
|
$
|
10,456
|
$
|
9,589
|
$
|
3,388
|
$
|
14
|
$
|
50,533
|
||||||||||||||
|
(1)
|
Payment amounts shown include interest at 3.5 percent, which is the current rate on our term loan obligations under the 2019 Credit Agreement and the First Modification Agreement.
|
|
(2)
|
The payment of contingent consideration resulting from prior business acquisitions is based on current estimates and projections. We reassess the fair value of estimated contingent consideration payments each
quarter based on available information. The actual payment of contingent consideration amounts may differ in amount and timing from those shown in the table.
|
Our contractual obligations presented above exclude uncertain tax positions totaling $1.6 million for which we cannot make a reasonably reliable estimate of the amount and period of payment. For further information regarding our uncertain tax
positions, refer to the notes to our consolidated financial statements as presented in Part II, Item 8 of this report on Form 10-K.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting policies that we used to prepare our consolidated financial statements
are outlined primarily in Note 1 and in Note 2 (revenue recognition policies) to the consolidated financial statements, which are presented in Part II, Item 8 of this Annual Report on Form 10-K. Some of those accounting policies require us to make
assumptions and use judgments that may affect the amounts reported in our consolidated financial statements. Management regularly evaluates its estimates and assumptions and bases those estimates and assumptions on historical experience, factors
that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America. Actual results may differ from these estimates under different assumptions or conditions,
including changes in economic and political conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results.
The following items require the most significant judgment and often involve complex estimates:
Revenue Recognition
We account for revenue in accordance with Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). For the All Access Pass, judgment is required to determine whether
the intellectual property and web-based functionality and content are considered distinct and accounted for separately, or not distinct and accounted for together.
We have determined to account for the AAP as a single performance obligation and recognize the associated transaction price ratably over the term of the underlying contract beginning on the commencement date of each contract, which is the date
the Company’s platforms and resources are made available to the customer. This determination was reached after considering that our web-based functionality and content, in combination with our intellectual property, each represent inputs that
transform into a combined output that represents the intended outcome of the AAP, which is to provide a continuously accessible, customized, and dynamic learning and development solution only accessible through the All Access Pass platform.
Judgment is required to determine the stand-alone selling price (SSP) for each distinct performance obligation in a revenue contract. Where we have more than one distinct performance obligation, we must allocate the transaction price to each
performance obligation based on its relative SSP. The SSP is the price which we would sell a promised product or service separately to a customer. In determining the SSP, we consider the size and volume of transactions, price lists, historical
sales, and contract prices. We may modify our pricing from time-to-time in the future, which could result in changes to the stand-alone selling price.
Stock-Based Compensation
Our shareholders have approved performance-based long-term incentive plans (LTIPs) that provide for grants of stock-based performance awards to certain managerial personnel and executive management as directed by the Organization and
Compensation Committee of the Board of Directors. The number of common shares that are vested and issued to LTIP participants is variable and is based upon the achievement of specified performance objectives during defined service periods. Due to
the variable number of common shares that may be issued under the LTIP, we reevaluate our LTIP grants on a quarterly basis and adjust the expected vesting dates and number of shares expected to be awarded based upon actual and estimated financial
results of the Company compared with the performance goals set for the award. Adjustments to the number of shares awarded, and to the corresponding compensation expense, are made on a cumulative basis at the adjustment date based upon the new
estimated probable number of common shares to be awarded.
The analysis of our LTIP awards contains uncertainties because we are required to make assumptions and judgments about the timing and eventual number of shares that will vest in each LTIP grant. The assumptions and judgments that are essential
to the analysis include forecasted sales and operating income levels during the LTIP service periods. These forecasted amounts may be difficult to predict over the life of the LTIP awards due to changes in our business, such as from the
introduction of subscription-based services, or other external factors, such as the COVID-19 pandemic, and their impact on our financial results. Events such as these may leave some previously approved performance measures obsolete or
unattainable. The evaluation of LTIP performance awards and the corresponding use of estimated amounts may produce additional volatility in our consolidated financial statements as we record cumulative adjustments to the estimated service periods
and number of common shares to be awarded under the LTIP grants as described above. For example, the impact of and expected recovery from the COVID-19 pandemic resulted in a significant reversal of previously recognized performance award
stock-based compensation expense during the third quarter of fiscal 2020.
Accounts Receivable Valuation
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Our allowance for doubtful accounts calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the
collectability of customer accounts, which may be influenced by a number of factors that are not within our control, such as the financial health of each customer. We regularly review the collectability assumptions of our allowance for doubtful
accounts calculation and compare them against historical collections. Adjustments to the assumptions may either increase or decrease our total allowance for doubtful accounts and may adversely impact our financial results. For example, a 10
percent increase to our allowance for doubtful accounts at August 31, 2020 would decrease our reported income from operations by approximately $0.4 million.
For further information regarding the calculation of our allowance for doubtful accounts, refer to the notes to our financial statements as presented in Item 8 of this report on Form 10-K.
Valuation of Indefinite-Lived Intangible Assets and Goodwill
Intangible assets that are deemed to have an indefinite life and goodwill balances are not amortized, but rather are tested for impairment on an annual basis, or more often if events or circumstances indicate that a potential impairment exists.
The Covey trade name intangible asset originated from the merger with the Covey Leadership Center in 1997 and has been deemed to have an indefinite life. This intangible asset is quantitatively tested for impairment using the present value of
estimated royalties on trade name related revenues, which consist primarily of training seminars and related products, and international licensee royalties.
Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. Under current accounting guidance, an annual or interim goodwill impairment test is
performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
Due to the impact of COVID-19, we tested goodwill for impairment during the third quarter of fiscal 2020 and at August 31, 2020 at the reporting unit level using a quantitative approach. The estimated fair value of each reporting unit was
calculated using a combination of the income approach (discounted cash flows) and the market approach (using market multiples derived from a set of companies with comparable market characteristics). The estimated fair values of the reporting units
from these approaches were weighted in the determination of the total fair value.
On an interim basis, we consider whether events or circumstances are present that may lead to the determination that goodwill may be impaired. These circumstances include, but are not limited to, the following:
|
•
|
significant underperformance relative to historical or projected future operating results;
|
|
•
|
significant change in the manner of our use of acquired assets or the strategy for the overall business;
|
|
•
|
significant change in prevailing interest rates;
|
|
•
|
significant negative industry or economic trend;
|
|
•
|
significant change in market capitalization relative to book value; and/or
|
|
•
|
significant negative change in market multiples of the comparable company set.
|
If, based on events or changing circumstances, we determine it is more likely than not that the fair value of a reporting unit does not exceed its carrying value, we would be required to test goodwill for impairment.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected
future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable
and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. Based on the results of our goodwill impairment testing during fiscal 2020, we
determined that no impairment existed at August 31, 2020, as each reportable operating segment’s estimated fair value exceeded its carrying value. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal
tests when impairment indicators are present.
Impairment of Long-Lived Assets
Long-lived tangible assets and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use an estimate of
undiscounted future net cash flows of the assets over their remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the anticipated future cash flows of the assets,
we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based upon discounted cash flows over the estimated remaining useful life of the asset. If
we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis, which is then depreciated or amortized over the remaining useful life of the asset. Impairment of long-lived assets is assessed at the lowest
levels for which there are identifiable cash flows that are independent from other groups of assets.
Our impairment evaluation calculations contain uncertainties because they require us to make assumptions and apply judgment in order to estimate future cash flows, forecast the useful lives of the assets, and select a discount rate that reflects
the risk inherent in future cash flows. Although we have not made any material recent changes to our long-lived assets impairment assessment methodology, if forecasts and assumptions used to support the carrying value of our long-lived tangible
and finite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.
Acquisitions and Contingent Consideration Liabilities
We record acquisitions resulting in the consolidation of an enterprise using the purchase method of accounting. Under this method, the acquiring company records the assets acquired, including intangible assets that can be identified and named,
and liabilities assumed based on their estimated fair values at the date of acquisition. The purchase price in excess of the fair value of the assets acquired and liabilities assumed is recorded as goodwill. If the assets acquired, net of
liabilities assumed, are greater than the purchase price paid, then a bargain purchase has occurred and the Company will recognize the gain immediately in earnings. Among other sources of relevant information, we use independent appraisals or
other valuations to assist in determining the estimated fair values of the assets and liabilities. Various assumptions are used in the determination of these estimated fair values including discount rates, market and volume growth rates, product
or service selling prices, cost structures, royalty rates, and other prospective financial information.
Additionally, we are required to reassess the fair value of contingent consideration liabilities resulting from business acquisitions at each reporting period. Although subsequent changes to the contingent consideration liabilities do not
affect the goodwill generated from the acquisition transaction, the valuation of expected contingent consideration often requires us to estimate future sales and/or profitability. These estimates require the use of numerous assumptions, many of
which may change frequently and lead to increased or decreased operating income in future periods. For instance, during fiscal 2020 we recorded approximately $49,000 of net decreases to the fair value of our contingent consideration liabilities
compared with $1.3 million of increases during fiscal 2019. Changes to the fair value of contingent consideration liabilities are recorded as a component of selling, general, and administrative expenses.
Income Taxes
We regularly evaluate our United States federal and various state and foreign jurisdiction income tax exposures. We account for certain aspects of our income tax provision using the provisions of ASC 740-10-05, which addresses the determination
of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than
50 percent likelihood of being realized upon final settlement. The provisions of ASC 740-10-05 also provide guidance on de-recognition, classification, interest, and penalties on income taxes, accounting for income taxes in interim periods, and
require increased disclosure of various income tax items. Taxes and penalties are components of our overall income tax provision.
We record previously unrecognized tax benefits in the financial statements when it becomes more likely than not (greater than a 50 percent likelihood) that the tax position will be sustained. To assess the probability of sustaining a tax
position, we consider all available evidence. In many instances, sufficient positive evidence may not be available until the expiration of the statute of limitations for audits by taxing jurisdictions, at which time the entire benefit will be
recognized as a discrete item in the applicable period.
Our unrecognized tax benefits result from uncertain tax positions about which we are required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions. The calculation of our income tax
provision or benefit, as applicable, requires estimates of future taxable income or losses. During the course of the fiscal year, these estimates are compared to actual financial results and adjustments may be made to our tax provision or benefit
to reflect these revised estimates. Our effective income tax rate is also affected by changes in tax law and the results of tax audits by various jurisdictions. Although we believe that our judgments and estimates discussed herein are reasonable,
actual results could differ, and we could be exposed to losses or gains that could be material.
We establish valuation allowances for deferred tax assets when we estimate it is more likely than not that the tax assets will not be realized. The determination of whether valuation allowances are needed on our deferred income tax assets
contains uncertainties because we must project future income, including the use of tax-planning strategies, by individual tax jurisdictions. Changes in industry and economic conditions and the competitive environment may impact the accuracy of our
projections. We regularly assess the likelihood that our deferred tax assets will be realized and determine if adjustments to our valuation allowance are necessary.
For example, in consideration of the relevant accounting guidance, we reevaluated our deferred tax assets during fiscal 2020 and considered both positive and negative evidence in determining whether it is more likely
than not that some portion or all of our deferred tax assets will be realized. Because of the cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to our business
resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax
assets before they expire, which are primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards. Accordingly, we increased the valuation allowance against our deferred tax assets in fiscal 2020.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to the consolidated financial statements for information on recent accounting pronouncements.
REGULATORY COMPLIANCE
We are registered in states in which we do business that have a sales tax and we collect and remit sales or use tax on sales made in these jurisdictions. Compliance with environmental laws and regulations has not had a material effect on our
operations.
INFLATION AND CHANGING PRICES
Inflation has not had a material effect on our operations. However, future inflation may have an impact on the price of materials used in the production of training products and related accessories, including paper and related raw materials.
We may not be able to pass on such increased costs to our customers.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements made by the Company in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the Exchange
Act). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,”
“project,” or words or phrases of similar meaning. In our reports and filings we may make forward-looking statements regarding, among other things, our expectations about future sales levels and financial results, expected effects from the
COVID-19 pandemic, including effects on how we conduct our business and our results of operations, the timing and duration of the recovery from the COVID-19 pandemic, future training and consulting sales activity, expected benefits from the All
Access Pass and the electronic delivery of our content, anticipated renewals of subscription offerings, the impact of new accounting standards on our financial condition and results of operations, the amount and timing of capital expenditures,
anticipated expenses, including SG&A expenses, depreciation, and amortization, future gross margins, the release of new services or products, the adequacy of existing capital resources, our ability to renew or extend our line of credit
facility, the amount of cash expected to be paid for income taxes, our ability to maintain adequate capital for our operations for at least the upcoming 12 months, the seasonality of future sales, future compliance with the terms and conditions of
our line of credit, the ability to borrow on our line of credit, expected collection of accounts receivable, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets. These, and other
forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are disclosed from time to time in reports filed by us
with the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended August 31, 2020, entitled
“Risk Factors.” In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas: cybersecurity risks; unanticipated costs or capital expenditures; delays or unanticipated outcomes
relating to our strategic plans; dependence on existing products or services; the rate and consumer acceptance of new product introductions, including the All Access Pass; competition; the impact of foreign exchange rates; the number and nature of
customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our products and services and those of competitors; adverse publicity; and other factors which may adversely affect our business.
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors may emerge and it is not possible for our 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 single factor, or combination of
factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our
failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our relatively low market capitalization,
the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management’s expectations as of the date made, and the Company does not undertake any responsibility to update any of these statements in the future except as required by law. Actual future performance
and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations
and elsewhere in our filings with the SEC.
Market Risk of Financial Instruments
We are exposed to financial instrument market risk primarily through fluctuations in foreign currency exchange rates and interest rates. To manage risks associated with foreign currency exchange and interest rates, we may make limited use of
derivative financial instruments. Derivatives are financial instruments that derive their value from one or more underlying financial instruments. As a matter of policy, our derivative instruments are entered into for periods consistent with the
related underlying exposures and do not constitute positions that are independent of those exposures. In addition, we do not enter into derivative contracts for trading or speculative purposes, nor are we party to any leveraged derivative
instrument. However, during the fiscal years ended August 31, 2020, 2019, and 2018, we were not party to any foreign exchange contracts, interest rate swap agreements, or similar derivative instruments.
Foreign Exchange Sensitivity
Due to the global nature of our operations, we are subject to risks associated with transactions that are denominated in currencies other than the United States dollar, as well as the effects of translating amounts denominated in foreign
currencies to United States dollars as a normal part of the reporting process. The objective of our foreign currency risk management activities is to reduce foreign currency risk in the consolidated financial statements. In order to manage
foreign currency risks, we may make limited use of foreign currency forward contracts and other foreign currency related derivative instruments.
Interest Rate Sensitivity
Our long-term liabilities primarily consist of term loans payable obtained from the lender on our 2019 Credit Agreement, a long-term lease agreement (financing obligation) associated with the previous sale of our corporate headquarters, amounts
borrowed on our revolving credit facility, deferred income taxes, and contingent consideration payments resulting from our business acquisitions. Our overall interest rate sensitivity is primarily influenced by any amounts borrowed on term loans
or on our revolving line of credit facility, and the prevailing interest rate on these instruments. The effective interest rate on the term loans and our revolving line of credit facility was 3.5 percent at August 31, 2020, and we may incur
additional expense if interest rates increase in future periods. For example, a one percent increase in the interest rate on our term loans payable at August 31, 2020 would result in approximately $0.2 million of additional interest expense in
fiscal 2021. We did not have borrowings on our revolving credit facility at August 31, 2020. Our financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent. Our other
long-term liabilities do not include an interest component.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franklin Covey Co.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Franklin Covey Co. and subsidiaries (the “Company”) as of August 31, 2020, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of August 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended August 31, 2020,
of the Company and our report dated November 16, 2020, expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the Company's change in method of accounting for revenue from contracts with
customers in fiscal year 2019 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
November 16, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franklin Covey Co.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Franklin Covey Co. and subsidiaries (the "Company") as of August 31, 2020 and 2019, the related consolidated statements of operations and comprehensive
loss, shareholders' equity, and cash flows for each of the three years in the period ended August 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in
all material respects, the financial position of the Company as of August 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2020, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 31, 2020, based on
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 16, 2020, expressed an
unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for revenue from contracts with customers in fiscal year 2019 due to the adoption of Accounting Standards Update No.
2014-09, Revenue from Contracts with Customers, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
November 16, 2020
We have served as the Company's auditor since 2016.
FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
In thousands, except per-share data
|
||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
27,137
|
$
|
27,699
|
||||
|
Accounts receivable, less allowance for doubtful accounts of $4,159 and $4,242
|
56,407
|
73,227
|
||||||
|
Inventories
|
2,974
|
3,481
|
||||||
|
Prepaid expenses
|
3,646
|
3,906
|
||||||
|
Other current assets
|
11,500
|
11,027
|
||||||
|
Total current assets
|
101,664
|
119,340
|
||||||
|
Property and equipment, net
|
15,723
|
18,579
|
||||||
|
Intangible assets, net
|
47,125
|
47,690
|
||||||
|
Goodwill
|
24,220
|
24,220
|
||||||
|
Deferred income tax assets
|
1,094
|
5,045
|
||||||
|
Other long-term assets
|
15,611
|
10,039
|
||||||
|
$
|
205,437
|
$
|
224,913
|
|||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of term notes payable
|
$
|
5,000
|
$
|
5,000
|
||||
|
Current portion of financing obligation
|
2,600
|
2,335
|
||||||
|
Accounts payable
|
5,622
|
9,668
|
||||||
|
Income taxes payable
|
-
|
764
|
||||||
|
Deferred subscription revenue
|
59,289
|
56,250
|
||||||
|
Other deferred revenue
|
7,389
|
5,972
|
||||||
|
Accrued liabilities
|
22,628
|
23,555
|
||||||
|
Total current liabilities
|
102,528
|
103,544
|
||||||
|
Term notes payable, less current portion
|
15,000
|
15,000
|
||||||
|
Financing obligation, less current portion
|
14,048
|
16,648
|
||||||
|
Other liabilities
|
9,110
|
7,527
|
||||||
|
Deferred income tax liabilities
|
5,298
|
180
|
||||||
|
Total liabilities
|
145,984
|
142,899
|
||||||
|
Commitments and contingencies (Note 9)
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued
|
1,353
|
1,353
|
||||||
|
Additional paid-in capital
|
211,920
|
215,964
|
||||||
|
Retained earnings
|
49,968
|
59,403
|
||||||
|
Accumulated other comprehensive income
|
641
|
269
|
||||||
|
Treasury stock at cost, 13,175 shares and 13,087 shares
|
(204,429
|
)
|
(194,975
|
)
|
||||
|
Total shareholders’ equity
|
59,453
|
82,014
|
||||||
|
$
|
205,437
|
$
|
224,913
|
|||||
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
YEAR ENDED AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
In thousands, except per-share amounts
|
||||||||||||
|
Net sales
|
$
|
198,456
|
$
|
225,356
|
$
|
209,758
|
||||||
|
Cost of sales
|
53,086
|
66,042
|
61,469
|
|||||||||
|
Gross profit
|
145,370
|
159,314
|
148,289
|
|||||||||
|
Selling, general, and administrative
|
129,979
|
140,530
|
138,280
|
|||||||||
|
Stock-based compensation
|
(573
|
)
|
4,789
|
2,846
|
||||||||
|
Restructuring costs
|
1,636
|
-
|
-
|
|||||||||
|
Depreciation
|
6,664
|
6,364
|
5,161
|
|||||||||
|
Amortization
|
4,606
|
4,976
|
5,368
|
|||||||||
|
Income (loss) from operations
|
3,058
|
2,655
|
(3,366
|
)
|
||||||||
|
Interest income
|
56
|
37
|
104
|
|||||||||
|
Interest expense
|
(2,318
|
)
|
(2,358
|
)
|
(2,676
|
)
|
||||||
|
Discount accretion on related-party receivables
|
-
|
258
|
418
|
|||||||||
|
Income (loss) before income taxes
|
796
|
592
|
(5,520
|
)
|
||||||||
|
Provision for income taxes
|
(10,231
|
)
|
(1,615
|
)
|
(367
|
)
|
||||||
|
Net loss
|
$
|
(9,435
|
)
|
$
|
(1,023
|
)
|
$
|
(5,887
|
)
|
|||
|
Net loss per share:
|
||||||||||||
|
Basic and diluted
|
$
|
(0.68
|
)
|
$
|
(0.07
|
)
|
$
|
(0.43
|
)
|
|||
|
Weighted average number of common shares:
|
||||||||||||
|
Basic and diluted
|
13,892
|
13,948
|
13,849
|
|||||||||
|
COMPREHENSIVE LOSS:
|
||||||||||||
|
Net loss
|
$
|
(9,435
|
)
|
$
|
(1,023
|
)
|
$
|
(5,887
|
)
|
|||
|
Foreign currency translation adjustments, net of income
|
||||||||||||
|
tax benefit (provision) of $16, $(5), and $(75)
|
372
|
(72
|
)
|
(326
|
)
|
|||||||
|
Comprehensive loss
|
$
|
(9,063
|
)
|
$
|
(1,095
|
)
|
$
|
(6,213
|
)
|
|||
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
YEAR ENDED AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
In thousands
|
||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net loss
|
$
|
(9,435
|
)
|
$
|
(1,023
|
)
|
$
|
(5,887
|
)
|
|||
|
Adjustments to reconcile net loss to net cash provided
|
||||||||||||
|
by operating activities:
|
||||||||||||
|
Depreciation and amortization
|
11,270
|
11,359
|
10,525
|
|||||||||
|
Amortization of capitalized curriculum development costs
|
3,949
|
4,954
|
5,280
|
|||||||||
|
Deferred income taxes
|
9,094
|
(1,051
|
)
|
(2,535
|
)
|
|||||||
|
Stock-based compensation expense
|
(573
|
)
|
4,789
|
2,846
|
||||||||
|
Change in the fair value of contingent consideration liabilities
|
(49
|
)
|
1,334
|
1,014
|
||||||||
| Amortization of right-of-use operating lease assets |
331 |
- |
- |
|||||||||
|
Changes in assets and liabilities, net of effect of acquired businesses:
|
||||||||||||
|
Decrease (increase) in accounts receivable, net
|
17,142
|
(1,770
|
)
|
(5,679
|
)
|
|||||||
|
Decrease (increase) in inventories
|
552
|
(260
|
)
|
157
|
||||||||
|
Decrease in receivable from related party
|
26
|
535
|
213
|
|||||||||
|
Decrease (increase) in prepaid expenses and other assets
|
(767
|
)
|
32
|
(1,335
|
)
|
|||||||
|
Increase (decrease) in accounts payable and accrued liabilities
|
(5,464
|
)
|
2,932
|
1,746
|
||||||||
|
Increase in deferred revenue
|
2,806
|
8,828
|
11,613
|
|||||||||
|
Increase (decrease) in income taxes payable/receivable
|
(794
|
)
|
889
|
109
|
||||||||
|
Decrease in other liabilities
|
(525
|
)
|
(1,096
|
)
|
(1,206
|
)
|
||||||
|
Net cash provided by operating activities
|
27,563
|
30,452
|
16,861
|
|||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Purchases of property and equipment
|
(4,183
|
)
|
(4,153
|
)
|
(6,528
|
)
|
||||||
|
Capitalized curriculum development costs
|
(5,082
|
)
|
(2,688
|
)
|
(2,998
|
)
|
||||||
|
Purchase of note receivable from bank (Note 17)
|
(2,600
|
)
|
-
|
-
|
||||||||
|
Acquisition of businesses, net of cash acquired
|
-
|
(32
|
)
|
(1,108
|
)
|
|||||||
|
Net cash used for investing activities
|
(11,865
|
)
|
(6,873
|
)
|
(10,634
|
)
|
||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Proceeds from line of credit borrowings
|
14,870
|
82,282
|
93,391
|
|||||||||
|
Payments on line of credit borrowings
|
(14,870
|
)
|
(93,619
|
)
|
(86,431
|
)
|
||||||
|
Proceeds from term notes payable financing
|
5,000
|
20,000
|
-
|
|||||||||
|
Principal payments on term notes payable
|
(5,000
|
)
|
(12,813
|
)
|
(6,250
|
)
|
||||||
|
Principal payments on financing obligation
|
(2,335
|
)
|
(2,092
|
)
|
(1,868
|
)
|
||||||
|
Purchases of common stock for treasury
|
(13,971
|
)
|
(12
|
)
|
(2,006
|
)
|
||||||
|
Payment of contingent consideration liabilities
|
(1,297
|
)
|
(653
|
)
|
(2,323
|
)
|
||||||
|
Proceeds from sales of common stock held in treasury
|
1,046
|
975
|
808
|
|||||||||
|
Net cash used for financing activities
|
(16,557
|
)
|
(5,932
|
)
|
(4,679
|
)
|
||||||
|
Effect of foreign currency exchange rates on cash and cash equivalents
|
297
|
(101
|
)
|
(319
|
)
|
|||||||
|
Net increase (decrease) in cash and cash equivalents
|
(562
|
)
|
17,546
|
1,229
|
||||||||
|
Cash and cash equivalents at beginning of the year
|
27,699
|
10,153
|
8,924
|
|||||||||
|
Cash and cash equivalents at end of the year
|
$
|
27,137
|
$
|
27,699
|
$
|
10,153
|
||||||
|
Supplemental disclosure of cash flow information:
|
||||||||||||
|
Cash paid for income taxes
|
$
|
2,057
|
$
|
1,778
|
$
|
2,512
|
||||||
|
Cash paid for interest
|
2,280
|
2,386
|
2,655
|
|||||||||
|
Non-cash investing and financing activities:
|
||||||||||||
|
Purchases of property and equipment financed by accounts payable
|
$
|
35
|
$
|
410
|
$
|
1,018
|
||||||
|
License rights acquired through royalties payable financing
|
4,009
|
-
|
-
|
|||||||||
|
Use of notes receivable to modify revenue contract (Note 17)
|
3,246
|
-
|
-
|
|||||||||
|
Consideration for business acquisition from liabilities of acquiree
|
-
|
798
|
-
|
|||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
|
Common
|
Common
|
Additional
|
|
Other
|
Treasury
|
Treasury
|
||||||||||||||||||||||
|
Stock
Shares
|
Stock
Amount
|
Paid-In
Capital
|
Retained
Earnings
|
Comprehensive
Income
|
Stock
Shares
|
Stock
Amount
|
||||||||||||||||||||||
|
In thousands
|
||||||||||||||||||||||||||||
|
Balance at August 31, 2017
|
27,056
|
$
|
1,353
|
$
|
212,484
|
$
|
69,456
|
$
|
667
|
(13,414
|
)
|
$
|
(198,895
|
)
|
||||||||||||||
|
Issuance of common stock from
|
||||||||||||||||||||||||||||
|
treasury
|
(3,702
|
)
|
337
|
4,510
|
||||||||||||||||||||||||
|
Purchase of treasury shares
|
(105
|
)
|
(2,006
|
)
|
||||||||||||||||||||||||
|
Restricted share award
|
(348
|
)
|
23
|
348
|
||||||||||||||||||||||||
|
Stock-based compensation
|
2,846
|
|||||||||||||||||||||||||||
|
Cumulative translation
|
||||||||||||||||||||||||||||
|
adjustments
|
(326
|
)
|
||||||||||||||||||||||||||
|
Net loss
|
(5,887
|
)
|
||||||||||||||||||||||||||
|
Balance at August 31, 2018
|
27,056
|
1,353
|
211,280
|
63,569
|
341
|
(13,159
|
)
|
(196,043
|
)
|
|||||||||||||||||||
|
Issuance of common stock from
|
||||||||||||||||||||||||||||
|
treasury
|
321
|
43
|
654
|
|||||||||||||||||||||||||
|
Purchase of treasury shares
|
1
|
(12
|
)
|
|||||||||||||||||||||||||
|
Restricted share award
|
(426
|
)
|
28
|
426
|
||||||||||||||||||||||||
|
Stock-based compensation
|
4,789
|
|||||||||||||||||||||||||||
|
Cumulative translation
|
||||||||||||||||||||||||||||
|
adjustments
|
(72
|
)
|
||||||||||||||||||||||||||
|
Cumulative effect of new
|
||||||||||||||||||||||||||||
|
accounting principle
|
(3,143
|
)
|
||||||||||||||||||||||||||
|
Net loss
|
(1,023
|
)
|
||||||||||||||||||||||||||
|
Balance at August 31, 2019
|
27,056
|
1,353
|
215,964
|
59,403
|
269
|
(13,087
|
)
|
(194,975
|
)
|
|||||||||||||||||||
|
Issuance of common stock from
|
||||||||||||||||||||||||||||
|
treasury
|
(3,138
|
)
|
291
|
4,184
|
||||||||||||||||||||||||
|
Purchase of treasury shares
|
(400
|
)
|
(13,971
|
)
|
||||||||||||||||||||||||
|
Restricted share award
|
(333
|
)
|
21
|
333
|
||||||||||||||||||||||||
|
Stock-based compensation
|
(573
|
)
|
||||||||||||||||||||||||||
|
Cumulative translation
|
||||||||||||||||||||||||||||
|
adjustments
|
372
|
|||||||||||||||||||||||||||
|
Net loss
|
(9,435
|
)
|
||||||||||||||||||||||||||
|
Balance at August 31, 2020
|
27,056
|
$
|
1,353
|
$
|
211,920
|
$
|
49,968
|
$
|
641
|
(13,175
|
)
|
$
|
(204,429
|
)
|
||||||||||||||
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Franklin Covey Co. (hereafter referred to as we, us, our, or the Company) is a global company specializing in organizational performance improvement. We help individuals and organizations achieve results that require a change in human behavior
and our mission is to “enable greatness in people and organizations everywhere.” We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training and products
based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, The Leader In Me, The Four Disciplines of Execution, and Multipliers, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, and Educational improvement. Our offerings are described in further detail at
www.franklincovey.com and elsewhere in this report. Through our organizational research and curriculum development efforts, we seek to consistently create, develop, and introduce new services and products that help individuals and organizations
achieve their own great purposes.
Fiscal Year
Our fiscal year ends on August 31 of each year and our fiscal quarters end on the last day of November, February, and May. Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, which consist of Franklin Development Corp., and our offices in Japan, China, the United Kingdom, Australia, Germany,
Switzerland, and Austria. Intercompany balances and transactions are eliminated in consolidation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity, revenues, and
expenses. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in our prior period financial statements to conform with the current period presentation. On our consolidated statements of operations and comprehensive loss for the fiscal years ended August 31, 2019
and 2018, we have separately presented stock-based compensation, which was previously included within selling, general, and administrative expense (Note 12).
Cash and Cash Equivalents
Some of our cash is deposited with financial institutions located throughout the United States of America and at banks in foreign countries where we operate subsidiary offices, and at times may exceed insured limits. We consider all highly
liquid debt instruments with a maturity date of three months or less to be cash equivalents. We did not hold a significant amount of investments that would be considered cash equivalent instruments at either August 31, 2020 or 2019. Of our $27.1
million in cash at August 31, 2020, $12.2 million was held outside the U.S. by our foreign subsidiaries. We routinely repatriate cash from our foreign subsidiaries and consider cash generated from foreign activities a key component of our overall
liquidity position.
Inventories
Inventories are stated at the lower of cost or net realizable value, cost being determined using the first-in, first-out method. Elements of cost in inventories generally include raw materials and direct labor. Cash flows from the sale of
inventory are included in cash flows provided by operating activities in our consolidated statements of cash flows. Our inventories are comprised primarily of training materials, books, and training-related accessories, and consisted of the
following (in thousands):
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
Finished goods
|
$
|
2,947
|
$
|
3,434
|
||||
|
Raw materials
|
27
|
47
|
||||||
|
$
|
2,974
|
$
|
3,481
|
|||||
Provision is made to reduce excess and obsolete inventories to their estimated net realizable value. In assessing the valuation of our inventories, we make judgments regarding future demand requirements and compare these estimates with current
and committed inventory levels. Inventory requirements may change based on projected customer demand, training curriculum life-cycle changes, and other factors that could affect the valuation of our inventories.
Other Current Assets
Significant components of our other current assets were as follows (in thousands):
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
Deferred commissions
|
$
|
8,897
|
$
|
8,337
|
||||
|
Other current assets
|
2,603
|
2,690
|
||||||
|
$
|
11,500
|
$
|
11,027
|
|||||
We defer commission expense on subscription-based sales and recognize the commission expense with the recognition of the corresponding revenue.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense, which includes depreciation on our corporate campus that is accounted for as a financing obligation (Note 7), is calculated using the straight-line method over the lesser of the
expected useful life of the asset or the contracted lease period. We generally use the following depreciable lives for our major classifications of property and equipment:
|
Description
|
Useful Lives
|
|
Buildings
|
20 years
|
|
Machinery and equipment
|
5–7 years
|
|
Computer hardware and software
|
3–5 years
|
|
Furniture, fixtures, and leasehold improvements
|
5–7 years
|
Our property and equipment were comprised of the following (in thousands):
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
Land and improvements
|
$
|
1,312
|
$
|
1,312
|
||||
|
Buildings
|
30,038
|
30,038
|
||||||
|
Machinery and equipment
|
900
|
1,162
|
||||||
|
Computer hardware and software
|
29,691
|
28,665
|
||||||
|
Furniture, fixtures, and leasehold
|
||||||||
|
improvements
|
9,129
|
8,409
|
||||||
|
71,070
|
69,586
|
|||||||
|
Less accumulated depreciation
|
(55,347
|
)
|
(51,007
|
)
|
||||
|
$
|
15,723
|
$
|
18,579
|
|||||
We expense costs for repairs and maintenance as incurred. Gains and losses resulting from the sale of property and equipment are recorded in income or (loss) from operations. Depreciation of capitalized subscription portal costs is included in
depreciation expense in the accompanying consolidated statements of operations and comprehensive loss. During fiscal 2018, we capitalized $0.1 million of interest expense in connection with the installation of our new enterprise resource planning
system and the development of our improved All Access Pass (AAP) portal.
Impairment of Long-Lived Assets
Long-lived tangible assets and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use an estimate of
undiscounted future net cash flows of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the anticipated future cash flows of the assets,
we recognize an impairment loss equal to the difference between the carrying values of the assets and their estimated fair values. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that
are independent from other groups of assets. The evaluation of long-lived assets requires us to use estimates of future cash flows. If forecasts and assumptions used to support the realizability of our long-lived tangible and finite-lived
intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.
Indefinite-Lived Intangible Assets and Goodwill Impairment Testing
Intangible assets that are deemed to have an indefinite life and acquired goodwill are not amortized, but rather are tested for impairment on an annual basis or more often if events or circumstances indicate that a potential impairment exists.
The Covey trade name intangible asset has been deemed to have an indefinite life. This intangible asset is tested for impairment using qualitative factors or the present value of estimated royalties on trade name related revenues, which consist
primarily of training seminars and work sessions, international licensee sales, and related products. Based on the fiscal 2020 evaluation of the Covey trade name, we believe the fair value of the Covey trade name substantially exceeds its carrying
value. No impairment charges were recorded against the Covey trade name during the periods presented in this report.
Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. An annual (or interim test if events and circumstances indicate a test should be
performed) goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
We tested goodwill for impairment at August 31, 2020 at the reporting unit level using a quantitative approach. The estimated fair value of each reporting unit was calculated using a combination of the income approach (discounted cash flows) and
the market approach (using market multiples derived from a set of companies with comparable market characteristics).
On an interim basis, we consider whether events or circumstances are present that may lead to the determination that goodwill may be impaired. If, based on events or changing circumstances, we determine it is more likely than not that the fair
value of a reporting unit does not exceed its carrying value, we are required to test goodwill for impairment.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected
future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable
and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. Based on the results of our goodwill impairment testing, we determined that no
impairment existed at either of August 31, 2020 or 2019 as each reporting unit’s estimated fair value exceeded its carrying value. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when
impairment indicators are present. For more information regarding our intangible assets and goodwill, refer to Note 5.
Capitalized Curriculum Development Costs
During the normal course of business, we develop training courses and related materials that we sell to our clients. Capitalized curriculum development costs include certain expenditures to develop course materials such as video segments,
course manuals, and other related materials. Our capitalized curriculum development spending in fiscal 2020, which totaled $5.1 million, was primarily for various Education practice offerings and courses for the All Access Pass, including new Multipliers content. Curriculum costs are capitalized when there is a major revision to an existing course that requires a significant re-write of the course materials. Costs incurred to maintain existing
offerings are expensed when incurred. In addition, development costs incurred in the research and development of new offerings and software products to be sold, leased, or otherwise marketed are expensed as incurred until economic and
technological feasibility has been established.
Capitalized development costs are amortized over three- to five-year useful lives, which are based on numerous factors, including expected cycles of major changes to our content. Capitalized curriculum development costs are reported as a
component of other long-term assets in our consolidated balance sheets and totaled $8.1 million and $7.0 million at August 31, 2020 and 2019. Amortization of capitalized curriculum development costs is reported as a component of cost of sales in
the accompanying consolidated statements of operations and comprehensive loss.
Accrued Liabilities
Significant components of our accrued liabilities were as follows (in thousands):
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
Accrued compensation
|
$
|
9,597
|
$
|
14,003
|
||||
|
Other accrued liabilities
|
13,031
|
9,552
|
||||||
|
$
|
22,628
|
$
|
23,555
|
|||||
Contingent Consideration Payments from Business Acquisitions
Business acquisitions may include contingent consideration payments based on various future financial measures related to the acquired entity. Contingent consideration is required to be recognized at fair value as of the acquisition date. We
estimate the fair value of these liabilities based on financial projections of the acquired company and estimated probabilities of achievement. Based on updated estimates and projections, the contingent consideration liabilities are adjusted at
each reporting date to their estimated fair value. Changes in fair value subsequent to the acquisition date are reported in selling, general, and administrative expense in our consolidated statements of operations and comprehensive loss, and may
have a material impact on our operating results. Variations in the fair value of contingent consideration liabilities may result from changes in discount periods or rates, changes in the timing and amount of earnings estimates, and changes in
probability assumptions with respect to the likelihood of achieving various payment criteria.
Foreign Currency Translation and Transactions
The functional currencies of our foreign operations are the reported local currencies. Translation adjustments result from translating our foreign subsidiaries’ financial statements into United States dollars. The balance sheet accounts of our
foreign subsidiaries are translated into United States dollars using the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated using average exchange rates for each month during the fiscal year. The resulting
translation differences are recorded as a component of accumulated other comprehensive income in shareholders’ equity. Foreign currency transaction losses totaled $0.1 million, $0.2 million, and $0.5 million for the fiscal years ended August 31,
2020, 2019, and 2018, respectively, and are included as a component of selling, general, and administrative expenses in our consolidated statements of operations and comprehensive loss.
Revenue Recognition
We account for revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on September 1, 2018 using the modified
retrospective method (see also Note 2).
Prior to the adoption of Topic 606, we recognized revenue when: 1) persuasive evidence of an arrangement existed, 2) delivery of the product occurred or the services were rendered, 3) the price to the customer was fixed or determinable, and 4)
collectability was reasonably assured. These principles governed our revenue recognition policies and procedures for fiscal 2018 as presented in this report. For training and service sales, these conditions were generally met upon presentation of
the training seminar or delivery of the consulting services based upon daily rates. For most of our product sales, these conditions were met upon shipment of the product to the customer. For intellectual property license sales, the revenue
recognition conditions were generally met at the later of delivery of the content to the client or the effective date of the arrangement. Our subscription revenues from the All Access Pass and the Leader in Me
membership were recognized over the duration of the underlying contracts since our clients had the right to content updates during the contracted period.
Revenue recognition for multiple-element arrangements required judgment to determine if multiple elements existed, whether elements could be accounted for as separate units of accounting, and if so, the fair value for each of the elements. A
deliverable constituted a separate unit of accounting when it had standalone value to our clients. We entered into arrangements that included various combinations of multiple training offerings, consulting services, and intellectual property
licenses. The timing of delivery and performance of the elements typically varied from contract to contract. Generally, these items qualified as separate units of accounting because they had value to the customer on a standalone basis. We
determined the fair value to be used for allocating revenue to the elements based on (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence (TPE), and (iii) best estimate of selling price (BESP).
Our international strategy includes the use of licensees in countries where we do not have a wholly-owned direct office. Licensee companies are unrelated entities that have been granted a license to translate our content and offerings, adapt
the content to the local culture, and sell our content in a specific country or region. Licensees are required to pay us royalties based upon a percentage of their sales to clients. We recognize royalty income each period based upon the sales
information reported to us from our licensees. Refer to the disaggregated revenue information presented in Note 16 for our royalty revenues in the fiscal years presented in this report.
Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns.
Stock-Based Compensation
We record the compensation expense for all stock-based payments, including grants of stock options and the compensatory elements of our employee stock purchase plan, in our consolidated statements of operations and comprehensive loss based upon
their fair values over the requisite service period. For more information on our stock-based compensation plans, refer to Note 12.
Shipping and Handling Fees and Costs
All shipping and handling fees billed to customers are recorded as a component of net sales. All costs incurred related to the shipping and handling of products are recorded in cost of sales.
Advertising Costs
Costs for advertising are expensed as incurred. Advertising costs included in selling, general, and administrative expenses totaled $3.3 million, $4.6 million, and $6.9 million for the fiscal years ended August 31, 2020, 2019, and 2018.
Restructuring Costs
During the fourth quarter of fiscal 2020, we restructured certain information technology, central operations, and marketing functions. We incurred $1.6 million of severance costs related to these restructuring activities. At August 31, 2020,
we had $1.2 million of remaining accrued restructuring costs, which are expected to be paid during fiscal 2021.
Income Taxes
Our income tax provision has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes represent the future tax consequences expected to occur when the reported amounts of
assets and liabilities are recovered or paid. The income tax provision represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred income taxes result from differences between the
financial and tax bases of our assets and liabilities and are adjusted for tax rates and tax laws when changes are enacted. A valuation allowance is provided against deferred income tax assets when it is more likely than not that all or some
portion of the deferred income tax assets will not be realized. Interest and penalties related to uncertain tax positions are recognized as components of income tax benefit or expense in our consolidated statements of operations and comprehensive
loss.
We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.
We provide for income taxes, net of applicable foreign tax credits, on temporary differences in our investment in foreign subsidiaries, which consist primarily of unrepatriated earnings.
Comprehensive Loss
Comprehensive loss includes changes to equity accounts that were not the result of transactions with shareholders. Comprehensive loss is comprised of net income or loss and other comprehensive income and loss items. Our other comprehensive
income and losses generally consist of changes in the cumulative foreign currency translation adjustment, net of tax.
Accounting Pronouncements Issued and Adopted
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB Accounting Standards Codification (ASC) Topic 840, Leases. The new guidance requires lessees to recognize a lease liability and corresponding right-of-use asset for all leases greater than 12 months. Recognition, measurement, and presentation of expenses depends upon
whether the lease is classified as a finance or operating lease. We adopted the new lease guidance prospectively on September 1, 2019. As part of the adoption of ASU 2016-02, we elected to apply the package of practical expedients, which allows
us to not reassess prior conclusions related to lease classification, not to recognize short-term leases on our balance sheet, and not to separate lease and non-lease components for our leases. On September 1, 2019, the adoption of ASU 2016-02
resulted in the recognition of $1.5 million of lease liabilities and right-of-use assets on our consolidated balance sheets for operating leases. For lessors, accounting for leases is substantially the same as in prior periods and there was no
impact from the adoption of ASU 2016-02 for those leases where we are the lessor. Refer to Note 8, Leases for further information on our leasing activity.
The lease on our corporate campus has historically been accounted for as a financing obligation and related building asset on our consolidated balance sheets, as the contract did not meet the criteria for application of sale-leaseback accounting
under previous leasing guidance. In transition to Topic 842, we reassessed whether the contract met the sale criteria under the new leasing standard. Based on this assessment, we determined that the sale criteria under the new leasing standard
was not met and we will continue to account for the corporate campus lease as a finance obligation on our consolidated balance sheet in future periods.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This new standard was issued in conjunction with the International Accounting Standards Board (IASB) and
is designed to create a single, principles-based process by which all businesses calculate revenue. The core principle of this standard is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it
expects to be entitled to receive for those goods or services. The new standard replaces numerous individual, industry-specific revenue rules found in generally accepted accounting principles in the United States. We adopted ASU No. 2014-09 on
September 1, 2018 using the “modified retrospective” approach. Under this transition method, we applied the new standard to contracts that were not completed as of the adoption date and recognized a cumulative effect adjustment which reduced our
retained earnings by $4.1 million ($3.1 million, net of tax) on September 1, 2018, which primarily consisted of initial licensing fees on international locations. The comparative period information for fiscal 2018 has not been restated and
continues to be presented according to accounting standards for revenue recognition in effect during that fiscal year.
The primary impact of ASU No. 2014-09 on our revenue recognition policies is a change in the way we account for our initial license fee associated with licensing an international location. The Company previously recorded the non-refundable
initial license fee from licensing an international location as revenue at the time the license period begins if all other revenue requirements had been met. However, under Topic 606, the Company recognizes revenue on the upfront license fees over
the duration of the contract.
Under Topic 606, we account for the All Access Pass as a single performance obligation and recognize the associated transaction price on a straight-line basis over the term of the underlying contract. This determination was reached after
considering that our web-based functionality and content, in combination with our intellectual property, each represent inputs that transform into a combined output that represents the intended outcome of the AAP, which is to provide a continuously
accessible, customized, and dynamic learning and development solution only accessible through the AAP platform.
We do not expect the accounting for fulfillment costs or costs incurred to obtain a contract to be materially affected in any period due to the adoption of ASU 2014-09. Refer to Note 2 for further details regarding our revenue recognition
accounting policies under Topic 606.
The cumulative after-tax effects of the changes made to our consolidated balance sheet from the adoption of Topic 606 were as follows (in thousands):
|
August 31,
|
ASC 606
|
September 1,
|
||||||||||
|
2018
|
Adjustments
|
2018
|
||||||||||
|
Assets:
|
||||||||||||
|
Other current assets
|
$
|
10,893
|
$
|
109
|
$
|
11,002
|
||||||
|
Deferred income tax assets
|
3,222
|
1,005
|
4,227
|
|||||||||
|
Liabilities and Shareholders' Equity:
|
||||||||||||
|
Deferred subscription revenue
|
47,417
|
1,453
|
48,870
|
|||||||||
|
Other deferred revenue
|
4,471
|
555
|
5,026
|
|||||||||
|
Other liabilities
|
5,501
|
2,249
|
7,750
|
|||||||||
|
Retained earnings
|
63,569
|
(3,143
|
)
|
60,426
|
||||||||
The following line items in our consolidated statement of operations and comprehensive loss were impacted by the adoption of the new revenue recognition standard for the year ended August 31, 2019 (in thousands, except per-share data):
|
August 31,
|
August 31,
|
|||||||||||
|
2019
|
2019
|
Impact of
|
||||||||||
|
As Reported
|
Without ASC 606
|
ASC 606
|
||||||||||
|
Net sales
|
$
|
225,356
|
$
|
225,222
|
$
|
134
|
||||||
|
Cost of sales
|
66,042
|
66,042
|
-
|
|||||||||
|
Selling, general, and administrative
|
140,530
|
140,540
|
(10
|
)
|
||||||||
|
Income tax provision
|
(1,615
|
)
|
(1,580
|
)
|
(35
|
)
|
||||||
|
Net loss
|
(1,023
|
)
|
(1,132
|
)
|
109
|
|||||||
|
Net loss per share:
|
||||||||||||
|
Basic and diluted
|
$
|
(0.07
|
)
|
$
|
(0.08
|
)
|
||||||
Selected consolidated balance sheet line items as of August 31, 2019, which were impacted by the adoption of the new standard, were as follows (in thousands):
|
August 31,
|
August 31,
|
|||||||||||
|
2019
|
2019
|
Impact of
|
||||||||||
|
As Reported
|
Without ASC 606
|
ASC 606
|
||||||||||
|
Assets:
|
||||||||||||
|
Other current assets
|
$
|
11,027
|
$
|
10,908
|
$
|
119
|
||||||
|
Deferred income tax assets
|
5,045
|
4,075
|
970
|
|||||||||
|
Total assets
|
224,913
|
223,824
|
1,089
|
|||||||||
|
Liabilities and Shareholders' Equity:
|
||||||||||||
|
Deferred subscription revenue
|
$
|
56,250
|
$
|
55,247
|
$
|
1,003
|
||||||
|
Other deferred revenue
|
5,972
|
5,417
|
555
|
|||||||||
|
Other liabilities
|
7,527
|
4,961
|
2,566
|
|||||||||
|
Retained earnings
|
59,403
|
62,438
|
(3,035
|
)
|
||||||||
|
Total liabilities and shareholders' equity
|
224,913
|
223,824
|
1,089
|
|||||||||
The adoption of ASC Topic 606 did not have a material impact on our cash flows from operating, investing, or financing activities.
Accounting Pronouncements Issued Not Yet Adopted
Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This accounting standard changes the methodology
for measuring credit losses on financial instruments, including trade accounts receivable, and the timing of when such losses are recorded. ASU No. 2016-13 is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. We expect to adopt the provisions of ASU No. 2016-13 on September 1, 2020 and do not expect this guidance
to have a material impact on our financial position, results of operations, and disclosures.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the FASB issued ASU No. 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 (ASU 2018-15). This guidance clarifies the accounting for implementation costs in a cloud computing arrangement that is a service contract and aligns the requirements for capitalizing those costs with the
capitalization requirements for costs incurred to develop or obtain internal-use software. The new standard is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. We are currently
evaluating the effects, if any, the adoption of ASU 2018-15 may have on our financial position, results of operations, cash flows, or disclosures.
| 2. |
REVENUE RECOGNTION
|
We account for revenue in accordance with ASC Topic 606, which was adopted on September 1, 2018 using the modified retrospective method (Note 1). We earn revenue from contracts with customers primarily through the delivery of our All Access
Pass and the Leader in Me membership subscription offerings, through the delivery of training days and training course materials (whether digitally or in person), and through the licensing of rights to sell
our content into geographic locations where the Company does not maintain a direct office. We also earn revenues from leasing arrangements that are not accounted for under Topic 606. Returns and refunds are generally immaterial, and we do not
have any significant warranty obligations.
Under Topic 606, we recognize revenue upon the transfer of control of promised products and services to customers in an amount equal to the consideration we expect to receive in exchange for those products or services. Although rare, if the
consideration promised in a contract includes variable amounts, we evaluate the estimate of variable consideration to determine whether the estimate needs to be constrained. We include the variable consideration in the transaction price only to
the extent that it is probable a significant reversal of the amount of cumulative revenue recognized will not occur.
We determine the amount of revenue to be recognized through application of the following steps:
|
•
|
Identification of the contract with a customer
|
|
•
|
Identification of the performance obligations in the contract
|
|
•
|
Determination of the transaction price
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract
|
|
•
|
Recognition of revenue when the Company satisfies the performance obligations
|
Taxes assessed by a government authority that are collected from a customer are excluded from net revenue.
Services and Products
We deliver Company-led training days from our offerings, such as The 7 Habits of Highly Effective People, at a customer’s location or live-online based upon a daily consultant rate and a set price for
training materials. These revenues are recognized as the training days occur and the services are performed. Customers also have the option to purchase training materials and present our offerings through internal facilitators and not through the
use of a Franklin Covey consultant. Revenue is recognized from these product sales when the materials are shipped. Shipping revenues associated with product sales are recorded in revenue with the corresponding shipping cost being recorded as a
component of cost of sales.
Subscription Revenues
Subscription revenues primarily relate to the Company’s All Access Pass and the Leader in Me membership offerings. We have determined that it is most appropriate to account for the AAP as a single
performance obligation and recognize the associated transaction price ratably over the term of the underlying contract beginning on the commencement date of each contract, which is the date the Company’s platforms and resources are made available
to the customer. This determination was reached after considering that our web-based functionality and content, in combination with our intellectual property, each represent inputs that transform into a combined output that represents the intended
outcome of the AAP, which is to provide a continuously accessible, customized, and dynamic learning and development solution only accessible through the AAP platform.
We typically invoice our customers annually upon execution of the contract or subsequent renewals. Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue or revenue, depending on whether transfer of control
has occurred.
Our Leader in Me offering is bifurcated into a portal membership obligation and a coaching delivery obligation. We have determined that it is appropriate to recognize revenue related to the portal
membership over the term of the underlying contract and to recognize revenue from coaching as those services are performed. The combined contract amount is recorded in deferred subscription revenue until the performance obligations are satisfied.
Any additional coaching or training days which are contracted independent of the Leader in Me membership are recorded as revenue in accordance with our general policy for services and products as previously
described.
Royalties
Our international strategy includes the use of licensees in countries where we do not have a wholly-owned direct office. Licensee companies are unrelated entities that have been granted a license to translate our content and offerings, adapt
the content to the local culture, and sell our content in a specific country or region. Licensees are required to pay us royalties based upon a percentage of their sales to clients. We recognize royalty income each reporting period based upon the
sales information reported to us from our licensees. When sales information is not received from a particular licensee at the end of a reporting period, the Company estimates the amount of royalties to be received for the period that is being
reported based upon prior forecasts and historical performance. These estimated royalties are recorded as revenue and are adjusted in the subsequent period.
The primary impact of ASU No. 2014-09 on our financial statements is a change in the way we account for the initial license fee associated with licensing an international location. The Company previously recorded the non-refundable initial
license fee from licensing an international location as revenue at the time the license period began if all other revenue requirements had been met. However, under Topic 606, we recognize revenue on the upfront fees over the term of the initial
contract.
Contracts with Multiple Performance Obligations
We periodically enter into contracts that include multiple performance obligations. A performance obligation is a promise in a contract to transfer products or services that are distinct, or that are distinct within the context of the
contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. Determining whether products and services meet the distinct criteria that should
be accounted for separately or combined as one unit of accounting requires significant judgment.
When determining whether goods and services meet the distinct criteria, we consider various factors for each agreement including the availability of the services and the nature of the offerings and services. We allocate the transaction price to
each performance obligation on a relative standalone selling price (SSP) basis. Judgment is required to determine the SSP for each distinct performance obligation. The SSP is the price which the Company would sell a promised product or service
separately to a customer. In determining the SSP, we consider the size and volume of transactions, price lists, historical sales, and contract prices. We may modify our pricing from time-to-time in the future, which could result in changes to the
SSP.
Contract Balances
As described above, subscription revenue is generally recognized ratably over the term of the underlying contract beginning on the commencement date of each agreement. The timing of when these contracts are invoiced, cash is collected, and
revenue is recognized impacts our accounts receivable and deferred revenue accounts. We generally bill our clients in advance for subscription offerings or within the month that the training and products are delivered. As such, consideration due
to the Company for work performed is included in accounts receivable and we do not have a significant amount of contract assets. Our receivables are generally collected within 30 to 120 days but typically no longer than 12 months. Deferred
revenue primarily consists of billings or payments received in advance of revenue being recognized from our subscription offerings. Furthermore, our clients, to expend funds in a particular budget cycle, may prepay for services or products which
are also a component of our consolidated deferred revenue. Our deferred revenue totaled $68.9 million at August 31, 2020 and $65.8 million at August 31, 2019, of which $2.2 million and $3.6 million were classified as components of other long-term
liabilities at August 31, 2020 and August 31, 2019, respectively. The amount of deferred revenue that was generated from subscription offerings totaled $60.6 million at August 31, 2020 and $58.2 million at August 31, 2019. During the fiscal years
ended August 31, 2020 and 2019, we recognized $86.5 million and $74.7 million of previously deferred subscription revenue.
Remaining Performance Obligations
When possible, we enter into multi-year non-cancellable contracts which are invoiced either upon execution of the contract or at the beginning of each annual contract period. Topic 606 introduced the concept of remaining transaction price which
represents contracted revenue that has not yet been recognized, including unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price is influenced by factors such as seasonality, the average
length of the contract term, and the ability of the Company to continue to enter multi-year non-cancellable contracts. At August 31, 2020 we had $100.2 million of remaining performance obligations, including $60.6 million of deferred revenue
related to our subscription offerings. The remaining performance obligation does not include other deferred revenue as amounts included in other deferred revenue include items such as deposits that are generally refundable at the client’s request
prior to the satisfaction of the obligation.
Costs Capitalized to Obtain Contracts
We capitalize the incremental costs of obtaining non-cancellable subscription revenue, primarily from the All Access Pass and the Leader in Me membership offerings. These incremental costs consist of
sales commissions paid to our sales force and include the associated payroll taxes and fringe benefits. As the same commission rates are paid annually when the customer renews their contract, the capitalized commission costs are generally
amortized ratably on an annual basis consistent with the recognition of the corresponding subscription revenue. At August 31, 2020, we have capitalized $9.7 million of direct commissions, of which $8.9 million is included in other current assets
and $0.8 million is in other long-term assets based on the expected recognition of the commission expense. At August 31, 2019, we had $9.0 million of capitalized direct sales commissions with $8.3 million included in other current assets and $0.7
million included in other long-term liabilities. During the fiscal year ended August 31, 2020, we capitalized $13.7 million of commission costs to obtain revenue contracts and amortized $13.0 million of deferred commissions to selling, general,
and administrative expense.
During fiscal 2020, we recorded $3.2 million of consideration paid for an amendment to the license agreement with FC Organizational Products (Note 17) as a capitalized cost of the license and will reduce our royalty revenue from this license
agreement by amortizing this amount over the remainder of the initial term of the license agreement, which ends in approximately 30 years.
Refer to Note 16 (Segment Information) to these consolidated financial statements for our disaggregated revenue information.
| 3. |
BUSINESS ACQUISITIONS
|
On December 5, 2018, we purchased all of the equity of Leadership Institut GmbH, a Munich, Germany based company with wholly owned subsidiary companies in Switzerland and Austria. Leadership Institut GmbH previously operated as an independent
licensee that provided our training and products to Germany, Switzerland, and Austria (GSA). We transitioned the GSA licensee operation into a directly owned office operation during fiscal 2019. The purchase price was $0.2 million in cash, plus
$0.8 million in forgiveness of liabilities owed to the Company from the pre-existing relationship at the purchase date. There is no contingent or other additional consideration associated with the purchase of the former GSA licensee. We accounted
for the acquisition of Leadership Institut Gmbh as a business combination in the second quarter of fiscal 2019. We incurred costs for severance, legal, and other related acquisition expenses which totaled $0.5 million and were expensed in selling,
general, and administrative expense during fiscal 2019. The acquisition of the GSA licensee provides us the opportunity to operate a directly owned office in one of the world’s largest economic markets and is expected to provide significant future
growth opportunities. The total purchase price consisted of the following (in thousands):
|
Cash paid at closing
|
$
|
159
|
||
|
Accounts receivable from GSA licensee
|
798
|
|||
|
Total purchase price
|
$
|
957
|
||
The major classes of assets and liabilities to which we have allocated the purchase price were as follows (in thousands):
|
Cash acquired
|
$
|
127
|
||
|
Accounts receivable
|
564
|
|||
|
Inventories
|
80
|
|||
|
Prepaid expenses and other current assets
|
45
|
|||
|
Intangible assets
|
741
|
|||
|
Property and equipment
|
27
|
|||
|
Other long-term assets
|
11
|
|||
|
Assets acquired
|
1,595
|
|||
|
Accounts payable
|
(208
|
)
|
||
|
Accrued liabilities
|
(383
|
)
|
||
|
Income taxes payable
|
(47
|
)
|
||
|
Liabilities assumed
|
(638
|
)
|
||
|
$
|
957
|
|||
The allocation of the purchase price to the intangible assets acquired was as follows (in thousands):
|
|
|||||
|
Description
|
Amount
|
Weighted Average Life
|
|||
|
Reacquisition of license rights
|
$
|
360
|
3 years
|
||
|
Localized content
|
202
|
3 years
|
|||
|
Customer relationships
|
179
|
3 years
|
|||
|
$
|
741
|
||||
We have included the financial results of the former GSA licensee in our financial results since the date of acquisition. The acquisition of the former GSA licensee was immaterial to our financial statements and pro forma financial information
was not deemed necessary for this acquisition.
| 4. |
ACCOUNTS RECEIVABLE
|
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts represents our best estimate of the amount of probable credit losses in the existing accounts receivable balance, and we
review the adequacy of the allowance for doubtful accounts on a regular basis. We determine the allowance for doubtful accounts using historical write-off experience based on the age of the receivable balances, current general economic conditions,
and other specific factors which may delay collection, such as the COVID-19 pandemic. Receivable balances past due over 90 days, which exceed a specified dollar amount, are reviewed individually for collectability. If the risk of non-collection
increases for our receivable balances, there may be additional charges to expense to increase the allowance for doubtful accounts.
Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance sheet credit exposure related to our customers nor do
we generally require collateral or other security agreements from our customers. Activity in our allowance for doubtful accounts was comprised of the following for the periods indicated (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Beginning balance
|
$
|
4,242
|
$
|
3,555
|
$
|
2,310
|
||||||
|
Charged to costs and expenses
|
2,023
|
1,212
|
2,029
|
|||||||||
|
Deductions
|
(2,106
|
)
|
(525
|
)
|
(784
|
)
|
||||||
|
Ending balance
|
$
|
4,159
|
$
|
4,242
|
$
|
3,555
|
||||||
Deductions on the foregoing table represent the write-off of amounts deemed uncollectible during the fiscal year presented. Recoveries of amounts previously written off were insignificant for the periods presented.
| 5. |
INTANGIBLE ASSETS AND GOODWILL
|
Intangible Assets
Our intangible assets were comprised of the following (in thousands):
|
Gross Carrying
|
Accumulated
|
Net Carrying
|
||||||||||
|
AUGUST 31, 2020
|
Amount
|
Amortization
|
Amount
|
|||||||||
|
Finite-lived intangible assets:
|
||||||||||||
|
Acquired content
|
$
|
62,327
|
$
|
(50,749
|
)
|
$
|
11,578
|
|||||
|
License rights
|
32,137
|
(21,321
|
)
|
10,816
|
||||||||
|
Customer lists
|
20,280
|
(18,926
|
)
|
1,354
|
||||||||
|
Acquired technology
|
3,568
|
(3,568
|
)
|
-
|
||||||||
|
Trade names
|
2,036
|
(1,759
|
)
|
277
|
||||||||
|
Non-compete agreements and other
|
759
|
(659
|
)
|
100
|
||||||||
|
121,107
|
(96,982
|
)
|
24,125
|
|||||||||
|
Indefinite-lived intangible asset:
|
||||||||||||
|
Covey trade name
|
23,000
|
-
|
23,000
|
|||||||||
|
$
|
144,107
|
$
|
(96,982
|
)
|
$
|
47,125
|
||||||
|
AUGUST 31, 2019
|
||||||||||||
|
Finite-lived intangible assets:
|
||||||||||||
|
Acquired content
|
$
|
62,307
|
$
|
(48,449
|
)
|
$
|
13,858
|
|||||
|
License rights
|
28,099
|
(20,063
|
)
|
8,036
|
||||||||
|
Customer lists
|
20,266
|
(18,450
|
)
|
1,816
|
||||||||
|
Acquired technology
|
3,568
|
(3,149
|
)
|
419
|
||||||||
|
Trade names
|
2,036
|
(1,602
|
)
|
434
|
||||||||
|
Non-compete agreements and other
|
758
|
(631
|
)
|
127
|
||||||||
|
117,034
|
(92,344
|
)
|
24,690
|
|||||||||
|
Indefinite-lived intangible asset:
|
||||||||||||
|
Covey trade name
|
23,000
|
-
|
23,000
|
|||||||||
|
$
|
140,034
|
$
|
(92,344
|
)
|
$
|
47,690
|
||||||
Our intangible assets are amortized over the estimated useful life of the asset. The range of remaining estimated useful lives and weighted-average amortization period over which we are amortizing the major categories of finite-lived intangible
assets at August 31, 2020 were as follows:
|
Category of Intangible Asset
|
Range of Remaining
Estimated Useful Lives
|
Weighted Average
Original Amortization Period
|
||
|
Acquired content
|
1 to 7 years
|
25 years
|
||
|
License rights
|
2 to 9 years
|
26 years
|
||
|
Customer lists
|
1 to 6 years
|
12 years
|
||
|
Acquired technology
|
None
|
3 years
|
||
|
Trade names
|
1 to 3 years
|
5 years
|
||
|
Non-compete agreements and other
|
1 to 7 years
|
4 years
|
Our aggregate amortization expense from finite-lived intangible assets totaled $4.6 million, $5.0 million, and $5.4 million for the fiscal years ended August 31, 2020, 2019, and 2018. Amortization expense from our intangible assets over the
next five years is expected to be as follows (in thousands):
|
YEAR ENDING
|
||||
|
AUGUST 31,
|
||||
|
2021
|
$
|
4,492
|
||
|
2022
|
4,025
|
|||
|
2023
|
3,054
|
|||
|
2024
|
3,054
|
|||
|
2025
|
3,053
|
|||
Multipliers License Rights
We obtained an exclusive license (with certain exceptions) to develop and sell leadership offerings based on the bestselling book Multipliers, by Liz Wiseman. We launched the new Multipliers-based offerings in August 2020, which started minimum required royalty payments of $0.6 million per year through the expiration of the initial term of the license on August 31, 2029. The initial
term of the Multipliers license may be extended over an additional five years, subject to the provisions of the license agreement. In August 2020, we recorded an increase to our intangible assets of $4.0
million, which is the present value of the minimum required royalty payments discounted at 5.0 percent. We will amortize the Multipliers license rights on a straight-line basis over the initial license period, which ends on August 31, 2029.
Goodwill
There were no changes to our consolidated goodwill balance during fiscal 2020 and we do not have any accumulated impairment charges against the carrying value of our goodwill. At August 31, 2020 and 2019, goodwill was allocated to our segments
as shown below (in thousands):
|
Direct offices
|
$
|
16,825
|
||
|
International licensees
|
5,065
|
|||
|
Education practice
|
2,330
|
|||
|
$
|
24,220
|
|||
| 6. |
TERM LOANS PAYABLE AND REVOLVING LINE OF CREDIT
|
On August 7, 2019, we entered into a new credit agreement (the 2019 Credit Agreement) with our existing lender, which replaced the amended and restated credit agreement dated March 2011 (the Original Credit Agreement). The 2019 Credit Agreement
provides up to $25.0 million in term loans and a $15.0 million revolving line of credit. Upon entering into the 2019 Credit Agreement, we borrowed $20.0 million of the available term loan and used the proceeds to repay all indebtedness under the
Original Credit Agreement.
During November 2019, we borrowed the remaining $5.0 million of available term loan capacity on the 2019 Credit Agreement.
The 2019 Credit Agreement is secured by substantially all of the assets of the Company and certain of our subsidiaries, and contains customary representations, warranties, and covenants. We incurred approximately $0.1 million of legal fees to
obtain the 2019 Credit Agreement.
First Modification Agreement
To address potential covenant compliance issues associated with the uncertainties surrounding the economic recovery from the COVID-19 pandemic, on July 8, 2020, we entered into the First Modification Agreement to the 2019 Credit Agreement. The
primary purpose of the First Modification Agreement is to provide temporary alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. These new covenants consist of the following:
|
1.
|
Minimum Liquidity – We must maintain consolidated minimum liquidity of not less than $13.0 million from August 31, 2020 through February 28, 2021 and $8.0 million at May 31, 2021.
|
|
2.
|
Minimum Adjusted EBITDA – We must maintain rolling four-quarter adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA) not less than the amount set forth below at the end of the specified
quarter (in thousands).
|
|
Quarter Ending
|
Amount
|
|||
|
August 31, 2020
|
$
|
11,000
|
||
|
November 30, 2020
|
8,500
|
|||
|
February 28, 2021
|
5,000
|
|||
|
May 31, 2021
|
15,000
|
|||
Adjusted EBITDA for purposes of this calculation may not be the same as reported by the Company in our earnings releases. The amounts in the table above exclude amortization of capitalized development costs which is
classified in cost of sales.
|
3.
|
Capital Expenditures – We may not make capital expenditures, including capitalized development costs, in an amount exceeding $8.5 million in aggregate for any fiscal year.
|
In addition to the new financial covenants described above, we are prohibited from making certain restricted payments, including dividend payments on our common stock and open-market purchases of our common stock until we have been in compliance
with the previously existing financial covenants for two consecutive quarters. The available credit on the revolving line of credit remains the same as under the 2019 Credit Agreement.
Interest on all borrowings under the 2019 Credit Agreement is due and payable on the first day of each month. Our interest rate under the First Modification Agreement increased to LIBOR plus 3.0 percent from LIBOR plus 1.85 percent under the
original 2019 Credit Agreement. Our unused credit commitment fee under the First Modification Agreement increased from 0.2 percent to 0.5 percent. The effective interest rate on our term loan obligations was 3.5 percent at August 31, 2020 and 4.1
percent at August 31, 2019.
In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the 2019 Credit Agreement. At
August 31, 2020, we believe that we were in compliance with the terms and covenants applicable to the 2019 Credit Agreement and the First Modification Agreement.
The previously existing financial covenants, which include (i) a Funded Indebtedness to Adjusted EBITDAR Ratio of less than 3.00 to 1.00; (ii) a Fixed Charge Coverage ratio not less than 1.15 to 1.00; (iii) an annual limit on capital
expenditures (excluding capitalized curriculum development costs) of $8.0 million; and (iv) consolidated accounts receivable of not less than 150% of the aggregate amount of the outstanding borrowings on the revolving line of credit, the undrawn
amount of outstanding letters of credit, and the amount of unreimbursed letter of credit disbursements remain in effect except for the quarterly periods covered by the First Modification Agreement.
Term Loans Payable
As previously described, we have borrowed the available $25.0 million of term loans on the 2019 Credit Agreement. Principal payments of $1.25 million are due and payable on the first day of each January, April, July, and October until the term
loans obligation is repaid in 2024. At August 31, 2020, the principal payments due on our term loans are as follows (in thousands):
|
YEAR ENDING
|
||||
|
AUGUST 31,
|
||||
|
2021
|
$
|
5,000
|
||
|
2022
|
5,000
|
|||
|
2023
|
5,000
|
|||
|
2024
|
5,000
|
|||
|
$
|
20,000
|
|||
Revolving Line of Credit
The key terms and conditions of our revolving line of credit associated with the 2019 Credit Agreement are as follows:
|
•
|
Available Credit – $15.0 million less outstanding standby letters of credit, which totaled $10,000 at August 31, 2020.
|
|
•
|
Maturity Date – August 7, 2024.
|
|
•
|
Interest Rate – The effective interest rate is LIBOR plus 3.0 percent per annum and the unused commitment fee on the line of credit is 0.5 percent per annum. The interest rate and commitment
fee were modified by the First Modification Agreement as described above.
|
We did not have any borrowings on the revolving line of credit at either August 31, 2020 or 2019.
| 7. |
FINANCING OBLIGATION
|
We previously sold our corporate headquarters campus located in Salt Lake City, Utah, and entered into a 20-year master lease agreement with the purchaser, an unrelated private investment group. The 20-year master lease agreement contains six
additional five-year renewal options that allow us to maintain our operations at the current location for up to 50 years. Although the corporate headquarters facility was sold and we have no legal ownership of the property, the applicable
accounting guidance prohibited us from recording the transaction as a sale since we subleased a significant portion of the property that was sold. In transition to the new lease accounting guidance in ASC 842, we reassessed whether the contract
met the sale criteria under the new leasing standard. Based on this assessment, we determined that the sale criteria under the new leasing standard was not met and we will continue to account for the corporate campus lease as a financing
obligation on our consolidated balance sheet in future periods.
The financing obligation on our corporate campus was comprised of the following (in thousands):
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
Financing obligation payable in
|
||||||||
|
monthly installments of $315 at
|
||||||||
|
August 31, 2020, including
|
||||||||
|
principal and interest, with two
|
||||||||
|
percent annual increases
|
||||||||
|
(imputed interest at 7.7%),
|
||||||||
|
through June 2025
|
$
|
16,648
|
$
|
18,983
|
||||
|
Less current portion
|
(2,600
|
)
|
(2,335
|
)
|
||||
|
Total financing obligation,
|
||||||||
|
less current portion
|
$
|
14,048
|
$
|
16,648
|
||||
Future principal maturities of our financing obligation were as follows at August 31, 2020 (in thousands):
|
YEAR ENDING
|
||||
|
AUGUST 31,
|
||||
|
2021
|
$
|
2,600
|
||
|
2022
|
2,887
|
|||
|
2023
|
3,199
|
|||
|
2024
|
3,538
|
|||
|
2025
|
4,424
|
|||
|
Thereafter
|
-
|
|||
|
$
|
16,648
|
|||
Our remaining future minimum payments under the financing obligation in the initial 20-year lease term are as follows (in thousands):
|
YEAR ENDING
|
||||
|
AUGUST 31,
|
||||
|
2021
|
$
|
3,798
|
||
|
2022
|
3,874
|
|||
|
2023
|
3,952
|
|||
|
2024
|
4,031
|
|||
|
2025
|
3,301
|
|||
|
Thereafter
|
-
|
|||
|
Total future minimum financing
|
||||
|
obligation payments
|
18,956
|
|||
|
Less interest
|
(3,620
|
)
|
||
|
Present value of future minimum
|
||||
|
financing obligation payments
|
$
|
15,336
|
||
The $1.3 million difference between the carrying value of the financing obligation and the present value of the future minimum financing obligation payments represents the carrying value of the land sold in the financing transaction, which is
not depreciated. At the conclusion of the master lease agreement, the remaining financing obligation and carrying value of the land will be offset and written off our consolidated financial statements.
| 8. |
LEASES
|
Lessee Obligations
In the normal course of business, we rent office space, primarily for international sales administration offices, in commercial office complexes that are conducive to sales and administrative operations. We also rent warehousing and
distribution facilities that are designed to provide secure storage and efficient distribution of our training products, books, and accessories, and certain office equipment such as copiers. All of these leases are classified as operating leases.
Operating lease assets and liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. Since most of our leases do not provide an implicit rate, we use our incremental borrowing rate
based on the information available at the commencement date in determining the present value of lease payments. Leases with an initial term of 12 months or less are not recorded on the balance sheet. For operating leases, expense is recognized on
a straight-line basis over the lease term. We do not have significant amounts of variable lease payments.
Some of our operating leases contain renewal options that may be exercised at our discretion after the completion of the base rental term. At August 31, 2020, we had operating leases with remaining terms ranging from less than one year to
approximately five years. The amounts of assets and liabilities (in thousands) and other information related to our operating leases follows:
|
|
|||||
|
|
Balance Sheet Caption |
Amount
|
|||
|
Assets:
|
|||||
|
Operating lease right of use assets
|
Other long-term assets
|
$
|
1,203
|
||
|
Liabilities:
|
|||||
|
Current:
|
|||||
|
Operating lease liabilities
|
Accrued liabilities
|
695
|
|||
|
Long-Term:
|
|||||
|
Operating lease liabilities
|
Other long-term liabilities
|
508
|
|||
|
$
|
1,203
|
||||
|
Weighted Average Remaining Lease Term:
|
|||||
|
Operating leases (years)
|
2.7
|
||||
|
Weighted Average Discount Rate:
|
|||||
|
Operating leases
|
4.2
|
%
|
|||
In fiscal 2020, we obtained $1.5 million of right-of-use operating lease assets in exchange for operating lease liabilities. Future minimum lease payments under our operating leases at August 31, 2020, are as follows (in thousands):
|
YEAR ENDING
|
||||
|
AUGUST 31,
|
||||
|
2021
|
$
|
751
|
||
|
2022
|
208
|
|||
|
2023
|
121
|
|||
|
2024
|
97
|
|||
|
2025
|
87
|
|||
|
Thereafter
|
14
|
|||
|
Total operating lease payments
|
1,278
|
|||
|
Less imputed interest
|
(75
|
)
|
||
|
Present value of operating lease liabilities
|
$
|
1,203
|
||
We recognize lease expense on a straight-line basis over the life of the lease agreement. Total rent expense recorded in selling, general, and administrative expense from our lease agreements totaled $1.5 million, $1.5 million, and $1.6 million
for the fiscal years ended August 31, 2020, 2019, and 2018.
As previously disclosed in our fiscal 2019 Form 10-K under the prior guidance of ASC 840, minimum payments under operating lease agreements as of August 31, 2019 were as follows (in thousands):
|
YEAR ENDING
|
||||
|
AUGUST 31,
|
||||
|
2020
|
$
|
752
|
||
|
2021
|
472
|
|||
|
2022
|
112
|
|||
|
2023
|
97
|
|||
|
2024
|
79
|
|||
|
Thereafter
|
92
|
|||
|
$
|
1,604
|
|||
Lessor Accounting
We have subleased the majority of our corporate headquarters campus located in Salt Lake City, Utah to multiple tenants. These sublease agreements are accounted for as operating leases. We recognize sublease income on a straight-line basis
over the life of the sublease agreement. The cost basis of our corporate campus was $36.0 million, which had a carrying value of $5.9 million at August 31, 2020. The following future minimum lease payments due to us from our sublease agreements
at August 31, 2020, are as follows (in thousands):
|
YEAR ENDING
|
||||
|
AUGUST 31,
|
||||
|
2021
|
$
|
3,965
|
||
|
2022
|
3,720
|
|||
|
2023
|
2,085
|
|||
|
2024
|
1,551
|
|||
|
2025
|
1,292
|
|||
|
Thereafter
|
-
|
|||
|
$
|
12,613
|
|||
Sublease revenue totaled $3.9 million, $3.9 million, and $3.5 million during the fiscal years ended August 31, 2020, 2019, and 2018.
| 9. |
COMMITMENTS AND CONTINGENCIES
|
Warehouse Outsourcing Contract
Effective July 1, 2016, we entered into a warehousing services agreement with an independent warehouse and distribution company to provide product kitting, warehousing, and order fulfillment services at a facility in Des Moines, Iowa. Under the
terms of this contract, we paid a fixed charge of approximately $19,000 per month for account management services and variable charges for other warehousing services based on specified activities, including shipping charges. The warehouse charges
may be increased each year of the contract based upon changes in the Employment Cost Index. The original warehousing and distribution contract expired on June 30, 2019, and we extended the contract with essentially the same terms until June 30,
2020. We are currently negotiating a new warehouse services agreement with the same facility in Des Moines and expect that contract to be completed in fiscal 2021. Until a new agreement is reached, we are accounting for these services on a
month-to-month basis.
During fiscal years 2020, 2019, and 2018, we expensed $2.1 million, $3.1 million, and $2.9 million for services provided under the terms of our warehouse and distribution outsourcing contract. The total amount expensed each year includes
freight charges, which are billed to us based upon activity. Freight charges included in the warehouse and distribution outsourcing costs totaled $1.3 million, $2.1 million, and $1.9 million during the fiscal years ended August 31, 2020, 2019, and
2018. Because of the variable component of the agreement, our payments for warehouse and distribution services may fluctuate in the future due to changes in sales and levels of specified activities.
Purchase Commitments
During the normal course of business, we issue purchase orders to various vendors for products and services. At August 31, 2020, we had open purchase commitments totaling $4.8 million for products and services to be delivered primarily in
fiscal 2021.
Letters of Credit
At August 31, 2020 and 2019, we had standby letters of credit totaling $10,000 and $0.1 million. These letters of credit were required to secure commitments for certain insurance policies. No amounts were drawn on the letters of credit at
either August 31, 2020 or August 31, 2019.
Legal Matters and Loss Contingencies
We are the subject of certain legal actions, which we consider routine to our business activities. At August 31, 2020, we believe that, after consultation with legal counsel, any potential liability to us under these other actions will not
materially affect our financial position, liquidity, or results of operations.
| 10. |
SHAREHOLDERS’ EQUITY
|
Preferred Stock
We have 14.0 million shares of preferred stock authorized for issuance. At August 31, 2020 and 2019, no shares of preferred stock were issued or outstanding.
Treasury Stock
On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $40.0 million of our outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does
not have an expiration date. During fiscal 2020, we purchased 5,000 shares of our common stock for $0.2 million under the terms of this Board approved plan. 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 our common shares, and applicable legal requirements. We have 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.
The cost of common stock purchased for treasury as shown on our consolidated statement of cash flows for the year ending August 31, 2020 is comprised of 284,608 shares purchased from Knowledge Capital Investment Group (Note 17), 109,896 shares
withheld for statutory income taxes on various stock-based compensation plans, and 5,000 shares purchased under the terms of our fiscal 2020 Board-approved purchase plan described above. The shares withheld for income taxes were valued at the
market price on the date the stock-based plan shares were distributed to participants, which totaled $3.7 million. For the fiscal years ended August 31, 2019 and 2018, we withheld 561 shares and 104,699 shares for statutory taxes on stock-based
compensation awards, which had a total market value of approximately $12,000 and $2.0 million, respectively.
| 11. |
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting standards related to fair
value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into the following three levels based on reliability:
|
•
|
Level 1 valuations are based on quoted prices in active markets for identical instruments that the Company can access at the measurement date.
|
|
•
|
Level 2 valuations are based on inputs other than quoted prices included in Level 1 that are observable for the instrument, either directly or indirectly, for substantially the full term of the asset or liability including the
following:
|
|
a.
|
quoted prices for similar, but not identical, instruments in active markets;
|
|
b.
|
quoted prices for identical or similar instruments in markets that are not active;
|
|
c.
|
inputs other than quoted prices that are observable for the instrument; or
|
|
d.
|
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
•
|
Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.
|
The book values of our financial instruments at August 31, 2020 and 2019 approximated their fair values. The assessment of the fair values of our financial instruments is based on a variety of factors and assumptions. Accordingly, the fair
values may not represent the actual values of the financial instruments that could have been realized at August 31, 2020 or 2019, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or
settlement. The following methods and assumptions were used to determine the fair values of our financial instruments, none of which were held for trading or speculative purposes.
Cash, Cash Equivalents, and Accounts Receivable – The carrying amounts of cash, cash equivalents, and accounts receivable approximate their fair
values due to the liquidity and short-term maturity of these instruments.
Other Assets – Our other assets, including notes receivable, were recorded at the net realizable value of estimated future cash flows from these
instruments.
Debt Obligations – At August 31, 2020, our debt obligations consisted primarily of a variable-rate term note payable. Our term note payable and
revolving line of credit (Note 6) are negotiated components of our 2019 Credit Agreement, which was completed in August 2019 and modified in July 2020. Accordingly, the applicable interest rates on the term loan and revolving line of credit are
reflective of current market conditions, and the carrying value of term loan and revolving line of credit (when applicable) obligations therefore approximate their fair value.
Contingent Consideration Liabilities from Business Acquisitions
We have contingent consideration liabilities arising from previous business acquisitions. We measure the fair values of our contingent consideration liabilities at each reporting date based on valuation models as described below. Changes to
the fair value of the contingent consideration liabilities are recorded as components of our selling, general, and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss in the period of
adjustment. The fair value of the contingent consideration liabilities from the acquisition of Robert Gregory Partners (RGP) and Jhana Education (Jhana) changed as follows during the fiscal year ended August 31, 2020 (in thousands):
|
Change in
|
||||||||||||||||
|
AUGUST 31,
|
2019
|
Fair Value
|
Payments
|
2020
|
||||||||||||
|
RGP contingent liability
|
$
|
1,761
|
$
|
(445
|
)
|
$
|
(500
|
)
|
$
|
816
|
||||||
|
Jhana contingent liability
|
3,468
|
396
|
(797
|
)
|
3,067
|
|||||||||||
|
$
|
5,229
|
$
|
(49
|
)
|
$
|
(1,297
|
)
|
$
|
3,883
|
|||||||
At each quarterly reporting date, we estimate the fair value of the contingent liabilities from both the RGP and Jhana acquisitions through the use of Monte Carlo simulations. Based on the timing of expected payments, all of the RGP and $0.8
million of the Jhana contingent consideration liabilities were recorded as components of accrued liabilities on our consolidated balance sheet at August 31, 2020. The remainder of our contingent consideration liabilities are classified as other
long-term liabilities. The following additional information is for our recurring contingent consideration liabilities shown above.
Robert Gregory Partners – The purchase price of RGP included contingent consideration payments to its former owners of up to $4.5 million, based on the achievement of specified levels
of EBITDA and the delivery of “add-on coaching services content” for our AAP as set forth in the purchase agreement. During fiscal 2019, we amended the RGP acquisition agreement to reflect events and implementation issues that have occurred since
the acquisition date. The amended contract increased the contingent consideration liability from the RGP acquisition by $1.1 million during the third quarter of fiscal 2019, but did not increase the total amount of contingent consideration
potentially payable to the former owners of RGP. The fair value of the RGP contingent consideration is considered a Level 3 measurement because we estimate qualifying revenues and expected growth rates at each valuation date. The measurement
period of the RGP contingent consideration ends on May 31, 2021 and the following range of growth rates were used to calculate the initial fair value of the contingent consideration:
|
Likely
|
Minimum
|
Maximum
|
||||||||||
|
RGP growth rate - Year 1
|
14.8
|
%
|
(12.0
|
)%
|
35.0
|
%
|
||||||
|
RGP growth rate - Year 2
|
10.0
|
%
|
(12.0
|
)%
|
35.0
|
%
|
||||||
|
RGP growth rate - Year 3
|
10.0
|
%
|
(12.0
|
)%
|
35.0
|
%
|
||||||
|
Add-on services growth rate - Year 1
|
60.0
|
%
|
(20.0
|
)%
|
130.0
|
%
|
||||||
|
Add-on services growth rate - Year 2
|
50.0
|
%
|
(20.0
|
)%
|
130.0
|
%
|
||||||
|
Add-on services growth rate - Year 3
|
40.0
|
%
|
(20.0
|
)%
|
130.0
|
%
|
||||||
Jhana Education – On July 11, 2017, we acquired the stock of Jhana. The purchase price included potential contingent consideration of $7.2 million through the measurement period,
which ends in July 2026. The fair value of the Jhana contingent consideration is a Level 3 measurement because we estimate projected consolidated Company and AAP sales over the measurement period. Changes in expected qualifying revenues over the
measurement period influence the timing and amount of these contingent payments to the former owners of Jhana.
12. STOCK-BASED COMPENSATION PLANS
Overview
We utilize various stock-based compensation plans as integral components of our overall compensation and associate retention strategy. Our shareholders have approved various stock incentive plans that permit us to grant performance awards,
restricted stock awards, stock options, fully-vested stock awards, and employee stock purchase plan (ESPP) shares. The Organization and Compensation Committee of the Board of Directors (the Compensation Committee) has responsibility for the
approval and oversight of our stock-based compensation plans.
On January 25, 2019, our shareholders approved the Franklin Covey Co. 2019 Omnibus Incentive Plan (the 2019 Plan), which authorized an additional 700,000 shares of common stock for issuance to employees and members of the Board of Directors as
stock-based payments. A more detailed description of the 2019 Plan is set forth in our Definitive Proxy Statement filed with the SEC on December 20, 2018. At August 31, 2020, the 2019 Plan had approximately 511,000 shares available for future
grants.
Our employee stock purchase plan (ESPP) is administered under the terms of the Franklin Covey Co. 2017 Employee Stock Purchase Plan, which was approved by our shareholders at the annual meeting of shareholders held on January 26, 2018. For
additional information regarding the Franklin Covey Co. 2017 Employee Stock Purchase Plan, please refer to our definitive Proxy Statement as filed with the SEC on December 22, 2017. At August 31, 2020, we had approximately 862,000 shares available
for purchase by plan participants under the terms of the current shareholder-approved ESPP.
The total compensation expense of our stock-based compensation plans was as follows (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Performance awards
|
$
|
(1,518
|
)
|
$
|
3,853
|
$
|
2,034
|
|||||
|
Restricted stock awards
|
700
|
700
|
642
|
|||||||||
|
Compensation cost of the ESPP
|
185
|
176
|
155
|
|||||||||
|
Fully vested stock awards
|
60
|
60
|
15
|
|||||||||
|
$
|
(573
|
)
|
$
|
4,789
|
$
|
2,846
|
||||||
At each quarterly or annual reporting date, we evaluate number and probability of shares expected to vest in each of our performance-based long-term incentive plan (LTIP) awards and adjust our stock-based compensation expense to correspond with
the number of shares expected to vest over the anticipated service period. Due to the significant impact of the COVID-19 pandemic on our results of operations in the third quarter of fiscal 2020 and the uncertainties surrounding the recovery of
the world’s economies and our business, we determined that the LTIP award tranches which are based on qualified Adjusted EBITDA for our fiscal 2015, 2016, 2017, 2019, and 2020 LTIP awards would not vest before the end of the respective service
periods. We therefore reversed the previously recognized stock-based compensation expense associated with these awards during fiscal 2020, which resulted in a credit to stock-based compensation for the year.
No stock-based compensation was capitalized during the fiscal years presented in this report. We recognize forfeitures of stock-based compensation instruments as they occur. During fiscal 2020, we issued 311,452 shares of our common stock from
shares held in treasury for various stock-based compensation arrangements. Our stock-based compensation plans allow shares to be withheld from the award to pay statutory income tax liabilities. We withheld 109,896 shares of our common stock (Note
10) for statutory income taxes during fiscal 2020.
The following is a description of our stock-based compensation plans.
Performance Awards
The Compensation Committee has awarded various performance-based stock compensation awards to members of our senior management as long-term incentive plan (LTIP) compensation. These awards vest to the participants based upon the achievement of
specified performance criteria. Compensation expense is recognized as we determine it is probable that the shares will vest. Adjustments to compensation expense to reflect the timing of and the number of shares expected to be awarded are made on
a cumulative basis at the date of the adjustment. We reevaluate the likelihood of shares vesting under performance awards at each reporting date.
No LTIP awards vested to participants during fiscal 2020 or fiscal 2019. The following is a description of our performance-based LTIP awards as of August 31, 2020.
Fiscal 2020 LTIP Award – On October 18, 2019, the Compensation Committee of the Board of Directors granted a new LTIP award to our executive officers and members of senior management.
The fiscal 2020 LTIP award has three tranches, which consist of the following: 1) shares that vest after three years of service; 2) the achievement of specified levels of qualified Adjusted EBITDA; and 3) the achievement of specified levels of
subscription service sales. Twenty-five percent of a participant’s award vests after three years of service, and the number of shares awarded in this tranche does not fluctuate based on financial measures. The number of shares granted in this
tranche totals 25,101 shares. The remaining two tranches of the award are based on the highest rolling four-quarter levels of qualified Adjusted EBITDA and subscription service sales achieved in the three-year period ended August 31, 2022. The
number of shares that will vest to participants for these two tranches is variable and may be 50 percent of the award (minimum award threshold) up to 200 percent of the participant’s award (maximum threshold). The maximum number of shares that may
be awarded in connection with these tranches totals 150,630 shares. The fiscal 2020 LTIP has a three-year life and expires on August 31, 2022.
Fiscal 2019 LTIP Award – On October 1, 2018, the Compensation Committee granted a performance-based LTIP award to our executive officers and members of senior management, which is
similar to the fiscal 2020 LTIP described above. The fiscal 2019 LTIP award has three tranches, which consist of the following: 1) shares that vest after three years of service; 2) the achievement of certain levels of qualified Adjusted EBITDA;
and 3) the achievement of certain levels of subscription service sales. Twenty-five percent of a participant’s award vests after three years of service, and the number of shares awarded in this tranche will not fluctuate based on financial
measures. The number of shares granted in this tranche totals 36,470 shares. The remaining two tranches of the fiscal 2019 award are based on the highest rolling four-quarter levels of qualified Adjusted EBITDA and subscription service sales
achieved in the three-year period ended August 31, 2021. The number of shares that will vest to participants for these two tranches is variable and may be 50 percent of the award (minimum threshold) up to 200 percent of the participant’s award
(maximum threshold). The maximum number of shares that may be awarded in connection with these tranches totals 218,818 shares. The fiscal 2019 LTIP has a three-year life and expires on August 31, 2021.
Fiscal 2019 Time-Based Award – On January 25, 2019, the Compensation Committee approved an incentive plan award for the Chief Executive Officer, Chief Financial Officer, and Chief
People Officer that has a two-year time-based vesting (service) condition. A total of 11,915 shares were issued to the participants in connection with this award. The fair value of this award was calculated by multiplying the number of shares
times the closing price of the Company’s common stock on the grant date, which was $24.54 per share. The fair value of this award totals $0.3 million, which is being expensed evenly over the two-year service period.
Fiscal 2018 LTIP Award – On November 14, 2017, the Compensation Committee granted a performance-based LTIP award to our executive officers and members of senior management. The fiscal
2018 LTIP award has three tranches, which consist of the following: 1) shares that vest after three years of service; 2) the achievement of specified levels of qualified Adjusted EBITDA; and 3) the achievement of specified levels of subscription
service sales. Twenty-five percent of a participant’s award vests after three years of service, and the number of shares awarded in this tranche will not fluctuate based on financial measures. The number of shares granted in this tranche totals
42,883 shares. The remaining two tranches of the fiscal 2018 award are based on the highest rolling four-quarter levels of qualified Adjusted EBITDA and subscription service sales achieved in the three-year period ended August 31, 2020. The
number of shares that will vest to participants for these two tranches is variable and may be 50 percent of the award up to 200 percent of the participant’s award. The maximum number of shares that may be awarded in connection with these tranches
totals 257,300 shares. Based on financial results achieved in the three-year period ended August 31, 2020, a total of 221,067 shares were earned by participants in the fiscal 2018 LTIP. The shares earned in the fiscal 2018 LTIP were distributed
to participants in the first quarter of fiscal 2021.
Fiscal 2017 LTIP Award – On October 18, 2016, the Compensation Committee granted performance-based awards for our executive officers and members of senior management. A total of
183,381 shares may be earned by the participants based on six individual vesting conditions that are divided into two performance measures, trailing four-quarter Adjusted EBITDA and trailing four-quarter gross All Access Pass sales. As of August
31, 2020, four tranches of this award have vested, totaling 97,803 shares. The 2017 LTIP has a six-year life and expires on August 31, 2022.
Fiscal 2016 LTIP Award – The fiscal 2016 LTIP was granted on November 12, 2015, to our executive officers and members of senior management. A total of 231,276 shares may be awarded to
the participants based on six individual vesting conditions that are divided into two performance measures, trailing four-quarter Adjusted EBITDA and increased sales of Organizational Development Suite (OD Suite) offerings. The OD Suite is defined
as Leadership, Productivity, and Trust practice sales. As of August 31, 2020, four tranches of the fiscal 2016 LTIP have vested to participants, totaling 123,348 shares. The 2016 LTIP has a six-year life and expires on August 31, 2021.
Fiscal 2015 LTIP Award – During fiscal 2015, the Compensation Committee granted a performance-based award for our executive officers and certain members of senior management. A total
of 112,464 shares were eligible to be awarded to participants based on six individual vesting conditions that are divided into two performance measures, trailing four-quarter Adjusted EBITDA and increased sales of OD Suite sales. As of August 31,
2020, a total of 59,980 shares, or four tranches, of the fiscal 2015 LTIP vested to participants. The 2015 LTIP had a six-year life that concluded on August 31, 2020 and the remaining award tranches, totaling 52,484 shares, expired unvested to the
participants.
Restricted Stock Awards
The annual Board of Director restricted stock award, which is administered under the terms of the Franklin Covey Co. 2019 Omnibus Incentive Plan, is designed to provide our non-employee directors, who are not eligible to participate in our
employee stock purchase plan, an opportunity to obtain an interest in the Company through the acquisition of shares of our common stock. Each eligible director is entitled to receive a whole-share grant equal to $100,000 with a one-year vesting
period, which is generally granted in January (following the Annual Shareholders’ Meeting) of each year. Shares granted under the terms of this annual award may not be voted or participate in any common stock dividends until they are vested.
We issued 21,420 shares, 28,525 shares, and 23,338 shares of our common stock to eligible members of the Board of Directors during fiscal 2020, fiscal 2019, and fiscal 2018 as restricted stock awards. The fair value of shares awarded to the
directors was $0.7 million in each of fiscal 2020, fiscal 2019, and fiscal 2018 as calculated on the grant date of the awards. The corresponding compensation cost of each award is recognized over the service period of the award, which is one
year. The cost of the common stock issued from treasury for these awards was $0.3 million in fiscal 2020, $0.4 million in fiscal 2019, and $0.3 million in fiscal 2018. The following information applies to our restricted stock awards for the
fiscal year ended August 31, 2020:
|
Weighted-
|
||||||||
|
Average Grant-
|
||||||||
|
Date Fair
|
||||||||
|
Number of
|
Value Per
|
|||||||
|
Shares
|
Share
|
|||||||
|
Restricted stock awards at
|
||||||||
|
August 31, 2019
|
28,525
|
$
|
24.54
|
|||||
|
Granted
|
21,420
|
32.68
|
||||||
|
Forfeited
|
-
|
-
|
||||||
|
Vested
|
(28,525
|
)
|
24.54
|
|||||
|
Restricted stock awards at
|
||||||||
|
August 31, 2020
|
21,420
|
$
|
32.68
|
|||||
At August 31, 2020, there was $0.2 million of unrecognized compensation cost on our restricted stock awards, which is expected to be recognized over the remaining service period of approximately four months. The total recognized income tax
benefit from restricted stock awards totaled $0.2 million for each of the years ended August 31, 2020, 2019, and 2018. The intrinsic value of our restricted stock awards at August 31, 2020 was $0.4 million.
Stock Options
We have an incentive stock option plan whereby options to purchase shares of our common stock may be issued to key employees at an exercise price not less than the fair market value of the Company’s common stock on the date of grant. At August
31, 2020, there was no remaining unrecognized compensation expense related to our stock options and the remaining stock options outstanding expire in January 2021. Information related to our stock option activity during the fiscal year ended
August 31, 2020 is presented below:
|
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||
|
Avg. Exercise
|
Remaining
|
Aggregate
|
||||||||||||||
|
Number of
|
Price Per
|
Contractual
|
Intrinsic Value
|
|||||||||||||
|
Stock Options
|
Share
|
Life (Years)
|
(thousands)
|
|||||||||||||
|
Outstanding at August 31, 2019
|
568,750
|
$
|
11.67
|
|||||||||||||
|
Granted
|
-
|
-
|
||||||||||||||
|
Exercised
|
(350,000
|
)
|
11.73
|
|||||||||||||
|
Forfeited
|
-
|
-
|
||||||||||||||
|
Outstanding at August 31, 2020
|
218,750
|
$
|
11.57
|
0.4
|
$
|
1,787
|
||||||||||
|
Options vested and exercisable at
|
||||||||||||||||
|
August 31, 2020
|
218,750
|
$
|
11.57
|
0.4
|
$
|
1,787
|
||||||||||
The stock options exercised during fiscal 2020 were exercised on a net basis (no cash was paid to exercise the options) and we withheld 102,656 shares of our common stock for statutory income taxes, which had a fair value of $3.6 million. The
intrinsic value of the exercised options totaled $8.0 million and we recognized an income tax benefit of $1.8 million from the exercise of these options. No options were exercised during either fiscal 2019 or 2018.
The following additional information applies to our stock options outstanding at August 31, 2020:
|
Weighted
|
||||||||||||||||||||||
|
Number
|
Average
|
Options
|
||||||||||||||||||||
|
Outstanding
|
Remaining
|
Weighted
|
Exercisable at
|
Weighted
|
||||||||||||||||||
|
at August 31,
|
Contractual
|
Average
|
August 31,
|
Average
|
||||||||||||||||||
|
Exercise Prices
|
2020
|
Life (Years)
|
Exercise Price
|
2020
|
Exercise Price
|
|||||||||||||||||
|
$
|
9.00
|
31,250
|
0.4
|
$
|
9.00
|
31,250
|
$
|
9.00
|
||||||||||||||
|
$
|
10.00
|
62,500
|
0.4
|
$
|
10.00
|
62,500
|
$
|
10.00
|
||||||||||||||
|
$
|
12.00
|
62,500
|
0.4
|
$
|
12.00
|
62,500
|
$
|
12.00
|
||||||||||||||
|
$
|
14.00
|
62,500
|
0.4
|
$
|
14.00
|
62,500
|
$
|
14.00
|
||||||||||||||
|
218,750
|
218,750
|
|||||||||||||||||||||
Employee Stock Purchase Plan
We have an employee stock purchase plan that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of each
quarter. ESPP participants purchased a total of 41,409 shares, 43,073 shares, and 40,941 shares our stock during the fiscal years ended August 31, 2020, 2019, and 2018, which had a corresponding cost basis of $0.6 million each year. We received
cash proceeds for these shares from ESPP participants totaling $1.0 million in fiscal 2020; $1.0 million during fiscal 2019; and $0.8 million in fiscal 2018.
Fully Vested Stock Awards
We have a stock-based incentive program that is designed to reward our client partners and training consultants for exceptional long-term performance. The program grants shares of our common stock to client partners who have achieved certain
cumulative sales goals and to training consultants who have delivered a specified number of training days during their career. During fiscal 2020, four employees qualified for this award program; four individuals qualified in fiscal 2019; and one
individual qualified for this award in fiscal 2018.
| 13. |
EMPLOYEE BENEFIT PLANS
|
Profit Sharing Plans
We have defined contribution profit sharing plans for our employees that qualify under Section 401(k) of the Internal Revenue Code. These plans provide retirement benefits for employees meeting minimum age and service requirements. Qualified
participants may contribute up to 75 percent of their gross wages, subject to certain limitations. These plans also provide for matching contributions to the participants that are paid by the Company. The matching contributions, which were
expensed as incurred, totaled $2.3 million, $2.2 million, and $2.1 million during the fiscal years ended August 31, 2020, 2019, and 2018, respectively. We do not sponsor or participate in any defined-benefit pension plans.
Non-Qualified Deferred Compensation Plan
We had a non-qualified deferred compensation (NQDC) plan that provided certain key officers and employees the ability to defer a portion of their compensation until a later date. Deferred compensation amounts used to pay benefits were held in a
“rabbi trust,” which invested in insurance contracts, various mutual funds, and shares of our common stock as directed by the plan participants. However, due to legal changes resulting from the American Jobs Creation Act of 2004, we determined to
cease compensation deferrals to the NQDC plan after December 31, 2004. Following the cessation of deferrals to the NQDC plan, the number of participants remaining in the plan declined steadily, and our Board of Directors decided to partially
terminate the NQDC plan. Following this decision, all of the plan’s assets were liquidated, the plan’s liabilities were paid, and the only remaining items in the NQDC plan are shares of our common stock owned by the remaining plan participants.
At August 31, 2020 and 2019, the cost basis of the shares of our common stock held by the rabbi trust was $0.1 million and $0.2 million. Shares of our common stock held in the rabbi trust are included as components of treasury stock on the
accompanying consolidated balance sheets.
| 14. INCOME TAXES |
|
Our provision for income taxes consisted of the following (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$
|
(15
|
)
|
$
|
93
|
$
|
29
|
|||||
|
State
|
(87
|
)
|
(14
|
)
|
210
|
|||||||
|
Foreign
|
(1,145
|
)
|
(2,745
|
)
|
(2,947
|
)
|
||||||
|
(1,247
|
)
|
(2,666
|
)
|
(2,708
|
)
|
|||||||
|
Deferred:
|
||||||||||||
|
Federal
|
2,306
|
3,112
|
1,426
|
|||||||||
|
State
|
98
|
102
|
(314
|
)
|
||||||||
|
Foreign
|
(77
|
)
|
(120
|
)
|
(281
|
)
|
||||||
|
Operating loss carryforward
|
(50
|
)
|
(1,625
|
)
|
2,636
|
|||||||
|
Adjustment for changes in U.S.
|
||||||||||||
|
income tax rates
|
-
|
-
|
1,654
|
|||||||||
|
Valuation allowance
|
(11,261
|
)
|
(418
|
)
|
(2,780
|
)
|
||||||
|
(8,984
|
)
|
1,051
|
2,341
|
|||||||||
|
$
|
(10,231
|
)
|
$
|
(1,615
|
)
|
$
|
(367
|
)
|
||||
The allocation of our total income tax provision is as follows (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Net loss
|
$
|
(10,231
|
)
|
$
|
(1,615
|
)
|
$
|
(367
|
)
|
|||
|
Other comprehensive income (loss)
|
16
|
(5
|
)
|
(75
|
)
|
|||||||
|
$
|
(10,215
|
)
|
$
|
(1,620
|
)
|
$
|
(442
|
)
|
||||
Income (loss) before income taxes consisted of the following (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
United States
|
$
|
3,062
|
$
|
(1,910
|
)
|
$
|
(8,960
|
)
|
||||
|
Foreign
|
(2,266
|
)
|
2,502
|
3,440
|
||||||||
|
$
|
796
|
$
|
592
|
$
|
(5,520
|
)
|
||||||
The differences between income taxes at the statutory federal income tax rate and the consolidated income tax rate reported in our consolidated statements of operations and comprehensive loss were as follows:
|
YEAR ENDED
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Federal statutory income tax rate
|
(21.0
|
)%
|
(21.0
|
)%
|
25.7
|
%
|
||||||
|
State income taxes, net of federal effect
|
16.9
|
(5.4
|
)
|
2.6
|
||||||||
|
Effect of change in U.S. federal tax rate
|
-
|
-
|
30.0
|
|||||||||
|
Valuation allowance
|
(1,412.9
|
)
|
(70.8
|
)
|
(50.4
|
)
|
||||||
|
Executive stock options
|
199.9
|
-
|
-
|
|||||||||
|
Foreign jurisdictions tax differential
|
1.4
|
(72.8
|
)
|
(6.8
|
)
|
|||||||
|
Tax differential on income subject to both U.S. and foreign taxes
|
11.9
|
(64.7
|
)
|
2.3
|
||||||||
|
Uncertain tax positions
|
13.8
|
34.0
|
(5.1
|
)
|
||||||||
|
Non-deductible executive compensation
|
(18.2
|
)
|
(8.8
|
)
|
(2.7
|
)
|
||||||
|
Non-deductible meals and entertainment
|
(22.3
|
)
|
(52.9
|
)
|
(8.9
|
)
|
||||||
|
Payout of deferred compensation (NQDC)
|
6.1
|
0.3
|
4.4
|
|||||||||
|
Other
|
(59.3
|
)
|
(10.7
|
)
|
2.2
|
|||||||
|
(1,283.7
|
)%
|
(272.8
|
)%
|
(6.7
|
)%
|
|||||||
Due to the near break-even amount of pre-tax income during fiscal 2020 and 2019, the effect of non-temporary items on our effective income tax rate was greatly amplified.
In consideration of the relevant accounting guidance, we reevaluated our deferred tax assets during fiscal 2020 and considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our
deferred tax assets will be realized. Because of the cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the
recovery from the pandemic, we were unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, primarily foreign
tax credit carryforwards and a portion of our net operating loss carryforwards. Based on this assessment, we increased the valuation allowance against our deferred tax assets, which generated $11.3 million of additional income tax expense in
fiscal 2020.
The Tax Cut and Jobs Act (the 2017 Tax Act) was signed into law on December 22, 2017. The 2017 Tax Act significantly revised the U.S. corporate income tax code by, among other things, lowering the statutory corporate tax rate from 35 percent to
21 percent; eliminating certain deductions; imposing a mandatory one-time transition tax, or deemed repatriation tax, on accumulated earnings of foreign subsidiaries as of 2017 that were previously tax deferred; introducing new tax regimes; and
changing how foreign earnings are subject to U.S. tax.
Since we have an August 31 fiscal year end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 25.7 percent for fiscal 2018 and a 21 percent rate for fiscal 2019 and subsequent years. Other
provisions of the 2017 Tax Act became effective for us in fiscal 2019, including limitations on the deductibility of interest and executive compensation as well as anti-deferral provisions on Global Intangible Low-Taxed Income (GILTI). We have
elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”).
In fiscal 2020, we recorded $0.2 million of income tax expense resulting from limitations added by the 2017 Tax Act on the deductibility of executive compensation. Because of losses in foreign jurisdictions, we recorded no income tax expense in
fiscal 2020 under the GILTI provisions. During fiscal 2019, we recorded income tax expense of $0.3 million under the GILTI provisions. We recorded $0.1 million of tax expense resulting from limitations added by the 2017 Tax Act on the
deductibility of executive compensation.
In fiscal 2018, we recorded income tax benefits totaling $1.7 million, including a one-time income tax benefit of $0.9 million as of the date of enactment. We recognized $0.8 million of the one-time benefit from re-measuring our net deferred
tax liabilities at the reduced U.S. federal tax rate and $0.2 million of the benefit from other changes enacted by the 2017 Tax Act. These benefits were partially offset by $0.1 million of expense from the deemed repatriation of accumulated
earnings from our foreign subsidiaries.
On September 1, 2017, we adopted the provisions of ASU 2016-09, which requires that the benefits of deductions resulting from stock-based compensation in excess of the corresponding book expense be recorded as a component of our income tax
provision or benefit for the period, instead of being recorded to additional paid-in capital. In fiscal 2020, as a result of our CEO and CFO’s exercise of stock options, we recorded an income tax benefit of $1.8 million for stock-based
compensation deductions that were greater than the corresponding book expense. We recorded income tax expense of $0.1 million in fiscal 2019 and an immaterial amount of income tax expense in fiscal 2018 for stock-based compensation deductions that
were less than the corresponding book expense.
The significant components of our deferred tax assets and liabilities were as follows (in thousands):
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
Deferred income tax assets:
|
||||||||
|
Foreign income tax credit
|
||||||||
|
carryforward
|
$
|
9,150
|
$
|
8,140
|
||||
|
Net operating loss carryforward
|
7,694
|
7,516
|
||||||
|
Sale and financing of corporate
|
||||||||
|
headquarters
|
3,939
|
4,431
|
||||||
|
Bonus and other accruals
|
1,607
|
1,622
|
||||||
|
Stock-based compensation
|
1,431
|
1,973
|
||||||
|
Inventory and bad debt reserves
|
1,328
|
1,376
|
||||||
|
Deferred revenue
|
1,268
|
829
|
||||||
|
Other
|
530
|
264
|
||||||
|
Total deferred income tax assets
|
26,947
|
26,151
|
||||||
|
Less: valuation allowance
|
(15,076
|
)
|
(3,815
|
)
|
||||
|
Net deferred income tax assets
|
11,871
|
22,336
|
||||||
|
Deferred income tax liabilities:
|
||||||||
|
Intangibles step-ups – indefinite lived
|
(5,494
|
)
|
(5,424
|
)
|
||||
|
Intangibles step-ups – finite lived
|
(2,786
|
)
|
(3,406
|
)
|
||||
|
Intangible asset impairment and
|
||||||||
|
amortization
|
(3,306
|
)
|
(2,906
|
)
|
||||
|
Deferred commissions
|
(2,231
|
)
|
(2,056
|
)
|
||||
|
Property and equipment depreciation
|
(1,904
|
)
|
(2,880
|
)
|
||||
|
Unremitted earnings of foreign
|
||||||||
|
subsidiaries
|
(354
|
)
|
(456
|
)
|
||||
|
Other
|
-
|
(343
|
)
|
|||||
|
Total deferred income tax liabilities
|
(16,075
|
)
|
(17,471
|
)
|
||||
|
Net deferred income taxes
|
$
|
(4,204
|
)
|
$
|
4,865
|
|||
Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
Long-term assets
|
$
|
1,094
|
$
|
5,045
|
||||
|
Long-term liabilities
|
(5,298
|
)
|
(180
|
)
|
||||
|
Net deferred income tax asset (liability)
|
$
|
(4,204
|
)
|
$
|
4,865
|
|||
Our U.S. federal net operating loss carryforwards were comprised of the following at August 31, 2020 (in thousands):
|
|
Loss
|
Loss
|
Operating
|
||||||||||||||
|
Loss Carryforward
|
Loss Expires
|
Deductions
|
Deductions
|
Loss Carried
|
|||||||||||||
|
for Year Ended
|
August 31,
|
Amount
|
in Prior Years
|
in Current Year
|
Forward
|
||||||||||||
|
December 31, 2014
|
2033
|
$
|
1,285
|
$
|
(1,019
|
)
|
$
|
(266
|
)
|
$
|
-
|
||||||
|
December 31, 2015
|
2034
|
1,491
|
-
|
(580
|
)
|
911
|
|||||||||||
|
December 31, 2016
|
2035
|
3,052
|
-
|
-
|
3,052
|
||||||||||||
|
July 15, 2017
|
|||||||||||||||||
|
Acquired NOL
|
2036
|
1,117
|
-
|
-
|
1,117
|
||||||||||||
|
6,945
|
(1,019
|
)
|
(846
|
)
|
5,080
|
||||||||||||
|
August 31, 2017
|
2037
|
16,361
|
(6,627
|
)
|
(1,366
|
)
|
8,368
|
||||||||||
|
August 31, 2018
|
2038
|
10,506
|
-
|
-
|
10,506
|
||||||||||||
|
$
|
33,812
|
$
|
(7,646
|
)
|
$
|
(2,212
|
)
|
$
|
23,954
|
||||||||
We have U.S. state net operating loss carryforwards generated in fiscal 2009 and before in various jurisdictions that expire primarily between September 1, 2020 and August 31, 2029. The U.S. state net operating loss carryforwards generated in
fiscal 2017 and fiscal 2018 primarily expire on August 31, 2037 and 2038, respectively. The state net operating loss carryforwards acquired through the purchase of Jhana Education stock expire between August 31, 2033 and August 31, 2036.
Our U.S. foreign income tax credit carryforwards were comprised of the following at August 31, 2020 (in thousands):
|
Credit Generated in
|
Credits Used
|
Credits Used
|
Credits
|
||||||||||||||
|
Fiscal Year Ended
|
Credit Expires
|
Credits
|
in Prior
|
in Current
|
Carried
|
||||||||||||
|
August 31,
|
August 31,
|
Generated
|
Years
|
Year
|
Forward
|
||||||||||||
|
2011
|
2021
|
$
|
3,445
|
$
|
(414
|
)
|
$
|
-
|
$
|
3,031
|
|||||||
|
2012
|
2022
|
2,563
|
(2,563
|
)
|
-
|
-
|
|||||||||||
|
2013
|
2023
|
2,815
|
(2,815
|
)
|
-
|
-
|
|||||||||||
|
2014
|
2024
|
1,378
|
(1,378
|
)
|
-
|
-
|
|||||||||||
|
2015
|
2025
|
1,422
|
(1,422
|
)
|
-
|
-
|
|||||||||||
|
2016
|
2026
|
1,569
|
(1,569
|
)
|
-
|
-
|
|||||||||||
|
2017
|
2027
|
1,804
|
-
|
-
|
1,804
|
||||||||||||
|
2018
|
2028
|
1,727
|
-
|
-
|
1,727
|
||||||||||||
|
2019
|
2029
|
1,578
|
-
|
-
|
1,578
|
||||||||||||
|
2020
|
2030
|
1,010
|
-
|
-
|
1,010
|
||||||||||||
|
$
|
19,311
|
$
|
(10,161
|
)
|
$
|
-
|
$
|
9,150
|
|||||||||
In fiscal 2020, we increased our valuation allowance on our deferred income tax assets as previously explained. During fiscal 2019, we determined that it was more likely than not that deferred income tax assets of certain foreign subsidiaries
would not be realized and we increased the valuation allowance accordingly. In fiscal 2018, we established a valuation allowance of $3.0 million against our foreign tax credit carryforward from fiscal 2011, after concluding it is more likely than
not that the carryforward will expire unused at the end of fiscal 2021. Our emphasis of the All Access Pass has generated, and will likely continue to generate, substantial amounts of deferred revenue for both book and tax purposes. This
situation has produced a cumulative U.S. domestic pre-tax loss for the past three fiscal years and a more-likely-than-not presumption that insufficient taxable income will be available to realize the fiscal 2011 foreign tax carryforward, which
expires at the end of fiscal 2021.
Activity in our deferred income tax asset valuation allowance was as follows for the periods indicated (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Beginning balance
|
$
|
3,815
|
$
|
3,397
|
$
|
612
|
||||||
|
Charged to costs and expenses
|
11,269
|
663
|
3,035
|
|||||||||
|
Deductions
|
(8
|
)
|
(245
|
)
|
(250
|
)
|
||||||
|
Ending balance
|
$
|
15,076
|
$
|
3,815
|
$
|
3,397
|
||||||
Except for the deferred tax assets subject to valuation allowances, we have determined that projected future taxable income is adequate to allow for realization of all deferred tax assets. We considered sources of taxable income, including
reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and reasonable, practical tax-planning strategies to generate additional taxable income. Based on the factors
described above, we concluded that realization of our deferred tax assets, except those subject to the valuation allowances described above, is more likely than not at August 31, 2020.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Beginning balance
|
$
|
1,895
|
$
|
2,111
|
$
|
2,359
|
||||||
|
Additions based on tax positions
|
||||||||||||
|
related to the current year
|
172
|
157
|
27
|
|||||||||
|
Additions for tax positions in
|
||||||||||||
|
prior years
|
10
|
7
|
367
|
|||||||||
|
Reductions for tax positions of prior
|
||||||||||||
|
years resulting from the lapse of
|
||||||||||||
|
applicable statute of limitations
|
(289
|
)
|
(370
|
)
|
(253
|
)
|
||||||
|
Other reductions for tax positions of
|
||||||||||||
|
prior years
|
(148
|
)
|
(10
|
)
|
(389
|
)
|
||||||
|
Ending balance
|
$
|
1,640
|
$
|
1,895
|
$
|
2,111
|
||||||
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.3 million at August 31, 2020, and $1.6 million at August 31, 2019. Included in the ending balance of gross unrecognized tax benefits at
August 31, 2020 is $1.6 million related to individual states’ net operating loss carryforwards. Interest and penalties related to uncertain tax positions are recognized as components of income tax expense. The net accruals and reversals of
interest and penalties increased or decreased our income tax expense by an insignificant amount in each of fiscal 2020, fiscal 2019, and fiscal 2018. The balance of interest and penalties included in other long-term liabilities on our consolidated
balance sheets at each of August 31, 2020 and 2019 was $0.2 million.
During the next 12 months, we expect a decrease in unrecognized tax benefits totaling $0.1 million relating to non-deductible expenses and state net operating loss deductions upon the lapse of the applicable statute of limitations.
We file United States federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The tax years that remain subject to examinations for our major tax jurisdictions are shown below.
|
2013-2020
|
Canada and Australia
|
|
2014-2020
|
Japan
|
|
2015-2020
|
Germany, Switzerland, and Austria
|
|
2016-2020
|
China
|
|
2016-2020
|
United Kingdom, Singapore
|
|
2016-2020
|
United States – state and local income tax
|
|
2017-2020
|
United States – federal income tax
|
| 15. LOSS PER SHARE |
|
The following schedule shows the calculation of loss per share for the periods presented (in thousands, except per-share amounts).
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Numerator for basic and
|
||||||||||||
|
diluted earnings per share:
|
||||||||||||
|
Net loss
|
$
|
(9,435
|
)
|
$
|
(1,023
|
)
|
$
|
(5,887
|
)
|
|||
|
Denominator for basic and
|
||||||||||||
|
diluted earnings per share:
|
||||||||||||
|
Basic weighted average shares
|
||||||||||||
|
outstanding
|
13,892
|
13,948
|
13,849
|
|||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Stock options and other
|
||||||||||||
|
stock-based awards
|
-
|
-
|
-
|
|||||||||
|
Diluted weighted average shares
|
||||||||||||
|
outstanding
|
13,892
|
13,948
|
13,849
|
|||||||||
|
EPS Calculations:
|
||||||||||||
|
Net loss per share:
|
||||||||||||
|
Basic and diluted
|
$
|
(0.68
|
)
|
$
|
(0.07
|
)
|
$
|
(0.43
|
)
|
|||
Since we incurred a net loss for the fiscal year ended August 31, 2020, no potentially dilutive securities were included in the calculation of our loss per share because the inclusion of these securities would be antidilutive. The number of
dilutive securities that would have been included at August 31, 2020 was approximately 65,000 shares. Other securities, including performance stock-based compensation instruments, may have a dilutive effect on our future EPS calculations if our
financial results reach specified targets (Note 12).
| 16. SEGMENT INFORMATION |
|
Reportable Segments
Our sales are primarily comprised of training and consulting services and our internal reporting structure is comprised of three reportable operating segments and a corporate services group. Our internal reporting structure and reportable
segments are organized primarily around the client channels which produce the Company’s revenues. The following is a brief description of our reportable segments:
|
•
|
Direct Offices – This segment includes our sales personnel that serve the United States and Canada; our international sales offices located in Japan, China, the United
Kingdom, Australia, Germany, Switzerland, and Austria; our governmental sales channel; our coaching operations; and our books and audio sales channel.
|
|
•
|
International Licensees – This segment is primarily comprised of our international licensees’ royalty revenues.
|
|
•
|
Education Practice – This group includes our domestic and international Education practice operations, which are focused on sales to educational institutions.
|
|
•
|
Corporate and Other – Our corporate and other information includes royalty revenue from Franklin Planner Corporation (Note 17), leasing operations, shipping and handling
revenues, and certain corporate administrative expenses.
|
We have determined that the Company’s chief operating decision maker continues to be the CEO, and the primary measurement tool used in business unit performance analysis is Adjusted EBITDA, which may not be calculated as similarly titled amounts
calculated by other companies. For reporting purposes, our consolidated Adjusted EBITDA can be calculated as our income or loss from operations excluding stock-based compensation, changes in the fair value of contingent consideration liabilities
from business acquisitions, restructuring charges, depreciation expense, amortization expense, and certain other unusual or infrequent items.
Our operations are not capital intensive and we do not own any manufacturing facilities or equipment. Accordingly, we do not allocate assets to the divisions for analysis purposes. Interest expense and interest income are primarily generated
at the corporate level and are not allocated. Income taxes are likewise calculated and paid on a corporate level (except for entities that operate in foreign jurisdictions) and are not allocated for analysis purposes.
All prior period segment information has been revised to conform to our current organizational structure, assigned responsibilities, and primary internal reports. We account for our segment information on the same basis as the accompanying
consolidated financial statements (in thousands).
|
Sales to
|
||||||||||||
|
Fiscal Year Ended
|
External
|
Adjusted
|
||||||||||
|
August 31, 2020
|
Customers
|
Gross Profit
|
EBITDA
|
|||||||||
|
Enterprise Division:
|
||||||||||||
|
Direct offices
|
$
|
139,780
|
$
|
108,144
|
$
|
17,694
|
||||||
|
International licensees
|
8,451
|
6,679
|
2,406
|
|||||||||
|
148,231
|
114,823
|
20,100
|
||||||||||
|
Education Division
|
43,405
|
27,099
|
(90
|
)
|
||||||||
|
Corporate and eliminations
|
6,820
|
3,448
|
(5,726
|
)
|
||||||||
|
Consolidated
|
$
|
198,456
|
$
|
145,370
|
$
|
14,284
|
||||||
|
Fiscal Year Ended
|
||||||||||||
|
August 31, 2019
|
||||||||||||
|
Enterprise Division:
|
||||||||||||
|
Direct offices
|
$
|
157,754
|
$
|
116,755
|
$
|
19,455
|
||||||
|
International licensees
|
12,896
|
10,231
|
6,072
|
|||||||||
|
170,650
|
126,986
|
25,527
|
||||||||||
|
Education Division
|
48,880
|
30,373
|
3,553
|
|||||||||
|
Corporate and eliminations
|
5,826
|
1,955
|
(8,474
|
)
|
||||||||
|
Consolidated
|
$
|
225,356
|
$
|
159,314
|
$
|
20,606
|
||||||
|
Fiscal Year Ended
|
||||||||||||
|
August 31, 2018
|
||||||||||||
|
Enterprise Division:
|
||||||||||||
|
Direct offices
|
$
|
145,890
|
$
|
108,140
|
$
|
13,254
|
||||||
|
International licensees
|
13,226
|
10,031
|
5,081
|
|||||||||
|
159,116
|
118,171
|
18,335
|
||||||||||
|
Education Division
|
45,272
|
28,654
|
2,710
|
|||||||||
|
Corporate and eliminations
|
5,370
|
1,464
|
(9,167
|
)
|
||||||||
|
Consolidated
|
$
|
209,758
|
$
|
148,289
|
$
|
11,878
|
||||||
A reconciliation of Adjusted EBITDA to consolidated net loss is provided below (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Segment Adjusted EBITDA
|
$
|
20,010
|
$
|
29,080
|
$
|
21,045
|
||||||
|
Corporate expenses
|
(5,726
|
)
|
(8,474
|
)
|
(9,167
|
)
|
||||||
|
Consolidated Adjusted EBITDA
|
14,284
|
20,606
|
11,878
|
|||||||||
|
Stock-based compensation
|
573
|
(4,789
|
)
|
(2,846
|
)
|
|||||||
|
Reduction (increase) in
|
||||||||||||
|
contingent consideration liabilities
|
49
|
(1,334
|
)
|
(1,014
|
)
|
|||||||
|
Restructuring costs
|
(1,636
|
)
|
-
|
-
|
||||||||
|
Gain from insurance settlement
|
933
|
-
|
-
|
|||||||||
|
Government COVID assistance
|
514
|
-
|
-
|
|||||||||
|
Knowledge Capital wind-down costs
|
(389
|
)
|
-
|
-
|
||||||||
|
ERP system implementation costs
|
-
|
-
|
(855
|
)
|
||||||||
|
Licensee transition costs
|
-
|
(488
|
)
|
-
|
||||||||
|
Depreciation
|
(6,664
|
)
|
(6,364
|
)
|
(5,161
|
)
|
||||||
|
Amortization
|
(4,606
|
)
|
(4,976
|
)
|
(5,368
|
)
|
||||||
|
Income (loss) from operations
|
3,058
|
2,655
|
(3,366
|
)
|
||||||||
|
Interest income
|
56
|
37
|
104
|
|||||||||
|
Interest expense
|
(2,318
|
)
|
(2,358
|
)
|
(2,676
|
)
|
||||||
|
Accretion of discount on related
|
||||||||||||
|
party receivable
|
-
|
258
|
418
|
|||||||||
|
Income (loss) before income taxes
|
796
|
592
|
(5,520
|
)
|
||||||||
|
Provision for income taxes
|
(10,231
|
)
|
(1,615
|
)
|
(367
|
)
|
||||||
|
Net loss
|
$
|
(9,435
|
)
|
$
|
(1,023
|
)
|
$
|
(5,887
|
)
|
|||
Disaggregated Revenue
Our revenues are derived primarily from the United States. However, we also operate directly-owned offices or contract with licensees to provide our services in various countries throughout the world. Our consolidated revenues were derived
from the following countries/regions (in thousands):
|
YEAR ENDED
|
||||||||||||
|
AUGUST 31,
|
2020
|
2019
|
2018
|
|||||||||
|
Americas
|
$
|
160,989
|
$
|
173,784
|
$
|
159,595
|
||||||
|
Asia Pacific
|
11,845
|
14,457
|
12,715
|
|||||||||
|
Europe/Middle East/Africa
|
25,622
|
37,115
|
37,448
|
|||||||||
|
$
|
198,456
|
$
|
225,356
|
$
|
209,758
|
|||||||
The following table presents our revenue disaggregated by our significant revenue generating activities. Sales of services and products include training and consulting services and related products such as training manuals. Subscription sales
include revenues from our subscription services such as the All Access Pass and Leader in Me membership. We receive royalty revenue from our international licensees and from other sources such as book
publishing arrangements. Corporate royalties are amounts received from Franklin Planner Co. pursuant to a new licensing arrangement obtained in fiscal 2020 (Note 17). Leases and other revenue is primarily comprised of lease revenues from
sub-leases for space at our corporate headquarters campus and from shipping and handling revenues (in thousands).
|
Fiscal Year Ended
|
Services and
|
Leases and
|
||||||||||||||||||
|
August 31, 2020
|
Products
|
Subscriptions
|
Royalties
|
Other
|
Consolidated
|
|||||||||||||||
|
Enterprise Division:
|
||||||||||||||||||||
|
Direct offices
|
$
|
75,580
|
$
|
60,954
|
$
|
3,246
|
$
|
-
|
$
|
139,780
|
||||||||||
|
International licensees
|
1,411
|
-
|
7,040
|
-
|
8,451
|
|||||||||||||||
|
76,991
|
60,954
|
10,286
|
-
|
148,231
|
||||||||||||||||
|
Education Division
|
15,107
|
25,587
|
2,711
|
-
|
43,405
|
|||||||||||||||
|
Corporate and eliminations
|
-
|
-
|
1,985
|
4,835
|
6,820
|
|||||||||||||||
|
Consolidated
|
$
|
92,098
|
$
|
86,541
|
$
|
14,982
|
$
|
4,835
|
$
|
198,456
|
||||||||||
|
Fiscal Year Ended
|
||||||||||||||||||||
|
August 31, 2019
|
||||||||||||||||||||
|
Enterprise Division:
|
||||||||||||||||||||
|
Direct offices
|
$
|
102,557
|
$
|
52,536
|
$
|
2,661
|
$
|
-
|
$
|
157,754
|
||||||||||
|
International licensees
|
2,439
|
-
|
10,457
|
-
|
12,896
|
|||||||||||||||
|
104,996
|
52,536
|
13,118
|
-
|
170,650
|
||||||||||||||||
|
Education Division
|
23,779
|
22,151
|
2,950
|
-
|
48,880
|
|||||||||||||||
|
Corporate and eliminations
|
-
|
-
|
-
|
5,826
|
5,826
|
|||||||||||||||
|
Consolidated
|
$
|
128,775
|
$
|
74,687
|
$
|
16,068
|
$
|
5,826
|
$
|
225,356
|
||||||||||
|
Fiscal Year Ended
|
||||||||||||||||||||
|
August 31, 2018
|
||||||||||||||||||||
|
Enterprise Division:
|
||||||||||||||||||||
|
Direct offices
|
$
|
100,730
|
$
|
42,465
|
$
|
2,695
|
$
|
-
|
$
|
145,890
|
||||||||||
|
International licensees
|
2,484
|
-
|
10,742
|
-
|
13,226
|
|||||||||||||||
|
103,214
|
42,465
|
13,437
|
-
|
159,116
|
||||||||||||||||
|
Education Division
|
26,061
|
15,587
|
3,624
|
-
|
45,272
|
|||||||||||||||
|
Corporate and eliminations
|
-
|
-
|
-
|
5,370
|
5,370
|
|||||||||||||||
|
Consolidated
|
$
|
129,275
|
$
|
58,052
|
$
|
17,061
|
$
|
5,370
|
$
|
209,758
|
||||||||||
Inter-segment sales were immaterial for the periods presented and were eliminated in consolidation.
Other Geographic Information
At August 31, 2020, we had wholly owned direct offices in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria. Our long-lived assets, excluding intangible assets and goodwill, were held in the following locations for
the periods indicated (in thousands):
|
AUGUST 31,
|
2020
|
2019
|
||||||
|
United States/Canada
|
$
|
28,327
|
$
|
31,129
|
||||
|
Japan
|
1,537
|
1,456
|
||||||
|
China
|
1,307
|
441
|
||||||
|
United Kingdom
|
720
|
207
|
||||||
|
Germany, Switzerland, and Austria
|
240
|
10
|
||||||
|
Singapore
|
158
|
370
|
||||||
|
Australia
|
139
|
164
|
||||||
|
$
|
32,428
|
$
|
33,777
|
|||||
| 17. RELATED PARTY TRANSACTIONS |
Knowledge Capital Investment Group
In December 2019, Knowledge Capital Investment Group (Knowledge Capital), an investor which held 2.8 million shares of our common stock stemming from its initial investment in Franklin Covey over 20 years ago, wound up its operations and
distributed its assets to investors. On December 9, 2019, prior to the distribution of its assets to investors, we purchased 284,608 shares of our common stock from Knowledge Capital at $35.1361 per share, for an aggregate purchase price of $10.1
million, including legal costs. Our CEO and a member of our Board of Directors each owned a partnership interest in Knowledge Capital. At August 31, 2020, Knowledge Capital does not own any shares of our common stock.
FC Organizational Products
We previously owned a 19.5 percent interest in FC Organizational Products (FCOP), an entity that purchased substantially all of our consumer solutions business unit assets in fiscal 2008 for the purpose of selling planners and related
organizational products under a comprehensive licensing agreement. As a result of FCOP’s structure as a limited liability company with separate owner capital accounts, we determined that our investment in FCOP was more than minor and we were
required to account for our investment in FCOP using the equity method of accounting. We have not recorded our share of FCOP’s losses in the accompanying consolidated statements of operations and comprehensive loss because we have impaired and
written off investment balances, as defined within the applicable accounting guidance, in excess of our share of FCOP’s losses.
Due to significant operating losses incurred after the establishment of FCOP, we reconsidered whether FCOP was a variable interest entity as defined under ASC 810, and determined that FCOP was a variable interest entity. We further determined
that we were not the primary beneficiary of FCOP because we did not have the ability to direct the activities that most significantly impact FCOP’s economic performance, which primarily consisted of the day-to-day sale of planning products and
related accessories, and we did not have an obligation to absorb losses or the right to receive benefits from FCOP that could have been significant.
On November 4, 2019, FCOP sold substantially all of its assets to Franklin Planner Corporation (FPC), a new unrelated entity, and FCOP was dissolved. FPC has continued FCOP’s business of selling planners and other related consumer products
based on the license agreement which granted FCOP the exclusive rights described below.
In connection with this transaction, we exchanged approximately $3.2 million of receivables from FCOP to amend the term and royalty provisions of the existing license agreement. The $3.2 million of consideration included a $2.6 million note
receivable, which represented FCOP’s third-party bank debt that we purchased directly from the bank on the transaction date. The amended license agreement grants the exclusive right to use certain of our trademarks and other intellectual property
in connection with certain consumer products and provides us with minimum royalties of approximately $1.3 million per year. We are also entitled to receive additional variable royalties if certain FPC financial metrics exceed specified levels.
FPC assumed the amended license agreement from FCOP upon the purchase of FCOP assets. We recorded the $3.2 million consideration for the amendment to the license agreement as a capitalized cost of the license agreement (Note 2) and will reduce our
royalty revenue by amortizing this amount over the remainder of the initial term of the license agreement, which ends in approximately 30 years. During the fiscal year ended August 31, 2020, we recognized $2.0 million of net royalty revenues from
the amended license agreement with FPC.
We do not have an ownership interest in FPC, do not have any obligation to provide additional subordinated support to FPC, do not have control over the day-to-day operations of FPC, and accordingly do not account for FPC as a variable interest
entity. We receive payments for royalties and rented space from FPC. At August 31, 2020, we had $1.7 million receivable from FPC and at August 31, 2019, we had $1.0 million receivable from FCOP, each of which are recorded in current assets.
Since most of FPC’s sales and cash flows are seasonal and occur between October and January, we expect to receive the majority of the required cash payments for royalties and outstanding receivables during our second and third quarters of each
fiscal year. During fiscal 2020, we received $1.4 million of cash from FPC as payment for royalties and reimbursable operating costs.
CoveyLink Acquisition and Contractual Payments
We previously acquired the assets of CoveyLink Worldwide, LLC (CoveyLink). CoveyLink conducts training and provides consulting based upon the book The Speed of Trust by Stephen M.R. Covey, who is the
brother of one of our executive officers.
Prior to the acquisition date, CoveyLink had granted us a non-exclusive license for content related to The Speed of Trust book and related training courses for which we paid CoveyLink specified
royalties. As part of the CoveyLink acquisition, we signed an amended and restated license for intellectual property that granted us an exclusive, perpetual, worldwide, transferable, royalty-bearing license to use, reproduce, display, distribute,
sell, prepare derivative works of, and perform the licensed material in any format or medium and through any market or distribution channel. We are required to pay Stephen M.R. Covey royalties for the use of certain intellectual property developed
by him. The amount expensed for these royalties totaled $1.6 million, $1.7 million, and $1.8 million during the fiscal years ended August 31, 2020, 2019, and 2018. As part of the acquisition of CoveyLink, we signed an amended license agreement as
well as a speaker services agreement. Based on the provisions of the speakers’ services agreement, we pay Stephen M.R. Covey a portion of the speaking revenues received for his presentations. We expensed $0.8 million, $1.2 million, and $0.9
million for payment on these presentations during the fiscal years ended August 31, 2020, 2019 and 2018. We had $0.2 million and $0.6 million accrued for these royalties and speaking fees at August 31, 2020 and 2019, respectively, which were
included as components of accrued liabilities on our consolidated balance sheets.
Acquired License Rights for Intellectual Property
During fiscal 2017, we acquired the license rights for certain intellectual property owned by Higher Moment, LLC for $0.8 million. The intellectual property is in part based on works authored and developed by Dr. Clayton Christensen, a
well-known author and lecturer, who was a member of our Board of Directors prior to his passing in January 2020. However, Dr. Christensen did not have an ownership interest in Higher Moment, LLC. The initial license period is five years and the
agreement may be renewed for successive five-year periods for $0.8 million at each renewal date. The agreement may be terminated by either party at any time, but if we choose to terminate the agreement prior to the third renewal date, we are
required to pay $0.3 million to Higher Moment, LLC.
Other Related Party Transactions
We pay an executive officer of the Company a percentage of the royalty proceeds received from the sales of certain books authored by him in addition to his annual salary. During the fiscal years ended August 31, 2020, 2019, and 2018, we
expensed $0.1 million, $0.1 million, and $0.2 million for these royalties. We had an insignificant amount accrued to this executive officer at August 31, 2020 and $0.1 million accrued at August 31, 2019 as payable under the terms of these
arrangements. These amounts are included as components of accrued liabilities in our consolidated balance sheets.
We pay a company owned by the brother of a member of our executive management team for the production of video segments used in our offerings. During the fiscal years ended August 31, 2020 and 2019, we paid $1.0 million and $0.8 million to this
company for services provided.
None.
Disclosure Controls and Procedures
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report.
Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The management of Franklin Covey Co. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (including its consolidated subsidiaries) and all related information appearing in the
Company’s Annual Report on Form 10-K. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that:
|
1.
|
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
|
|
2.
|
provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with the authorization of management and/or of our Board of Directors; and
|
|
3.
|
provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
|
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the
criteria set forth in Internal Control—Integrated Framework as issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 COSO Framework). Based upon this evaluation, our
management concluded that our internal control over financial reporting was effective as of the end of the period covered by this Annual Report on Form 10-K.
Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the consolidated financial statements included in this annual report on Form 10-K and, as part of their audit, has issued an audit report, included herein,
on the effectiveness of our internal control over financial reporting. Their report is included in Item 8 of this Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the fourth quarter ended August 31, 2020 that materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
None.
Certain information required by this Item is incorporated by reference to the sections entitled “Nominees for Election to the Board of Directors,” “Delinquent Section 16(a) Reports,” “Corporate Governance,” and “Board of Director Committees and
Meetings” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 22, 2021. The definitive Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended. Executive officer biographies may be found in Item 1, under the section entitled “Information About Our Executive Officers,” of this report on Form 10-K.
The Board of Directors has determined that one of the Audit Committee members, Mr. Michael Fung, is a “financial expert” as defined in Regulation S-K 407(d)(5) adopted under the Securities Exchange Act of 1934, as amended. Our Board of
Directors has also determined that Mr. Fung is an “independent director” as defined by the NYSE.
We have adopted a code of ethics for our senior financial officers that include the Chief Executive Officer, the Chief Financial Officer, and other members of our financial leadership team. This code of ethics is available on our website at
www.franklincovey.com. We intend to satisfy any disclosure requirements under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by posting such information on our web site at the
address and location specified above.
The information required by this Item is incorporated by reference to the sections entitled “Compensation Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in our
definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 22, 2021.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
|
[a]
|
|
[b]
|
|
[c]
|
|
|||||||
|
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, warrants, and rights
|
Weighted-average exercise price of outstanding options, warrants, and rights
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column [a])
|
|||||||||
|
(in thousands)
|
(in thousands)
|
|||||||||||
|
Equity compensation plans approved by security holders
|
1,049
|
(1)(2)
|
$
|
11.57
|
1,373
|
(3)(4)
|
||||||
| (1) |
Excludes 21,420 shares of restricted stock awards that are subject to forfeiture.
|
| (2) |
Amount includes 829,840 performance share awards that may be awarded under the terms of various long-term incentive plans. The number of shares eventually awarded to participants through our long-term incentive plans is variable and
based upon the achievement of specified financial goals. For performance-based compensation awards where the number of shares may fluctuate within a range based on the achievement of the specified goal, this amount includes the maximum
number of shares that may be awarded to participants. The actual number of shares issued to participants therefore, may be less than the amount disclosed. The weighted average exercise price of outstanding options, warrants, and rights
does not include the impact of performance awards or restricted stock units. For further information on our stock-based compensation plans, refer to the notes to our financial statements as presented in Item 8 of this report.
|
| (3) |
Amount is comprised of the remaining shares authorized under our 2019 Omnibus Incentive Plan and 2017 Employee Stock Purchase Plan. The number of performance-based plan shares expected to be awarded at August 31, 2020 may change in
future periods based upon the achievement of specified goals and revisions to estimates.
|
| (4) |
At August 31, 2020, we had approximately 862,000 shares authorized for purchase by participants in our Employee Stock Purchase Plan.
|
Beneficial Ownership of Company Stock
The remaining information required by this Item is incorporated by reference to the section entitled “Principal Holders of Voting Securities” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held
on January 22, 2021.
The information required by this Item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” and “Corporate Governance” in our definitive Proxy Statement for the annual meeting of shareholders,
which is scheduled to be held on January 22, 2021.
The information required by this Item is incorporated by reference to the section entitled “Principal Accountant Fees” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 22, 2021.
(a) List of documents filed as part of this report:
|
1.
|
Financial Statements. The consolidated financial statements of the Company and Report of Independent Registered Public Accounting Firm thereon included in the Annual Report to Shareholders on
Form 10-K for the year ended August 31, 2020, are as follows:
|
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at August 31, 2020 and 2019
Consolidated Statements of Operations and Statements of Comprehensive Loss for the fiscal years ended August 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the fiscal years ended August 31, 2020, 2019, and 2018
Consolidated Statements of Shareholders’ Equity for the fiscal years ended August 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
|
2.
|
Financial Statement Schedules.
|
Other financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the financial statements or notes thereto, or contained in this report.
|
3.
|
Exhibit List.
|
|
Exhibit No.
|
Exhibit
|
Incorporated
By Reference
|
Filed
Herewith
|
|
2.1
|
(8)
|
||
|
2.2
|
(9)
|
||
|
3.1
|
(4)
|
||
|
3.2
|
(7)
|
||
|
3.3
|
(14)
|
||
|
4.1
|
Specimen Certificate of the Registrant’s Common Stock, par value $.05 per share
|
(2)
|
|
|
4.2
|
(3)
|
||
|
4.3
|
(3)
|
||
|
4.4
|
(4)
|
||
|
4.5
|
(4)
|
||
|
4.6
|
(20)
|
||
|
10.1*
|
Forms of Nonstatutory Stock Options
|
(1)
|
|
|
10.2
|
(5)
|
||
|
10.3
|
(5)
|
||
|
10.4
|
(6)
|
||
|
10.5
|
(10)
|
||
|
10.6
|
(10)
|
||
|
10.7
|
(10)
|
||
|
10.8
|
(10)
|
||
|
10.9
|
(10)
|
||
|
10.10
|
(11)
|
||
|
10.11
|
(11)
|
||
|
10.12*
|
(12)
|
||
|
10.13
|
(13)
|
||
|
10.14*
|
(15)
|
||
|
10.15*
|
(16)
|
|
|
10.16*
|
(17)
|
||
|
10.17*
|
(18)
|
||
|
10.18
|
(19)
|
||
|
10.19
|
(19)
|
||
|
10.20
|
(21)
|
||
|
21
|
éé
|
||
|
23
|
éé
|
||
|
31.1
|
éé
|
||
|
31.2
|
éé
|
||
|
32
|
éé
|
||
|
101.INS
|
XBRL Instance Document
|
éé
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema
|
éé
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
éé
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
éé
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
éé
|
|
|
101.PRE
|
XBRL Extension Presentation Linkbase
|
éé
|
|
(1)
|
Incorporated by reference to Registration Statement on Form S-1 filed with the Commission on April 17, 1992, Registration No. 33-47283.
|
|
(2)
|
Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1 filed with the Commission on May 26, 1992, Registration No. 33-47283.
|
|
(3)
|
Incorporated by reference to Schedule 13D (CUSIP No. 534691090 as filed with the Commission on June 14, 1999). Registration No. 005-43123.
|
|
(4)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on March 10, 2005.**
|
|
(5)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on June 27, 2005.**
|
|
(6)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on October 24, 2005.**
|
|
(7)
|
Incorporated by reference to the Definitive Proxy Statement on Form DEF 14A filed with the Commission on December 12, 2005.**
|
|
(8)
|
Incorporated by reference to Report on Form 8-K/A filed with the Commission on May 29, 2008.**
|
|
(9)
|
Incorporated by reference to Report on Form 10-Q filed July 10, 2008, for the Quarter ended May 31, 2008.**
|
|
(10)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on July 11, 2008.**
|
|
(11)
|
Incorporated by reference to Report on Form 10-Q filed with the Commission on April 9, 2009.**
|
|
(12)
|
Incorporated by reference to the Definitive Proxy Statement on Form DEF 14A (Appendix A) filed with the Commission on December 15, 2010.**
|
|
(13)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on July 28, 2011.**
|
|
(14)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on February 1, 2012.**
|
|
(15)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on March 14, 2012.**
|
|
(16)
|
Incorporated by reference to the Definitive Proxy Statement on Form DEF 14A (Appendix A) filed with the Commission on December 22, 2014.**
|
|
(17)
|
Incorporated by reference to the Definitive Proxy Statement on Form DEF 14A (Appendix A) filed with the Commission on December 22, 2017.**
|
|
(18)
|
Incorporated by reference to the Definitive Proxy Statement on Form DEF 14A (Appendix A) filed with the Commission on December 20, 2018.**
|
|
(19)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on August 8, 2019.**
|
|
(20)
|
Incorporated by reference to Report on Form 10-K/A filed with the Commission on December 12, 2019.**
|
|
(21)
|
Incorporated by reference to Report on Form 8-K filed with the Commission on July 10, 2020.**
|
éé Filed herewith and attached to this report.
* Indicates a management contract or compensatory plan or agreement.
** Registration No. 001-11107.
None.
Pursuant to the requirements of Section 13 or 15(d) 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 16, 2020.
FRANKLIN COVEY CO.
|
|
By:
|
/s/ Robert A. Whitman
|
|
|
|
Robert A. Whitman
Chairman and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/ Robert A. Whitman
|
Chairman of the Board
and Chief Executive Officer
|
November 16, 2020
|
|
Robert A. Whitman
|
||
|
/s/ Anne Chow
|
Director
|
November 16, 2020
|
|
Anne Chow
|
||
|
/s/ Michael Fung
|
Director
|
November 16, 2020
|
|
Michael Fung
|
||
|
/s/ Dennis G. Heiner
|
Director
|
November 16, 2020
|
|
Dennis G. Heiner
|
||
|
/s/ Donald J. McNamara
|
Director
|
November 16, 2020
|
|
Donald J. McNamara
|
||
|
/s/ Joel C. Peterson
|
Director
|
November 16, 2020
|
|
Joel C. Peterson
|
||
|
/s/ Nancy Phillips
|
Director
|
November 16, 2020
|
|
Nancy Phillips
|
||
|
/s/ E. Kay Stepp
|
Director
|
November 16, 2020
|
|
E. Kay Stepp
|
||
|
/s/ Derek van Bever
|
Director
|
November 16, 2020
|
|
Derek van Bever
|
||
|
/s/ Stephen D. Young
|
Chief Financial Officer
and Chief Accounting Officer
|
November 16, 2020
|
|
Stephen D. Young
|
99
Exhibit 21
FRANKLIN COVEY CO.
Subsidiaries
Domestic:
Franklin Development Corporation (a Utah corporation)
Franklin Covey Travel, Inc. (a Utah corporation)
Franklin Covey Client Sales, Inc. (a Utah corporation)
International:
Franklin Covey Canada, Ltd. (a Canada corporation)
Franklin Covey Europe, Ltd. (England, Wales)
Franklin Covey Proprietary Limited (Queensland, Australia)
Franklin Covey Japan Co. Ltd. (Japan)
Franklin Covey de Mexico, S. de R.L. de C.V. (Mexico)
Franklin Covey International Pte. Ltd. (Singapore)
Franklin Covey Business Consulting Shanghai Ltd. (China)
Franklin Covey Business Consultation Beijing Ltd. (China)
Franklin Covey (Shenzhen) Ltd. (China)
Shen Zhen Covey Enterprise Management & Consulting Ltd. (China)
Franklin Covey Germany GmbH (Germany)
Franklin Covey Switzerland GmbH (Switzerland)
Franklin Covey Austria GmbH (Austria)
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-200459, 333-131485, 333-128131, and 333-89541 on Forms S-3 and Registration
Statements No. 333-229363, 333-218391, 333-201679, 333-139048, 33-73624 and 33-51314 on Forms S-8 of our reports dated November 16, 2020, relating to the financial statements of Franklin Covey Co., and the effectiveness of Franklin Covey Co.'s
internal control over financial reporting, appearing in this Annual Report on Form 10-K for the year ended August 31, 2020.
/s/ Deloitte & Touche LLP
Salt Lake City, Utah
November 16, 2020
Exhibit 31.1
SECTION 302 CERTIFICATION
I, Robert A. Whitman, certify that:
|
1.
|
I have reviewed this yearly report on Form 10-K of Franklin Covey Co.;
|
||
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
||
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
||
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
||
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
||
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
||
|
c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
||
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
||
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
||
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
||
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
|
||
|
|
|
|
|
|
|
|
|
Date: November 16, 2020
|
/s/ Robert A. Whitman
|
|
|
|
Robert A. Whitman
Chief Executive Officer
|
|
Exhibit 31.2
SECTION 302 CERTIFICATION
I, Stephen D. Young, certify that:
|
1.
|
I have reviewed this yearly report on Form 10-K of Franklin Covey Co.;
|
||
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
|
||
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
|
||
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
||
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
||
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
||
|
c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
|
||
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
||
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
|
||
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
|
||
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
||
|
|
|
|
|
|
|
|
|
Date: November 16, 2020
|
/s/ Stephen D. Young
|
|
|
|
Stephen D. Young
Chief Financial Officer
|
|
Exhibit 32
CERTIFICATION
In connection with the yearly report of Franklin Covey Co. (the “Company”) on Form 10-K for the period ended August 31, 2020, as filed with the Securities
and Exchange Commission (the “Report”), we, Robert A. Whitman, President and Chief Executive Officer of the Company, and Stephen D. Young, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18,
Chapter 63, Section 1350 of the United States Code, that to the best of our knowledge:
|
1.
|
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
|
|
2.
|
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at
the dates and for the periods indicated.
|
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
|
|
|
|
|
|
|
|||
|
/s/ Robert A. Whitman
|
|
/s/ Stephen D. Young
|
|
|
Robert A. Whitman
Chief Executive Officer |
|
|
Stephen D. Young
Chief Financial Officer |
|
Date: November 16, 2020
|
Date: November 16, 2020
|