UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2020
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file no. 1-11107
FRANKLIN COVEY CO.
(Exact name of registrant as specified in its charter)
Utah | 87-0401551 | |
(State of incorporation) | (I.R.S. employer identification number) | |
2200 West Parkway Boulevard | 84119-2099 | |
Salt Lake City, Utah | (Zip Code) | |
(Address of principal executive offices) | ||
Registrant’s telephone number, | (801) 817-1776 | |
Including area code |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.05 Par Value | FC | New York Stock Exchange |
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 ☒ TNo ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒T 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.
Large Accelerated Filer | £ | Accelerated Filer | T | |||
Non-accelerated Filer | £ | Smaller Reporting Company | £ | |||
Emerging Growth Company | £ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐£ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date:
14,156,827 shares of Common Stock as of June 30, 2020
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
(in thousands, except per-share amounts)
May 31, | August 31, | ||||
2021 | 2020 | ||||
(unaudited) | |||||
ASSETS | |||||
Current assets: | |||||
Cash and cash equivalents | $ | 35,757 | $ | 27,137 | |
Accounts receivable, less allowance for doubtful accounts of $4,543 and $4,159 | 44,477 | 56,407 | |||
Inventories | 2,652 | 2,974 | |||
Prepaid expenses and other current assets | 15,343 | 15,146 | |||
Total current assets | 98,229 | 101,664 | |||
Property and equipment, net | 12,114 | 15,723 | |||
Intangible assets, net | 51,603 | 47,125 | |||
Goodwill | 31,220 | 24,220 | |||
Deferred income tax assets | 5,316 | 1,094 | |||
Other long-term assets | 14,167 | 15,611 | |||
$ | 212,649 | $ | 205,437 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||
Current liabilities: | |||||
Current portion of notes payable | $ | 5,835 | $ | 5,000 | |
Current portion of financing obligation | 2,813 | 2,600 | |||
Accounts payable | 4,655 | 5,622 | |||
Deferred subscription revenue | 54,344 | 59,289 | |||
Other deferred revenue | 8,984 | 7,389 | |||
Accrued liabilities | 28,012 | 22,628 | |||
Total current liabilities | 104,643 | 102,528 | |||
Notes payable, less current portion | 14,191 | 15,000 | |||
Financing obligation, less current portion | 11,913 | 14,048 | |||
Other liabilities | 7,570 | 9,110 | |||
Deferred income tax liabilities | - | 5,298 | |||
Total liabilities | 138,317 | 145,984 | |||
Shareholders’ equity: | |||||
Common stock, $0.05 par value; 40,000 shares authorized, 27,056 shares issued | 1,353 | 1,353 | |||
Additional paid-in capital | 211,283 | 211,920 | |||
Retained earnings | 61,784 | 49,968 | |||
Accumulated other comprehensive income | 764 | 641 | |||
Treasury stock at cost, 12,901 shares and 13,175 shares | (200,852) | (204,429) | |||
Total shareholders’ equity | 74,332 | 59,453 | |||
$ | 212,649 | $ | 205,437 |
May 31, | August 31, | |||||||
2020 | 2019 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 37,006 | $ | 27,699 | ||||
Accounts receivable, less allowance for doubtful accounts of $3,873 and $4,242 | 38,612 | 73,227 | ||||||
Inventories | 3,106 | 3,481 | ||||||
Prepaid expenses and other current assets | 13,295 | 14,933 | ||||||
Total current assets | 92,019 | 119,340 | ||||||
Property and equipment, net | 16,894 | 18,579 | ||||||
Intangible assets, net | 44,189 | 47,690 | ||||||
Goodwill | 24,220 | 24,220 | ||||||
Deferred income tax assets | 1,388 | 5,045 | ||||||
Other long-term assets | 14,894 | 10,039 | ||||||
$ | 193,604 | $ | 224,913 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of term notes payable | $ | 5,000 | $ | 5,000 | ||||
Current portion of financing obligation | 2,532 | 2,335 | ||||||
Accounts payable | 3,922 | 9,668 | ||||||
Deferred subscription revenue | 42,794 | 56,250 | ||||||
Other deferred revenue | 7,915 | 5,972 | ||||||
Accrued liabilities | 18,212 | 24,319 | ||||||
Total current liabilities | 80,375 | 103,544 | ||||||
Line of credit | 14,870 | - | ||||||
Term notes payable, less current portion | 16,250 | 15,000 | ||||||
Financing obligation, less current portion | 14,726 | 16,648 | ||||||
Other liabilities | 6,061 | 7,527 | ||||||
Deferred income tax liabilities | 4,274 | 180 | ||||||
Total liabilities | 136,556 | 142,899 | ||||||
Shareholders’ equity: | ||||||||
Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued | 1,353 | 1,353 | ||||||
Additional paid-in capital | 211,067 | 215,964 | ||||||
Retained earnings | 48,988 | 59,403 | ||||||
Accumulated other comprehensive income | 231 | 269 | ||||||
Treasury stock at cost, 13,198 shares and 13,087 shares | (204,591 | ) | (194,975 | ) | ||||
Total shareholders’ equity | 57,048 | 82,014 | ||||||
$ | 193,604 | $ | 224,913 |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
(in thousands, except per-share amounts)
Quarter Ended | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
(unaudited) | (unaudited) | ||||||||||
Net sales | $ | 58,736 | $ | 37,105 | $ | 155,223 | $ | 149,463 | |||
Cost of sales | 12,829 | 10,284 | 35,589 | 41,946 | |||||||
Gross profit | 45,907 | 26,821 | 119,634 | 107,517 | |||||||
Selling, general, and administrative | 37,762 | 29,254 | 102,312 | 101,231 | |||||||
Stock-based compensation | 2,370 | (5,104) | 5,127 | (1,460) | |||||||
Depreciation | 1,423 | 1,652 | 4,904 | 4,925 | |||||||
Amortization | 1,238 | 1,164 | 3,503 | 3,504 | |||||||
Income (loss) from operations | 3,114 | (145) | 3,788 | (683) | |||||||
Interest income | 16 | 18 | 56 | 36 | |||||||
Interest expense | (525) | (621) | (1,633) | (1,783) | |||||||
Income (loss) before income taxes | 2,605 | (748) | 2,211 | (2,430) | |||||||
Income tax benefit (provision) | 10,149 | (10,220) | 9,605 | (7,985) | |||||||
Net income (loss) | $ | 12,754 | $ | (10,968) | $ | 11,816 | $ | (10,415) | |||
Net income (loss) per share: | |||||||||||
Basic and diluted | $ | 0.90 | $ | (0.79) | $ | 0.84 | $ | (0.75) | |||
Weighted average number of common shares: | |||||||||||
Basic | 14,145 | 13,869 | 14,068 | 13,897 | |||||||
Diluted | 14,156 | 13,869 | 14,133 | 13,897 | |||||||
COMPREHENSIVE INCOME (LOSS) | |||||||||||
Net income (loss) | $ | 12,754 | $ | (10,968) | $ | 11,816 | $ | (10,415) | |||
Foreign currency translation adjustments, | |||||||||||
net of income taxes of | |||||||||||
$0, $0, $0, and $0 | (151) | (91) | 123 | (38) | |||||||
Comprehensive income (loss) | $ | 12,603 | $ | (11,059) | $ | 11,939 | $ | (10,453) |
Quarter Ended | Three Quarters Ended | |||||||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Net sales | $ | 37,105 | $ | 56,006 | $ | 149,463 | $ | 160,191 | ||||||||
Cost of sales | 10,284 | 16,342 | 41,946 | 48,379 | ||||||||||||
Gross profit | 26,821 | 39,664 | 107,517 | 111,812 | ||||||||||||
Selling, general, and administrative | 29,254 | 37,662 | 101,231 | 106,242 | ||||||||||||
Stock-based compensation | (5,104 | ) | 1,051 | (1,460 | ) | 3,040 | ||||||||||
Depreciation | 1,652 | 1,556 | 4,925 | 4,806 | ||||||||||||
Amortization | 1,164 | 1,259 | 3,504 | 3,797 | ||||||||||||
Loss from operations | (145 | ) | (1,864 | ) | (683 | ) | (6,073 | ) | ||||||||
Interest income | 18 | 8 | 36 | 30 | ||||||||||||
Interest expense | (621 | ) | (562 | ) | (1,783 | ) | (1,817 | ) | ||||||||
Discount accretion on related party receivable | - | - | - | 258 | ||||||||||||
Loss before income taxes | (748 | ) | (2,418 | ) | (2,430 | ) | (7,602 | ) | ||||||||
Income tax benefit (provision) | (10,220 | ) | 394 | (7,985 | ) | 704 | ||||||||||
Net loss | $ | (10,968 | ) | $ | (2,024 | ) | $ | (10,415 | ) | $ | (6,898 | ) | ||||
Net loss per share: | ||||||||||||||||
Basic and diluted | $ | (0.79 | ) | $ | (0.14 | ) | $ | (0.75 | ) | $ | (0.49 | ) | ||||
Weighted average number of common shares: | ||||||||||||||||
Basic and diluted | 13,869 | 13,963 | 13,897 | 13,939 | ||||||||||||
COMPREHENSIVE LOSS | ||||||||||||||||
Net loss | $ | (10,968 | ) | $ | (2,024 | ) | $ | (10,415 | ) | $ | (6,898 | ) | ||||
Foreign currency translation adjustments, | ||||||||||||||||
net of income tax benefit | ||||||||||||||||
of $0, $8, $0, and $8 | (91 | ) | (144 | ) | (38 | ) | (15 | ) | ||||||||
Comprehensive loss | $ | (11,059 | ) | $ | (2,168 | ) | $ | (10,453 | ) | $ | (6,913 | ) |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
(in thousands)
Three Quarters Ended | |||||
May 31, | May 31, | ||||
2021 | 2020 | ||||
(unaudited) | |||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||
Net income (loss) | $ | 11,816 | $ | (10,415) | |
Adjustments to reconcile net income (loss) to net cash | |||||
provided by operating activities: | |||||
Depreciation and amortization | 8,407 | 8,429 | |||
Amortization of capitalized curriculum costs | 2,583 | 3,042 | |||
Stock-based compensation | 5,127 | (1,460) | |||
Deferred income taxes | (10,521) | 7,678 | |||
Change in fair value of contingent consideration liabilities | 164 | (367) | |||
Amortization of right-of-use operating lease assets | 758 | - | |||
Loss on disposal of assets | - | 39 | |||
Changes in assets and liabilities, net of effect of acquired business: | |||||
Decrease in accounts receivable, net | 12,391 | 34,692 | |||
Decrease in inventories | 322 | 377 | |||
Decrease in prepaid expenses and other assets | 1,393 | 1,784 | |||
Increase (decrease) in accounts payable and accrued liabilities | 4,629 | (11,057) | |||
Decrease in deferred revenue | (4,172) | (12,612) | |||
Decrease in income taxes payable/receivable | (653) | (1,415) | |||
Decrease in other long-term liabilities | (1,392) | (6) | |||
Net cash provided by operating activities | 30,852 | 18,709 | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||
Purchases of property and equipment | (1,185) | (3,336) | |||
Curriculum development costs | (1,827) | (3,436) | |||
Acquisition of business, net of cash acquired | (10,554) | - | |||
Purchase of note receivable from bank | - | (2,600) | |||
Net cash used for investing activities | (13,566) | (9,372) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||
Proceeds from line of credit borrowings | - | 14,870 | |||
Proceeds from term notes payable | - | 5,000 | |||
Principal payments on notes payable | (3,750) | (3,750) | |||
Principal payments on financing obligation | (1,922) | (1,725) | |||
Purchases of common stock for treasury | (2,971) | (13,833) | |||
Payment of contingent consideration liabilities | (899) | (1,167) | |||
Proceeds from sales of common stock held in treasury | 783 | 780 | |||
Net cash provided by (used for) financing activities | (8,759) | 175 | |||
Effect of foreign currency exchange rates on cash and cash equivalents | 93 | (205) | |||
Net increase in cash and cash equivalents | 8,620 | 9,307 | |||
Cash and cash equivalents at the beginning of the period | 27,137 | 27,699 | |||
Cash and cash equivalents at the end of the period | $ | 35,757 | $ | 37,006 | |
Supplemental disclosure of cash flow information: | |||||
Cash paid for income taxes | $ | 1,454 | $ | 1,713 | |
Cash paid for interest | 1,634 | 1,751 | |||
Non-cash investing and financing activities: | |||||
Purchases of property and equipment financed by accounts payable | $ | 105 | $ | 352 | |
Acquisition of right-of-use operating lease assets for operating lease liabilities | 885 | - | |||
Use of notes payable to acquire business | 3,766 | - | |||
Use of notes receivable to modify revenue contract | - | 3,246 |
Three Quarters Ended | ||||||||
May 31, | May 31, | |||||||
2020 | 2019 | |||||||
(unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (10,415 | ) | $ | (6,898 | ) | ||
Adjustments to reconcile net loss to net cash | ||||||||
provided by operating activities: | ||||||||
Depreciation and amortization | 8,429 | 8,619 | ||||||
Amortization of capitalized curriculum costs | 3,042 | 3,951 | ||||||
Stock-based compensation | (1,460 | ) | 3,040 | |||||
Deferred income taxes | 7,678 | (2,207 | ) | |||||
Change in fair value of contingent consideration liabilities | (367 | ) | 1,145 | |||||
Loss on disposal of assets | 39 | - | ||||||
Changes in assets and liabilities, net of effect of acquired business: | ||||||||
Decrease in accounts receivable, net | 34,692 | 19,461 | ||||||
Decrease in inventories | 377 | 158 | ||||||
Decrease in prepaid expenses and other assets | 1,784 | 2,585 | ||||||
Decrease in accounts payable and accrued liabilities | (11,057 | ) | (2,792 | ) | ||||
Decrease in deferred revenue | (12,612 | ) | (8,384 | ) | ||||
Increase (decrease) in income taxes payable/receivable | (1,415 | ) | 358 | |||||
Decrease in other long-term liabilities | (6 | ) | (412 | ) | ||||
Net cash provided by operating activities | 18,709 | 18,624 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | (3,336 | ) | (2,996 | ) | ||||
Curriculum development costs | (3,436 | ) | (1,821 | ) | ||||
Purchase of note receivable from bank (Note 12) | (2,600 | ) | - | |||||
Acquisition of business, net of cash acquired | - | (32 | ) | |||||
Net cash used for investing activities | (9,372 | ) | (4,849 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from line of credit borrowings | 14,870 | 66,451 | ||||||
Payments on line of credit borrowings | - | (73,665 | ) | |||||
Proceeds from term notes payable | 5,000 | - | ||||||
Principal payments on term notes payable | (3,750 | ) | (4,688 | ) | ||||
Principal payments on financing obligation | (1,725 | ) | (1,544 | ) | ||||
Purchases of common stock for treasury | (13,833 | ) | (12 | ) | ||||
Payment of contingent consideration liabilities | (1,167 | ) | (483 | ) | ||||
Proceeds from sales of common stock held in treasury | 780 | 694 | ||||||
Net cash provided by (used for) financing activities | 175 | (13,247 | ) | |||||
Effect of foreign currency exchange rates on cash and cash equivalents | (205 | ) | 177 | |||||
Net increase in cash and cash equivalents | 9,307 | 705 | ||||||
Cash and cash equivalents at the beginning of the period | 27,699 | 10,153 | ||||||
Cash and cash equivalents at the end of the period | $ | 37,006 | $ | 10,858 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for income taxes | $ | 1,713 | $ | 1,247 | ||||
Cash paid for interest | 1,751 | 1,855 | ||||||
Non-cash investing and financing activities: | ||||||||
Purchases of property and equipment financed by accounts payable | $ | 352 | $ | 597 | ||||
Use of notes receivable to modify revenue contract (Note 12) | 3,246 | - | ||||||
Consideration for business acquisition from liabilities of acquiree | - | 798 |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
(in thousands and unaudited)
Accumulated | ||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | ||||||
Balance at August 31, 2020 | 27,056 | $ | 1,353 | $ | 211,920 | $ | 49,968 | $ | 641 | (13,175) | $ | (204,429) |
Issuance of common stock from | ||||||||||||
treasury |
|
| (3,411) |
|
| 236 | 3,668 | |||||
Purchase of treasury shares |
|
|
|
|
| (89) | (1,530) | |||||
Stock-based compensation |
|
| 1,158 |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| 307 |
|
| |||||
Net loss |
|
|
| (892) |
|
|
| |||||
Balance at November 30, 2020 | 27,056 | 1,353 | 209,667 | 49,076 | 948 | (13,028) | (202,291) | |||||
Issuance of common stock from |
|
| (2,014) |
|
| 143 | 2,222 | |||||
treasury | ||||||||||||
Purchase of treasury shares |
|
|
|
|
| (58) | (1,441) | |||||
Stock-based compensation |
|
| 1,599 |
|
|
|
| |||||
Restricted stock award |
|
| (436) |
|
| 28 | 436 | |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (33) |
|
| |||||
Net loss |
|
|
| (46) |
|
|
| |||||
Balance at February 28, 2021 | 27,056 | 1,353 | 208,816 | 49,030 | 915 | (12,915) | (201,074) | |||||
Issuance of common stock from | ||||||||||||
treasury |
|
| 97 |
|
| 14 | 222 | |||||
Stock-based compensation |
|
| 2,370 |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (151) |
|
| |||||
Net income |
|
|
| 12,754 |
|
|
| |||||
Balance at May 31, 2021 | 27,056 | $ | 1,353 | $ | 211,283 | $ | 61,784 | $ | 764 | (12,901) | $ | (200,852) |
Accumulated | ||||||||||||||||||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||||||||||||||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | ||||||||||||||||||||||
Balance at August 31, 2019 | 27,056 | $ | 1,353 | $ | 215,964 | $ | 59,403 | $ | 269 | (13,087 | ) | $ | (194,975 | ) | ||||||||||||||
Issuance of common stock from | ||||||||||||||||||||||||||||
treasury | 131 | 9 | 123 | |||||||||||||||||||||||||
Purchase of treasury shares | (3 | ) | ||||||||||||||||||||||||||
Stock-based compensation | 1,851 | |||||||||||||||||||||||||||
Cumulative translation | ||||||||||||||||||||||||||||
adjustments | (37 | ) | ||||||||||||||||||||||||||
Net loss | (544 | ) | ||||||||||||||||||||||||||
Balance at November 30, 2019 | 27,056 | 1,353 | 217,946 | 58,859 | 232 | (13,078 | ) | (194,855 | ) | |||||||||||||||||||
Issuance of common stock from | ||||||||||||||||||||||||||||
treasury | (3,361 | ) | 241 | 3,591 | ||||||||||||||||||||||||
Purchase of treasury shares | (393 | ) | (13,830 | ) | ||||||||||||||||||||||||
Stock-based compensation | 1,793 | |||||||||||||||||||||||||||
Restricted stock award | (333 | ) | 21 | 333 | ||||||||||||||||||||||||
Cumulative translation | ||||||||||||||||||||||||||||
adjustments | 90 | |||||||||||||||||||||||||||
Net income | 1,097 | |||||||||||||||||||||||||||
Balance at February 29, 2020 | 27,056 | 1,353 | 216,045 | 59,956 | 322 | (13,209 | ) | (204,761 | ) | |||||||||||||||||||
Issuance of common stock from | ||||||||||||||||||||||||||||
treasury | 126 | 11 | 170 | |||||||||||||||||||||||||
Stock-based compensation | (5,104 | ) | ||||||||||||||||||||||||||
Cumulative translation | �� | |||||||||||||||||||||||||||
adjustments | (91 | ) | ||||||||||||||||||||||||||
Net loss | (10,968 | ) | ||||||||||||||||||||||||||
Balance at May 31, 2020 | 27,056 | $ | 1,353 | $ | 211,067 | $ | 48,988 | $ | 231 | (13,198 | ) | $ | (204,591 | ) |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
(in thousands and unaudited)
Accumulated | ||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | ||||||
Balance at August 31, 2019 | 27,056 | $ | 1,353 | $ | 215,964 | $ | 59,403 | $ | 269 | (13,087) | $ | (194,975) |
Issuance of common stock from | ||||||||||||
treasury |
|
| 131 |
|
| 9 | 123 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
|
| (3) | |||||
Stock-based compensation |
|
| 1,851 |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (37) |
|
| |||||
Net loss |
|
|
| (544) |
|
|
| |||||
Balance at November 30, 2019 | 27,056 | 1,353 | 217,946 | 58,859 | 232 | (13,078) | (194,855) | |||||
Issuance of common stock from | ||||||||||||
treasury |
|
| (3,361) |
|
| 241 | 3,591 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
| (393) | (13,830) | |||||
Stock-based compensation |
|
| 1,793 |
|
|
|
| |||||
Restricted stock award |
|
| (333) |
|
| 21 | 333 | |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| 90 |
|
| |||||
Net income |
|
|
| 1,097 |
|
|
| |||||
Balance at February 29, 2020 | 27,056 | 1,353 | 216,045 | 59,956 | 322 | (13,209) | (204,761) | |||||
Issuance of common stock from | ||||||||||||
treasury |
|
| 126 |
|
| 11 | 170 | |||||
Stock-based compensation |
|
| (5,104) |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (91) |
|
| |||||
Net loss |
|
|
| (10,968) |
|
|
| |||||
Balance at May 31, 2020 | 27,056 | $ | 1,353 | $ | 211,067 | $ | 48,988 | $ | 231 | (13,198) | $ | (204,591) |
Accumulated | ||||||||||||||||||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||||||||||||||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | ||||||||||||||||||||||
Balance at August 31, 2018 | 27,056 | $ | 1,353 | $ | 211,280 | $ | 63,569 | $ | 341 | (13,159 | ) | $ | (196,043 | ) | ||||||||||||||
Issuance of common stock from | ||||||||||||||||||||||||||||
treasury | 64 | 11 | 166 | |||||||||||||||||||||||||
Purchases of common shares | ||||||||||||||||||||||||||||
for treasury | (7 | ) | ||||||||||||||||||||||||||
Stock-based compensation | 946 | |||||||||||||||||||||||||||
Cumulative translation | ||||||||||||||||||||||||||||
adjustments | (309 | ) | ||||||||||||||||||||||||||
Cumulative effect of | ||||||||||||||||||||||||||||
accounting change | (3,143 | ) | ||||||||||||||||||||||||||
Net loss | (1,357 | ) | ||||||||||||||||||||||||||
Balance at November 30, 2018 | 27,056 | 1,353 | 212,290 | 59,069 | 32 | (13,148 | ) | (195,884 | ) | |||||||||||||||||||
Issuance of common stock from | ||||||||||||||||||||||||||||
treasury | 53 | 11 | 162 | |||||||||||||||||||||||||
Purchases of common shares | ||||||||||||||||||||||||||||
for treasury | (5 | ) | ||||||||||||||||||||||||||
Stock-based compensation | 1,043 | |||||||||||||||||||||||||||
Restricted stock award | (426 | ) | 28 | 426 | ||||||||||||||||||||||||
Cumulative translation | ||||||||||||||||||||||||||||
adjustments | 438 | |||||||||||||||||||||||||||
Net loss | (3,517 | ) | ||||||||||||||||||||||||||
Balance at February 28, 2019 | 27,056 | 1,353 | 212,960 | 55,552 | 470 | (13,109 | ) | (195,301 | ) | |||||||||||||||||||
Issuance of common stock from | ||||||||||||||||||||||||||||
treasury | 81 | 12 | 168 | |||||||||||||||||||||||||
Stock-based compensation | 1,051 | |||||||||||||||||||||||||||
Cumulative translation | ||||||||||||||||||||||||||||
adjustments | (144 | ) | ||||||||||||||||||||||||||
Net loss | (2,024 | ) | ||||||||||||||||||||||||||
Balance at May 31, 2019 | 27,056 | $ | 1,353 | $ | 214,092 | $ | 53,528 | $ | 326 | (13,097 | ) | $ | (195,133 | ) |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
General
Franklin Covey Co. (hereafter referred to as us, we, our, or the Company) 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. We are fundamentally a content and solutions company, and we believe that our offerings and services create the connection between capabilities and results. Our expertise extendsWe have a wide range of content delivery options, including: the All Access Pass (AAP) subscription, 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 seven crucial areas: Leadership, Execution, Productivity, Trust, Educational Improvement, Sales Performance, and Customer Loyalty.deliver our content to clients in a high-quality learning environment whether those clients are working remotely or in a centralized location. 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.
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, The Leader in Me, and The 4 Disciplines of Execution, and Multipliers, and proprietary content in the areas of Execution, Sales Performance, Productivity, Educational Improvement, and Customer Loyalty. Our offerings are described in further detail at www.franklincovey.com.www.franklincovey.com. The information posted on our website is not incorporated into this report.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and results of operations of the Company as of the dates and for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the fiscal year ended August 31, 2019.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The results of operations for the quarter and three quarters ended May 31, 20202021 are not necessarily indicative of results expected for the entire fiscal year ending August 31, 2020,2021, or for any future periods.
Note on the COVID-19 Pandemic
With the rapid spread of COVID-19 around the world and the continuously evolving responses to the pandemic, we have witnessed the significant and growing negativeadverse impact of COVID-19 on the global economic and operating environment. These negative impacts significantly reducedconditions have adversely affected our consolidated sales during the quarter and three quarters ended May 31, 20202021 as some workplaces and schools wereremained closed in response to the pandemic. However, during the third quarter of fiscal 2021 we have benefitted from the recovery of certain countries and markets. The recovery from COVID-19 has thus far been uneven as case numbers have fluctuated and increased in certain areas of the world, which has caused continued business, educational, and social disruptions. In light of these events, we have taken measures to reduce our costs and to maintain adequate liquidity. However, dueDue to the rapidly changing business and education environment unprecedented market volatility, and other circumstances
resulting from the COVID-19 pandemic, we are currently unable to fully determine the extent of COVID-19’s impact on our business in future periods. Our business in future periods will be heavily influenced by the timing, length, and intensity of the economic recoveries in the United States and in other countries around the world. We continue to monitor evolving economic and general business conditions and the actual and potential impacts on our financial position, results of operations, and cash flows.
Accounting Pronouncements Issued and Adopted
Credit Losses on Financial Accounting Standards Board (FASB) issuedInstruments
On September 1, 2020, we adopted Accounting Standards Update (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 condensed 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 5, Leases for further information regarding our leasing activity.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
On September 1, 2020, we adopted 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 Company adopted ASU 2018-15 on a prospective basis and the adoption of this new standard did not have a material impact on our condensed consolidated financial statements or disclosures.
Accounting Pronouncements Issued and Not Yet Adopted
In December 2019, the Financial Accounting Standards Board issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The guidance in ASU 2019-12 is effective for interim and annual periodsfiscal years beginning after December 15, 2019, and2020, although early adoption is permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the effects, if any,impact of the adoptionprovisions of ASU 2018-15 may have2019-12 on our consolidated financial position,statements.
NOTE 2 – ACQUISITION OF STRIVE TALENT, INC.
On April 26, 2021 (the Closing Date), through our wholly-owned subsidiary Franklin Covey Client Sales, Inc., we purchased all of the issued and outstanding stock of Strive Talent, Inc. (Strive), a San Francisco-based technology company which has developed and markets an innovative learning deployment platform. The Strive platform is expected to enable the seamless integration and deployment of our content, services, technology, and metrics to deliver behavioral impact at scale, primarily through the Company’s All Access Pass subscription. The aggregate consideration for the purchase of Strive may total up to $20.0 million and is comprised of the following:
Approximately $10.6 million paid in cash on the Closing Date of the transaction, including $1.0 million placed in escrow for 18 months from the Closing Date to serve as the first source of funds to satisfy certain indemnification obligations of Strive.
Approximately $4.2 million payable in equal cash payments on the first five anniversaries of the Closing Date.
Approximately $1.0 million will be paid 18 months following the Closing Date to stockholders and option holders of Strive who are still employed by the Company or its affiliates as of such 18-month date, subject to certain exceptions. The bonus payments are forfeit by the individuals if they voluntarily terminate their employment with
the Company prior to the 18-month anniversary of the purchase. These payments may be made in either cash or shares of our common stock at our sole discretion.
A maximum of approximately $4.3 million may be earned by the former principal owner of Strive over a five-year period ending in May 2026. The total value of this consideration is contingent upon sales and growth of the All Access Pass subscription and subscription services revenues during the five-year period measurement ending in May 2026. The contingent earn out payments are conditional upon the continued employment of former principal owner of Strive over the first four years of the measurement period. These payments may be made in either cash or shares of our common stock at our sole discretion.
As described above, included in the purchase agreement for the acquisition of Strive are additional contingent payments of up to $5.3 million subject to continued employment of the primary seller and certain employees. These payments are expensed as earned and may be settled by us, at our sole discretion, in shares of our common stock or cash. Based on the relevant accounting literature for business acquisitions, the initial purchase price of Strive is comprised of the following:
Cash paid at closing | $ | 10,554 | |
Notes payable | 3,766 | ||
Total purchase price | $ | 14,320 |
We have included the operating results of Strive in our financial statements since the Closing Date. However, the acquisition of Strive had an immaterial impact on our results of operations cash flows,for the quarter ended May 31, 2021. For the twelve months ended December 31, 2020, Strive had revenues of $1.3 million (unaudited) and an operating loss of $(1.1) million (unaudited). Strive does not meet the definition of a “significant subsidiary” as specified by Regulation S-X of the Securities and Exchange Commission. The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows (in thousands):
Cash acquired | $ | 345 | |
Accounts receivable | 154 | ||
Prepaid and other current assets | 56 | ||
Property and equipment | 13 | ||
Intangible assets | 7,976 | ||
Goodwill | 7,000 | ||
Assets acquired | 15,544 | ||
Deferred revenue | (52) | ||
Accrued liabilities | (135) | ||
Deferred income tax liability | (1,037) | ||
Notes payable, current portion | (836) | ||
Notes payable, long-term | (2,930) | ||
Liabilities assumed | (4,990) | ||
$ | 10,554 |
The preliminary allocation of the purchase price to the intangible assets acquired was as follows (in thousands):
Weighted Average | |||||
Description | Amount | Life | |||
Non-compete agreements | $ | 171 | 2 years | ||
Content | 389 | 5 years | |||
Customer relationships | 764 | 3 years | |||
Tradename | 889 | 5 years | |||
Internally developed software | 5,763 | 8 years | |||
$ | 7,976 |
The goodwill generated by the Strive acquisition is primarily attributable to the technology, content, and software development capabilities that complement our existing All Access Pass subscription and has not yet been allocated to our operating segments. None of the goodwill or disclosures.
deductible for income tax purposes. Acquisition costs totaled approximately $0.3 million and were recorded in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations.
NOTE 23 – INVENTORIES
Inventories are stated at the lower of cost or net realizable value, cost being determined using the first-in, first-out method, and were comprised of the following (in thousands):
May 31, | August 31, | ||||
2021 | 2020 | ||||
Finished goods | $ | 2,624 | $ | 2,947 | |
Raw materials | 28 | 27 | |||
$ | 2,652 | $ | 2,974 |
May 31, | August 31, | |||||||
2020 | 2019 | |||||||
Finished goods | $ | 3,086 | $ | 3,434 | ||||
Raw materials | 20 | 47 | ||||||
$ | 3,106 | $ | 3,481 |
NOTE 4 – RECEIVABLES
Our trade accounts receivable are recorded at net realizable value, which includes an allowance for estimated credit losses as described in Note 1, Basis of Presentation. Under the guidance found in ASC Topic 326, the “expected credit loss” model replaces the previous “incurred loss” model and requires consideration of a broader range of information to estimate expected credit losses over the lives of our trade accounts receivable. Our prior methodology for estimating credit losses on our trade accounts receivable did not differ significantly from the new requirements of Topic 326.
We maintain an allowance for credit losses related to our trade accounts receivable for future expected credit losses resulting from the inability or unwillingness of our customers to make required payments. We estimate the allowance based upon historical bad debts, current customer receivable balances, age of customer receivable balances, and the customers’ financial condition in relation to a representative pool of assets consisting of customers with similar risk characteristics. The allowance is adjusted as appropriate to reflect differences in current conditions as well as changes in forecasted macroeconomic conditions. Receivables that do not share risk characteristics are evaluated on an individual basis, including those associated with customers that have a higher probability of default. Our estimate of credit losses includes expected current and future economic and market conditions surrounding the COVID-19 pandemic. We do not have a significant amount of notes or other receivables.
The following schedule provides a reconciliation of the activity in our allowance for estimated credit losses during the quarter and three quarters ended May 31, 2021 (in thousands):
Balance at August 31, 2020 | $ | 4,159 | |
Charged to costs and expenses | 247 | ||
Amounts written off | (655) | ||
Balance at November 30, 2020 | 3,751 | ||
Charged to costs and expenses | 46 | ||
Amounts written off | (135) | ||
Balance at February 28, 2021 | 3,662 | ||
Charged to costs and expenses | 1,066 | ||
Amounts written off | (185) | ||
Balance at May 31, 2021 | $ | 4,543 |
No customer represented more than 10 percent of our total trade receivables balance at May 31, 2021 or August 31, 2020. Recoveries of amounts previously written off were immaterial for the periods presented.
NOTE 35 – TERM NOTES PAYABLECONSENT AND LINESECOND MODIFICATION OF CREDIT
In connection with the acquisition of Strive as described in Note 2, we entered into a Consent and Second Modification Agreement to our existing secured credit agreement (the 2019 Agreement) with JPMorgan Chase Bank, N.A. (the Lender). The primary purposes of the Consent and Second Modification Agreement are to:
Consent to the credit agreement we obtained in August 2019 (the 2019 Credit Agreement), we havepurchase of Strive.
Reinstate the ability to borrow up to $25.0 million in term loans. At August 31, 2019, we had borrowed $20.0 millionoriginal debt covenants of the available term loan amount. During November 2019 we borrowedAgreement which were temporarily replaced by alternate debt covenants in the remaining $5.0 million term loan available.First Modification Agreement to the 2019 Agreement.
Reduce the interest rate for borrowings from LIBOR plus 3.0 percent to LIBOR plus 1.85 percent, which was the original rate on the 2019 Agreement. The additional $5.0 million term loan hasunused credit commitment fee also returns to the same termspreviously established 0.2 percent.
The Consent and conditions as the previous term loan and doesSecond Modification Agreement did not change any repayment or credit availability terms on the 2019 Agreement. Our reinstated debt covenants consist of the following: (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 our quarterly principal payments. However,unreimbursed letter of credit disbursements.
In the maturity dateevent of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the term loans is extended for one year to August 2024 as a resultrepayment of any amounts outstanding on the additional payments.2019 Agreement. At May 31, 2020, our future principal payments on2021, we believe that we were in compliance with the term loans are as follows (in thousands):
YEAR ENDING AUGUST 31, | Amount | |||
2020 | $ | 1,250 | ||
2021 | 5,000 | |||
2022 | 5,000 | |||
2023 | 5,000 | |||
2024 | 5,000 | |||
$ | 21,250 |
NOTE 46 – FAIR VALUE OF FINANCIAL INSTRUMENTS
At May 31, 2020,2021, the carrying value of our financial instruments approximated their fair values. The fair values of our contingent consideration liabilities from previous business acquisitions are considered “Level 3” measurements because we use various estimates in the valuation models to project the timing and amount of future contingent payments. The fair value of the contingent consideration liabilities from the acquisitions of Jhana Education (Jhana) and Robert Gregory Partners (RGP) changed as follows during the quarter and three quarters ended May 31, 20202021 (in thousands):
Jhana | RGP | Total | |||||||
Balance at August 31, 2020 | $ | 3,067 | $ | 816 | $ | 3,883 | |||
Change in fair value | 80 | (18) | 62 | ||||||
Payments | (329) | - | (329) | ||||||
Balance at November 30, 2020 | 2,818 | 798 | 3,616 | ||||||
Change in fair value | 34 | (50) | (16) | ||||||
Payments | (211) | - | (211) | ||||||
Balance at February 28, 2021 | 2,641 | 748 | 3,389 | ||||||
Change in fair value | 34 | 84 | 118 | ||||||
Payments | (359) | - | (359) | ||||||
Balance at May 31, 2021 | $ | 2,316 | $ | 832 | $ | 3,148 |
Jhana | RGP | Total | ||||||||||
Balance at August 31, 2019 | $ | 3,468 | $ | 1,761 | $ | 5,229 | ||||||
Change in fair value | 98 | (7 | ) | 91 | ||||||||
Payments | (282 | ) | (500 | ) | (782 | ) | ||||||
Balance at November 30, 2019 | 3,284 | 1,254 | 4,538 | |||||||||
Change in fair value | 153 | (335 | ) | (182 | ) | |||||||
Payments | (129 | ) | - | (129 | ) | |||||||
Balance at February 29, 2020 | 3,308 | 919 | 4,227 | |||||||||
Change in fair value | (102 | ) | (174 | ) | (276 | ) | ||||||
Payments | (256 | ) | - | (256 | ) | |||||||
Balance at May 31, 2020 | $ | 2,950 | $ | 745 | $ | 3,695 |
At each quarterly reporting date, we typically estimate the fair value of theour contingent liabilities from both the Jhana and RGP acquisitions through the use of Monte Carlo simulations. However, the RGP contingent consideration measurement period ended on May 31, 2021 and the fair value of the final contingent payment was measured using the specified performance objectives in the purchase agreement rather than a Monte Carlo simulation. Based on the timing of expected payments, $0.8$1.2 million of the Jhana and $0.5 millionall of the RGP contingent consideration liabilities were recorded as components of accrued liabilities on our condensed consolidated balance sheet at May 31, 2020.2021. The remainderremaining $1.1 million of ourthe Jhana contingent consideration liabilities are classified asliability is reported in other long-term liabilities. Adjustments to the fair value of our contingent consideration liabilities are included in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations.
Balance Sheet | May 31, | ||||
Caption | 2020 | ||||
Assets: | |||||
Operating lease right of use assets | Other long-term assets | $ | 1,383 | ||
Liabilities: | |||||
Current: | |||||
Operating lease liabilities | Accrued liabilities | 843 | |||
Long-Term: | |||||
Operating lease liabilities | Other long-term liabilities | 540 | |||
$ | 1,383 | ||||
Weighted Average Remaining Lease Term: | |||||
Operating leases (years) | 2.6 | ||||
Weighted Average Discount Rate: | |||||
Operating leases | 4.2 | % |
YEAR ENDING AUGUST 31, | Amount | |||
Remainder of 2020 | $ | 271 | ||
2021 | 724 | |||
2022 | 197 | |||
2023 | 112 | |||
2024 | 90 | |||
Thereafter | 94 | |||
Total operating lease payments | 1,488 | |||
Less imputed interest | (105 | ) | ||
Present value of operating lease liabilities | $ | 1,383 |
YEAR ENDING AUGUST 31, | Amount | |||
Remainder of 2020 | $ | 979 | ||
2021 | 3,944 | |||
2022 | 3,699 | |||
2023 | 2,065 | |||
2024 | 1,527 | |||
Thereafter | 1,275 | |||
$ | 13,489 |
NOTE 7 – REVENUE RECOGNITION
Contract Balances
Our deferred revenue totaled $53.1$64.8 million at May 31, 20202021 and $65.8$68.9 million at August 31, 2019,2020, of which $2.4$1.5 million and $3.6$2.2 million were classified as components of other long-term liabilities at May 31, 2020,2021, and August 31, 2019,2020, respectively. The amount of deferred revenue that was generated from subscription offerings totaled $43.9$55.3 million at May 31, 20202021 and $58.2$60.6 million at August 31, 2019.2020. During the quarter and three quarters ended May 31, 2020,2021, we recognized $22.2$25.9 million and $64.7$70.5 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. ASC Topic 606 introduced the concept of remainingRemaining 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 May 31, 2020,2021, we had $77.3$96.6 million of remaining performance obligations, including the amount 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.
Disaggregated Revenue Information
Refer to Note 11, Segment Information, to these condensed consolidated financial statements for our disaggregated revenue information.
NOTE 8 – STOCK-BASED COMPENSATION
Our stock-based compensation was comprised of the following for the periods presented (in thousands):
Quarter Ended | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Long-term incentive awards | $ | 2,144 | $ | (5,326) | $ | 4,458 | $ | (2,124) | |||
Restricted stock awards | 175 | 175 | 525 | 525 | |||||||
Employee stock purchase plan | 51 | 47 | 144 | 139 | |||||||
$ | 2,370 | $ | (5,104) | $ | 5,127 | $ | (1,460) |
Quarter Ended | Three Quarters Ended | |||||||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Long-term incentive awards | $ | (5,326 | ) | $ | 826 | $ | (2,124 | ) | $ | 2,384 | ||||||
Restricted stock awards | 175 | 175 | 525 | 525 | ||||||||||||
Employee stock purchase plan | 47 | 50 | 139 | 131 | ||||||||||||
$ | (5,104 | ) | $ | 1,051 | $ | (1,460 | ) | $ | 3,040 |
For the quarter and three quarters ended May 31, 2020. The subscription sales based tranches of the 2018, 2019, and 2020 LTIP awards are still expected to vest to participants, but at reduced achievement levels.
Due to the significant impact of the other developmentsCOVID-19 pandemic on our results of operations in the third quarter of fiscal 2020 and uncertainties surrounding the economic recovery from the pandemic, we determined that the long-term incentive plan (LTIP) award tranches which vest based on qualified adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA) for our stock-basedvarious LTIP awards would not vest before the end of their respective service periods. On October 2, 2020, the Organization and Compensation Committee (the Compensation Committee) of the Board of Directors modified the terms of our performance-based LTIP award tranches to extend the service period of each tranche by two years and increase each Adjusted EBITDA vesting target by $2.0 million. No time-based vesting LTIP tranches were modified. During the first quarter of fiscal 2021, we reassessed the probability that the modified award tranches would vest and concluded the modified award tranches would vest prior to the end of their respective service
periods. We accounted for the modifications in accordance with the applicable accounting guidance and are recognizing compensation plans duringcost for awards expected to vest over the quarter and three quarters ended May 31, 2020.
Stock Options
On January 12, 2021, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) exercised stock options. Nearly all of thehis remaining stock options, exercisedwhich would have expired inon January 2020.14, 2021. The following information applies to our stock option activity during the three quarters endedoptions through May 31, 2020.2021 (in thousands):
Weighted | |||||
Avg. Exercise | |||||
Number of | Price Per | ||||
Stock Options | Share | ||||
Outstanding at August 31, 2020 | 218,750 | $ | 11.57 | ||
Granted | - | - | |||
Exercised | (218,750) | (11.57) | |||
Forfeited | - | - | |||
Outstanding at May 31, 2021 | - | $ | - | ||
Options vested and exercisable at | |||||
May 31, 2021 | - | $ | - |
Weighted | ||||||||
Avg. Exercise | ||||||||
Number of | Price Per | |||||||
Stock Options | Share | |||||||
Outstanding at August 31, 2019 | 568,750 | $ | 11.67 | |||||
Granted | - | - | ||||||
Exercised | (350,000 | ) | (11.73 | ) | ||||
Forfeited | - | - | ||||||
Outstanding at May 31, 2020 | 218,750 | $ | 11.57 | |||||
Options vested and exercisable at | ||||||||
May 31, 2020 | 218,750 | $ | 11.57 |
The stock options were exercised on a net basis (no cash was paid to exercise the options) and we withheld 102,65651,738 shares of our common stock with a fair value of $3.6$1.3 million for income taxes. The intrinsic value of the exercised options totaled $8.0$2.9 million and we recognized an income tax benefit of $1.8$0.7 million, (Note 9) duringof which $0.5 million was recognized upon the second quarterexercise of fiscal 2020. Our remaining stock options outstanding at May 31, 2020 expire in January 2021.
Fiscal 20202021 Restricted Stock Award
Our annual restricted stock award granted to non-employee members of the Board of Directors is administered under the terms of the 2019 Franklin Covey Co. Omnibus Incentive Plan, and 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. The annual award is granted in January (following the annual shareholders’ meeting) of each year. For the fiscal 20202021 award, each eligible director received a whole-share grant equal to $100,000 with a one-yearone year vesting period. Our restricted stock award activity during the three quarters ended May 31, 20202021 consisted of the following:
Weighted-Average | |||||
Grant Date | |||||
Number of | Fair Value | ||||
Shares | Per Share | ||||
Restricted stock awards at | |||||
August 31, 2020 | 21,420 | $ | 32.68 | ||
Granted | 28,049 | 24.96 | |||
Forfeited | - | - | |||
Vested | (21,420) | 32.68 | |||
Restricted stock awards at | |||||
May 31, 2021 | 28,049 | $ | 24.96 |
Weighted-Average | ||||||||
Grant Date | ||||||||
Number of | Fair Value | |||||||
Shares | Per 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 | ||||||||
May 31, 2020 | 21,420 | $ | 32.68 |
At May 31, 2020,2021, there was $0.4 million of unrecognized compensation expense remaining on the fiscal 20202021 Board of Director restricted share award.
Fiscal 20202021 Long-Term Incentive Plan Award
On October 18, 2019,2, 2020, the Organization and Compensation Committee of the Board of Directors granted a new LTIP award to our executive officers and members of senior management. The fiscal 20202021 LTIP award is similar to the fiscal 2019 LTIP award and has three2 tranches, one of which has1 with a time-based vesting condition and two of which have1 with a performance-based vesting conditionscondition as described below:
Time-Based Award Shares
–Performance-Based Award Shares
– TheEmployee Stock Purchase Plan
We have an employee stock purchase plan (ESPP) 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 fiscal quarter. During the quarter and three quarters ended May 31, 2020,2021, we issued 10,94814,242 shares and 26,37540,384 shares of our common stock to participants in the ESPP.
NOTE 9 – INCOME TAXES
For the three quarters ended May 31, 2020,2021, we recorded an income tax expensebenefit of $8.0$9.6 million on a pre-tax lossincome of $2.4$2.2 million, which resulted in an effective tax expensebenefit rate of approximately 329434 percent for the first three quarters of fiscal 2020.2021. We computed income taxes by applying an estimated annual effective income tax rate to the consolidated pre-tax lossincome for the period, adjusting for discrete items arising during the period, including a $10.2$10.9 million increasetax benefit from a decrease in the valuation allowance against our deferred income tax assets during the third quarter of fiscal 2020 and a $0.5 million tax benefit from the exercise of stock options (Note 8), which produced an income benefit of $1.8 million in the second quarter of fiscal 2020.
The increasedecrease in our deferred tax asset valuation allowance resulted in additionala net income tax expensebenefit of $10.2$10.9 million infor the first three quarters of fiscal 2020. In consideration2021. To determine the necessity and amount of the required valuation allowance, we applied relevant accounting guidance, we consideredconsidering 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 lossesincome over the past three fiscal years, combined with the Company’s better-than-anticipated performance during the COVID-19 pandemic and expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic,strong continuing performance, we determined that it is more-likely-than-not that insufficientsufficient 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 ourexcept for net operating loss carryforwards.carryforwards in certain foreign jurisdictions. Accordingly, we increaseddecreased the valuation allowance against our deferred tax assets.
NOTE 10 – LOSSINCOME (LOSS) PER SHARE
The following schedule shows the calculation of lossincome (loss) per share for the periods presented (in thousands, except per-share amounts).
Quarter Ended | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Numerator for basic and | |||||||||||
diluted loss per share: | |||||||||||
Net income (loss) | $ | 12,754 | $ | (10,968) | $ | 11,816 | $ | (10,415) | |||
Denominator for basic and | |||||||||||
diluted loss per share: | |||||||||||
Basic weighted average shares | |||||||||||
outstanding | 14,145 | 13,869 | 14,068 | 13,897 | |||||||
Effect of dilutive securities: | |||||||||||
Stock options and other | |||||||||||
stock-based awards | 11 | - | 65 | - | |||||||
Diluted weighted average | |||||||||||
shares outstanding | 14,156 | 13,869 | 14,133 | 13,897 | |||||||
EPS Calculations: | |||||||||||
Net income (loss) per share: | |||||||||||
Basic and diluted | $ | 0.90 | $ | (0.79) | $ | 0.84 | $ | (0.75) |
Quarter Ended | Three Quarters Ended | |||||||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Numerator for basic and | ||||||||||||||||
diluted loss per share: | ||||||||||||||||
Net loss | $ | (10,968 | ) | $ | (2,024 | ) | $ | (10,415 | ) | $ | (6,898 | ) | ||||
Denominator for basic and | ||||||||||||||||
diluted loss per share: | ||||||||||||||||
Basic weighted average shares | ||||||||||||||||
outstanding | 13,869 | 13,963 | 13,897 | 13,939 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options and other | ||||||||||||||||
stock-based awards | - | - | - | - | ||||||||||||
Diluted weighted average | ||||||||||||||||
shares outstanding | 13,869 | 13,963 | 13,897 | 13,939 | ||||||||||||
EPS Calculations: | ||||||||||||||||
Net loss per share: | ||||||||||||||||
Basic and diluted | $ | (0.79 | ) | $ | (0.14 | ) | $ | (0.75 | ) | $ | (0.49 | ) |
NOTE 11 – SEGMENT INFORMATION
Segment Information
Our sales are primarily comprised of training and consulting services. Ourservices and our internal reporting and operating structure is currently organized around two2 divisions. The Enterprise Division, which consists of our Direct Office and International Licensee segments and the Education Division, which is comprised of our Education practice. Based on the applicable guidance, our operations are comprised of three3 reportable segments and a1 corporate services group. The following is a brief description of our reportable segments:
Direct Offices –
Our Direct Office segment has a depth of expertise in helping organizations solve problems that require changes in human behavior, including leadership, productivity, execution, trust, and sales performance. We have a variety of principle-based offerings that help build winning and profitable cultures. 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 government services sales channel; and ourInternational Licensees –
Our independently owned international licensees provide our offerings and services in countries where we do not have a directly-owned office. These licensee partners allow us to expand the reach of our services to large multinational organizations as well as smaller organizations in their countries. This segment’s results are primarily comprised of royalty revenues received from these licensees.Education Practice –
Centered around the principles found in The Leader in Me, the Education practice is dedicated to helping educational institutions build a culture that will produce great results. We believe these results are manifested by increases in student performance, improved school culture, decreased disciplinary issues, and increased teacher engagement and parental involvement. This segment includes our domestic and international Education practice operations, which are focused on sales to educational institutions such as elementary schools, high schools, and colleges andCorporate and Other –
Our corporate and other information includes leasing operations, shipping and handling revenues, royalty revenues from Franklin Planner Corp.We have determined that the Company’s chief operating decision maker is 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 disclosed by other companies. Adjusted EBITDA is a non-GAAP financial measure. For reporting purposes, our consolidated Adjusted EBITDA may be calculated as net lossincome (loss) excluding interest expense, income taxes, depreciation expense, amortization expense, stock-based compensation, and certain other charges such as adjustments for changes in the fair value of contingent liabilities arising from business acquisitions. We reference this non-GAAP financial measure in our decision making because it provides supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and we believe it provides investors with greater transparency to evaluate operational activities and financial results.
Our operations are not capital intensive and we do not own any manufacturing facilities or equipment. Accordingly, we do not allocate assets to the reportable segments 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. We periodically make minor changes to our reporting structure in the normal course of operations. The segment information presented below reflects certain revisions to our reporting structure which occurred during the second quarter of fiscal 2019. Prior period segment information has been revised to conform with our current segment reporting.
We account for the following segment information on the same basis as the accompanying condensed consolidated financial statements (in thousands).
Sales to | ||||||
Quarter Ended | External | Adjusted | ||||
May 31, 2021 | Customers | Gross Profit | EBITDA | |||
Enterprise Division: | ||||||
Direct offices | $ | 42,704 | $ | 34,678 | $ | 8,894 |
International licensees | 2,395 | 2,069 | 821 | |||
45,099 | 36,747 | 9,715 | ||||
Education practice | 11,899 | 8,179 | 1,132 | |||
Corporate and eliminations | 1,738 | 981 | (2,284) | |||
Consolidated | $ | 58,736 | $ | 45,907 | $ | 8,563 |
Quarter Ended | ||||||
May 31, 2020 | ||||||
Enterprise Division: | ||||||
Direct offices | $ | 26,760 | $ | 21,108 | $ | 352 |
International licensees | 708 | 339 | (724) | |||
27,468 | 21,447 | (372) | ||||
Education practice | 8,216 | 4,711 | (1,536) | |||
Corporate and eliminations | 1,421 | 663 | (1,734) | |||
Consolidated | $ | 37,105 | $ | 26,821 | $ | (3,642) |
Three Quarters Ended | ||||||
May 31, 2021 | ||||||
Enterprise Division: | ||||||
Direct offices | $ | 115,185 | $ | 93,201 | $ | 21,729 |
International licensees | 7,421 | 6,454 | 3,608 | |||
122,606 | 99,655 | 25,337 | ||||
Education practice | 27,874 | 17,510 | (2,010) | |||
Corporate and eliminations | 4,743 | 2,469 | (5,925) | |||
Consolidated | $ | 155,223 | $ | 119,634 | $ | 17,402 |
Three Quarters Ended | ||||||
May 31, 2020 | ||||||
Enterprise Division: | ||||||
Direct offices | $ | 106,844 | $ | 81,221 | $ | 10,796 |
International licensees | 7,120 | 5,696 | 2,696 | |||
113,964 | 86,917 | 13,492 | ||||
Education practice | 30,190 | 17,828 | (3,707) | |||
Corporate and eliminations | 5,309 | 2,772 | (4,410) | |||
Consolidated | $ | 149,463 | $ | 107,517 | $ | 5,375 |
Sales to | ||||||||||||
Quarter Ended | External | Adjusted | ||||||||||
May 31, 2020 | Customers | Gross Profit | EBITDA | |||||||||
Enterprise Division: | ||||||||||||
Direct offices | $ | 26,760 | $ | 21,108 | $ | 352 | ||||||
International licensees | 708 | 339 | (724 | ) | ||||||||
27,468 | 21,447 | (372 | ) | |||||||||
Education practice | 8,216 | 4,711 | (1,536 | ) | ||||||||
Corporate and eliminations | 1,421 | 663 | (1,734 | ) | ||||||||
Consolidated | $ | 37,105 | $ | 26,821 | $ | (3,642 | ) | |||||
Quarter Ended | ||||||||||||
May 31, 2019 | ||||||||||||
Enterprise Division: | ||||||||||||
Direct offices | $ | 40,387 | $ | 29,836 | $ | 4,520 | ||||||
International licensees | 3,014 | 2,432 | 1,281 | |||||||||
43,401 | 32,268 | 5,801 | ||||||||||
Education practice | 11,088 | 6,846 | (181 | ) | ||||||||
Corporate and eliminations | 1,517 | 550 | (2,549 | ) | ||||||||
Consolidated | $ | 56,006 | $ | 39,664 | $ | 3,071 | ||||||
Three Quarters Ended | ||||||||||||
May 31, 2020 | ||||||||||||
Enterprise Division: | ||||||||||||
Direct offices | $ | 106,844 | $ | 81,221 | $ | 10,796 | ||||||
International licensees | 7,120 | 5,696 | 2,696 | |||||||||
113,964 | 86,917 | 13,492 | ||||||||||
Education practice | 30,190 | 17,828 | (3,707 | ) | ||||||||
Corporate and eliminations | 5,309 | 2,772 | (4,410 | ) | ||||||||
Consolidated | $ | 149,463 | $ | 107,517 | $ | 5,375 | ||||||
Three Quarters Ended | ||||||||||||
May 31, 2019 | ||||||||||||
Enterprise Division: | ||||||||||||
Direct offices | $ | 115,271 | $ | 84,200 | $ | 10,703 | ||||||
International licensees | 9,598 | 7,515 | 4,127 | |||||||||
124,869 | 91,715 | 14,830 | ||||||||||
Education practice | 31,132 | 18,668 | (1,355 | ) | ||||||||
Corporate and eliminations | 4,190 | 1,429 | (6,272 | ) | ||||||||
Consolidated | $ | 160,191 | $ | 111,812 | $ | 7,203 |
A reconciliation of our consolidated Adjusted EBITDA to consolidated net lossincome (loss) is provided below (in thousands).
Quarter Ended | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Segment Adjusted EBITDA | $ | 10,847 | $ | (1,908) | $ | 23,327 | $ | 9,785 | |||
Corporate expenses | (2,284) | (1,734) | (5,925) | (4,410) | |||||||
Consolidated Adjusted EBITDA | 8,563 | (3,642) | 17,402 | 5,375 | |||||||
Stock-based compensation | (2,370) | 5,104 | (5,127) | 1,460 | |||||||
Business acquisition costs | (300) | - | (300) | - | |||||||
Decrease (increase) in the fair value of | |||||||||||
contingent consideration liabilities | (118) | 276 | (164) | 367 | |||||||
Government COVID-19 assistance | - | - | 234 | - | |||||||
Knowledge Capital wind-down costs | - | - | - | (389) | |||||||
Gain from insurance settlement | - | 933 | 150 | 933 | |||||||
Depreciation | (1,423) | (1,652) | (4,904) | (4,925) | |||||||
Amortization | (1,238) | (1,164) | (3,503) | (3,504) | |||||||
Income (loss) from operations | 3,114 | (145) | 3,788 | (683) | |||||||
Interest income | 16 | 18 | 56 | 36 | |||||||
Interest expense | (525) | (621) | (1,633) | (1,783) | |||||||
Income (loss) before income taxes | 2,605 | (748) | 2,211 | (2,430) | |||||||
Income tax benefit (provision) | 10,149 | (10,220) | 9,605 | (7,985) | |||||||
Net income (loss) | $ | 12,754 | $ | (10,968) | $ | 11,816 | $ | (10,415) |
Quarter Ended | Three Quarters Ended | |||||||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Segment Adjusted EBITDA | $ | (1,908 | ) | $ | 5,620 | $ | 9,785 | $ | 13,475 | |||||||
Corporate expenses | (1,734 | ) | (2,549 | ) | (4,410 | ) | (6,272 | ) | ||||||||
Consolidated Adjusted EBITDA | (3,642 | ) | 3,071 | 5,375 | 7,203 | |||||||||||
Stock-based compensation | 5,104 | (1,051 | ) | 1,460 | (3,040 | ) | ||||||||||
Decrease (increase) in the fair value of | ||||||||||||||||
contingent consideration liabilities | 276 | (1,069 | ) | 367 | (1,145 | ) | ||||||||||
Gain from insurance proceeds | 933 | - | 933 | - | ||||||||||||
Knowledge Capital wind-down costs | - | - | (389 | ) | - | |||||||||||
Licensee transition costs | - | - | - | (488 | ) | |||||||||||
Depreciation | (1,652 | ) | (1,556 | ) | (4,925 | ) | (4,806 | ) | ||||||||
Amortization | (1,164 | ) | (1,259 | ) | (3,504 | ) | (3,797 | ) | ||||||||
Loss from operations | (145 | ) | (1,864 | ) | (683 | ) | (6,073 | ) | ||||||||
Interest income | 18 | 8 | 36 | 30 | ||||||||||||
Interest expense | (621 | ) | (562 | ) | (1,783 | ) | (1,817 | ) | ||||||||
Discount accretion on related | ||||||||||||||||
party receivable | - | - | - | 258 | ||||||||||||
Loss before income taxes | (748 | ) | (2,418 | ) | (2,430 | ) | (7,602 | ) | ||||||||
Income tax benefit (provision) | (10,220 | ) | 394 | (7,985 | ) | 704 | ||||||||||
Net loss | $ | (10,968 | ) | $ | (2,024 | ) | $ | (10,415 | ) | $ | (6,898 | ) |
Revenue by Category
The following table presents our revenue disaggregated by geographic region (in thousands).
Quarter Ended | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2021 | 2020 | 2021 | 2020 | ||||||||
Americas | $ | 47,524 | $ | 32,788 | $ | 124,679 | $ | 119,545 | |||
Asia Pacific | 7,922 | 2,759 | 21,351 | 19,987 | |||||||
Europe/Middle East/Africa | 3,290 | 1,558 | 9,193 | 9,931 | |||||||
$ | 58,736 | $ | 37,105 | $ | 155,223 | $ | 149,463 |
Quarter Ended | Three Quarters Ended | |||||||||||||||
May 31, | May 31, | May 31, | May 31, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Americas | $ | 32,788 | $ | 44,919 | $ | 119,545 | $ | 125,676 | ||||||||
Asia Pacific | 2,759 | 7,914 | 19,987 | 24,592 | ||||||||||||
Europe/Middle East/Africa | 1,558 | 3,173 | 9,931 | 9,923 | ||||||||||||
$ | 37,105 | $ | 56,006 | $ | 149,463 | $ | 160,191 |
The following table presents our revenue disaggregated by type of service (in thousands).
Quarter Ended | Services and | Leases and | ||||||||
May 31, 2021 | Products | Subscriptions | Royalties | Other | Consolidated | |||||
Enterprise Division: | ||||||||||
Direct offices | $ | 23,266 | $ | 18,752 | $ | 686 | $ | - | $ | 42,704 |
International licensees | 412 | - | 1,983 | - | 2,395 | |||||
23,678 | 18,752 | 2,669 | - | 45,099 | ||||||
Education practice | 4,298 | 7,171 | 430 | - | 11,899 | |||||
Corporate and eliminations | - | - | 345 | 1,393 | 1,738 | |||||
Consolidated | $ | 27,976 | $ | 25,923 | $ | 3,444 | $ | 1,393 | $ | 58,736 |
Quarter Ended | ||||||||||
May 31, 2020 | ||||||||||
Enterprise Division: | ||||||||||
Direct offices | $ | 10,051 | $ | 15,965 | $ | 744 | $ | - | $ | 26,760 |
International licensees | 191 | - | 517 | - | 708 | |||||
10,242 | 15,965 | 1,261 | - | 27,468 | ||||||
Education practice | 1,373 | 6,286 | 557 | - | 8,216 | |||||
Corporate and eliminations | - | - | 334 | 1,087 | 1,421 | |||||
Consolidated | $ | 11,615 | $ | 22,251 | $ | 2,152 | $ | 1,087 | $ | 37,105 |
Three Quarters Ended | ||||||||||
May 31, 2021 | ||||||||||
Enterprise Division: | ||||||||||
Direct offices | $ | 60,589 | $ | 52,499 | $ | 2,097 | $ | - | $ | 115,185 |
International licensees | 1,267 | - | 6,154 | - | 7,421 | |||||
61,856 | 52,499 | 8,251 | - | 122,606 | ||||||
Education practice | 8,018 | 17,977 | 1,879 | - | 27,874 | |||||
Corporate and eliminations | - | - | 1,053 | 3,690 | 4,743 | |||||
Consolidated | $ | 69,874 | $ | 70,476 | $ | 11,183 | $ | 3,690 | $ | 155,223 |
Three Quarters Ended | ||||||||||
May 31, 2020 | ||||||||||
Enterprise Division: | ||||||||||
Direct offices | $ | 58,946 | $ | 45,425 | $ | 2,473 | $ | - | $ | 106,844 |
International licensees | 1,191 | - | 5,929 | - | 7,120 | |||||
60,137 | 45,425 | 8,402 | - | 113,964 | ||||||
Education practice | 7,908 | 19,296 | 2,986 | - | 30,190 | |||||
Corporate and eliminations | - | - | 1,649 | 3,660 | 5,309 | |||||
Consolidated | $ | 68,045 | $ | 64,721 | $ | 13,037 | $ | 3,660 | $ | 149,463 |
Quarter Ended | Services and | Leases and | ||||||||||||||||||
May 31, 2020 | Products | Subscriptions | Royalties | Other | Consolidated | |||||||||||||||
Enterprise Division: | ||||||||||||||||||||
Direct offices | $ | 10,051 | $ | 15,965 | $ | 744 | $ | - | $ | 26,760 | ||||||||||
International licensees | 191 | - | 517 | - | 708 | |||||||||||||||
10,242 | 15,965 | 1,261 | - | 27,468 | ||||||||||||||||
Education practice | 1,373 | 6,286 | 557 | - | 8,216 | |||||||||||||||
Corporate and eliminations | - | - | 334 | 1,087 | 1,421 | |||||||||||||||
Consolidated | $ | 11,615 | $ | 22,251 | $ | 2,152 | $ | 1,087 | $ | 37,105 | ||||||||||
Quarter Ended | ||||||||||||||||||||
May 31, 2019 | ||||||||||||||||||||
Enterprise Division: | ||||||||||||||||||||
Direct offices | $ | 26,295 | $ | 13,363 | $ | 729 | $ | - | $ | 40,387 | ||||||||||
International licensees | 403 | - | 2,611 | - | 3,014 | |||||||||||||||
26,698 | 13,363 | 3,340 | - | 43,401 | ||||||||||||||||
Education practice | 5,065 | 5,564 | 459 | - | 11,088 | |||||||||||||||
Corporate and eliminations | - | - | - | 1,517 | 1,517 | |||||||||||||||
Consolidated | $ | 31,763 | $ | 18,927 | $ | 3,799 | $ | 1,517 | $ | 56,006 | ||||||||||
Three Quarters Ended | ||||||||||||||||||||
May 31, 2020 | ||||||||||||||||||||
Enterprise Division: | ||||||||||||||||||||
Direct offices | $ | 58,946 | $ | 45,425 | $ | 2,473 | $ | - | $ | 106,844 | ||||||||||
International licensees | 1,191 | - | 5,929 | - | 7,120 | |||||||||||||||
60,137 | 45,425 | 8,402 | - | 113,964 | ||||||||||||||||
Education practice | 7,908 | 19,296 | 2,986 | - | 30,190 | |||||||||||||||
Corporate and eliminations | - | - | 1,649 | 3,660 | 5,309 | |||||||||||||||
Consolidated | $ | 68,045 | $ | 64,721 | $ | 13,037 | $ | 3,660 | $ | 149,463 | ||||||||||
Three Quarters Ended | ||||||||||||||||||||
May 31, 2019 | ||||||||||||||||||||
Enterprise Division: | ||||||||||||||||||||
Direct offices | $ | 74,405 | $ | 38,453 | $ | 2,413 | $ | - | $ | 115,271 | ||||||||||
International licensees | 1,793 | - | 7,805 | - | 9,598 | |||||||||||||||
76,198 | 38,453 | 10,218 | - | 124,869 | ||||||||||||||||
Education practice | 11,565 | 16,644 | 2,923 | - | 31,132 | |||||||||||||||
Corporate and eliminations | - | - | - | 4,190 | 4,190 | |||||||||||||||
Consolidated | $ | 87,763 | $ | 55,097 | $ | 13,141 | $ | 4,190 | $ | 160,191 |
Quarter Ending | Amount | |||
August 31, 2020 | $ | 11,000 | ||
November 30, 2020 | 8,500 | |||
February 28, 2021 | 5,000 | |||
May 31, 2021 | 15,000 |
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management’s current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995.” We suggest that the following discussion and analysis be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, RESULTS OF OPERATIONS Overview Franklin Covey Co. is a global company focused on individual and organizational performance improvement. We believe that our content and services create the connection between capabilities and results. 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. Our Our strong performance during the third quarter of fiscal 2021 reflects the continuation of four key trends that have been evident throughout the ongoing COVID-19 pandemic. These trends include: Strong growth of All Access Pass. All Access Pass subscription sales increased 17 percent in the third quarter of fiscal 2021, 15 percent in the first three quarters of fiscal 2021, and 14 percent over the four quarters ended May 31, 2021 when compared with the corresponding periods of fiscal 2020. Growth of All Access Pass subscription services. Sales of All Access Pass subscription services continued to strengthen in the third quarter, reflecting strong bookings of subscription services in prior quarters, and the Company’s capabilities to deliver services live-online and digitally. International sales are improving. Sales in our international direct offices and through many of our international licensee partners continued to strengthen in the third quarter. Education Division performance is expected to improve. Despite the challenging environment for education, booking and delivery trends in the Education Division strengthened in the third quarter, and Education Division performance is expected to continue to improve in the fourth quarter of fiscal 2021. As areas of our operations continue to recover and grow, we believe the strength of our subscription-based offerings and services led the Company to higher levels of profitability and cash flows than in fiscal 2020, including the pre-pandemic first half of fiscal 2020. We believe these trends will continue through the fourth quarter of fiscal 2021 and will continue to produce improved earnings and cash flows compared with the prior year. The third quarter of Sales – Our consolidated sales for the quarter ending May 31, 2021 totaled $58.7 million, compared with At May 31, Cost of Sales/Gross Profit Operating Expenses Income Taxes – Our income Operating Cash Flows from Operating Activities – Purchase of Strive Talent, Inc. – During the third quarter of fiscal Further details regarding our Quarter Ended May 31, 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, and our offices in Germany, Switzerland, and Austria (GSA) Quarter Ended Quarter Ended May 31, % of May 31, % of 2021 Sales 2020 Sales Change Sales $ 42,704 100.0 $ 26,760 100.0 $ 15,944 Cost of sales 8,026 18.8 5,652 21.1 2,374 Gross profit 34,678 81.2 21,108 78.9 13,570 SG&A expenses 25,784 60.4 20,756 77.6 5,028 Adjusted EBITDA $ 8,894 20.8 $ 352 1.3 $ 8,542 During the third quarter of fiscal 2021 our All Access Pass subscription revenues remained strong and increased 17 percent over the third quarter of fiscal 2020, while annual AAP revenue retention remained above 90 percent. Our invoiced AAP amounts increased 43 percent compared with the third quarter of fiscal 2020 and we believe the continued increase in invoiced AAP sales, which are initially recognized on the balance sheet, provide a solid base for continued revenue growth in future periods. In addition to the Our foreign direct offices continue to be impacted by the COVID-19 pandemic as governmental mandates limited gatherings, business activity, and Gross Profit. SG&A Expense. International Licensees Segment In Quarter Ended Quarter Ended May 31, % of May 31, % of 2021 Sales 2020 Sales Change Sales $ 2,395 100.0 $ 708 100.0 $ 1,687 Cost of sales 326 13.6 369 52.1 (43) Gross profit 2,069 86.4 339 47.9 1,730 SG&A expenses 1,248 52.1 1,063 150.1 185 Adjusted EBITDA $ 821 34.3 $ (724) (102.3) $ 1,545 Sales. clients. Foreign exchange rates had an immaterial impact on international licensee sales and operating results during the quarter ended May 31, Gross Profit SG&A Expense. 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 Quarter Ended Quarter Ended May 31, % of May 31, % of 2021 Sales 2020 Sales Change Sales $ 11,899 100.0 $ 8,216 100.0 $ 3,683 Cost of sales 3,720 31.3 3,505 42.7 215 Gross profit 8,179 68.7 4,711 57.3 3,468 SG&A expenses 7,047 59.2 6,247 76.0 800 Adjusted EBITDA $ 1,132 9.5 $ (1,536) (18.7) $ 2,668 Sales. Gross Profit. SG&A Expenses. Other Operating Expense Items Depreciation – Amortization Income Taxes Our Three Quarters Ended May 31, Enterprise Division Direct Offices Segment The following comparative information is for our Direct Offices segment for the periods indicated (in thousands): Three Quarters Three Quarters Ended Ended May 31, % of May 31, % of 2021 Sales 2020 Sales Change Sales $ 115,185 100.0 $ 106,844 100.0 $ 8,341 Cost of sales 21,984 19.1 25,623 24.0 (3,639) Gross profit 93,201 80.9 81,221 76.0 11,980 SG&A expenses 71,472 62.0 70,425 65.9 1,047 Adjusted EBITDA $ 21,729 18.9 $ 10,796 10.1 $ 10,933 Sales. As previously mentioned, our Gross Profit. SG&A Expense. International Licensees Segment The following comparative information is for our international licensee operations for the periods indicated (in thousands): Three Quarters Three Quarters Ended Ended May 31, % of May 31, % of 2021 Sales 2020 Sales Change Sales $ 7,421 100.0 $ 7,120 100.0 $ 301 Cost of sales 967 13.0 1,424 20.0 (457) Gross profit 6,454 87.0 5,696 80.0 758 SG&A expenses 2,846 38.4 3,000 42.1 (154) Adjusted EBITDA $ 3,608 48.6 $ 2,696 37.9 $ 912 Sales. Gross Profit SG&A Expense. Education Division The following comparative information is for our Education Division in the periods indicated (in thousands): Three Quarters Three Quarters Ended Ended May 31, % of May 31, % of 2021 Sales 2020 Sales Change Sales $ 27,874 100.0 $ 30,190 100.0 $ (2,316) Cost of sales 10,364 37.2 12,362 40.9 (1,998) Gross profit 17,510 62.8 17,828 59.1 (318) SG&A expenses 19,520 70.0 21,535 71.3 (2,015) Adjusted EBITDA $ (2,010) (7.2) $ (3,707) (12.3) $ 1,697 Sales. Gross Profit. SG&A Expenses. Income Taxes Our effective income tax We paid LIQUIDITY AND CAPITAL RESOURCES Introduction In the current economic environment of In anticipation of potential covenant compliance issues associated with the COVID-19 pandemic and uncertainties associated with the economic recovery, on July 8, 2020, we entered into the First Modification Agreement to Consent to the purchase of Strive. Reinstate the original debt covenants of the 2019 Agreement which were temporarily replaced by alternate debt covenants in the First Modification Agreement to the 2019 Agreement. Reduce the interest rate for borrowings from LIBOR plus 3.0 percent to LIBOR plus 1.85 percent, which was the original rate on the 2019 Agreement. The unused credit commitment fee also returns to the previously established 0.2 percent. The Consent and At May 31, 2021, our reinstated debt covenants consist of the 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 May 31, 2021, we believe that we were in compliance with the In addition to our term-loan obligation and borrowings on our revolving line of credit, we have a long-term rental agreement on our corporate campus that is accounted for as a financing obligation. 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 three quarters ended May 31, Cash Flows From Operating Activities Our primary source of cash from operating activities was the sale of services to our customers in the normal course of business. Our 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. Despite the operating difficulties resulting from the COVID-19 pandemic in the Cash Flows Through May 31, 2021, our cash used for investing activities We spent Our purchases of property and equipment Cash Flows During the first three quarters of fiscal quarters of fiscal 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 the remainder of fiscal Sources of Liquidity We expect to meet our We believe that our existing cash and cash equivalents, cash generated by operating activities, and the availability of external funds as described above, will be sufficient for us to maintain our operations for at least the upcoming 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, the length and severity of business disruptions associated with the COVID-19 pandemic, 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 the repayment of term loan obligations; rental payments resulting from the sale of our corporate campus (financing obligation); ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED Refer to the discussion of new accounting pronouncements as found in Note 1 to the financial statements as presented within this report. 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 used to prepare our consolidated financial statements, including our revenue recognition policy, are outlined primarily in Note 1 to the consolidated financial statements presented in Part II, Item 8 of our annual report on Form 10-K for the fiscal year ended August 31, Estimates Some of the accounting guidance we use requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. We regularly evaluate our estimates and assumptions and base 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 conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results. 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, our financial performance during fiscal 2021, 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 our annual report on Form 10-K for the fiscal year ended August 31, 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 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 we do 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity At May 31, There have been no other material changes from the information previously reported under Item 7A of our Annual Report on Form 10-K for the fiscal year ended August 31, ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We evaluated 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, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. PART II. OTHER INFORMATION Item 1A.RISK FACTORS Except as discussed below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on November Our results of operations have been adversely affected and could be materially impacted in the future by the COVID-19 (coronavirus) pandemic. The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption during late fiscal Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table summarizes the purchases of our common stock during the fiscal quarter ended May 31, Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) (in thousands) March 1, 2020 to March 31, 2021 - $ - - $ 39,824 April 1, 2021 to April 30, 2021 - $ - - $ 39,824 May 1, 2021 to May 31, 2021 - $ - - $ 39,824 Total Common Shares - $ - - (1)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. We did not purchase any shares of our common stock during the quarter ended May 31, 2021 under the terms of this Board approved plan. The actual timing, number, and value of common shares repurchased under Item 6.EXHIBITS (A)Exhibits: 101.INS XBRL Instance 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).** ** Filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN COVEY CO. Date: July 8, 2021 By: /s/ Robert A. Whitman Robert A. Whitman Chief Executive Officer (Duly Authorized Officer) Date: By: /s/ Stephen D. Young Stephen D. Young Chief Financial Officer (Principal Financial and Accounting Officer)2019.After strong financial performance during the first two quarters of fiscal 2020, which featured increased sales, profitability, and cash flows from operating activities over the prior year, our third quarter results were significantly 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. 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 a significant decline in sales during the third quarter as previously scheduled onsite presentations, coaching days, and facilitated presentations 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 (AAP) 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. We believe the ability to deliver our offerings in digital form 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.24As previously discussed, our financial results for the quarter ended May 31, 2020 were significantly influenced by2021 represent the COVID-19 pandemic and mandated responses to slow its spread. The following is a summary of key financial results for thebest third quarter results since the sale of fiscal 2020:Sales – our consumer solutions business unit in 2008. Our consolidated sales for the third quarter of fiscal 20202021 totaled $37.1$58.7 million compared with sales of$37.1 million in fiscal 2020 and $56.0 million in the pre-pandemic third quarter of fiscal 2019. On the strength of increased sales and improved gross margins, our gross profit for the third quarter increased to $45.9 million in 2021, $26.8 million in 2020, and $39.7 million in fiscal 2019. Although our selling, general, and administrative (SG&A) expenses (excluding stock-based compensation) have increased over the prior year, as a percent of sales our SG&A expenses were 64.3 percent in 2021 compared with 78.8 percent in fiscal 2020, and 67.2 percent in the third quarter of fiscal 2019. As a result of these factors, our pre-tax income improved to $2.6 million in fiscal 2021 compared with a loss of $(0.7) million in 2020, and a loss of $(2.4) million in fiscal 2019. Allour business units were adversely impacted byfiscal 2020 included the closureonset of offices, schools, and other gathering placesthe pandemic in the United States, Canada, and inmany other countries throughout the world, as governments, organizations,which had a significantly adverse impact on our financial results during that quarter. Comparisons to the prior year reflect those conditions and individuals sought to slow the spreadstrengthening of COVID-19.our operations over the course of the pandemic. The inability to deliver previously scheduled training, coaching days, and consulting resulted in reduced sales for both the Enterprise and Education Divisions. Enterprise Division salesfollowing is a summary of financial highlights for the third quarter of fiscal 2020 were $27.52021:$43.4$37.1 million in the third quarter of fiscal 2020. Sales declined through both direct officeWe were pleased with the continued strength of our All Access Pass and licensee operations. Education Division sales were $8.2 millionLeader in Me subscription-based services in the third quarter and believe the electronic delivery capabilities of these offerings have been key to our business performance during the pandemic. During the third quarter of fiscal 2020,2021, AAP sales increased 17 percent compared with $11.1 million inthe third quarter of the prior year and annual revenue retention remained strong at greater than 90 percent. During the third quarter of fiscal 2019,2021 we saw signs of economic recovery in the United States and decreased primarily due to reduced material sales and decreased coaching days delivered as educators transitioned to virtual classrooms and remote teaching. However, many of the previously postponed or canceled training or coaching days have been rescheduledother countries in which we operate as companies, schools, and individuals are being delivered live on-line. We expect this trendadapting, and the positive effect of vaccinations is enabling certain economies to continue during the COVID-19 pandemic.For the quarter ended May 31, 2020,open and recover. As a result, sales improved in each of our reported subscription revenue increased $3.4 million, or 18%,segments compared with the correspondingthird quarter of fiscal 2019. 2020. We remain optimistic about the future and look forward to continued recovery from the pandemic during the fourth quarter of fiscal 2021.2020,2021, we had $43.9$55.3 million of deferred subscription revenue on our balance sheet, a 10%,26 percent, or $4.0$11.4 million, increase compared with deferred subscription revenue on our balance sheet at May 31, 2019.2020. At May 31, 2020,2021, we had $33.4$41.3 million of unbilled deferred revenue compared with $23.7$33.4 million of unbilled deferred revenue at May 31, 2019.2020. Unbilled deferred revenue represents business that is contracted but unbilled (primarily from multiyear contracts), and excluded from our balance sheet.$10.3$12.8 million for the quarter ended May 31, 2020,2021, compared with $16.3$10.3 million in the third quarter of the prior year. Gross profit for the third quarter of 2020fiscal 2021 was $26.8$45.9 million compared with $39.7$26.8 million in fiscal 2019. Cost of sales and gross profit decreased due to reduced sales during the third quarter of fiscal 2020 as previously described.2020. Our gross margin for the quarter ended May 31, 20202021 improved 146587 basis points to 72.3%78.2 percent of sales compared with 70.8%72.3 percent in the third quarter of fiscal 2019,2020, reflecting increasedthe continued increase in subscription revenues in the mix of services sold when compared withoverall sales and the prior year.2020 decreased $14.62021 increased $15.8 million compared with the prior year, which was due to decreased selling, general, and administrative (SG&A) expenses, reduced stock-based compensation, a $0.9 million gain from insurance proceeds for assets damaged in a flood, and $0.7 million of deferred employer payroll taxes as allowed under the CARES Act. 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 other areas of the Company’s operations. 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 (Note 8). Accordingly, we reversed the previously recognized stock-based compensation expense for these tranches, which resulted in a net credit to stock-based compensation of $5.1 million. Partially offsetting these decreased costs were additional sales personnel that we have hired over previous quarters. At May 31, 2020, we had 252 client partners compared with 227 client partners at May 31, 2019.25Income Taxes – During the third quarter of fiscal 2020, wewhich was primarily due to an $8.5 million increase in SG&A expenses and a $7.5 million increase in stock-based compensation expense. Despite the increase in SG&A expenses, as a percent of sales our SG&A expenses in fiscal 2021 decreased to 64.3 percent compared with 78.8 percent in fiscal 2020. Our SG&A expenses increased the valuation allowanceprimarily due to increased commissions on our deferred tax assets which resulted in $10.2 million of additional income tax expense during the quarter (Note 9). In consideration of relevant accounting guidance, we considered both positiveimproved sales, increased associate costs resulting from bonuses 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 disruptionsincentives on improved operations, and negative impactincreased content development expense. Due to our business resulting from uncertainties related to the COVID-19 pandemic and recovery from the pandemic, we determined that it is more-likely-than-not that insufficient taxableour stock-based compensation awards related to Adjusted EBITDA would not vest before they expired and we reversed the previously recognized compensation expense from these awards in the third quarter of fiscal 2020. Our Compensation Committee modified these awards in the first quarter of fiscal 2021 and accordingly, we recognized stock-based compensation expense in the third quarter of fiscal 2021. Increased SG&A and stock-based compensation expenses were partially offset by cost savings from the successful implementation of expense reduction initiatives in various areas of the Company’s operations during the pandemic.will be available to realize alltax benefit for the quarter ended May 31, 2021 was $10.1 million, compared with income tax expense of $10.2 million in the third quarter of fiscal 2020. Our income tax expense in fiscal 2020 was primarily the result of increasing our valuation allowance against deferred income tax assets before they expire, primarily foreign tax credit carryforwardsdue to three-year cumulative pre-tax losses combined with expected disruptions and a portionnegative impacts to our business resulting from the COVID-19 pandemic and uncertainties related to recovery from the pandemic. However, during fiscal 2021 the Company’s performance exceeded expectations, which returned us to three-year cumulative pre-tax income, and we expect continued strong performance in future periods. After consideration of our net operating loss carryforwards. Accordingly,these circumstances and the relevant accounting literature, we increasedreduced the valuation allowance against our deferred tax assets.LossIncome and Net Loss Our lossAs a result of increased sales and improved gross margins, our income from operations for the quarter ended May 31, 2020 was $(0.1)2021 improved to $3.1 million compared with $(1.9)a loss of $(0.1) million for the quarter ended May 31, 2019, primarily due to the factors previously discussed. Forin the third quarter of fiscal 2020, we recognized2020. Combined with the income tax benefit described above, our third quarter fiscal 2021 net income was $12.8 million, or $0.90 per diluted share, compared with a net loss of $(11.0) million, or $(0.79) per share, including the impact of the $10.2 million increase in the valuation allowance on our deferred income tax assets, compared with a net loss of $(2.0) million, or $(0.14) per share, in the third quarter of the prior year.totaled $18.7increased 65 percent to $30.9 million for the three quarters ended May 31, 2020,2021, compared with $18.6$18.7 million in the first three quarters of fiscal 2019. Our improved2020. At May 31, 2021, we had $35.8 million of cash flows reflect a strong first halfwith no borrowings on our $15.0 million secured line of credit facility.20202021, we purchased Strive (Note 2), a San Francisco-based technology company which has developed and strong collectionsmarkets an innovative learning deployment platform. While the purchase of Strive did not materially impact our accounts receivableresults of operations during the third quarter.thirdresults for the quarter resultsand three quarters ended May 31, 2021 are provided throughout the following management’s discussion and analysis.20202021 Compared with the Quarter Ended May 31, 2019 which were acquired in the second quarter of fiscal 2019;; and other groups such as our government services office.office and books and audio sales. The following comparative information is for our Direct Offices segment for the periods indicated (in thousands): Quarter Ended Quarter Ended May 31, % of May 31, % of 2020 Sales 2019 Sales Change Sales $ 26,760 100.0 $ 40,387 100.0 $ (13,627 ) Cost of sales 5,652 21.1 10,551 26.1 (4,899 ) Gross profit 21,108 78.9 29,836 73.9 (8,728 ) SG&A expenses 20,756 77.6 25,316 62.7 (4,560 ) Adjusted EBITDA $ 352 1.3 $ 4,520 11.2 $ (4,168 ) Sales. Forquarter endingincrease in invoiced AAP sales, the number of multi-year contracts is increasing as well. As of May 31, 2020,2021, 40 percent of all AAP contracts are now multi-year contracts. We continue to be encouraged by the durability of AAP sales as clients have transitioned to and effectively utilized the digital delivery options available through the All Access Pass. As a result of this successful transition, our invoiced subscription services are recovering and were strong in the third quarter. We are also encouraged by the recovery of other areas of our direct office channel decreased dueoperations, such as our facilitator and custom materials channels, which grew $1.3 million compared with the third quarter of the prior year.mandated responsestraining opportunities during fiscal 2021. However, these operations have been steadily improving since the third quarter of fiscal 2020 and each of our international direct offices had increased sales compared with the prior year. Overall international direct office sales increased $5.4 million or 161 percent, compared with the third quarter of fiscal 2020. We remain confident that our international direct offices will continue to the pandemic, which essentially closed the economies of the countries in which we operate direct offices. Despite the decline in net salesrecover during the quarter, we believe our previousremainder of fiscal 2021 and ongoing investmentswill strengthen in the All Access Pass and online delivery modalities will enable us to continue to reschedule postponed or canceled onsite presentations in countries where we have launched the AAP and/or electronic content delivery. Some of the countries in which we operate direct offices have not fully re-opened their economies and may continue to experience further sales declines as the closures become prolonged.future periods. Foreign exchange rates had an immateriala $0.6 million favorable impact on our Direct Office sales and a $0.1 million favorable impact on operating resultsincome during the third quarter of fiscal 2020.decreasedincreased primarily due to decreased salesincreased recognition of previously deferred subscription revenues in the third quarter as described above.mix of overall sales, which also increased Direct Office gross margin increased due to increased subscription sales inpercentage when compared with the mix of services and products sold during the quarter. Decreased Increased Direct Office SG&A expense was primarily due to reduced variable compensation, includingassociate costs from increased commissions incentives,on improved sales, increased bonus and bonuses resulting from decreased salesincentive pay on improved operating results, and decreased travel expenses since most of our onsite presentations scheduled to be delivered during the quarter were either transitioned to an online format or were postponed.increased headcount. These reductionsincreases were partially offset by increased associate expenses resultingreduced travel and entertainment expense and cost savings from new sales and sales-related personnel. 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): Quarter Ended Quarter Ended May 31, % of May 31, % of 2020 Sales 2019 Sales Change Sales $ 708 100.0 $ 3,014 100.0 $ (2,306 ) Cost of sales 369 52.1 582 19.3 (213 ) Gross profit 339 47.9 2,432 80.7 (2,093 ) SG&A expenses 1,063 150.1 1,151 38.2 (88 ) Adjusted EBITDA $ (724 ) (102.3 ) $ 1,281 42.5 $ (2,005 ) During the quarter ended May 31, 2020,Our licensee revenues decreasedincreased significantly compared with the prior year primarily due to the worldwide COVID-19 outbreak. Our international licensees deliver mostrecovery of their programs and generate revenue primarily through onsite presentations. Nearly alleconomies in many of the presentations scheduledcountries where our licensees operate. The recovery led to be held duringsignificantly improved licensee royalty revenues and continued increases in AAP sales. During the third quarter of fiscal 2021, our royalty revenues increased 283 percent and our share of AAP revenues increased by 127 percent compared with the prior year. We receive additional revenue from the international licensees for AAP sales to cover a portion of the costs of operating the AAP portal. Partially offsetting these increases were postponed or canceled duedecreased product sales to the licensees. Despite the ongoing COVID-19difficulties associated with the pandemic and corresponding restrictionsthe varying impacts on public gatherings. Futureeach country’s business environment, we continue to be encouraged by the recovery of our licensee operations as they are adapting to conditions, improving digital delivery capabilities, and increasing sales of the All Access Pass subscription. The continued recovery of our licensee segment is highly dependent upon the re-opening of foreign economies, and the ability or willingness of people to travel and meet together in groups.groups, and increasing AAP sales to clients. We have translated AAP content into multiple languages and we anticipate thatbelieve the electronic availability of our offerings onthrough this platform may accelerate the recovery of licensee operations if they can effectively market, adapt, and sell this online technology to their2020.27decreasedincreased due to lowerincreased sales as previously described. Gross margin decreasedimproved primarily due to the mix of revenue recognized during the quarter, which included lesssignificantly more royalty revenue compared withrevenues than in the prior year.decreasedincreased primarily due to cost reduction initiatives implementedincreased associate costs resulting from higher revenues and the normalization of certain operating costs compared with operations in the third and fourth quartersearly months of fiscal 2019. We continue to expect reducedthe pandemic. However, as a percent of sales, licensee SG&A expenses decreased compared with the prior year during the remainder of fiscal 2020.Inin Me program designed for students primarily in K-6 elementary schools. The following comparative information is for our Education Division in the periods indicated (in thousands): Quarter Ended Quarter Ended May 31, % of May 31, % of 2020 Sales 2019 Sales Change Sales $ 8,216 100.0 $ 11,088 100.0 $ (2,872 ) Cost of sales 3,505 42.7 4,242 38.3 (737 ) Gross profit 4,711 57.3 6,846 61.7 (2,135 ) SG&A expenses 6,247 76.0 7,027 63.4 (780 ) Adjusted EBITDA $ (1,536 ) (18.7 ) $ (181 ) (1.6 ) $ (1,355 ) 2020 decreased2021 grew primarily due to decreasedincreased consulting, coaching, and training days delivered during the quarter, and increased training material sales and less consulting/coaching delivered when compared with the prior year. As schools were closedDespite an educational environment which has continued to be very challenging, we have seen strengthening trends in response to the COVID-19 pandemic, many training programs were postponed or canceled, which reduced training material sales and coaching revenues as educators focused on establishing effective online learning environments for their students. These conditions also led to decreased membership renewalsour Education business during the third quarter and fewer new schools added than in the prior year.throughout fiscal 2021. We believe that the current environment of reduced tax revenues will strain the ability of some schools to renew their memberships, but we are encouraged by signs of recovery in fiscal 2021 as renewal trends are improving, new schools continue to be added, and stimulus funds may be available to schools during the early fourth quarter of fiscal 2020 as renewal trends have improved2021 and new schools have been added. We believe the demand for the Leader in Me program throughout the world remains strong.early fiscal 2022. As of May 31, 2020,2021, theLeader in Me program is used in over 4,4004,300 schools and in overmore than 50 countries.decreasedincreased primarily due to decreasedincreased sales as previously described. Education segment gross margin declinedimproved compared with the prior year primarily due to increased coaching and consulting sales with little variable cost increase resulting from the fixed cost of coaches, who are salaried over less sales than incoaches. This led to improved coaching margins on days delivered during the prior year.expense decreasedexpenses increased primarily due to reduced travel expenses as some programs were postponed or canceled during the quarter, and reduced variableincreased associate costs resulting from decreased sales.Gain from Insurance Proceeds – In October 2019, a water supply line on our corporate campus ruptured, which caused extensive flood damage to one of the buildings that we occupy. We received $0.9 million of insurance proceeds for the assets that were damaged and written off. Nearly all of the assets that were written off our books were fully depreciated at the time of the flood. Based on applicable accounting guidance, we recognized a gain from the proceeds received from our insurance, which was included in selling, general, and administrative expense for the quarter ended May 31, 2020.28increased $0.1decreased $0.2 million compared with prior yearthe third quarter of fiscal 2020 primarily due to the additionfull depreciation of newcertain assets in fiscal 2020.during the quarter. We currently expect depreciation expense will total approximately $6.7$6.4 million in fiscal 2020.decreased byincreased $0.1 million compared with the third quarter of fiscal 2019the prior year primarily due to the full amortizationacquisition of certain intangible assets.Strive Talent, Inc. (Note 2). We now expect amortization expense will total $4.6$4.9 million during fiscal 2020.2021.
increased income tax expensebenefit for the quarter ended May 31, 20202021 was primarily due to the recognition of an increase to the valuation allowance on our deferred$10.1 million, compared with income tax assets. Duringexpense of $10.2 million in the third quarter of fiscal 2020, we increased the valuation allowance on our deferred tax assets which resulted in $10.2 million of additionalprior year. The income tax expense during the quarter. In consideration of relevant accounting guidance, we considered both positive and negative evidence in determining whether it is more likely than not that some portion or all offiscal 2020 resulted primarily from increasing our valuation allowance against deferred income tax assets will be realized. Because of thedue to three-year 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,COVID-19 pandemic. However, during fiscal 2021 the Company’s performance exceeded expectations, which returned us to three-year cumulative pre-tax income, and we determined that it is more-likely-than-not that insufficient taxable income will be available to realize allexpect continued strong performance in future periods. After consideration of the relevant accounting literature, we reduced our valuation allowance against deferred tax assets, which primarily foreignaccounts for the income tax credit carryforwards and a portion of our net operating loss carryforwards, before they expire. Accordingly,benefit we increasedrecorded for the valuation allowance against our deferred tax assets.20202021 Compared with the Three Quarters Ended May 31, 2019 Three Quarters Three Quarters Ended Ended May 31, % of May 31, % of 2020 Sales 2019 Sales Change Sales $ 106,844 100.0 $ 115,271 100.0 $ (8,427 ) Cost of sales 25,623 24.0 31,071 27.0 (5,448 ) Gross profit 81,221 76.0 84,200 73.0 (2,979 ) SG&A expenses 70,425 65.9 73,497 63.8 (3,072 ) Adjusted EBITDA $ 10,796 10.1 $ 10,703 9.3 $ 93 After a strong start duringDuring the first twothree quarters of fiscal 2020, which saw2021 our U.S./Canada sales grow by $4.0 million, government sales increase by $1.2 million,All Access Pass subscription revenues remained strong and international direct office revenue grow by $0.3 million compared withincreased 15 percent over the prior year, our direct office sales were down significantly in the third quartersame period of fiscal 2020 due2020. We continue to be encouraged by the COVID-19 pandemicdurability of AAP subscription sales as described inclients transitioned to and effectively utilized the previous section of this management’s discussion and analysis. Our growth in the first two quarters of fiscal 2020 was fueled by increased sales ofdigital delivery options available through the All Access Pass throughout fiscal 2021. Increased subscription and increased subscription-related revenues. Increased sales through the second quarter in the GSA, Australia, and Japan officessubscription service revenues were partially offset by a $1.0$3.4 million decrease in facilitator material sales fromcompared with the first three quarters of fiscal 2020.China office, which wasforeign direct offices have been impacted early by the COVID-19 outbreak. Our GSApandemic throughout fiscal 2021 as governmental mandates limited gatherings, business activity, and training opportunities. However, international direct office recognized $1.1sales have steadily strengthened during fiscal 2021 and, despite a difficult start, have increased $0.5 million of increased sales during the first two quarters of fiscal 2020 whenor 2 percent, compared with the prior year. However, allWe believe these offices will continue to recover during the remainder of our foreign direct offices were closed during portions of our third quarter as mandated by their national governments.fiscal 2021 and in future periods. Foreign exchange rates had an immateriala $1.4 million favorable impact on our Direct Office sales and a $0.2 million favorable impact on operating resultsincome during the first three quarters of fiscal 2020.29decreasedincreased due to decreasedincreased sales in the first three quarters of fiscal 20202021 as previously described.described above. Direct Office gross margin increased primarily due to increased subscription sales in the mix of services and products sold during the first three quarters of fiscal 2020, including increased subscription sales.operating expenses decreasedSG&A expense was primarily due to reduced variableincreased associate costs, includingexpenses from higher commissions incentives,on improved sales, increased bonus expense, and bonuses on lower sales and reduced travel costs in the third quarter.increased headcount. These reductionsincreases were partially offset by associate costs from new sales personnel. Three Quarters Three Quarters Ended Ended May 31, % of May 31, % of 2020 Sales 2019 Sales Change Sales $ 7,120 100.0 $ 9,598 100.0 $ (2,478 ) Cost of sales 1,424 20.0 2,083 21.7 (659 ) Gross profit 5,696 80.0 7,515 78.3 (1,819 ) SG&A expenses 3,000 42.1 3,388 35.3 (388 ) Adjusted EBITDA $ 2,696 37.9 $ 4,127 43.0 $ (1,431 ) For the three quarters ended May 31, 2020,International licensee revenues wereare primarily impacted bycomprised of royalty revenues, which decreased significantly with the onset of COVID-19 pandemic, which significantly reduced sales in the third quarter. Beforequarter of fiscal 2020 and the impactelimination of nearly all in-person training events. At the beginning of the pandemic our international licensee royalty revenue inoperations had not established strong subscription businesses and were heavily reliant on live, onsite presentations. We are encouraged by the recovery of our licensee operations as they are adapting to conditions, improving digital delivery capabilities, and increasing sales of the All Access Pass. Due to strengthening economies during the first twothree quarters of fiscal 20202021, our royalty revenues have increased by $0.2 millionfour percent compared with the prior year.year and our share of revenues from sales of the All Access Pass have increased 51 percent. We have translated AAP content into multiple languages to provide content to various international and multi-national entities, including our international licensees. Foreign exchange rates had an immaterial impact on international licensee sales and operating results during the first three quarters of fiscal 2020.decreasedincreased due to an overall decrease in licensee revenues during the first three quarters of fiscal 2020improved sales as previously described. However, licensee grossGross margin improved over the prior year primarily due to increased royalty revenues in the mix of totalrevenue recognized during the quarter, which included less materials sales when compared withthan in the prior year.third and fourth quartersfirst half of fiscal 2019.30 Three Quarters Three Quarters Ended Ended May 31, % of May 31, % of 2020 Sales 2019 Sales Change Sales $ 30,190 100.0 $ 31,132 100.0 $ (942 ) Cost of sales 12,362 40.9 12,464 40.0 (102 ) Gross profit 17,828 59.1 18,668 60.0 (840 ) SG&A expenses 21,535 71.3 20,023 64.3 1,512 Adjusted EBITDA $ (3,707 ) (12.3 ) $ (1,355 ) (4.4 ) $ (2,352 ) For Education Division sales for the three quarters ended May 31, 2021 decreased primarily due to fewer consulting, coaching, and training days delivered and the cancelation of Symposium conference events. Due to disruptions from the COVID-19 pandemic, especially in the first half of fiscal 2021, many training programs were postponed, canceled, or delayed, which reduced consulting, coaching, and training days delivered as educators continue to deal with ongoing education challenges and uncertainties caused by the pandemic. A significant number of the coaching and consulting days that were not able to be delivered during the first two quarters of fiscal 2020, our Education Division sales increased primarily due2021 are contractual and are expected to increased subscription revenuesbe delivered and the addition of new schools. Growthrecognized during the firstsecond half of fiscal 2020 was offset by decreased sales2021, including the increased days delivered during the third quarter. As trends continue to strengthen, we are optimistic that the fourth quarter ofwill provide a strong conclusion to fiscal 2020 resulting from2021 in the COVID-19 pandemic (refer to previous discussion) which reduced training materials and coaching sales. Foreign exchange rates reduced reported Education Division revenues and results of operations by $0.2 million for the first three quarters of fiscal 2020. for the first three quarters of fiscal 2020 decreased primarily due to decreased sales as previously described. Education segment gross margin declined slightlyimproved compared with the prior year primarily due to the fixed costmix of services sold, the cancelation of Symposium conferences and their associated costs, and reduced travel expenses for coaches who are salaried, on reduced revenues.and consultants.increaseddecreased primarily due to investmentsreduced sales associate travel expenses, reduced variable associate costs resulting from decreased sales primarily in additional salesthe first two quarters of fiscal 2021, and sales-related personnelcost savings from initiatives implemented in late fiscal 2019 and early fiscal 2020.expensebenefit rate for the three quarters ended May 31, 20202021 was approximately 329434 percent, compared with an income tax benefitexpense rate of approximately 9329 percent in the first three quarters of fiscal 2019.2020. The income tax benefit for the first three quarters of fiscal 2021 was primarily due to a $10.9 million decrease in the valuation allowance against our deferred income tax assets and a $0.5 million tax benefit from the exercise of stock options (Note 8). The income tax expense for the first three quarters of fiscal 2020 was primarily due to a $10.2 million increase in the valuation allowance against our deferred income tax assets recorded during the third quarter, which was partially offset by a $1.8 million income tax benefit from the exercise of stock options in the second quarter of fiscal 2020.$1.7$1.5 million in cash for income taxes during the first three quarters of fiscal 2020.2021. 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 to the extent we are able to utilize net operating loss carryforwards, foreign tax credit carryforwards, and other deferred income tax assets.reduced salesCOVID-19 and anthe uncertain path to economic recovery, a major priority of ours ishas been the continued maintenance and preservation of liquidity. We believe our expense reduction efforts during late fiscal 2020 and the first half of fiscal 2021 were successful and provided the ability to maintain operations and make a strategic investment through the acquisition of Strive Talent, Inc. during the third quarter. Our cash and cash equivalents at May 31, 20202021 remained strong and totaled $37.0 million. During the third quarter of fiscal 2020, we drew down all of the available funds$35.8 million, with no borrowings on our $15.0 million revolving credit facility to maximize our flexibility during this period of economic and operating uncertainty.facility. Of our $37.0$35.8 million in cash at May 31, 2020, $11.62021, $13.7 million was held at 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 revolving line of credit facility, and term loans.facility. Our primary uses of liquidity include payments for operating activities, debt payments, business acquisitions, capital expenditures (including curriculum development), debt payments, contingent liability payments from the acquisition of businesses, working capital expansion, and purchases of our common stock.31Pursuant the credit agreement we obtained in August 2019 (the 2019 Credit Agreement), we had the ability to borrow up to $25.0 million in term loans. At August 31, 2019, we had borrowed $20.0 million of the available term loan amount. During November 2019, we borrowed the remaining $5.0 million term loan available on the 2019 Credit Agreement. The additional $5.0 million term loan has the same terms and conditions as the previous term loan and does not change our quarterly principal payments. The additional term loan extended the maturity of our term loan obligation by one year.We may use the proceeds from our 2019 Credit Agreement for general corporate purposes as well as for other transactions, unless specifically prohibited by the terms(the 2019 Agreement). The primary purpose of the agreement. OurFirst Modification Agreement was to provide temporary alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. In connection with the acquisition of Strive (Note 2), we entered into a Consent and Second Modification Agreement to the 2019 CreditAgreement. The primary purposes of the Consent and Second Modification Agreement contains customary representationsare to:guarantees, as well as provisions forSecond Modification Agreement did not change any repayment and liens. Theor credit availability terms on the 2019 Credit Agreement also includesAgreement.following financial covenants:following: (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. Wefinancialterms and covenants and other terms applicable to the 2019 Credit Agreement at May 31, 2020.On July 8, 2020, we entered into the First Modification Agreement to our 2019 Credit Agreement. The primary purpose of the First Modification Agreement is to provide alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. These new temporary covenants are designed to prevent covenant compliance issues during the ongoing COVID-19 pandemic and expected economic recovery, and are described in more detail in Note 13 to the financial statements contained within this report on Form 10-Q. The First Modification Agreement does not reduce available credit under the 2019 Credit Agreement and we believe the agreement will be beneficial to maintaining adequate levels of liquidity in future periods.2020.third quarterfirst three quarters of fiscal 2020,2021, our cash provided by operating activities for the three quarters ended May 31, 2020 was $18.7increased 65 percent to $30.9 million compared with $18.6$18.7 million in the first three quarters of fiscal 2019.2020. The increase was primarily due to improved operating resultsincreased income from operations and favorable changes in working capital during the first halfthree quarters of fiscal 2020 and strong collections of accounts receivable during the third quarter. Our2021. Despite pandemic conditions, our collection of accounts receivable remained strong during the first three quarters of fiscal 20202021 and provided a significant amount ofthe necessary cash to support our operations, pay our obligations, and make critical investments. Although we are required to defer AAP and other subscription revenues over the lives of the underlying contracts, we invoice the entire contract amount and collect the associated receivable at the inception of the agreement. However, due to decreased sales stemming from the COVID-19 pandemic in the third quarter of fiscal 2020, we expect to use significant amounts of cash to support operating activities in the fourth quarter of fiscal 2020.32FromUsed For Investing Activities and Capital ExpendituresOurduring the first three quarters of fiscal 2020 totaled $9.4$13.6 million. The primary uses of cash for investing activities included the purchase of Strive Talent, Inc. (Note 2) for $10.6 million in cash, and additional investments in the development of our offerings and 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 FCOP (Note 12).$3.4$1.8 million during the first three quarters of fiscal 20202021 on the development of various content and offerings. Our previous and ongoing investments in onlinecontent and digital delivery capabilities have proved to be valuable assets induring the wake of the COVID-19ongoing pandemic as we were able to quickly transition a significant number of our onsite presentations to “live online” presentations. We believe continued investment in our offerings and delivery capabilities is critical to our future success and we anticipate that our capital spending for curriculum development will total $5.0$3.5 million during fiscal 2020.totaled $3.3 million induring the first three quarters of fiscal 2020, and2021 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. As previously mentioned, we have previously andhardware. We expect to continue to investour investing in our content and delivery modalities, including the AAP and Leader in Me subscription services. These electronic delivery methods have proved valuable as many clients have moved to remote workplaces due to the COVID-19 pandemic. We will continue to invest in improved delivery modalitiesservices, and currently anticipate that our purchases of property and equipment will total approximately $4.0$2.2 million in fiscal 2020.In November 2019, we purchased $2.6 million of notes payable from a bank that were the obligations of FCOP. We exchanged the receivables from FCOP 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.FromUsed For Financing Activities2020,2021, our net cash provided byused for financing activities totaled $0.2$8.8 million. Our primary sourcesuses of financing cash during fiscal 2020 included $14.9$5.7 million (the available credit) from our long-term revolving line of credit, a $5.0 million term loan which was available on our 2019 Credit Agreement, and $0.8 million of proceeds from participants in the employee stock purchase plan. These sources of cash were partially offset by $13.8 million for purchases of our common stock for treasury, $5.5 millionused for principal payments on our term loans and financing obligation, $3.0 million for purchases of our common stock for treasury, and $1.2$0.9 million of cash used to pay contingent consideration liabilities from previous business acquisitions.In December 2019, we purchased 284,608 shares Our purchases of our common stock from Knowledge Capitalduring fiscal 2021 were solely for $10.1 million (Note 6) priorshares withheld 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 will not be included in the November 15, 2019 authorized purchase plan described below. We also purchased 103,117 shares of our common stock that were withheld forpay statutory income taxes on stock-based compensation awards primarily stock options, which were exercised duringdistributed in the first and second three2020. These withheld2021. Partially offsetting these uses of cash were $0.8 million of proceeds from ESPP participants to purchase 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 $3.6 million.3320202021 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.projected capital expenditures, repay amounts borrowedobligations on ourthe 2019 Credit Agreement, service our existing financing obligation, pay for projected capital expenditures, and meet other working capital requirements during fiscal 20202021 from current cash balances and future cash flows from operating activities. Going forward, we will continue to incur costs necessary for the day-to-day operation of the business and may use additional credit and other financing alternatives, if necessary, for these expenditures. 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 fromto 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.repaymentpayments on notes payable from the fiscal 2021 purchase of term loan obligations; repayment of our revolving line of credit;Strive; expected contingent consideration payments from business acquisitions; short-term purchase obligations for inventory items and other products and services used in the ordinary course of business; minimum operating lease payments; and minimum payments for outsourced warehousing and distribution service charges. For further information on our contractual obligations, please refer to the table included in our annual report on Form 10-K for the fiscal year ended August 31, 2019.342019.2020. Please refer to these disclosures for further information regarding our uses of estimates and critical accounting policies. There have been no significant changes to our previously disclosed estimates or critical accounting policies.2019,2020, 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.352020,2021, our long-term obligations primarily consisted of term loans payable, amounts borrowed on our revolving credit agreement, a long-term lease agreement (financing obligation) on our corporate headquarters facility, fixed-rate notes payable from the purchase of Strive, and deferred payments and potential contingent consideration payments resulting from previous business acquisitions. Our overall interest rate sensitivity is primarily influenced by any amounts borrowed on term loans orand our revolving line of credit facility, and the prevailing interest rates on these instruments. The effective interest rate on our term loans payable and line of credit facility is variable and was 2.62.4 percent at May 31, 2020.2021. Accordingly, we may incur additional expense if interest rates increase in future periods. For example, a one percent increase in the effective interest rate on our term loans outstanding and amounts borrowed against our revolving line of credit at May 31, 20202021 would result in approximately $0.3$0.1 million of additional interest expense over the next 12 months. Our financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent, and our contingent consideration liabilities are not subject to interest rates.362019.2020. We did not utilize any foreign currency or interest rate derivative instruments during the quarter or three quarters ended May 31, 2020.
14, 2019 (as amended on December 2, 2019).2020.2020 and during fiscal 2021. 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; 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 any closure of our offices. Any of these events, or related conditions, could cause or contribute to the risks and uncertainties described in our Annual Report and could materially adversely affect our business, financial condition, results of operations, cash flows, and stock price.2020:2021: March 1, 2020 to March 31, 2020 April 1, 2020 to April 30, 2020 May 1, 2020 to May 31, 2020 (1)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. We did not purchase any shares of our common stock during the quarter ended May 31, 2020 under the terms of this Board approved plan.thisour board-approved 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.
(A)Exhibits:10.1101.INSDocument.101.SCH101.CAL101.DEF101.LAB101.PRE**Filed herewith.
Date:July 10, 2020By:July 10, 2020By:40