UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

~~[X]~~

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

[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~~

2021

[ ]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)		~~87-0401551~~ (I.R.S. employer identification number)

2200 West Parkway Boulevard		84119-2099
Salt Lake City, Utah		(Zip Code)
(Address of principal executive offices)		~~84119-2099~~ ~~(Zip Code)~~

Registrant’s telephone number,		(801) 817-1776
Including area code		~~(801) 817-1776~~

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:

~~13,877,984~~

14,156,827 shares of Common Stock as of June 30, ~~2020~~

2021
‎

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED BALANCE SHEETS

(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.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS

OF COMPREHENSIVE LOSS

INCOME (LOSS)

(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.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(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.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(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.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY –

PRIOR FISCAL YEAR

(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.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 extends~~We 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.

~~In the training and consulting marketplace, we believe there are three important characteristics that distinguish us from our competitors.~~

~~World Class Content~~ – Our content is principle-centered and based on natural laws of human behavior and effectiveness. When our content is applied consistently in an organization, we believe the culture of that organization will change to enable the organization to achieve their own great purposes. Our content is designed to build new skillsets, establish new mindsets, and provide enabling toolsets to our clients.

~~Breadth and Scalability of Delivery Options~~ ~~– We have a wide range of content delivery options, including: subscription offerings, which includes the All Access Pass (available in multiple languages), the~~ ~~Leader in Me~~ membership, and other subscription offerings; intellectual property licenses; on-line learning; on-site training; training led through certified facilitators; and organization-wide transformational processes, including consulting and coaching services. Over the past few years we have significantly increased our ability to deliver content electronically to workers who may be engaged in remote locations.

~~Global Capability~~ – We have sales professionals in the United States and Canada who serve clients in the private sector and in governmental organizations; wholly-owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria; and we contract with licensee partners who deliver our content and provide related services in over 140 other countries and territories around the world.

~~We are committed to, and measure ourselves by, our clients’ achievement of transformational results.~~

We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, 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.~~

2020.

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.

~~Our fiscal year ends on August 31 of each year and our fiscal quarters end on the last day of November, February, and May of each year.~~

The results of operations for the quarter and three quarters ended May 31, ~~2020~~2021 are not necessarily indicative of results expected for the entire fiscal year ending August 31, ~~2020,~~2021, or for any future periods.

~~Reclassifications~~

Certain reclassifications have been made to our prior period financial statements to conform with the current period presentation. On our fiscal 2020 condensed consolidated statements of operations, we have presented stock-based compensation separately to show the magnitude of the reversal of stock-based compensation during the third quarter of fiscal 2020 due to the impact of the COVID-19 pandemic and have reclassified the prior period amounts for comparability. Stock-based compensation was previously included as a component of selling, general, and administrative expense.

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 negative~~adverse impact of COVID-19 on the global economic and operating environment. These ~~negative impacts significantly reduced~~conditions have adversely affected our consolidated sales during the quarter and three quarters ended May 31, ~~2020~~2021 as some workplaces and schools ~~were~~remained 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, due~~Due 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.

Various accounting guidance requires us to evaluate the recoverability of our long-lived assets, including goodwill and indefinite-lived intangible assets, whenever events or changes in circumstances may indicate that the carrying value of the assets are not recoverable or are less than their fair values. Due to the impact of the COVID-19 pandemic on our third quarter operating results and uncertainties associated with the recovery from the pandemic in future periods, we determined that it was appropriate to test our long-lived assets, including goodwill and indefinite-lived intangible assets, for impairment during the third quarter of fiscal 2020. No impairment charges were recorded during the third quarter of fiscal 2020 as a result of these tests.

Accounting Pronouncements Issued and Adopted

~~In February 2016, the~~

Credit Losses on Financial ~~Accounting Standards Board (FASB) issued~~Instruments

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.~~

The lease for our corporate campus has historically been accounted for as a financing obligation and related building asset on our consolidated balance sheets, as the contract did not meet the criteria for application of sale-leaseback accounting under previous leasing guidance. In transition to Topic 842, we reassessed whether the contract met the sale criteria under the new leasing standard. Based on this assessment, we determined that the sale criteria under the new leasing standard was not met and we will continue to account for the corporate campus lease as a finance obligation on our consolidated balance sheet in future periods.

~~Accounting Pronouncements Issued Not Yet Adopted~~

~~Credit Losses on~~ 2016-13, Financial ~~Instruments~~

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments - Credit~~Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments(Topic 326). This ~~accounting~~new standard ~~changes the methodology for measuring~~is intended to improve financial reporting by requiring more timely recognition of credit losses on ~~financial instruments, including~~ trade accounts receivable and requires the ~~timing~~measurement of ~~when such~~all expected credit losses ~~are recorded. ASU No. 2016-13 is effective for fiscal years,~~based on historical experience, current economic conditions, and ~~interim periods within those years, beginning after December 15, 2019. Early~~reasonable and supportable forecasts. The adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. We expect to adopt the provisions of ASU No. 2016-13 on September 1, 2020 and are currently evaluating the impact of this ~~guidance~~ASU did not have a material impact on our condensed consolidated financial ~~position, results of operations,~~statements and disclosures.

For further information on our receivables, refer to Note 4, Receivables.

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

~~In August 2018, the FASB issued~~

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 periods~~fiscal years beginning after December 15, ~~2019, and~~2020, 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 ~~adoption~~provisions of ASU ~~2018-15 may have~~2019-12 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.~~

intangible assets generated by the acquisition of Strive are expected to be

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 PAYABLE~~CONSENT AND ~~LINE~~SECOND MODIFICATION OF CREDIT

~~Pursuant~~ AGREEMENT

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 have~~purchase of Strive.

Reinstate the ~~ability to borrow up to $25.0 million in term loans. At August 31, 2019, we had borrowed $20.0 million~~original debt covenants of the ~~available term loan amount. During November~~ 2019 ~~we borrowed~~Agreement 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 has~~unused credit commitment fee also returns to the ~~same terms~~previously established 0.2 percent.

The Consent and ~~conditions as the previous term loan and does~~Second 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 date~~event 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 result~~repayment of any amounts outstanding on the ~~additional payments.~~2019 Agreement. At May 31, ~~2020, our future principal payments on~~2021, 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

~~During~~terms and covenants applicable to the quarter ended May 31, 2020, we withdrew $14.9 million (the available credit) on our revolving credit facility primarily to maximize our flexibility during this period of economic uncertainty. The line of credit is due2019 Agreement and ~~payable in August 2024.~~

subsequent modifications.

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, ~~2020~~2021 (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 ~~the~~our 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 million~~all 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 ~~remainder~~remaining $1.1 million of ~~our~~the Jhana contingent consideration ~~liabilities are classified as~~liability 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.~~

~~NOTE 5 – LEASES~~

~~Lessee Obligations~~

In the normal course of business, we rent office space, primarily for international sales administration offices, in commercial office complexes that are conducive to sales and administrative operations. We also rent warehousing and distribution facilities that are designed to provide secure storage and efficient distribution of our training products, books, and accessories. All of these leases are classified as operating leases. Operating lease assets and liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. Since most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Leases with an initial term of 12 months or less are not recorded on the balance sheet. For operating leases, expense is recognized on a straight-line basis over the lease term. We do not have significant amounts of variable lease payments.

Some of our operating leases contain renewal options that may be exercised at our discretion after the completion of the base rental term. At May 31, 2020, we had operating leases with remaining terms ranging from less than one year to approximately five years. The amounts of assets and liabilities (in thousands) and other information related to our operating leases follows:

Balance Sheet
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
%

During the quarter and three quarters ended May 31, 2020, lease expense totaled $0.4 million and $1.2 million, respectively. For the quarter and three quarters ended May 31, 2019, lease expense also totaled $0.4 million and $1.2 million. Operating lease expense is reported in selling, general, and administrative expense in our condensed consolidated statements of operations.

~~The approximate future minimum lease payments under our operating leases at May 31, 2020, are as follows (in thousands):~~

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

~~Lessor Accounting~~

We have subleased the majority of our corporate headquarters campus located in Salt Lake City, Utah to multiple tenants. These sublease agreements are accounted for as operating leases. We recognize sublease income on a straight-line basis over the life of the sublease agreement. The cost basis of our corporate campus was $36.0 million, which had a carrying value of $6.2 million at May 31, 2020. The following future minimum lease payments due to us from our sublease agreements at May 31, 2020, are as follows (in thousands):

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

For the quarter and three quarters ended May 31, 2020, sublease revenue totaled $1.0 million and $2.9 million, respectively. During the quarter and three quarters ended May 31, 2019, sublease revenue also totaled $1.0 million and $2.9 million. Sublease revenues are included in net sales in the accompanying condensed consolidated statements of operations.

~~NOTE 6 – SHAREHOLDERS’ EQUITY~~

In December 2019, Knowledge Capital Investment Group (Knowledge Capital), an investor which held 2.8 million shares of our common stock stemming from its initial investment in Franklin Covey over 20 years ago, wound up its operations and distributed its assets to investors. On December 9, 2019, prior to the distribution of its assets to investors, we purchased 284,608 shares of our common stock from Knowledge Capital at $35.1361 per share, for an aggregate purchase price of $10.1 million, including legal costs. Our CEO and a member of our Board of Directors each owned a partnership interest in Knowledge Capital. As of the date hereof, Knowledge Capital does not own any shares of our common stock.comprehensive income (loss).

NOTE 7 – REVENUE RECOGNITION

Contract Balances

Our deferred revenue totaled ~~$53.1~~$64.8 million at May 31, ~~2020~~2021 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, ~~2020~~2021 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 remaining~~Remaining transaction price ~~which~~ represents contracted revenue that has not yet been recognized, including unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price is influenced by factors such as seasonality, the average length of the contract term, and the ability of the Company to continue to enter multi-year non-cancellable contracts. At 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

At each reporting date, we evaluate number and probability of shares expected to vest in each of our performance-based long-term incentive plan (LTIP) awards and adjust our stock-based compensation expense to correspond with the number of shares expected to vest over the anticipated service period. Due to the significant impact of the COVID-19 pandemic on our results of operations in the third quarter of fiscal 2020 and the uncertainties surrounding the recovery of the world’s economies, at May 31, 2020, we determined that the LTIP award tranches which are based on qualified adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA) for our fiscal 2015, 2016, 2017, 2019, and 2020 LTIP awards would not vest before the end of the respective service periods. We therefore reversed the previously recognized stock-based compensation expense associated with these awards at May 31, 2020, which resulted in a significant net credit to stock-based compensation for

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.~~

~~During the three quarters ended May 31, 2020,~~2021, we issued ~~281,479~~14,242 shares and 421,367 shares, respectively, of our common stock under various stock-based compensation ~~arrangements.~~arrangements, including our employee stock purchase plan (ESPP). Our stock-based compensation plans also allow shares to be withheld to cover statutory income taxes if so elected by the award recipient. During the ~~first~~ three quarters ~~of fiscal 2020,~~ended May 31, 2021, we withheld ~~103,117~~147,092 shares of our common stock for taxes on stock-based compensation arrangements, which had a total fair value of ~~$3.6~~$3.0 million. ~~The following is a description~~

Due to the significant impact of the ~~other developments~~COVID-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-based~~various 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 during~~cost for awards expected to vest over the ~~quarter and three quarters ended May 31, 2020.~~

remaining service period of each award.

Stock Options

~~During December 2019,~~

On January 12, 2021, our Chief Executive Officer (CEO) ~~and Chief Financial Officer (CFO)~~ exercised ~~stock options. Nearly all of the~~his remaining stock options, ~~exercised~~which would have expired inon January ~~2020.~~14, 2021. The following information applies to our stock ~~option activity during the three quarters ended~~options 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 ~~102,656~~51,738 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) during~~of which $0.5 million was recognized upon the ~~second quarter~~exercise of ~~fiscal 2020. Our remaining stock options outstanding at May 31, 2020 expire in January 2021.~~

the options.

Fiscal ~~2020~~2021 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 ~~2020~~2021 award, each eligible director received a whole-share grant equal to $100,000 with a ~~one-year~~one year vesting period. Our restricted stock award activity during the three quarters ended May 31, ~~2020~~2021 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 ~~2020~~2021 Board of Director restricted share award.

Fiscal ~~2020~~2021 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 ~~2020~~2021 LTIP award ~~is similar to the fiscal 2019 LTIP award and~~ has ~~three~~2 tranches, ~~one of which has~~1 with a time-based vesting condition and ~~two of which have~~1 with a performance-based vesting ~~conditions~~condition as described below:

Time-Based Award Shares – ~~Twenty-five~~NaN percent of the ~~2020~~2021 LTIP award shares vest to participants ~~after three years of service.~~on August 31, 2023. The number of shares that may be earned by participants at the end of the service period totals ~~25,101~~52,696 shares. The number of shares awarded in this tranche ~~is not variable and~~ does not fluctuate based on the achievement of financial measures.

Performance-Based Award Shares – The ~~remaining two tranches~~other tranche of the ~~2020~~fiscal 2021 LTIP award ~~are~~is based on the highest rolling four-quarter ~~levels~~level of qualified Adjusted EBITDA ~~and subscription service sales~~ in the three-year period ~~ended~~ending August 31, ~~2022.~~2023. The number of shares that will vest to participants for ~~these two tranches~~this tranche is variable and may be 50 percent of the award (minimum award threshold) or up to 200 percent of the participant’s award (maximum threshold) depending on the ~~levels~~level of qualified Adjusted EBITDA ~~and subscription service sales~~ achieved. The number of shares that may be earned for achieving 100 percent of the performance-based ~~objectives~~objective totals ~~75,315~~158,088 shares. The maximum number of shares that may be awarded in connection with the performance-based ~~tranches of the 2020 LTIP totals 150,630 shares. At May 31, 2020, we determined that the Adjusted EBITDA~~ tranche of the ~~2020~~2021 LTIP ~~was improbable of vesting prior to August 31, 2022 and we reversed previously recognized stock-based compensation expense for this award tranche.~~

~~The fiscal 2020 LTIP expires on August 31, 2022.~~

totals 316,176 shares.

Employee 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 ~~10,948~~14,242 shares and ~~26,375~~40,384 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 ~~expense~~benefit of ~~$8.0~~$9.6 million on a pre-tax ~~loss~~income of ~~$2.4~~$2.2 million, which resulted in an effective tax ~~expense~~benefit rate of approximately ~~329~~434 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 ~~loss~~income for the period, adjusting for discrete items arising during the period, including a ~~$10.2~~$10.9 million ~~increase~~tax 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 ~~increase~~decrease in our deferred tax asset valuation allowance resulted in ~~additional~~a net income tax ~~expense~~benefit of ~~$10.2~~$10.9 million infor the first three quarters of fiscal ~~2020. In consideration~~2021. To determine the necessity and amount of the required valuation allowance, we applied relevant accounting guidance, ~~we considered~~considering both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Because of ~~the~~ cumulative pre-tax ~~losses~~income 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 ~~insufficient~~sufficient taxable income will be available to realize all of our deferred tax assets before they expire, ~~primarily foreign tax credit carryforwards and a portion of our~~except for net operating loss ~~carryforwards.~~carryforwards in certain foreign jurisdictions. Accordingly, we ~~increased~~decreased the valuation allowance against our deferred tax ~~assets.~~

assets at May 31, 2021.

NOTE 10 – ~~LOSS~~INCOME (LOSS) PER SHARE

The following schedule shows the calculation of ~~loss~~income (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
)

Since we incurred a net loss for the quarter and three quarters ended May 31, 2020, no potentially dilutive securities are included in the calculation of diluted loss per share for those periods because such effect would be anti-dilutive. The number of dilutive stock options and other stock-based awards as of May 31, 2020 would have been approximately 56,000 shares.

NOTE 11 – SEGMENT INFORMATION

Segment Information

Our sales are primarily comprised of training and consulting ~~services. Our~~services and our internal reporting and operating structure is currently organized around ~~two~~2 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 ~~three~~3 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 our ~~public programs operations.~~

book and audio sales.

International 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 and ~~universities.~~universities.

Corporate and Other – Our corporate and other information includes leasing operations, shipping and handling revenues, royalty revenues from Franklin Planner Corp. ~~(Note 12)~~, and certain corporate administrative functions.

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 ~~loss~~income (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 ~~loss~~income (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

‎

~~NOTE 12 – INVESTMENT IN FC ORGANIZATIONAL PRODUCTS~~

We previously owned a 19.5 percent interest in FC Organizational Products (FCOP), an entity that purchased substantially all of our consumer solutions business unit assets in fiscal 2008 for the purpose of selling planners and related organizational products under a comprehensive licensing agreement. On November 4, 2019, FCOP sold substantially all of its assets to Franklin Planner Corporation (FPC), a new unrelated entity, and FCOP was dissolved. FPC is expected to continue FCOP’s business of selling planners and other related consumer products based on the license agreement which granted FCOP the exclusive rights described below. In connection with this transaction, we exchanged approximately $3.2 million of receivables from FCOP to amend the term and royalty provisions of the existing license agreement. The $3.2 million included a $2.6 million note receivable, which represented FCOP’s third-party bank debt that we purchased directly from the bank on the transaction date. The amended license agreement grants the exclusive right to use certain of our trademarks and other intellectual property in connection with certain consumer products and provides us with minimum royalties of approximately $1.3 million per year. We are also entitled to receive additional variable royalties if certain FPC financial metrics exceed specified levels. FPC assumed the amended license agreement from FCOP upon the purchase of FCOP assets. We recorded the $3.2 million consideration for the amendment to the license agreement as a capitalized cost of the license and will reduce our royalty revenue by amortizing this amount over the remainder of the initial term of the license agreement, which ends in approximately 30 years. During the quarter and three quarters ended May 31, 2020, we recognized $0.3 million and $1.6 million of net royalty revenues from the amended license agreement with FPC.

We do not have an ownership interest in FPC, do not have any obligation to provide additional subordinated support to FPC, and do not have control over the day-to-day operations of FPC, which primarily consist of the sale of planning products and accessories. We receive payments for royalties and rented space from FPC. At May 31, 2020, we had $1.3 million receivable from FPC and at August 31, 2019, we had $1.0 million receivable from FCOP, each of which are recorded in current assets. Since most of FPC’s sales and cash flows are seasonal and occur between October and January, we expect to receive the majority of the required cash payments for royalties and outstanding receivables during our second and third quarters of each fiscal year. During the second quarter of fiscal 2020, we received $1.9 million of cash from FPC as payment for royalties and reimbursable operating costs.

~~NOTE 13 – SUBSEQUENT EVENTS~~

~~Amendment to the 2019 Credit Agreement~~

1.	~~Minimum Liquidity~~ ~~– We must maintain consolidated minimum liquidity of not less than $13.0 million from August 31, 2020 through February 28, 2021 and $8.0 million at May 31, 2021.~~

2.	~~Minimum Adjusted EBITDA~~ ~~– We must maintain rolling four-quarter Adjusted EBITDA not less than the amount set forth below at the end of the specified quarter (in thousands).~~

Quarter Ending Amount
August 31, 2020
$
11,000

November 30, 2020
8,500

February 28, 2021
5,000

May 31, 2021
15,000

Adjusted EBITDA for purposes of this calculation is not the same as generally reported by the Company in its quarterly earnings. The amounts in the table above exclude amortization of capitalized development costs which is classified in cost of sales.

3.	~~Capital Expenditures~~ ~~– We may not make capital expenditures, including capitalized development costs, in an amount exceeding $8.5 million in aggregate for any fiscal year.~~

~~The previously existing financial covenants remain in effect at all times other than the quarterly periods ending from August 31, 2020 through May 31, 2021.~~

In addition to the new financial covenants described above, we will repay the amount previously drawn on our revolving line of credit and we will be prohibited from holding domestic cash balances in excess of $5.0 million at the time of any borrowing on the revolving credit facility. The available credit on the revolving line of credit remains the same as under the 2019 Credit Agreement. We are also prohibited from making certain restricted payments, including dividend payments on our common stock and open-market purchases of our common stock for treasury until we have been in compliance with the previously existing financial covenants for two consecutive quarters.

~~The Company’s interest rate under the First Amendment will increase from LIBOR plus 1.85% to LIBOR plus 3.0% and the unused credit commitment fee will increase from to 0.2% to 0.5%.~~

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, ~~2019.~~

2020.

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.

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.

Our international direct offices also followed the same pattern of closures and restrictions on associate travel and delivery of our offerings. These actions, and similar steps taken by most of our clients, resulted in 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.

~~As previously discussed, our~~ financial results for the quarter ended May 31, ~~2020 were significantly influenced by~~2021 represent the ~~COVID-19 pandemic and mandated responses to slow its spread. The following is a summary of key financial results for the~~best 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 ~~2020~~2021 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.

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. ~~All~~

The third quarter of ~~our business units were adversely impacted by~~fiscal 2020 included the ~~closure~~onset of ~~offices, schools, and other gathering places~~the 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 ~~spread~~strengthening 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 sales~~following is a summary of financial highlights for the third quarter of fiscal ~~2020 were $27.5~~2021:

Sales – Our consolidated sales for the quarter ending May 31, 2021 totaled $58.7 million, compared with ~~$43.4~~$37.1 million in the third quarter of fiscal 2020. ~~Sales declined through both direct office~~We were pleased with the continued strength of our All Access Pass and ~~licensee operations. Education Division sales were $8.2 million~~Leader 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 in~~the 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 rescheduled~~other countries in which we operate as companies, schools, and individuals are ~~being delivered live on-line. We expect this trend~~adapting, 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 ~~corresponding~~third 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.

At May 31, ~~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.

Cost of Sales/Gross Profit – Our cost of sales totaled ~~$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 ~~2020~~fiscal 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, ~~2020~~2021 improved ~~146~~587 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 ~~increased~~the continued increase in subscription revenues in the mix of ~~services sold when compared with~~overall sales and the ~~prior year.~~

impact of increased sales on fixed cost of sale elements such as salaried Education Division coaches and capitalized curriculum amortization expense. Gross profit increased due to improved sales as described above.

Operating Expenses – Our operating expenses for the quarter ended May 31, ~~2020 decreased $14.6~~2021 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.

~~Income 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 allowance~~primarily 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 positive~~improved 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 impact~~increased 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 taxable~~our 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.

Income Taxes – Our income ~~will be available to realize all~~tax 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 carryforwards~~due to three-year cumulative pre-tax losses combined with expected disruptions and ~~a portion~~negative 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 ~~increased~~reduced the valuation allowance against our deferred tax ~~assets.~~

assets, which primarily accounts for the income tax benefit we recorded for the quarter ended May 31, 2021.

Operating ~~Loss~~Income and Net Loss – ~~Our loss~~As 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. For~~in the third quarter of fiscal ~~2020, we recognized~~2020. 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.~~

year, which included the adverse impact of an increased valuation allowance on deferred tax assets.

Cash Flows from Operating Activities – Our cash flows from operating activities ~~totaled $18.7~~increased 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 improved~~2020. At May 31, 2021, we had $35.8 million of cash ~~flows reflect a strong first half~~with no borrowings on our $15.0 million secured line of credit facility.

Purchase of Strive Talent, Inc. – During the third quarter of fiscal ~~2020~~2021, we purchased Strive (Note 2), a San Francisco-based technology company which has developed and ~~strong collections~~markets an innovative learning deployment platform. While the purchase of Strive did not materially impact our ~~accounts receivable~~results of operations during the third ~~quarter.~~

quarter, we are excited to add the capabilities of this platform to our All Access Pass subscription. Once integrated into the AAP, 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 to our clients. We believe the acquired technology from Strive will be a key element of our future business model and strategy.

Further details regarding our ~~third~~results for the quarter ~~results~~and three quarters ended May 31, 2021 are provided throughout the following management’s discussion and analysis.

Quarter Ended May 31, ~~2020~~2021 Compared with the Quarter Ended May 31, ~~2019~~

2020

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) ~~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
		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

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.~~ ~~For~~

revenue growth in future periods. In addition to the ~~quarter ending~~increase 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 due~~operations, such as our facilitator and custom materials channels, which grew $1.3 million compared with the third quarter of the prior year.

Our foreign direct offices continue to be impacted by the COVID-19 pandemic as governmental mandates limited gatherings, business activity, and ~~mandated responses~~training 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 sales~~recover during the ~~quarter, we believe our previous~~remainder of fiscal 2021 and ~~ongoing investments~~will 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 immaterial~~a $0.6 million favorable impact on our Direct Office sales and a $0.1 million favorable impact on operating ~~results~~income during the third quarter of fiscal ~~2020.~~

2021. As a result of the COVID-19 pandemic, we expect that our foreign Direct Offices will accelerate their transition to the All Access Pass in future periods, especially in China and Japan. While we are optimistic about the future of our direct office channel and AAP revenues, our future Direct Office financial performance is highly dependent upon economic recovery from the pandemic, including the opening of national and regional economies and other factors which may not be within in our control.

Gross Profit. Gross profit ~~decreased~~increased primarily due to ~~decreased sales~~increased 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 in~~percentage when compared with the ~~mix of services and products sold during the quarter.~~

prior year.

SG&A Expense. ~~Decreased~~ Increased Direct Office SG&A expense was primarily due to ~~reduced variable compensation, including~~associate costs from increased commissions ~~incentives,~~on improved sales, increased bonus and ~~bonuses resulting from decreased sales~~incentive 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 ~~reductions~~increases were partially offset by ~~increased associate expenses resulting~~reduced travel and entertainment expense and cost savings from ~~new sales and sales-related personnel.~~

initiatives which were implemented as a result of the pandemic.

International Licensees Segment

In ~~countries or~~ foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations for the periods indicated (in thousands):



		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

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 )

Sales. International licensee revenues are primarily comprised of royalty revenues. ~~During the quarter ended May 31, 2020,~~Our licensee revenues ~~decreased~~increased significantly compared with the prior year primarily due to the ~~worldwide COVID-19 outbreak. Our international licensees deliver most~~recovery of ~~their programs and generate revenue primarily through onsite presentations. Nearly all~~economies in many of the ~~presentations scheduled~~countries where our licensees operate. The recovery led to ~~be held during~~significantly 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 due~~decreased product sales to the licensees. Despite the ongoing ~~COVID-19~~difficulties associated with the pandemic and ~~corresponding restrictions~~the varying impacts on ~~public gatherings. Future~~each 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 that~~believe 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 their

clients. Foreign exchange rates had an immaterial impact on international licensee sales and operating results during the quarter ended May 31, ~~2020.~~

2021.

Gross Profit. Gross profit ~~decreased~~increased due to ~~lower~~increased sales as previously described. Gross margin ~~decreased~~improved primarily due to the mix of revenue recognized during the quarter, which included ~~less~~significantly more royalty ~~revenue compared with~~revenues than in the prior year.

SG&A Expense. International licensee SG&A expenses ~~decreased~~increased primarily due to ~~cost reduction initiatives implemented~~increased associate costs resulting from higher revenues and the normalization of certain operating costs compared with operations in the ~~third and fourth quarters~~early months of ~~fiscal 2019. We continue to expect reduced~~the pandemic. However, as a percent of sales, licensee SG&A expenses decreased compared with the prior year ~~during the remainder of fiscal 2020.~~

due to increased revenues.

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 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
		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

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 )

Sales. Education Division sales for the quarter ended May 31, ~~2020 decreased~~2021 grew primarily due to ~~decreased~~increased 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 closed~~Despite 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 improved~~2021 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 ~~4,400~~4,300 schools ~~and~~ in ~~over~~more than 50 countries.

Gross Profit. Education Division gross profit ~~decreased~~increased primarily due to ~~decreased~~increased sales as previously described. Education segment gross margin ~~declined~~improved 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 in~~coaches. This led to improved coaching margins on days delivered during the ~~prior year.~~

quarter.

SG&A Expenses. Education SG&A ~~expense decreased~~expenses increased primarily due to ~~reduced travel expenses as some programs were postponed or canceled during the quarter, and reduced variable~~increased associate costs ~~resulting~~ from ~~decreased sales.~~

increased sales and additional headcount compared with the prior year. These increases were partially offset by cost cutting initiatives implemented in the Education Division.

Other Operating Expense Items

~~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.

Depreciation – Depreciation expense ~~increased $0.1~~decreased $0.2 million compared with ~~prior year~~the third quarter of fiscal 2020 primarily due to the ~~addition~~full depreciation of ~~new~~certain assets ~~in fiscal 2020.~~during the quarter. We currently expect depreciation expense will total approximately ~~$6.7~~$6.4 million in fiscal ~~2020.~~

2021.

Amortization – Amortization expense ~~decreased by~~increased $0.1 million compared with the third quarter of ~~fiscal 2019~~the prior year primarily due to the ~~full amortization~~acquisition 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.

‎

Income Taxes

Our ~~increased~~ income tax ~~expense~~benefit for the quarter ended May 31, ~~2020~~2021 was ~~primarily due to the recognition of an increase to the valuation allowance on our deferred~~$10.1 million, compared with income tax ~~assets. During~~expense 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 additional~~prior 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 of~~fiscal 2020 resulted primarily from increasing our valuation allowance against deferred income tax assets ~~will be realized. Because of the~~due 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 all~~expect continued strong performance in future periods. After consideration of the relevant accounting literature, we reduced our valuation allowance against deferred tax assets, which primarily ~~foreign~~accounts for the income tax ~~credit carryforwards and a portion of our net operating loss carryforwards, before they expire. Accordingly,~~benefit we ~~increased~~recorded for the ~~valuation allowance against our deferred tax assets.~~

quarter ended May 31, 2021.

Three Quarters Ended May 31, ~~2020~~2021 Compared with the Three Quarters Ended May 31, ~~2019~~

2020

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

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

Sales. ~~After a strong start during~~During the first ~~two~~three quarters of fiscal ~~2020, which saw~~2021 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 with~~increased 15 percent over the ~~prior year, our direct office sales were down significantly in the third quarter~~same period of fiscal ~~2020 due~~2020. We continue to be encouraged by the ~~COVID-19 pandemic~~durability of AAP subscription sales as ~~described in~~clients 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 of~~digital 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 offices~~subscription service revenues were partially offset by a ~~$1.0~~$3.4 million decrease in facilitator material sales ~~from~~compared with the first three quarters of fiscal 2020.

As previously mentioned, our ~~China office, which was~~foreign direct offices have been impacted ~~early~~ by the COVID-19 ~~outbreak. Our GSA~~pandemic throughout fiscal 2021 as governmental mandates limited gatherings, business activity, and training opportunities. However, international direct office ~~recognized $1.1~~sales 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 when~~or 2 percent, compared with the prior year. ~~However, all~~We 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 immaterial~~a $1.4 million favorable impact on our Direct Office sales and a $0.2 million favorable impact on operating ~~results~~income during the first three quarters of fiscal ~~2020.~~

2021. While we are optimistic about the future of our direct office channel, our future financial performance is highly dependent upon economic recovery from the pandemic, including the opening of national and regional economies and other factors which may not be within our control.

Gross Profit. Gross profit ~~decreased~~increased due to ~~decreased~~increased sales in the first three quarters of fiscal ~~2020~~2021 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.~~

2021.

SG&A Expense. Increased Direct Office ~~operating expenses decreased~~SG&A expense was primarily due to ~~reduced variable~~increased associate ~~costs, including~~expenses 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 ~~reductions~~increases were partially offset by ~~associate costs from new sales personnel.~~

reduced travel and entertainment expense; decreased marketing expense; and cost savings initiatives which were successfully implemented to save cash and preserve liquidity.

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
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 )


		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. ~~For the three quarters ended May 31, 2020,~~International licensee revenues ~~were~~are primarily ~~impacted by~~comprised of royalty revenues, which decreased significantly with the onset of COVID-19 ~~pandemic, which significantly reduced sales~~ in the third ~~quarter. Before~~quarter of fiscal 2020 and the ~~impact~~elimination of nearly all in-person training events. At the beginning of the pandemic our ~~international~~ licensee ~~royalty revenue in~~operations 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 ~~two~~three quarters of fiscal ~~2020~~2021, our royalty revenues have increased ~~by $0.2 million~~four 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.~~

ending May 31, 2021.

Gross Profit. Gross profit ~~decreased~~increased due to ~~an overall decrease in licensee revenues during the first three quarters of fiscal 2020~~improved sales as previously described. ~~However, licensee gross~~Gross margin improved ~~over the prior year~~ primarily due to ~~increased royalty revenues in~~ the mix of ~~total~~revenue recognized during the quarter, which included less materials sales ~~when compared with~~than in the prior year.

SG&A Expense. International licensee SG&A expenses decreased primarily due to cost reduction initiatives implemented in response to lower revenues, especially in the ~~third and fourth quarters~~first half of fiscal ~~2019.~~

2021.

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

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 )

Sales. ~~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 due~~2021 are contractual and are expected to ~~increased subscription revenues~~be delivered and ~~the addition of new schools. Growth~~recognized during the ~~first~~second half of fiscal ~~2020 was offset by decreased sales~~2021, 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 from~~2021 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.~~

Division.

Gross Profit. Education Division gross profit ~~for the first three quarters of fiscal 2020~~ decreased primarily due to decreased sales as previously described. Education segment gross margin ~~declined slightly~~improved compared with the prior year primarily due to the ~~fixed cost~~mix 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.

SG&A Expenses. Education SG&A expense ~~increased~~decreased primarily due to ~~investments~~reduced sales associate travel expenses, reduced variable associate costs resulting from decreased sales primarily in ~~additional sales~~the first two quarters of fiscal 2021, and ~~sales-related personnel~~cost savings from initiatives implemented in ~~late fiscal 2019 and early fiscal 2020.~~

response to the pandemic.

Income Taxes

Our effective income tax ~~expense~~benefit rate for the three quarters ended May 31, ~~2020~~2021 was approximately ~~329~~434 percent, compared with an income tax ~~benefit~~expense 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.

We paid ~~$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.

LIQUIDITY AND CAPITAL RESOURCES

Introduction

In the current economic environment of ~~reduced sales~~COVID-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, ~~2020~~2021 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, $11.6~~2021, $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.

~~Pursuant~~

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 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. Our~~First 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 ~~Credit~~Agreement. The primary purposes of the Consent and Second Modification Agreement ~~contains customary representations~~are 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 ~~guarantees, as well as provisions for~~Second Modification Agreement did not change any repayment ~~and liens. The~~or credit availability terms on the 2019 ~~Credit Agreement also includes~~Agreement.

At May 31, 2021, our reinstated debt covenants consist of the ~~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. We

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 ~~financial~~terms 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.

subsequent modifications.

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, ~~2020.~~

2021.

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 ~~third quarter~~first three quarters of fiscal ~~2020,~~2021, our cash provided by operating activities ~~for the three quarters ended May 31, 2020 was $18.7~~increased 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 results~~increased income from operations and favorable changes in working capital during the first ~~half~~three quarters of fiscal ~~2020 and strong collections of accounts receivable during the third quarter. Our~~2021. Despite pandemic conditions, our collection of accounts receivable remained strong during the first three quarters of fiscal ~~2020~~2021 and provided ~~a significant amount of~~the 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.

Cash Flows ~~From~~Used For Investing Activities and Capital Expenditures

~~Our~~

Through May 31, 2021, our cash used for investing activities ~~during 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).~~

business.

We spent ~~$3.4~~$1.8 million during the first three quarters of fiscal ~~2020~~2021 on the development of various content and offerings. Our previous and ongoing investments in ~~online~~content and digital delivery capabilities have proved to be valuable ~~assets in~~during the ~~wake of the COVID-19~~ongoing 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.~~

2021.

Our purchases of property and equipment ~~totaled $3.3 million in~~during the first three quarters of fiscal ~~2020, and~~2021 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 and~~hardware. We expect to continue ~~to invest~~our 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.

2021.

Cash Flows ~~From~~Used For Financing Activities

During the first three quarters of fiscal ~~2020,~~2021, our net cash ~~provided by~~used for financing activities totaled ~~$0.2~~$8.8 million. Our primary ~~sources~~uses 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 Capital~~during fiscal 2021 were solely for ~~$10.1 million (Note 6) prior~~shares 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 during~~distributed in the first ~~and second~~ three

quarters of fiscal ~~2020. These withheld~~2021. 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.~~

stock during fiscal 2021.

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 ~~2020~~2021 are expected to include required payments on our term loans and financing obligation, contingent consideration payments from previous business acquisitions, and may include purchases of our common stock for treasury. However, the timing and amount of common stock purchases is dependent on a number of factors, including available resources, and we are not obligated to make purchases of our common stock during any future period.

Sources of Liquidity

We expect to meet our ~~projected capital expenditures, repay amounts borrowed~~obligations on ~~our~~the 2019 Credit Agreement, service our existing financing obligation, pay for projected capital expenditures, and meet other working capital requirements during fiscal ~~2020~~2021 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 ~~from~~to 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.

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); ~~repayment~~payments 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.~~

2020, which was filed with the SEC on November 16, 2020.

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, ~~2019.~~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.

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, ~~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.

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, ~~2020,~~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 ~~2.6~~2.4 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, ~~2020~~2021 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.~~

rate fluctuations.

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, ~~2019.~~2020. We did not utilize any foreign currency or interest rate derivative instruments during the quarter or three quarters ended May 31, ~~2020.~~

2021.

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 ~~14, 2019 (as amended on December 2, 2019).~~

16, 2020.

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 ~~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.

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, ~~2020:~~2021:


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	-	$	-	-

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, 2020
-

$
-

-

$
39,824

April 1, 2020 to April 30, 2020
-

-

-

39,824

May 1, 2020 to May 31, 2020
-

-

-

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, 2020 under the terms of this Board approved plan.

⁽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 ~~this~~our 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.

‎

Item 6.EXHIBITS

(A)Exhibits:

~~(A)~~

~~Exhibits:~~

	~~10.1~~
2.1	~~First~~ Stock Purchase Agreement by and among the stockholders of Strive Talent, Inc., William James Houghteling, as the Stockholder Representative, and Franklin Covey Client Sales, dated as of April 26, 2021 (filed as Exhibit 2.1 to a Current Report on Form 8-K filed with the Commission on April 29, 2021 and incorporated herein by reference).
10.1	Consent and Second Modification Agreement by and among JPMorgan Chase Bank, N.A., Franklin Covey Co., and the subsidiary guarantors signatory thereto, dated ~~July 8, 2020 (incorporated by reference~~April 26, 2021 (filed as Exhibit 10.1 to a Current Report on Form 8-K filed with the Commission on ~~July 10, 2020)~~April 29, 2021 and incorporated herein by reference).

31.1	Rule 13a-14(a) Certifications of the Chief Executive Officer.**

31.2	Rule 13a-14(a) Certifications of the Chief Financial Officer.**

32	Section 1350 Certifications.**

101.INS

~~101.INS~~

XBRL Instance ~~Document.~~

Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.**

101.SCH

~~101.SCH~~

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

~~101.CAL~~

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

~~101.DEF~~

Inline XBRL Taxonomy Definition Linkbase Document.

101.LAB

~~101.LAB~~

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	~~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.

**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:
~~Date:~~	~~July 10, 2020~~	~~By:~~	/s/ Robert A. Whitman
			Robert A. Whitman
			Chief Executive Officer
			(Duly Authorized Officer)

Date: July 8, 2021	~~July 10, 2020~~ By:	~~By:~~	/s/ Stephen D. Young
			Stephen D. Young
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

YEAR ENDING AUGUST 31,	Amount
2020	$	1,250
2021		5,000
2022		5,000
2023		5,000
2024		5,000
	$	21,250

	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

Quarter Ending	Amount
August 31, 2020	$	11,000
November 30, 2020		8,500
February 28, 2021		5,000
May 31, 2021		15,000