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

For the quarterly period ended February 28, ~~202~~12022

[ ]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~~File Number: 001-11107

Logo

Description automatically generated

FRANKLIN COVEY CO.

(Exact name of registrant as specified in its charter)


Utah		87-0401551
(State or other jurisdiction of ~~incorporation)~~incorporation or organization)		(I.R.S. employer identification ~~number)~~no.)

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

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

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.05 Par Value	FC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past

90 days. Yes T No £

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 T

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date:

~~14,145,630~~14,342,897 shares of Common Stock as of March 31, ~~2021~~2022
‎

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share amounts)



		February 28,		August 31,		February 28,		August 31,
		2021		2020		2022		2021
		(unaudited)				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	40,343	$	27,137	$	61,062	$	47,417
Accounts receivable, less allowance for doubtful accounts of $3,662 and $4,159		41,482		56,407
Accounts receivable, less allowance for doubtful accounts of $4,504 and $4,643						47,726		70,680
Inventories		2,641		2,974		2,472		2,496
Prepaid expenses and other current assets		15,799		15,146		16,105		16,115
Total current assets		100,265		101,664		127,365		136,708

Property and equipment, net		13,159		15,723		10,032		11,525
Intangible assets, net		44,864		47,125		47,325		50,097
Goodwill		24,220		24,220		31,220		31,220
Deferred income tax assets		843		1,094		3,658		4,951
Other long-term assets		15,378		15,611		13,864		15,153
	$	198,729	$	205,437	$	233,464	$	249,654

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of term notes payable	$	5,000	$	5,000
Current portion of notes payable					$	5,835	$	5,835
Current portion of financing obligation		2,741		2,600		3,040		2,887
Accounts payable		5,060		5,622		6,644		6,948
Deferred subscription revenue		57,344		59,289		68,583		74,772
Other deferred revenue		8,126		7,389		12,349		11,117
Accrued liabilities		22,837		22,628		23,302		34,980
Total current liabilities		101,108		102,528		119,753		136,539

Term notes payable, less current portion		12,500		15,000
Notes payable, less current portion						10,543		12,975
Financing obligation, less current portion		12,638		14,048		9,598		11,161
Other liabilities		8,631		9,110		7,067		8,741
Deferred income tax liabilities		4,812		5,298		375		375
Total liabilities		139,689		145,984		147,336		169,791

Shareholders’ equity:
Common stock, $0.05 par value; 40,000 shares authorized, 27,056 shares issued		1,353		1,353		1,353		1,353
Additional paid-in capital		208,816		211,920		215,348		214,888
Retained earnings		49,030		49,968		69,281		63,591
Accumulated other comprehensive income		915		641		533		709
Treasury stock at cost, 12,915 shares and 13,175 shares		(201,074)		(204,429)
Treasury stock at cost, 12,730 shares and 12,889 shares						(200,387)		(200,678)
Total shareholders’ equity		59,040		59,453		86,128		79,863
	$	198,729	$	205,437	$	233,464	$	249,654

See notes to condensed consolidated financial statements

‎

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS

OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per-share amounts)



		Quarter Ended			Two Quarters Ended					Quarter Ended			Two Quarters Ended
		February 28,		February 29,		February 28,		February 29,		February 28,		February 28,		February 28,		February 28,
		2021		2020		2021		2020		2022		2021		2022		2021
		(unaudited)				(unaudited)				(unaudited)				(unaudited)

Net sales	$	48,162	$	53,745	$	96,486	$	112,357	$	56,599	$	48,162	$	117,859	$	96,486
Cost of sales		10,822		15,079		22,760		31,662		12,485		10,822		26,146		22,760
Gross profit		37,340		38,666		73,726		80,695		44,114		37,340		91,713		73,726

Selling, general, and administrative		33,623		36,221		67,306		75,620		38,061		33,623		77,405		67,306
Depreciation		1,740		1,653		3,481		3,273		1,190		1,740		2,470		3,481
Amortization		1,133		1,170		2,265		2,340		1,346		1,133		2,776		2,265
Income (loss) from operations		844		(378)		674		(538)
Income from operations										3,517		844		9,062		674

Interest income		16		13		40		18		12		16		27		40
Interest expense		(540)		(557)		(1,108)		(1,162)		(423)		(540)		(869)		(1,108)
Income (loss) before income taxes		320		(922)		(394)		(1,682)		3,106		320		8,220		(394)
Income tax benefit (provision)		(366)		2,019		(544)		2,235
Income tax provision										(1,228)		(366)		(2,530)		(544)
Net income (loss)	$	(46)	$	1,097	$	(938)	$	553	$	1,878	$	(46)	$	5,690	$	(938)

Net income (loss) per share:
Basic and diluted	$	(0.00)	$	0.08	$	(0.07)	$	0.04	$	0.13	$	(0.00)	$	0.40	$	(0.07)

Weighted average number of common shares:
Basic		14,082		13,841		14,029		13,911		14,312		14,082		14,279		14,029
Diluted		14,082		13,990		14,029		14,118		14,333		14,082		14,323		14,029


COMPREHENSIVE INCOME (LOSS)
Net income (loss)	$	(46)	$	1,097	$	(938)	$	553	$	1,878	$	(46)	$	5,690	$	(938)
Foreign currency translation adjustments,
net of income taxes of
$0, $0, $0, and $0		(33)		90		274		53		(32)		(33)		(176)		274
Comprehensive income (loss)	$	(79)	$	1,187	$	(664)	$	606	$	1,846	$	(79)	$	5,514	$	(664)

See notes to condensed consolidated financial statements
‎

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Two Quarters Ended				Two Quarters Ended
		February 28,		February 29,		February 28,		February 28,
		2021		2020		2022		2021
		(unaudited)				(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(938)	$	553	$	5,690	$	(938)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization		5,746		5,613		5,246		5,746
Amortization of capitalized curriculum costs		1,750		2,029		1,620		1,750
Stock-based compensation		2,757		3,644		3,618		2,757
Deferred income taxes		(198)		(2,012)		1,277		(198)
Change in fair value of contingent consideration liabilities		46		(91)		48		46
Amortization of right-of-use operating lease assets		509		-		475		509
Loss on disposal of assets		-		38
Changes in assets and liabilities:
Decrease in accounts receivable, net		14,978		24,556		22,925		14,978
Decrease in inventories		346		681		25		346
Increase in prepaid expenses and other assets		(344)		(180)
Decrease (increase) in prepaid expenses and other assets						353		(344)
Decrease in accounts payable and accrued liabilities		(244)		(6,959)		(11,165)		(244)
Decrease in deferred revenue		(1,497)		(8,888)		(5,518)		(1,497)
Decrease in income taxes payable/receivable		(87)		(1,605)		(238)		(87)
Decrease in other long-term liabilities		(912)		(6)		(1,118)		(912)
Net cash provided by operating activities		21,912		17,373		23,238		21,912

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(877)		(2,516)		(1,264)		(877)
Curriculum development costs		(1,292)		(2,232)		(774)		(1,292)
Purchase of note receivable from bank		-		(2,600)
Net cash used for investing activities		(2,169)		(7,348)		(2,038)		(2,169)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from term notes payable		-		5,000
Principal payments on term notes payable		(2,500)		(2,500)
Principal payments on notes payable						(2,500)		(2,500)
Principal payments on financing obligation		(1,269)		(1,139)		(1,409)		(1,269)
Purchases of common stock for treasury		(2,971)		(13,833)		(3,535)		(2,971)
Payment of contingent consideration liabilities		(540)		(911)		(671)		(540)
Proceeds from sales of common stock held in treasury		464		484		668		464
Net cash used for financing activities		(6,816)		(12,899)		(7,447)		(6,816)
Effect of foreign currency exchange rates on cash and cash equivalents		279		(15)		(108)		279
Net increase (decrease) in cash and cash equivalents		13,206		(2,889)
Net increase in cash and cash equivalents						13,645		13,206
Cash and cash equivalents at the beginning of the period		27,137		27,699		47,417		27,137
Cash and cash equivalents at the end of the period	$	40,343	$	24,810	$	61,062	$	40,343

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	788	$	1,381	$	1,302	$	788
Cash paid for interest		1,085		1,144		782		1,085

Non-cash investing and financing activities:
Purchases of property and equipment financed by accounts payable	$	48	$	985	$	160	$	48
Acquisition of right-of-use operating lease assets for operating lease liabilities		885		-		338		885
Use of notes receivable to modify revenue contract		-		3,246

See notes to condensed consolidated financial statements
‎

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands and unaudited)



									Accumulated												Accumulated
	Common		Common		Additional				Other	Treasury		Treasury	Common		Common		Additional				Other	Treasury		Treasury
	Stock		Stock		Paid-In		Retained		Comprehensive	Stock		Stock	Stock		Stock		Paid-In		Retained		Comprehensive	Stock		Stock
	Shares		Amount		Capital		Earnings		Income	Shares		Amount	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)
Balance at August 31, 2021													27,056	$	1,353	$	214,888	$	63,591	$	709	(12,889)	$	(200,678)
Issuance of common stock from
treasury					(3,411)					236		3,668					(3,033)					217		3,378
Purchase of treasury shares										(89)		(1,530)
Purchases of common shares
for treasury																						(85)		(3,488)
Stock-based compensation					1,158												1,649
Cumulative translation
adjustments									307												(144)
Net loss							(892)
Balance at November 30, 2020	27,056		1,353		209,667		49,076		948	(13,028)		(202,291)
Net income																			3,812
Balance at November 30, 2021													27,056		1,353		213,504		67,403		565	(12,757)		(200,788)

Issuance of common stock from					(2,014)					143		2,222
treasury																	84					15		239
Purchase of treasury shares										(58)		(1,441)
Purchases of common shares
for treasury																						(1)		(47)
Stock-based compensation					1,599												1,969
Restricted stock award					(436)					28		436					(209)					13		209
Cumulative translation
adjustments									(33)												(32)
Net loss							(46)
Balance at February 28, 2021	27,056	$	1,353	$	208,816	$	49,030	$	915	(12,915)	$	(201,074)
Net income																			1,878
Balance at February 28, 2022													27,056	$	1,353	$	215,348	$	69,281	$	533	(12,730)	$	(200,387)

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												Accumulated
	Common		Common		Additional				Other	Treasury		Treasury	Common		Common		Additional				Other	Treasury		Treasury
	Stock		Stock		Paid-In		Retained		Comprehensive	Stock		Stock	Stock		Stock		Paid-In		Retained		Comprehensive	Stock		Stock
	Shares		Amount		Capital		Earnings		Income	Shares		Amount	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)
Balance at August 31, 2020													27,056	$	1,353	$	211,920	$	49,968	$	641	(13,175)	$	(204,429)
Issuance of common stock from
treasury					131					9		123					(3,411)					236		3,668
Purchases of common shares
for treasury												(3)										(89)		(1,530)
Stock-based compensation					1,851												1,158
Cumulative translation
adjustments									(37)												307
Net loss							(544)												(892)
Balance at November 30, 2019	27,056		1,353		217,946		58,859		232	(13,078)		(194,855)
Balance at November 30, 2020													27,056		1,353		209,667		49,076		948	(13,028)		(202,291)

Issuance of common stock from
treasury					(3,361)					241		3,591					(2,014)					143		2,222
Purchases of common shares
for treasury										(393)		(13,830)										(58)		(1,441)
Stock-based compensation					1,793												1,599
Restricted stock award					(333)					21		333					(436)					28		436
Cumulative translation
adjustments									90												(33)
Net income							1,097
Balance at February 29, 2020	27,056	$	1,353	$	216,045	$	59,956	$	322	(13,209)	$	(204,761)
Net loss																			(46)
Balance at February 28, 2021													27,056	$	1,353	$	208,816	$	49,030	$	915	(12,915)	$	(201,074)

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. 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,~~licenses; digital online ~~learning,~~learning; on-site ~~training,~~training; training led through certified ~~facilitators,~~facilitators; blended ~~learning,~~learning; and organization-wide transformational processes, including consulting and coaching. We believe our investments in digital delivery modalities over the past few years have enabled us to deliver our content to clients in a high-quality learning environment whether those clients are working remotely or in a centralized location. We believe that our clients are able to utilize our content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.

We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, The Leader in Me, ~~and~~ The 4 Disciplines of Execution, and Multipliers, and proprietary content in the areas of Execution, Sales Performance, Productivity, Educational Improvement, and Customer Loyalty. Our offerings are described in further detail at www.franklincovey.com. 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 (GAAP) 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~~Annual Report on Form 10-K for the fiscal year ended August 31, ~~2020.~~2021.

The preparation of financial statements in conformity with ~~accounting principles generally accepted in the United States of America~~GAAP requires ~~management~~us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The results of operations for the quarter and two quarters ended February 28, ~~2021~~2022 are not necessarily indicative of results expected for the entire fiscal year ending August 31, ~~2021,~~2022, or for any future periods.

Note on the Continuing COVID-19 Pandemic

~~With the rapid spread of~~The COVID-19 ~~around the world and the continuously evolving responses~~pandemic continues to ~~the pandemic, we have witnessed the significant and growing negative impact of COVID-19 on the global~~produce difficult economic and operating ~~environment.~~conditions for certain areas of our business, including our international direct offices and licensee partners as countries and local municipalities have maintained a variety of measures designed to contain the spread of the virus. These ~~negative impacts significantly reduced our consolidated sales during~~measures included the ~~quarter~~closure of offices, schools, and ~~two quarters ended February 28, 2021 as workplaces~~other meeting spaces. These efforts persist in the face of new variants, increasing cases, and ~~schools remained closed in response to~~ongoing uncertainty regarding the pandemic. ~~In light~~While our content is able to be presented digitally and is translated into numerous languages, the technology base differs significantly among countries, which may impede the smooth delivery of ~~these events,~~content to remote work locations. We remain optimistic about the future as we ~~have taken measures~~continue to reduce our costs and to maintain adequate liquidity. However, 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 extentsee signs 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~~recovery in the United States and inmany of the other countries ~~around the world. We continue to monitor evolving economic~~in which we operate as companies, schools, and individuals are adapting,

~~general business conditions~~ and the positive effect of vaccinations and therapeutics are enabling some economies to open and recover. However, emerging variants continue to create uncertainty and many countries, states, and local governments may continue to implement additional lockdowns or other containment measures in future periods. These measures change rapidly to new and perceived threats and may have an adverse impact on our results of operations in future periods. We will continue to monitor developments related to the COVID-19 pandemic, including supply chain issues, and their actual and potential impacts on our financial position, results of operations, and ~~cash flows.~~liquidity.

Accounting Pronouncements Issued and ~~Adopted~~

~~Credit Losses on Financial Instruments~~

~~On September 1, 2020, we adopted Accounting Standards Update (ASU) No. 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~ (Topic 326). This new standard is intended to improve financial reporting by requiring more timely recognition of credit losses on our trade accounts receivable and requires the measurement of all expected credit losses based on historical experience, current economic conditions, and reasonable and supportable forecasts. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and disclosures. For further information on our receivables, refer to Note 3, ~~Receivables~~.

~~Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement~~

~~On September 1, 2020, we adopted ASU No. 2018-15,~~ ~~Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~ (ASU 2018-15). This guidance clarifies the accounting for implementation costs in a cloud computing arrangement that is a service contract and aligns the requirements for capitalizing those costs with the capitalization requirements for costs incurred to develop or obtain internal-use software. The Company adopted ASU 2018-15 on a prospective basis and the adoption of this new standard did not have a material impact on our condensed consolidated financial statements or disclosures.

~~Accounting Pronouncements Issued and Not Yet~~ Adopted

In December 2019, the Financial Accounting Standards Board issued ~~ASU~~Accounting Standards Update 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 fiscal years beginning after December 15, 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 impact of the provisions~~The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.

NOTE 2 – 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):



		February 28,		August 31,		February 28,		August 31,
		2021		2020		2022		2021
Finished goods	$	2,612	$	2,947	$	2,445	$	2,468
Raw materials		29		27		27		28
	$	2,641	$	2,974	$	2,472	$	2,496

~~NOTE 3 – 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, which did not significantly impact our allowance. We do not have a significant amount of notes or other receivables.

~~The following provides a reconciliation of the activity in our allowance for estimated credit losses during the quarter and two quarters ended February 28, 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~~

No customer represented more than 10 percent of our total trade receivables balance at February 28, 2021 or August 31, 2020. Recoveries of amounts previously written off were immaterial for the periods presented.

NOTE 43 – FAIR VALUE OF FINANCIAL INSTRUMENTS

At February 28, ~~2021,~~2022, 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~~liability from the ~~acquisitions~~acquisition of Jhana Education (Jhana) ~~and Robert Gregory Partners (RGP)~~ changed as follows during the quarter and two quarters ended February 28, ~~2021~~2022 (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



Balance at August 31, 2021	$	2,095
Change in fair value		28
Payments		(368)
Balance at November 30, 2021		1,755
Change in fair value		20
Payments		(303)
Balance at February 28, 2022	$	1,472

At each quarterly reporting date, we estimate the fair value of our contingent liability from the ~~contingent liabilities from both the~~acquisition of Jhana ~~and RGP acquisitions~~ through the use of a Monte Carlo ~~simulations.~~simulation. Based on the timing of expected payments, ~~$1.1 million of the Jhana and~~ all ~~of the RGP contingent consideration liabilities were recorded as components of accrued liabilities at February 28, 2021. The remaining $1.5 million~~ of the Jhana contingent consideration liability ~~is reported~~was recorded in ~~other long-term liabilities.~~accrued liabilities at February 28, 2022. 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 and comprehensive income (loss).

NOTE 54 – REVENUE RECOGNITION

Contract Balances

Our deferred revenue totaled ~~$67.5~~$83.0 million at February 28, ~~2021~~2022 and ~~$68.9~~$88.6 million at August 31, ~~2020,~~2021, of which ~~$2.0~~$2.1 million and ~~$2.2~~$2.7 million were classified as components of other long-term liabilities at February 28, ~~2021,~~2022, and August 31, ~~2020,~~2021, respectively. The amount of deferred revenue that was generated from subscription offerings totaled ~~$58.5~~$70.4 million at February 28, ~~2021~~2022 and ~~$60.6~~$77.0 million at August 31, ~~2020.~~2021. During the quarter and two quarters ended February 28, ~~2021,~~2022, we recognized ~~$22.9~~$28.0 million and ~~$44.6~~$56.4 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. Remaining transaction price 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 into multi-year non-cancellable contracts. At February 28, ~~2021,~~2022, we had ~~$95.9~~$119.3 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 9,7, Segment Information, to these condensed consolidated financial statements for our disaggregated revenue information.

NOTE 65 – STOCK-BASED COMPENSATION

Our stock-based compensation was comprised of the following for the periods presented (in thousands):



		Quarter Ended			Two Quarters Ended					Quarter Ended			Two Quarters Ended
		February 28,		February 29,		February 28,		February 29,		February 28,		February 28,		February 28,		February 28,
		2021		2020		2021		2020		2022		2021		2022		2021
Long-term incentive awards	$	1,368	$	1,566	$	2,314	$	3,201	$	1,375	$	1,368	$	2,498	$	2,314
Strive acquisition compensation										366		-		645		-
Restricted stock awards		175		175		350		350		168		175		343		350
Employee stock purchase plan		56		52		93		93		60		56		117		93
Fully-vested share awards										-		-		15		-
	$	1,599	$	1,793	$	2,757	$	3,644	$	1,969	$	1,599	$	3,618	$	2,757

~~For~~During the ~~quarter and~~ two quarters ended February 28, ~~2021,~~2022, we issued ~~170,992~~245,157 shares ~~and 407,125 shares, respectively,~~ of our common stock under various stock-based compensation 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 ~~quarter and~~ two quarters ended February 28, ~~2021,~~2022, we withheld ~~58,388 shares and 147,092~~86,125 shares of our common stock for taxes on stock-based compensation arrangements, which had a total fair value of ~~$3.0~~$3.5 million.

~~Due to the significant impact~~Adoption of the 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 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 cost for awards expected to vest over the remaining service period of each award.

~~Stock Options~~Franklin Covey Co. 2022 Omnibus Incentive Plan

On January ~~12, 2021,~~14, 2022, our Chief Executive Officer (CEO) exercised his remaining stock options, which would have expired on January 14, 2021. The following information applies to our stock options through February 28, 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 February 28, 2021
-
$
-
Options vested and exercisable at
February 28, 2021
-
$
-

~~The stock options were exercised on a net basis (no cash was paid to exercise~~shareholders approved the options) and we withheld 51,738 shares of our common stock with a fair value of $1.3 million for income taxes. The intrinsic value of the exercised options totaled $2.9 million and we recognized an income tax benefit of $0.7 million during the second quarter of fiscal 2021.

~~Fiscal 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. 2022 Omnibus Incentive Plan ~~and~~(the 2022 Plan), which authorized an additional 1,000,000 shares of common stock for issuance as stock-based payments. A more detailed description of the 2022 Plan is ~~designed to provide our non-employee directors, who are not eligible to participate~~set forth in our ~~employee stock purchase plan, an opportunity to obtain an interest in~~Definitive Proxy Statement filed with 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 award, each eligible director received a whole-share grant equal to $100,000 with a one year vesting period. Our restricted stock award activity during the two quarters ended February 28, 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
February 28, 2021
28,049
$
24.96

~~At February 28, 2021, there was $0.6 million of unrecognized compensation expense remaining~~SEC on ~~the fiscal 2021 Board of Director restricted share award.~~December 15, 2021.

119

Fiscal ~~2021~~2022 Long-Term Incentive Plan Award

On ~~October 2, 2020,~~February 4, 2022, the Compensation Committee granted a new LTIP award to our executive officers and members of senior management. The fiscal ~~2021~~2022 LTIP award has 2two tranches, 1one with a time-based vesting condition and 1one with a performance-based vesting condition as described below:

Time-Based Award Shares – NaN percent of the ~~2021~~2022 LTIP award shares vest to participants on August 31, ~~2023.~~2024. The ~~total~~ number of shares that may be earned by participants at the end of the service period totals ~~52,696~~24,649 shares. The number of shares awarded in this tranche does not fluctuate based on the achievement of financial measures.

Performance-Based Award Shares – The remaining ~~tranche~~shares of the fiscal ~~2021~~2022 LTIP award isare earned based on the highest rolling four-quarter level of qualified ~~Adjusted EBITDA~~adjusted earnings before interest, income taxes, depreciation, amortization, and certain other charges (Adjusted EBITDA) achieved in the three-year period ending August 31, ~~2023.~~2024. The number of shares that will vest to participants for 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 level of qualified Adjusted EBITDA achieved. The number of shares that may be earned for achieving 100 percent of the performance-based objective totals ~~158,088~~73,929 shares. The maximum number of shares that may be awarded in connection with the performance-based tranche of the ~~2021~~2022 LTIP totals ~~316,176~~147,840 shares.

Fiscal 2022 Restricted Stock Award

Our annual restricted stock award granted to non-employee members of the Board of Directors is administered under the terms of our omnibus incentive plans, 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 2022 award, each eligible director received a whole-share grant equal to $110,000 with a one year vesting period. Our restricted stock award activity during the two quarters ended February 28, 2022 consisted of the following:



			Weighted-Average
			Grant Date
	Number of		Fair Value
	Shares		Per Share
Restricted stock awards at
August 31, 2021	28,049	$	24.96
Granted	13,260		49.78
Forfeited	-		-
Vested	(28,049)		24.96
Restricted stock awards at
February 28, 2022	13,260	$	49.78

Employee Stock Purchase Plan

We have an employee stock purchase plan that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of each fiscal quarter. During the quarter and two quarters ended February 28, ~~2021,~~2022, we issued ~~11,045~~8,667 shares and ~~26,142~~18,046 shares of our common stock to participants in the ESPP.

~~NOTE 7 – INCOME TAXES~~

For the two quarters ended February 28, 2021, we recorded income tax expense of $0.5 million on a pre-tax loss of $0.4 million, resulting in an effective tax expense rate of approximately 138 percent for the first half of fiscal 2021. Our effective tax rate was adversely affected by an increase in the valuation allowance against deferred income tax assets, non-deductible executive compensation, and certain other non-deductible expenses, which were partially offset by the favorable impact of the exercise of stock options during the second quarter of fiscal 2021 (Note 6). We computed our income tax provision for the first two quarters of fiscal 2021 using the discrete method, applying the actual year-to-date effective tax rate to our pre-tax loss. We believe that this method yields a more reliable income tax calculation for the reported period. We believe the estimated annual effective tax rate method is not reasonable due to its sensitivity to small changes in forecasted annual income or loss before income taxes, which would result in significant variations in the customary relationship between income tax expense and pre-tax income or loss for interim periods.

‎

1210

NOTE 86 – INCOME (LOSS) PER SHARE

The following schedule shows the calculation of income (loss) per share for the periods presented (in thousands, except per-share amounts).



	Quarter Ended				Two Quarters Ended				Quarter Ended				Two Quarters Ended
		February 28,		February 29,		February 28,		February 29,		February 28,		February 28,		February 28,		February 28,
		2021		2020		2021		2020		2022		2021		2022		2021
Numerator for basic and
diluted loss per share:
Net income (loss)	$	(46)	$	1,097	$	(938)	$	553	$	1,878	$	(46)	$	5,690	$	(938)

Denominator for basic and
diluted loss per share:
Basic weighted average shares
outstanding		14,082		13,841		14,029		13,911		14,312		14,082		14,279		14,029
Effect of dilutive securities:
Stock options and other
stock-based awards		-		149		-		207
Other stock-based awards										21		-		44		-
Diluted weighted average
shares outstanding		14,082		13,990		14,029		14,118		14,333		14,082		14,323		14,029

EPS Calculations:
Net income (loss) per share:
Basic and diluted	$	(0.00)	$	0.08	$	(0.07)	$	0.04	$	0.13	$	(0.00)	$	0.40	$	(0.07)

Since we incurred a net loss for the quarter ended February 28, 2021, 0 potentially dilutive securities are included in the calculation of diluted loss per share for the quarter because such effect would be anti-dilutive. The number of dilutive stock options and other stock-based awards as of February 28, 2021 would have been approximately 71,000 shares.

NOTE 97 – SEGMENT INFORMATION

Segment Information

Our sales are primarily comprised of training and consulting services and our internal reporting and operating structure is currently organized around 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 3 reportable segments and 1 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 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.

‎

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

We have determined that the Company’s chief operating decision maker is the ~~CEO,~~Chief Executive Officer, 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 income (loss) excluding interest expense, income taxes, depreciation expense, intangible asset 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 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
February 28, 2022								Customers		Gross Profit		EBITDA

Enterprise Division:
Direct offices							$	41,502	$	33,948	$	8,732
International licensees								2,588		2,304		1,444
								44,090		36,252		10,176
Education practice								11,066		7,098		(324)
Corporate and eliminations								1,443		764		(1,810)
Consolidated							$	56,599	$	44,114	$	8,042
		Sales to
Quarter Ended		External				Adjusted
February 28, 2021		Customers		Gross Profit		EBITDA

Enterprise Division:
Direct offices	$	35,738	$	29,084	$	6,131	$	35,738	$	29,084	$	6,131
International licensees		2,429		2,100		1,505		2,429		2,100		1,505
		38,167		31,184		7,636		38,167		31,184		7,636
Education practice		8,478		5,344		(858)		8,478		5,344		(858)
Corporate and eliminations		1,517		812		(1,655)		1,517		812		(1,655)
Consolidated	$	48,162	$	37,340	$	5,123	$	48,162	$	37,340	$	5,123

Quarter Ended
February 29, 2020
Two Quarters Ended
February 28, 2022

Enterprise Division:
Direct offices	$	37,973	$	28,702	$	4,734	$	86,621	$	70,150	$	18,686
International licensees		2,691		2,237		1,384		5,586		5,005		3,115
		40,664		30,939		6,118		92,207		75,155		21,801
Education practice		10,893		6,460		(1,068)		22,763		14,959		(89)
Corporate and eliminations		2,188		1,267		(994)		2,889		1,599		(3,738)
Consolidated	$	53,745	$	38,666	$	4,056	$	117,859	$	91,713	$	17,974

Two Quarters Ended
February 28, 2021

Enterprise Division:
Direct offices	$	72,481	$	58,523	$	12,827	$	72,481	$	58,523	$	12,827
International licensees		5,026		4,385		2,795		5,026		4,385		2,795
		77,507		62,908		15,622		77,507		62,908		15,622
Education practice		15,975		9,331		(3,142)		15,975		9,331		(3,142)
Corporate and eliminations		3,004		1,487		(3,641)		3,004		1,487		(3,641)
Consolidated	$	96,486	$	73,726	$	8,839	$	96,486	$	73,726	$	8,839

Two Quarters Ended
February 29, 2020

Enterprise Division:
Direct offices	$	80,085	$	60,113	$	10,444
International licensees		6,411		5,357		3,419
		86,496		65,470		13,863
Education practice		21,974		13,117		(2,171)
Corporate and eliminations		3,887		2,108		(2,675)
Consolidated	$	112,357	$	80,695	$	9,017

‎

1512

A reconciliation of our consolidated Adjusted EBITDA to consolidated net income (loss) is provided below (in thousands).



	Quarter Ended				Two Quarters Ended				Quarter Ended				Two Quarters Ended
		February 28,		February 29,		February 28,		February 29,		February 28,		February 28,		February 28,		February 28,
		2021		2020		2021		2020		2022		2021		2022		2021
Segment Adjusted EBITDA	$	6,778	$	5,050	$	12,480	$	11,692	$	9,852	$	6,778	$	21,712	$	12,480
Corporate expenses		(1,655)		(994)		(3,641)		(2,675)		(1,810)		(1,655)		(3,738)		(3,641)
Consolidated Adjusted EBITDA		5,123		4,056		8,839		9,017		8,042		5,123		17,974		8,839
Stock-based compensation		(1,599)		(1,793)		(2,757)		(3,644)		(1,969)		(1,599)		(3,618)		(2,757)
Increase (decrease) in the fair value of
Increase in the fair value of
contingent consideration liabilities		16		182		(46)		91		(20)		16		(48)		(46)
Government COVID-19 assistance		27		-		234		-		-		27		-		234
Knowledge Capital wind-down costs		-		-		-		(389)
Gain from insurance settlement		150		-		150		-		-		150		-		150
Depreciation		(1,740)		(1,653)		(3,481)		(3,273)		(1,190)		(1,740)		(2,470)		(3,481)
Amortization		(1,133)		(1,170)		(2,265)		(2,340)		(1,346)		(1,133)		(2,776)		(2,265)
Income (loss) from operations		844		(378)		674		(538)		3,517		844		9,062		674
Interest income		16		13		40		18		12		16		27		40
Interest expense		(540)		(557)		(1,108)		(1,162)		(423)		(540)		(869)		(1,108)
Income (loss) before income taxes		320		(922)		(394)		(1,682)		3,106		320		8,220		(394)
Income tax benefit (provision)		(366)		2,019		(544)		2,235
Income tax provision										(1,228)		(366)		(2,530)		(544)
Net income (loss)	$	(46)	$	1,097	$	(938)	$	553	$	1,878	$	(46)	$	5,690	$	(938)

Revenue by Category

The following table presents our revenue disaggregated by geographic region (in thousands).



	Quarter Ended				Two Quarters Ended				Quarter Ended				Two Quarters Ended
		February 28,		February 29,		February 28,		February 29,		February 28,		February 28,		February 28,		February 28,
		2021		2020		2021		2020		2022		2021		2022		2021

Americas	$	38,828	$	42,721	$	77,155	$	86,756	$	46,447	$	38,828	$	95,202	$	77,155
Asia Pacific		6,622		7,089		13,428		17,228		6,489		6,622		14,287		13,428
Europe/Middle East/Africa		2,712		3,935		5,903		8,373		3,663		2,712		8,370		5,903
	$	48,162	$	53,745	$	96,486	$	112,357	$	56,599	$	48,162	$	117,859	$	96,486

‎

1613

The following table presents our revenue disaggregated by type of service (in thousands).



Quarter Ended												Services and						Leases and
February 28, 2022												Products		Subscriptions		Royalties		Other		Consolidated

Enterprise Division:
Direct offices											$	20,212	$	20,553	$	737	$	-	$	41,502
International licensees												99		313		2,176		-		2,588
												20,311		20,866		2,913		-		44,090
Education practice												2,844		7,128		1,094		-		11,066
Corporate and eliminations												-		-		220		1,223		1,443
Consolidated											$	23,155	$	27,994	$	4,227	$	1,223	$	56,599

Quarter Ended		Services and						Leases and
February 28, 2021		Products		Subscriptions		Royalties		Other		Consolidated

Enterprise Division:
Direct offices	$	17,912	$	17,132	$	694	$	-	$	35,738	$	17,912	$	17,132	$	694	$	-	$	35,738
International licensees		522		-		1,907		-		2,429		522		-		1,907		-		2,429
		18,434		17,132		2,601		-		38,167		18,434		17,132		2,601		-		38,167
Education practice		1,797		5,731		950		-		8,478		1,797		5,731		950		-		8,478
Corporate and eliminations		-		-		373		1,144		1,517		-		-		373		1,144		1,517
Consolidated	$	20,231	$	22,863	$	3,924	$	1,144	$	48,162	$	20,231	$	22,863	$	3,924	$	1,144	$	48,162

Quarter Ended
February 29, 2020
Two Quarters Ended
February 28, 2022

Enterprise Division:
Direct offices	$	21,644	$	15,172	$	1,157	$	-	$	37,973	$	44,063	$	41,065	$	1,493	$	-	$	86,621
International licensees		410		-		2,281		-		2,691		212		605		4,769		-		5,586
		22,054		15,172		3,438		-		40,664		44,275		41,670		6,262		-		92,207
Education practice		2,950		6,192		1,751		-		10,893		6,070		14,972		1,721		-		22,763
Corporate and eliminations		-		-		935		1,253		2,188		-		-		564		2,325		2,889
Consolidated	$	25,004	$	21,364	$	6,124	$	1,253	$	53,745	$	50,345	$	56,642	$	8,547	$	2,325	$	117,859

Two Quarters Ended
February 28, 2021

Enterprise Division:
Direct offices	$	37,323	$	33,747	$	1,411	$	-	$	72,481	$	37,323	$	33,747	$	1,411	$	-	$	72,481
International licensees		854		-		4,172		-		5,026		854		-		4,172		-		5,026
		38,177		33,747		5,583		-		77,507		38,177		33,747		5,583		-		77,507
Education practice		3,721		10,805		1,449		-		15,975		3,721		10,805		1,449		-		15,975
Corporate and eliminations		-		-		708		2,296		3,004		-		-		708		2,296		3,004
Consolidated	$	41,898	$	44,552	$	7,740	$	2,296	$	96,486	$	41,898	$	44,552	$	7,740	$	2,296	$	96,486

Two Quarters Ended
February 29, 2020

Enterprise Division:
Direct offices	$	48,895	$	29,461	$	1,729	$	-	$	80,085
International licensees		1,000		-		5,411		-		6,411
		49,895		29,461		7,140		-		86,496
Education practice		6,535		13,010		2,429		-		21,974
Corporate and eliminations		-		-		1,314		2,573		3,887
Consolidated	$	56,430	$	42,471	$	10,883	$	2,573	$	112,357

‎

1714

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, ~~2020.~~2021.

RESULTS OF OPERATIONS

Overview

Franklin Covey Co. is a global company focused on individual and organizational performance improvement. We believe that our content, coaching and consulting services, and innovative delivery modalities 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.

~~We are very pleased with~~Our financial results for the ~~Company’s~~quarter ended February 28, 2022 maintained the strong momentum that has been generated during the recovery from the COVID-19 pandemic and included increased sales, increased gross profit, improved gross margin, increased operating and net income, and higher Adjusted EBITDA. Our consolidated sales for the second quarter ~~and~~of fiscal ~~2021 year-to-date results.~~2022 increased 18 percent, or $8.4 million, to $56.6 million compared with $48.2 million in the second quarter of fiscal 2021. Our strong performance during the second quarter of fiscal ~~2021~~2022 reflects the continuation of ~~four~~three key trends that have been evident throughout the ongoing COVID-19 pandemic and that have significantly contributed to our improving financial results as national and local economies work to recover from the pandemic. These trends include:

Strong growth of All Access Pass ~~sales.~~and Related Services. All Access ~~pass~~Pass (AAP) and related sales increased 1329 percent in the second quarter of fiscal ~~2021, 14 percent in the first two quarters of fiscal 2021, and 15 percent over the four quarters ended February 28, 2021 when compared with the corresponding pre-pandemic periods of fiscal 2020.~~2022 to $32.0 million.

Growth of All Access Pass related services. Sales of All Access Pass related services in the second quarter were even higher than add-on sales in last year’s pre-pandemic second quarter, reflecting the strong bookings of services in prior quarters, and the Company’s capabilities to deliver services live-online and digitally.

International sales ~~are improving.~~improvement. Sales inincreased at all of our international direct offices, ~~and through our international licensee partners continued to strengthen in the second quarter.~~

~~Education Division performance is expected to improve. Despite the challenging environment for education, booking trends in the Education Division strengthened in the second quarter, even~~except China, compared with the second quarter of ~~fiscal 2020.~~the prior year and international licensee revenues increased seven percent over the prior year, reflecting increased sales and improving economic conditions in many of the countries in which we and our licensees operate.

~~Over~~Education Division performance improvement. Education Division revenues grew 31 percent on the ~~course~~strength of increased consulting, coaching, and training days delivered during the ~~COVID-19 pandemic, we have been able~~quarter, increased recognition of previously deferred revenue related to ~~mitigate some of the effects of reduced sales through improved gross margins as subscription revenues increase~~Leader in ~~the overall mix of services~~Me subscriptions, and ~~products sold,~~increased training and ~~through focused efforts to reduce operating expenses.~~ classroom material sales.

As ~~certain~~ areas of our operations continue to recover and grow, we believe the strength of our ~~subscription based~~subscription-based offerings and services led the Company to higher levels of profitability ~~and cash flows~~ than experienced in prior periods, including the pre-pandemic ~~second quarter~~first half of fiscal 2020. We ~~believe~~are optimistic these trends will continue through ~~the remainder of~~ fiscal ~~2021~~2022 and will continue to produce improved earnings and cash flows compared with the prior year. However, these expectations are dependent upon continued recovery from the COVID-19 pandemic and improving international economic and geopolitical stability.

1815

The second quarter of fiscal 2021 included the relatively early stages of the COVID-19 pandemic in the United States, Canada, and many other countries throughout the world, which had a significantly adverse impact on our financial results during that quarter. Comparisons of the second quarter of fiscal 2022 with the prior year reflect those conditions and the strengthening of our operations over the course of the pandemic, which has produced large variances in the current period analysis. As recovery from the COVID-19 pandemic progressed through prior-year periods in the third and fourth quarters of fiscal 2021, we do not expect the large variances to prior year results to continue in the remainder of fiscal 2022. We also anticipate ongoing governmental mandates will have an adverse impact on some of our foreign operations, especially in China and Japan, during the third and fourth quarters of fiscal 2022.

The following is a summary of consolidated financial highlights for the second quarter of fiscal ~~2021:~~2022:

Sales – Our consolidated sales for the ~~second~~ quarter ~~of fiscal 2021 totaled $48.2~~ended February 28, 2022 increased 18 percent, or $8.4 million, to $56.6 million compared with ~~$53.7~~$48.2 million in the ~~pre-pandemic quarter ended February 29, 2020. While our consolidated sales were adversely impacted in certain areas by the ongoing COVID-19 pandemic, we were~~prior year. We continue to be pleased with the ~~continued~~ strength of our All Access Pass and Leader in Me subscription-based ~~services.~~services and believe the electronic delivery capabilities of these offerings have been key to our business performance during the pandemic and the ongoing recovery. Enterprise Division sales increased 16 percent, or $5.9 million, to $44.1 million compared with $38.2 million in fiscal 2021. During the second quarter of fiscal ~~2021,~~2022, AAP and related sales increased 1329 percent compared with the ~~second quarter~~same period of the prior year and annual revenue retention remained strong at greater than 90 percent. ~~The pivot~~Education Division sales grew 31 percent compared with the prior year on the strength of increased consulting, coaching, and training days delivered during the quarter, increased recognition of previously deferred revenue related to ~~online delivery continued~~Leader in Me subscriptions, and increased training and classroom material sales when compared with the prior year. During the second quarter ~~and~~of fiscal 2022, sales improved in each of our ~~booking pace in the U.S/Canada recovered to be higher than the prior year. However, increased All Access Pass~~Direct Office, International Licensee, and ~~related sales did not fully offset fewer coaching and consulting days delivered in the~~ Education Division ~~cancelation of Education Division Symposium events in fiscal 2021, decreased materials sales, and decreased international direct office revenues. As we begin~~segments compared with the second ~~half~~quarter of fiscal 2021 we are beginning to see signs of recovery in many of these areas as companies, schools, and individuals are adapting, and the positive effect of vaccinations is enabling certain economies to open and recover.2021. We remain optimistic about the future and look forward to continued growth and recovery from the ~~COVID-19~~ pandemic in many parts of the world during the ~~third and fourth quarters~~remainder of fiscal ~~2021.~~2022.

At February 28, ~~2021,~~2022, we had ~~$58.5~~$70.4 million of deferred subscription revenue on our balance sheet, a ~~22%,~~20 percent, or ~~$10.6~~$11.8 million, increase compared with deferred subscription revenue on our balance sheet at February ~~29, 2020.~~28, 2021. At February 28, ~~2021,~~2022, we had ~~$37.4~~$49.0 million of unbilled deferred revenue compared with ~~$34.8~~$37.4 million of unbilled deferred revenue at February ~~29, 2020.~~28, 2021. 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 ~~$10.8~~$12.5 million for the quarter ended February 28, ~~2021,~~2022, compared with ~~$15.1~~$10.8 million in the second quarter of fiscal ~~2020.~~2021. Gross profit for the second quarter of fiscal ~~2021 was $37.3~~2022 increased 18 percent to $44.1 million compared with ~~$38.7~~$37.3 million in ~~fiscal 2020.~~the prior year. Our gross margin for the quarter ended February 28, ~~2021 improved 559 basis points to 77.5~~2022 remained strong at 77.9 percent of sales compared with ~~71.9~~77.5 percent in the ~~second~~same quarter of the prior year, reflecting the continued increase in subscription revenues in the mix of overall sales, ~~when compared with the prior year. The decline in~~and increased licensee royalty revenues. Cost of goods sold and gross profit ~~was~~each increased primarily due to ~~decreased~~higher sales as described above.

Operating Expenses – Our operating expenses for the second quarter ~~ended February 28, 2021 decreased $2.5~~of fiscal 2022 increased $4.1 million compared with the same quarter ~~ended February 29, 2020,~~of the prior year, which was primarily due to ~~decreased~~a $4.4 million increase in selling, general, and administrative (SG&A) expenses. ~~Decreased~~Despite the increase in SG&A ~~expense was primarily related~~expenses, as a percent of sales, our SG&A expenses in the second quarter of fiscal 2022 decreased to decreased travel, entertainment, and marketing; decreased associate costs; and cost savings from the successful implementation of expense reduction initiatives in various areas of the Company’s operations during the COVID-19 pandemic.

~~Income Taxes~~ ~~– For the quarter ended February 28, 2021, we recorded $0.4 million of income tax expense on pre-tax income of $0.3 million, resulting in an effective tax expense rate of 114~~67.2 percent compared with ~~an effective benefit rate of 219~~69.8 percent in the prior year. Our ~~effective tax rate during~~SG&A expenses increased primarily due to increased associate costs resulting from new sales and sales related headcount, the ~~second~~acquisition of Strive in the third quarter of fiscal 2021, was primarily impacted by an increase in the valuation allowance against our deferred income tax assets, which was partially offset by the exercise of stock options during the quarter. The income tax benefit recognized in the second quarter of the prior year was primarily the result of stock options exercised during the second quarter of fiscal 2020.

~~Operating Income~~ and ~~Net Loss~~ ~~– As a result of improved gross margins~~increased salaries; increased commissions on higher sales; increased content development expense; and ~~decreased SG&A expenses, our income from operations for the quarter ended~~increased stock-based compensation expense. We had 265 client partners at February 28, ~~2021 was $0.8 million~~2022 compared with a loss of $(0.4) million in the prior year. For the second quarter of fiscal 2021 we recognized a net loss of $(46,000), or $(0.00) per share, compared with net income of $1.1 million, or $0.08 per diluted share, in the second quarter of the prior year, reflecting the factors noted above.

251 client partners at February 28, 2021.

1916

Operating Income, Net Income, and Adjusted EBITDA – As a result of increased sales and strong gross margin, our income from operations for the second quarter of fiscal 2022 improved 317 percent, or $2.7 million, to $3.5 million compared with $0.8 million in the corresponding quarter of fiscal 2021. Our second quarter fiscal 2022 net income increased to $1.9 million, or $0.13 per diluted share, compared with a net loss of $(46,000), or $(0.00) per share, in the second quarter of the prior year. Our Adjusted EBITDA for the quarter ended February 28, 2022 increased 57 percent, or $2.9 million, to $8.0 million compared with $5.1 million in the second quarter of the prior year. Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of Adjusted EBITDA to net income (loss) is provided in Note 7, Segment Information, to our financial statements above.

Cash Flows from Operating Activities and Liquidity – Our cash flows from operating activities remained strong and increased ~~26 percent~~ to ~~$21.9~~$23.2 million for the two quarters ended February 28, ~~2021,~~2022, compared with ~~$17.4~~$21.9 million in the first ~~half~~two quarters of fiscal ~~2020.~~2021. At February 28, ~~2021,~~2022, we had ~~$40.3~~$61.1 million of cash with no borrowings on our $15.0 million secured line of credit facility.

Further details regarding our results for the quarter and two quarters ended February 28, ~~2021~~2022 are provided throughout the following management’s discussion and analysis.

Quarter Ended February 28, ~~2021~~2022 Compared with the Quarter Ended February ~~29, 2020~~28, 2021

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);~~Austria; and other groups such as our government services 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					Quarter Ended			Quarter Ended
		February 28,	% of		February 29,	% of				February 28,	% of		February 28,	% of
		2021	Sales		2020	Sales		Change		2022	Sales		2021	Sales		Change
Sales	$	35,738	100.0	$	37,973	100.0	$	(2,235)	$	41,502	100.0	$	35,738	100.0	$	5,764
Cost of sales		6,654	18.6		9,271	24.4		(2,617)		7,554	18.2		6,654	18.6		900
Gross profit		29,084	81.4		28,702	75.6		382		33,948	81.8		29,084	81.4		4,864
SG&A expenses		22,953	64.2		23,968	63.1		(1,015)		25,216	60.8		22,953	64.2		2,263
Adjusted EBITDA	$	6,131	17.2	$	4,734	12.5	$	1,397	$	8,732	21.0	$	6,131	17.2	$	2,601

~~Sales.~~ During the second quarter of fiscal ~~2021~~2022, Direct Office segment revenue increased 16 percent, or $5.8 million, to $41.5 million compared with $35.7 million in the prior year. The increase was primarily the result of strong performance in our ~~All Access Pass~~offices in the United States and Canada which grew revenue 17 percent in the quarter, as well as improving performance in our international direct offices which grew revenue 11 percent over the prior year. During the second quarter of fiscal 2022 our AAP subscription and subscription related revenues remained strong and increased 1329 percent over the second quarter of fiscal ~~2020,~~2021, while annual AAP revenue retention remained above 90 percent. We ~~continue to be~~are encouraged by ~~the durability of AAP~~this momentum as invoiced 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 add-on services are recovering and exceeded the prior year in the U.S. ~~and Canada. However,~~/Canada direct offices were the highest ever recorded in a quarterly period during the second quarter. The sum of deferred subscription revenue on our ~~facilitator material sales continue~~balance sheet combined with unbilled multi-year contracts entered into, increased 24 percent to ~~be adversely impacted by the pandemic and declined $2.0~~$119.3 million, compared with the ~~prior year. Our foreign~~second quarter of fiscal 2021. We believe the continued increase in invoiced AAP other subscription sales, which are initially recognized on the balance sheet, provide a solid base for continued revenue growth in future periods.

The performance of our international direct offices ~~also continue~~during the second quarter was directly related to ~~be impacted by~~ the ~~COVID-19~~level of recovery from the pandemic ~~as governmental mandates limited gatherings,~~and corresponding business activity ~~and training opportunities.~~in each country. During the second quarter of fiscal ~~2021,~~2022, sales ~~through our foreign direct offices decreased $1.2 million or 15 percent, compared with the prior year. Sales decreased at~~increased in each of our international direct offices, except for China, which ~~increased sales by $1.3 million over the prior year. Our sales~~had a resurgence of COVID cases in ~~China during~~ the second and early third quarter of ~~the prior year were significantly reduced~~fiscal 2022. Sales growth was led by ~~in-country restrictions imposed prior to the global spread of COVID-19, and~~ our office in ~~China has emerged from pandemic earlier in~~the United Kingdom, which grew 65 percent compared with fiscal 2021 ~~than~~and was followed by more moderate growth at our ~~other~~offices in Australia, Japan, and Germany/Switzerland/Austria. The governmental pandemic-related mandates in the various international ~~offices. We~~locations in which we operate continue to impact business activity and training opportunities. While we remain confident ~~that~~in our

international direct offices’ ability to grow in future periods, growth in our China and Japan offices ~~will continue~~is expected to ~~recover during~~be negatively impacted by significant ongoing governmental pandemic-related mandates in the ~~remainder~~third and fourth quarters of fiscal ~~2021.~~2022. Foreign exchange rates had a ~~$0.4~~$0.3 million ~~favorable~~unfavorable impact on our Direct Office sales and an immaterial ~~impact~~effect on operating income during the second quarter of fiscal ~~2021. As a result~~2022.

We also anticipate that the conflict in Ukraine may have an adverse impact upon our international direct offices and licensees as the negative economic and tragic human toll of the ~~COVID-19 pandemic,~~war spreads to other regions and influences business activity. Our products and services in Russia and the Ukraine are delivered by independent licensees and we ~~expect that~~do not have any long-term investment in either of these countries. During the second quarter of fiscal 2022, we suspended our ~~foreign Direct Offices will accelerate their transition~~relationship with our licensee in Russia and our operations in Ukraine have also been limited due to the ~~All Access Pass~~conflict. It is unclear when or if our licensees will be able to resume normal operations in ~~future periods, especially~~Russia and Ukraine. Our royalty revenue from Ukraine and Russia is not generally material and totaled approximately $0.1 million 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.fiscal 2021.

Gross Profit. Gross profit increased primarily due to increased ~~recognition of~~sales as previously ~~deferred subscription services revenues in the mix of overall sales, which also increased~~described. Direct Office gross margin ~~percentage when~~remained strong, and increased slightly to 81.8 percent compared with 81.4 percent in the prior year.

SG&A Expense. ~~Decreased~~ Direct Office SG&A expense ~~was~~increased primarily due to ~~reduced travel~~increased associate costs resulting from new sales and ~~entertainment expense; decreased marketing expense; reduced associate expense;~~sales related headcount, the acquisition of Strive in the third quarter of fiscal 2021, and ~~cost savings initiatives which were implemented as a result of the pandemic.~~increased salaries; increased commissions on higher sales; and increased content and platform development expense.

International Licensees Segment

In 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~~in the periods indicated (in thousands):



		Quarter Ended			Quarter Ended					Quarter Ended			Quarter Ended
		February 28,	% of		February 29,	% of				February 28,	% of		February 28,	% of
		2021	Sales		2020	Sales		Change		2022	Sales		2021	Sales		Change
Sales	$	2,429	100.0	$	2,691	100.0	$	(262)	$	2,588	100.0	$	2,429	100.0	$	159
Cost of sales		329	13.5		454	16.9		(125)		284	11.0		329	13.5		(45)
Gross profit		2,100	86.5		2,237	83.1		(137)		2,304	89.0		2,100	86.5		204
SG&A expenses		595	24.5		853	31.7		(258)		860	33.2		595	24.5		265
Adjusted EBITDA	$	1,505	62.0	$	1,384	51.4	$	121	$	1,444	55.8	$	1,505	62.0	$	(61)

Sales. International licensee revenues are primarily comprised of royalty revenues. ~~Prior~~The increase in licensee revenues during the second quarter was primarily due to ~~the onset~~increased royalty revenues from certain licensees as economies in many of the ~~pandemic,~~countries where our licensees operate continue to recover. During the second quarter of fiscal 2022, our royalty revenues increased 14 percent compared with the prior year, which was partially offset by a decrease in our share of All Access Pass revenue and decreased licensee service revenues through our licensee operations had not established strong subscription businesses and were heavily reliant on live, onsite presentations. As live gatherings became prohibited by national and local ordinances to curb the spread of COVID-19, our international licensee revenues decreased significantly as the licensees’ clients sought to adapt to the rapidly changing circumstances in their countries.support team. Despite the ongoing difficulties associated with the pandemic and the varying impacts on 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~~have been working to increase sales of the All Access Pass. During the second quarter of fiscal 2021, our royalty revenues decreased 16 percent compared with the prior year, which was partially offset by a 97 percent increase in our share of revenues from sales of the All Access Pass. We receive additional revenue from the international licensees for AAP sales to cover a portion of the costs of operating the AAP portal. The continued recovery of our licensee segment is highly dependent upon the re-opening of foreign economies, the ability or willingness of people to travel and meet together in groups, and increasing AAP sales to clients.Pass subscription. We have translated AAP content into multiple languages, and we believe the electronic availability of our offerings through this platform may accelerate the recovery of licensee operations if they can effectively market, adapt, and sell this online technology to their clients. The continued recovery of our licensee segment is highly dependent upon the ability or willingness of people to meet together in groups and increasing AAP sales to clients. A resurgence of COVID-19 cases in Asia during March 2022, and governmental actions in response to the surge in cases, may delay the recovery of licensee operations in these areas during the third and fourth quarters of fiscal 2022. Foreign exchange rates had ~~an immaterial~~a $0.1 million negative impact on international licensee sales and operating results during the quarter ended February 28, ~~2021.~~2022.

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

SG&A Expense. International licensee SG&A expenses ~~decreased~~increased primarily due to ~~cost reduction initiatives implemented in response~~increased bad debt expense and increased associate expenses during the second quarter of fiscal 2022. Bad debt expense increased primarily due to recoveries of previously written off receivables which occurred during the ~~COVID-19 pandemic.~~second quarter of fiscal 2021 and benefitted that quarter’s results.

Education Division

Our Education Division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed Leader in Me ~~program designed for students primarily in K-6 elementary schools.~~program. The following comparative information is for our Education Division in the periods indicated (in thousands):



		Quarter Ended			Quarter Ended					Quarter Ended			Quarter Ended
		February 28,	% of		February 29,	% of				February 28,	% of		February 28,	% of
		2021	Sales		2020	Sales		Change		2022	Sales		2021	Sales		Change
Sales	$	8,478	100.0	$	10,893	100.0	$	(2,415)	$	11,066	100.0	$	8,478	100.0	$	2,588
Cost of sales		3,134	37.0		4,433	40.7		(1,299)		3,968	35.9		3,134	37.0		834
Gross profit		5,344	63.0		6,460	59.3		(1,116)		7,098	64.1		5,344	63.0		1,754
SG&A expenses		6,202	73.2		7,528	69.1		(1,326)		7,422	67.1		6,202	73.2		1,220
Adjusted EBITDA	$	(858)	(10.1)	$	(1,068)	(9.8)	$	210	$	(324)	(2.9)	$	(858)	(10.1)	$	534

Sales. Education Division sales for the quarter ended February 28, ~~2021 decreased~~2022 grew primarily due to ~~fewer~~increased consulting, coaching, and training days delivered during the ~~quarter; the cancelation~~quarter, increased recognition of ~~Symposium conference events;~~previously deferred revenue related to Leader in Me subscriptions, and ~~decreased~~increased training and classroom material sales when compared with the prior year. ~~Due to ongoing disruptions from the COVID-19 pandemic, many training programs were postponed, canceled, or delayed,~~Despite an educational environment 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 ablehas continued to be ~~delivered~~very challenging, we have seen strengthening trends in our Education business during the first ~~two~~and second quarters of fiscal ~~2021 are contractual~~2022 and are expected to be delivered and recognized during the second half of fiscal 2021. Due to restrictions on in-person gatherings, we canceled our Symposium conference events during the quarter which provided

revenue and additional marketing opportunities in the second quarter of fiscal 2020. Despite the significant headwinds faced by educational institutions during the second half of fiscal 2020 as schools closed, teaching moved online, and budgets were constrained, nearly 2,200 existing ~~Leader in Me~~ ~~schools renewed their~~ ~~Leader in Me~~ ~~subscriptions during fiscal 2020 (a number higher than in fiscal 2019) and 320 new~~ ~~Leader in Me~~ ~~schools were added. Some of these trends continued into the second quarter of fiscal 2021 as the number of~~ ~~Leader in Me~~ schools with a contract in the advanced stages of renewal was 46 percent higher at February 28, 2021 than at the same point in the previous year. Although the pandemic has created significant challenges for our Education Division, 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 third and fourth quarter ofthroughout fiscal 2021. As of February 28, ~~2021,~~2022, theLeader in Me program is used in over ~~4,300~~3,100 schools in ~~more than 50 countries.~~the United States and Canada.

Gross Profit. Education Division gross profit ~~decreased~~increased primarily due to ~~decreased~~increased sales as previously described. Education segment gross margin improved compared with the prior year primarily due to increased coaching and consulting sales with little variable cost increase as most coaches are salaried. The gross margin improvement was also favorably impacted by increased sales of high-margin materials compared with the ~~cancelation of Symposium conferences and their associated costs and improved coaching margins on days delivered.~~prior year.

SG&A Expenses. Education SG&A ~~expense decreased~~expenses increased primarily due to ~~reduced travel expenses, reduced variable~~increased associate costs ~~resulting~~ from ~~decreased~~additional commission expense on improved sales, additional sales support headcount, and ~~cost savings from initiatives implemented in response to~~increased salaries compared with the ~~pandemic.~~prior year.

Other Operating Expense Items

Depreciation – Depreciation expense ~~increased $0.1~~decreased $0.6 million compared with the second quarter of the prior year primarily due to ~~asset acquisitions~~the full depreciation of certain assets during fiscal 2021 and in the first half of fiscal ~~2020 and early 2021.~~2022, combined with reduced capital expenditures over the past two years. We currently expect depreciation expense will total approximately ~~$6.5~~$5.3 million in fiscal ~~2021.~~2022.

Amortization – Amortization expense ~~decreased slightly~~increased $0.2 million compared with ~~the second quarter of~~ the prior year due to the ~~full amortization~~acquisition of ~~certain~~Strive Talent, Inc. in the third quarter of fiscal 2021. We expect definite-lived intangible ~~assets. We expect~~asset amortization expense will total ~~$4.5~~$5.3 million during fiscal ~~2021.~~2022.

Income Taxes

Our ~~effective~~ income tax ~~expense rate~~provision for the quarter ended February 28, ~~2021~~2022 was $1.2 million, for an effective income tax rate of approximately ~~114~~40 percent, compared with an effective ~~benefit~~income tax expense rate of approximately ~~219~~114 percent in the second quarter of the prior year. ~~The~~Our income tax expense rate in the second quarter of fiscal 2022 was adversely impacted by disallowed executive compensation and the tax differential on income subject to both U.S. and foreign taxes. The income tax expense rate for the second quarter of fiscal 2021 was unusually high, primarily ~~impacted by~~due to an increase in the valuation allowance against certain deferred income tax assets, which was partially offset by the benefit resulting from the exercise of executive stock options. The ~~income tax benefit recorded in~~effective rate for the second quarter of the prior year was ~~primarily due to~~also amplified by the ~~exercise~~tax on all permanent book/tax differences divided by the small amount of ~~stock options in fiscal 2020. We computed our~~pre-tax income ~~tax provision~~ for the second quarter of fiscal 2021 using the discrete method, applying the actual year-to-date effective tax rate to our pre-tax loss. We believe that this method yields a more reliable income tax calculation for the period. We believe the estimated annual effective tax rate method is not reasonable due to its sensitivity to small changes in forecasted annual income or loss before income taxes, which would result in significant variations in the customary relationship between income tax expense and pre-tax income or loss for interim periods.quarter.

‎

Two Quarters Ended February 28, ~~2021~~2022 Compared with the Two Quarters Ended February ~~29, 2020~~28, 2021

Enterprise Division

Direct Offices Segment

The following comparative information is for our Direct Offices segment ~~for~~in the periods indicated (in thousands):



		Two Quarters			Two Quarters					Two Quarters			Two Quarters
		Ended			Ended					Ended			Ended
		February 28,	% of		February 29,	% of				February 28,	% of		February 28,	% of
		2021	Sales		2020	Sales		Change		2022	Sales		2021	Sales		Change
Sales	$	72,481	100.0	$	80,085	100.0	$	(7,604)	$	86,621	100.0	$	72,481	100.0	$	14,140
Cost of sales		13,958	19.3		19,972	24.9		(6,014)		16,471	19.0		13,958	19.3		2,513
Gross profit		58,523	80.7		60,113	75.1		(1,590)		70,150	81.0		58,523	80.7		11,627
SG&A expenses		45,696	63.0		49,669	62.0		(3,973)		51,464	59.4		45,696	63.0		5,768
Adjusted EBITDA	$	12,827	17.7	$	10,444	13.0	$	2,383	$	18,686	21.6	$	12,827	17.7	$	5,859

~~Sales.~~ During the first two quarters of fiscal ~~2021~~2022, our ~~All Access Pass~~Direct Office segment revenue increased 20 percent to $86.6 million compared with $72.5 million in the first half of the prior year. The increase is the result of strong performance in our offices in the United States and Canada which grew 19 percent in the first half of fiscal 2022, as well as strong performance in our international direct offices which also grew 19 percent over the prior year. During the first half of fiscal 2022 our AAP subscription and subscription related revenues remained strong and increased 1428 percent over the first half of fiscal 2020. We continue to be encouraged by the durability of AAP sales as clients transitioned to and effectively utilized the digital delivery options available through the All Access Pass. However, increased subscription revenues were offset by a $4.2 million decrease in facilitator material sales compared with the first half of fiscal 2020. As previously mentioned, our foreign direct offices also continue to be impacted by the COVID-19 pandemic as governmental mandates limit gatherings, business activity, and training opportunities. For the first two quarters of fiscal 2021, while annual AAP revenue retention remained above 90 percent. We are encouraged by this momentum as invoiced sales in the U.S./Canada direct offices were the highest ever recorded in a quarterly period during the second quarter of fiscal 2022. We believe the continued increase in invoiced AAP other subscription sales, which are initially deferred and recognized on the balance sheet, provide a solid base for continued revenue growth in future periods.

The performance of our ~~foreign~~international direct ~~office sales decreased $5.0 million or 26 percent, compared with~~offices during the ~~prior year. However, foreign direct office sales for~~first two quarters of fiscal 2022 was directly related to the level of recovery from the pandemic and corresponding business activity in each country. For the first half of fiscal ~~2021 improved 58 percent over~~2022, sales increased in each of our international direct offices, except for China, which had a resurgence of COVID cases in the ~~third and fourth quarters~~second quarter of fiscal ~~2020 and we believe these offices will continue to recover~~2022. Sales growth during the ~~remainder~~first half of fiscal ~~2021.~~2022 was led by our office in the United Kingdom, which grew 61 percent compared with fiscal 2021 and was followed by more moderate growth at our offices in Australia, Japan, and Germany/Switzerland/Austria. While we remain confident in our international direct offices’ ability to grow in future periods, growth in our China and Japan offices is expected to be adversely impacted by mandated restrictions aimed to curb the ongoing pandemic. Foreign exchange rates had a ~~$0.8~~$0.2 million ~~favorable~~unfavorable impact on our Direct Office sales and ~~a $0.1 million favorable impact~~an immaterial effect on operating income during the first two quarters of fiscal 2021. While we are optimistic about the future of our direct office channel and AAP revenues, our future financial performance is highly dependent upon economic recovery from the pandemic, including the opening of national and regional economies and other factors which may not be within our control.2022.

Gross Profit. ~~Gross~~Direct Office gross profit ~~decreased~~increased primarily due to increased sales ~~performance in the first two quarters of fiscal 2021 compared with the pre-pandemic first two quarters of fiscal 2020~~ as ~~described above.~~previously described. Direct Office gross margin remained strong, and increased ~~due~~ to ~~increased subscription sales~~81.0 percent compared with 80.7 percent in the ~~mix of services and products sold during the first half of fiscal 2021.~~prior year.

SG&A Expense. ~~Decreased~~ Direct Office SG&A expense ~~was~~for the first half of fiscal 2022 increased primarily due to ~~reduced travel~~increased associate costs resulting from new sales and ~~entertainment expense; decreased marketing expense;~~sales related headcount, the acquisition of Strive, and ~~cost savings initiatives which were successfully implemented to save cash~~increased salaries; increased commissions on higher sales; and ~~preserve liquidity.~~increased content and platform development expense.

‎

International Licensees Segment

The following comparative information is for our international licensee operations for the periods indicated (in thousands):



		Two Quarters			Two Quarters					Two Quarters			Two Quarters
		Ended			Ended					Ended			Ended
		February 28,	% of		February 29,	% of				February 28,	% of		February 28,	% of
		2021	Sales		2020	Sales		Change		2022	Sales		2021	Sales		Change
Sales	$	5,026	100.0	$	6,411	100.0	$	(1,385)	$	5,586	100.0	$	5,026	100.0	$	560
Cost of sales		641	12.8		1,054	16.4		(413)		581	10.4		641	12.8		(60)
Gross profit		4,385	87.2		5,357	83.6		(972)		5,005	89.6		4,385	87.2		620
SG&A expenses		1,590	31.6		1,938	30.2		(348)		1,890	33.8		1,590	31.6		300
Adjusted EBITDA	$	2,795	55.6	$	3,419	53.3	$	(624)	$	3,115	55.8	$	2,795	55.6	$	320

Sales. ~~International~~During thefirst half of fiscal 2022, our licensee revenues ~~are~~increased primarily ~~comprised of~~due to increased royalty revenues which decreased significantly with the onset of COVID-19 and the elimination of nearly all in-person training events. As previously mentioned, our licensee operations had not established strong subscription businesses and were heavily reliant on live, onsite presentations at the beginningfrom certain licensees as economies in many of the ~~pandemic. We are encouraged by the~~countries where our licensees operate continue to recover. The ongoing recovery led to improved licensee royalty revenues and continued increases in our share of ~~our licensee operations as they are adapting to conditions, improving digital delivery capabilities, and increasing sales of the All Access Passes. Over~~AAP sales. During the first two quarters of fiscal ~~2021,~~2022, our royalty revenues ~~decreased 23~~increased 14 percent and our share of AAP revenues increased by two percent compared with the prior ~~year, which was partially offset by~~year. We receive additional revenue from the international licensees for AAP sales to cover a ~~31 percent increase in our share of revenues from sales~~portion of the ~~All Access Pass. We have translated~~costs of operating the AAP ~~content into multiple languages to provide content to various international and multi-national entities, including~~portal. Partially offsetting these increases were decreased service sales through our ~~international licensees.~~licensee support team. Foreign exchange rates had ~~an immaterial~~a $0.1 million adverse impact on international licensee sales and operating results during the first two quarters ~~ended February 28, 2021.~~of fiscal 2022.

Gross Profit. Gross profit ~~decreased~~increased due to ~~lower~~increased sales as previously described. Gross margin improved primarily due to the mix of revenue recognized during the ~~quarter,~~first half of fiscal 2022, which included more royalty revenues and less ~~materials~~service sales 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 combined with the normalization of certain operating costs, such as travel, compared with operations in ~~response to lower revenues.~~the early months of the pandemic.

‎

Education Division

The following comparative information is for our Education Division in the periods indicated (in thousands):



		Two Quarters			Two Quarters					Two Quarters			Two Quarters
		Ended			Ended					Ended			Ended
		February 28,	% of		February 29,	% of				February 28,	% of		February 28,	% of
		2021	Sales		2020	Sales		Change		2022	Sales		2021	Sales		Change
Sales	$	15,975	100.0	$	21,974	100.0	$	(5,999)	$	22,763	100.0	$	15,975	100.0	$	6,788
Cost of sales		6,644	41.6		8,857	40.3		(2,213)		7,804	34.3		6,644	41.6		1,160
Gross profit		9,331	58.4		13,117	59.7		(3,786)		14,959	65.7		9,331	58.4		5,628
SG&A expenses		12,473	78.1		15,288	69.6		(2,815)		15,048	66.1		12,473	78.1		2,575
Adjusted EBITDA	$	(3,142)	(19.7)	$	(2,171)	(9.9)	$	(971)	$	(89)	(0.4)	$	(3,142)	(19.7)	$	3,053

Sales. Education Division sales for the two quarters ended February 28, ~~2021 decreased primarily due to fewer consulting, coaching,~~2022 grew on the strength of increased Leader in Me subscription revenues and training days delivered; decreased training material sales; and the cancelation of Symposium conference events. Due to ongoing disruptions from the COVID-19 pandemic, many training programs were postponed, canceled, or delayed, which reduced consulting and coaching days delivered and training material sales as educators continue to deal with ongoing education challenges and uncertainties caused by the pandemic. Previously contractedsubscription services, including coaching and consulting, ~~days are expected~~together with related increases in sales of materials used by schools in connection with their membership subscription. Despite an educational environment which has continued to be ~~delivered~~very challenging, we have seen strengthening trends in our Education business during the ~~third~~first two quarters of fiscal 2022 and fourth quarters and we are anticipating additional coaching and training days to be delivered after the conclusion of the 2020/2021 school year when teachers and administrators have professional development days available.throughout fiscal 2021.

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 ~~the fixed~~increased coaching and consulting sales with little variable cost ~~of salaried~~increase as most coaches ~~associated with less days delivered than the first two quarters of the prior year and increased costs from new product offerings. Partially offsetting these reductions to~~are salaried. The Education Division gross margin was also favorably impacted by increased sales of high-margin materials compared with the ~~cancelation of Symposium conferences and their associated costs and reduced travel costs.~~prior year.

SG&A Expenses. Education SG&A ~~expense decreased~~expenses increased primarily due to ~~reduced sales associate travel expenses, reduced variable~~increased associate costs ~~resulting~~ from ~~decreased~~additional commission expense on improved sales, additional sales support headcount, and ~~cost savings from initiatives implemented in response to~~increased salaries compared with the ~~pandemic.~~prior year.

Other Operating Expense Items

Depreciation – ~~Depreciation~~For the first two quarters of fiscal 2022, our depreciation expense ~~increased $0.2~~decreased $1.0 million compared with the prior year primarily due to ~~asset acquisitions~~the full depreciation of certain assets during fiscal 2021 and in ~~fiscal 2020 and~~ the first ~~two quarters~~half of fiscal ~~2021.~~2022, combined with reduced capital expenditures over the past two years.

Amortization – Amortization expense ~~decreased $0.1~~in the first half of fiscal 2022 increased $0.5 million compared with the prior year primarily due to the acquisition of Strive Talent, Inc. in the third quarter of fiscal 2021.

Interest Expense – Our interest expense for the first two quarters of fiscal 2022 decreased $0.2 million primarily due to reduced term loan debt and a reduced principal balance on our financing obligation (long-term lease on corporate campus) compared with the prior ~~year due to the full amortization of certain intangible assets.~~year.

Income Taxes

Our income tax provision for the two quarters ended February 28, 2022 was $2.5 million on pre-tax income of $8.2 million for an effective tax expense rate of 31 percent, compared with an effective expense rate of approximately 138 percent in the first half of fiscal 2021 ~~was~~as we recognized income tax expense of $0.5 million on a pre-tax loss of $0.4 ~~million for an~~million. Our effective tax ~~expense~~ rate in fiscal 2022 was adversely affected by non-deductible executive compensation and the tax differential on income subject to both U.S. and foreign taxes, which items were partially offset by the benefit of ~~138 percent, compared with an effective benefit rate~~share-based compensation deductions in excess of ~~approximately 133 percent in~~ the ~~first half of fiscal 2020.~~corresponding book expense. Our effective tax rate in fiscal 2021 was adversely impacted by an increase in the valuation allowance on ~~our~~certain deferred income tax assets, non-deductible executive compensation, and certain other non-deductible expenses. These factors were partially offset by the benefit from the exercise of stock options in the second quarter of fiscal 2021. The ~~income~~effective tax ~~benefit recorded~~rate for the first two quarters of fiscal 2021 was also amplified by the ~~prior year was primarily due to~~tax on all permanent book/tax differences divided by the ~~exercise~~small amount of ~~stock options in~~pre-tax loss for the ~~second quarter of fiscal 2020.~~period.

We paid ~~$0.8~~$1.3 million in cash for income taxes during the first half of fiscal ~~2021.~~2022. 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 light of current geopolitical events, including various international conflicts, and the ~~current environment of reduced sales and~~ongoing impacts from the COVID-19 pandemic with an ~~uncertain~~unclear path to national and global economic recovery, a major priority of ours over the past two years has been the continued maintenance and preservation of liquidity. We believe ~~our expense reduction~~these efforts during ~~late fiscal 2020 and~~ the ~~first half of fiscal 2021~~pandemic have been successful and have ~~significantly contributed~~provided the ability to ~~our cash on hand~~maintain operations and ~~overall liquidity at~~make strategic investments over the past several quarters. At February 28, ~~2021. Our~~2022, our cash and cash equivalents ~~at February 28, 2021 remained strong and~~ totaled ~~$40.3~~$61.1 million, with no borrowings on our $15.0 million revolving credit facility. Of our ~~$40.3~~$61.1 million in cash at February 28, ~~2021, $13.5~~2022, $16.9 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. Our primary uses of liquidity include payments for operating activities, debt payments, business acquisitions, capital expenditures (including curriculum development), ~~contingent payments from the acquisition of businesses,~~ working capital expansion, and purchases of our common stock.

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 toAt February 28, 2022, our 2019 Credit Agreement. The primary purpose of the First Modification Agreement is to provide temporary alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. These newdebt 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

~~Minimum Liquidity~~ ~~– We must maintain consolidated minimum liquidity~~receivable of not less than ~~$13.0 million from August 31, 2020 through February 28, 2021~~150% of the aggregate amount of the outstanding borrowings on the revolving line of credit, the undrawn amount of outstanding letters of credit, 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~~unreimbursed letter of this calculation is not the same as generally reported by the Company in its quarterly earnings. The amounts in the table above exclude amortization of capitalized development costs which is classified in cost of sales.

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

In addition to the new financial covenants described above, we are prohibited from making certain restricted payments, including dividend payments on our common stock and open-market purchases of our common stock until we have been in compliance with our previously existing financial covenants for two consecutive quarters.

credit disbursements.

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 credit agreement entered into on August 7, 2019 (the 2019 Credit ~~Agreement.~~Agreement). At February 28, ~~2021,~~2022, we believe that we were in compliance with the terms and covenants applicable to the 2019 Credit Agreement and ~~the First Modification Agreement.~~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 two quarters ended February 28, ~~2021.~~2022.

Cash Flows ~~From~~Provided By 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~~SG&A expenses, to fund changes in working capital, payments for direct costs necessary to conduct training programs, and payments to suppliers for materials used in training manuals ~~sold,~~sold. Our cash provided by operating activities for the first two quarters of fiscal 2022 remained strong and increased to ~~fund working capital needs. Despite the operating difficulties resulting from the COVID-19 pandemic~~$23.2 million compared with $21.9 million in the first half of fiscal ~~2021, our cash provided~~2021. The improvement was primarily driven by improved operating ~~activities increased 26 percent to $21.9 million compared with $17.4 million in~~results over the first two quarters of fiscal ~~2020. The increase was primarily due to increased income from operations~~2021. Despite pandemic and ~~favorable changes in working capital during the first half of fiscal 2021. Our~~other economic difficulties, our collection of accounts receivable remained strong during the first ~~half~~two quarters of fiscal ~~2021~~2022 and provided the necessary cash to support our operations, pay our obligations, and make critical investments.

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

~~Through February 28, 2021,~~For the first two quarters of fiscal 2022 our cash used for investing activities totaled ~~$2.2~~$2.0 million. The primary uses of cash for investing activities ~~included additional investments in the development of our offerings and~~were purchases of property and equipment in the normal course of ~~business.~~

~~We spent $1.3 million during the first two quarters of fiscal 2021 on~~business and additional investments in the development of ~~various content and~~our offerings. Our previous and ongoing investments in content and digital delivery capabilities have proved to be valuable during the ongoing pandemic as we were able to quickly transition 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 $3.7 million during fiscal 2021.

Our purchases of property and equipment during the first half of fiscal ~~2021~~2022 consisted primarily of computer hardware, software, and ~~hardware.~~leasehold improvements. We expect to continue our investing in our content and delivery modalities, including the AAP and Leader in Me subscription services, and currently anticipate that our purchases of property and equipment will total ~~approximately $2.6~~$5.5 million in fiscal ~~2021.~~2022.

We spent $0.8 million during the first two quarters of fiscal 2022 on the development of various content and offerings. We believe continued investment in our content and offerings is key to future growth and the development of our subscription offerings. We currently expect that our capital spending for curriculum development will increase during the third and fourth quarters and will total $5.0 million during fiscal 2022.

Cash Flows ~~From~~Used For Financing Activities

~~During the first two quarters of fiscal 2021,~~Through February 28, 2022, our net cash used for financing activities totaled ~~$6.8~~$7.4 million. Our primary uses of financing cash included ~~$3.8~~$3.9 million used for principal payments on our term ~~loans~~loan and financing ~~obligation, $3.0~~obligations, $3.5 million ~~for purchases of our common stock for treasury,~~to cover shares withheld to pay income taxes on stock-based compensation awards, and ~~$0.5~~$0.7 million of cash used to pay contingent consideration liabilities from previous business acquisitions. Our purchases of common stock during the first half of fiscal ~~2021~~2022 were solely for shares withheld from participants to pay statutory income taxes on stock-based compensation awards which were distributed ~~in the first two quarters of~~during fiscal ~~2021.~~2022. Partially offsetting these uses of cash were ~~$0.5~~$0.7 million of proceeds from ~~ESPP~~Employee Stock Purchase Plan participants to purchase shares of stock during the ~~quarter.~~first two quarters of fiscal 2022.

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 ~~2021~~2022 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.~~stock. 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 obligations on the 2019 Credit Agreement, service our existing financing obligation, pay for projected capital expenditures, and meet other ~~working capital requirements~~obligations during fiscal ~~2021~~2022 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 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 (and new variants), 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.

Material Uses of Cash Contractual Obligations

We do not operate any manufacturing, mining, or other capital-intensive facilities, and 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); expected contingent consideration payments from business acquisitions; short-term purchase obligations for inventory itemsHowever, we have normal ongoing cash expenditures and ~~other products and services used in the ordinary course of business; operating lease payments; and payments for outsourced warehousing and distribution service charges. For further information on our~~are subject to various contractual obligations ~~refer~~that are required to run our business. Our material cash requirements include the ~~table included~~following:

Associate and Consultant Compensation

Information Technology Expenditures

Content Development Costs

Income Taxes

Contractual Obligations

These material cash requirements are discussed in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our ~~annual report~~Annual Report on Form 10-K for the fiscal year ended August 31, ~~2020,~~2021. During the first two quarters of fiscal 2022 there have been no material changes to our expected material uses of cash and contractual obligations from those discussed in our Annual Report for the fiscal year ended August 31, 2021. However, current economic conditions indicate that our material uses of cash may increase due to inflationary pressures in the upcoming months. For further information on our material uses of cash and contractual obligations, refer to the information included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021, which was filed with the ~~SEC~~Securities and Exchange Commission on November ~~16, 2020.~~12, 2021.

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.~~GAAP. 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~~Annual Report on Form 10-K for the fiscal year ended August 31, ~~2020.~~2021. 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.~~GAAP. 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~~forward-looking statements regarding, among other things, our expectations about future sales levels and financial results, our financial performance during fiscal ~~2021,~~2022, expected and lingering 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~~AAP 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~~Annual Report on Form 10-K for the fiscal year ended August 31, ~~2020,~~2021, 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 February 28, ~~2021,~~2022, our long-term obligations primarily consisted of term loans payable, a long-term lease agreement (financing obligation) on our corporate headquarters facility, fixed-rate notes payable from the purchase of Strive Talent, Inc., and deferred payments and potential contingent consideration ~~payments~~ resulting from previous business acquisitions. ~~Our~~Since most of our long-term obligations have a fixed interest rate, our overall interest rate sensitivity is primarily influenced by any amounts borrowed on term loans and 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 ~~3.5~~2.4 percent at February 28, ~~2021. Accordingly,~~2022. Based on expected increases in interest rates over the remainder of fiscal 2022 and into fiscal 2023, we ~~may~~will incur additional expense ~~if interest rates increase~~on our variable-rate loans in future periods. For example, a one percent increase in the effective interest rate on our term loans outstanding at February 28, ~~2021~~2022 would result in ~~approximately~~ $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, ~~2020.~~2021. We did not utilize any foreign currency or interest rate derivative instruments during the ~~quarter or~~ two quarters ended February 28, ~~2021.~~2022.

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~~SEC’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.

‎

2926

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~~SEC on November ~~16, 2020.~~12, 2021.

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 and early fiscal 2021.~~over the past several quarters. 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, including related supply chain issues (including, for example, shipping delays, capacity constraints, increasing labor costs, and supply shortages), and actions taken in ~~response;~~response to such impacts; the effect on our clients, including educational institutions, and client demand for our services; our ability to conduct in-person programs; 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.

Our results of operations may be adversely impacted by the costs of persistent and rising inflation if we are unable to pass these costs on to our clients.

In recent quarters inflation has increased significantly in the United States and in many of the countries where we conduct business. Inflation increases the cost of many aspects of our business, including the cost of our products sold, benefit costs, travel expenses, and associate salaries since we must increase our compensation to retain key personnel. If we are unable to increase our prices to sufficiently offset the increased costs of doing business, our results of operations and profitability may be adversely impacted.

Unstable market and economic conditions may have serious adverse consequences on our business, financial condition, and operations.

The global credit and financial markets have from time to time experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. The financial markets and the global economy may also be adversely affected by the current or anticipated impact of military conflict, including the conflict between Russia and Ukraine, terrorism, or other geopolitical events. Sanctions imposed by the United States and other countries in response to such conflicts, including the one in Ukraine, may also adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others could exacerbate market and economic instability. There can be no assurance that further deterioration in markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions.

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 February 28, ~~2021:~~2022:

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)
December 1, 2020 to December 31, 2020
-
$
-
-
$
39,824
January 1, 2021 to January 31, 2021
-
$
-
-
$
39,824
February 1, 2021 to February 28, 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 Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs⁽¹⁾ (in thousands)
December 1, 2021 to December 31, 2021	-	$	-	-	$	39,824

January 1, 2022 to January 31, 2022	-	$	-	-	$	39,824

February 1, 2022 to February 28, 2022	-	$	-	-	$	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 February 28, ~~2021~~2022 under the terms of this Board approved plan. The table above excludes 58,388 shares withheld for statutory income taxes on stock-based compensation award shares issued during the quarter. The withheld shares were valued at the closing market price on the date the award shares were issued to participants.

The actual timing, number, and value of common shares repurchased under 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:



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	XBRL Instance 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	Inline XBRL Taxonomy Extension Schema Document.**
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.**
101.DEF	Inline XBRL Taxonomy Definition Linkbase Document.**
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.**
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.**
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).**

**	Filed herewith.

‎

3128

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: April ~~8, 2021~~6, 2022	By:	/s/ ~~Robert A. Whitman~~Paul S. Walker
		~~Robert A. Whitman~~Paul S. Walker
		President and Chief Executive Officer
		(Duly Authorized Officer)

Date: April ~~8, 2021~~6, 2022	By:	/s/ Stephen D. Young
		Stephen D. Young
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

3229


	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



			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 February 28, 2021	-	$	-

Options vested and exercisable at
February 28, 2021	-	$	-