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.
· | Direct Offices – This group includes our sales personnel that serve the United States and Canada; our international sales offices located in Japan, China, the United Kingdom, and Australia; our governmental sales channel; and our public program operations.
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· | Education Practice – This group includes our domestic and international Education practice operations, which are focused on sales to educational institutions.Corporate and Other – Our corporate and other information includes leasing operations, shipping and handling revenues, royalty revenues from Franklin Planner Corp. (Note 12), and certain corporate administrative functions. |
· | International Licensees – This division is primarily comprised of our international licensees' royalty revenues. The international licensees are included in the Enterprise Division.
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· | Corporate and Other – Our corporate and other information includes leasing operations, shipping and handling revenues, and certain corporate administrative expenses.
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We have determined that the Company'sCompany’s chief operating decision maker continues to beis the CEO, and the primary measurement tool used in business unit performance analysis is Adjusted EBITDA, which may not be calculated as similarly titled amounts disclosed by other companies. Adjusted EBITDA is a non-GAAP financial measure. For reporting purposes, our consolidated Adjusted EBITDA may be calculated as our net income or loss from operations excluding stock-based compensation,interest expense, income taxes, depreciation expense, amortization expense, stock-based compensation expense, and certain other charges such as restructuring charges, impaired asset charges, and adjustments for changes in the fair value of contingent liabilities arising from business acquisitions. Prior period segmentWe reference this non-GAAP financial measure in our decision making because it provides supplemental information was reclassifiedthat facilitates consistent internal comparisons to conformthe historical operating performance of prior periods and we believe it provides investors with greater transparency to our current reportingevaluate operational activities and operating structure.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 divisionsreportable segments for analysis purposes. Interest expense and interest income are primarily generated at the corporate level and are not allocated. Income taxes are likewise calculated and paid on a corporate level (except for entities that operate in foreign jurisdictions) and are not allocated for analysis purposes. We periodically make minor changes to our reporting structure in the normal course of operations. The segment information presented below reflects certain revisions to our reporting structure which occurred during the second quarter of fiscal 2019. Prior period segment information has been revised to conform with our current segment reporting.
We account for the following segment information on the same basis as the accompanying condensed consolidated financial statements (in thousands).
| | | | | | | | | |
| | Sales to | | | | | | | |
Quarter Ended | | External | | | | | | Adjusted | |
November 30, 2017 | | Customers | | | Gross Profit | | | EBITDA | |
| | | | | | | | | |
Direct offices | | $ | 34,197 | | | $ | 24,561 | | | $ | 3,078 | |
Education practice | | | 9,176 | | | | 5,430 | | | | (670 | ) |
International licensees | | | 3,320 | | | | 2,503 | | | | 1,412 | |
Total | | | 46,693 | | | | 32,494 | | | | 3,820 | |
Corporate and eliminations | | | 1,239 | | | | 374 | | | | (3,218 | ) |
Consolidated | | $ | 47,932 | | | $ | 32,868 | | | $ | 602 | |
| | | | | | | | | | | | |
Quarter Ended | | | | | | | | | | | | |
November 26, 2016 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Direct offices | | $ | 26,383 | | | $ | 16,937 | | | $ | (1,761 | ) |
Education practice | | | 8,743 | | | | 5,024 | | | | 233 | |
International licensees | | | 3,431 | | | | 2,652 | | | | 1,308 | |
Total | | | 38,557 | | | | 24,613 | | | | (220 | ) |
Corporate and eliminations | | | 1,230 | | | | 695 | | | | (2,599 | ) |
Consolidated | | $ | 39,787 | | | $ | 25,308 | | | $ | (2,819 | ) |
| | Sales to | | | | | | | |
Quarter Ended | | External | | | | | | Adjusted | |
February 29, 2020 | | Customers | | | Gross Profit | | | EBITDA | |
| | | | | | | | | |
Enterprise Division: | | | | | | | | | |
Direct offices | | $ | 37,973 | | | $ | 28,702 | | | $ | 4,734 | |
International licensees | | | 2,691 | | | | 2,237 | | | | 1,384 | |
| | | 40,664 | | | | 30,939 | | | | 6,118 | |
Education practice | | | 10,893 | | | | 6,460 | | | | (1,068 | ) |
Corporate and eliminations | | | 2,188 | | | | 1,267 | | | | (994 | ) |
Consolidated | | $ | 53,745 | | | $ | 38,666 | | | $ | 4,056 | |
| | | | | | | | | | | | |
Quarter Ended | | | | | | | | | | | | |
February 28, 2019 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | |
Direct offices | | $ | 36,414 | | | $ | 27,294 | | | $ | 2,543 | |
International licensees | | | 2,906 | | | | 2,221 | | | | 1,218 | |
| | | 39,320 | | | | 29,515 | | | | 3,761 | |
Education practice | | | 9,698 | | | | 5,429 | | | | (909 | ) |
Corporate and eliminations | | | 1,338 | | | | 422 | | | | (1,888 | ) |
Consolidated | | $ | 50,356 | | | $ | 35,366 | | | $ | 964 | |
| | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | |
Two Quarters Ended | | | | | | | | | | | | |
February 28, 2019 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | |
Direct offices | | $ | 74,885 | | | $ | 54,364 | | | $ | 6,183 | |
International licensees | | | 6,583 | | | | 5,084 | | | | 2,846 | |
| | | 81,468 | | | | 59,448 | | | | 9,029 | |
Education practice | | | 20,044 | | | | 11,822 | | | | (1,174 | ) |
Corporate and eliminations | | | 2,673 | | | | 878 | | | | (3,722 | ) |
Consolidated | | $ | 104,185 | | | $ | 72,148 | | | $ | 4,133 | |
As a result of the change in our segments, all of the goodwill previously included in the Strategic Markets segment was reassigned to the Direct Office segment. As of November 30, 2017, our goodwill balances were $16.8 million in the Direct Offices segment, $2.3 million in the Education Practice segment, and $5.1 million in the International Licensee segment. In conjunction with the change in reportable segments, we evaluated goodwill in the Direct Offices and Strategic Markets reportable segments for impairment, both before and after the segment change, and determined that goodwill was not impaired.
A reconciliation of our consolidated Adjusted EBITDA to consolidated net lossincome (loss) is provided below (in thousands).
| | | | | | | | Quarter Ended | | | Two Quarters Ended | |
| | | | | | | | February 29, | | | February 28, | | | February 29, | | | February 28, | |
| | Quarter Ended | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | November 30, | | | November 26, | | |
| | 2017 | | | 2016 | | |
Enterprise Adjusted EBITDA | | $ | 3,820 | | | $ | (220 | ) | |
Segment Adjusted EBITDA | | | $ | 5,050 | | | $ | 2,852 | | | $ | 11,692 | | | $ | 7,855 | |
Corporate expenses | | | (3,218 | ) | | | (2,599 | ) | | | (994 | ) | | | (1,888 | ) | | | (2,675 | ) | | | (3,722 | ) |
Consolidated Adjusted EBITDA | | | 602 | | | | (2,819 | ) | | 4,056 | | | 964 | | | 9,017 | | | 4,133 | |
Stock-based compensation expense | | | (956 | ) | | | (1,214 | ) | | (1,793 | ) | | (1,043 | ) | | (3,644 | ) | | (1,989 | ) |
Reduction (increase) in contingent | | | | | | | | | |
consideration liabilities | | | (176 | ) | | | 1,013 | | |
China office start-up costs | | | - | | | | (479 | ) | |
ERP system implementation costs | | | (426 | ) | | | (288 | ) | |
Decrease (increase) in the fair value of | | | | | | | | | | | | | |
contingent consideration liabilities | | | 182 | | | (52 | ) | | 91 | | | (76 | ) |
Knowledge Capital wind-down costs | | | - | | | - | | | (389 | ) | | - | |
Licensee transition costs | | | - | | | (428 | ) | | - | | | (488 | ) |
Depreciation | | | (901 | ) | | | (866 | ) | | (1,653 | ) | | (1,697 | ) | | (3,273 | ) | | (3,251 | ) |
Amortization | | | (1,395 | ) | | | (722 | ) | | | (1,170 | ) | | | (1,300 | ) | | | (2,340 | ) | | | (2,538 | ) |
Loss from operations | | | (3,252 | ) | | | (5,375 | ) | | (378 | ) | | (3,556 | ) | | (538 | ) | | (4,209 | ) |
Interest income | | | 61 | | | | 116 | | | 13 | | | 9 | | | 18 | | | 22 | |
Interest expense | | | (549 | ) | | | (620 | ) | | (557 | ) | | (623 | ) | | (1,162 | ) | | (1,255 | ) |
Discount accretion on related | | | | | | | | | | | | | |
party receivable | | | | - | | | | 243 | | | | - | | | | 258 | |
Loss before income taxes | | | (3,740 | ) | | | (5,879 | ) | | (922 | ) | | (3,927 | ) | | (1,682 | ) | | (5,184 | ) |
Income tax benefit | | | 1,348 | | | | 1,921 | | | | 2,019 | | | | 410 | | | | 2,235 | | | | 310 | |
Net loss | | $ | (2,392 | ) | | $ | (3,958 | ) | |
Net income (loss) | | | $ | 1,097 | | | $ | (3,517 | ) | | $ | 553 | | | $ | (4,874 | ) |
Revenue by Category
The following table presents our revenue disaggregated by geographic region (in thousands).
| | Quarter Ended | | | Two Quarters Ended | |
| | February 29, | | | February 28, | | | February 29, | | | February 28, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | | | | | | | | | | | |
Americas | | $ | 42,721 | | | $ | 39,839 | | | $ | 86,756 | | | $ | 80,757 | |
Asia Pacific | | | 7,089 | | | | 7,398 | | | | 17,228 | | | | 16,678 | |
Europe/Middle East/Africa | | | 3,935 | | | | 3,119 | | | | 8,373 | | | | 6,750 | |
| | $ | 53,745 | | | $ | 50,356 | | | $ | 112,357 | | | $ | 104,185 | |
The following table presents our revenue disaggregated by type of service (in thousands).
Quarter Ended | | Services and | | | | | | | | | Leases and | | | | |
February 29, 2020 | | Products | | | Subscriptions | | | Royalties | | | Other | | | Consolidated | |
| | | | | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | | | | |
Direct offices | | $ | 21,644 | | | $ | 15,172 | | | $ | 1,157 | | | $ | - | | | $ | 37,973 | |
International licensees | | | 410 | | | | - | | | | 2,281 | | | | - | | | | 2,691 | |
| | | 22,054 | | | | 15,172 | | | | 3,438 | | | | - | | | | 40,664 | |
Education practice | | | 2,950 | | | | 6,192 | | | | 1,751 | | | | - | | | | 10,893 | |
Corporate and eliminations | | | - | | | | - | | | | 935 | | | | 1,253 | | | | 2,188 | |
Consolidated | | $ | 25,004 | | | $ | 21,364 | | | $ | 6,124 | | | $ | 1,253 | | | $ | 53,745 | |
| | | | | | | | | | | | | | | | | | | | |
Quarter Ended | | | | | | | | | | | | | | | | | | | | |
February 28, 2019 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | | | | | | | | | |
Direct offices | | $ | 23,102 | | | $ | 12,416 | | | $ | 896 | | | $ | - | | | $ | 36,414 | |
International licensees | | | 517 | | | | - | | | | 2,389 | | | | - | | | | 2,906 | |
| | | 23,619 | | | | 12,416 | | | | 3,285 | | | | - | | | | 39,320 | |
Education practice | | | 2,583 | | | | 5,368 | | | | 1,747 | | | | - | | | | 9,698 | |
Corporate and eliminations | | | - | | | | - | | | | - | | | | 1,338 | | | | 1,338 | |
Consolidated | | $ | 26,202 | | | $ | 17,784 | | | $ | 5,032 | | | $ | 1,338 | | | $ | 50,356 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Two Quarters Ended | | | | | | | | | | | | | | | | | | | | |
February 28, 2019 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | | | | | | | | | |
Direct offices | | $ | 48,111 | | | $ | 25,091 | | | $ | 1,683 | | | $ | - | | | $ | 74,885 | |
International licensees | | | 1,389 | | | | - | | | | 5,194 | | | | - | | | | 6,583 | |
| | | 49,500 | | | | 25,091 | | | | 6,877 | | | | - | | | | 81,468 | |
Education practice | | | 6,501 | | | | 11,080 | | | | 2,463 | | | | - | | | | 20,044 | |
Corporate and eliminations | | | - | | | | - | | | | - | | | | 2,673 | | | | 2,673 | |
Consolidated | | $ | 56,001 | | | $ | 36,171 | | | $ | 9,340 | | | $ | 2,673 | | | $ | 104,185 | |
NOTE 712 – INVESTMENT IN FC ORGANIZATIONAL PRODUCTS
We ownowned a 19.5 percent interest in FC Organizational Products (FCOP), an entity that purchased substantially all of our consumer solutionsolutions business unit assets in fiscal 2008 for the purpose of selling planners and related organizational products under a comprehensive licensing agreement. DueOn November 4, 2019, FCOP sold substantially all of its assets to significant operating losses incurred afterFranklin Planner Corporation (FPC), a new unrelated entity, and FCOP was dissolved. FPC is expected to continue FCOP’s business of selling planners and other related consumer products based on the establishmentlicense agreement which granted FCOP the exclusive rights described below. In connection with this transaction, we exchanged approximately $3.2 million of receivables from FCOP to amend the term and royalty provisions of the existing license agreement. The $3.2 million included a $2.6 million note receivable, which represented FCOP’s third-party bank debt that we purchased directly from the bank on the transaction date. The amended license agreement grants the exclusive right to use certain of our trademarks and other intellectual property in connection with certain consumer products and provides us with minimum royalties of approximately $1.3 million per year. We are also entitled to receive additional variable royalties if certain FPC financial metrics exceed specified levels. FPC assumed the amended license agreement from FCOP upon the purchase of FCOP we reconsidered whether FCOP wasassets. We recorded the $3.2 million consideration for the amendment to the license agreement as a variable interest entity as defined under FASC 810, and determined that FCOP was a variable interest entity. We further determined that we are not the primary beneficiary of FCOP because we do not have the ability to direct the activities that most significantly impact FCOP's economic performance, which primarily consistcapitalized cost of the day-to-day salelicense and will reduce our royalty revenue by amortizing this amount over the remainder of planning productsthe initial term of the license agreement, which ends in approximately 30 years. During the quarter and related accessories,two quarters ended February 29, 2020, we recognized $0.9 million and we$1.3 million of net royalty revenues from the amended license agreement with FPC.
We do not have an ownership interest in FPC, do not have any obligation to absorb losses orprovide additional subordinated support to FPC, and do not have control over the right to receive benefits from FCOP that could potentially be significant.
We account for our investment in FCOP using the equity method of accounting. However, we have not recorded our share of FCOP's losses in the accompanying condensed consolidated statements of operations because we have impaired and written off investment balances in previous periods, as defined within the applicable accounting guidance, in excess of our share of FCOP's losses through November 30, 2017.
Theday-to-day operations of FCOP areFPC, which primarily financed byconsist of the sale of planning products and accessoriesaccessories. We receive payments for royalties and rented space from FPC. At February 29, 2020, we had $0.9 million receivable from FPC and at August 31, 2019, we had $1.0 million receivable from FCOP, each of which are recorded in the normal coursecurrent assets. Since most of business. The majority of FCOP'sFPC’s sales and cash flows are seasonal and occur between October and January. Accordingly,January, we generallyexpect to receive payment onthe majority of the required cash payments for royalties and outstanding receivables during our second and third quarters of each fiscal year. At November 30, 2017,During the quarter ended February 29, 2020, we hadreceived $1.9 million (net of $0.6cash from FPC as payment for royalties and reimbursable operating costs.
NOTE 13 – SUBSEQUENT EVENTS
Effects of COVID-19 Pandemic
With the rapid spread of COVID-19 around the world and the continuously evolving responses to the pandemic, we have witnessed the significant and growing negative impact of COVID-19 on the global economic and operating environment. Due to the rapidly changing business and education environment, unprecedented market volatility, and other circumstances resulting from the COVID-19 pandemic, we are currently unable to fully determine the extent of COVID-19’s impact on our business in future periods. However, we are monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations, and cash flows.
Revolving Line of Credit
Subsequent to February 29, 2020, we obtained $14.9 million discount) receivableof cash (the available proceeds) from FCOP, compared with $1.7 million (netour revolving line of $0.7 million discount) receivable at August 31, 2017.credit. These receivables are classified as components of current and long-term assetsproceeds will be included in our condensed consolidatedreported cash balance sheets based on expected payment dates. The long-term receivables have been discounted using a rate of 15 percent.for future periods until the amount is repaid.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management'sManagement’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'smanagement’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“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'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended August 31, 2017.2019.
RESULTS OF OPERATIONS
Overview
Franklin Covey Co. is a global company focused on individual and organizational performance improvement. We believe that our content and services create the connection between capabilities and results. Our business is currently structured around two divisions, the Enterprise Division and the Education Division. The firstEnterprise Division consists of our Direct Office and International Licensee segments and is focused on selling our offerings to corporations, governments, not-for-profits, and other related organizations. Franklin Covey offerings delivered through the Enterprise Division are designed to help organizations and individuals achieve their own great results. Our Education Division is centered around the principles found in The Leader in Me and is dedicated to helping educational institutions build cultures that will produce great results, including increased student performance, improved school culture, and increased parental and teacher involvement.
During 2016, we introduced the All Access Pass (AAP), which we believe is a ground-breaking subscription service that allows our clients unlimited access to our content through an electronic portal. We believe the All Access Pass is a revolutionary and innovative way to deliver our content to clients of various sizes, including large, multinational organizations in a flexible and cost-effective manner. Clients may utilize complete offerings such as The 7 Habits of Highly Effective People and The 5 Choices to Extraordinary Productivity, or use individual concepts from any of our well-known offerings to create a custom solution to fit their organizational or individual training needs. We have also translated All Access Pass materials into numerous additional languages, which allows the AAP to be used effectively by multinational entities and provides for greater international sales opportunities. The AAP is primarily sold through our Enterprise Division.
In our Education Division, we have launched our Leader in Me membership, which provides coaching, access to the Leader in Me online service, and authorizes use of Franklin Covey’s proprietary intellectual property. The Leader in Me online service provides access to student leadership guides, leadership lessons, illustrated leadership stories, and a variety of other resources to enable an educational institution to effectively implement and utilize the Leader in Me program. We believe that the tools and resources available through the Leader in Me membership will provide measurable results that are designed to develop student leadership, improve school culture, and increase academic proficiency.
Each of our subscription offerings allow clients to participate in training through a variety of delivery modalities, including on-line services and virtual training courses, which allow for presentation of our content to both clients and classrooms which are working remotely. We believe that our investments in multiple high-quality offerings and content combined with multiple delivery modalities provide a learning environment that can be effectively tailored to both corporate and individual settings.
Our financial performance for the second quarter of our fiscal year includes2020, which ended on February 29, 2020, continued the months of September, October,momentum and November. Ourgrowth trajectory that began in the first quarter of fiscal 20182020, despite the difficulties from the COVID-19 (or coronavirus) outbreak that significantly impacted our business at our Asian direct offices and at many of our licensee operations. For the quarter ended on November 30, 2017, andFebruary 29, 2020, our consolidated sales increased 7% to $53.7 million compared with $50.4 million in the firstsecond quarter of fiscal 2019. Our second quarter sales growth was broad based through both our Enterprise and Education Divisions and was primarily attributable to increased subscription service revenues. Increased sales for the second quarter led to increased gross profit and significantly improved operating results when compared with the prior yearyear.
For the quarter ended on November 26, 2016. On January 20, 2017,February 29, 2020, our Board of Directors approved a change to our fiscal quarter ending dates from a modified 52/53-week calendar, in which quarterly periods ended on different dates from year-to-year, to the last day of the calendar month in each quarter. The change was made to improve comparability between fiscal periods. Beginningreported subscription and subscription-related revenue grew 24% compared with the second quarter of fiscal 2017,2019. At February 29, 2020, we had $48.0 million of deferred subscription revenue on our fiscal quarters end on the last day of November, February, and May. We do not believe that the change in quarter ending dates hadbalance sheet, a material impact on the financial results for the quarter ended November 30, 2017.
At its core, Franklin Covey Co. is a content and solutions company. During our history, we have created and developed world-class content designed to help our clients solve challenges which require significant and lasting changes in human behavior. Several years ago, we began moving from simply selling training courses to providing fully-integrated solutions and practices which were focused on helping organizational clients successfully execute on their strategic priorities, develop their leaders, and build winning cultures. Two years ago, we determined that we could substantially expand the breadth and depth of our client impact, and the lifetime value of our clients, if we moved from selling content on a course-by-course basis, to a subscription-as-a-service (SaaS) basis, such as through the All Access Pass (AAP).
The All Access Pass provides our clients with a compelling value proposition under which they receive: (1) unlimited access to our content and solutions; (2) the ability to assemble, integrate and deliver this content through an almost limitless combination of delivery modalities, and soon in 16 languages worldwide; (3) the services of an implementation specialist to help curate and organize the content and solutions in the AAP to exactly meet their needs; (4) a cost per population trained which is less than21%, or equal to that offered by other providers for just a single course through a single delivery modality; and (5) an array of affordable add-on implementation services to help them accomplish their key "jobs-to-be-done."
Since its introduction in the first quarter of fiscal 2016, AAP and related services amounts invoiced have grown steadily on a year-over-year basis, from $7.1$8.4 million, in the first quarter of fiscal 2017 to $9.2 million in the first quarter of fiscal 2018. Including our Education membership subscription
and related services, our total SaaS amounts invoiced increased to $14.3 million in the first quarter of fiscal 2018,increase compared with $13.5 million in the prior year.deferred subscription revenue on our balance sheet at February 28, 2019. At November 30, 2017,February 29, 2020, we had $15.9$34.8 million of unbilled deferred revenue whichcompared with $25.0 million of unbilled deferred revenue at February 28, 2019. Unbilled deferred revenue represents business that is contracted but unbilled, and excluded from our balance sheet. We believe that multi-year contractual arrangements will provide value to our clients and a more predictable revenue stream for the Company in future periods.
While the rewards of a SaaS business model are appealing to our clients and to us, we also recognized that the transition to a SaaS business model would be disruptive, both to our financial reporting, since subscription revenues are required to be deferred and recognized over the lives of the subscriptions, and to our existing business model as clients transition from traditional delivery channels. As expected, the transition to the SaaS business model has been disruptive, especially to fiscal 2017 financial results, as we deferred a significant amount of revenue. But we believe that the transition to a SaaS business model is working and we are beginning to see the benefits of this business model in the first quarter of fiscal 2018. For the quarter ended November 30, 2017, our consolidated sales increased 20 percent to $47.9 million compared with $39.8 million in the first quarter of fiscal 2017. Sales growth and the corresponding improvement in our gross margin were primarily driven by the recognition of previously deferred high-margin subscription sales during the quarter. These improvements were partially offset by increased operating expenses as we continue to work through the transition to a subscription model and seek to reorganize and optimize our operations in order to improve profitability. We believe the first quarter of fiscal 2018 represents a key inflection point that we believe will begin a pattern of improved financial performance compared with prior periods. However, the ongoing transition to the SaaS business model may continue to present challenges to our quarterly financial results during certain periods of fiscal 2018 when compared with the prior year.
Our financial results for the quarter ended November 30, 2017February 29, 2020 were affectedinfluenced by a number of factors, which are described in further detail throughout this discussion and analysis. The following is a summary of key financial results for the second quarter ended November 30, 2017:of fiscal 2020:
· | Sales – Our net sales for the quarter ended November 30, 2017 totaled $47.9 million compared with $39.8 million in the first quarter of the prior year. As mentioned above, the improvement in sales was primarily driven by the recognition of previously deferred subscription revenues. In addition, our sales were also favorably impacted by the acquisition of businesses in fiscal 2017, a large intellectual property contract that was obtained in the first quarter of fiscal 2018, increased onsite presentation revenue, and increased Education Division revenues.Sales – Our consolidated sales for the second quarter of fiscal 2020 increased 7% to $53.7 million, compared with sales of $50.4 million in the second quarter of fiscal 2019. Sales growth during the quarter was broad-based across our Divisions. Enterprise Division sales during the second quarter of fiscal 2020 increased 3% to $40.7 million, compared with $39.3 million in fiscal 2019, despite significant decreases in the Company’s China and Japan direct offices, and certain international licensees related to business disruption from the COVID-19 outbreak. Education Division revenues increased 12% to $10.9 million, compared with $9.7 million in the second quarter of fiscal 2019. Our sales growth was primarily driven by increased sales of subscription services in both the Enterprise and Education Divisions. |
· | Cost of Sales/Gross Profit – Our cost of goods sold was $15.1 million in the first quarter of fiscal 2018, compared with $14.5 million in the prior year. Gross profit for the quarter ended November 30, 2017 was $32.9 million compared with $25.3 million in the first quarter of fiscal 2017, and increased primarily due to increased sales, as described above. Our consolidated gross margin was 68.6 percent compared with 63.6 percent in the prior year. The improvement was primarily due to the recognition of deferred subscription revenues, including the All Access Pass, which have a higher margin than many of our offerings.Cost of Sales/Gross Profit – Our cost of sales totaled $15.1 million for the quarter ended February 29, 2020, compared with $15.0 million in the prior year. Second quarter 2020 gross profit increased 9%, or $3.3 million, to $38.7 million compared with $35.4 million in fiscal 2019. Our gross margin for the quarter ended February 29, 2020 improved 171 basis points to 71.9% of sales compared with 70.2% in the second quarter of the prior year, reflecting increased subscription revenues in the mix of services sold when compared with the prior year. |
· | Operating Expenses – Our operating expenses in the first quarter increased by $5.4 million compared with the prior year, which was primarily due to a $4.7 million increase in selling, general, and administrative (SG&A) expenses, and a $0.7 million increase in amortization expense. Increased SG&A expenses were primarily due to increased associate costs resulting from new sales and sales related personnel, especially in our Education Division, increased commission expense on higher sales, and $1.2 million of increased expense associated with the change in fair value of contingent consideration liabilities from prior business acquisitions. Increased amortization expense was due to the amortization of intangible assets acquired in business combinations which occurred in the second half of fiscal 2017.Operating Expenses – Our operating expenses for the quarter ended February 29, 2020 increased $0.1 million compared with the prior year, which was due to increased selling, general, and administrative (SG&A) expenses. As a percent of sales, SG&A expenses decreased to 67.4 percent compared with 71.3 percent in the second quarter of fiscal 2019. Increased SG&A expense was primarily related to increased commissions and bonuses on higher sales, increased investments in new sales and sales-related personnel, and a $0.8 million increase in non-cash stock-based compensation. These increases in operating expenses were partially offset by $0.4 million of decreased licensee transition costs related to the fiscal 2019 acquisition of the Company’s licensee in Germany, Switzerland, and Austria (GSA); a $0.4 million decrease in our China office expenses resulting from suspended business operations due to the COVID-19 outbreak; and cost savings from various other areas of the Company’s operations. At February 29, 2020, we had 255 client partners compared with 230 client partners at February 28, 2019. |
Operating Loss and Net Income – Our loss from operations for the quarter ended February 29, 2020 improved to $(0.4) million compared with a loss of $(3.6) million in the second quarter of the prior year. Our effective income tax benefit rate for the quarter ended February 29, 2020 was approximately 219 percent compared with an effective benefit rate of approximately 10 percent in the second quarter of fiscal 2019. The higher tax benefit rate in fiscal 2020 was primarily due to the exercise of stock options, which produced a $1.8 million tax benefit in the quarter. During the second quarter of fiscal 2020, we recognized net income of $1.1 million, or $.08 per diluted share, compared with a net loss of $(3.5) million, or $(.25) per share, in the prior year.
· | Operating Loss and Net Loss – As a result of the above-noted factors, our loss from operations for the quarter ended November 30, 2017 was $3.3 million compared with $5.4 million in the first quarter of fiscal 2017. Net loss for the first quarter of fiscal 2018 was $2.4 million, or $(.17) per share, compared with a loss of $4.0 million, or $(.29) per share, in the quarter ended November 26, 2016.
|
While our first two quarters of fiscal 2020 produced significant growth over the prior year and set the foundation for growth in the second half of fiscal 2020, the COVID-19 pandemic and unprecedented responses to the virus have had a crippling effect on the economies of the world. The challenges and disruptions associated with the COVID-19 pandemic are expected to have a significantly adverse impact upon our financial results during the second half of fiscal 2020 and in future periods, depending on the duration and severity of preventative measures and the time needed to return to normal business operations. During such times, normal business and decision-making processes are often interrupted. Though we expect that the COVID-19 pandemic will have a significant adverse impact on our financial results during the second half of fiscal 2020, we believe our offerings will help our clients through these difficult periods by sharpening the focus and execution of their organizations on their most important priorities, building trust with stakeholders in a time of uncertainty, and transforming fear and uncertainty into high levels of engagement.
While the coming months will be full of uncertainty and challenges, we believe that we have entered this period operationally, strategically, and financially strong: 1) Operationally Strong – we had broad-based momentum in the second quarter and for fiscal 2020, especially in our subscription business; 2) Strategically Strong – our subscription model provides clients with the ability to access our best-in-class content and solutions across a wide variety of delivery modalities, including digital, live on-line, and in weekly micro-learning bursts. Our investments in technology are allowing us to work with clients who have the need to convert previously-booked onsite services to live-on-line or digital to accommodate employees working remotely; and 3) Financially Strong – we entered this period with significant cash balances and a strong balance sheet.
Further details regarding these factors and their impact on our operatingsecond quarter results and liquidity are provided throughout the following management'smanagement’s discussion and analysis. The following table sets forth consolidated sales data by category and by our reportable segments for the periods indicated (in thousands).
| | Quarter Ended | |
| | November 30, 2017 | | | November 26, 2016 | | | Percent Change | |
Sales by Category: | | | | | | | | | |
Training and consulting services | | $ | 46,549 | | | $ | 38,073 | | | | 22 | |
Products | | | 490 | | | | 828 | | | | (41 | ) |
Leasing | | | 893 | | | | 886 | | | | 1 | |
| | $ | 47,932 | | | $ | 39,787 | | | | 20 | |
| | | | | | | | | | | | |
Sales by Segment: | | | | | | | | | | | | |
Direct offices | | $ | 34,197 | | | $ | 26,383 | | | | 30 | |
Education practice | | | 9,176 | | | | 8,743 | | | | 5 | |
International licensees | | | 3,320 | | | | 3,431 | | | | (3 | ) |
Corporate and other | | | 1,239 | | | | 1,230 | | | | - | |
| | $ | 47,932 | | | $ | 39,787 | | | | 20 | |
As shown above, our sales primarily consist of training and consulting services. In fiscal 2017, we exited the publishing business in Japan, which will significantly reduce our sales of tangible products. Due to the immateriality of product and leasing revenues compared with training and consulting sales, we intend to phase out the reporting of those revenue classifications in future periods.
Quarter Ended November 30, 2017February 29, 2020 Compared with the Quarter Ended November 26, 2016February 28, 2019
SalesEnterprise Division
The following sales analysis for the quarter ended November 30, 2017 is based on activity through our operating segments as shown above.
Direct Offices – This reporting unit 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 Australia;our offices in Germany, Switzerland, and Austria (GSA) which were acquired in the second quarter of fiscal 2019; and other groups that were formerly included in the Strategic Markets segment, such as our government services office and global 50 group. During the first quarter of fiscal 2018, we dissolved the Strategic Markets segment and combined those sales groups with theoffice. The following comparative information is for our Direct Offices segment since most of these groups have a common focus--selling subscription services. The increase in direct office sales was primarily due tofor the recognition of previously deferred revenue from subscription sales as discussed above. In addition to the benefit from increased recognition of deferred sales, we had $1.2 million of increased revenue from businesses acquired in the second half of fiscal 2017, a $0.9 million intellectual property sale, and a $0.8 million increase in onsite presentation revenues.periods indicated (in thousands):
| | Quarter Ended | | | | | | Quarter Ended | | | | | | | |
| | February 29, | | | % of | | | February 28, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 37,973 | | | | 100.0 | | | $ | 36,414 | | | | 100.0 | | | $ | 1,559 | |
Cost of sales | | | 9,271 | | | | 24.4 | | | | 9,120 | | | | 25.0 | | | | 151 | |
Gross profit | | | 28,702 | | | | 75.6 | | | | 27,294 | | | | 75.0 | | | | 1,408 | |
SG&A expenses | | | 23,968 | | | | 63.1 | | | | 24,751 | | | | 68.0 | | | | (783 | ) |
Adjusted EBITDA | | $ | 4,734 | | | | 12.5 | | | $ | 2,543 | | | | 7.0 | | | $ | 2,191 | |
International direct officeSales. For the quarter ending February 29, 2020, our U.S./Canada sales grew 8 percent, or $1.6 million, and government service sales increased $0.7$0.9 million compared with the prior year. Sales increased at all of ourInternational direct offices except for Japan, which declined $0.5office revenues decreased $1.1 million compared with fiscal 2017. The decrease in Japan was due to our fiscal 2017 exit of the publishing business. Our new China offices continue to perform well and recognized a $0.3 million increase in sales compared with the prior year.year, primarily due to the impact on our China and Japan offices from the COVID-19 outbreak. Increased direct office sales were primarily attributable to the growth of the All Access Pass and recognition of previously deferred subscription revenues, as well as new contracts and renewals obtained during the quarter. Our new GSA direct office also contributed $0.4 million of increased sales during the quarter. Foreign exchange rates did not have a material effecthad an immaterial impact on our international direct officesDirect Office sales and operating results during the firstsecond quarter of fiscal 2018. We are currently planning to launch the AAP in 15 additional languages later in fiscal 2018. We believe that our international direct offices will be favorably impacted by the availability of the content and offerings of the AAP to our foreign clients.2020.
Education Practice – Gross Profit.Our Education practice division is comprised of our domestic and international Education practice operations (focused on sales Gross profit increased due to educational institutions) and includes our widely acclaimed The Leader In Me program designed for students primarily in K-6 elementary schools. We continue to see increased demand for The Leader in Me program in many school districtssales in the United Statessecond quarter as well as in international locations,previously described. Direct Office gross margin increased primarily due to the mix of services and products sold during the quarter, which contributed to a $0.4 million, or five percent, increase in Education practice revenues compared with the prior year. We continue to make substantial investments in new sales personnel for our Education practice and expect that our sales will continue to grow when compared with prior periods. Consistent with prior fiscal years, we expect the majority of sales growth from our Education practice to occur during our fourth fiscal quarter.featured increased subscription revenues.
SG&A Expense. Decreased Direct Office SG&A expense was primarily due to the office closure in China related to the COVID-19 outbreak, reduced travel and advertising costs, and savings in other areas of Direct Office operations. These reductions were partially offset by increased associate expenses resulting from increased commissions on higher sales and new sales and sales-related personnel.
International Licensees – Segment
In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees, which may translate and adaptlicensees. The following comparative information is for our curriculum to local preferences and customs, if necessary. Our international licensee operations for the periods indicated (in thousands):
| | Quarter Ended | | | | | | Quarter Ended | | | | | | | |
| | February 29, | | | % of | | | February 28, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 2,691 | | | | 100.0 | | | $ | 2,906 | | | | 100.0 | | | $ | (215 | ) |
Cost of sales | | | 454 | | | | 16.9 | | | | 685 | | | | 23.6 | | | | (231 | ) |
Gross profit | | | 2,237 | | | | 83.1 | | | | 2,221 | | | | 76.4 | | | | 16 | |
SG&A expenses | | | 853 | | | | 31.7 | | | | 1,003 | | | | 34.5 | | | | (150 | ) |
Adjusted EBITDA | | $ | 1,384 | | | | 51.4 | | | $ | 1,218 | | | | 41.9 | | | $ | 166 | |
Sales. International licensee revenues are primarily comprised of royalty revenues. During the quarter ended February 29, 2020, royalty revenues decreased primarily due to lower sales in certain countries, especially in Asia, which have been impacted by the COVID-19 outbreak. Royalty revenue decreased by $0.1 million compared with the second quarter of fiscal 2019. Sales of materials (primarily kits) to the licensees decreased by $0.1 million compared with the prior year dueyear. Many licensees have started to source the production of training kits in locations closer to their area of operations, which have reduced revenues at somesales of ourproducts to the licensees. Foreign exchange rates had an immaterial impact on international licensee operations. We anticipate thatsales and operating results during the launch of the All Access Pass in numerous new languages later in fiscal 2018 will increase sales at our international licensees.quarter ended February 29, 2020.
Corporate and other – Gross ProfitOur "corporate and other" sales are primarily comprised of leasing, and shipping and handling revenues. These sales increased. Gross profit improved primarily due to a slight increasechange in shipping and handlingthe mix of international licensee revenues during the quarter, which included more royalty revenue as a percent of total revenues. This mix change also improved international licensee gross margin when compared with the prior year.
Gross Profit
Gross profit consists of net sales less the cost of services provided or the cost of products sold. For the quarter ended November 30, 2017, our gross profit was $32.9 million compared with $25.3 million in the prior year. The increase in gross profit was primarily attributable to sales activity, including the recognition of previously deferred subscription revenue, as described above. Our gross margin for the quarter ended November 30, 2017 was 68.6 percent of sales compared with 63.6 percent in the first quarter of fiscal 2017. The improvement wasSG&A Expense. International licensee SG&A expenses decreased primarily due to cost reduction initiatives implemented in the recognitionthird and fourth quarters of previously deferred subscription service revenue, which has a higher gross margin than many of our other offerings.fiscal 2019.
Operating ExpensesEducation Division
Our operating expenses consistedEducation Division is comprised of theour 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. The following comparative information is for our Education Division in the periods indicated (in thousands):
| | | | | | | | | | | | |
| | Quarter Ended | | | | | | | |
| | November 30, 2017 | | | November 26, 2016 | | | $ Change | | | % Change | |
Selling, general, and administrative expense | | $ | 32,692 | | | $ | 28,894 | | | $ | 3,798 | | | | 13 | |
Increase (decrease) in contingent consideration liabilities | | | 176 | | | | (1,013 | ) | | | 1,189 | | | | n/a | |
Stock-based compensation | | | 956 | | | | 1,214 | | | | (258 | ) | | | (21 | ) |
Total selling, general, and administrative expense | | | 33,824 | | | | 29,095 | | | | 4,729 | | | | 16 | |
Depreciation | | | 901 | | | | 866 | | | | 35 | | | | 4 | |
Amortization | | | 1,395 | | | | 722 | | | | 673 | | | | 93 | |
| | $ | 36,120 | | | $ | 30,683 | | | $ | 5,437 | | | | 18 | |
| | Quarter Ended | | | | | | Quarter Ended | | | | | | | |
| | February 29, | | | % of | | | February 28, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 10,893 | | | | 100.0 | | | $ | 9,698 | | | | 100.0 | | | $ | 1,195 | |
Cost of sales | | | 4,433 | | | | 40.7 | | | | 4,269 | | | | 44.0 | | | | 164 | |
Gross profit | | | 6,460 | | | | 59.3 | | | | 5,429 | | | | 56.0 | | | | 1,031 | |
SG&A expenses | | | 7,528 | | | | 69.1 | | | | 6,338 | | | | 65.4 | | | | 1,190 | |
Adjusted EBITDA | | $ | (1,068 | ) | | | (9.8 | ) | | $ | (909 | ) | | | (9.4 | ) | | $ | (159 | ) |
Selling, General and AdministrativeSales. – The increase in our SG&A expenses during For the quarter ending November 30, 2017, wasended February 29, 2020, our Education Division sales increased 12 percent, or $1.2 million, primarily due to 1) a $4.0 million increase in spending related toincreased subscription revenues, the addition of new schools, and increased sales and sales-related personnel (especially in the Education Division), increased commissions on higher sales, and new personnel from business acquisitions completed in fiscal 2017; and 2) a $1.2 million change in the fair value of estimated contingent consideration from previous business acquisitions.training materials. Consistent with prior years, we continue to investsee increased demand for the Leader in newMe program throughout the world. As of February 29, 2020, the Leader in Me program is used in over 4,400 schools and in over 50 countries.
Gross Profit. Education Division gross profit increased primarily due to increased sales as previously described. Education segment gross margin improved primarily due to the mix of products and services sold, including increased subscription offering sales.
SG&A Expenses. Education SG&A expense increased primarily due to investments in additional sales and sales supportsales-related personnel, and we had 224 client partners at November 30, 2017increased commissions and related costs on higher sales.
Other Expenses
Amortization – Amortization expense decreased by $0.1 million compared with 216 client partners at November 26, 2016. During the firstsecond quarter of fiscal 2017, we determined that2019 due to the likelihoodfull amortization of another contingent consideration payment arising from the acquisition of NinetyFive 5, LLC was becoming less probable. Accordingly, we reversed a portion of the previously accrued contingent considerationcertain intangible assets. We expect amortization expense associated with the potential payment, which resulted in a significant creditwill total $4.6 million during the first quarter of fiscal 2017 that did not repeat in the first quarter of fiscal 2018. These increases were partially offset by decreased operating expenses in various other areas of our business.2020.
Depreciation – Depreciation expense increased slightly due todid not materially fluctuate compared with the acquisition of assets in fiscal 2017 and the first quarter of fiscal 2018. Based on property and equipment acquisitions during fiscal 2017 and expected capital additions during fiscal 2018, including the completion of a new enterprise resource planning (ERP) system and new All Access Pass portal, weprior year. We currently expect depreciation expense will total approximately $5.5$6.7 million in fiscal 2018.
Amortization – Our amortization expense increased compared with the prior year primarily due to business acquisitions completed during the last two quarters of fiscal 2017. We currently expect our amortization expense from definite-lived intangible assets will total $5.4 million in fiscal 2018.2020.
Income Taxes
Our effective income tax benefit rate for the quarter ended November 30, 2017February 29, 2020 was 36.0approximately 219 percent compared with an effective benefit rate of 32.7approximately 10 percent in the firstsecond quarter of the prior year. The lowerhigher tax benefit rate in fiscal 2020 was primarily due to the exercise of stock options, which produced a $1.8 million tax benefit in the quarter. The tax benefit rate in the prior yearsecond quarter of fiscal 2019 was due primarily to lowerdecreased significantly by Global Intangible Low-Taxed Income (GILTI), nondeductible expenses, and effective foreign tax rates appliedwhich were considerably higher than the U.S. federal statutory rate. These items had a much smaller impact on our effective rate for the second quarter of fiscal 2020.
Two Quarters Ended February 29, 2020 Compared with the Two Quarters Ended February 28, 2019
Enterprise Division
Direct Offices Segment
The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
| | Two Quarters | | | | | | Two Quarters | | | | | | | |
| | Ended | | | | | | Ended | | | | | | | |
| | February 29, | | | % of | | | February 28, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 80,085 | | | | 100.0 | | | $ | 74,885 | | | | 100.0 | | | $ | 5,200 | |
Cost of sales | | | 19,972 | | | | 24.9 | | | | 20,521 | | | | 27.4 | | | | (549 | ) |
Gross profit | | | 60,113 | | | | 75.1 | | | | 54,364 | | | | 72.6 | | | | 5,749 | |
SG&A expenses | | | 49,669 | | | | 62.0 | | | | 48,181 | | | | 64.3 | | | | 1,488 | |
Adjusted EBITDA | | $ | 10,444 | | | | 13.0 | | | $ | 6,183 | | | | 8.3 | | | $ | 4,261 | |
Sales. During the first two quarters of fiscal 2020, our U.S./Canada sales grew $4.0 million, government services sales increased $1.2 million, and international direct office revenue grew $0.3 million compared with the prior year. Increased direct office sales were primarily attributable to taxable losses in certain foreign jurisdictions. Computationthe growth of a reliable annual effective income tax rate is currently impracticable because of uncertainties regarding the amount of All Access Pass and otherrecognition of previously deferred subscription revenues, as well as new contracts and renewals of previously existing AAP contracts. Increased sales in the GSA, Australia, and Japan offices were partially offset by a $1.0 million decrease in sales from our China office, which was adversely impacted by the COVID-19 outbreak. Our GSA direct office recognized $1.1 million of increased sales during the first two quarters of fiscal 2020 when compared with the prior year. Foreign exchange rates had an immaterial impact on Direct Office sales and operating results during the first two quarters of fiscal 2020.
Gross Profit. Gross profit increased due to increased sales in the first two quarters of fiscal 2020 as previously described. Direct Office gross margin increased primarily due to the mix of services and products sold during fiscal 2020, including increased subscription sales.
SG&A Expense. Direct Office operating expenses increased primarily due to new sales and sales related personnel, increased commissions on higher sales, and GSA expenses that totaled $0.5 million during the first quarter of fiscal 2020. We acquired the GSA office in the second quarter of the prior year.
International Licensees Segment
The following comparative information is for our international licensee operations for the periods indicated (in thousands):
| | Two Quarters | | | | | | Two Quarters | | | | | | | |
| | Ended | | | | | | Ended | | | | | | | |
| | February 29, | | | % of | | | February 28, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 6,411 | | | | 100.0 | | | $ | 6,583 | | | | 100.0 | | | $ | (172 | ) |
Cost of sales | | | 1,054 | | | | 16.4 | | | | 1,499 | | | | 22.8 | | | | (445 | ) |
Gross profit | | | 5,357 | | | | 83.6 | | | | 5,084 | | | | 77.2 | | | | 273 | |
SG&A expenses | | | 1,938 | | | | 30.2 | | | | 2,238 | | | | 34.0 | | | | (300 | ) |
Adjusted EBITDA | | $ | 3,419 | | | | 53.3 | | | $ | 2,846 | | | | 43.2 | | | $ | 573 | |
Sales. For the two quarters ended February 29, 2020, increased royalty revenues were offset by decreased sales of materials (primarily kits) to the licensees and by reduced revenues from the sale of new licenses. Royalty revenue increased by $0.2 million compared with the first half of fiscal 2019 as sales increased at certain licensees during the year. Foreign exchange rates had an immaterial impact on international licensee sales and operating results during the first two quarters of fiscal 2020.
Gross Profit. Gross profit improved due to increased royalty revenues during the first two quarters of fiscal 2020, which also improved international licensee gross margin when compared with the prior year.
SG&A Expense. International licensee SG&A expenses decreased primarily due to cost reduction initiatives implemented in the third and fourth quarters of fiscal 2019. We continue to expect reduced SG&A expenses, compared with the prior year, relativeduring the remainder of fiscal 2020.
Education Division
The following comparative information is for our Education Division in the periods indicated (in thousands):
| | Two Quarters | | | | | | Two Quarters | | | | | | | |
| | Ended | | | | | | Ended | | | | | | | |
| | February 29, | | | % of | | | February 28, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 21,974 | | | | 100.0 | | | $ | 20,044 | | | | 100.0 | | | $ | 1,930 | |
Cost of sales | | | 8,857 | | | | 40.3 | | | | 8,222 | | | | 41.0 | | | | 635 | |
Gross profit | | | 13,117 | | | | 59.7 | | | | 11,822 | | | | 59.0 | | | | 1,295 | |
SG&A expenses | | | 15,288 | | | | 69.6 | | | | 12,996 | | | | 64.8 | | | | 2,292 | |
Adjusted EBITDA | | $ | (2,171 | ) | | | (9.9 | ) | | $ | (1,174 | ) | | | (5.9 | ) | | $ | (997 | ) |
Sales. For the two quarters ended February 29, 2020, our Education Division sales increased primarily due to our other revenues. Therefore, we computedincreased subscription revenues and the addition of new schools. Foreign exchange rates reduced reported Education Division revenues and results of operations by $0.2 million for the two quarters ended February 29, 2020.
Gross Profit. Education Division gross profit in the first half of fiscal 2020 increased primarily due to increased sales as previously described. Education segment gross margin improved primarily due to increased subscription revenues in the mix of services sold during fiscal 2020.
SG&A Expenses. Education SG&A expense increased primarily due to investments in additional sales and sales-related personnel, and increased commissions and related costs on higher sales.
Income Taxes
Our effective income tax benefit rate for the two quarters ended February 29, 2020 was approximately 133 percent, compared with a benefit rate of approximately 6 percent in the first two quarters of fiscal 2019. The increased benefit rate in the current year was primarily due to the exercise of stock options in the second quarter, ended November 30, 2017which produced a tax benefit of $1.8 million in the period. The tax benefit rate for the first two quarters of fiscal 2019 was decreased significantly by applying actual year-to-date adjustmentsGILTI, nondeductible expenses, and effective foreign tax rates to our pre-tax loss.which were considerably higher than the U.S. federal statutory rate. These items had a much smaller impact on the effective benefit rate for the first two quarters of fiscal 2020.
Although we paid $0.6$1.4 million in cash for income taxes during the quarter ended November 30, 2017,first two quarters of fiscal 2020, we anticipate that our total cash paid for income taxes over the coming three to five years will be less than our total income tax provision as we continue to emphasize AAP and other subscription sales. The reduced taxable income from the deferral of subscription revenues will
extend the time over which we utilize ournet operating loss carryforwards, foreign tax credit carryforwards, and other deferred income tax assets, resulting in lower total cash payments for income taxes than our income tax provision amounts over the coming three to five years.
On December 22, 2017, President Trump signed the Tax Cut and Jobs Act into law. We expect a tax benefit between $1.2 million and $1.5 million, primarily due to re-measurement of deferred tax assets and liabilities. The statutory U.S. federal income tax rate for our current fiscal year ending August 31, 2018 is expected to be 26 percent. The statutory rate applicable in future years is expected to be 21 percent.assets.
LIQUIDITY AND CAPITAL RESOURCES
Introduction
In the current environment, a major priority is the maintenance and preservation of liquidity. Our cash balanceand cash equivalents at November 30, 2017 was $8.1February 29, 2020 totaled $24.8 million, with $21.0nothing drawn on our $14.9 million available on ourrevolving line of credit facility. Subsequent to February 29, 2020, we drew down all of the available funds on our revolving credit facility primarily to maximize our flexibility during this period of uncertainty. Of our $8.1$24.8 million in cash at November 30, 2017, substantially all of itFebruary 29, 2020, $11.6 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 net working capital (current assets less current liabilities) was $9.4 million at November 30, 2017 compared with $11.2 million at August 31, 2017. Our primary sources of liquidity are cash flows from the sale of services in the normal course of business, available proceeds from our revolving line of credit facility, and term loans. Our primary uses of liquidity include payments for operating activities, capital expenditures (including curriculum development), business acquisitions,debt payments, contingent liability payments from the acquisition of businesses, working capital expansion, and purchases of our common stock, working capital expansion,stock.
Pursuant to the credit agreement we obtained in August 2019 (the 2019 Credit Agreement), we had the ability to borrow up to $25.0 million in term loans. At August 31, 2019, we had borrowed $20.0 million of the available term loan amount. During November 2019, we borrowed the remaining $5.0 million term loan available on the 2019 Credit Agreement. The additional $5.0 million term loan has the same terms and debtconditions as the previous term loan and does not change our quarterly principal payments. The additional term loan extended the maturity of our term loan obligation by one year.
We may use the proceeds from our line of credit facility2019 Credit Agreement for general corporate purposes as well as for other transactions, unless specifically prohibited by the terms of the line of credit agreement. Our restated credit agreement2019 Credit Agreement contains customary representations and guarantees, as well as provisions for repayment and liens. In addition to customary non-financial terms and conditions,The 2019 Credit Agreement also includes the restated credit agreement requires compliance with specified covenants, includingfollowing financial covenants: (i) a funded debtFunded Indebtedness to Adjusted EBITDAR ratioRatio of less than 3.03.00 to 1.0;1.00; (ii) a fixed charge coverageFixed Charge Coverage ratio greaternot less than 1.15 to 1.0;1.00; (iii) an annual limit on capital expenditures (excluding capitalized curriculum development)development costs) of $8.0 million; and (iv) consolidated accounts receivable of not less than 150% of the aggregate amount of the outstanding borrowings on the revolving line of credit, may not exceed 150 percentthe undrawn amount of consolidated accounts receivable.outstanding letters of credit, and the amount of unreimbursed letter of credit disbursements. We believe that we were in compliance with the financial covenants and other terms applicable to the restated credit agreement2019 Credit Agreement at November 30, 2017.February 29, 2020.
In addition to our term-loan obligation and borrowings on our revolving line of credit, facility and term-loan obligations, we have a long-term leaserental 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 quartertwo quarters ended November 30, 2017.February 29, 2020.
Cash Flows From Operating Activities
Our primary source of cash from operating activities was the sale of services to our customers in the normal course of business. Our primary uses of cash for operating activities were payments for selling, general, and administrative expenses, payments for direct costs necessary to conduct training programs, payments to suppliers for materials used in training manuals sold, and to fund working capital needs. Our cash provided by operating activities duringfor the quartertwo quarters ended NovemberFebruary 29, 2020 increased 30 2017 totaled $2.3percent to $17.4 million compared with $2.9$13.4 million of cash used in the first quarterhalf of the prior year.fiscal 2019. The improvement in cash flows from operating activitiesincrease was primarily attributabledue to increased collectionsimproved operating results and favorable changes in working capital during the first two quarters of fiscal 2020. Our collection of accounts receivable remained strong during the first half of fiscal 2020 and improved operating results when compared with the prior year. Whileprovided a significant amount of cash to support operations, pay our obligations, and make critical investments. Although we are required to defer AAP and other subscription revenues over the lives of the underlying contracts, we invoice the entire contract amount and collect the associated receivable at the inception of the agreement. Our cash flowsHowever, we anticipate collections of accounts receivable to slow during the first quartersecond half of each fiscal year are also routinely impacted by payments of seasonally high accrued liability (primarily2020 due to year-end bonuses) and accounts payable balances.
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business disruptions stemming from the COVID-19 pandemic.
Cash Flows From Investing Activities and Capital Expenditures
Our cash used for investing activities during the first quartertwo quarters of fiscal 20182020 totaled $4.2$7.3 million. The primary uses of cash for investing activities included the purchase of a note receivable from a bank used as consideration for an amended license agreement with FCOP (Note 12), purchases of property and equipment in the normal course of business, a contingent consideration payment associated with the acquisition of Jhana Education, which was completedand additional investments in the fourth quarter of fiscal 2017, and spending on the development of our offerings.
In November 2019, we purchased $2.6 million of notes payable from a bank that were the obligations of FCOP. We exchanged the receivables from FCOP to modify the term and royalty provisions of a long-term licensing agreement that is expected to increase our cash flows over the duration of the license agreement. The licensing arrangement was assumed by Franklin Planner Corp., a new unrelated entity that purchased substantially all of the assets of FCOP in November 2019.
Our purchases of property and equipment, which totaled $2.4$2.5 million in the first two quarters of fiscal 2020, consisted primarily of computer software costs related to significant upgrades in our AAP portalhardware, leasehold improvements on leased office space, and the replacement of our existing ERP software. Our new ERP system was successfully launched in early December 2017. We currently anticipate that our purchases of property and equipment will total approximately $5.5$5.3 million in fiscal 2018; however, we are still in the process of making significant upgrades to our AAP portal, which may increase capital asset spending over our current expectations.
During the quarter ended November 30, 2017, we paid $1.1 million to the former owners of Jhana Education as contingent consideration related to this acquisition. Due to the timing of the payment, we classified the $1.1 million as a component of investing activities in our condensed consolidated statement of cash flows for the first quarter of fiscal 2018. Future contingent consideration payments from this acquisition will be classified as a component of financing activities in our consolidated statements of cash flows.2020.
We spent $0.7$2.2 million during the first quartertwo quarters of fiscal 20182020 on the development of various offerings, including the continued developmentcontent and expansion of our AAP offerings. We believe continued investment in our offerings is critical to our future success and anticipate that our capital spending for curriculum development will total $6.5$5.0 million during fiscal 2018.2020.
Cash Flows From Financing Activities
ForDuring the quarter ended November 30, 2017,first half of fiscal 2020, our net cash provided byused for financing activities totaled $1.2$12.9 million. Our primary sources of cash from financing activities were proceeds from our revolving line of credit facility and proceeds from participants in our employee stock purchase program. Our primary uses of cash for financing cashactivities during the first quartertwo quarters of fiscal 20182020 were $13.8 million for purchases of our common stock for treasury, $3.6 million for principal payments on our term loans and the financing obligation, on our corporate campus, and $2.0$0.9 million of cash used to pay contingent liabilities from previous business acquisitions. These uses of cash were partially offset by our election to obtain the remaining $5.0 million of term loan borrowing capacity associated with the 2019 Credit Agreement, and by $0.5 million of proceeds from participants in the employee stock purchase plan.
In December 2019, we purchased 284,608 shares of our common stock from Knowledge Capital for $10.1 million (Note 6) prior to the distribution of Knowledge Capital assets to its investors. This purchase of shares from Knowledge Capital was completed under a separate Board of Directors authorization and will not be included in the November 15, 2019 authorized purchase plan described below. We also purchased 103,029 shares of our common stock which consisted entirely of shareswere withheld for statutory income taxes on stock-based compensation awards, that vestedprimarily stock options, which were exercised during the first quarter ended February 29, 2020. These withheld shares were valued at the market price on the date that the shares were distributed to participants. The total fair value of fiscal 2018.the withheld shares was $3.6 million.
On January 23, 2015,November 15, 2019, our Board of Directors approved a new plan to repurchase up to $10.0$40.0 million of the Company'sCompany’s outstanding common stock. AllThe previously existing common stock repurchase plans wereplan was canceled and the new common share repurchase plan does not have an expiration date. On March 27, 2015,Our uses of financing cash during the remainder of fiscal 2020 are expected to include required payments on our Board of Directors increased the aggregate value of shares of Company common stock thatterm loans and financing obligation, contingent consideration payments from previous business acquisitions, and may be purchased under the January 2015 plan to $40.0 million so long as we have either $10.0 million in cash and cash equivalents or have access to debt financing of at least $10.0 million. Under the terms of this expanded common stock repurchase plan, we have purchased 1,539,828 sharesinclude additional purchases of our common stock for $26.8 million through November 30, 2017. Future purchasestreasury. However, the timing and amount of common stock under the termspurchases is dependent on a number of this Board approved plan will increase the amountfactors, including available resources, and we are not obligated to make purchases of cash used for financing activities.
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our common stock during any future period.
Sources of Liquidity
We expect to meet our projected capital expenditures, repay amounts borrowed on our 2019 Credit Agreement, service our existing financing obligation, and notes payable, and meet other working capital requirements during the remainder of fiscal 2018 and into fiscal 2019 through2020 from current cash balances and future cash flows from operating activities, and from borrowings on our existing secured credit agreement.activities. Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available line ofadditional credit and other financing alternatives, if necessary, for these expenditures. Our existing credit agreement2019 Credit Agreement expires on March 31, 2020in August 2024 and we expect to renew this credit agreement regularly in future periodsand amend the 2019 Credit Agreement on a regular basis to maintain the long-term availabilityborrowing capacity of this credit facility. Subsequent to February 29, 2020, we withdrew the remaining $14.9 million of available borrowing capacity on our 2019 Credit Agreement and will include the proceeds in our cash balances in future reporting periods until repaid. Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources. If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.
Considering the foregoing, we anticipateWe believe that our existing capital resources shouldcash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be adequate to enablesufficient for us to maintain our operations for at least the upcoming 12 months.on both a short- and long-term basis. However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, the length and severity of business disruptions associated with the COVID-19 pandemic, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new curriculums andofferings or technology by our competitors. We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements. However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.
Contractual Obligations
We have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. Our requiredRequired contractual payments primarily consist of 1) leaserental payments resulting from the sale of our corporate campus (financing obligation); 2) principal and interest payments onrepayment of term loans payable; 3) potentialloan obligations; repayment of our revolving line of credit; expected contingent consideration payments resulting from previous business acquisitions; 4) short-term purchase obligations for inventory items and other products and services used in the ordinary course of business; 5) minimum operating lease payments; and minimum payments primarily for domestic regional and foreign office space; and 6) payments to HP Enterprise Services for outsourcing services related tooutsourced warehousing and distribution services.service charges. For further information on our contractual obligations, please refer to the table included in our annual report on Form 10-K for the fiscal year ended August 31, 2017.2019.
ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This new standard was issued in conjunction with the International Accounting Standards Board (IASB) and is designed to create a single, principles-based process by which all businesses calculate revenue. The core principle of this standard is that an entity should recognize revenue for the transfer of goods or services equalRefer to the amount that it expects to be entitled to receive for those goods or services. The standard also requires additional disclosure about the nature, amount, timing and uncertaintydiscussion of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The new standard replaces numerous individual, industry-specific revenue rulesaccounting pronouncements as found in generally accepted accounting principles in the United States. We are requiredNote 1 to adopt this standard on September 1, 2018, and apply the new guidance during interim periods within fiscal 2019. The new standard may be adopted using the "full retrospective"
or "modified retrospective" approach. We are continuing to assess the impact of adopting ASU 2014-09 on our financial position, results of operations, and related disclosures, and we have not yet determined the method of adoption nor the full impact that the standard will have on our reported revenue or results of operations. We currently believe that the adoption of ASU No. 2014-09 will not significantly change the recognition of revenues associated with the delivery of onsite presentations and facilitator material sales. However, the recognition of revenues associated with intellectual property licenses, such as our All Access Pass, and other revenue streams may be more significantly impacted by the new standard. The Company will continue to assess the new standard along with industry trends and additional interpretive guidance, and it may adjust its implementation plan accordingly. We do not expect the adoption of ASU 2014-09 to have any impact on our operating cash flows.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing. The guidance in ASU 2016-10 clarifies aspects of Topic 606 related to identifying performance obligations and the licensing implementation guidance, while retaining the related core principles for those areas. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements for Topic 606 (ASU 2014-09) discussed above. As of November 30, 2017, we have not yet determined the full impact that ASU No. 2016-10 will have on our reported revenue or results of operations.
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases. The new lease accounting standard is the result of a collaborative effort with the IASB (similar to the new revenue standard described above), although some differences remain between the two standards. This new standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. For public companies, the new lease standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for all entities. For leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements lessees and lessors must apply a modified retrospective transition approach. While we expect the adoption ofas presented within this new standard will increase reported assets and liabilities, as of November 30, 2017, we have not yet determined the full impact that the adoption of ASU 2016-02 will have on our financial statements.report.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting policespolicies used to prepare our consolidated financial statements, including our revenue recognition policy, are outlined primarily in Note 1 to the consolidated financial statements presented in Part II, Item 8 of our annual report on Form 10-K for the fiscal year ended August 31, 2017.2019. Please refer to these disclosures found in our Form 10-K for further information regarding our uses of estimates and critical accounting policies. There have been no significant changes to our previously disclosed estimates or critical accounting policies.
Estimates
Some of the accounting guidance we use requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. We regularly evaluate our estimates and assumptions and base those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America. Actual results may differ from these estimates under different assumptions or conditions, including changes in economic conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain oral and written statements made by the Company in this report are "forward-looking statements"“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,"“believe,” “anticipate,” “expect,” “estimate,” “project,” or words or phrases of similar meaning. In our reports and filings we may make forward-looking statements regarding, among other things, our expectations about future sales levels and financial results, expected effects from the COVID-19 pandemic, timing of the recovery from the COVID-19 pandemic, future training and consulting sales activity, expected sales and benefits from the All Access Pass, anticipated renewals of the All Access Pass, the expected transition period for revenue recognition and the change in the business plan associated with the All Access Pass, the timing of the expected release of the upgraded AAP portal with additional languages, the expected growth of our Education practice,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, the impact of the new tax reform changes recently signed into law, our ability to maintain adequate capital for our operations for at least the upcoming 12 months, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuations, the seasonality of future sales, the seasonal fluctuations in cash used for and provided by operating activities, future compliance with the terms and conditions of our line of credit, the ability to borrow on our line of credit, expected collection of amountsaccounts receivable, from FC Organizational Products LLC and others, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets. These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of our annual report on Form 10-K for the fiscal year ended August 31, 2017,2019, entitled "Risk“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'smanagement’s expectations as of the date made, and the Company doeswe 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'sManagement’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 November 30, 2017, we had $9.1 million drawn onFebruary 29, 2020, our revolving line of credit. Our other long-term obligations at November 30, 2017 primarily consisted of term loans payable, a long-term lease agreement (financing obligation) associated with the sale ofon our corporate headquarters facility, term loans payable, and potential contingent consideration payments resulting from previous business acquisitions completed in fiscal 2017.acquisitions. Our overall interest rate sensitivity is primarily influenced by any amounts borrowed on term loans or 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 3.23.5 percent at November 30, 2017, andFebruary 29, 2020. Accordingly, we may incur additional expense if interest rates increase in future periods. For example, a one-percent1% increase in the effective interest rate on our term loans outstanding at February 29, 2020 and the amount outstanding onamounts borrowed against our revolving line of credit facility at November 30, 2017in March 2020 would result in approximately $0.2$0.3 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.percent, and our contingent consideration liabilities are not subject to interest rates.
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, 2017.2019. We did not utilize any foreign currency or interest rate derivative instruments during the quartertwo quarters ended November 30, 2017.February 29, 2020.
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'sCompany’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'sCommission’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 controlcontrols over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1A.RISK FACTORS
For further information regarding our Risk Factors, please refer to Item 1AExcept as discussed below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K forfiled with the fiscal year ended August 31, 2017.Securities and Exchange Commission on November 14, 2019 (as amended on December 2, 2019).
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 fiscal 2020. The extent to which the COVID-19 pandemic impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration, scope, and severity of the pandemic; governmental, business, and individuals’ actions that have been taken, and continue to be taken, in response to the pandemic; the impact of the pandemic on worldwide economic activity and actions taken in response; the effect on our clients, including educational institutions, and client demand for our services; our ability to sell and provide our services and solutions, including the impact of travel restrictions and from people working from home; the ability of our clients to pay for our services on a timely basis or at all; the ability to maintain sufficient liquidity; and any closure of our offices. Any of these events, or related conditions, could cause or contribute to the risks and uncertainties described in our Annual Report and could materially adversely affect our business, financial condition, results of operations, cash flows, and stock price.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the purchases of our common stock during the fiscal quarter ended November 30, 2017:February 29, 2020:
| | | | | | | | | | | | |
Period | | Total Number of Shares Purchased(2) | | | 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) | |
September 1, 2017 to September 30, 2017 | | | - | | | $ | - | | | | - | | | $ | 13,174 | |
| | | | | | | | | | | | | | | | |
October 1, 2017 to October 31, 2017 | | | - | | | | - | | | | - | | | | 13,174 | |
| | | | | | | | | | | | | | | | |
November 1, 2017 to November 30, 2017 | | | - | | | | - | | | | - | | | | 13,174 | |
| | | | | | | | | | | | | | | | |
Total Common Shares | | | - | | | $ | - | | | | - | | | | | |
| | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) (in thousands) | |
December 1, 2019 to December 31, 2019 | | | 289,608 | | | $ | 35.14 | | | | 5,000 | | | $ | 39,824 | |
| | | | | | | | | | | | | | | | |
January 1, 2020 to January 31, 2020 | | | - | | | | - | | | | - | | | | 39,824 | |
| | | | | | | | | | | | | | | | |
February 1, 2020 to February 29, 2020 | | | - | | | | - | | | | - | | | | 39,824 | |
| | | | | | | | | | | | | | | | |
Total Common Shares | | | 289,608 | | | $ | 35.14 | | | | 5,000 | | | | | |
(1) | On January 23, 2015,November 15, 2019, our Board of Directors approved a new plan to repurchase up to $10.0$40.0 million of the Company'sour outstanding common stock. AllThe previously existing common stock repurchase plans wereplan was canceled and the new common share repurchase plan does not have an expiration date. On March 27, 2015, our Board of Directors increased the aggregate value of shares of Company common stock that may be purchased under the January 2015 plan to $40.0 million so long as we have either $10.0 million in cash and cash equivalents or have access to debt financing of at least $10.0 million. Under the terms of this expanded common stock repurchasenew purchase plan, we have purchased 1,539,8285,000 shares of our common stock for $26.8$0.2 million through November 30, 2017.during the quarter ended February 29, 2020. |
(1)
The actual timing, number, and value of common shares repurchased under this plan will be determined at our discretion and will depend on a number of factors, including, among others, general market and business conditions, the trading price of common shares, and applicable legal requirements. The Company hasWe 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.
(2)
| Amount excludes 102,765 shares of our common stock that were withheld for statutory taxes on stock-based compensation awards vested to employees during the quarter ended November 30, 2017. The withheld shares were valued at the market price on the date that the shares were distributed to participants and were acquired at a weighted average price of $19.15The table above includes 284,608 shares of our common stock which were purchased from Knowledge Capital for $10.1 million prior to the distribution of Knowledge Capital assets to its investors. This purchase of shares from Knowledge Capital was completed under a separate Board of Directors authorization and was not included in the new authorized purchase plan described above.
The table above excludes 103,029 shares of our common stock that were withheld for statutory taxes on stock-based compensation awards that were exercised or awarded during the quarter ended February 29, 2020. The withheld shares were valued at the market price on the date that the award shares were distributed to participants and were acquired at a weighted average price of $34.73 per share. |
Item 6. 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.** |
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Section 1350 Certifications.** |
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101.INS | 101.INS |
XBRL Instance Document. |
| 101.SCH | XBRL Taxonomy Extension Schema Document. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
| **Filed herewith. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | | | FRANKLIN COVEY CO. | | | | | | | | | | | Date: | JanuaryApril 9, 20182020 | | By: | /s/ Robert A. Whitman | | | | | Robert A. Whitman | | | | | Chief Executive Officer | | | | | (Duly Authorized Officer) | | | | | | Date: | JanuaryApril 9, 20182020 | | By: | /s/ Stephen D. Young | | | | | Stephen D. Young | | | | | Chief Financial Officer | | | | | (Principal Financial and Accounting Officer) |
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