We have an employee stock purchase plan (ESPP) that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of each fiscal quarter. During the quarter and three quarters ended November 30, 2017,May 31, 2020, we issued 9,88710,948 shares and 26,375 shares of our common stock to participants in the ESPP.
International Licensees – Our independently owned international licensees provide our offerings and services in countries where we do not have a directly-owned office. These licensee partners allow us to expand the reach of our services to large multinational organizations as well as smaller organizations in their countries. This segment’s results are primarily comprised of royalty revenues received from these licensees.
· | 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.
|
· | Education Practice – This group includes our domestic and international Education practice operations, which are focused on sales to educational institutions.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. |
· | International Licensees – This division is primarily comprised of our international licensees' royalty revenues. The international licensees are included in the Enterprise Division.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. |
· | Corporate and Other – Our corporate and other information includes leasing operations, shipping and handling revenues, and certain corporate administrative expenses.
|
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 ournet loss excluding interest expense, income or loss from operations excluding stock-based compensation,taxes, depreciation expense, amortization expense, stock-based compensation, 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 | |
May 31, 2020 | | Customers | | | Gross Profit | | | EBITDA | |
| | | | | | | | | |
Enterprise Division: | | | | | | | | | |
Direct offices | | $ | 26,760 | | | $ | 21,108 | | | $ | 352 | |
International licensees | | | 708 | | | | 339 | | | | (724 | ) |
| | | 27,468 | | | | 21,447 | | | | (372 | ) |
Education practice | | | 8,216 | | | | 4,711 | | | | (1,536 | ) |
Corporate and eliminations | | | 1,421 | | | | 663 | | | | (1,734 | ) |
Consolidated | | $ | 37,105 | | | $ | 26,821 | | | $ | (3,642 | ) |
| | | | | | | | | | | | |
Quarter Ended | | | | | | | | | | | | |
May 31, 2019 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | |
Direct offices | | $ | 40,387 | | | $ | 29,836 | | | $ | 4,520 | |
International licensees | | | 3,014 | | | | 2,432 | | | | 1,281 | |
| | | 43,401 | | | | 32,268 | | | | 5,801 | |
Education practice | | | 11,088 | | | | 6,846 | | | | (181 | ) |
Corporate and eliminations | | | 1,517 | | | | 550 | | | | (2,549 | ) |
Consolidated | | $ | 56,006 | | | $ | 39,664 | | | $ | 3,071 | |
| | | | | | | | | | | | |
Three Quarters Ended | | | | | | | | | | | | |
May 31, 2020 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | |
Direct offices | | $ | 106,844 | | | $ | 81,221 | | | $ | 10,796 | |
International licensees | | | 7,120 | | | | 5,696 | | | | 2,696 | |
| | | 113,964 | | | | 86,917 | | | | 13,492 | |
Education practice | | | 30,190 | | | | 17,828 | | | | (3,707 | ) |
Corporate and eliminations | | | 5,309 | | | | 2,772 | | | | (4,410 | ) |
Consolidated | | $ | 149,463 | | | $ | 107,517 | | | $ | 5,375 | |
| | | | | | | | | | | | |
Three Quarters Ended | | | | | | | | | | | | |
May 31, 2019 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | |
Direct offices | | $ | 115,271 | | | $ | 84,200 | | | $ | 10,703 | |
International licensees | | | 9,598 | | | | 7,515 | | | | 4,127 | |
| | | 124,869 | | | | 91,715 | | | | 14,830 | |
Education practice | | | 31,132 | | | | 18,668 | | | | (1,355 | ) |
Corporate and eliminations | | | 4,190 | | | | 1,429 | | | | (6,272 | ) |
Consolidated | | $ | 160,191 | | | $ | 111,812 | | | $ | 7,203 | |
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 loss is provided below (in thousands).
| | | | | | | | Quarter Ended | | | Three Quarters Ended | |
| | | | | | | | May 31, | | | May 31, | | | May 31, | | | May 31, | |
| | Quarter Ended | | | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | November 30, | | | November 26, | | |
| | 2017 | | | 2016 | | |
Enterprise Adjusted EBITDA | | $ | 3,820 | | | $ | (220 | ) | |
Segment Adjusted EBITDA | | | $ | (1,908 | ) | | $ | 5,620 | | | $ | 9,785 | | | $ | 13,475 | |
Corporate expenses | | | (3,218 | ) | | | (2,599 | ) | | | (1,734 | ) | | | (2,549 | ) | | | (4,410 | ) | | | (6,272 | ) |
Consolidated Adjusted EBITDA | | | 602 | | | | (2,819 | ) | | (3,642 | ) | | 3,071 | | | 5,375 | | | 7,203 | |
Stock-based compensation expense | | | (956 | ) | | | (1,214 | ) | |
Reduction (increase) in contingent | | | | | | | | | |
consideration liabilities | | | (176 | ) | | | 1,013 | | |
China office start-up costs | | | - | | | | (479 | ) | |
ERP system implementation costs | | | (426 | ) | | | (288 | ) | |
Stock-based compensation | | | 5,104 | | | (1,051 | ) | | 1,460 | | | (3,040 | ) |
Decrease (increase) in the fair value of | | | | | | | | | | | | | |
contingent consideration liabilities | | | 276 | | | (1,069 | ) | | 367 | | | (1,145 | ) |
Gain from insurance proceeds | | | 933 | | | - | | | 933 | | | - | |
Knowledge Capital wind-down costs | | | - | | | - | | | (389 | ) | | - | |
Licensee transition costs | | | - | | | - | | | - | | | (488 | ) |
Depreciation | | | (901 | ) | | | (866 | ) | | (1,652 | ) | | (1,556 | ) | | (4,925 | ) | | (4,806 | ) |
Amortization | | | (1,395 | ) | | | (722 | ) | | | (1,164 | ) | | | (1,259 | ) | | | (3,504 | ) | | | (3,797 | ) |
Loss from operations | | | (3,252 | ) | | | (5,375 | ) | | (145 | ) | | (1,864 | ) | | (683 | ) | | (6,073 | ) |
Interest income | | | 61 | | | | 116 | | | 18 | | | 8 | | | 36 | | | 30 | |
Interest expense | | | (549 | ) | | | (620 | ) | | (621 | ) | | (562 | ) | | (1,783 | ) | | (1,817 | ) |
Discount accretion on related | | | | | | | | | | | | | |
party receivable | | | | - | | | | - | | | | - | | | | 258 | |
Loss before income taxes | | | (3,740 | ) | | | (5,879 | ) | | (748 | ) | | (2,418 | ) | | (2,430 | ) | | (7,602 | ) |
Income tax benefit | | | 1,348 | | | | 1,921 | | |
Income tax benefit (provision) | | | | (10,220 | ) | | | 394 | | | | (7,985 | ) | | | 704 | |
Net loss | | $ | (2,392 | ) | | $ | (3,958 | ) | | $ | (10,968 | ) | | $ | (2,024 | ) | | $ | (10,415 | ) | | $ | (6,898 | ) |
Revenue by Category
The following table presents our revenue disaggregated by geographic region (in thousands).
| | Quarter Ended | | | Three Quarters Ended | |
| | May 31, | | | May 31, | | | May 31, | | | May 31, | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| | | | | | | | | | | | |
Americas | | $ | 32,788 | | | $ | 44,919 | | | $ | 119,545 | | | $ | 125,676 | |
Asia Pacific | | | 2,759 | | | | 7,914 | | | | 19,987 | | | | 24,592 | |
Europe/Middle East/Africa | | | 1,558 | | | | 3,173 | | | | 9,931 | | | | 9,923 | |
| | $ | 37,105 | | | $ | 56,006 | | | $ | 149,463 | | | $ | 160,191 | |
The following table presents our revenue disaggregated by type of service (in thousands).
Quarter Ended | | Services and | | | | | | | | | Leases and | | | | |
May 31, 2020 | | Products | | | Subscriptions | | | Royalties | | | Other | | | Consolidated | |
| | | | | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | | | | |
Direct offices | | $ | 10,051 | | | $ | 15,965 | | | $ | 744 | | | $ | - | | | $ | 26,760 | |
International licensees | | | 191 | | | | - | | | | 517 | | | | - | | | | 708 | |
| | | 10,242 | | | | 15,965 | | | | 1,261 | | | | - | | | | 27,468 | |
Education practice | | | 1,373 | | | | 6,286 | | | | 557 | | | | - | | | | 8,216 | |
Corporate and eliminations | | | - | | | | - | | | | 334 | | | | 1,087 | | | | 1,421 | |
Consolidated | | $ | 11,615 | | | $ | 22,251 | | | $ | 2,152 | | | $ | 1,087 | | | $ | 37,105 | |
| | | | | | | | | | | | | | | | | | | | |
Quarter Ended | | | | | | | | | | | | | | | | | | | | |
May 31, 2019 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | | | | | | | | | |
Direct offices | | $ | 26,295 | | | $ | 13,363 | | | $ | 729 | | | $ | - | | | $ | 40,387 | |
International licensees | | | 403 | | | | - | | | | 2,611 | | | | - | | | | 3,014 | |
| | | 26,698 | | | | 13,363 | | | | 3,340 | | | | - | | | | 43,401 | |
Education practice | | | 5,065 | | | | 5,564 | | | | 459 | | | | - | | | | 11,088 | |
Corporate and eliminations | | | - | | | | - | | | | - | | | | 1,517 | | | | 1,517 | |
Consolidated | | $ | 31,763 | | | $ | 18,927 | | | $ | 3,799 | | | $ | 1,517 | | | $ | 56,006 | |
| | | | | | | | | | | | | | | | | | | | |
Three Quarters Ended | | | | | | | | | | | | | | | | | | | | |
May 31, 2020 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | | | | | | | | | |
Direct offices | | $ | 58,946 | | | $ | 45,425 | | | $ | 2,473 | | | $ | - | | | $ | 106,844 | |
International licensees | | | 1,191 | | | | - | | | | 5,929 | | | | - | | | | 7,120 | |
| | | 60,137 | | | | 45,425 | | | | 8,402 | | | | - | | | | 113,964 | |
Education practice | | | 7,908 | | | | 19,296 | | | | 2,986 | | | | - | | | | 30,190 | |
Corporate and eliminations | | | - | | | | - | | | | 1,649 | | | | 3,660 | | | | 5,309 | |
Consolidated | | $ | 68,045 | | | $ | 64,721 | | | $ | 13,037 | | | $ | 3,660 | | | $ | 149,463 | |
| | | | | | | | | | | | | | | | | | | | |
Three Quarters Ended | | | | | | | | | | | | | | | | | | | | |
May 31, 2019 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Enterprise Division: | | | | | | | | | | | | | | | | | | | | |
Direct offices | | $ | 74,405 | | | $ | 38,453 | | | $ | 2,413 | | | $ | - | | | $ | 115,271 | |
International licensees | | | 1,793 | | | | - | | | | 7,805 | | | | - | | | | 9,598 | |
| | | 76,198 | | | | 38,453 | | | | 10,218 | | | | - | | | | 124,869 | |
Education practice | | | 11,565 | | | | 16,644 | | | | 2,923 | | | | - | | | | 31,132 | |
Corporate and eliminations | | | - | | | | - | | | | - | | | | 4,190 | | | | 4,190 | |
Consolidated | | $ | 87,763 | | | $ | 55,097 | | | $ | 13,141 | | | $ | 4,190 | | | $ | 160,191 | |
NOTE 712 – INVESTMENT IN FC ORGANIZATIONAL PRODUCTS
We ownpreviously owned 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,three quarters ended May 31, 2020, we recognized $0.3 million and we$1.6 million of net royalty revenues from the amended license agreement with FPC.
We do not have an ownership interest in FPC, do not have any obligation to 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 May 31, 2020, we had $1.3 million receivable from FPC and at August 31, 2019, we had $1.0 million receivable from FCOP, each of which are recorded in 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 second quarter of fiscal 2020, we hadreceived $1.9 million (net of $0.6 million discount) receivablecash from FCOP, compared with $1.7 million (netFPC as payment for royalties and reimbursable operating costs.
NOTE 13 – SUBSEQUENT EVENTS
Amendment to the 2019 Credit Agreement
On July 8, 2020, we entered into the First Modification Agreement to our 2019 Credit Agreement. The primary purpose of $0.7 million discount) receivable atthe First Modification Agreement is to provide alternative borrowing covenants for the fiscal quarters ending August 31, 2017.2020 through May 31, 2021. These receivables are classified as components of current and long-term assets in our condensed consolidated balance sheets based on expected payment dates. The long-term receivables have been discounted using a rate of 15 percent.new covenants include the following:
1. | Minimum Liquidity – We must maintain consolidated minimum liquidity of not less than $13.0 million from August 31, 2020 through February 28, 2021 and $8.0 million at May 31, 2021. |
2. | Minimum Adjusted EBITDA – We must maintain rolling four-quarter Adjusted EBITDA not less than the amount set forth below at the end of the specified quarter (in thousands).
|
Quarter Ending | | Amount | |
August 31, 2020 | | $ | 11,000 | |
November 30, 2020 | | | 8,500 | |
February 28, 2021 | | | 5,000 | |
May 31, 2021 | | | 15,000 | |
Adjusted EBITDA for purposes of this calculation is not the same as generally reported by the Company in its quarterly earnings. The amounts in the table above exclude amortization of capitalized development costs which is classified in cost of sales.
3. | Capital Expenditures – We may not make capital expenditures, including capitalized development costs, in an amount exceeding $8.5 million in aggregate for any fiscal year. |
The previously existing financial covenants remain in effect at all times other than the quarterly periods ending from August 31, 2020 through May 31, 2021.
In addition to the new financial covenants described above, we will repay the amount previously drawn on our revolving line of credit and we will be prohibited from holding domestic cash balances in excess of $5.0 million at the time of any borrowing on the revolving credit facility. The available credit on the revolving line of credit remains the same as under the 2019 Credit Agreement. We are also prohibited from making certain restricted payments, including dividend payments on our common stock and open-market purchases of our common stock for treasury until we have been in compliance with the previously existing financial covenants for two consecutive quarters.
The Company’s interest rate under the First Amendment will increase from LIBOR plus 1.85% to LIBOR plus 3.0% and the unused credit commitment fee will increase from to 0.2% to 0.5%.
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's
Management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon
management'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 first quarterEnterprise Division consists of our fiscal year includesDirect 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 months of September, October,Enterprise Division are designed to help organizations and November.individuals achieve their own great results. Our Education Division is centered around the principles found in The Leader in Me and is dedicated to helping educational institutions build cultures that will produce great results, including increased student performance, improved school culture, and increased parental and teacher involvement.
After strong financial performance during the first quartertwo quarters of fiscal 2018 ended on November 30, 2017,2020, which featured increased sales, profitability, and the first quarter ofcash flows from operating activities over the prior year, ended on November 26, 2016. On January 20, 2017, our Boardthird quarter results were significantly impacted by the COVID-19 pandemic and the resulting closure of Directors approved a changeoffices and educational institutions throughout the United States and in the countries where we operate direct offices and contract with licensee partners to deliver our fiscal quarter ending dates from a modified 52/53-week calendar,offerings. We closed our corporate offices and restricted travel to protect the health and safety of our associates and clients in which quarterly periods ended on different dates from year-to-year,an effort to slow the last dayspread of the calendar monthpandemic. Our international direct offices also followed the same pattern of closures and restrictions on associate travel and delivery of our offerings. These actions, and similar steps taken by most of our clients, resulted in each quarter. The change was madea significant decline in sales during the third quarter as previously scheduled onsite presentations, coaching days, and facilitated presentations were postponed or canceled.
However, during the widespread closure of offices, schools, and other gathering places, we accelerated our connection and engagement with clients through the use of our digital delivery systems, including the All Access Pass (AAP) in the Enterprise Division and the Leader in Me subscription service in the Education Division. Our subscription service clients are able to improve comparability between fiscalaccess content and programs from remote locations, which allows continued engagement of personnel and students during long periods of displacement from normal working or classroom conditions. We believe the ability to deliver our offerings in digital form will prove to be a valuable strategic advantage and we believe these capabilities will accelerate our recovery from the effects of the pandemic and will generate increased opportunities in future periods. Beginning withHowever, our recovery from the second quarterCOVID-19 pandemic is dependent upon a number of fiscal 2017,factors, many of which are not within our fiscal quarters endcontrol, such as the timing of re-opening national, state, and local economies; continuing effects of the pandemic on client operations; and other governmental responses to address the last dayimpacts of November, February,the pandemic. We will continue to monitor these developments and May. We do not believe that the change in quarter ending dates had a material impacttheir actual and potential impacts on theour financial position, results of operations, and liquidity.
As previously discussed, our financial results for the quarter ended November 30, 2017.
AtMay 31, 2020 were significantly influenced by the COVID-19 pandemic and mandated responses to slow its core, Franklin Covey Co.spread. The following 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 expandsummary of key financial results for 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 than 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 firstthird quarter of fiscal 2016, AAP and related services amounts invoiced have grown steadily on a year-over-year basis, from $7.12020:
Sales – Our consolidated sales for the third quarter of fiscal 2020 totaled $37.1 million, compared with sales of $56.0 million in the firstthird quarter of the prior year. All of our business units were adversely impacted by the closure of offices, schools, and other gathering places in the United States and in other countries throughout the world as governments, organizations, and individuals sought to slow the spread of COVID-19. The inability to deliver previously scheduled training, coaching days, and consulting resulted in reduced sales for both the Enterprise and Education Divisions. Enterprise Division sales for the third quarter of fiscal 2017 to $9.22020 were $27.5 million compared with $43.4 million in the firstthird quarter of fiscal 2018. Including our2020. Sales declined through both direct office and licensee operations. Education membership subscription
and related services, our total SaaS amounts invoiced increased to $14.3Division sales were $8.2 million in the firstthird quarter of fiscal 2018,2020, compared with $13.5$11.1 million in the prior year.third quarter of fiscal 2019, and decreased primarily due to reduced material sales and decreased coaching days delivered as educators transitioned to virtual classrooms and remote teaching. However, many of the previously postponed or canceled training or coaching days have been rescheduled and are being delivered live on-line. We expect this trend to continue during the COVID-19 pandemic.
For the quarter ended May 31, 2020, our reported subscription revenue increased $3.4 million, or 18%, compared with the corresponding quarter of fiscal 2019. At November 30, 2017,May 31, 2020, we had $15.9$43.9 million of deferred subscription revenue on our balance sheet, a 10%, or $4.0 million, increase compared with deferred subscription revenue on our balance sheet at May 31, 2019. At May 31, 2020, we had $33.4 million of unbilled deferred revenue whichcompared with $23.7 million of unbilled deferred revenue at May 31, 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
Cost of Sales/Gross Profit – Our cost of sales totaled $10.3 million 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 modelquarter ended May 31, 2020, compared with $16.3 million in the firstprior year. Gross profit for the third quarter of 2020 was $26.8 million compared with $39.7 million in fiscal 2019. Cost of sales and gross profit decreased due to reduced sales during the third quarter of fiscal 2018. For2020 as previously described. Our gross margin for the quarter ended November 30, 2017, our consolidatedMay 31, 2020 improved 146 basis points to 72.3% of sales increased 20 percent to $47.9 million compared with $39.8 million70.8% in the firstthird quarter of fiscal 2017. Sales growth and2019, reflecting increased subscription revenues in the corresponding improvement in our gross margin were primarily driven by the recognitionmix 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 2018services sold when compared with the prior year.
Operating Expenses – Our financial resultsoperating expenses for the quarter ended November 30, 2017May 31, 2020 decreased $14.6 million compared with the prior year, which was due to decreased selling, general, and administrative (SG&A) expenses, reduced stock-based compensation, a $0.9 million gain from insurance proceeds for assets damaged in a flood, and $0.7 million of deferred employer payroll taxes as allowed under the CARES Act. Decreased SG&A expense was primarily related to decreased variable compensation such as commissions, bonuses, and incentives; decreased travel and entertainment; decreased contingent consideration liability expense; and cost savings from various other areas of the Company’s operations. We reevaluate our stock-based compensation instruments at each reporting date. Due to the adverse impact of COVID-19 and uncertainties related to the expected recovery, we determined that certain tranches of previously granted performance awards would not vest prior to their expiration (Note 8). Accordingly, we reversed the previously recognized stock-based compensation expense for these tranches, which resulted in a net credit to stock-based compensation of $5.1 million. Partially offsetting these decreased costs were affected byadditional sales personnel that we have hired over previous quarters. At May 31, 2020, we had 252 client partners compared with 227 client partners at May 31, 2019.
Income Taxes – During the third quarter of fiscal 2020, we increased the valuation allowance on our deferred tax assets which resulted in $10.2 million of additional income tax expense during the quarter (Note 9). In consideration of relevant accounting guidance, we considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Because of the cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we determined that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, primarily foreign tax credit carryforwards and a numberportion of factors, which are described in further detail throughout this discussionour net operating loss carryforwards. Accordingly, we increased the valuation allowance against our deferred tax assets.
Operating Loss and analysis. The following is a summary of key financial resultsNet Loss – Our loss from operations for the quarter ended November 30, 2017:May 31, 2020 was $(0.1) million compared with $(1.9) million for the quarter ended May 31, 2019, primarily due to the factors previously discussed. For the third quarter of fiscal 2020, we recognized a net loss of $(11.0) million, or $(0.79) per share, including the impact of the $10.2 million increase in the valuation allowance on our deferred income tax assets, compared with a net loss of $(2.0) million, or $(0.14) per share, in the third quarter of the prior year.
· | 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.
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· | 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.
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· | 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.
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13Cash Flows from Operating Activities –
Our cash flows from operating activities totaled $18.7 million for the three quarters ended May 31, 2020, compared with $18.6 million in the first three quarters of fiscal 2019. Our improved cash flows reflect a strong first half of fiscal 2020 and strong collections of our accounts receivable during the third quarter.· | 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.
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Further details regarding these factors and their impact on our operatingthird 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, 2017May 31, 2020 Compared with the Quarter Ended November 26, 2016May 31, 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. The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
| | Quarter Ended | | | | | | Quarter Ended | | | | | | | |
| | May 31, | | | % of | | | May 31, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 26,760 | | | | 100.0 | | | $ | 40,387 | | | | 100.0 | | | $ | (13,627 | ) |
Cost of sales | | | 5,652 | | | | 21.1 | | | | 10,551 | | | | 26.1 | | | | (4,899 | ) |
Gross profit | | | 21,108 | | | | 78.9 | | | | 29,836 | | | | 73.9 | | | | (8,728 | ) |
SG&A expenses | | | 20,756 | | | | 77.6 | | | | 25,316 | | | | 62.7 | | | | (4,560 | ) |
Adjusted EBITDA | | $ | 352 | | | | 1.3 | | | $ | 4,520 | | | | 11.2 | | | $ | (4,168 | ) |
Sales. For the quarter ending May 31, 2020, sales through our direct office channel decreased due to the COVID-19 pandemic and global 50 group. Duringmandated responses to the firstpandemic, which essentially closed the economies of the countries in which we operate direct offices. Despite the decline in net sales during the quarter, we believe our previous and ongoing investments in the All Access Pass and online delivery modalities will enable us to continue to reschedule postponed or canceled onsite presentations in countries where we have launched the AAP and/or electronic content delivery. Some of the countries in which we operate direct offices have not fully re-opened their economies and may continue to experience further sales declines as the closures become prolonged. Foreign exchange rates had an immaterial impact on Direct Office sales and operating results during the third quarter of fiscal 2018, we dissolved2020.
Gross Profit. Gross profit decreased due to decreased sales in the Strategic Markets segmentthird quarter as described above. Direct Office gross margin increased due to increased subscription sales in the mix of services and combined those sales groups withproducts sold during the quarter.
SG&A Expense. Decreased Direct Offices segment since most of these groups have a common focus--selling subscription services. The increase in direct office salesOffice SG&A expense was primarily due to the recognition of previously deferred revenuereduced variable compensation, including commissions, incentives, and bonuses resulting from subscriptiondecreased 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.
International direct office sales increased $0.7 million compared with the prior year. Sales increased at alldecreased travel expenses since most of our direct offices except for Japan, which declined $0.5 million compared with fiscal 2017. The decrease in Japan was dueonsite presentations scheduled 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. Foreign exchange rates did not have a material effect on our international direct offices salesbe delivered during the first quarter of fiscal 2018. We are currently planningwere either transitioned to launch the AAP in 15 additional languages later in fiscal 2018. We believe that our international direct offices will be favorably impactedan online format or were postponed. These reductions were partially offset by the availability of the contentincreased associate expenses resulting from new sales and offerings of the AAP to our foreign clients.sales-related personnel.
Education Practice – Our Education practice division is comprised of our domestic and international Education practice operations (focused on sales 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 districts in the United States as well as in international locations, 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.
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 curriculuminternational licensee operations for the periods indicated (in thousands):
| | Quarter Ended | | | | | | Quarter Ended | | | | | | | |
| | May 31, | | | % of | | | May 31, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 708 | | | | 100.0 | | | $ | 3,014 | | | | 100.0 | | | $ | (2,306 | ) |
Cost of sales | | | 369 | | | | 52.1 | | | | 582 | | | | 19.3 | | | | (213 | ) |
Gross profit | | | 339 | | | | 47.9 | | | | 2,432 | | | | 80.7 | | | | (2,093 | ) |
SG&A expenses | | | 1,063 | | | | 150.1 | | | | 1,151 | | | | 38.2 | | | | (88 | ) |
Adjusted EBITDA | | $ | (724 | ) | | | (102.3 | ) | | $ | 1,281 | | | | 42.5 | | | $ | (2,005 | ) |
Sales. International licensee revenues are primarily comprised of royalty revenues. During the quarter ended May 31, 2020, licensee revenues decreased primarily due to local preferences and customs, if necessary.the worldwide COVID-19 outbreak. Our international licensees deliver most of their programs and generate revenue primarily through onsite presentations. Nearly all of the presentations scheduled to be held during the third quarter were postponed or canceled due to the ongoing COVID-19 pandemic and corresponding restrictions on public gatherings. Future recovery of our licensee segment is highly dependent upon the re-opening of foreign economies and the ability or willingness of people to travel and meet together in groups. We have translated AAP content into multiple languages and we anticipate that the electronic availability of our offerings on this platform may accelerate the recovery of licensee operations if they can effectively market, adapt, and sell this online technology to their clients. Foreign exchange rates had an immaterial impact on international licensee sales and operating results during the quarter ended May 31, 2020.
Gross Profit. Gross profit decreased due to lower sales as previously described. Gross margin decreased primarily due to the mix of revenue recognized during the quarter, which included less royalty revenue 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, during the remainder of fiscal 2020.
Education Division
Our Education Division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed Leader In Me program designed for students primarily in K-6 elementary schools. The following comparative information is for our Education Division in the periods indicated (in thousands):
| | Quarter Ended | | | | | | Quarter Ended | | | | | | | |
| | May 31, | | | % of | | | May 31, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 8,216 | | | | 100.0 | | | $ | 11,088 | | | | 100.0 | | | $ | (2,872 | ) |
Cost of sales | | | 3,505 | | | | 42.7 | | | | 4,242 | | | | 38.3 | | | | (737 | ) |
Gross profit | | | 4,711 | | | | 57.3 | | | | 6,846 | | | | 61.7 | | | | (2,135 | ) |
SG&A expenses | | | 6,247 | | | | 76.0 | | | | 7,027 | | | | 63.4 | | | | (780 | ) |
Adjusted EBITDA | | $ | (1,536 | ) | | | (18.7 | ) | | $ | (181 | ) | | | (1.6 | ) | | $ | (1,355 | ) |
Sales. Education Division sales for the quarter ended May 31, 2020 decreased primarily due to decreased training material sales and less consulting/coaching delivered when compared with the prior year. As schools were closed in response to the COVID-19 pandemic, many training programs were postponed or canceled, which reduced training material sales and coaching revenues as educators focused on establishing effective online learning environments for their students. These conditions also led to decreased membership renewals during the quarter and fewer new schools added than in the prior year. We believe that the current environment of reduced tax revenues will strain the ability of some schools to renew their memberships, but we are encouraged by signs of recovery in the early fourth quarter of fiscal 2020 as renewal trends have improved and new schools have been added. We believe the demand for the Leader in Me program throughout the world remains strong. As of May 31, 2020, the Leader in Me program is used in over 4,400 schools and in over 50 countries.
Gross Profit. Education Division gross profit decreased primarily due to decreased sales as previously described. Education segment gross margin declined compared with the prior year primarily due to the fixed cost of coaches, who are salaried, over less sales than in the prior year.
SG&A Expenses. Education SG&A expense decreased primarily due to reduced travel expenses as some programs were postponed or canceled during the quarter, and reduced variable associate costs resulting from decreased sales.
Other Operating Expense Items
Gain from Insurance Proceeds – In October 2019, a water supply line on our corporate campus ruptured, which caused extensive flood damage to one of the buildings that we occupy. We received $0.9 million of insurance proceeds for the assets that were damaged and written off. Nearly all of the assets that were written off our books were fully depreciated at the time of the flood. Based on applicable accounting guidance, we recognized a gain from the proceeds received from our insurance, which was included in selling, general, and administrative expense for the quarter ended May 31, 2020.
Depreciation – Depreciation expense increased $0.1 million compared with prior year primarily due to the addition of new assets in fiscal 2020. We currently expect depreciation expense will total approximately $6.7 million in fiscal 2020.
Amortization – Amortization expense decreased by $0.1 million compared with the third quarter of fiscal 2019 due to the full amortization of certain intangible assets. We expect amortization expense will total $4.6 million during fiscal 2020.
Income Taxes
Our increased income tax expense for the quarter ended May 31, 2020 was primarily due to the recognition of an increase to the valuation allowance on our deferred income tax assets. During the third quarter of fiscal 2020, we increased the valuation allowance on our deferred tax assets which resulted in $10.2 million of additional income tax expense during the quarter. In consideration of relevant accounting guidance, we considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Because of the cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we determined that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets, primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards, before they expire. Accordingly, we increased the valuation allowance against our deferred tax assets.
Three Quarters Ended May 31, 2020 Compared with the Three Quarters Ended May 31, 2019
Enterprise Division
Direct Offices Segment
The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
| | Three Quarters | | | | | | Three Quarters | | | | | | | |
| | Ended | | | | | | Ended | | | | | | | |
| | May 31, | | | % of | | | May 31, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 106,844 | | | | 100.0 | | | $ | 115,271 | | | | 100.0 | | | $ | (8,427 | ) |
Cost of sales | | | 25,623 | | | | 24.0 | | | | 31,071 | | | | 27.0 | | | | (5,448 | ) |
Gross profit | | | 81,221 | | | | 76.0 | | | | 84,200 | | | | 73.0 | | | | (2,979 | ) |
SG&A expenses | | | 70,425 | | | | 65.9 | | | | 73,497 | | | | 63.8 | | | | (3,072 | ) |
Adjusted EBITDA | | $ | 10,796 | | | | 10.1 | | | $ | 10,703 | | | | 9.3 | | | $ | 93 | |
Sales. After a strong start during the first two quarters of fiscal 2020, which saw our U.S./Canada sales grow by $4.0 million, government sales increase by $1.2 million, and international direct office revenue grow by $0.3 million compared with the prior year, our direct office sales were down significantly in the third quarter of fiscal 2020 due to reduced revenues at somethe COVID-19 pandemic as described in the previous section of our international licensee operations. We anticipate thatthis management’s discussion and analysis. Our growth in the launchfirst two quarters of fiscal 2020 was fueled by increased sales of the All Access Pass and increased subscription-related revenues. Increased sales through the second quarter in numerous new languages laterthe GSA, Australia, and Japan offices were partially offset by a $1.0 million decrease in sales from our China office, which was impacted early by the COVID-19 outbreak. Our GSA direct office recognized $1.1 million of increased sales during the first two quarters of fiscal 2018 will increase2020 when compared with the prior year. However, all of our foreign direct offices were closed during portions of our third quarter as mandated by their national governments. Foreign exchange rates had an immaterial impact on Direct Office sales at our international licensees.and operating results during the first three quarters of fiscal 2020.
Corporate and other – Gross Profit.Our "corporate and other" Gross profit decreased due to decreased sales are primarily comprisedin the first three quarters of leasing, and shipping and handling revenues. These salesfiscal 2020 as previously described. Direct Office gross margin increased primarily due to a slight increasethe mix of services and products sold during fiscal 2020, including increased subscription sales.
SG&A Expense. Direct Office operating expenses decreased primarily due to reduced variable associate costs, including commissions, incentives, and bonuses on lower sales and reduced travel costs in shippingthe third quarter. These reductions were partially offset by associate costs from new sales personnel.
International Licensees Segment
The following comparative information is for our international licensee operations for the periods indicated (in thousands):
| | Three Quarters | | | | | | Three Quarters | | | | | | | |
| | Ended | | | | | | Ended | | | | | | | |
| | May 31, | | | % of | | | May 31, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 7,120 | | | | 100.0 | | | $ | 9,598 | | | | 100.0 | | | $ | (2,478 | ) |
Cost of sales | | | 1,424 | | | | 20.0 | | | | 2,083 | | | | 21.7 | | | | (659 | ) |
Gross profit | | | 5,696 | | | | 80.0 | | | | 7,515 | | | | 78.3 | | | | (1,819 | ) |
SG&A expenses | | | 3,000 | | | | 42.1 | | | | 3,388 | | | | 35.3 | | | | (388 | ) |
Adjusted EBITDA | | $ | 2,696 | | | | 37.9 | | | $ | 4,127 | | | | 43.0 | | | $ | (1,431 | ) |
Sales. For the three quarters ended May 31, 2020, licensee revenues were primarily impacted by the COVID-19 pandemic, which significantly reduced sales in the third quarter. Before the impact of the pandemic, our international licensee royalty revenue in the first two quarters of fiscal 2020 increased by $0.2 million compared with the prior year. Foreign exchange rates had an immaterial impact on international licensee sales and handlingoperating results during the first three quarters of fiscal 2020.
Gross Profit. Gross profit decreased due to an overall decrease in licensee revenues during the first three quarters of fiscal 2020 as previously described. However, licensee gross margin improved over the prior year primarily due to increased royalty revenues in the mix of total sales 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 consisted of theThe 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 | |
| | Three Quarters | | | | | | Three Quarters | | | | | | | |
| | Ended | | | | | | Ended | | | | | | | |
| | May 31, | | | % of | | | May 31, | | | % of | | | | |
| | 2020 | | | Sales | | | 2019 | | | Sales | | | Change | |
Sales | | $ | 30,190 | | | | 100.0 | | | $ | 31,132 | | | | 100.0 | | | $ | (942 | ) |
Cost of sales | | | 12,362 | | | | 40.9 | | | | 12,464 | | | | 40.0 | | | | (102 | ) |
Gross profit | | | 17,828 | | | | 59.1 | | | | 18,668 | | | | 60.0 | | | | (840 | ) |
SG&A expenses | | | 21,535 | | | | 71.3 | | | | 20,023 | | | | 64.3 | | | | 1,512 | |
Adjusted EBITDA | | $ | (3,707 | ) | | | (12.3 | ) | | $ | (1,355 | ) | | | (4.4 | ) | | $ | (2,352 | ) |
Selling, General and AdministrativeSales. – The increase in For the first two quarters of fiscal 2020, our SG&A expenses during the quarter ending November 30, 2017, wasEducation Division sales increased primarily due to 1) a $4.0increased subscription revenues and the addition of new schools. Growth during the first half of fiscal 2020 was offset by decreased sales during the third quarter of fiscal 2020 resulting from the COVID-19 pandemic (refer to previous discussion) which reduced training materials and coaching sales. Foreign exchange rates reduced reported Education Division revenues and results of operations by $0.2 million increasefor the first three quarters of fiscal 2020.
Gross Profit. Education Division gross profit for the first three quarters of fiscal 2020 decreased primarily due to decreased sales as previously described. Education segment gross margin declined slightly primarily due to the fixed cost of coaches, who are salaried, on reduced revenues.
SG&A Expenses. Education SG&A expense increased primarily due to investments in spending related to newadditional sales and sales-related personnel (especially in the Education Division), increased commissions on higher sales,late fiscal 2019 and new personnel from business acquisitions completed inearly fiscal 2017; and 2) a $1.2 million change in the fair value of estimated contingent consideration from previous business acquisitions. Consistent with prior years, we continue to invest in new sales and sales support personnel, and we had 224 client partners at November 30, 2017 compared with 216 client partners at November 26, 2016. During the first quarter of fiscal 2017, we determined that the likelihood 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 consideration expense associated with the potential payment, which resulted in a significant credit 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.
Depreciation – Depreciation expense increased slightly due to 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, we expect depreciation expense will total approximately $5.5 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 benefitexpense rate for the quarterthree quarters ended November 30, 2017May 31, 2020 was 36.0approximately 329 percent, compared with an effectiveincome tax benefit rate of 32.7approximately 9 percent in the first quarterthree quarters of fiscal 2019. The income tax expense for the prior year. The lower tax benefit ratefirst three quarters of fiscal 2020 was primarily due to a $10.2 million increase in the prior year was due primarily to lower tax rates applied to taxable losses in certain foreign jurisdictions. Computation of a reliable annual effectivevaluation allowance against our deferred income tax rate is currently impracticable because of uncertainties regardingassets recorded during the amount of All Access Pass and other subscription revenues for the fiscal year relative to our other revenues. Therefore, we computed thethird quarter, which was partially offset by a $1.8 million income tax benefit forfrom the exercise of stock options in the second quarter ended November 30, 2017 by applying actual year-to-date adjustments and tax rates to our pre-tax loss.of fiscal 2020.
Although weWe paid $0.6$1.7 million in cash for income taxes during the quarter ended November 30, 2017, wefirst three 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 asto the extent we continueare able 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 of reduced sales and an uncertain path to economic recovery, a major priority of ours is the maintenance and preservation of liquidity. Our cash balanceand cash equivalents at November 30, 2017 was $8.1 million, with $21.0 millionMay 31, 2020 remained strong and totaled $37.0 million. During the third quarter of fiscal 2020, we drew down all of the available funds on our linerevolving credit facility to maximize our flexibility during this period of credit facility.economic and operating uncertainty. Of our $8.1$37.0 million in cash at November 30, 2017, substantially all of itMay 31, 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 restated2019 Credit Agreement at May 31, 2020.
On July 8, 2020, we entered into the First Modification Agreement to our 2019 Credit Agreement. The primary purpose of the First Modification Agreement is to provide alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. These new temporary covenants are designed to prevent covenant compliance issues during the ongoing COVID-19 pandemic and expected economic recovery, and are described in more detail in Note 13 to the financial statements contained within this report on Form 10-Q. The First Modification Agreement does not reduce available credit under the 2019 Credit Agreement and we believe the agreement at November 30, 2017.will be beneficial to maintaining adequate levels of liquidity in future periods.
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 quarterthree quarters ended November 30, 2017.May 31, 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. OurDespite the operating difficulties resulting from the COVID-19 pandemic in the third quarter of fiscal 2020, our cash provided by operating activities duringfor the quarterthree quarters ended November 30, 2017 totaled $2.3May 31, 2020 was $18.7 million compared with $2.9$18.6 million of cash used in the first quarterthree quarters of the prior year.fiscal 2019. The improvement in cash flows from operating activitiesincrease was primarily attributabledue to increasedimproved operating results during the first half of fiscal 2020 and strong collections of accounts receivable during the third quarter. Our collection of accounts receivable remained strong during the first three quarters 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 flows duringHowever, due to decreased sales stemming from the firstCOVID-19 pandemic in the third quarter of each fiscal year are also routinely impacted by payments2020, we expect to use significant amounts of seasonally high accrued liability (primarily duecash to year-end bonuses) and accounts payable balances.support operating activities in the fourth quarter of fiscal 2020.
Cash Flows From Investing Activities and Capital Expenditures
Our cash used for investing activities during the first quarterthree quarters of fiscal 20182020 totaled $4.2$9.4 million. The primary uses of cash for investing activities included additional investments in the development of our offerings, purchases of property and equipment in the normal course of business, and the purchase of a contingentnote receivable from a bank used as consideration payment associatedfor an amended license agreement with FCOP (Note 12).
We spent $3.4 million during the acquisition of Jhana Education, which was completed in the fourth quarterfirst three quarters of fiscal 2017, and spending2020 on the development of various content and offerings. Our previous and ongoing investments in online capabilities proved to be valuable assets in the wake of the COVID-19 pandemic as were able to quickly transition a significant number of our offerings.onsite presentations to “live online” presentations. We believe continued investment in our offerings and delivery capabilities is critical to our future success and we anticipate that our capital spending for curriculum development will total $5.0 million during fiscal 2020.
Our purchases of property and equipment which totaled $2.4$3.3 million in the first three quarters of fiscal 2020, and consisted primarily of computer hardware, new furnishings to replace assets destroyed by a flood at our corporate headquarters, software, costs relatedand leasehold improvements on leased office space. As previously mentioned, we have previously and continue to significant upgradesinvest in our content and delivery modalities, including the AAP portal and Leader in Me subscription services. These electronic delivery methods have proved valuable as many clients have moved to remote workplaces due to the replacement of our existing ERP software. Our new ERP system was successfully launchedCOVID-19 pandemic. We will continue to invest in early December 2017. Weimproved delivery modalities and currently anticipate that our purchases of property and equipment will total approximately $5.5$4.0 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.2020.
DuringIn November 2019, we purchased $2.6 million of notes payable from a bank that were the quarter ended November 30, 2017, we paid $1.1 millionobligations of FCOP. We exchanged the receivables from FCOP to modify the former ownersterm and royalty provisions of Jhana Education as contingent consideration relateda long-term licensing agreement that is expected to this acquisition. Due toincrease our cash flows over the timingduration of the payment, we classifiedlicense agreement. The licensing arrangement was assumed by Franklin Planner Corp., a new unrelated entity that purchased substantially all of the $1.1 million as a componentassets of investing activitiesFCOP 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.
We spent $0.7 million during the first quarter of fiscal 2018 on the development of various offerings, including the continued development 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 million during fiscal 2018.November 2019.
Cash Flows From Financing Activities
ForDuring the quarter ended November 30, 2017,first three quarters of fiscal 2020, our net cash provided by financing activities totaled $1.2$0.2 million. Our primary sources of financing cash from financing activities were proceedsduring fiscal 2020 included $14.9 million (the available credit) from our long-term revolving line of credit, facilitya $5.0 million term loan which was available on our 2019 Credit Agreement, and $0.8 million of proceeds from participants in ourthe employee stock purchase program. Our primary usesplan. These sources of financing cash during the first quarterwere partially offset by $13.8 million for purchases of fiscal 2018 wereour common stock for treasury, $5.5 million for principal payments on our term loans and the financing obligation, on our corporate campus, and $2.0$1.2 million of cash used to purchasepay contingent consideration liabilities from previous business acquisitions.
In December 2019, we purchased 284,608 shares of our common stock which consisted entirelyfrom 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 103,117 shares of our common stock that were withheld for statutory income taxes on stock-based compensation awards, that vestedprimarily stock options, which were exercised during the first quarterand second quarters of fiscal 2018.2020. These withheld shares were valued at the market price on the date that the shares were distributed to participants. The total fair value of the withheld shares was $3.6 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 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.
18
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. 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. 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, including effects on how we conduct our business and our results of operations, the timing and duration of the recovery from the COVID-19 pandemic, future training and consulting sales activity, expected sales and benefits from the All Access Pass and the electronic delivery of our content, 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 drawnMay 31, 2020, our long-term obligations primarily consisted of term loans payable, amounts borrowed on our revolving line of credit. Our other long-term obligations at November 30, 2017 primarily consisted ofcredit agreement, 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 3.22.6 percent at November 30, 2017, andMay 31, 2020. Accordingly, we may incur additional expense if interest rates increase in future periods. For example, a one-percentone percent increase in the effective interest rate on our term loans outstanding and the amount outstanding onamounts borrowed against our revolving line of credit facility at November 30, 2017May 31, 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 quarterthree quarters ended November 30, 2017.May 31, 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:May 31, 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) | |
March 1, 2020 to March 31, 2020 | | | - | | | $ | - | | | | - | | | $ | 39,824 | |
| | | | | | | | | | | | | | | | |
April 1, 2020 to April 30, 2020 | | | - | | | | - | | | | - | | | | 39,824 | |
| | | | | | | | | | | | | | | | |
May 1, 2020 to May 31, 2020 | | | - | | | | - | | | | - | | | | 39,824 | |
| | | | | | | | | | | | | | | | |
Total Common Shares | | | - | | | $ | - | | | | - | | | | | |
(1) | On 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 repurchase plan, we have purchased 1,539,828We did not purchase any shares of our common stock for $26.8 million through November 30, 2017.during the quarter ended May 31, 2020 under the terms of this Board approved plan. |
The actual timing, number, and value of common shares repurchased under this plan will be determined at our discretion and will depend on a number of factors, including, among others, general market and business conditions, the trading price of common shares, and applicable legal requirements. 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 $19.15 per share. |
Item 6. EXHIBITS
| 10.1 | First Modification Agreement by and among JPMorgan Chase Bank, N.A., Franklin Covey Co., and the subsidiary guarantors signatory thereto, dated July 8, 2020 (incorporated by reference to Report on Form 8-K filed with the Commission on July 10, 2020). |
31.1 | Rule 13a-14(a) Certifications of the Chief Executive Officer.** |
31.2 | Rule 13a-14(a) Certifications of the Chief Financial Officer.** |
32 | Section 1350 Certifications.** |
| 101.INS | XBRL Instance Document. |
| 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: | January 9, 2018July 10, 2020 | | By: | /s/ Robert A. Whitman |
| | | | Robert A. Whitman |
| | | | Chief Executive Officer |
| | | | (Duly Authorized Officer) |
| | | | |
Date: | January 9, 2018July 10, 2020 | | By: | /s/ Stephen D. Young |
| | | | Stephen D. Young |
| | | | Chief Financial Officer |
| | | | (Principal Financial and Accounting Officer) |