UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2017
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file no. 1-11107
FRANKLIN COVEY CO.
(Exact name of registrant as specified in its charter)
Utah | 87-0401551 | |
(State or other jurisdiction of | (I.R.S. employer identification | |
2200 West Parkway Boulevard | 84119-2099 | |
Salt Lake City, Utah | (Zip Code) | |
(Address of principal executive offices) | ||
Registrant’s telephone number, | (801) 817-1776 | |
Including area code |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.05 Par Value | FC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated | £ | Accelerated Filer | T | |||
Non-accelerated | £ | Smaller Reporting Company | £ | |||
Emerging Growth Company | £ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of Common Stock as of the latest practicable date:
14,297,151 shares of Common Stock as of December 31, 20172021
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share amounts)
November 30, | August 31, | ||||
2021 | 2021 | ||||
(unaudited) | |||||
ASSETS | |||||
Current assets: | |||||
Cash and cash equivalents | $ | 51,250 | $ | 47,417 | |
Accounts receivable, less allowance for doubtful accounts of $4,701 and $4,643 | 51,692 | 70,680 | |||
Inventories | 2,579 | 2,496 | |||
Prepaid expenses and other current assets | 16,162 | 16,115 | |||
Total current assets | 121,683 | 136,708 | |||
Property and equipment, net | 10,585 | 11,525 | |||
Intangible assets, net | 48,667 | 50,097 | |||
Goodwill | 31,220 | 31,220 | |||
Deferred income tax assets | 4,259 | 4,951 | |||
Other long-term assets | 14,246 | 15,153 | |||
$ | 230,660 | $ | 249,654 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||
Current liabilities: | |||||
Current portion of notes payable | $ | 5,835 | $ | 5,835 | |
Current portion of financing obligation | 2,963 | 2,887 | |||
Accounts payable | 5,485 | 6,948 | |||
Deferred subscription revenue | 65,812 | 74,772 | |||
Other deferred revenue | 11,958 | 11,117 | |||
Accrued liabilities | 26,107 | 34,980 | |||
Total current liabilities | 118,160 | 136,539 | |||
Notes payable, less current portion | 11,759 | 12,975 | |||
Financing obligation, less current portion | 10,387 | 11,161 | |||
Other liabilities | 7,942 | 8,741 | |||
Deferred income tax liabilities | 375 | 375 | |||
Total liabilities | 148,623 | 169,791 | |||
Shareholders’ equity: | |||||
Common stock, $0.05 par value; 40,000 shares authorized, 27,056 shares issued | 1,353 | 1,353 | |||
Additional paid-in capital | 213,504 | 214,888 | |||
Retained earnings | 67,403 | 63,591 | |||
Accumulated other comprehensive income | 565 | 709 | |||
Treasury stock at cost, 12,757 shares and 12,889 shares | (200,788) | (200,678) | |||
Total shareholders’ equity | 82,037 | 79,863 | |||
$ | 230,660 | $ | 249,654 | ||
| November 30, | August 31, | |||||||
| 2017 | 2017 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 8,087 | $ | 8,924 | ||||
| Accounts receivable, less allowance for doubtful accounts of $2,738 and $2,310 | 50,153 | 66,343 | ||||||
| Receivable from related party | 1,182 | 1,020 | ||||||
| Inventories | 3,309 | 3,353 | ||||||
| Income taxes receivable | 329 | 259 | ||||||
| Prepaid expenses and other current assets | 12,604 | 11,936 | ||||||
| Total current assets | 75,664 | 91,835 | ||||||
| Property and equipment, net | 21,435 | 19,730 | ||||||
| Intangible assets, net | 55,899 | 57,294 | ||||||
| Goodwill | 24,220 | 24,220 | ||||||
| Long-term receivable from related party | 754 | 727 | ||||||
| Other long-term assets | 16,889 | 16,925 | ||||||
| $ | 194,861 | $ | 210,731 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of financing obligation | $ | 1,922 | $ | 1,868 | ||||
| Current portion of term notes payable | 6,250 | 6,250 | ||||||
| Accounts payable | 7,068 | 9,119 | ||||||
| Deferred revenue | 35,250 | 40,772 | ||||||
| Accrued liabilities | 15,781 | 22,617 | ||||||
| Total current liabilities | 66,271 | 80,626 | ||||||
| Line of credit | 9,050 | 4,377 | ||||||
| Financing obligation, less current portion | 20,570 | 21,075 | ||||||
| Term notes payable, less current portion | 11,563 | 12,813 | ||||||
| Other liabilities | 5,626 | 5,742 | ||||||
| Deferred income tax liabilities | 39 | 1,033 | ||||||
| Total liabilities | 113,119 | 125,666 | ||||||
| Shareholders' equity: | ||||||||
| Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued | 1,353 | 1,353 | ||||||
| Additional paid-in capital | 209,840 | 212,484 | ||||||
| Retained earnings | 67,064 | 69,456 | ||||||
| Accumulated other comprehensive income | 590 | 667 | ||||||
| Treasury stock at cost, 13,261 shares and 13,414 shares | (197,105 | ) | (198,895 | ) | ||||
| Total shareholders' equity | 81,742 | 85,065 | ||||||
| $ | 194,861 | $ | 210,731 | |||||
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per-share amounts)
Quarter Ended | |||||
November 30, | November 30, | ||||
2021 | 2020 | ||||
(unaudited) | |||||
Net sales | $ | 61,259 | $ | 48,324 | |
Cost of sales | 13,661 | 11,938 | |||
Gross profit | 47,598 | 36,386 | |||
Selling, general, and administrative | 39,343 | 33,683 | |||
Depreciation | 1,279 | 1,741 | |||
Amortization | 1,431 | 1,131 | |||
Income (loss) from operations | 5,545 | (169) | |||
Interest income | 15 | 24 | |||
Interest expense | (446) | (568) | |||
Income (loss) before income taxes | 5,114 | (713) | |||
Income tax provision | (1,302) | (179) | |||
Net income (loss) | $ | 3,812 | $ | (892) | |
Net income (loss) per share: | |||||
Basic and diluted | $ | 0.27 | $ | (0.06) | |
Weighted average number of common shares: | |||||
Basic | 14,246 | 13,977 | |||
Diluted | 14,312 | 13,977 | |||
COMPREHENSIVE INCOME (LOSS) | |||||
Net income (loss) | $ | 3,812 | $ | (892) | |
Foreign currency translation adjustments, | |||||
net of income taxes of | |||||
$0 and $0 | (144) | 307 | |||
Comprehensive income (loss) | $ | 3,668 | $ | (585) | |
| Quarter Ended | ||||||||
| November 30, | November 26, | |||||||
| 2017 | 2016 | |||||||
| (unaudited) | ||||||||
| Net sales | $ | 47,932 | $ | 39,787 | ||||
| Cost of sales | 15,064 | 14,479 | ||||||
| Gross profit | 32,868 | 25,308 | ||||||
| Selling, general, and administrative | 33,824 | 29,095 | ||||||
| Depreciation | 901 | 866 | ||||||
| Amortization | 1,395 | 722 | ||||||
| Loss from operations | (3,252 | ) | (5,375 | ) | ||||
| Interest income | 61 | 116 | ||||||
| Interest expense | (549 | ) | (620 | ) | ||||
| Loss before income taxes | (3,740 | ) | (5,879 | ) | ||||
| Income tax benefit | 1,348 | 1,921 | ||||||
| Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||
| Net loss per share: | ||||||||
| Basic and diluted | $ | (0.17 | ) | $ | (0.29 | ) | ||
| Weighted average number of common shares: | ||||||||
| Basic and diluted | 13,725 | 13,791 | ||||||
| COMPREHENSIVE INCOME (LOSS) | ||||||||
| Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||
| Foreign currency translation adjustments, | ||||||||
| net of income tax benefit of $42 and $342 | (77 | ) | 635 | |||||
| Comprehensive loss | $ | (2,469 | ) | $ | (3,323 | ) | ||
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Quarter Ended | |||||
November 30, | November 30, | ||||
2021 | 2020 | ||||
(unaudited) | |||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||
Net income (loss) | $ | 3,812 | $ | (892) | |
Adjustments to reconcile net income (loss) to net cash | |||||
provided by operating activities: | |||||
Depreciation and amortization | 2,710 | 2,872 | |||
Amortization of capitalized curriculum costs | 789 | 889 | |||
Stock-based compensation | 1,649 | 1,158 | |||
Deferred income taxes | 679 | (111) | |||
Change in fair value of contingent consideration liabilities | 28 | 62 | |||
Amortization of right-of-use operating lease assets | 225 | 259 | |||
Changes in assets and liabilities, net of effect of acquired business: | |||||
Decrease in accounts receivable, net | 18,829 | 13,482 | |||
Decrease (increase) in inventories | (92) | 309 | |||
Decrease (increase) in prepaid expenses and other assets | 196 | (176) | |||
Decrease in accounts payable and accrued liabilities | (9,825) | (2,721) | |||
Decrease in deferred revenue | (8,219) | (3,625) | |||
Decrease in income taxes payable/receivable | (47) | (111) | |||
Decrease in other long-term liabilities | (570) | (519) | |||
Net cash provided by operating activities | 10,164 | 10,876 | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||
Purchases of property and equipment | (520) | (185) | |||
Curriculum development costs | (243) | (263) | |||
Net cash used for investing activities | (763) | (448) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||
Principal payments on notes payable | (1,250) | (1,250) | |||
Principal payments on financing obligation | (698) | (628) | |||
Purchases of common stock for treasury | (3,488) | (1,530) | |||
Payment of contingent consideration liabilities | (368) | (329) | |||
Proceeds from sales of common stock held in treasury | 344 | 256 | |||
Net cash used for financing activities | (5,460) | (3,481) | |||
Effect of foreign currency exchange rates on cash and cash equivalents | (108) | 176 | |||
Net increase in cash and cash equivalents | 3,833 | 7,123 | |||
Cash and cash equivalents at the beginning of the period | 47,417 | 27,137 | |||
Cash and cash equivalents at the end of the period | $ | 51,250 | $ | 34,260 | |
Supplemental disclosure of cash flow information: | |||||
Cash paid for income taxes | $ | 577 | $ | 403 | |
Cash paid for interest | 410 | 562 | |||
Non-cash investing and financing activities: | |||||
Purchases of property and equipment financed by accounts payable | $ | 238 | $ | 20 | |
Acquisition of right-of-use operating lease assets for operating lease liabilities | 142 | 726 | |||
| Quarter Ended | ||||||||
| November 30, | November 26, | |||||||
| 2017 | 2016 | |||||||
| (unaudited) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||
| Adjustments to reconcile net loss to net cash provided | ||||||||
| by (used for) operating activities: | ||||||||
| Depreciation and amortization | 2,295 | 1,588 | ||||||
| Stock-based compensation expense | 956 | 1,214 | ||||||
| Amortization of capitalized curriculum costs | 1,277 | 977 | ||||||
| Deferred income taxes | (1,799 | ) | - | |||||
| Increase (reduction) in contingent consideration liabilities | 176 | (1,013 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Decrease in accounts receivable, net | 16,148 | 10,850 | ||||||
| Decrease (increase) in inventories | 26 | (191 | ) | |||||
| Increase in receivable from related party | (190 | ) | (231 | ) | ||||
| Increase in prepaid expenses and other assets | (416 | ) | (1,458 | ) | ||||
| Decrease in accounts payable and accrued liabilities | (8,125 | ) | (6,562 | ) | ||||
| Decrease in deferred revenue | (5,570 | ) | (553 | ) | ||||
| Increase in income taxes payable/receivable | (53 | ) | (2,630 | ) | ||||
| Increase (decrease) in other long-term liabilities | 5 | (911 | ) | |||||
| Net cash provided by (used for) operating activities | 2,338 | (2,878 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment | (2,414 | ) | (2,040 | ) | ||||
| Curriculum development costs | (703 | ) | (666 | ) | ||||
| Acquisition of business | (1,109 | ) | - | |||||
| Net cash used for investing activities | (4,226 | ) | (2,706 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from line of credit borrowings | 24,633 | - | ||||||
| Payments on line of credit borrowings | (19,960 | ) | - | |||||
| Proceeds from term notes payable financing | - | 5,000 | ||||||
| Principal payments on term notes payable | (1,250 | ) | (1,250 | ) | ||||
| Principal payments on financing obligation | (451 | ) | (401 | ) | ||||
| Purchases of common stock for treasury | (1,968 | ) | (17 | ) | ||||
| Proceeds from sales of common stock held in treasury | 158 | 153 | ||||||
| Net cash provided by financing activities | 1,162 | 3,485 | ||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | (111 | ) | (481 | ) | ||||
| Net decrease in cash and cash equivalents | (837 | ) | (2,580 | ) | ||||
| Cash and cash equivalents at the beginning of the period | 8,924 | 10,456 | ||||||
| Cash and cash equivalents at the end of the period | $ | 8,087 | $ | 7,876 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 640 | $ | 688 | ||||
| Cash paid for interest | 614 | 615 | ||||||
| Non-cash investing and financing activities: | ||||||||
| Purchases of property and equipment financed by accounts payable | $ | 901 | $ | 300 | ||||
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands and unaudited)
Accumulated | ||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | ||||||
Balance at August 31, 2021 | 27,056 | $ | 1,353 | $ | 214,888 | $ | 63,591 | $ | 709 | (12,889) | $ | (200,678) |
Issuance of common stock from | ||||||||||||
treasury |
|
| (3,033) |
|
| 217 | 3,378 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
| (85) | (3,488) | |||||
Stock-based compensation |
|
| 1,649 |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (144) |
|
| |||||
Net income |
|
|
| 3,812 |
|
|
| |||||
Balance at November 30, 2021 | 27,056 | $ | 1,353 | $ | 213,504 | $ | 67,403 | $ | 565 | (12,757) | $ | (200,788) |
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY –
PRIOR FISCAL YEAR
(in thousands and unaudited)
Accumulated | ||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | ||||||
Balance at August 31, 2020 | 27,056 | $ | 1,353 | $ | 211,920 | $ | 49,968 | $ | 641 | (13,175) | $ | (204,429) |
Issuance of common stock from | ||||||||||||
treasury |
|
| (3,411) |
|
| 236 | 3,668 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
| (89) | (1,530) | |||||
Stock-based compensation |
|
| 1,158 |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| 307 |
|
| |||||
Net loss |
|
|
| (892) |
|
|
| |||||
Balance at November 30, 2020 | 27,056 | $ | 1,353 | $ | 209,667 | $ | 49,076 | $ | 948 | (13,028) | $ | (202,291) |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
General
Franklin Covey Co. (hereafter referred to as us, we, our, or the Company) is a global company focused on individual and organizational performance improvement. Our mission is to "enable“enable greatness in people and organizations everywhere,"” and our employees worldwide are organizedglobal structure is designed to help individuals and organizations achieve sustained superior performance through changes in human behavior. We are fundamentally a content and solutions company, and we believe that our offerings and services create the connection between capabilities and results. Our expertise extendsWe have a wide range of content delivery options, including: the All Access Pass (AAP) subscription, the Leader in Me membership, and other intellectual property licenses; digital online learning; on-site training; training led through certified facilitators; blended learning; and organization-wide transformational processes, including consulting and coaching. We believe our investments in digital delivery modalities over the past few years have enabled us to seven crucial areas: Leadership, Execution, Productivity, Trust, Educational Improvement, Sales Performance, and Customer Loyalty.deliver our content to clients in a high-quality learning environment whether those clients are working remotely or in a centralized location. We believe that our clients are able to utilize our content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.
We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, and The Leader in Me, The 4 Disciplines of Execution, and Multipliers, and proprietary content in the areas of Execution, Sales Performance, Productivity, Educational Improvement, and Customer Loyalty. Our offerings are described in further detail at www.franklincovey.com.
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and results of operations of the Company as of the dates and for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our annual reportAnnual Report on Form 10-K for the fiscal year ended August 31, 2017.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires managementus to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The results of operations for the quarter ended November 30, 20172021 are not necessarily indicative of results expected for the entire fiscal year ending August 31, 2018,2022, or for any future periods.
Note on the Continuing COVID-19 Pandemic
The COVID-19 pandemic continues to produce difficult economic and operating conditions for certain areas of our business, including our international direct offices and licensee partners as countries and local municipalities have maintained a variety of measures designed to contain the spread of the virus. These measures included the closure of offices, schools, and other meeting spaces. These efforts persist in the face of new variants, increasing cases, and ongoing uncertainty regarding the pandemic. While our content is able to be presented digitally and is translated into numerous languages, the technology base differs significantly among countries, which may impede the smooth delivery of content to remote work locations. We remain optimistic about the future as we continue to see signs of economic recovery in the United States and many of the other countries in which we operate as companies, schools, and individuals are adapting,
and the positive effect of vaccinations and therapeutics are enabling some economies to open and recover. However, emerging variants continue to create uncertainty and many countries, states, and local governments may continue to implement additional lockdowns or other containment measures in future periods. These measures change rapidly to new and perceived threats and may have an adverse impact on our results of operations in future periods. We will continue to monitor developments related to the COVID-19 pandemic, including supply chain issues, and their actual and potential impacts on our financial position, results of operations, and liquidity.
Accounting Pronouncements Issued and Adopted
In March 2016,December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation - Stock Compensation (Topic 718) - ImprovementsNo. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to Employee Share-Based Payment Accounting.promote consistency among reporting entities. The guidance in ASU 2016-09 simplifies several aspects of the accounting for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of items on the statement of cash flows. The guidance in ASU 2016-092019-12 is effective for public companies' annual periods, including interim periods within those fiscal years beginning after December 15, 2016. On September 1, 2017, we adopted2020, although early adoption is permitted. Most amendments within the provisions of ASU 2016-09.standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The adoption of this accounting standardASU 2019-12 did not have a material impact on our consolidated financial statements.
NOTE 2 – INVENTORIES
Inventories are stated at the lower of cost or market,net realizable value, cost being determined using the first-in, first-out method, and were comprised of the following (in thousands):
November 30, | August 31, | ||||
2021 | 2021 | ||||
Finished goods | $ | 2,551 | $ | 2,468 | |
Raw materials | 28 | 28 | |||
$ | 2,579 | $ | 2,496 |
| November 30, | August 31, | |||||||
| 2017 | 2017 | |||||||
| Finished goods | $ | 3,284 | $ | 3,306 | ||||
| Raw materials | 25 | 47 | ||||||
| $ | 3,309 | $ | 3,353 | |||||
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS
At NovemberNovember 30, 2017,2021, the carrying value of our financial instruments approximated their fair values. The fair values of our contingent consideration liabilities from previous business acquisitions are considered "level 3"“Level 3” measurements because we use various estimates in the valuation models to project the timing and amount of future contingent payments. The valuation models described in our annual report on Form 10-K for the fiscal year ended August 31, 2017 were utilized during the current period (with updated estimates) to arrive at the estimated fair value of the contingent consideration liabilities. The fair value of the liabilitiesliability from the Robert Gregory Partners (RGP) andacquisition of Jhana Education (Jhana) acquisitions changed as follows during the quarter ended November 30, 20172021 (in thousands):
Balance at August 31, 2021 | $ | 2,095 | |
Change in fair value | 28 | ||
Payments | (368) | ||
Balance at November 30, 2021 | $ | 1,755 | |
| Balance at | Increases in | Payments/ | Balance at | |||||||||||||
| August 31, 2017 | Fair Value | Decreases | November 30, 2017 | |||||||||||||
| RGP Acquisition | $ | 913 | $ | - | $ | - | $ | 913 | ||||||||
| Jhana Acquisition | 6,052 | 176 | (1,109 | ) | 5,119 | |||||||||||
| $ | 6,965 | $ | 176 | $ | (1,109 | ) | $ | 6,032 | ||||||||
At each quarterly reporting date, we estimate the fair value of our contingent liability from the acquisition of Jhana through the use of a Monte Carlo simulation. Based on the timing of expected payments, $1.4 million of the Jhana contingent consideration liability was recorded as a component ofin accrued liabilities in our condensed consolidated balance sheet at November 30, 2017.2021. The remainderremaining $0.4 million of ourthe Jhana contingent consideration liability is classified as a component ofreported in other long-term liabilities. Due to the timing of the first Jhana contingent liability payment, the amount was classified as a component of investing activities on our condensed consolidated statement of cash flows for the quarter ended November 30, 2017.
NOTE 4 – REVENUE RECOGNITION
Contract Balances
Our deferred revenue totaled $80.2 million at November 30, 2021 and $88.6 million at August 31, 2021, of which $2.4 million and $2.7 million were classified as components of other long-term liabilities at November 30, 2021, and August 31, 2021, respectively. The amount of deferred revenue that was generated from subscription offerings totaled $67.8 million at November 30, 2021 and $77.0 million at August 31, 2021. During the quarter ended November 30, 2021, we recognized $28.4 million of previously deferred subscription revenue.
Remaining Performance Obligations
When possible, we enter into multi-year non-cancellable contracts which are invoiced either upon execution of the contract or at the beginning of each annual contract period. Remaining transaction price represents contracted revenue that has not yet been recognized, including unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price is influenced by factors such as seasonality, the average length of the contract term, and the ability of the Company to continue to enter multi-year non-cancellable contracts. At November 30, 2021, we had $121.1 million of remaining performance obligations, including the amount of deferred revenue related to our subscription offerings. The remaining performance obligation does not include other deferred revenue, as amounts included in other deferred revenue include items such as deposits that are generally refundable at the client’s request prior to the satisfaction of the obligation.
Disaggregated Revenue Information
Refer to Note 7, Segment Information, to these condensed consolidated financial statements for our disaggregated revenue information.
NOTE 45 – STOCK-BASED COMPENSATION
Our stock-based compensation plans is included in selling, general, and administrative expenses inwas comprised of the accompanying condensed consolidated statements of operations. The total cost of our stock-based compensation plans was as followsfollowing for the periods presented (in thousands):
Quarter Ended | |||||
November 30, | November 30, | ||||
2021 | 2020 | ||||
Long-term incentive awards | $ | 1,123 | $ | 946 | |
Strive acquisition compensation | 279 | - | |||
Restricted stock awards | 175 | 175 | |||
Employee stock purchase plan | 57 | 37 | |||
Fully-vested share awards | 15 | - | |||
$ | 1,649 | $ | 1,158 | ||
| Quarter Ended | ||||||||
| November 30, | November 26, | |||||||
| 2017 | 2016 | |||||||
| Performance awards | $ | 791 | $ | 1,078 | ||||
| Unvested share awards | 131 | 113 | ||||||
| Employee stock purchase plan | 34 | 23 | ||||||
| $ | 956 | $ | 1,214 | |||||
During the quarter ended November 30, 2017,2021, we issued 251,234216,752 shares of our common stock to employees forunder various stock-based compensation awards.arrangements, including our employee stock purchase plan (ESPP). Our stock-based compensation plans also allow shares to be withheld to cover statutory income taxes if so elected by the award recipient. During the first quarter of fiscal 2018,ended November 30, 2021, we withheld 102,76585,095 shares of our common stock to cover statutoryfor taxes on stock-based compensation awards that vested during the quarter. The following isarrangements, which had a descriptiontotal fair value of the developments in our stock-based compensation plans during the quarter ended November 30, 2017.
Employee Stock Purchase Plan
We have an employee stock purchase plan (ESPP) that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of each fiscal quarter. During the quarter ended November 30, 2017,2021, we issued 9,8879,379 shares of our common stock to participants in the ESPP.
NOTE 56 – EARNINGSINCOME (LOSS) PER SHARE
The following is a reconciliation from basic earningsschedule shows the calculation of income (loss) per share (EPS) to diluted EPSfor the periods presented (in thousands, except per-share amounts).
Quarter Ended | |||||
November 30, | November 30, | ||||
2021 | 2020 | ||||
Numerator for basic and | |||||
diluted loss per share: | |||||
Net income (loss) | $ | 3,812 | $ | (892) | |
Denominator for basic and | |||||
diluted loss per share: | |||||
Basic weighted average shares | |||||
outstanding | 14,246 | 13,977 | |||
Effect of dilutive securities: | |||||
Other stock-based awards | 66 | - | |||
Diluted weighted average | |||||
shares outstanding | 14,312 | 13,977 | |||
EPS Calculations: | |||||
Net income (loss) per share: | |||||
Basic and diluted | $ | 0.27 | $ | (0.06) | |
| Quarter Ended | ||||||||
| November 30, | November 26, | |||||||
| 2017 | 2016 | |||||||
| Numerator for basic and | ||||||||
| diluted earnings per share: | ||||||||
| Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||
| Denominator for basic and | ||||||||
| diluted earnings per share: | ||||||||
| Basic weighted average shares | ||||||||
| outstanding | 13,725 | 13,791 | ||||||
| Effect of dilutive securities: | ||||||||
| Stock options and other | ||||||||
| stock-based awards | - | - | ||||||
| Diluted weighted average | ||||||||
| shares outstanding | 13,725 | 13,791 | ||||||
| EPS Calculations: | ||||||||
| Net loss per share: | ||||||||
| Basic | $ | (0.17 | ) | $ | (0.29 | ) | ||
| Diluted | (0.17 | ) | (0.29 | ) | ||||
NOTE 67 – SEGMENT INFORMATION
Segment Information
Our sales are primarily comprised of training and consulting services. During the first quarterservices and our internal reporting and operating structure is currently organized around 2 divisions. The Enterprise Division, which consists of fiscal 2018, we reorganized our operations into two new divisions: the Enterprise DivisionDirect Office and International Licensee segments and the Education Division. The Enterprise Division, consists of sales channels that are primarily focused on sales of the All Access Pass and related services to both corporate and governmental entities. Paul S. Walker was named President of the Enterprise Division during the quarter ended November 30, 2017. The Education Divisionwhich is focused on sales to educational institutions, including elementary schools, middle schools, high schools, and colleges and universities. M. Sean Covey was appointed President of the Education Division during the quarter ended November 30, 2017. Our internal reporting structure was revised to reflect these changes and is now comprised of three operatingour Education practice. Based on the applicable guidance, our operations are comprised of 3 reportable segments and a1 corporate services group. The former Strategic Markets operating segment was absorbed by the Direct Office operating segment since their target customers and sales methodologies are essentially identical. The remaining operating segments were determined to be reportable segments under the applicable accounting guidance. The following is a brief description of our reportable segments:
Direct Offices – Our Direct Office segment has a depth of expertise in helping organizations solve problems that require changes in human behavior, including leadership, productivity, execution, trust, and sales performance. We have a variety of principle-based offerings that help build winning and profitable cultures. This segment includes our sales personnel that serve the United States and Canada; our international sales offices located in Japan, China, the United Kingdom, Australia, Germany, Switzerland, and Austria; our government services sales channel; and our book and audio sales.
International Licensees – Our independently owned international licensees provide our offerings and services in countries where we do not have a directly-owned office. These licensee partners allow us to expand the reach of our services to large multinational organizations as well as smaller organizations in their countries. This segment’s results are primarily comprised of royalty revenues received from these licensees.
Education Practice – Centered around the principles found in The Leader in Me, the Education practice is dedicated to helping educational institutions build a culture that will produce great results. We believe these results are manifested by increases in student performance, improved school culture, decreased disciplinary issues, and increased teacher engagement and parental involvement. This segment includes our domestic and international Education practice operations, which are focused on sales to educational institutions such as elementary schools, high schools, and colleges and universities.
Corporate and Other – Our corporate and other information includes leasing operations, shipping and handling revenues, royalty revenues from Franklin Planner Corp., and certain corporate administrative functions.
We have determined that the Company'sCompany’s chief operating decision maker continues to beis the CEO,Chief Executive Officer, and the primary measurement tool used in business unit performance analysis is Adjusted EBITDA, which may not be calculated as similarly titled amounts disclosed by other companies. Adjusted EBITDA is a non-GAAP financial measure. For reporting purposes, our consolidated Adjusted EBITDA may be calculated as ournet income or loss from operations(loss) excluding stock-based compensation,interest expense, income taxes, depreciation expense, intangible asset 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.
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 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, 2021 | Customers | Gross Profit | EBITDA | |||||
Enterprise Division: | ||||||||
Direct offices | $ | 45,119 | $ | 36,202 | $ | 9,954 | ||
International licensees | 2,997 | 2,701 | 1,671 | |||||
48,116 | 38,903 | 11,625 | ||||||
Education practice | 11,697 | 7,860 | 235 | |||||
Corporate and eliminations | 1,446 | 835 | (1,928) | |||||
Consolidated | $ | 61,259 | $ | 47,598 | $ | 9,932 | ||
Quarter Ended | ||||||||
November 30, 2020 | ||||||||
Enterprise Division: | ||||||||
Direct offices | $ | 36,743 | $ | 29,439 | $ | 6,703 | ||
International licensees | 2,596 | 2,285 | 1,284 | |||||
39,339 | 31,724 | 7,987 | ||||||
Education practice | 7,498 | 3,986 | (2,285) | |||||
Corporate and eliminations | 1,487 | 676 | (1,986) | |||||
Consolidated | $ | 48,324 | $ | 36,386 | $ | 3,716 |
| 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 | ) | |||||
A reconciliation of our consolidated Adjusted EBITDA to consolidated net lossincome (loss) is provided below (in thousands).
Quarter Ended | |||||
November 30, | November 30, | ||||
2021 | 2020 | ||||
Segment Adjusted EBITDA | $ | 11,860 | $ | 5,702 | |
Corporate expenses | (1,928) | (1,986) | |||
Consolidated Adjusted EBITDA | 9,932 | 3,716 | |||
Stock-based compensation | (1,649) | (1,158) | |||
Increase in the fair value of | |||||
contingent consideration liabilities | (28) | (62) | |||
Government COVID-19 assistance | - | 207 | |||
Depreciation | (1,279) | (1,741) | |||
Amortization | (1,431) | (1,131) | |||
Income (loss) from operations | 5,545 | (169) | |||
Interest income | 15 | 24 | |||
Interest expense | (446) | (568) | |||
Income (loss) before income taxes | 5,114 | (713) | |||
Income tax provision | (1,302) | (179) | |||
Net income (loss) | $ | 3,812 | $ | (892) | |
| Quarter Ended | ||||||||
| November 30, | November 26, | |||||||
| 2017 | 2016 | |||||||
| Enterprise Adjusted EBITDA | $ | 3,820 | $ | (220 | ) | |||
| Corporate expenses | (3,218 | ) | (2,599 | ) | ||||
| Consolidated Adjusted EBITDA | 602 | (2,819 | ) | |||||
| 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 | ) | ||||
| Depreciation | (901 | ) | (866 | ) | ||||
| Amortization | (1,395 | ) | (722 | ) | ||||
| Loss from operations | (3,252 | ) | (5,375 | ) | ||||
| Interest income | 61 | 116 | ||||||
| Interest expense | (549 | ) | (620 | ) | ||||
| Loss before income taxes | (3,740 | ) | (5,879 | ) | ||||
| Income tax benefit | 1,348 | 1,921 | ||||||
| Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||
Revenue by Category
The following table presents our consumer solution business unit assets in fiscal 2008 for the purpose of selling planners and related organizational products under a comprehensive licensing agreement. Due to significant operating losses incurred after the establishment of FCOP, we reconsidered whether FCOP was 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 consist of the day-to-day sale of planning products and related accessories, and we do not have an obligation to absorb losses or the right to receive benefits from FCOP that could potentially be significant.
Quarter Ended | |||||
November 30, | November 30, | ||||
2021 | 2020 | ||||
Americas | $ | 48,755 | $ | 38,327 | |
Asia Pacific | 7,797 | 6,806 | |||
Europe/Middle East/Africa | 4,707 | 3,191 | |||
$ | 61,259 | $ | 48,324 | ||
The following table presents our revenue disaggregated by type of service (in thousands).
Quarter Ended | Services and | Leases and | ||||||||||||
November 30, 2021 | Products | Subscriptions | Royalties | Other | Consolidated | |||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 23,851 | $ | 20,512 | $ | 756 | $ | - | $ | 45,119 | ||||
International licensees | 404 | - | 2,593 | - | 2,997 | |||||||||
24,255 | 20,512 | 3,349 | - | 48,116 | ||||||||||
Education practice | 3,226 | 7,844 | 627 | - | 11,697 | |||||||||
Corporate and eliminations | - | - | 344 | 1,102 | 1,446 | |||||||||
Consolidated | $ | 27,481 | $ | 28,356 | $ | 4,320 | $ | 1,102 | $ | 61,259 | ||||
Quarter Ended | ||||||||||||||
November 30, 2020 | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 19,412 | $ | 16,614 | $ | 717 | $ | - | $ | 36,743 | ||||
International licensees | 331 | - | 2,265 | - | 2,596 | |||||||||
19,743 | 16,614 | 2,982 | - | 39,339 | ||||||||||
Education practice | 1,924 | 5,075 | 499 | - | 7,498 | |||||||||
Corporate and eliminations | - | - | 335 | 1,152 | 1,487 | |||||||||
Consolidated | $ | 21,667 | $ | 21,689 | $ | 3,816 | $ | 1,152 | $ | 48,324 |
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management'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 fiscal year ended August 31, 2017.
RESULTS OF OPERATIONS
Overview
Franklin Covey Co. is a global company focused on individual and organizational performance improvement. We believe that our content and solutions company. Duringservices create the connection between capabilities and results. Our business is currently structured around two divisions, the Enterprise Division and the Education Division. The Enterprise Division consists of our history, we have createdDirect Office and developed world-class contentInternational Licensee segments and is focused on selling our offerings to corporations, governments, not-for-profits, and other related organizations. Franklin Covey offerings delivered through the Enterprise Division are designed to help our clients solve challenges which require significantorganizations and lasting changesindividuals achieve their own great results. Our Education Division is centered around the principles found in human behavior. Several years ago, we began moving from simply selling training coursesThe Leader in Me and is dedicated to providing fully-integrated solutionshelping educational institutions build cultures that will produce great results, including increased student performance, improved school culture, and practices which were focused on helping organizational clients successfully execute on their strategic priorities, develop their leaders,increased parental and build winning cultures. Two years ago, we determined that we could substantially expand the breadth and depth of our client impact, and the lifetime value of our clients, if we moved from selling content on a course-by-course basis, to a subscription-as-a-service (SaaS) basis, such as through the All Access Pass (AAP).
Our financial results for the quarter ended November 30, 2017 were affected by2021 represent the best first quarter results since the sale of our consumer solutions business unit in 2008 and included increased sales, improved gross margin, increased operating and net income, and higher Adjusted EBITDA. Our consolidated sales for the first quarter of fiscal 2022 increased 27 percent, or $12.9 million, to $61.3 million compared with $48.3 million in fiscal 2021. Our strong performance during the first quarter of fiscal 2022 reflects the continuation of three key trends that have been evident throughout the ongoing COVID-19 pandemic and that have significantly contributed to our improving financial results as national and local economies struggle to recover from the pandemic. These trends include:
Strong growth of All Access Pass and Related Services. All Access Pass (AAP) and related sales increased 27 percent in the first quarter of fiscal 2022 to $33.1 million.
International sales improvement. Sales increased at all of our international direct offices compared with the first quarter of the prior year and international licensee revenues increased 15 percent over the prior year, reflecting increased sales and improving economic conditions in many of the licensee countries.
Education Division performance improvement. Education Division revenues grew 56% on the strength of increased Leader in Me subscription sales compared with fiscal 2021, increased subscription coaching and consulting services, and increased material sales.
As areas of our operations continue to recover and grow, we believe the strength of our subscription-based offerings and services led the Company to higher levels of profitability than experienced in prior periods, including the pre-pandemic first half of fiscal 2020. We are optimistic these trends will continue through fiscal 2022 and will continue to produce improved earnings and cash flows compared with the prior year. However, these expectations are dependent upon continued recovery from the COVID-19 pandemic and improving international economic stability.
The first quarter of fiscal 2021 included the relatively early stages of the COVID-19 pandemic in the United States, Canada, and many other countries throughout the world, which had a numbersignificantly adverse impact on our financial results during that quarter. Comparisons to the prior year reflect those conditions and the strengthening of factors, which are described in further detail throughout this discussion and analysis.our operations over the course of the pandemic. The following is a summary of consolidated financial highlights for the first quarter of fiscal 2022:
Sales – Our consolidated sales for the quarter ended November 30, 2021 increased 27 percent, or $12.9 million, to $61.3 million compared with $48.3 million in the prior year. We continue to be pleased with the strength of our All Access Pass and Leader in Me subscription-based services and believe the electronic delivery capabilities of these offerings have been key to our business performance during the pandemic. During the first quarter of fiscal 2022, AAP and related sales increased 27 percent compared with the first quarter of the prior year and annual revenue retention remained strong at greater than 90 percent. Education Division sales grew 56 percent compared with the prior year on the strength of increased Leader in Me subscription revenues and subscription services, including coaching and consulting, together with related increases in materials sales used by schools in connection with their membership subscription. During the first quarter of fiscal 2022 we continued to see signs of economic recovery in the United States and many of the other countries in which we operate as companies, schools, and individuals are adapting, and the positive effect of vaccinations is enabling certain economies to open and recover. As a result of these factors and other favorable market and operating conditions, sales improved in each of our Direct Office, International Licensee, and Education Division segments compared with the first quarter of fiscal 2021. We remain optimistic about the future and look forward to continued recovery from the pandemic during the remainder of fiscal 2022.
At November 30, 2021, we had $67.8 million of deferred subscription revenue on our balance sheet, a 19 percent, or $10.8 million, increase compared with deferred subscription revenue on our balance sheet at November 30, 2020. At November 30, 2021, we had $53.4 million of unbilled deferred revenue compared with $40.5 million of unbilled deferred revenue at November 30, 2020. Unbilled deferred revenue represents business that is contracted but unbilled (primarily from multiyear contracts), and excluded from our balance sheet.
Cost of Sales/Gross Profit – Our cost of sales totaled $13.7 million for the quarter ended November 30, 2021, compared with $11.9 million in the first quarter of fiscal 2021. Gross profit for the first quarter of fiscal 2022 was $47.6 million compared with $36.4 million in the prior year. Our gross margin for the first quarter of fiscal 2022 improved 240 basis points to 77.7 percent of sales compared with 75.3 percent in the first quarter of the prior year, reflecting the continued increase in subscription revenues in the mix of overall sales, increased licensee royalty revenues, and the impact of increased sales on fixed cost of sale elements such as salaried Education Division coaches and capitalized curriculum amortization expense. Gross profit increased due to improved sales as described above.
Operating Expenses – Our operating expenses for the quarter ended November 30, 2021 increased $5.5 million compared with the first quarter of fiscal 2021, which was due to a $5.7 million increase in selling, general, and administrative (SG&A) expenses. Despite the increase in SG&A expenses, as a percent of sales our SG&A expenses in the first quarter of fiscal 2022 decreased to 64.2 percent compared with 69.7 percent in the prior year. Our SG&A expenses increased primarily due to increased commissions on improved sales, increased associate costs resulting from new sales and sales related headcount, increased stock-based compensation expense, and increased content development expense. Increased SG&A expense in these areas was partially offset by cost savings from the successful implementation of expense reduction initiatives in various areas of the Company’s operations.
Operating Income, Net Income, and Adjusted EBITDA – As a result of increased sales and improved gross margin, our income from operations for the quarter ended November 30, 2021 improved $5.7 million to $5.5 million compared with a loss of $(0.2) million in the first quarter of the prior year. Our first quarter fiscal 2022 net income was $3.8 million, or $0.27 per diluted share, compared with a net loss of $(0.9) million, or $(0.06) per share, in the first quarter of the prior year. Our Adjusted EBITDA for the first quarter increased 167 percent, or $6.2 million, to $9.9 million compared with $3.7 million in the first quarter of the prior year. Adjusted EBITDA is a non-GAAP financial measure. A reconciliation of Adjusted EBITDA to net income (loss) is provided in Note 7, Segment Information to our financial statements above.
Cash Flows from Operating Activities and Liquidity – Our cash flows from operating activities remained strong at $10.2 million for the quarter ended November 30, 2021, compared with $10.9 million in the first quarter of fiscal 2021. At November 30, 2021, we had $51.3 million of cash with no borrowings on our $15.0 million secured line of credit facility.
Further details regarding our results for the quarter ended November 30, 2017:
| 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 | ||||||||
Quarter Ended November 30, 20172021 Compared with the Quarter Ended November 26, 2016
Enterprise Division
Direct Offices
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; and other groups that were formerly included in the Strategic Markets segment, such as our government services office and global 50 group. books and audio sales. The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
Quarter Ended | Quarter Ended | |||||||||
November 30, | % of | November 30, | % of | |||||||
2021 | Sales | 2020 | Sales | Change | ||||||
Sales | $ | 45,119 | 100.0 | $ | 36,743 | 100.0 | $ | 8,376 | ||
Cost of sales | 8,917 | 19.8 | 7,304 | 19.9 | 1,613 | |||||
Gross profit | 36,202 | 80.2 | 29,439 | 80.1 | 6,763 | |||||
SG&A expenses | 26,248 | 58.2 | 22,736 | 61.9 | 3,512 | |||||
Adjusted EBITDA | $ | 9,954 | 22.1 | $ | 6,703 | 18.2 | $ | 3,251 |
During the first quarter of fiscal 2018, we dissolved the Strategic Markets2022, Direct Office segment and combined those sales groups with the Direct Offices segment since most of these groups have a common focus--selling subscription services. The increase in direct office sales was primarily duerevenue increased 23 percent to the recognition of previously deferred revenue from subscription sales as discussed above. In addition to the benefit from increased recognition of deferred sales, we had $1.2 million of increased revenue from businesses acquired in the second half of fiscal 2017, a $0.9 million intellectual property sale, and a $0.8 million increase in onsite presentation revenues.
While our operations in the United States and Canada are generating higher revenues than pre-pandemic levels, our international direct offices operations continue to our fiscal 2017 exit of the publishing business.be hampered by pandemic protocols and have not yet rebounded to pre-pandemic levels. Our new Chinaforeign direct offices continue to perform wellbe impacted by the COVID-19 pandemic as evolving governmental mandates in these international locations continue to impact business activity and recognized a $0.3 million increase intraining opportunities. However, these operations have been steadily improving since the third quarter of fiscal 2020 and each of our international direct offices had increased sales compared with the prior year. Foreign exchange rates did not have a material effect onfirst quarter of fiscal 2021. We remain confident that our international direct offices will continue to recover during the remainder of fiscal 2022. Foreign exchange rates had an immaterial impact on our Direct Office sales and operating income during the first quarter of fiscal 2018.2022. While we are optimistic about the future of our direct office channel and AAP revenues, our future Direct Office financial
performance is highly dependent upon economic recovery from the pandemic, including the opening of national and regional economies and other factors which may not be within in our control.
Gross Profit. Gross profit increased primarily due to increased recognition of previously deferred subscription revenues in the mix of overall sales, which also increased Direct Office gross margin percentage when compared with the prior year.
SG&A Expense. Increased Direct Office SG&A expense was primarily due to associate costs from increased commissions on improved sales, increased bonus and incentive pay on improved operating results, and increased headcount from the acquisition of Strive Talent, Inc. in the third quarter of fiscal 2021.
International Licensees Segment
In foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations for the periods indicated (in thousands):
Quarter Ended | Quarter Ended | |||||||||
November 30, | % of | November 30, | % of | |||||||
2021 | Sales | 2020 | Sales | Change | ||||||
Sales | $ | 2,997 | 100.0 | $ | 2,596 | 100.0 | $ | 401 | ||
Cost of sales | 296 | 9.9 | 311 | 12.0 | (15) | |||||
Gross profit | 2,701 | 90.1 | 2,285 | 88.0 | 416 | |||||
SG&A expenses | 1,030 | 34.4 | 1,001 | 38.6 | 29 | |||||
Adjusted EBITDA | $ | 1,671 | 55.8 | $ | 1,284 | 49.5 | $ | 387 |
Sales. International licensee revenues are primarily comprised of royalty revenues. Our licensee revenues increased compared with the prior year primarily due to the recovery of economies in many of the countries where our licensees operate. The ongoing recovery led to improved licensee royalty revenues and continued increases in AAP sales. During the first quarter of fiscal 2022, our royalty revenues increased 15 percent and our share of AAP revenues increased by 45 percent compared with the prior year. We are currently planningreceive additional revenue from the international licensees for AAP sales to launchcover a portion of the costs of operating the AAP in 15 additional languages later in fiscal 2018. We believe that our international direct offices willportal. Partially offsetting these increases were decreased product sales to the licensees. Despite the ongoing difficulties associated with the pandemic and the varying impacts on each country’s business environment, we continue to be favorably impactedencouraged by the recovery of our licensee operations as they are adapting to conditions, improving digital delivery capabilities, and increasing sales of the All Access Pass subscription. The continued recovery of our licensee segment is highly dependent upon the ability or willingness of people to meet together in groups and increasing AAP sales to clients. We have translated AAP content into multiple languages, and we believe the electronic availability of our offerings through this platform may accelerate the contentrecovery of licensee operations if they can effectively market, adapt, and offeringssell this online technology to their clients. Foreign exchange rates had an immaterial impact on international licensee sales and operating results during the quarter ended November 30, 2021.
Gross Profit. Gross profit increased due to increased sales as previously described. Gross margin improved primarily due to the mix of revenue recognized during the quarter, which included more royalty revenues than in the prior year.
SG&A Expense. International licensee SG&A expenses increased by three percent primarily due the normalization of certain operating costs, such as travel, compared with operations in the early months of the AAPpandemic. However, as a percent of sales, licensee SG&A expenses decreased compared with the prior year due to our foreign clients.
Education Practice –
Our Education practice divisionDivision 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. The following comparative information is for our Education Division in the periods indicated (in thousands):
Quarter Ended | Quarter Ended | |||||||||
November 30, | % of | November 30, | % of | |||||||
2021 | Sales | 2020 | Sales | Change | ||||||
Sales | $ | 11,697 | 100.0 | $ | 7,498 | 100.0 | $ | 4,199 | ||
Cost of sales | 3,837 | 32.8 | 3,512 | 46.8 | 325 | |||||
Gross profit | 7,860 | 67.2 | 3,986 | 53.2 | 3,874 | |||||
SG&A expenses | 7,625 | 65.2 | 6,271 | 83.6 | 1,354 | |||||
Adjusted EBITDA | $ | 235 | 2.0 | $ | (2,285) | (30.5) | $ | 2,520 |
Sales. Education Division sales for the quarter ended November 30, 2021 grew on the strength of increased Leader Inin Me program designed for students primarily subscription revenues and subscription services, including coaching and consulting, together with related increases in K-6 elementary schools.sales of materials used by schools in connection with their membership subscription. Despite an educational environment which has continued to be very challenging, we have seen strengthening trends in our Education business during the first quarter of fiscal 2022 and throughout fiscal 2021 as school operations and budgets move toward more normalized activity. We continue to see increased demandbe encouraged by the recovery of the Education Division and its prospects for The continued growth in future periods. As of November 30, 2021, the Leader in Me program is used in many school districtsnearly 3,000 schools in the United States and Canada.
Gross Profit. Education Division gross profit increased primarily due to increased sales as well as in international locations, which contributed to a $0.4 million, or five percent, increase inpreviously described. Education practice revenuessegment gross margin improved compared with the prior year. We continueyear primarily due to make substantial investments in newincreased coaching and consulting sales personnel for ourwith little variable cost increase as most coaches are salaried. The Education practice and expect that ourDivision gross margin was also favorably impacted by increased sales will continue to grow whenof high-margin materials compared with the prior periods. Consistentyear.
SG&A Expenses. Education SG&A expenses increased primarily due to increased associate costs from more commission expense on improved sales and additional sales support headcount compared with the prior year.
Other Operating Expense Items
Depreciation – Depreciation expense decreased $0.5 million compared with the prior year primarily due to the full depreciation of certain assets during fiscal years, we2021 and in the first quarter of fiscal 2022. We currently expect the majority of sales growth from our Education practice to occur during our fourthdepreciation expense will total approximately $5.7 million in fiscal quarter.
Amortization –
Income Taxes
Our gross marginincome tax provision for the quarter ended November 30, 20172021 was 68.6$1.3 million, for an effective income tax rate of 25.5 percent, of sales compared with 63.6an income tax provision of $0.2 million, for an effective tax expense rate of 25.1 percent, in the prior year. Although we had a pre-tax loss in the first quarter of fiscal 2017. The improvement was primarily2021, we recorded tax expense due to the recognitionexaggerated impact of previously deferred subscription service revenue, which has a higher gross margin than manyunfavorable permanent items on the small (near breakeven) amount of our other offerings.
| 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 | ||||||||||
LIQUIDITY AND CAPITAL RESOURCES
Introduction
In the continued uncertain economic environment of COVID-19 and the unclear path to national and global economic recovery, a major priority of ours has been the continued maintenance and preservation of liquidity. We believe our expense reduction efforts during the pandemic have been successful and provided the ability to maintain operations and make strategic investments over the past several quarters. Our cash balanceand cash equivalents at November 30, 2017 was $8.12021 remained strong and totaled $51.3 million, with $21.0 million availableno borrowings on our line of$15.0 million revolving credit facility. Of our $8.1$51.3 million in cash at November 30, 2017, substantially all of it2021, $13.7 million was held at our foreign subsidiaries. We routinely repatriate cash from our foreign subsidiaries and consider cash generated from foreign activities a key component of our overall liquidity position. Our 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 and available proceeds from our revolving line of credit facility, and term loans.facility. Our primary uses of liquidity include payments for operating activities, debt payments, business acquisitions, capital expenditures (including curriculum development), business acquisitions,working capital expansion, and purchases of our common stock, working capital expansion, andstock.
At November 30, 2021, our debt payments.
In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the credit agreement entered into on August 7, 2019 (the 2019 Credit Agreement). At November 30, 2021, we believe that we were in compliance with the financialterms and covenants and other terms applicable to the restated credit agreement at November 30, 2017.
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 quarter ended November 30, 2017.
Cash Flows FromProvided By Operating Activities
Our primary source of cash from operating activities was the sale of services to our customers in the normal course of business. Our primary uses of cash for operating activities were payments for selling, general, and administrativeSG&A expenses, to fund changes in working capital, payments for direct costs necessary to conduct training programs, and payments to suppliers for materials used in training manuals sold, and to fund working capital needs.sold. Our cash provided by operating activities duringfor the first quarter ended November 30, 2017 totaled $2.3remained strong at $10.2 million compared with $2.9$10.9 million of cash used in the first quarter of the prior year. The improvement in cash flows from operating activities was primarily attributable to increased collections of accounts receivable and improvedfiscal 2021. Improved operating results when compared with the prior year. While 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 during the first quarter of each fiscal year are also routinely impactedwere offset by payments of seasonally high accrued liability (primarily due to year-end bonuses) and accounts payable balances.
Cash Flows Used For Investing Activities and Capital Expenditures
For the first quarter of fiscal 2022, our cash used for investing activities totaled $4.2$0.8 million. The primary uses of cash for investing activities includedwere purchases of property and equipment in the normal course of business a contingent consideration payment associated with the acquisition of Jhana Education, which was completedand additional investments in the fourth quarter of fiscal 2017, and spending on the development of our offerings.
Our purchases of property and equipment which totaled $2.4 million,during the first quarter of fiscal 2022 consisted primarily of computer software costs relatedand hardware. We expect to significant upgradescontinue our investing in our content and delivery modalities, including the AAP portal and the replacement of our existing ERP software. Our new ERP system was successfully launchedLeader in early December 2017. WeMe subscription services, and currently anticipate that our purchases of property and equipment will total approximately $5.5$4.8 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.
We spent $0.2 million during the quarter ended November 30, 2017, we paid $1.1 million to the former owners of Jhana Education as contingent consideration related to this acquisition. Due to the timing of the payment, we classified the $1.1 million as a component of investing activities in our condensed consolidated statement of cash flows for the first quarter of fiscal 2018. Future contingent consideration payments from this acquisition will be classified as a component of financing activities in our consolidated statements of cash flows.
Cash Flows FromUsed For Financing Activities
During the quarter ended November 30, 2017,2021, our net cash provided byused for financing activities totaled $1.2$5.5 million. Our primary sources of cash from financing activities were proceeds from our revolving line of credit facility and proceeds from participants in our employee stock purchase program. Our primary uses of financing cash included $3.5 million to cover shares withheld to pay income taxes on stock-based compensation awards, $1.9 million used for principal payments on our term loan and financing obligations, and $0.4 million of cash used to pay contingent consideration liabilities from previous business acquisitions. Our purchases of common stock during the first quarter of fiscal 20182022 were payments on our term loans and the financing obligation on our corporate campus, and $2.0 million used to purchase shares of our common stock, which consisted entirely ofsolely for shares withheld forfrom participants to pay statutory income taxes on stock-based compensation awards that vestedwhich were distributed during the first quarterquarter. Partially offsetting these uses of cash were $0.3 million of proceeds from Employee Stock Purchase Plan participants to purchase shares of stock during fiscal 2018.
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 2022 are expected to include required payments on our Boardterm loans and financing obligation, contingent consideration payments from previous business acquisitions, and may include purchases of Directors increasedour common stock. However, the aggregate valuetiming and amount of shares of Company common stock that may be purchased under the January 2015 planpurchases is dependent on a number of factors, including available resources, and we are not obligated 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 sharesmake purchases of our common stock for $26.8 million through November 30, 2017. Future purchases of common stock under the terms of this Board approved plan will increase the amount of cash used for financing activities.
Sources of Liquidity
We expect to meet our projected capital expenditures,obligations on the 2019 Credit Agreement, service our existing financing obligation, and notes payable,pay for projected capital expenditures, and meet other working capital requirementsobligations during the remainder of fiscal 2018 and into fiscal 2019 through2022 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 fromto public or private sources. If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.
We believe that our existing capital resources shouldcash and cash equivalents, cash generated by operating activities, and the 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 (and new variants), our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new 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.
Material Uses of Cash Contractual Obligations
We do not operate any manufacturing, mining, or other capital-intensive facilities, and we have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. Our required contractual payments primarily consist of 1) lease payments resulting from the sale of our corporate campus (financing obligation); 2) principalHowever, we have normal ongoing cash expenditures and interest payments on term loans payable; 3) potential 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 primarily for domestic regional and foreign office space; and 6) paymentsare subject to HP Enterprise Services for outsourcing services related to warehousing and distribution services. For further information on ourvarious contractual obligations please referthat are required to run our business. Our material cash requirements include the table includedfollowing:
Associate and Consultant Compensation
Information Technology Expenditures
Content Development Costs
Income Taxes
Contractual Obligations
These material cash requirements are discussed in more detail in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our annual reportAnnual Report on Form 10-K for the fiscal year ended August 31, 2017.2021. During the first quarter of fiscal 2022 there have been no material changes to our expected material uses of cash and contractual obligations from those discussed in our Annual Report for the fiscal year ended August 31, 2021. However, current economic conditions indicate that our material uses of cash may increase due to inflationary pressures in the upcoming months. For further information on our material uses of cash and contractual obligations, refer to the information included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021, which was filed with the Securities and Exchange Commission on November 12, 2021.
ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED
Refer 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"
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 reportAnnual Report on Form 10-K for the fiscal year ended August 31, 2017.2021. 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, our financial performance during fiscal 2022, expected and lingering effects from the COVID-19 pandemic, including effects on how we conduct our business and our results of operations, the timing and duration of the recovery from the COVID-19 pandemic, future training and consulting sales activity, expected sales and benefits from the All Access Pass,AAP 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 reportAnnual Report on Form 10-K for the fiscal year ended August 31, 2017,2021, entitled "Risk“Risk Factors."” In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas: cybersecurity risks; unanticipated costs or capital expenditures; delays or unanticipated outcomes relating to our strategic plans; dependence on existing products or services; the rate and consumer acceptance of new product introductions, including the All Access Pass; competition; the impact of foreign exchange rates; the number and nature of customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our products and services and those of competitors; adverse publicity; and other factors which may adversely affect our business.
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management'smanagement’s expectations as of the date made, and the Company doeswe do not undertake any responsibility to update any of these statements in the future except as required by law. Actual future performance and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
At November 30, 2017, we had $9.1 million drawn on2021, our revolving line of credit. Our other long-term obligations at November 30, 2017 primarily consisted of term loans payable, a long-term lease agreement (financing obligation) associated with the sale ofon our corporate headquarters facility, term loansfixed-rate notes payable from the purchase of Strive Talent, Inc., and deferred payments 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 orand our revolving line of credit facility, and the prevailing interest rates on these instruments. The effective interest rate on our term loans payable and line of credit facility is variable and was 3.22.4 percent at November 30, 2017, and2021. 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 and the amount outstanding on our line of credit facility at November 30, 20172021 would result in approximately $0.2$0.1 million of additional interest expense over the next 12 months. Our financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent.
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, 2017.2021. We did not utilize any foreign currency or interest rate derivative instruments during the quarter ended November 30, 2017.
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'sSEC’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 FACTORSExcept as discussed below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on November 12, 2021.
Our results of operations have been adversely affected and could be materially impacted in the future by the COVID-19 (coronavirus) pandemic.
The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption over the past several quarters. The extent to which the COVID-19 pandemic impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration, scope, and severity of the pandemic; governmental, business, and individuals’ actions that have been taken, and continue to be taken, in response to the pandemic; the impact of the pandemic on worldwide economic activity, including related supply chain issues (including, for example, shipping delays, capacity constraints, increasing labor costs, and supply shortages), and actions taken in response to such impacts; the fiscal year ended August 31, 2017.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSThe following table summarizes the purchases of our common stock during the fiscal quarter ended November 30, 2017:2021:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) (in thousands) | ||||||
September 1, 2021 to September 30, 2021 | - | $ | - | - | $ | 39,824 | ||||
October 1, 2021 to October 31, 2021 | - | $ | - | - | $ | 39,824 | ||||
November 1, 2021 to November 30, 2021 | - | $ | - | - | $ | 39,824 | ||||
Total Common Shares | - | $ | - | - |
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 | - | $ | - | - | ||||||||||||
(1)On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $40.0 million of our outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does not have an expiration date. We did not purchase any shares of our common stock during the quarter ended November 30, 2021 under the terms of this Board approved plan.
The actual timing, number, and value of common shares repurchased under thisour board-approved plan will be determined at our discretion and will depend on a number of factors, including, among others, general market and business conditions, the trading price of common shares, and applicable legal requirements. 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.
Item 6.EXHIBITS
(A)Exhibits:
101.INS | XBRL Instance |
101.SCH | Inline XBRL Taxonomy Extension Schema Document.** |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.** |
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document.** |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.** |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.** | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).** | |
** | Filed herewith. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FRANKLIN COVEY CO. | |||||
Date: January 7, 2022 | By: | /s/ Paul S. Walker | |||
Paul S. Walker | |||||
President and Chief Executive Officer | |||||
(Duly Authorized Officer) | |||||
Date: January 7, 2022 | By: | /s/ Stephen D. Young | |||
Stephen D. Young | |||||
Chief Financial Officer | |||||
(Principal Financial and Accounting Officer) | |||||