UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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:
13,858,140 shares of Common Stock as of December 31, 2017June 30, 2022
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
(in thousands, except per-share amounts)
May 31, | August 31, | ||||
2022 | 2021 | ||||
(unaudited) | |||||
ASSETS | |||||
Current assets: | |||||
Cash and cash equivalents | $ | 52,068 | $ | 47,417 | |
Accounts receivable, less allowance for doubtful accounts of $4,345 and $4,643 | 50,430 | 70,680 | |||
Inventories | 3,356 | 2,496 | |||
Prepaid expenses and other current assets | 16,233 | 16,115 | |||
Total current assets | 122,087 | 136,708 | |||
Property and equipment, net | 9,591 | 11,525 | |||
Intangible assets, net | 45,993 | 50,097 | |||
Goodwill | 31,220 | 31,220 | |||
Deferred income tax assets | 6,269 | 4,951 | |||
Other long-term assets | 13,236 | 15,153 | |||
$ | 228,396 | $ | 249,654 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||
Current liabilities: | |||||
Current portion of notes payable | $ | 5,835 | $ | 5,835 | |
Current portion of financing obligation | 3,119 | 2,887 | |||
Accounts payable | 8,067 | 6,948 | |||
Deferred subscription revenue | 66,646 | 74,772 | |||
Other deferred revenue | 16,646 | 11,117 | |||
Accrued liabilities | 28,570 | 34,980 | |||
Total current liabilities | 128,883 | 136,539 | |||
Notes payable, less current portion | 8,490 | 12,975 | |||
Financing obligation, less current portion | 8,794 | 11,161 | |||
Other liabilities | 6,908 | 8,741 | |||
Deferred income tax liabilities | 375 | 375 | |||
Total liabilities | 153,450 | 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 | 217,862 | 214,888 | |||
Retained earnings | 76,443 | 63,591 | |||
Accumulated other comprehensive income (loss) | (203) | 709 | |||
Treasury stock at cost, 13,218 shares and 12,889 shares | (220,509) | (200,678) | |||
Total shareholders’ equity | 74,946 | 79,863 | |||
$ | 228,396 | $ | 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.
(in thousands, except per-share amounts)
Quarter Ended | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
(unaudited) | (unaudited) | ||||||||||
Net sales | $ | 66,176 | $ | 58,736 | $ | 184,035 | $ | 155,223 | |||
Cost of sales | 15,044 | 12,829 | 41,190 | 35,589 | |||||||
Gross profit | 51,132 | 45,907 | 142,845 | 119,634 | |||||||
Selling, general, and administrative | 42,637 | 40,132 | 120,042 | 107,439 | |||||||
Depreciation | 1,217 | 1,423 | 3,686 | 4,904 | |||||||
Amortization | 1,329 | 1,238 | 4,106 | 3,503 | |||||||
Income from operations | 5,949 | 3,114 | 15,011 | 3,788 | |||||||
Interest income | 21 | 16 | 48 | 56 | |||||||
Interest expense | (405) | (525) | (1,274) | (1,633) | |||||||
Income before income taxes | 5,565 | 2,605 | 13,785 | 2,211 | |||||||
Income tax benefit (provision) | 1,597 | 10,149 | (933) | 9,605 | |||||||
Net income | $ | 7,162 | $ | 12,754 | $ | 12,852 | $ | 11,816 | |||
Net income per share: | |||||||||||
Basic | $ | 0.51 | $ | 0.90 | $ | 0.90 | $ | 0.84 | |||
Diluted | 0.51 | 0.90 | 0.90 | 0.84 | |||||||
Weighted average number of common shares: | |||||||||||
Basic | 14,173 | 14,145 | 14,244 | 14,068 | |||||||
Diluted | 14,175 | 14,156 | 14,273 | 14,133 | |||||||
COMPREHENSIVE INCOME | |||||||||||
Net income | $ | 7,162 | $ | 12,754 | $ | 12,852 | $ | 11,816 | |||
Foreign currency translation adjustments, | |||||||||||
net of income taxes of | |||||||||||
$0, $0, $0, and $0 | (736) | (151) | (912) | 123 | |||||||
Comprehensive income | $ | 6,426 | $ | 12,603 | $ | 11,940 | $ | 11,939 |
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.
(in thousands)
Three Quarters Ended | |||||
May 31, | May 31, | ||||
2022 | 2021 | ||||
(unaudited) | |||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||
Net income | $ | 12,852 | $ | 11,816 | |
Adjustments to reconcile net income to net cash | |||||
provided by operating activities: | |||||
Depreciation and amortization | 7,792 | 8,407 | |||
Amortization of capitalized curriculum costs | 2,374 | 2,583 | |||
Stock-based compensation | 5,987 | 5,127 | |||
Deferred income taxes | (1,409) | (10,521) | |||
Change in fair value of contingent consideration liabilities | 60 | 164 | |||
Amortization of right-of-use operating lease assets | 695 | 758 | |||
Changes in assets and liabilities, net of effect of acquired business: | |||||
Decrease in accounts receivable, net | 19,794 | 12,391 | |||
Decrease (increase) in inventories | (888) | 322 | |||
Decrease in prepaid expenses and other assets | 321 | 1,393 | |||
Increase (decrease) in accounts payable and accrued liabilities | (4,294) | 4,629 | |||
Decrease in deferred revenue | (2,760) | (4,172) | |||
Increase (decrease) in income taxes payable/receivable | 355 | (653) | |||
Decrease in other long-term liabilities | (1,343) | (1,392) | |||
Net cash provided by operating activities | 39,536 | 30,852 | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||
Purchases of property and equipment | (2,080) | (1,185) | |||
Curriculum development costs | (1,379) | (1,827) | |||
Acquisition of business, net of cash acquired | - | (10,554) | |||
Net cash used for investing activities | (3,459) | (13,566) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||
Principal payments on notes payable | (4,585) | (3,750) | |||
Principal payments on financing obligation | (2,135) | (1,922) | |||
Purchases of common stock for treasury | (23,850) | (2,971) | |||
Payment of contingent consideration liabilities | (1,099) | (899) | |||
Proceeds from sales of common stock held in treasury | 1,006 | 783 | |||
Net cash used for financing activities | (30,663) | (8,759) | |||
Effect of foreign currency exchange rates on cash and cash equivalents | (763) | 93 | |||
Net increase in cash and cash equivalents | 4,651 | 8,620 | |||
Cash and cash equivalents at the beginning of the period | 47,417 | 27,137 | |||
Cash and cash equivalents at the end of the period | $ | 52,068 | $ | 35,757 | |
Supplemental disclosure of cash flow information: | |||||
Cash paid for income taxes | $ | 1,744 | $ | 1,454 | |
Cash paid for interest | 1,295 | 1,634 | |||
Non-cash investing and financing activities: | |||||
Purchases of property and equipment financed by accounts payable | $ | 165 | $ | 105 | |
Acquisition of right-of-use operating lease assets for operating lease liabilities | 344 | 885 | |||
Use of notes payable to acquire business | - | 3,766 |
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.
(in thousands and unaudited)
Accumulated | ||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||
Shares | Amount | Capital | Earnings | Income (Loss) | 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) | |||||
Issuance of common stock from | ||||||||||||
treasury |
|
| 84 |
|
| 15 | 239 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
| (1) | (47) | |||||
Stock-based compensation |
|
| 1,969 |
|
|
|
| |||||
Restricted stock award |
|
| (209) |
|
| 13 | 209 | |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (32) |
|
| |||||
Net income |
|
|
| 1,878 |
|
|
| |||||
Balance at February 28, 2022 | 27,056 | 1,353 | 215,348 | 69,281 | 533 | (12,730) | (200,387) | |||||
Issuance of common stock from | ||||||||||||
treasury |
|
| 145 |
|
| 11 | 193 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
| (499) | (20,315) | |||||
Stock-based compensation |
|
| 2,369 |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (736) |
|
| |||||
Net income | 7,162 | |||||||||||
Balance at May 31, 2022 | 27,056 | $ | 1,353 | $ | 217,862 | $ | 76,443 | $ | (203) | (13,218) | $ | (220,509) |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
(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) | |||||
Issuance of common stock from | ||||||||||||
treasury |
|
| (2,014) |
|
| 143 | 2,222 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
| (58) | (1,441) | |||||
Stock-based compensation |
|
| 1,599 |
|
|
|
| |||||
Restricted stock award |
|
| (436) |
|
| 28 | 436 | |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (33) |
|
| |||||
Net loss |
|
|
| (46) |
|
|
| |||||
Balance at February 28, 2021 | 27,056 | 1,353 | 208,816 | 49,030 | 915 | (12,915) | (201,074) | |||||
Issuance of common stock from | ||||||||||||
treasury | 97 | 14 | 222 | |||||||||
Stock-based compensation |
|
| 2,370 |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (151) |
|
| |||||
Net income |
|
|
| 12,754 |
|
|
| |||||
Balance at May 31, 2021 | 27,056 | $ | 1,353 | $ | 211,283 | $ | 61,784 | $ | 764 | (12,901) | $ | (200,852) |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
(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 Leadership, Execution, Sales Performance, Productivity, Educational Improvement, and Customer Loyalty.Sales Performance. 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 (GAAP) have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our annual 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 AmericaGAAP 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 and three quarters ended November 30, 2017May 31, 2022 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. During the third quarter of fiscal 2022, our offices in China and Japan were especially affected as offices, schools, and other meeting spaces were closed and some personnel were prohibited from travel outside of their homes. 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. Although there is continued economic uncertainty resonating from the ongoing pandemic and other macroeconomic conditions, 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. However, certain 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 provisionsstandard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The fiscal 2022 adoption of ASU 2016-09. The adoption of this accounting standard2019-12 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):
May 31, | August 31, | ||||
2022 | 2021 | ||||
Finished goods | $ | 3,329 | $ | 2,468 | |
Raw materials | 27 | 28 | |||
$ | 3,356 | $ | 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 November 30, 2017,May 31, 2022, the carrying value of our financial instruments approximated their fair values. The fair values of our contingent consideration liabilities from previous business acquisitions are considered "level 3"“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 and three quarters ended November 30, 2017May 31, 2022 (in thousands):
Balance at August 31, 2021 | $ | 2,095 | |
Change in fair value | 28 | ||
Payments | (368) | ||
Balance at November 30, 2021 | 1,755 | ||
Change in fair value | 20 | ||
Payments | (303) | ||
Balance at February 28, 2022 | 1,472 | ||
Change in fair value | 12 | ||
Payments | (428) | ||
Balance at May 31, 2022 | $ | 1,056 |
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, all of the Jhana contingent consideration liability shown above was recorded as a component ofin accrued liabilities in our condensed consolidated balance sheet at November 30, 2017. The remainder of our contingent consideration liability is classified as a component of 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 – SHAREHOLDERS’ EQUITY
During the first three quarters of fiscal 2022, we have purchased $23.9 million of our common stock for treasury, which includes 499,411 shares purchased for $20.3 million in open-market transactions during the third quarter. Our purchases of common stock during fiscal 2022 were comprised of open market purchases and shares withheld for income taxes from recipients of stock-based compensation awards (Note 6) as shown below (in thousands):
Open market purchases | $ | 20,315 |
Shares withheld for taxes on stock- | ||
based compensation awards | 3,535 | |
$ | 23,850 |
NOTE 5 – REVENUE RECOGNITION
Contract Balances
Our deferred revenue totaled $85.5 million at May 31, 2022 and $88.6 million at August 31, 2021, of which $2.2 million and $2.7 million were classified as components of other long-term liabilities at May 31, 2022, and August 31, 2021, respectively. The amount of deferred revenue that was generated from subscription offerings totaled $68.5 million at May 31, 2022 and $77.0 million at August 31, 2021. During the quarter and three quarters ended May 31, 2022, we recognized $30.6 million and $87.0 million of previously deferred subscription revenue.
Deferred subscription revenue primarily consists of billings or payments received in advance of revenue being recognized from subscription services. Deferred revenue is recognized in sales as the applicable revenue recognition criteria are met. We generally invoice customers in annual installments upon execution of a contract. With the Leader in Me offering, the contract includes both a subscription membership and onsite consulting which can be invoiced to the client in one lump sum. In this circumstance, the entire lump sum is included in deferred subscription revenue. The deferred subscription revenue related to the Leader in Me membership is recognized as revenue over the life of the contract whereas the consulting is recognized when the consulting takes place.
Remaining Performance Obligations
Whenever 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 inflation, the average length of the contract term, and the ability of the Company to continue to enter into multi-year non-cancellable contracts. At May 31, 2022, we had $116.5 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 contain items such as deposits that are generally refundable at the client’s request prior to the satisfaction of the obligation.
Disaggregated Revenue Information
Refer to Note 9, Segment Information, to these condensed consolidated financial statements for our disaggregated revenue information.
NOTE 46 – 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 | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Long-term incentive awards | $ | 1,877 | $ | 2,094 | $ | 4,375 | $ | 4,408 | |||
Strive acquisition compensation | 267 | 50 | 912 | 50 | |||||||
Restricted stock awards | 165 | 175 | 508 | 525 | |||||||
Employee stock purchase plan | 60 | 51 | 177 | 144 | |||||||
Fully-vested share awards | - | - | 15 | - | |||||||
$ | 2,369 | $ | 2,370 | $ | 5,987 | $ | 5,127 |
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 quarterthree quarters ended November 30, 2017,May 31, 2022, we issued 251,234257,406 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,three quarters ended May 31, 2022, we withheld 102,76586,125 shares of our common stock to cover statutoryfor taxes on stock-based compensation awards that vested duringarrangements, which had a total fair value of $3.5 million (Note 4).
Adoption of the quarter. The following is aFranklin Covey Co. 2022 Omnibus Incentive Plan
On January 14, 2022, our shareholders approved the Franklin Covey Co. 2022 Omnibus Incentive Plan (the 2022 Plan), which authorized an additional 1,000,000 shares of common stock for issuance as stock-based payments. A more detailed description of the developments2022 Plan is set forth in our stock-based compensation plans duringDefinitive Proxy Statement filed with the quarter ended November 30, 2017.
Fiscal 2022 Long-Term Incentive Plan Award
On November 14, 2017,February 4, 2022, the Organization and Compensation Committee (the Compensation Committee) of the Board of Directors granted a new performance-based long-term incentive plan (LTIP)LTIP award to our executive officers and members of senior management. The fiscal 20182022 LTIP award has threetwo tranches, which consistone with a time-based vesting condition and one with a performance-based vesting condition as described below:
Time-Based Award Shares – NaN percent of the following: 1)2022 LTIP award shares vest to participants on August 31, 2024. The number of shares that vest after three yearsmay be earned by participants at the end of service; 2) fiscal 2020 qualified adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA); and 3) fiscal 2020 subscription sales. Twenty-five percent of a participant's award vests after three years ofthe service and theperiod totals 24,649 shares. The number of shares awarded in this tranche willdoes not fluctuate based on financial measures. The number of shares granted in this tranche totals 42,883 shares. The remaining two tranches of the award are divided between the achievement of financial measures.
Performance-Based Award Shares – The remaining shares of the fiscal 2022 LTIP award are earned based on the highest rolling four-quarter level of qualified adjusted earnings before interest, income taxes, depreciation, amortization, and certain levels of Adjusted EBITDA and subscription sales recognizedother charges (Adjusted EBITDA) achieved in fiscal 2020.the three-year period ending August 31, 2024. The number of shares that will vest to participants for these two tranchesthis tranche is variable and may be 50 percent of the award (minimum award threshold) or up to 200 percent of the participant'sparticipant’s award (maximum threshold). depending on the level of qualified Adjusted EBITDA achieved. The number of shares that may be earned for achieving 100 percent of the performance-based objective totals 73,929 shares. The maximum number of shares that may be awarded in connection with these tranchesthe performance-based tranche of the 2022 LTIP totals 257,300147,840 shares.
Fiscal 2022 Restricted Stock Award
Our annual restricted stock award granted to non-employee members of the Board of Directors is administered under the terms of our omnibus incentive plans, and is designed to provide our non-employee directors, who are not eligible to participate in our employee stock purchase plan, an opportunity to obtain an interest in the Company through the acquisition of shares of our common stock. The annual award is granted in January (following the annual shareholders’ meeting) of each year. For the fiscal 2018 LTIP has2022 award, each eligible director received a three-year life and expires on August 31, 2020.
Weighted-Average | |||||
Grant Date | |||||
Number of | Fair Value | ||||
Shares | Per Share | ||||
Restricted stock awards at | |||||
August 31, 2021 | 28,049 | $ | 24.96 | ||
Granted | 13,260 | 49.78 | |||
Forfeited | - | - | |||
Vested | (28,049) | 24.96 | |||
Restricted stock awards at | |||||
May 31, 2022 | 13,260 | $ | 49.78 |
Employee Stock Purchase Plan
We have an employee stock purchase plan (ESPP) that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of each fiscal quarter. During the quarter and three quarters ended November 30, 2017,May 31, 2022, we issued 9,8878,616 shares and 26,662 shares of our common stock to participants in the ESPP.
NOTE 57 – EARNINGS (LOSS)INCOME TAXES
For the three quarters ended May 31, 2022, we recorded income tax expense of $0.9 million on pre-tax income of $13.8 million, which resulted in an effective tax rate of approximately 7 percent for the first three quarters of fiscal 2022. We computed our income tax provision by applying an estimated annual effective income tax rate to the consolidated pre-tax income for the period, adjusting for discrete items arising during the period, which included a $3.0 million tax benefit from the utilization of foreign tax credits against which we had previously established a valuation allowance, as well as a $0.5 million tax benefit from the federal tax deduction for Foreign-Derived Intangibles Income (FDII). These benefits were partially offset by non-deductible executive compensation.
NOTE 8 – NET INCOME PER SHARE
The following is a reconciliation from basic earnings (loss)schedule shows the calculation of net income per share (EPS) to diluted EPSfor the periods presented (in thousands, except per-share amounts).
Quarter Ended | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Numerator for basic and | |||||||||||
diluted loss per share: | |||||||||||
Net income | $ | 7,162 | $ | 12,754 | $ | 12,852 | $ | 11,816 | |||
Denominator for basic and | |||||||||||
diluted loss per share: | |||||||||||
Basic weighted average shares | |||||||||||
outstanding | 14,173 | 14,145 | 14,244 | 14,068 | |||||||
Effect of dilutive securities: | |||||||||||
Other stock-based awards | 2 | 11 | 29 | 65 | |||||||
Diluted weighted average | |||||||||||
shares outstanding | 14,175 | 14,156 | 14,273 | 14,133 | |||||||
EPS Calculations: | |||||||||||
Net income per share: | |||||||||||
Basic | $ | 0.51 | $ | 0.90 | $ | 0.90 | $ | 0.84 | |||
Diluted | 0.51 | 0.90 | 0.90 | 0.84 |
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 69 – 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 the cost of 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 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 | ||||||
May 31, 2022 | Customers | Gross Profit | EBITDA | |||||
Enterprise Division: | ||||||||
Direct offices | $ | 47,416 | $ | 38,144 | $ | 9,978 | ||
International licensees | 2,610 | 2,340 | 1,303 | |||||
50,026 | 40,484 | 11,281 | ||||||
Education practice | 14,439 | 9,790 | 1,887 | |||||
Corporate and eliminations | 1,711 | 858 | (2,292) | |||||
Consolidated | $ | 66,176 | $ | 51,132 | $ | 10,876 | ||
Quarter Ended | ||||||||
May 31, 2021 | ||||||||
Enterprise Division: | ||||||||
Direct offices | $ | 42,704 | $ | 34,678 | $ | 8,894 | ||
International licensees | 2,395 | 2,069 | 821 | |||||
45,099 | 36,747 | 9,715 | ||||||
Education practice | 11,899 | 8,179 | 1,132 | |||||
Corporate and eliminations | 1,738 | 981 | (2,284) | |||||
Consolidated | $ | 58,736 | $ | 45,907 | $ | 8,563 | ||
Three Quarters Ended | ||||||||
May 31, 2022 | ||||||||
Enterprise Division: | ||||||||
Direct offices | $ | 134,037 | $ | 108,294 | $ | 28,664 | ||
International licensees | 8,196 | 7,344 | 4,418 | |||||
142,233 | 115,638 | 33,082 | ||||||
Education practice | 37,202 | 24,749 | 1,798 | |||||
Corporate and eliminations | 4,600 | 2,458 | (6,030) | |||||
Consolidated | $ | 184,035 | $ | 142,845 | $ | 28,850 | ||
Three Quarters Ended | ||||||||
May 31, 2021 | ||||||||
Enterprise Division: | ||||||||
Direct offices | $ | 115,185 | $ | 93,201 | $ | 21,729 | ||
International licensees | 7,421 | 6,454 | 3,608 | |||||
122,606 | 99,655 | 25,337 | ||||||
Education practice | 27,874 | 17,510 | (2,010) | |||||
Corporate and eliminations | 4,743 | 2,469 | (5,925) | |||||
Consolidated | $ | 155,223 | $ | 119,634 | $ | 17,402 |
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 is provided below (in thousands).
Quarter Ended | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Segment Adjusted EBITDA | $ | 13,168 | $ | 10,847 | $ | 34,880 | $ | 23,327 | |||
Corporate expenses | (2,292) | (2,284) | (6,030) | (5,925) | |||||||
Consolidated Adjusted EBITDA | 10,876 | 8,563 | 28,850 | 17,402 | |||||||
Stock-based compensation | (2,369) | (2,370) | (5,987) | (5,127) | |||||||
Increase in the fair value of | |||||||||||
contingent consideration liabilities | (12) | (118) | (60) | (164) | |||||||
Business acquisition costs | - | (300) | - | (300) | |||||||
Government COVID-19 assistance | - | - | - | 234 | |||||||
Gain from insurance settlement | - | - | - | 150 | |||||||
Depreciation | (1,217) | (1,423) | (3,686) | (4,904) | |||||||
Amortization | (1,329) | (1,238) | (4,106) | (3,503) | |||||||
Income from operations | 5,949 | 3,114 | 15,011 | 3,788 | |||||||
Interest income | 21 | 16 | 48 | 56 | |||||||
Interest expense | (405) | (525) | (1,274) | (1,633) | |||||||
Income before income taxes | 5,565 | 2,605 | 13,785 | 2,211 | |||||||
Income tax benefit (provision) | 1,597 | 10,149 | (933) | 9,605 | |||||||
Net income | $ | 7,162 | $ | 12,754 | $ | 12,852 | $ | 11,816 |
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 | Three Quarters Ended | ||||||||||
May 31, | May 31, | May 31, | May 31, | ||||||||
2022 | 2021 | 2022 | 2021 | ||||||||
Americas | $ | 56,081 | $ | 47,524 | $ | 151,283 | $ | 124,679 | |||
Asia Pacific | 5,609 | 7,922 | 19,896 | 21,351 | |||||||
Europe/Middle East/Africa | 4,486 | 3,290 | 12,856 | 9,193 | |||||||
$ | 66,176 | $ | 58,736 | $ | 184,035 | $ | 155,223 |
The following table presents our revenue disaggregated by type of service (in thousands).
Quarter Ended | Services and | Leases and | ||||||||||||
May 31, 2022 | Products | Subscriptions | Royalties | Other | Consolidated | |||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 24,647 | $ | 22,101 | $ | 668 | $ | - | $ | 47,416 | ||||
International licensees | 87 | 331 | 2,192 | - | 2,610 | |||||||||
24,734 | 22,432 | 2,860 | - | 50,026 | ||||||||||
Education practice | 5,780 | 8,185 | 474 | - | 14,439 | |||||||||
Corporate and eliminations | - | - | 315 | 1,396 | 1,711 | |||||||||
Consolidated | $ | 30,514 | $ | 30,617 | $ | 3,649 | $ | 1,396 | $ | 66,176 | ||||
Quarter Ended | ||||||||||||||
May 31, 2021 | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 23,266 | $ | 18,752 | $ | 686 | $ | - | $ | 42,704 | ||||
International licensees | 412 | - | 1,983 | - | 2,395 | |||||||||
23,678 | 18,752 | 2,669 | - | 45,099 | ||||||||||
Education practice | 4,298 | 7,171 | 430 | - | 11,899 | |||||||||
Corporate and eliminations | - | - | 345 | 1,393 | 1,738 | |||||||||
Consolidated | $ | 27,976 | $ | 25,923 | $ | 3,444 | $ | 1,393 | $ | 58,736 | ||||
Three Quarters Ended | ||||||||||||||
May 31, 2022 | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 68,710 | $ | 63,167 | $ | 2,160 | $ | - | $ | 134,037 | ||||
International licensees | 299 | 936 | 6,961 | - | 8,196 | |||||||||
69,009 | 64,103 | 9,121 | - | 142,233 | ||||||||||
Education practice | 11,850 | 23,157 | 2,195 | - | 37,202 | |||||||||
Corporate and eliminations | - | - | 879 | 3,721 | 4,600 | |||||||||
Consolidated | $ | 80,859 | $ | 87,260 | $ | 12,195 | $ | 3,721 | $ | 184,035 | ||||
Three Quarters Ended | ||||||||||||||
May 31, 2021 | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 60,589 | $ | 52,499 | $ | 2,097 | $ | - | $ | 115,185 | ||||
International licensees | 1,267 | - | 6,154 | - | 7,421 | |||||||||
61,856 | 52,499 | 8,251 | - | 122,606 | ||||||||||
Education practice | 8,018 | 17,977 | 1,879 | - | 27,874 | |||||||||
Corporate and eliminations | - | - | 1,053 | 3,690 | 4,743 | |||||||||
Consolidated | $ | 69,874 | $ | 70,476 | $ | 11,183 | $ | 3,690 | $ | 155,223 |
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, coaching and consulting services, and innovative delivery modalities create the connection between capabilities and results. Our business is currently structured around two divisions, the Enterprise Division and the Education Division. The first quarterEnterprise Division consists of our fiscal year includesDirect Office and International Licensee segments and is focused on selling our offerings to corporations, governments, not-for-profits, and other related organizations. Franklin Covey offerings delivered through the months of September, October,Enterprise Division are designed to help organizations and November.individuals achieve their own great results. Our first quarter of fiscal 2018 ended on November 30, 2017,Education Division is centered around the principles found in The Leader in Me and the first quarter of the prior year ended on November 26, 2016. On January 20, 2017, our Board of Directors approved a changeis dedicated to our fiscal quarter ending dates from a modified 52/53-week calendar, in which quarterly periods ended on different dates from year-to-year, to the last day of the calendar month in each quarter. The change was made to improve comparability between fiscal periods. Beginning with the second quarter of fiscal 2017, our fiscal quarters end on the last day of November, February,helping educational institutions build cultures that will produce great results, including increased student performance, improved school culture, and May. We do not believe that the change in quarter ending dates had a material impact on theincreased parental and teacher involvement.
Our financial results for the quarter ended November 30, 2017.
Strong growth of All Access Pass and Related Services. All Access Pass (AAP) and related sales increased 32 percent in the third quarter of fiscal 2022 to $39.1 million.
Education Division performance improvement. Education Division revenues grew 21 percent on the strength of increased consulting, coaching, and training days delivered during the quarter, increased recognition of previously deferred revenue related to Leader in Me subscriptions, and increased training and classroom material sales.
International sales improvement. Three of our five international direct offices reported improved sales compared with the third quarter of the prior year and international licensee revenues increased nine percent over the prior year, reflecting increased sales and improving economic conditions in many of the countries in which we and our licensees operate. We expect sales activity in Asia to improve in future periods as pandemic-related measures are relieved.
We were pleased with our overall sales growth during the quarter despite some international headwinds, including a 66 percent decrease in China office sales and a 15 percent decrease in Japan office sales primarily due to pandemic mitigation measures and economic conditions in those countries. Foreign exchange rates also had a $0.8 million adverse impact on the Company’s sales during the third quarter of fiscal 2022. Excluding these items, the remainder of the Company grew 19 percent compared with the third quarter of the prior year.
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 and geopolitical stability.
The following is a summary of consolidated financial highlights for the third quarter of fiscal 2022:
Sales – Our consolidated sales for the quarter ended May 31, 2022 increased 13 percent, or $7.4 million, to $66.2 million compared with $58.7 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 and the ongoing recovery. Enterprise Division sales increased 11 percent, or $4.9 million, to $50.0 million compared with $45.1 million in fiscal 2021, despite significantly decreased sales in China and Japan during the quarter resulting primarily from the ongoing pandemic. During the third quarter of fiscal 2022, AAP and related sales increased 32 percent compared with the prior year and annual revenue retention remained strong at well above 90 percent. Education Division sales grew 21 percent compared with the prior year on the strength of increased consulting, coaching, and training days delivered during the quarter, increased recognition of previously deferred revenue related to Leader in Me subscriptions, and increased training and classroom material sales when compared with the prior year. During the third quarter of fiscal 2022, sales improved in each of our Direct Office, International Licensee, and Education Division segments compared with the third quarter of fiscal 2021.
At November 30, 2017,May 31, 2022, we had $15.9$68.5 million of deferred subscription revenue on our balance sheet, a 24 percent, or $13.2 million, increase compared with deferred subscription revenue on our balance sheet at May 31, 2021. At May 31, 2022, we had $48.0 million of unbilled deferred revenue whichcompared with $41.3 million of unbilled deferred revenue at May 31, 2021. Unbilled deferred revenue represents business that is contracted but unbilled (primarily from multiyear subscription contracts), and excluded from our balance sheet. Approximately 42 percent of our AAP contracts are currently multi-year arrangements.
Cost of Sales/Gross Profit – Our cost of sales totaled $15.0 million for the quarter ended May 31, 2022, compared with $12.8 million in the third quarter of fiscal 2021. Gross profit for the quarter ended May 31, 2022 increased 11 percent to $51.1 million compared with $45.9 million in the prior year. Our gross margin for the third quarter of fiscal 2022 remained strong at 77.3 percent of sales compared with 78.2 percent in the prior year, reflecting minor changes in the mix of services and products in consolidated sales. Cost of goods sold and gross profit each increased primarily due to higher sales as described above.
Operating Expenses – Our operating expenses for the third quarter of fiscal 2022 increased $2.4 million compared with the third quarter of the prior year, which was primarily due to a $2.5 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 third quarter of fiscal 2022 decreased to 64.4 percent compared with 68.3 percent in the prior year. Our SG&A expenses increased primarily due to increased associate costs resulting from new personnel and increased salaries; increased commissions on higher sales; increased travel expense; and increased marketing and advertising expenses. We believe that multi-year contractual arrangements will provide valuehad 265 client partners at May 31, 2022 compared with 259 client partners at May 31, 2021. We currently anticipate having 303 client partners at August 31, 2022.
Income Taxes – Our income tax benefit for the quarter ended May 31, 2022 was $1.6 million, compared with an income tax benefit of $10.1 million for the third quarter of fiscal 2021. Our income tax benefit in fiscal 2022 resulted primarily from the utilization of $3.0 million in foreign tax credits against which we had previously established a valuation allowance. Our income tax benefit in fiscal 2021 was primarily the result of a $10.9 million reduction in the valuation allowance against certain deferred tax assets, based on our return to our clientsthree-year cumulative pre-tax income measurement during the third quarter of fiscal 2021, and an outlook for continued strong financial performance.
Operating Income, Net Income, and Adjusted EBITDA – As a result of increased sales and a more predictable revenue streamstrong gross margin, our income from operations for the Companythird quarter of fiscal 2022 improved 91 percent, or $2.8 million, to $5.9 million compared with $3.1 million in future periods.
Cash Flows from Operating Activities and recognized overLiquidity – Our cash flows provided by operating activities for the lives of the subscriptions, and to our existing business model as clients transition from traditional delivery channels. As expected, the transition to the SaaS business model has been disruptive, especially to fiscal 2017 financial results, as we deferred a significant amount of revenue. But we believe that the transition to a SaaS business model is working and we are beginning to see the benefits of this business model in the first quarter of fiscal 2018. For the quarterthree quarters ended November 30, 2017, our consolidated salesMay 31, 2022 increased 2028 percent to $47.9$39.5 million compared with $39.8$30.9 million in the first three quarters of fiscal 2021. At May 31, 2022, we had $52.1 million of cash with no borrowings on our $15.0 million secured line of credit facility even after using $20.3 million of cash to repurchase 499,411 shares of our common stock on the open market during the third quarter of fiscal 2017. Sales growth and the corresponding improvement in2022.
Further details regarding our gross margin were primarily driven by the recognition of previously deferred high-margin subscription sales during the quarter. These improvements were partially offset by increased operating expenses as we continue to work through the transition to a subscription model and seek to reorganize and optimize our operations in order to improve profitability. We believe the first quarter of fiscal 2018 represents a key inflection point that we believe will begin a pattern of improved financial performance compared with prior periods. However, the ongoing transition to the SaaS business model may continue to present challenges to our quarterly financial results during certain periods of fiscal 2018 when compared with the prior year.
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, 2017May 31, 2022 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 | |||||||||
May 31, | % of | May 31, | % of | |||||||
2022 | Sales | 2021 | Sales | Change | ||||||
Sales | $ | 47,416 | 100.0 | $ | 42,704 | 100.0 | $ | 4,712 | ||
Cost of sales | 9,272 | 19.6 | 8,026 | 18.8 | 1,246 | |||||
Gross profit | 38,144 | 80.4 | 34,678 | 81.2 | 3,466 | |||||
SG&A expenses | 28,166 | 59.4 | 25,784 | 60.4 | 2,382 | |||||
Adjusted EBITDA | $ | 9,978 | 21.0 | $ | 8,894 | 20.8 | $ | 1,084 |
During the firstthird quarter of fiscal 2018,2022, Direct Office segment revenue increased 11 percent, or $4.7 million, to $47.4 million compared with $42.7 million in the prior year. The increase was primarily the result of strong performance in our offices in the United States and Canada where revenue increased 19 percent in the quarter, but was partially offset by decreased sales from our China and Japan international direct offices and unfavorable foreign exchange rates. During the third quarter of fiscal 2022 our AAP subscription and subscription related revenues remained strong and increased 32 percent over the third quarter of fiscal 2021, while annual AAP revenue retention remained well above 90 percent. The sum of deferred subscription revenue on our balance sheet combined with unbilled multi-year contracts entered into, increased 21 percent to $116.5 million, compared with May 31, 2021. We believe the continued increase in invoiced AAP and other subscription sales, which are initially recognized on the balance sheet, provide a solid base for continued revenue growth in future periods.
The performance of our international direct offices during the third quarter was directly related to the level of recovery from the pandemic and corresponding business and social activity in each country. Increased sales in the United Kingdom, Australia, and Germany/Switzerland/Austria offices were offset by decreased sales in China and Japan. During the third quarter of fiscal 2022, China had a resurgence of COVID cases and enacted strict lockdown measures in response to the rise in cases. These lockdown measures led to a 66 percent reduction in quarter-over-quarter sales in our China office. Sales in our Japan office decreased by 15 percent compared to the prior year and were hampered by economic activity and the fear of resurging COVID cases. While we dissolvedremain confident in our international direct offices’
ability to grow in future periods, growth in our China and Japan offices may continue to be negatively impacted by significant ongoing governmental pandemic-related mandates in the Strategic Markets segmentfourth quarter of fiscal 2022 and combined thosein future periods. Foreign exchange rates had a $0.7 million unfavorable impact on our Direct Office sales groups withand a $0.2 million unfavorable effect on operating income during the Direct Offices segment since mostthird quarter of fiscal 2022.
We also anticipate that the ongoing conflict in Ukraine may have an adverse impact upon our international direct offices and licensees as the negative economic and tragic human toll of the war spreads to other regions and influences business activity. Our products and services in Russia and the Ukraine are delivered by independent licensees and we do not have any long-term investment in either of these groupscountries. During the second quarter of fiscal 2022, we suspended our relationship with our licensee in Russia and our operations in Ukraine have also been limited due to the conflict. It is unclear when or if our licensees will be able to resume normal operations in Russia and Ukraine. Our royalty revenue from Ukraine and Russia is not generally material and totaled approximately $0.1 million in fiscal 2021.
Gross Profit. Gross profit increased primarily due to increased sales as previously described. Direct Office gross margin remained strong, and was 80.4 percent compared with 81.2 percent in the prior year.
SG&A Expense. Direct Office SG&A expense increased primarily due to increased associate costs resulting from new personnel, increased salaries, and increased commissions on higher sales; increased marketing costs; and increased travel expenses.
International Licensees Segment
In foreign locations where we do not have a common focus--selling subscription services.directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations in the periods indicated (in thousands):
Quarter Ended | Quarter Ended | |||||||||
May 31, | % of | May 31, | % of | |||||||
2022 | Sales | 2021 | Sales | Change | ||||||
Sales | $ | 2,610 | 100.0 | $ | 2,395 | 100.0 | $ | 215 | ||
Cost of sales | 270 | 10.3 | 326 | 13.6 | (56) | |||||
Gross profit | 2,340 | 89.7 | 2,069 | 86.4 | 271 | |||||
SG&A expenses | 1,037 | 39.7 | 1,248 | 52.1 | (211) | |||||
Adjusted EBITDA | $ | 1,303 | 49.9 | $ | 821 | 34.3 | $ | 482 |
Sales. International licensee revenues are primarily comprised of royalty revenues. The increase in direct office saleslicensee revenues during the third quarter was primarily due to increased royalty revenues from certain licensees as economies in many of the recognition of previously deferred revenue from subscription sales as discussed above. In additioncountries where our licensees operate continue to recover. During the benefit from increased recognition of deferred sales, we had $1.2 million of increased revenue from businesses acquired in the second halfthird quarter of fiscal 2017, a $0.9 million intellectual property sale, and a $0.8 million increase in onsite presentation revenues.
Gross Profit. Gross profit increased primarily due to increased royalty revenues and AAP revenues as previously described. Gross margin improved primarily due to the mix of fiscal 2018. We are currently planningrevenue recognized during the third quarter, which included more royalty and AAP revenues and less product and licensee support revenues than in the prior year.
SG&A Expense. International licensee SG&A expenses decreased primarily due to launchlower associate costs and efforts to reduce operating expenses in the AAP in 15 additional languages later in fiscal 2018. We believe that our international direct offices will be favorably impacted bylicensee segment during the availability of the content and offerings of the AAP to our foreign clients.third quarter.
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 The Leader In Me program designed for students primarily in K-6 elementary schools. We continue to see increased demand for The Leader in Me program in many school districts program. The following comparative information is for our Education Division in the United States as well asperiods indicated (in thousands):
Quarter Ended | Quarter Ended | |||||||||
May 31, | % of | May 31, | % of | |||||||
2022 | Sales | 2021 | Sales | Change | ||||||
Sales | $ | 14,439 | 100.0 | $ | 11,899 | 100.0 | $ | 2,540 | ||
Cost of sales | 4,649 | 32.2 | 3,720 | 31.3 | 929 | |||||
Gross profit | 9,790 | 67.8 | 8,179 | 68.7 | 1,611 | |||||
SG&A expenses | 7,903 | 54.7 | 7,047 | 59.2 | 856 | |||||
Adjusted EBITDA | $ | 1,887 | 13.1 | $ | 1,132 | 9.5 | $ | 755 |
Sales. Education Division sales for the quarter ended May 31, 2022 grew primarily due to increased consulting, coaching, and training days delivered during the quarter, increased recognition of previously deferred revenue related to Leader in international locations, which contributed to a $0.4 million, or five percent, increase in Education practice revenuesMe subscriptions, and increased training and classroom material sales when compared with the prior year. We continueDespite an educational environment which has continued to make substantial investmentsbe very challenging, we have seen strengthening trends in new sales personnel for our Education practicebusiness during the first, second, and expect that ourthird quarters of fiscal 2022 and throughout fiscal 2021. As of May 31, 2022, the Leader in Me program is used in over 3,100 schools in the United States and Canada.
Gross Profit. Education Division gross profit increased primarily due to sales will continue to grow whengrowth as previously described. Education segment gross margin decreased compared with the prior periods. Consistent with prior fiscal years, we expect the majority of sales growth from our Education practiceyear primarily due to occur during our fourth fiscal quarter.
SG&A Expenses. Education SG&A expenses increased primarily due to increased associate costs from additional commission expense on improved sales, additional sales support headcount, and adapt our curriculumincreased salaries compared with the prior year.
Other Operating Expense Items
Depreciation – Depreciation expense decreased $0.2 million compared with the third quarter of the prior year primarily due to local preferencesthe full depreciation of certain assets during fiscal 2021 and customs, if necessary. Our international licensee revenues decreased byin the first three quarters of fiscal 2022, combined with reduced capital expenditures over the past two years. We currently expect depreciation expense will total approximately $5.2 million in fiscal 2022.
Amortization – Amortization expense increased $0.1 million compared with the prior year due to reduced revenues at somethe acquisition of our international licensee operations. We anticipate that the launch of the All Access Pass in numerous new languages later in fiscal 2018 will increase sales at our international licensees.
Income Taxes
Our gross marginincome tax benefit for the quarter ended November 30, 2017May 31, 2022 was 68.6$1.6 million on pre-tax income of $5.6 million, for an effective income tax benefit rate of approximately 29 percent, of sales compared with 63.6an effective tax benefit rate of approximately 390 percent in the firstthird quarter of the prior year as we recognized an income tax benefit of $10.1 million on pre-tax income of $2.6 million. Our income tax benefit in fiscal 2022 resulted primarily from the utilization of $3.0 million in foreign tax credits against which we had previously established a valuation allowance, as well as a $0.5 million tax benefit from the federal tax deduction for Foreign-Derived Intangibles Income (FDII), which were partially offset by disallowed deductions for executive compensation. Our income tax benefit in fiscal 2021 was primarily the result of a $10.9 million reduction in the valuation allowance against deferred tax assets, based on our return to three-year cumulative pre-tax income measurement during the third quarter of fiscal 2017. 2021 and the outlook for continued strong financial performance.
Three Quarters Ended May 31, 2022 Compared with the Three Quarters Ended May 31, 2021
Enterprise Division
Direct Offices Segment
The improvement was primarily due to the recognition of previously deferred subscription service revenue, which has a higher gross margin than many offollowing comparative information is for our other offerings.
Three Quarters | Three Quarters | |||||||||
Ended | Ended | |||||||||
May 31, | % of | May 31, | % of | |||||||
2022 | Sales | 2021 | Sales | Change | ||||||
Sales | $ | 134,037 | 100.0 | $ | 115,185 | 100.0 | $ | 18,852 | ||
Cost of sales | 25,743 | 19.2 | 21,984 | 19.1 | 3,759 | |||||
Gross profit | 108,294 | 80.8 | 93,201 | 80.9 | 15,093 | |||||
SG&A expenses | 79,630 | 59.4 | 71,472 | 62.0 | 8,158 | |||||
Adjusted EBITDA | $ | 28,664 | 21.4 | $ | 21,729 | 18.9 | $ | 6,935 |
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 |
During the first three quarters of fiscal 2022, our Direct Office segment revenue increased 16 percent to $134.0 million compared with $115.2 million in the first three quarters of fiscal 2021. The increase is the result of strong performance in our SG&A expensesoffices in the United States and Canada which grew 19 percent in the first three quarters of fiscal 2022, and sales growth from our international direct offices which increased six percent over the prior year. During the first three quarters of fiscal 2022 our AAP subscription and subscription related revenues remained strong and increased 29 percent over the same period of fiscal 2021, while annual AAP revenue retention remained well above 90 percent. We are encouraged by this momentum as invoiced sales in the U.S./Canada direct offices were the highest ever recorded in a quarterly period during our second quarter of fiscal 2022. We believe the continued increase in invoiced AAP and other subscription sales, which are initially deferred and recognized on the balance sheet, provide a solid base for continued revenue growth in future periods.
The performance of our international direct offices during the quarter ending November 30, 2017,first three quarters of fiscal 2022 was directly related to the level of recovery from the pandemic and corresponding business activity in each country. For the first three quarters of fiscal 2022, sales increased in each of our international direct offices, except for China, which had a resurgence of COVID cases late in the second and during the third quarters of fiscal 2022 and enacted strict lockdown measures to mitigate the spread of the virus. Sales growth during the first three quarters of fiscal 2022 was led by our office in the United Kingdom, which grew 51 percent compared with fiscal 2021 and was followed by more moderate growth at our offices in Australia, Germany/Switzerland/Austria, and Japan. While we remain confident in our international direct offices’ ability to grow in future periods, growth in our China and Japan offices is expected to be adversely impacted by mandated restrictions aimed to curb the ongoing pandemic and prevailing economic conditions in those countries. Foreign exchange rates had a $0.8 million unfavorable impact on our Direct Office sales and a $0.4 million adverse effect on operating income during the first three quarters of fiscal 2022.
Gross Profit. Direct Office gross profit increased primarily due to 1) a $4.0 million increase in spending related to new sales growth as previously described. Direct Office gross margin remained strong, and sales-related personnel (especiallywas 80.8 percent compared with 80.9 percent in the Education Division)prior year.
SG&A Expense. Direct Office SG&A expense for the first three quarters of fiscal 2022 increased primarily due to increased associate costs resulting from new personnel, the acquisition of Strive Talent, Inc., and increased salaries; increased commissions on higher sales,sales; increased marketing; increased platform and new personnel from business acquisitions completed in fiscal 2017;content development expense; and 2) a $1.2 million changeincreased travel costs.
International Licensees Segment
The following comparative information is for our international licensee operations in the fair valueperiods indicated (in thousands):
Three Quarters | Three Quarters | |||||||||
Ended | Ended | |||||||||
May 31, | % of | May 31, | % of | |||||||
2022 | Sales | 2021 | Sales | Change | ||||||
Sales | $ | 8,196 | 100.0 | $ | 7,421 | 100.0 | $ | 775 | ||
Cost of sales | 852 | 10.4 | 967 | 13.0 | (115) | |||||
Gross profit | 7,344 | 89.6 | 6,454 | 87.0 | 890 | |||||
SG&A expenses | 2,926 | 35.7 | 2,846 | 38.4 | 80 | |||||
Adjusted EBITDA | $ | 4,418 | 53.9 | $ | 3,608 | 48.6 | $ | 810 |
Sales. During thefirst three quarters of estimated contingent considerationfiscal 2022, our licensee revenues increased primarily due to increased royalty revenues from previous business acquisitions. Consistent with prior years, wecertain licensees as economies in many of the countries where our licensees operate continue to investrecover. The ongoing recovery led to improved licensee royalty revenues and continued increases in new sales and sales support personnel, and we had 224 client partners at November 30, 2017 compared with 216 client partners at November 26, 2016.our share of AAP sales. During the first quarterthree quarters of fiscal 2017, we determined that2022, our royalty revenues increased 13 percent and our share of AAP revenues increased by seven percent compared with the likelihood of another contingent consideration payment arisingprior year. We receive additional revenue from the acquisition of NinetyFive 5, LLC was becoming less probable. Accordingly, we reversedinternational licensees for AAP sales to cover a portion of the previously accrued contingent consideration expense associated withcosts of operating the potential payment, which resulted inAAP portal. Partially offsetting these increases were decreased service revenues through our licensee support team and decreased wholesale product sales. Foreign exchange rates had a significant credit$0.2 million unfavorable impact on international licensee sales and operating results during the first quarterthree quarters of fiscal 2017 that did not repeat in the first quarter of fiscal 2018. These increases were partially offset by decreased operating expenses in various other areas of our business.
Gross Profit. Gross profit increased slightlydue to increased revenues as previously described. Gross margin improved primarily due to the acquisitionmix of assets in fiscal 2017 andrevenue recognized during the first quarterthree quarters of fiscal 2018. Based2022, which included more royalty and AAP revenues and less service and product sales than in the prior year.
SG&A Expense. International licensee SG&A expenses were essentially flat compared with the prior year.
Education Division
The following comparative information is for our Education Division in the periods indicated (in thousands):
Three Quarters | Three Quarters | |||||||||
Ended | Ended | |||||||||
May 31, | % of | May 31, | % of | |||||||
2022 | Sales | 2021 | Sales | Change | ||||||
Sales | $ | 37,202 | 100.0 | $ | 27,874 | 100.0 | $ | 9,328 | ||
Cost of sales | 12,453 | 33.5 | 10,364 | 37.2 | 2,089 | |||||
Gross profit | 24,749 | 66.5 | 17,510 | 62.8 | 7,239 | |||||
SG&A expenses | 22,951 | 61.7 | 19,520 | 70.0 | 3,431 | |||||
Adjusted EBITDA | $ | 1,798 | 4.8 | $ | (2,010) | (7.2) | $ | 3,808 |
Sales. Education Division sales for the three quarters ended May 31, 2022 grew on propertythe strength of increased Leader in Me subscription revenues and equipment acquisitionssubscription services, including coaching and consulting, together with related increases in sales of materials used by schools in connection with their membership subscription. Despite an educational environment which has continued to be very challenging, we have seen strengthening trends in our Education business during the first three quarters of fiscal 20172022 and expected capital additions duringthroughout fiscal 2018, including the completion of a new enterprise resource planning (ERP) system and new All Access Pass portal, we expect depreciation expense will total approximately $5.5 million in fiscal 2018.
Gross Profit. Education Division gross profit increased primarily due to increased sales as previously described. Education segment gross margin improved compared with the prior year primarily due to business acquisitions completed duringincreased Leader in Me subscription revenues combined with a slight decrease in fixed operating costs, and an increase in coaching and consulting sales with little variable cost increase as most coaches are salaried. Education Division gross margin was also favorably impacted by increased sales of high-margin materials compared with the last twoprior year.
SG&A Expenses. Education SG&A expenses increased primarily due to increased associate costs from additional commission expense on improved sales, additional sales support headcount, and increased salaries compared with the prior year.
Other Operating Expense Items
Depreciation – For the first three quarters of fiscal 2017. We currently expect2022, our amortizationdepreciation expense from definite-lived intangibledecreased $1.2 million compared with the prior year primarily due to the full depreciation of certain assets will total $5.4during fiscal 2021 and in the first three quarters of fiscal 2022, combined with reduced capital expenditures over the past two years.
Amortization – Amortization expense in the first three quarters of fiscal 2022 increased $0.6 million compared with the prior year primarily due to the acquisition of Strive Talent, Inc. in the third quarter of fiscal 2018.
Interest Expense – Our interest expense for the first three quarters of fiscal 2022 decreased $0.4 million primarily due to reduced term loan debt and a reduced principal balance on our financing obligation (long-term lease on our corporate campus) compared with the prior year.
Income Taxes
Our income tax provision for the three quarters ended May 31, 2022 was $0.9 million on pre-tax income of $13.8 million, for an effective income tax benefitexpense rate for the quarter ended November 30, 2017 was 36.0of approximately seven percent, compared with an effective benefit rate of 32.7approximately 434 percent in the first quarterthree quarters of the prior year. The lower tax benefit rate in the prior year was due primarily to lower tax rates applied to taxable losses in certain foreign jurisdictions. Computation of a reliable annual effective income tax rate is currently impracticable because of uncertainties regarding the amount of All Access Pass and other subscription revenues for the fiscal year relative to our other revenues. Therefore,2021 as we computed therecognized an income tax benefit of $9.6 million on pre-tax income of $2.2 million. Our effective tax rate in fiscal 2022 was reduced by the utilization of $3.0 million of foreign tax credits on which we had previously established a valuation allowance, and a $0.5 million tax benefit from the federal tax deduction for FDII, which were partially offset by disallowed deductions for executive compensation. Our income tax benefit in fiscal 2021 was primarily the result of a $10.9 million reduction in the valuation allowance against certain deferred tax assets, based on our return to three-year cumulative pre-tax income during the third quarter ended November 30, 2017 by applying actual year-to-date adjustmentsof fiscal 2021 and tax rates to our pre-tax loss.
We paid $0.6$1.7 million in cash for income taxes during the quarter ended November 30, 2017, wefirst three quarters of fiscal 2022. We anticipate that our total cash paid for income taxes over the coming three to five years will be less than our total income tax provision asto the extent we continueare able to emphasize AAP and other subscription sales. The reduced taxable income from the deferral of subscription revenues will
LIQUIDITY AND CAPITAL RESOURCES
Introduction
In light of current geopolitical events, including uncertain macroeconomic conditions, international conflicts, and the ongoing impacts from the COVID-19 pandemic with an unclear path to national and global economic recovery, a major priority of ours over the past two years has been the continued maintenance and preservation of liquidity. We believe these efforts have been successful and have provided the ability to maintain operations, make strategic investments, and purchase shares of our common stock. At May 31, 2022, our cash balance at November 30, 2017 was $8.1and cash equivalents totaled $52.1 million, with $21.0 million availableno borrowings on our line of$15.0 million revolving credit facility. Of our $8.1$52.1 million in cash at November 30, 2017, substantially all of itMay 31, 2022, $15.7 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 May 31, 2022, our debt payments.
receivable of not less than 150% of the aggregate amount of the outstanding borrowings on the revolving line of credit, may not exceed 150 percentthe undrawn amount of consolidated accounts receivable. Weoutstanding letters of credit, and the amount of unreimbursed letter of credit disbursements.
In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the credit agreement entered into on August 7, 2019 (the 2019 Credit Agreement). At May 31, 2022, 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 quarterthree quarters 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 during the quarter ended November 30, 2017 totaled $2.3first three quarters of fiscal 2022 increased 28 percent to $39.5 million compared with $2.9$30.9 million of cash used in the first quarterthree quarters of the prior year.fiscal 2021. The improvement inoperating cash flows from operating activities was primarily attributable to increaseddriven by improved operating results over the first three quarters of fiscal 2021 and strong collections of accounts receivable and improved operating results when compared withreceivable. Despite the prior year. While we are required to defer AAPpandemic and other subscription revenues overeconomic difficulties, our collection of accounts receivable remained strong and provided the lives of the underlying contracts, we invoice the entire contract amountnecessary cash to support our operations, pay our obligations, 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 impacted by payments of seasonally high accrued liability (primarily due to year-end bonuses) and accounts payable balances.
Cash Flows FromUsed For Investing Activities and Capital Expenditures
During the first three quarters of fiscal 2022 our cash used for investing activities during the first quarter of fiscal 2018 totaled $4.2$3.5 million. TheOur 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 three quarters of fiscal 2022 consisted primarily of computer software costs relatedhardware, leasehold improvements on our corporate campus, and software. We expect to significant upgradescontinue investing in our content and delivery modalities, including the AAP portal and the replacement ofLeader in Me subscription services and also expect to make required leasehold improvements on our existing ERP software. Our new ERP system was successfully launched in early December 2017.corporate campus. We 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 $0.7$1.4 million during the first quarterthree quarters of fiscal 20182022 on the development of various offerings, including the continued developmentcontent and expansion of our AAP offerings. We believe continued investment in our content and offerings is criticalkey to future growth and the development of our future success and anticipatesubscription offerings. We currently expect that our capital spending for curriculum development will increase during the fourth quarter and will total $6.5$4.0 million during fiscal 2018.
Cash Flows FromUsed For Financing Activities
For the quarterthree quarters ended November 30, 2017,May 31, 2022, our net cash provided byused for financing activities totaled $1.2$30.7 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 during the first quarterincluded $23.9 million for purchases of fiscal 2018 wereour common stock for treasury, $6.7 million used for principal payments on our term loansloan and the financing obligation on our corporate campus,obligations, and $2.0$1.1 million of cash used to purchase sharespay contingent consideration liabilities from previous business acquisitions. Our purchases of our common stock which consisted entirelyduring the first three quarters of fiscal 2022 were comprised of $20.3 million from open market purchases and $3.5 million for shares withheld forfrom participants to pay statutory income taxes on stock-based compensation awards that vestedwhich were distributed during the first quarterfiscal 2022. Partially offsetting these uses of cash were $1.0 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.
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.GAAP. 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.GAAP. Actual results may differ from these estimates under different assumptions or conditions, including changes in economic conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain 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 ofsubscription offerings, our Education practice, the impact of new accounting standards on our financial condition and results of operations,ability to hire sales professionals, 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; inflation and other macroeconomic 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 onMay 31, 2022, 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. Ouracquisitions. Since most of our long-term obligations have a fixed interest rate, our overall interest rate sensitivity is primarily influenced by any amounts borrowed on term loans 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 3.22.7 percent at November 30, 2017,May 31, 2022. Based on expected increases in interest rates over the remainder of fiscal 2022 and into fiscal 2023, we maywill incur additional expense if interest rates increaseon our variable-rate loans 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, 2017May 31, 2022 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.
The interest rate on our 2019 Credit Agreement is currently based upon published LIBOR rates, which are expected to be discontinued in the future. The provisions of the 2019 Credit Agreement address the eventual transition away from LIBOR pricing and provide alternative interest rate pricing. We do not have any other material contracts which are dependent upon LIBOR pricing and we believe that we are prepared for the discontinuation of LIBOR rate pricing.
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 quarterthree quarters 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.effect on our clients, including educational institutions, and client demand for our services; our ability to conduct in-person programs; our ability to sell and provide our services and solutions, including the impact of travel restrictions and from people working from home; the ability of our clients to pay for our services on a timely basis or at all; the ability to maintain sufficient liquidity; and any closure of our offices. Any of these events, or related conditions, could cause or contribute to the risks and uncertainties described in our Annual Report and could materially adversely affect our business, financial condition, results of operations, cash flows, and stock price.
Our results of operations may be adversely impacted by the costs of persistent and rising inflation if we are unable to pass these costs on to our clients.
In recent quarters inflation has increased significantly in the United States and in many of the countries where we conduct business. Inflation increases the cost of many aspects of our business, including the cost of our products sold, benefit costs, travel expenses, and associate salaries since we must increase our compensation to retain key personnel. If we are unable to increase our prices to sufficiently offset the increased costs of doing business, our results of operations and profitability may be adversely impacted.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition, and operations.
The global credit and financial markets have from time to time experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. The financial markets and the global economy may also be adversely affected by the current or anticipated impact of military conflict, including the conflict between Russia and Ukraine, terrorism, or other geopolitical events. Sanctions imposed by the United States and other countries in response to such conflicts, including the one in Ukraine, may also adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others could exacerbate market and economic instability. There can be no assurance that further deterioration in markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSThe following table summarizes the purchases of our common stock during the fiscal quarter ended May 31, 2022:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1) (in thousands) | ||||||
March 1, 2022 to March 31, 2022 | - | $ | - | - | $ | 39,824 | ||||
April 1, 2022 to April 30, 2022 | 262,901 | $ | 42.78 | 262,901 | $ | 28,577 | ||||
May 1, 2022 to May 31, 2022 | 236,510 | $ | 38.34 | 236,510 | $ | 19,510 | ||||
Total Common Shares | 499,411 | $ | 40.68 | 499,411 |
(1)On November 30, 2017:
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 | - | $ | - | - |
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: July 7, 2022 | By: | /s/ Paul S. Walker | |||
Paul S. Walker | |||||
President and Chief Executive Officer | |||||
(Duly Authorized Officer) | |||||
Date: July 7, 2022 | By: | /s/ Stephen D. Young | |||
Stephen D. Young | |||||
Chief Financial Officer | |||||
(Principal Financial and Accounting Officer) |