UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2017
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file no. 1-11107
FRANKLIN COVEY CO.
(Exact name of registrant as specified in its charter)
Utah | 87-0401551 | |
(State or other jurisdiction of | (I.R.S. employer identification | |
2200 West Parkway Boulevard | 84119-2099 | |
Salt Lake City, Utah | (Zip Code) | |
(Address of principal executive offices) | ||
Registrant’s telephone number, | (801) 817-1776 | |
Including area code |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.05 Par Value | FC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated | £ | Accelerated Filer | T | |||
Non-accelerated | £ | Smaller Reporting Company | £ | |||
Emerging Growth Company | £ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No T
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of Common Stock as of the latest practicable date:
13,852,825 shares of Common Stock as of DecemberMarch 31, 20172023
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share amounts)
February 28, | August 31, | ||||
2023 | 2022 | ||||
(unaudited) | |||||
ASSETS | |||||
Current assets: | |||||
Cash and cash equivalents | $ | 55,121 | $ | 60,517 | |
Accounts receivable, less allowance for doubtful accounts of $4,116 and $4,492 | 53,729 | 72,561 | |||
Inventories | 3,468 | 3,527 | |||
Prepaid expenses and other current assets | 18,532 | 19,278 | |||
Total current assets | 130,850 | 155,883 | |||
Property and equipment, net | 9,853 | 9,798 | |||
Intangible assets, net | 42,651 | 44,833 | |||
Goodwill | 31,220 | 31,220 | |||
Deferred income tax assets | 3,555 | 4,686 | |||
Other long-term assets | 15,956 | 12,735 | |||
$ | 234,085 | $ | 259,155 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||
Current liabilities: | |||||
Current portion of notes payable | $ | 5,835 | $ | 5,835 | |
Current portion of financing obligation | 3,365 | 3,199 | |||
Accounts payable | 8,488 | 10,864 | |||
Deferred subscription revenue | 74,089 | 85,543 | |||
Other deferred revenue | 14,619 | 14,150 | |||
Accrued liabilities | 18,654 | 34,205 | |||
Total current liabilities | 125,050 | 153,796 | |||
Notes payable, less current portion | 4,823 | 7,268 | |||
Financing obligation, less current portion | 6,233 | 7,962 | |||
Other liabilities | 6,419 | 7,116 | |||
Deferred income tax liabilities | 199 | 199 | |||
Total liabilities | 142,724 | 176,341 | |||
Shareholders’ equity: | |||||
Common stock, $0.05 par value; 40,000 shares authorized, 27,056 shares issued | 1,353 | 1,353 | |||
Additional paid-in capital | 225,643 | 220,246 | |||
Retained earnings | 88,427 | 82,021 | |||
Accumulated other comprehensive loss | (526) | (542) | |||
Treasury stock at cost, 13,216 shares and 13,203 shares | (223,536) | (220,264) | |||
Total shareholders’ equity | 91,361 | 82,814 | |||
$ | 234,085 | $ | 259,155 | ||
| November 30, | August 31, | |||||||
| 2017 | 2017 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 8,087 | $ | 8,924 | ||||
| Accounts receivable, less allowance for doubtful accounts of $2,738 and $2,310 | 50,153 | 66,343 | ||||||
| Receivable from related party | 1,182 | 1,020 | ||||||
| Inventories | 3,309 | 3,353 | ||||||
| Income taxes receivable | 329 | 259 | ||||||
| Prepaid expenses and other current assets | 12,604 | 11,936 | ||||||
| Total current assets | 75,664 | 91,835 | ||||||
| Property and equipment, net | 21,435 | 19,730 | ||||||
| Intangible assets, net | 55,899 | 57,294 | ||||||
| Goodwill | 24,220 | 24,220 | ||||||
| Long-term receivable from related party | 754 | 727 | ||||||
| Other long-term assets | 16,889 | 16,925 | ||||||
| $ | 194,861 | $ | 210,731 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of financing obligation | $ | 1,922 | $ | 1,868 | ||||
| Current portion of term notes payable | 6,250 | 6,250 | ||||||
| Accounts payable | 7,068 | 9,119 | ||||||
| Deferred revenue | 35,250 | 40,772 | ||||||
| Accrued liabilities | 15,781 | 22,617 | ||||||
| Total current liabilities | 66,271 | 80,626 | ||||||
| Line of credit | 9,050 | 4,377 | ||||||
| Financing obligation, less current portion | 20,570 | 21,075 | ||||||
| Term notes payable, less current portion | 11,563 | 12,813 | ||||||
| Other liabilities | 5,626 | 5,742 | ||||||
| Deferred income tax liabilities | 39 | 1,033 | ||||||
| Total liabilities | 113,119 | 125,666 | ||||||
| Shareholders' equity: | ||||||||
| Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued | 1,353 | 1,353 | ||||||
| Additional paid-in capital | 209,840 | 212,484 | ||||||
| Retained earnings | 67,064 | 69,456 | ||||||
| Accumulated other comprehensive income | 590 | 667 | ||||||
| Treasury stock at cost, 13,261 shares and 13,414 shares | (197,105 | ) | (198,895 | ) | ||||
| Total shareholders' equity | 81,742 | 85,065 | ||||||
| $ | 194,861 | $ | 210,731 | |||||
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED INCOME STATEMENTS OF OPERATIONS AND STATEMENTS
OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per-share amounts)
Quarter Ended | Two Quarters Ended | ||||||||||
February 28, | February 28, | February 28, | February 28, | ||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
(unaudited) | (unaudited) | ||||||||||
Net sales | $ | 61,756 | $ | 56,599 | $ | 131,125 | $ | 117,859 | |||
Cost of sales | 14,546 | 12,485 | 31,173 | 26,146 | |||||||
Gross profit | 47,210 | 44,114 | 99,952 | 91,713 | |||||||
Selling, general, and administrative | 42,338 | 38,061 | 86,350 | 77,405 | |||||||
Depreciation | 951 | 1,190 | 2,196 | 2,470 | |||||||
Amortization | 1,093 | 1,346 | 2,185 | 2,776 | |||||||
Income from operations | 2,828 | 3,517 | 9,221 | 9,062 | |||||||
Interest income | 362 | 12 | 442 | 27 | |||||||
Interest expense | (409) | (423) | (819) | (869) | |||||||
Income before income taxes | 2,781 | 3,106 | 8,844 | 8,220 | |||||||
Income tax provision | (1,042) | (1,228) | (2,438) | (2,530) | |||||||
Net income | $ | 1,739 | $ | 1,878 | $ | 6,406 | $ | 5,690 | |||
Net income per share: | |||||||||||
Basic | $ | 0.13 | $ | 0.13 | $ | 0.46 | $ | 0.40 | |||
Diluted | 0.12 | 0.13 | 0.44 | 0.40 | |||||||
Weighted average number of common shares: | |||||||||||
Basic | 13,900 | 14,312 | 13,888 | 14,279 | |||||||
Diluted | 14,533 | 14,333 | 14,520 | 14,323 | |||||||
COMPREHENSIVE INCOME | |||||||||||
Net income | $ | 1,739 | $ | 1,878 | $ | 6,406 | $ | 5,690 | |||
Foreign currency translation adjustments, | |||||||||||
net of income taxes of $0, $0, $0, and $0 | 146 | (32) | 16 | (176) | |||||||
Comprehensive income | $ | 1,885 | $ | 1,846 | $ | 6,422 | $ | 5,514 | |||
| Quarter Ended | ||||||||
| November 30, | November 26, | |||||||
| 2017 | 2016 | |||||||
| (unaudited) | ||||||||
| Net sales | $ | 47,932 | $ | 39,787 | ||||
| Cost of sales | 15,064 | 14,479 | ||||||
| Gross profit | 32,868 | 25,308 | ||||||
| Selling, general, and administrative | 33,824 | 29,095 | ||||||
| Depreciation | 901 | 866 | ||||||
| Amortization | 1,395 | 722 | ||||||
| Loss from operations | (3,252 | ) | (5,375 | ) | ||||
| Interest income | 61 | 116 | ||||||
| Interest expense | (549 | ) | (620 | ) | ||||
| Loss before income taxes | (3,740 | ) | (5,879 | ) | ||||
| Income tax benefit | 1,348 | 1,921 | ||||||
| Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||
| Net loss per share: | ||||||||
| Basic and diluted | $ | (0.17 | ) | $ | (0.29 | ) | ||
| Weighted average number of common shares: | ||||||||
| Basic and diluted | 13,725 | 13,791 | ||||||
| COMPREHENSIVE INCOME (LOSS) | ||||||||
| Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||
| Foreign currency translation adjustments, | ||||||||
| net of income tax benefit of $42 and $342 | (77 | ) | 635 | |||||
| Comprehensive loss | $ | (2,469 | ) | $ | (3,323 | ) | ||
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Two Quarters Ended | |||||
February 28, | February 28, | ||||
2023 | 2022 | ||||
(unaudited) | |||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||
Net income | $ | 6,406 | $ | 5,690 | |
Adjustments to reconcile net income to net cash | |||||
provided by operating activities: | |||||
Depreciation and amortization | 4,381 | 5,246 | |||
Amortization of capitalized curriculum costs | 1,648 | 1,620 | |||
Stock-based compensation | 6,050 | 3,618 | |||
Deferred income taxes | 1,130 | 1,277 | |||
Change in fair value of contingent consideration liabilities | 7 | 48 | |||
Amortization of right-of-use operating lease assets | 411 | 475 | |||
Changes in assets and liabilities: | |||||
Decrease in accounts receivable, net | 19,050 | 22,925 | |||
Decrease in inventories | 71 | 25 | |||
Decrease in prepaid expenses and other assets | 1,333 | 353 | |||
Decrease in accounts payable and accrued liabilities | (16,823) | (11,165) | |||
Decrease in deferred revenue | (11,674) | (5,518) | |||
Increase in income taxes payable | (455) | (238) | |||
Decrease in other long-term liabilities | (327) | (1,118) | |||
Net cash provided by operating activities | 11,208 | 23,238 | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||
Purchases of property and equipment | (2,644) | (1,264) | |||
Curriculum development costs | (5,277) | (774) | |||
Net cash used for investing activities | (7,921) | (2,038) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||
Principal payments on notes payable | (2,500) | (2,500) | |||
Principal payments on financing obligation | (1,562) | (1,409) | |||
Purchases of common stock for treasury | (4,665) | (3,535) | |||
Payment of contingent consideration liabilities | (736) | (671) | |||
Proceeds from sales of common stock held in treasury | 739 | 668 | |||
Net cash used for financing activities | (8,724) | (7,447) | |||
Effect of foreign currency exchange rates on cash and cash equivalents | 41 | (108) | |||
Net increase (decrease) in cash and cash equivalents | (5,396) | 13,645 | |||
Cash and cash equivalents at the beginning of the period | 60,517 | 47,417 | |||
Cash and cash equivalents at the end of the period | $ | 55,121 | $ | 61,062 | |
Supplemental disclosure of cash flow information: | |||||
Cash paid for income taxes | $ | 1,604 | $ | 1,302 | |
Cash paid for interest | 738 | 782 | |||
Non-cash investing and financing activities: | |||||
Purchases of property and equipment financed by accounts payable | $ | 141 | $ | 160 | |
Acquisition of right-of-use operating lease assets for operating lease liabilities | 448 | 338 | |||
| Quarter Ended | ||||||||
| November 30, | November 26, | |||||||
| 2017 | 2016 | |||||||
| (unaudited) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (2,392 | ) | $ | (3,958 | ) | ||
| Adjustments to reconcile net loss to net cash provided | ||||||||
| by (used for) operating activities: | ||||||||
| Depreciation and amortization | 2,295 | 1,588 | ||||||
| Stock-based compensation expense | 956 | 1,214 | ||||||
| Amortization of capitalized curriculum costs | 1,277 | 977 | ||||||
| Deferred income taxes | (1,799 | ) | - | |||||
| Increase (reduction) in contingent consideration liabilities | 176 | (1,013 | ) | |||||
| Changes in assets and liabilities: | ||||||||
| Decrease in accounts receivable, net | 16,148 | 10,850 | ||||||
| Decrease (increase) in inventories | 26 | (191 | ) | |||||
| Increase in receivable from related party | (190 | ) | (231 | ) | ||||
| Increase in prepaid expenses and other assets | (416 | ) | (1,458 | ) | ||||
| Decrease in accounts payable and accrued liabilities | (8,125 | ) | (6,562 | ) | ||||
| Decrease in deferred revenue | (5,570 | ) | (553 | ) | ||||
| Increase in income taxes payable/receivable | (53 | ) | (2,630 | ) | ||||
| Increase (decrease) in other long-term liabilities | 5 | (911 | ) | |||||
| Net cash provided by (used for) operating activities | 2,338 | (2,878 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of property and equipment | (2,414 | ) | (2,040 | ) | ||||
| Curriculum development costs | (703 | ) | (666 | ) | ||||
| Acquisition of business | (1,109 | ) | - | |||||
| Net cash used for investing activities | (4,226 | ) | (2,706 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from line of credit borrowings | 24,633 | - | ||||||
| Payments on line of credit borrowings | (19,960 | ) | - | |||||
| Proceeds from term notes payable financing | - | 5,000 | ||||||
| Principal payments on term notes payable | (1,250 | ) | (1,250 | ) | ||||
| Principal payments on financing obligation | (451 | ) | (401 | ) | ||||
| Purchases of common stock for treasury | (1,968 | ) | (17 | ) | ||||
| Proceeds from sales of common stock held in treasury | 158 | 153 | ||||||
| Net cash provided by financing activities | 1,162 | 3,485 | ||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | (111 | ) | (481 | ) | ||||
| Net decrease in cash and cash equivalents | (837 | ) | (2,580 | ) | ||||
| Cash and cash equivalents at the beginning of the period | 8,924 | 10,456 | ||||||
| Cash and cash equivalents at the end of the period | $ | 8,087 | $ | 7,876 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | 640 | $ | 688 | ||||
| Cash paid for interest | 614 | 615 | ||||||
| Non-cash investing and financing activities: | ||||||||
| Purchases of property and equipment financed by accounts payable | $ | 901 | $ | 300 | ||||
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands and unaudited)
Accumulated | ||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||
Shares | Amount | Capital | Earnings | Loss | Shares | Amount | ||||||
Balance at August 31, 2022 | 27,056 | $ | 1,353 | $ | 220,246 | $ | 82,021 | $ | (542) | (13,203) | $ | (220,264) |
Issuance of common stock from | ||||||||||||
treasury |
|
| (568) |
|
| 56 | 935 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
| (18) | (835) | |||||
Stock-based compensation |
|
| 2,735 |
|
|
|
| |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| (130) |
|
| |||||
Net income |
|
|
| 4,667 |
|
|
| |||||
Balance at November 30, 2022 | 27,056 | 1,353 | 222,413 | 86,688 | (672) | (13,165) | (220,164) | |||||
Issuance of common stock from | ||||||||||||
treasury |
|
| 181 |
|
| 12 | 192 | |||||
Purchases of common shares | ||||||||||||
for treasury |
|
|
|
|
| (79) | (3,830) | |||||
Stock-based compensation |
|
| 3,315 |
|
|
|
| |||||
Unvested stock award |
|
| (266) |
|
| 16 | 266 | |||||
Cumulative translation | ||||||||||||
adjustments |
|
|
|
| 146 |
|
| |||||
Net income |
|
|
| 1,739 |
|
|
| |||||
Balance at February 28, 2023 | 27,056 | $ | 1,353 | $ | 225,643 | $ | 88,427 | $ | (526) | (13,216) | $ | (223,536) |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY –
PRIOR YEAR
(in thousands and unaudited)
Accumulated | ||||||||||||
Common | Common | Additional | Other | Treasury | Treasury | |||||||
Stock | Stock | Paid-In | Retained | Comprehensive | Stock | Stock | ||||||
Shares | Amount | Capital | Earnings | Income | Shares | Amount | ||||||
Balance at August 31, 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 |
|
|
|
| |||||
Unvested 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) |
See notes to condensed consolidated financial statements
FRANKLIN COVEY CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
General
Franklin Covey Co. (hereafter referred to as us, we, our, or the Company) is a global company focused on individual and organizational performance improvement. Our mission is to "enable“enable greatness in people and organizations everywhere,"” and our employees worldwide are organizedglobal structure is designed to help individuals and organizations achieve sustained superior performance through changes in human behavior. We are fundamentally a content and solutions company, and we believe that our offerings and services create the connection between capabilities and results. Our expertise extendsWe have a wide range of content delivery options, including: the All Access Pass (AAP) subscription, the Leader in Me membership, and other intellectual property licenses; digital online learning; on-site training; training led through certified facilitators; blended learning; and organization-wide transformational processes, including consulting and coaching. We believe our investments in digital delivery modalities over the past few years have enabled us to seven crucial areas: Leadership, Execution, Productivity, Trust, Educational Improvement, Sales Performance, and Customer Loyalty.deliver our content to clients in a high-quality learning environment whether those clients are working remotely or in a centralized location. We believe that our clients are able to utilize our content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.
We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, and The Leader in Me, The 4 Disciplines of Execution, and Multipliers, and proprietary content in the areas of 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 two quarters ended November 30, 2017February 28, 2023 are not necessarily indicative of results expected for the entire fiscal year ending August 31, 2018,2023, or for any future periods.
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):
February 28, | August 31, | ||||
2023 | 2022 | ||||
Finished goods | $ | 3,464 | $ | 3,519 | |
Raw materials | 4 | 8 | |||
$ | 3,468 | $ | 3,527 |
| 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,February 28, 2023, 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 quartertwo quarters ended November 30, 2017February 28, 2023 (in thousands):
Balance at August 31, 2022 | $ | 729 | |
Change in fair value | 7 | ||
Payments | (429) | ||
Balance at November 30, 2022 | 307 | ||
Change in fair value | - | ||
Payments | (307) | ||
Balance at February 28, 2023 | $ | - | |
| 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 estimated the Jhana contingent consideration liability was recorded as a component of accrued liabilities in our condensed consolidated balance sheet at November 30, 2017. The remainderfair value of our contingent consideration liability is classified asfrom the acquisition of Jhana through the use of 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 – PURCHASES OF COMMON STOCK
Our purchases of common stock during the first two quarters of fiscal 2023 were comprised of open-market purchases and shares withheld on stock-based compensation awards (Note 6). Our stock-based compensation plans allow shares to be withheld to cover statutory income taxes if so elected by the award recipient. These shares are valued at the market price on the date the shares are withheld. Shares purchased during the first two quarters of fiscal 2023 consisted of the following (in thousands):
Common Shares | Cost | ||||
Open market purchases | 79 | $ | 3,830 | ||
Shares withheld for taxes on stock- | |||||
based compensation awards | 18 | 835 | |||
97 | $ | 4,665 | |||
On February 14, 2023, our Board of Directors approved a new plan to repurchase up to $50.0 million of our outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does not have an expiration date. The actual timing, number, and value of common shares repurchased under our board-approved plan will be determined at our discretion and will depend on a number of factors, including, among others, general market and business conditions, the trading price ofcommon shares, and applicable legal requirements. We have no obligation to repurchase any common shares under the authorization, and the repurchase plan may be suspended, discontinued, or modified at any time for any reason.
NOTE 5 – REVENUE RECOGNITION
Contract Balances
Our deferred revenue totaled $90.9 million at February 28, 2023 and $102.4 million at August 31, 2022, of which $2.2 million and $2.7 million were classified as components of other long-term liabilities at February 28, 2023, and August 31, 2022, respectively. The amount of deferred revenue that was generated from subscription offerings totaled $76.1 million at February 28, 2023 and $88.1 million at August 31, 2022. During the quarter and two quarters ended February 28, 2023, we recognized $33.0 million and $66.0 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 service 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 February 28, 2023, we had $145.8 million of remaining performance obligations, including our deferred subscription revenue. 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 8, 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 | Two Quarters Ended | ||||||||||
February 28, | February 28, | February 28, | February 28, | ||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Long-term incentive awards | $ | 2,866 | $ | 1,375 | $ | 5,204 | $ | 2,498 | |||
Strive acquisition compensation | 200 | 366 | 366 | 645 | |||||||
Unvested stock awards | 175 | 168 | 340 | 343 | |||||||
Employee stock purchase plan | 74 | 60 | 140 | 117 | |||||||
Fully-vested share awards | - | - | - | 15 | |||||||
$ | 3,315 | $ | 1,969 | $ | 6,050 | $ | 3,618 | ||||
| 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 quartertwo quarters ended November 30, 2017,February 28, 2023, we issued 251,23483,392 shares of our common stock to employees forunder various stock-based compensation awards. Our stock-based compensation plans allow shares to be withheld to cover statutory income taxes if so elected byarrangements, including our employee stock purchase plan (ESPP).
Fiscal 2023 Long-Term Incentive Plan Award
On October 14, 2022, the award recipient. During the first quarter of fiscal 2018, we withheld 102,765 shares of our common stock to cover statutory taxes on stock-based compensation awards that vested during the quarter. The following is a description of the developments in our stock-based compensation plans during the quarter ended November 30, 2017.
Time-Based Award Shares – Twenty-five percent of a participant'sthe 2023 LTIP award vests after three yearsshares vest to participants on August 31, 2025. The number of shares that may be earned by participants at the end of the service and theperiod totals approximately 26,000 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 2023 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, 2025. 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 approximately 77,300 shares. The maximum number of shares that may be awarded in connection with these tranchesthe performance-based tranche of the 2023 LTIP totals 257,300approximately 154,600 shares.
New Long-Term Incentive Performance and Retention Plan
During the first quarter of fiscal 2018 LTIP has2023, we introduced a three-year lifenew long-term equity incentive plan for client partners, managing directors, and expirescertain other associates that we believe are critical to our long-term success. These awards are generally based on the achievement of specified sales goals and are expected to be granted annually. One-third of the award shares will vest to participants on each August 31 2020.
Fiscal 2023 Board of Director Unvested Share Award
Our annual unvested 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 as part of their compensation. The annual award is granted in January (following the annual shareholders’ meeting) of each year. For the fiscal 2023 award, each eligible director received a whole-share grant equal to $120,000 with a one year vesting period. Our unvested stock award activity during the quartertwo quarters ended November 30, 2017, for performance awards includes expense related to awards granted in previous periods for whichFebruary 28, 2023 consisted of the performance conditions are probable of being achieved.following:
Weighted-Average | |||||
Grant Date | |||||
Number of | Fair Value | ||||
Shares | Per Share | ||||
Unvested stock awards at | |||||
August 31, 2022 | 13,260 | $ | 49.78 | ||
Granted | 15,882 | 45.34 | |||
Forfeited | - | - | |||
Vested | (13,260) | 49.78 | |||
Unvested stock awards at | |||||
February 28, 2023 | 15,882 | $ | 45.34 |
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 two quarters ended November 30, 2017,February 28, 2023, we issued 9,8878,498 shares and 17,591 shares of our common stock to participants in the ESPP.
NOTE 57 – EARNINGS (LOSS)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 | Two Quarters Ended | ||||||||||
February 28, | February 28, | February 28, | February 28, | ||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Numerator for basic and | |||||||||||
diluted income per share: | |||||||||||
Net income | $ | 1,739 | $ | 1,878 | $ | 6,406 | $ | 5,690 | |||
Denominator for basic and | |||||||||||
diluted income per share: | |||||||||||
Basic weighted average shares | |||||||||||
outstanding | 13,900 | 14,312 | 13,888 | 14,279 | |||||||
Effect of dilutive securities: | |||||||||||
Stock-based compensation awards | 633 | 21 | 632 | 44 | |||||||
Diluted weighted average | |||||||||||
shares outstanding | 14,533 | 14,333 | 14,520 | 14,323 | |||||||
EPS Calculations: | |||||||||||
Net income per share: | |||||||||||
Basic | $ | 0.13 | $ | 0.13 | $ | 0.46 | $ | 0.40 | |||
Diluted | 0.12 | 0.13 | 0.44 | 0.40 | |||||||
| 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 68 – 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 two 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 our Education practice. Based on the applicable guidance, our operations consist of three operatingreportable segments and aone 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 sales 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, 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 | ||||||
February 28, 2023 | Customers | Gross Profit | EBITDA | |||||
Enterprise Division: | ||||||||
Direct offices | $ | 43,646 | $ | 35,854 | $ | 9,641 | ||
International licensees | 2,935 | 2,659 | 1,541 | |||||
46,581 | 38,513 | 11,182 | ||||||
Education practice | 14,198 | 8,392 | (622) | |||||
Corporate and eliminations | 977 | 305 | (2,373) | |||||
Consolidated | $ | 61,756 | $ | 47,210 | $ | 8,187 | ||
Quarter Ended | ||||||||
February 28, 2022 | ||||||||
Enterprise Division: | ||||||||
Direct offices | $ | 41,502 | $ | 33,948 | $ | 8,732 | ||
International licensees | 2,588 | 2,304 | 1,444 | |||||
44,090 | 36,252 | 10,176 | ||||||
Education practice | 11,066 | 7,098 | (324) | |||||
Corporate and eliminations | 1,443 | 764 | (1,810) | |||||
Consolidated | $ | 56,599 | $ | 44,114 | $ | 8,042 | ||
Two Quarters Ended | ||||||||
February 28, 2023 | ||||||||
Enterprise Division: | ||||||||
Direct offices | $ | 93,812 | $ | 75,775 | $ | 20,890 | ||
International licensees | 6,213 | 5,635 | 3,372 | |||||
100,025 | 81,410 | 24,262 |
| 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 | ) | |||||
Education practice | 28,549 | 17,568 | (341) | |||||
Corporate and eliminations | 2,551 | 974 | (4,262) | |||||
Consolidated | $ | 131,125 | $ | 99,952 | $ | 19,659 | ||
Two Quarters Ended | ||||||||
February 28, 2022 | ||||||||
Enterprise Division: | ||||||||
Direct offices | $ | 86,621 | $ | 70,150 | $ | 18,686 | ||
International licensees | 5,586 | 5,005 | 3,115 | |||||
92,207 | 75,155 | 21,801 | ||||||
Education practice | 22,763 | 14,959 | (89) | |||||
Corporate and eliminations | 2,889 | 1,599 | (3,738) | |||||
Consolidated | $ | 117,859 | $ | 91,713 | $ | 17,974 |
A reconciliation of our consolidated Adjusted EBITDA to consolidated net lossincome is provided below (in thousands).
Quarter Ended | Two Quarters Ended | ||||||||||
February 28, | February 28, | February 28, | February 28, | ||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Segment Adjusted EBITDA | $ | 10,560 | $ | 9,852 | $ | 23,921 | $ | 21,712 | |||
Corporate expenses | (2,373) | (1,810) | (4,262) | (3,738) | |||||||
Consolidated Adjusted EBITDA | 8,187 | 8,042 | 19,659 | 17,974 | |||||||
Stock-based compensation | (3,315) | (1,969) | (6,050) | (3,618) | |||||||
Increase in the fair value of | |||||||||||
contingent consideration liabilities | - | (20) | (7) | (48) | |||||||
Depreciation | (951) | (1,190) | (2,196) | (2,470) | |||||||
Amortization | (1,093) | (1,346) | (2,185) | (2,776) | |||||||
Income from operations | 2,828 | 3,517 | 9,221 | 9,062 | |||||||
Interest income | 362 | 12 | 442 | 27 | |||||||
Interest expense | (409) | (423) | (819) | (869) | |||||||
Income before income taxes | 2,781 | 3,106 | 8,844 | 8,220 | |||||||
Income tax provision | (1,042) | (1,228) | (2,438) | (2,530) | |||||||
Net income | $ | 1,739 | $ | 1,878 | $ | 6,406 | $ | 5,690 | |||
Revenue by Category
The following table presents our revenue disaggregated by geographic region (in thousands).
Quarter Ended | Two Quarters Ended | ||||||||||
February 28, | February 28, | February 28, | February 28, | ||||||||
2023 | 2022 | 2023 | 2022 | ||||||||
Americas | $ | 51,638 | $ | 46,447 | $ | 108,380 | $ | 95,202 | |||
Asia Pacific | 5,925 | 6,489 | 13,383 | 14,287 | |||||||
Europe/Middle East/Africa | 4,193 | 3,663 | 9,362 | 8,370 | |||||||
$ | 61,756 | $ | 56,599 | $ | 131,125 | $ | 117,859 | ||||
| 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 | ) | ||
The following table presents our revenue disaggregated by type of service (in thousands).
Quarter Ended | Services and | Leases and | ||||||||||||
February 28, 2023 | Products | Subscriptions | Royalties | Other | Consolidated | |||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 19,086 | $ | 23,711 | $ | 849 | $ | - | $ | 43,646 | ||||
International licensees | 43 | 343 | 2,549 | - | 2,935 | |||||||||
19,129 | 24,054 | 3,398 | - | 46,581 | ||||||||||
Education practice | 4,110 | 8,860 | 1,228 | - | 14,198 | |||||||||
Corporate and eliminations | - | - | 308 | 669 | 977 | |||||||||
Consolidated | $ | 23,239 | $ | 32,914 | $ | 4,934 | $ | 669 | $ | 61,756 | ||||
Quarter Ended | ||||||||||||||
February 28, 2022 | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 20,212 | $ | 20,553 | $ | 737 | $ | - | $ | 41,502 | ||||
International licensees | 99 | 313 | 2,176 | - | 2,588 | |||||||||
20,311 | 20,866 | 2,913 | - | 44,090 | ||||||||||
Education practice | 2,844 | 7,128 | 1,094 | - | 11,066 | |||||||||
Corporate and eliminations | - | - | 220 | 1,223 | 1,443 | |||||||||
Consolidated | $ | 23,155 | $ | 27,994 | $ | 4,227 | $ | 1,223 | $ | 56,599 | ||||
Two Quarters Ended | ||||||||||||||
February 28, 2023 | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 45,303 | $ | 47,201 | $ | 1,308 | $ | - | $ | 93,812 | ||||
International licensees | 186 | 695 | 5,332 | - | 6,213 | |||||||||
45,489 | 47,896 | 6,640 | - | 100,025 | ||||||||||
Education practice | 8,610 | 18,044 | 1,895 | - | 28,549 | |||||||||
Corporate and eliminations | - | - | 624 | 1,927 | 2,551 | |||||||||
Consolidated | $ | 54,099 | $ | 65,940 | $ | 9,159 | $ | 1,927 | $ | 131,125 | ||||
Two Quarters Ended | ||||||||||||||
February 28, 2022 | ||||||||||||||
Enterprise Division: | ||||||||||||||
Direct offices | $ | 44,063 | $ | 41,065 | $ | 1,493 | $ | - | $ | 86,621 | ||||
International licensees | 212 | 605 | 4,769 | - | 5,586 | |||||||||
44,275 | 41,670 | 6,262 | - | 92,207 | ||||||||||
Education practice | 6,070 | 14,972 | 1,721 | - | 22,763 | |||||||||
Corporate and eliminations | - | - | 564 | 2,325 | 2,889 | |||||||||
Consolidated | $ | 50,345 | $ | 56,642 | $ | 8,547 | $ | 2,325 | $ | 117,859 |
NOTE 9 – SUBSEQUENT EVENT
On March 27, 2023, we entered into a new credit agreement (the 2023 Credit Agreement) with KeyBank National Association (KeyBank) leading a group of financial institutions (collectively, the Lenders), which replaced our previous credit agreement with JPMorgan Chase Bank, N.A. (the 2019 Credit Agreement). KeyBank will act as the sole administrative and collateral agent under the 2023 Credit Agreement. The 2023 Credit Agreement provides up to $70.0 million in total credit, of which $7.5 million will be used to replace the outstanding term loan balance from the 2019 Credit Agreement. The remaining $62.5 million will be available as a revolving line of credit or for future term loans.
Principal payments on the term loans will consist of quarterly payments totaling $1.25 million that are due and payable on the last business day of each March, June, September, and December until the term loan obligation is repaid. These payment terms on the term loan are essentially the same as under the 2019 Credit Agreement.
The 2023 Credit Agreement matures on March 27, 2028 and interest on all borrowings under the 2023 Credit Agreement is due and payable on the last day of each month. The interest rate for borrowings on the 2023 Credit Agreement is based on the Secured Overnight Financing Rate (SOFR) and is a 19.5 percent interesttiered structure that varies according to the ratio of Funded Debt to Adjusted EBITDA (Leverage Ratio, as defined in FC Organizational Products (FCOP), an entitythe 2023 Credit Agreement) as shown below:
Funded Debt Ratio | Interest Rate | |
Less than 1.00 | SOFR plus 1.50% | |
Between 1.00 and 2.00 | SOFR plus 1.75% | |
Between 2.01 and 2.50 | SOFR plus 2.25% | |
Greater than 2.51 | SOFR plus 2.75% |
The 2023 Credit Agreement also contains representations, warranties, and certain covenants. While any amounts are outstanding under the 2023 Credit Agreement, we are subject to a number of affirmative and negative covenants, including covenants regarding dispositions of property, investments, forming or acquiring subsidiaries, and business combinations or acquisitions, among other customary covenants, subject to certain exceptions. As defined in the 2023 Credit Agreement, we are (i) required to maintain a Leverage Ratio of less than 3.00 to 1.00 and a Fixed Charge Coverage Ratio greater than 1.15 to 1.00; and (ii) restricted from making certain distributions to stockholders, including repurchases of common stock. However, we are permitted to make distributions, including through purchases of outstanding common stock, provided that purchasedwe are in compliance with the Leverage Ratio and Fixed Charge Coverage Ratio financial covenants before and after such distribution. 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 amounts outstanding under the 2023 Credit Agreement.
The 2023 Credit Agreement is secured by substantially all of our consumer solution business unit assets in fiscal 2008and certain of our subsidiaries, and provides for standard events of default, such as for non-payment and failure to perform or observe covenants, and contains standard indemnifications benefitting the purposeLenders. In connection with the 2023 Credit Agreement, the Company and certain of selling plannersits subsidiaries, as applicable, also entered into a Security Agreement, Intellectual Property Security Agreement, and related organizational products under a comprehensive licensing agreement. Due to significant operating losses incurred after the establishmentGuaranty 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 consistPayment.
The foregoing description of the day-to-day sale2023 Credit Agreement does not purport to be complete and is qualified by reference to the text of planning productsthe 2023 Credit Agreement and related accessories,the Security Agreement, which are included as Exhibits 10.1 and we do not have an obligation10.2 to absorb losses or the right to receive benefits from FCOP that could potentially be significant.
noteE
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.
Non-GAAP Measures
This Management’s Discussion and Analysis includes the concepts of adjusted earnings before interest, income taxes, depreciation, and amortization (Adjusted EBITDA) and “constant currency,” which are non-GAAP measures. We define Adjusted EBITDA as net income excluding the impact of interest, income taxes, intangible asset amortization, depreciation, stock-based compensation expense, and certain other items such as adjustments to the fair value of expected contingent consideration liabilities arising from business acquisitions. Constant currency is a non-GAAP financial measure that removes the impact of fluctuations in foreign currency exchange rates and is calculated by translating the current period’s financial results at the same average exchange rates in effect during the prior year and then comparing that amount to the prior year.
We reference these non-GAAP financial measures in our decision making because they provide supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and we believe it provides investors with greater transparency to evaluate operational activities and financial results. For a reconciliation of our segment Adjusted EBITDA to net income, a related GAAP measure, refer to Note 8, Segment Information, to our financial statements.
RESULTS OF OPERATIONS
Overview
Franklin Covey Co. is a global company focused on individual and organizational performance improvement. Our mission is to “enable greatness in people and organizations everywhere,” and our worldwide resources are organized to help individuals and organizations achieve sustained superior performance at scale through changes in human behavior. We believe that our content and services create the connection between capabilities and results. Our business is currently structured around two divisions, the Enterprise Division and the Education Division. The first quarterEnterprise Division consists of our fiscal year includesDirect Office and International Licensee segments and is focused on selling our offerings to corporations, governments, not-for-profits, and other related organizations. Our offerings delivered through the monthsEnterprise Division are designed to help organizations and individuals achieve their own great results. Our Education Division is centered around the principles found in The Leader in Me and is dedicated to helping educational institutions build cultures that will produce great results, including increased student performance, improved school culture, and increased parental and teacher involvement.
We were generally pleased with our financial results for the quarter ended February 28, 2023 despite the growing challenges from factors such as macroeconomic uncertainty, banking sector instability, unfavorable foreign exchange rates, and lingering pandemic issues in China, Japan, and certain other areas of September, October,the world. We believe the strength and November.durability of our subscription model is driven by 1) our clients’ mission critical challenges, which are typically more intense during periods of economic uncertainty; 2) our effective solutions which help clients successfully address these challenges, which can be flexibly utilized to meet each organization’s needs; and 3) our strength in acquiring, retaining, and expanding meaningful client relationships. For the quarter ended February 28, 2023, our results of operations included increased sales, gross profit, and Adjusted EBITDA. Our firstconsolidated sales for the second quarter of fiscal 2018 ended on November 30, 2017, and2023 increased nine percent, or $5.2 million, to $61.8 million compared with $56.6 million in fiscal 2022. On a constant currency basis, our consolidated sales for the first quarter increased 11 percent. Sales for the first half of fiscal 2023
increased 11 percent to $131.1 million compared with $117.9 million in the prior year endedfirst two quarters fiscal 2022, and increased 14 percent on November 26, 2016. On January 20, 2017, our Boarda constant currency basis. Our sales performance in fiscal 2023 reflects the continuation of Directors approved a changethree key trends that have been evident throughout the preceding fiscal year. These trends include:
Growth of All Access Pass and Related Services. All Access Pass (AAP) subscription and subscription services sales increased 11 percent in the second quarter of fiscal 2023 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$35.4 million, compared with the second quarter of fiscal 2017, our2022. Rolling four-quarter AAP subscription and subscription services sales increased 22 percent to $154.4 million.
Education Division performance improvement. Education Division revenues grew 28 percent during the second quarter of fiscal quarters end2023 on the last daystrength of November, February,increased consulting, coaching, and May. We do not believe thattraining days delivered during the changequarter, increased Symposium conference revenues, and increased Leader in Me subscription revenues. For the first two quarters of fiscal 2023, Education Division sales increased 25 percent compared with the first half of fiscal 2022.
International sales improvement. Our international operations continue to recover and improve as second quarter ending datesinternational licensee revenues increased 13 percent compared with the prior year, and international direct offices, excluding China and Japan, increased sales by eight percent. For the second quarter of fiscal 2023, sales in our China and Japan offices decreased by 30 percent and three percent compared with the prior year, respectively, primarily due to lingering pandemic and pandemic-related economic issues in those countries. Foreign exchange rates had a material$1.0 million negative impact on our consolidated sales and a $0.2 million adverse impact on our operating income in the second quarter of fiscal 2023.
The following is a summary of financial resultshighlights for the second quarter of fiscal 2023:
Sales – Our consolidated sales for the quarter ended November 30, 2017.
At November 30, 2017,February 28, 2023, we had $15.9$76.1 million of deferred subscription revenue on our balance sheet, an eight percent, or $5.8 million, increase compared with deferred subscription revenue at February 28, 2022. At February 28, 2023, we had $69.7 million of unbilled deferred revenue whichcompared with $49.0 million of unbilled deferred revenue at February 28, 2022. Unbilled deferred revenue represents business that is contracted but unbilled (primarily from multiyear subscription contracts), and excluded from our balance sheet. We believe that multi-year contractual arrangements will provide value to our clients and a more predictable revenue stream
Cost of Sales/Gross Profit – Our cost of sales totaled $14.5 million for the Company in future periods.
Operating Expenses – Our operating expenses for the second quarter of fiscal 2023 increased $3.8 million compared with the second quarter of fiscal 2022, which was due to a $4.3 million increase in selling, general, and administrative (SG&A) expenses. Our SG&A expenses increased primarily due to increased associate costs resulting from investments in new client-facing personnel and increased salaries; increased commissions on higher sales; increased stock-based compensation expense; and increased travel expense. Over the past 12 months we have invested in new associates for a variety of primarily client-facing roles, including sales and sales-related personnel, Leader in Me coaches, and implementation specialists. At February 28, 2023, we had 289 client partners compared with 265 client partners at February 28, 2022. We believe these investments will provide a strong return in future periods. The increase in stock-based compensation is due to the timing of the fiscal 2022 Long-Term Incentive Plan (LTIP) award, which occurred in February 2022 rather than in October 2021 (when such awards are typically issued), and our increased use of equity-based compensation to attract and retain key personnel.
Operating Income, Net Income, and Adjusted EBITDA – Our income from operations for the quarter ended November 30, 2017, our consolidated sales increased 20 percent to $47.9February 28, 2023 was $2.8 million compared with $39.8$3.5 million in the firstsecond quarter of fiscal 2017. Sales growth2022, which reflected increased sales, more gross profit, and the corresponding improvement in our gross margin were primarily driven by the recognition of previously deferred high-margin subscription sales during the quarter. These improvements were partially offset by increased operatingSG&A expenses as we continue to work throughdescribed above. Net income for the transition to a subscription model and seek to reorganize and optimize our operations in order to improve profitability. We believe the firstsecond quarter of fiscal 2018 represents a key inflection point that we believe will begin a pattern of improved financial performance2023 was $1.7 million, or $0.12 per diluted share, compared with prior periods. However,$1.9 million, or $0.13 per diluted share, in fiscal 2022. Our Adjusted EBITDA for the ongoing transitionquarter ended February 28, 2023 improved to $8.2 million, compared with $8.0 million in the SaaS business model may continue to present challenges to our quarterly financial results during certain periodssecond quarter of fiscal 2018 when2022.
Liquidity and Financial Position – Our liquidity and financial position remained strong through the second quarter of fiscal 2023. At February 28, 2023, we had $55.1 million of cash with no borrowings on our $15.0 million secured line of credit facility, compared with the prior year.
Further details regarding our results for the quarter ended November 30, 2017 were affected by a number of factors, which are described in further detail throughout this discussion and analysis. The following is a summary of key financial results for the quarter ended November 30, 2017:
| Quarter Ended | ||||||||||||
November 30, 2017 | November 26, 2016 | Percent Change | ||||||||||
| Sales by Category: | ||||||||||||
| Training and consulting services | $ | 46,549 | $ | 38,073 | 22 | |||||||
| Products | 490 | 828 | (41 | ) | ||||||||
| Leasing | 893 | 886 | 1 | |||||||||
| $ | 47,932 | $ | 39,787 | 20 | ||||||||
| Sales by Segment: | ||||||||||||
| Direct offices | $ | 34,197 | $ | 26,383 | 30 | |||||||
| Education practice | 9,176 | 8,743 | 5 | |||||||||
| International licensees | 3,320 | 3,431 | (3 | ) | ||||||||
| Corporate and other | 1,239 | 1,230 | - | |||||||||
| $ | 47,932 | $ | 39,787 | 20 | ||||||||
Quarter Ended November 30, 2017February 28, 2023 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, Germany, Switzerland, and Australia;Austria; and other groups that were formerly included in the Strategic Markets segment, such as our government services office and global 50 group. Duringbooks and audio sales. The following comparative information is for our Direct Offices segment in the firstperiods indicated (in thousands):
Quarter Ended | Quarter Ended | |||||||||
February 28, | % of | February 28, | % of | |||||||
2023 | Sales | 2022 | Sales | Change | ||||||
Sales | $ | 43,646 | 100.0 | $ | 41,502 | 100.0 | $ | 2,144 | ||
Cost of sales | 7,792 | 17.9 | 7,554 | 18.2 | 238 | |||||
Gross profit | 35,854 | 82.1 | 33,948 | 81.8 | 1,906 | |||||
SG&A expenses | 26,213 | 60.1 | 25,216 | 60.8 | 997 | |||||
Adjusted EBITDA | $ | 9,641 | 22.1 | $ | 8,732 | 21.0 | $ | 909 |
For the second quarter of fiscal 2018, we dissolved the Strategic Markets2023, our Direct Office segment and combined thoserevenue increased five percent to $43.6 million compared with $41.5 million in fiscal 2022. In constant currency, Direct Office sales groupsincreased seven percent compared with the Direct Offices segment since most of these groups have a common focus--selling subscription services.prior year. The increase in direct office sales was primarily duethe result of strong performance in our offices in the United States and Canada where revenue increased 11 percent in the quarter, but was partially offset by unfavorable foreign currency exchange and decreased sales from our China and Japan offices. During the second quarter of fiscal 2023 our AAP subscription and subscription related revenues remained strong and increased 11 percent over the second quarter of fiscal 2022. We remain confident that the strength and durability of our AAP offering, our principle-based content, and our subscription business model will help our clients solve difficult issues and will continue to drive growth in future periods despite potential macroeconomic and geopolitical challenges. The sum of deferred subscription revenue on our balance sheet combined
with unbilled multi-year contracts entered into, increased 22 percent, or $26.5 million, to $145.8 million, compared with February 28, 2022. 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.
Over the previous several quarters, the performance of our international direct offices has been directly related to the recognitionlevel of previously deferred revenuerecovery from subscription sales as discussed above. In additionthe pandemic and corresponding business and social activity in each country, which materially impacted our China and Japan offices. During fiscal 2022, China had a resurgence of COVID cases and enacted strict lockdown measures in response to the benefit from increased recognitionrise in cases. These continuing lockdown measures, economic instability, and social unrest adversely impacted our China office during second quarter of deferred sales,fiscal 2023 and led to a 30 percent reduction in quarter-over-quarter sales. Sales in our Japan office decreased by three percent compared to the prior year and were hampered by economic activity and lingering pandemic issues. While we had $1.2 million of increased revenue from businesses acquiredremain 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 unfavorable economic conditions, lingering pandemic issues, and social unrest in the second half of fiscal 2017, a $0.9 million intellectual property sale,2023 and in future periods. Foreign exchange rates had a $0.8 million increaseunfavorable impact on our Direct Office sales and a $0.1 million unfavorable effect on operating income during the second quarter of fiscal 2023.
Gross Profit. Gross profit increased primarily due to increased sales as previously described. Direct Office gross margin remained strong, and increased to 82.1 percent compared with 81.8 percent in onsite presentationthe prior year primarily due to a change in the mix of services and products sold during the quarter.
SG&A Expense. Direct Office SG&A expense increased primarily due to increased associate costs resulting from investments in new primarily client-facing personnel, increased salaries, and increased commissions on higher sales.
International Licensees Segment
In foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations in the periods indicated (in thousands):
Quarter Ended | Quarter Ended | |||||||||
February 28, | % of | February 28, | % of | |||||||
2023 | Sales | 2022 | Sales | Change | ||||||
Sales | $ | 2,935 | 100.0 | $ | 2,588 | 100.0 | $ | 347 | ||
Cost of sales | 276 | 9.4 | 284 | 11.0 | (8) | |||||
Gross profit | 2,659 | 90.6 | 2,304 | 89.0 | 355 | |||||
SG&A expenses | 1,118 | 38.1 | 860 | 33.2 | 258 | |||||
Adjusted EBITDA | $ | 1,541 | 52.5 | $ | 1,444 | 55.8 | $ | 97 |
Sales. International licensee sales are primarily comprised of royalty revenues.
Gross Profit. Gross profit increased primarily due to increased royalty revenues as previously described. Gross margin remained strong at 90.6 percent compared with 89.0 percent in the second quarter of fiscal 2018. We are currently planning2022 and improved primarily due to launch the AAP in 15mix of revenue recognized during the second quarter of fiscal 2023.
SG&A Expense. International licensee SG&A expenses increased primarily due to additional languages later in fiscal 2018. We believe that our international direct offices will be favorably impacted by the availability of the contentspending on technology, development, and offerings of the AAP to our foreign clients.
Education Practice –
Our Education practice divisionDivision is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed The Leader In Me program designed for students primarily in K-6 elementary schools. We continue to see increased demand for The Leader in Me program in many school districts in the United States as well as in international locations, which contributed to a $0.4 million, or five percent, increase in Education practice revenues compared with the prior year. We continue to make substantial investments in new sales personnel program. The following comparative information is for our Education practice and expect that ourDivision in the periods indicated (in thousands):
Quarter Ended | Quarter Ended | |||||||||
February 28, | % of | February 28, | % of | |||||||
2023 | Sales | 2022 | Sales | Change | ||||||
Sales | $ | 14,198 | 100.0 | $ | 11,066 | 100.0 | $ | 3,132 | ||
Cost of sales | 5,806 | 40.9 | 3,968 | 35.9 | 1,838 | |||||
Gross profit | 8,392 | 59.1 | 7,098 | 64.1 | 1,294 | |||||
SG&A expenses | 9,014 | 63.5 | 7,422 | 67.1 | 1,592 | |||||
Adjusted EBITDA | $ | (622) | (4.4) | $ | (324) | (2.9) | $ | (298) |
Sales. Education Division sales will continue to grow when compared with prior periods. Consistent with prior fiscal years, we expectfor the majority of sales growth from our Education practice to occur during our fourth fiscal quarter.
Gross Profit. Education Division gross profit increased primarily due to a slight increase in shipping and handling revenues whensales growth as previously described. Education segment gross margin decreased compared with the prior year.
| 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 | ||||||||||
SG&A Expenses. Education SG&A expenses during the quarter ending November 30, 2017, wasincreased primarily due to 1) a $4.0 million increase in spending relatedincreased associate expenses from new personnel and changes to new sales and sales-related personnel (especially in the Education Division),compensation plans, increased commissions on higherincreased sales, and new personnel from business acquisitions completed in fiscal 2017; and 2) aincreased travel costs compared with the prior year.
Other Operating Expense Items
Depreciation – Depreciation expense during the second quarter was $1.0 million compared with $1.2 million change in the fair value of estimated contingent consideration from previous business acquisitions. Consistent with prior years, we continue to invest in new sales and sales support personnel, and we had 224 client partners at November 30, 2017 compared with 216 client partners at November 26, 2016. During the firstsecond quarter of fiscal 2017, we determined that the likelihood of another contingent consideration payment arising from the acquisition of NinetyFive 5, LLC was becoming less probable. Accordingly, we reversed a portion of the previously accrued contingent consideration expense associated with the potential payment, which resulted in a significant credit during the first quarter of fiscal 2017 that did not repeat in the first quarter of fiscal 2018. These increases were partially offset by2022, and decreased operating expenses in various other areas of our business.
Amortization – Amortization –
Interest Income – Our interest income increased compared with the prior year primarily due to business acquisitions completed during the last two quarters of fiscal 2017. We currently expect our amortization expense from definite-lived intangible assets will total $5.4 millionsignificant increase in fiscal 2018.
Income Taxes
Our effective income tax benefit rateprovision for the quarter ended November 30, 2017February 28, 2023 was 36.0 percent$1.0 million compared with an effective benefit rate of 32.7 percent$1.2 million in the firstsame quarter of the prior year. Our effective tax rate for the second quarter was generally consistent with the prior year at 37.5 percent in fiscal 2023, compared with 39.5 percent in fiscal 2022. The lowereffective tax benefit raterates for the second quarters of fiscal 2023 and 2022 were higher than statutory rates primarily due to non-deductible executive compensation and additional income tax related to foreign earnings.
Two Quarters Ended February 28, 2023 Compared with the Two Quarters Ended February 28, 2022
Enterprise Division
Direct Offices Segment
The following comparative information is for our Direct Offices segment in the periods indicated (in thousands):
Two Quarters | Two Quarters | |||||||||
Ended | Ended | |||||||||
February 28, | % of | February 28, | % of | |||||||
2023 | Sales | 2022 | Sales | Change | ||||||
Sales | $ | 93,812 | 100.0 | $ | 86,621 | 100.0 | $ | 7,191 | ||
Cost of sales | 18,037 | 19.2 | 16,471 | 19.0 | 1,566 | |||||
Gross profit | 75,775 | 80.8 | 70,150 | 81.0 | 5,625 | |||||
SG&A expenses | 54,885 | 58.5 | 51,464 | 59.4 | 3,421 | |||||
Adjusted EBITDA | $ | 20,890 | 22.3 | $ | 18,686 | 21.6 | $ | 2,204 |
During the first two quarters of fiscal 2023, Direct Office segment revenue increased eight percent to $93.8 million compared with $86.6 million in fiscal 2022. In constant currency, Direct Office sales increased 11 percent compared with fiscal 2022. The increase was primarily the result of strong performance in our offices in the United States and Canada where revenue increased 14 percent in the first half of fiscal 2023, but was partially offset by unfavorable foreign currency exchange and decreased sales from our China and Japan offices. During the first two quarters of fiscal 2023, our AAP subscription and subscription related revenues remained strong and increased 15 percent over the first half of fiscal 2022. We continue to be encouraged by the durability of the All Access Pass and our subscription model despite the current challenges in the economy and international instability.
For the first half of fiscal 2023, increased sales in our United Kingdom, Australia, and Germany/Switzerland/Austria offices were offset by decreased sales in China and Japan. During fiscal 2022, China had a resurgence of COVID cases and enacted strict lockdown measures in response to the rise in cases. These continuing lockdown measures and related social unrest adversely impacted our China office during first two quarters of fiscal 2023 and led to an 18 percent reduction in year-over-year sales. Sales in our Japan office decreased by four percent compared to the prior year and were hampered by economic activity and lingering pandemic issues. While we remain 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 unfavorable economic conditions, lingering pandemic-related issues, and social unrest in the remainder of fiscal 2023 and future periods. Foreign exchange rates had a $2.6 million unfavorable impact on our Direct Office sales and a $0.6 million unfavorable effect on operating income during the first half of fiscal 2023.
Gross Profit. Gross profit increased primarily due to increased sales as previously described. Direct Office gross margin remained strong, and was 80.8 percent compared with 81.0 percent in the prior year.
SG&A Expense. Direct Office SG&A expense increased primarily due to investments in new client-facing sales and sales-related personnel, increased salaries, increased commissions on higher sales, and increased travel expenses.
International Licensees Segment
The following comparative information is for our international licensee operations in the periods indicated (in thousands):
Two Quarters | Two Quarters | |||||||||
Ended | Ended | |||||||||
February 28, | % of | February 28, | % of | |||||||
2023 | Sales | 2022 | Sales | Change | ||||||
Sales | $ | 6,213 | 100.0 | $ | 5,586 | 100.0 | $ | 627 | ||
Cost of sales | 578 | 9.3 | 581 | 10.4 | (3) | |||||
Gross profit | 5,635 | 90.7 | 5,005 | 89.6 | 630 | |||||
SG&A expenses | 2,263 | 36.4 | 1,890 | 33.8 | 373 | |||||
Adjusted EBITDA | $ | 3,372 | 54.3 | $ | 3,115 | 55.8 | $ | 257 |
Sales. During the first two quarters of fiscal 2023 our licensee revenues increased primarily due to increased royalty revenues from certain licensees as economies in many of the countries where our licensees operate continue to recover from the pandemic. Compared with the first half of fiscal 2022, our royalty revenues increased 12 percent and our share of AAP revenues increased by 14 percent to $0.8 million. We receive additional revenue from the international licensees for AAP sales to cover a portion of the costs of operating the AAP portal. While we remain optimistic that our licensees’ sales and our corresponding royalty revenues will continue to grow in the remainder of fiscal 2023, difficult macroeconomic conditions, such as foreign exchange rates and inflation, and regional conflicts may negatively impact our licensees’ operations and our royalty revenues in future periods. Foreign exchange rates had a $0.4 million adverse impact on international licensee sales and operating results during the two quarters ended February 28, 2023.
Gross Profit. Gross profit increased primarily due to increased royalty revenues as previously described. Gross margin remained strong at 90.7 percent compared with 89.6 percent in the prior year, and improved due to the mix of revenue recognized during the first two quarters of fiscal 2023.
SG&A Expense. International licensee SG&A expenses increased primarily due to additional spending on technology, development, and various other shared service costs.
Education Division
The following comparative information is for our Education Division in the periods indicated (in thousands):
Two Quarters | Two Quarters | |||||||||
Ended | Ended | |||||||||
February 28, | % of | February 28, | % of | |||||||
2023 | Sales | 2022 | Sales | Change | ||||||
Sales | $ | 28,549 | 100.0 | $ | 22,763 | 100.0 | $ | 5,786 | ||
Cost of sales | 10,981 | 38.5 | 7,804 | 34.3 | 3,177 | |||||
Gross profit | 17,568 | 61.5 | 14,959 | 65.7 | 2,609 | |||||
SG&A expenses | 17,909 | 62.7 | 15,048 | 66.1 | 2,861 | |||||
Adjusted EBITDA | $ | (341) | (1.2) | $ | (89) | (0.4) | $ | (252) |
Sales. For the two quarters ended February 28, 2023, Education Division sales increased 25 percent, or $5.8 million, primarily due to increased consulting, coaching, and training days delivered during the year, increased Leader in Me subscription revenue, and an increase in the number of Symposium conference events held. During the first half of fiscal 2023, the Education Division delivered over 800 more training and coaching days than during the first half of the prior year, which are recognized as they are delivered. Education Annual membership subscription and subscription services revenue increased 21 percent compared with the first two quarters of fiscal 2022 due to increased sales from previously deferred training and coaching days and Annual Membership sales resulting primarily from fiscal 2022 new schools. We held three Symposium conference events to promote the Leader in Me program during the first two quarters of fiscal 2023 compared with only one in the prior year. We continue to be pleased with the strength and momentum of our Education Division, and believe this positive momentum generated in fiscal 2022 and the first half of fiscal 2023 will continue through the remainder of fiscal 2023.
Gross Profit. Education Division gross profit increased primarily due to sales growth as previously described. Education segment gross margin decreased compared with the prior year primarily due to increased costs related to the delivery of coaching and consulting services, a change in the mix of services and products sold, and an increased number of Symposium conferences, which are essentially break-even events.
SG&A Expenses. Education SG&A expenses increased primarily due to increased associate expenses from investments in new personnel, increased commissions on higher sales, changes to compensation plans, and increased travel costs compared with the prior year.
Other Operating Expense Items
Depreciation – Depreciation expense for the first half of fiscal 2023 totaled $2.2 million compared with $2.5 million in the first two quarters of fiscal 2022, and decreased primarily due to the full depreciation of certain assets.
Amortization – Amortization expense decreased $0.6 million compared with the prior year due full amortization of certain intangible assets from previous business acquisitions.
Interest Income – Interest income increased $0.4 million compared with the prior year primarily due to increased interest rates in late fiscal 2022 and in the first half of fiscal 2023.
Income Taxes
Our income tax provision for the first two quarters of fiscal 2023 was due primarily to lower$2.4 million compared with $2.5 million during the first two quarters of fiscal 2022. Our effective tax rate through February 28, 2023 was generally consistent with the prior year at 27.6 percent compared with 30.8 percent through February 28, 2022. The effective tax rates appliedfor each of the first two quarters of fiscal 2023 and 2022 were higher than statutory rates primarily due to taxable losses in certain foreign jurisdictions. Computation of a reliable annual effectivenon-deductible executive compensation and additional income tax rate is currently impracticable becauserelated to foreign earnings. During the first half of uncertainties regarding the amount of All Access Pass and other subscription revenues for the fiscal year relative to our other revenues. Therefore, we computed the income tax benefit for the quarter ended November 30, 2017 by applying actual year-to-date adjustments and tax rates to our pre-tax loss.
LIQUIDITY AND CAPITAL RESOURCES
Introduction
Due to economic uncertainties generated by a variety of current geopolitical events, including macroeconomic factors, international conflicts, and the lingering impacts from the recent pandemic, we have prioritized maintaining and preserving adequate liquidity during the past few years. 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 February 28, 2023, our cash balance at November 30, 2017 was $8.1and cash equivalents totaled $55.1 million, with $21.0 million availableno borrowings on our line of$15.0 million revolving credit facility. We believe that our cash balances are held at stable banking institutions, but the amount of such deposits exceed insured balances. We are currently in the process of taking additional actions to protect our cash from banking system instability. Of our $8.1$55.1 million inof cash at November 30, 2017, substantially all of itFebruary 28, 2023, $16.7 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, capital expenditures (including curriculum development), business acquisitions,working capital expansion, and purchases of our common stock, working capital expansion, andstock.
At February 28, 2023, our debt payments.
Subsequent to February 28, 2023, we obtained a new credit agreement with a new lender (refer to Note 9, Subsequent Event). This new credit agreement provides expanded borrowing capacity, fewer financial covenants, and otherthe flexibility to enable growth in future periods. We refinanced our existing term loan debt at essentially the same terms applicable toas on the restatedprevious credit agreement at November 30, 2017.
In addition to our revolving line of credit facility and term-loan obligations,obligation, we have a long-term leaserental agreement on our corporate campus that is accounted for as a financing obligation.
The following discussion is a description of the primary factors affecting our cash flows and their effects upon our liquidity and capital resources during the quartertwo quarters ended November 30, 2017.
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 half of fiscal 2023 was $11.2 million compared with $2.9$23.2 million of cash used in the first quartertwo quarters of the prior year.fiscal 2022. The improvement in cash flows from operating activitiesdifference was primarily attributable to increased collections ofchanges in working capital during the year related to more cash used to pay accounts receivablepayable and improved operating results whenaccrued liabilities plus changes in deferred revenue compared with the prior year. While we are required to defer AAP and other subscription revenues over the lives of the underlying contracts, we invoice the entire contract amount and collect the associated receivable at the inception of the agreement. Our cash flows duringDuring the first quartertwo quarters of each fiscal year are also routinely impacted by payments2023 our collection of seasonally high accrued liability (primarily dueaccounts receivable remained strong and provided the necessary cash to year-end bonuses)support our operations, pay our obligations, and accounts payable balances.
Cash Flows FromUsed For Investing Activities and Capital Expenditures
During the first half of fiscal 2023, our cash used for investing activities during the first quarter of fiscal 2018 totaled $4.2$7.9 million. TheOur primary uses of cash for investing activities includedwere additional investments in the development of our offerings and purchases of property and equipment in the normal course of business, a contingent consideration payment associated withbusiness.
We spent $5.3 million during the acquisition of Jhana Education, which was completed in the fourth quarterfirst two quarters of fiscal 2017, and spending2023 on the development of various content and offerings. We believe continued investment in our content and offerings is key to future growth and the development of our subscription offerings.
Our purchases of property and equipment which totaled $2.4 million,during the first two quarters of fiscal 2023 consisted primarily of computer software costs related to significant upgrades inand hardware, and leasehold improvements on our AAP portal and the replacement of 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$7.6 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.
Cash Flows FromUsed For Financing Activities
For the quartertwo quarters ended November 30, 2017,February 28, 2023, our net cash provided byused for financing activities totaled $1.2$8.7 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 quarterwere comprised of fiscal 2018 were payments on our term loans and the financing obligation on our corporate campus, and $2.0$4.7 million used to purchase shares of our common stock, which consisted entirelyincluding $3.8 million used to purchase shares on the open market in the second quarter (refer to Note 4, Purchases of Common Stock); $4.1 million used for principal payments on our term loan and financing obligations; and $0.7 million used to pay contingent consideration liabilities from previous business acquisitions. Partially offsetting these uses of cash were $0.7 million of proceeds from our Employee Stock Purchase Plan participants to purchase shares withheld for statutory taxes on stock-based compensation awards that vestedof stock during the first quarterhalf of fiscal 2018.
On January 23, 2015,February 14, 2023, our Board of Directors approved a new plan to repurchase up to $10.0$50.0 million of the Company'sour outstanding common stock. AllThe previously existing common stock repurchase plans wereplan was canceled and the new common share repurchase plan does not have an expiration date. On March 27, 2015,At February 28, 2023, we have $46.6 million remaining in the current purchase authorization.
Our uses of financing cash during the remainder of fiscal 2023 are expected to include required payments on our Boardterm loans and financing obligation, 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 notes payable, service our existing financing obligation, and notes payable,pay for projected capital expenditures, and meet other working capital requirementsobligations during the remainder of fiscal 20182023 and intoearly fiscal 2019 through2024 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 existingSubsequent to February 28, 2023, we entered into a new five-year credit agreement expires on March 31, 2020 andwhich we expect to renew this credit agreement regularly in future periodsand amend 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, ongoing business disruptions associated with the COVID-19 pandemic, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new curriculums andofferings or technology by our competitors. We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements. However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.
Material Uses of Cash and 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.
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, 2017.2022. 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 2023, 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, 2017,2022, 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 onFebruary 28, 2023, 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 3.26.5 percent at November 30, 2017,February 28, 2023. Based on expected increases in interest rates over the remainder of fiscal 2023 and into fiscal 2024, 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 unpaid term loans and the amount outstanding on our line of credit facility at November 30, 2017February 28, 2023 would result in approximately $0.2 million$50,000 of additional interest expense over the next 12 months. Our financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent.
There have been no other material changes from the information previously reported under Item 7A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2017.2022. We did not utilize any foreign currency or interest rate derivative instruments during the quarter or two 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 FACTORSAdverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults, or non-performance by financial institutions, could adversely affect our Risk Factors, please refer to Item 1Abusiness, financial condition, results of operations, or our prospects.
The funds in our Annual Reportaccounts are held in banks or other financial institutions. Our cash held in non-interest bearing and interest-bearing accounts would exceed any applicable Federal Deposit Insurance Corporation (FDIC) insurance limits. Should events, including limited liquidity, defaults, non-performance or other adverse developments occur with respect to the banks or other financial institutions that hold our funds, or that affect financial institutions or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, our liquidity may be adversely affected. For example, on Form 10-KMarch 10, 2023, the FDIC announced that Silicon Valley Bank had been closed by the California Department of Financial Protection and Innovation. Although we did not have any funds in Silicon Valley Bank or other institutions that have been closed, we cannot guarantee that the banks or other financial institutions that hold our funds will not experience similar issues.
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for the fiscal year ended August 31, 2017.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSThe following table summarizes the purchases of our common stock during the fiscal quarter ended November 30, 2017:February 28, 2023:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1) (in thousands) | ||||||
December 1, 2022 to December 31, 2022 | - | $ | - | - | $ | 19,510 | ||||
January 1, 2023 to January 31, 2023 | 10,265 | $ | 44.67 | 10,265 | $ | 19,051 | ||||
February 1, 2023 to February 28, 2023 | 68,676 | $ | 49.10 | 68,676 | $ | 46,628 | ||||
Total Common Shares | 78,941 | $ | 48.52 | 78,941 |
Period | Total Number of Shares Purchased(2) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) (in thousands) | ||||||||||||
| September 1, 2017 to September 30, 2017 | - | $ | - | - | $ | 13,174 | ||||||||||
| October 1, 2017 to October 31, 2017 | - | - | - | 13,174 | ||||||||||||
| November 1, 2017 to November 30, 2017 | - | - | - | 13,174 | ||||||||||||
| Total Common Shares | - | $ | - | - | ||||||||||||
(1)On February 14, 2023, our Board of Directors approved a new plan to repurchase up to $50.0 million of our outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does not have an expiration date. |
Item 6.EXHIBITS
(A)Exhibits:
10.1 | |
10.2 | |
31.1 | Rule 13a-14(a) Certifications of the Chief Executive Officer.** |
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: April 5, 2023 | By: | /s/ Paul S. Walker | |||
Paul S. Walker | |||||
President and Chief Executive Officer | |||||
(Duly Authorized Officer) | |||||
Date: April 5, 2023 | By: | /s/ Stephen D. Young | |||
Stephen D. Young | |||||
Chief Financial Officer | |||||
(Principal Financial and Accounting Officer) | |||||