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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
Form
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þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE ENDED |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___
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(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
| (Commission File No.) |
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(Address of principal executive offices, including zip code)
Registrants telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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Large Accelerated Filer | £ |
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
As of February 28, 2022, the aggregate market value of the Registrants Common Stock held by non-affiliates of the Registrant was approximately $
As of October 31, 2022, the Registrant had
DOCUMENTS INCORPORATED BY REFERENCE
Franklin Covey Co.
TABLE OF CONTENTS
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| 4 | |
| Business | 4 | |
| Risk Factors | 12 | |
| Unresolved Staff Comments | 23 | |
| Properties | 23 | |
| Legal Proceedings | 23 | |
| Mine Safety Disclosures | 23 | |
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| 23 | |
| Market for the Registrant’s Common Equity, Related Shareholder Maters, and Issuer Purchases of Equity Securities | 23 | |
| Reserved | 25 | |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 25 | |
| Quantitative and Qualitative Disclosures About Market Risk | 43 | |
| Financial Statements and Supplementary Data | 45 | |
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| Report of Independent Registered Public Accounting Firm PCAOB ID No. | 45 |
| Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 87 | |
| Controls and Procedures | 87 | |
| Other Information | 88 | |
| Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 88 | |
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| 88 | |
| Directors, Executive Officers and Corporate Governance | 88 | |
| Executive Compensation | 88 | |
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 89 | |
| Certain Relationships and Related Transactions, and Director Independence | 89 | |
| Principal Accountant Fees and Services | 89 | |
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| 90 | |
| Exhibits and Financial Statement Schedules | 90 | |
| Form 10-K Summary | 92 | |
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PART I
Disclosure Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and such forward-looking statements involve risks and uncertainties. Statements about future sales, costs, margins, cost savings, foreign currency exchange rates, earnings, earnings per share, cash flows, plans, objectives, expectations, growth, profitability, or recovery from the COVID-19 pandemic are forward-looking statements based on management’s estimates, assumptions, and projections. Words such as “could,” “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and variations on such words, including similar expressions, are used to identify these forward-looking statements. These forward-looking statements are only predictions, subject to risks and uncertainties, and actual results could differ materially from those discussed in this, and other reports, filed with the Securities and Exchange Commission (SEC) and elsewhere. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to, the factors discussed under the section of this report entitled “Risk Factors.”
Forward-looking statements in this report are based on management’s current views and assumptions regarding future events and speak only as of the date when made. Franklin Covey Co. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by federal securities laws.
In this Annual Report on Form 10-K, unless the context requires otherwise, the terms “the Company,” “Franklin Covey,” “us,” “we,” and “our” refer to Franklin Covey Co. and its subsidiaries.
ITEM 1. BUSINESS
General Information
Franklin Covey is a global company focused on organizational performance improvement. Our mission is to “enable greatness in people and organizations everywhere,” and our global structure is designed to help individuals and organizations achieve results that require collective behavior change. From the foundational work of Dr. Stephen R. Covey in leadership and personal effectiveness, and Hyrum W. Smith in productivity and time management, we have developed deep expertise that extends to helping organizations and individuals achieve desired results through lasting behavioral change. We believe that our clients are able to utilize our content and offerings to create cultures which include 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.
The Company was incorporated in 1983 under the laws of the state of Utah, and we merged with the Covey Leadership Center in 1997 to form Franklin Covey Co. Our consolidated net sales for the fiscal year ended August 31, 2022 totaled $262.8 million and our shares of common stock are traded on the New York Stock Exchange (NYSE) under the ticker symbol “FC.”
Our fiscal year ends on August 31 of each year. Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.
The Company’s principal executive offices are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, and our telephone number is (801) 817-1776. Our website is www.franklincovey.com.
Franklin Covey Services and Offerings
Our mission is to “enable greatness in people and organizations everywhere,” and we believe that we are experts at solving certain pervasive, intractable problems, each of which requires a change in human behavior. Our services and products are designed to help our clients succeed in four key areas:
1.Develop exceptional leaders at every level.
2.Instill habits of effectiveness in every individual.
3.Build an inclusive, high-trust culture.
4.Use a common execution framework to pursue their most important goals.
We believe that when organizations partner with us, their people change behavior—both individually and collectively—in ways that help solve an organization’s most pressing problems and achieve breakthrough results. Lasting behavior change begins with individuals from the inside out, with how people see themselves and the world around them. These insights translate into how individuals engage and lead others. Our content, which is based on timeless principles of human effectiveness, is designed to help people change both their mindset and behavior.
We seek to combine the best content, people, and technology to help our clients achieve results at scale—across an entire organization. We believe the combination of powerful content, teams of experts, a dynamic behavior change platform, and key metrics can guide leaders and teams through impact journeys that deliver exceptional results again and again.
Our services and products are primarily delivered through our subscription offerings, which are comprised of the All Access Pass (AAP), which is primarily sold through our Enterprise Division, and the Leader in Me membership, which is designed specifically for our Education Division. We believe the AAP is a revolutionary and innovative way to deliver our content to clients of various sizes, including large, multinational organizations, in a flexible and cost-effective manner. Clients may utilize complete offerings such as The 7 Habits of Highly Effective People, The Four Disciplines of Execution, and The 5 Choices to Extraordinary Productivity, or use individual concepts from any of our well-known offerings to create a custom solution to fit their organizational or individual training needs. Since the introduction of the All Access Pass, we have developed the role of Implementation Specialists to provide our clients with the direction necessary to create meaningful impact journeys using our tools and content. An impact journey is a customized plan to utilize the content and offerings on the AAP to achieve a client’s specific goals and to provide them with the keys to obtain maximum value from the pass. We have also translated AAP materials into numerous additional languages, which allows the AAP to be used effectively by multinational entities and provides for greater international sales opportunities.
In our Education Division, we offer the Leader in Me membership, which provides access to the Leader in Me online service, and authorizes use of Franklin Covey’s proprietary intellectual property. The Leader in Me online service provides access to digital versions of student leadership guides, leadership lessons, illustrated leadership stories, and a variety of other resources to enable an educational institution to effectively implement and utilize the Leader in Me program. We believe that the tools and resources available through the Leader in Me membership will provide measurable results that are designed to develop student leadership, improve school culture, and increase academic proficiency.
To deliver these services and products, we operate globally with one common brand and a business model designed to enable us to provide clients around the world with the same high level of service. To achieve this high level of service we have sales and support associates in various locations around the United States and Canada, and operate wholly owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria. In foreign locations where we do not have a directly owned office, we may contract with independent licensee partners who deliver our content and provide services in 150 other countries and territories around the world.
Further information about our content and services can be found on our website at www.franklincovey.com. However, the information contained in, or that can be accessed through, our website does not constitute any part of this Annual Report.
Business Development
Our business is currently structured around two divisions, the Enterprise Division and the Education Division. The Enterprise Division consists of our Direct Office and International Licensee segments and is focused on selling our offerings to corporations, governments, not-for-profits, and other related organizations. Franklin Covey offerings delivered through the Enterprise Division are designed to help organizations and individuals achieve their own great purposes through behavior changing content and coaching. 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.
Following the launch of our AAP subscription service and Leader in Me membership, we have consistently sought to improve the technology, content, and overall client experience with these offerings. Bob Whitman, our former Chief Executive Officer and current Executive Chairman of our Board of Directors described our commitment to continued development as, “We don’t want to fall in love with our current solutions, we want to ‘fall in love with problems’ and keep working to find solutions that help people make real progress.” We believe that continued investments in technology, content, and personnel are key to subscription service renewals and the future growth of our offerings.
In addition to the internal development of our offerings, we have on occasion sought to grow our sales through acquisitions of businesses and content licenses, and opening new international offices. Over the past few years, our growth investment efforts have included the following:
Acquisition of Strive Talent, Inc. – In April 2021 we purchased Strive Talent, Inc. (Strive), a San Francisco-based technology company which has developed and markets an innovative learning deployment platform. The Strive platform is expected to enable the seamless integration and deployment of our content, services, technology, and metrics to deliver behavioral impact at scale, primarily through the Company’s AAP subscription. We are excited to fully roll out the new capabilities of the Strive platform in early fiscal 2023 and believe the new Impact Platform will provide significant additional value to our clients and appeal to potential new clients.
Investment in New Client Partners – On August 31, 2018, we had 214 client partners. Despite the recent employment turmoil during the COVID-19 pandemic and the ongoing recovery, we have increased the number of client partners to 300 at August 31, 2022. We expect to hire additional sales professionals in fiscal 2023 and future periods to provide additional growth opportunities.
We seek to consistently deliver world-class content with the broadest and deepest distribution capabilities through the most flexible content delivery modalities and expect to make additional investments in technology, content, and personnel in fiscal 2023 and in future periods as market conditions allow. These investments may include business acquisitions, the acquisition of license rights, and hiring additional personnel.
Our Associates
We have approximately 1,150 associates worldwide, who are mostly full-time employees. We also utilize independent contractors and temporary personnel to supplement our workforce. None of our associates are represented by a union or collective bargaining agreement, and we have never experienced a material labor interruption due to labor disagreements. For more information regarding our associates refer to the Human Capital Resources disclosures found later in this section.
Our Industry and Clients
According to the Training magazine 2022 Training Industry Survey, the total size of the U.S. training industry is expected to increase 10 percent over 2021 and is estimated to be $101.6 billion. As such, we believe that there is ample room for growth and increased market share within our industry. Overall, the training industry is highly fragmented and includes a wide variety of training and service providers of varying sizes. We believe our competitive advantages in this industry
stem from our fully integrated principle-centered training offerings, our wide variety of delivery options, and various implementation tools to help organizations and individuals measurably improve their effectiveness.
The training industry is a highly competitive and rapidly changing global marketplace and we compete with a variety of organizations of assorted sizes that offer services comparable with ours. Based upon our annual sales, we believe that we are a significant competitor in the performance skills and education market. Other significant comparative companies that compete with our Enterprise Division include: LinkedIn Learning, Development Dimension International, SkillSoft, Coursera, Udemy Business, Harvard Business Publishing, Cornerstone, Workboard, and Korn Ferry, among others. Our Education Division competes with entities such as: Second Step, Avid, Responsive Classroom, Panorama Education, and 7 Mindsets.
We believe that the principal competitive factors in the industry in which we compete include the following:
Quality of offerings, services, and solutions
Skills and capabilities of people who develop and deliver our content
Innovative training and consulting services combined with effective technology and products
Ability to add value to client operations
Reputation and client references
Pricing
Global reach and scale
Branding and name recognition in our marketplace
Given the relative ease of entry into the training market, the number of our competitors could increase, many of whom may imitate existing methods of distribution, or could offer similar content and programs at lower prices. However, we believe that we have several areas of competitive differentiation in our industry. We believe that our competitive advantages include: (1) the quality of our content; (2) the breadth of our delivery options, including the AAP and Leader in Me membership; (3) our global reach, which allows truly multinational clients to scale our content uniformly across the globe; and (4) the significant impact which our offerings can have on our clients’ organization and results.
We have a relatively broad base of clients, which includes thousands of organizational, governmental, educational, and individual clients in both the United States and in other countries that are served through our directly owned operations. We have thousands of additional organizational clients throughout the world which are served through our global licensee partner network, and we believe that our content, in all its forms, delivers results that encourage strong client loyalty. Our clients are in a broad array of industries and we are not dependent on a single client or industry group. During the periods presented in this report, none of our clients were responsible for more than ten percent of our consolidated revenues.
Our Intellectual Property
Our success has resulted in part from our proprietary content, methodologies, and other intellectual property rights. We seek to protect our intellectual property through a combination of trademarks, copyrights, and confidentiality agreements. We claim rights for over 660 trademarks in the United States and foreign countries, and we have obtained registration in the United States and numerous foreign countries for many of our trademarks including FranklinCovey, The 7 Habits of Highly Effective People, The 4 Disciplines of Execution, and The 7 Habits. We consider our trademarks and other proprietary rights to be important and material to our business and we regularly review the status of our trademarks and renew them to prevent the trademark protection from lapsing.
We claim nearly 235 registered copyrights, and own sole or joint copyrights on our books, manuals, text and other printed information provided in our training programs, and other electronic media products, including audio and video media. We may license, rather than sell, facilitator workbooks and other seminar and training materials in order to protect our intellectual property rights therein. We place trademark and copyright notices on our instructional, marketing, and advertising materials. In order to maintain the proprietary nature of our product information, we enter into written
confidentiality agreements with certain executives, product developers, sales professionals, training consultants, other employees, and licensees.
Our Products and Sustainability
We offer training materials and related accessories in either digital or paper formats. Our printed training materials are primarily comprised of paper, which we believe is a renewable and sustainable resource. We purchase our training materials and related products from various vendors and suppliers located both domestically and internationally, and we are not dependent upon any one vendor for the production of our training and related materials as the raw materials for these products are readily available. Our training materials are primarily warehoused and distributed from an independent warehouse facility located in Des Moines, Iowa.
Seasonality
Our fourth quarter of each fiscal year typically has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education Division (when school administrators and faculty have professional development days) and to increased sales that typically occur during that quarter from year-end incentive programs. Overall, training sales are moderately seasonal because of the timing of corporate training, which is not typically scheduled as heavily during holiday and certain vacation periods.
Human Capital Resources
A Culture of Belonging at Franklin Covey
Our mission is to “enable greatness in people and organizations everywhere,” which is also the cornerstone of our culture. To fulfill that mission and successfully implement our strategy, we must attract, develop, and retain highly qualified associates for each role in the organization. We currently have approximately 1,150 associates worldwide dedicated to providing the best service possible for our clients and for each other. Our goal is to have every associate feel they are a valued member of a winning team doing meaningful work in an environment of trust. To accomplish this ideal outcome, we are continuously focused on attracting, developing, and retaining talent while looking through the lens of diversity, equity, and inclusion in each area.
Providing Focus and Accountability
We have historically attracted mission-driven people who care deeply about making a difference in the world. Our approaches to ensure accountability and responsibility to our mission and culture are shared by all of us and are further fortified through our Diversity, Equity, and Inclusion (DEI) Core Council, the Director of Learning, Development, and Inclusion, and the Manager of Diversity Partnerships.
The purpose of the DEI Core Council is to provide input, insight, feedback, and guidance on our Diversity, Equity, and Inclusivity commitments and initiatives as we strive to enhance our intent of being the workplace of choice for achievers with heart. This multi-disciplinary council is comprised of approximately 35 associates from across our organization. During fiscal 2022, the DEI Core Council focused on hiring and promotion opportunities, and building cultural competence.
The role of Director of Learning, Development, and Inclusion is accountable for the internal learning and development of our associates in ways that align with our strategic plans for growth through the multi-dimensional lens of inclusion. In fiscal 2022, we grew the Mentorship and Employee Resource programs and evaluated our Contribution Conversations program for effectiveness. We also worked to align our Human Resource Information System and Learning Management Systems (LMS), and to support the professional development of our internal LMS stakeholder groups.
Attracting Talent
Our recruiting and hiring efforts cast a wide net when looking for candidates by partnering with many groups and agencies, including alumni organizations, multiple diversity job boards, diversity career fairs, the Utah Governor’s Committee on Employment of People with Disabilities and Business Relations, and ElevatHER – an organization designed to promote women in leadership.
We remain steadfast in our commitment to recruiting and developing underinvested and underrepresented groups of employees. Women currently constitute 67 percent of our workforce, while the number of women in leadership grew to 44 percent. Black, Indigenous, and People of Color (BIPOC) associates currently comprise 19 percent of our workforce, which represents growth of more than five percent over the prior year. We continue to make efforts to increase the representation of BIPOC, veterans, women, and individuals with disabilities in our workforce while ensuring that our associate promotions are fair and equitable.
Developing Talent
We believe that building an environment that encourages lifelong learning and development is essential for us to maintain a high level of service and to achieve our goal of having every associate feel they are a valued member of a winning team doing meaningful work in an environment of trust. We believe Franklin Covey is one of the world’s premier training and consulting organizations. We develop and deliver various offerings, including leadership and individual effectiveness, to clients around the globe, and we provide these same world-class offerings to our associates. During an associate’s first year, they complete a three-part Company culture orientation, including our 7 Habits of Highly Effective People offering, which is the cultural operating system for our organization. Our associates have unlimited access to our content and training through the AAP, where they can experience the exact high-quality solutions available to our clients.
If an associate struggles with reaching their goals or producing the results required of the role, a thoughtful and thorough performance plan is created and implemented by the associates manager and our Chief People Officer. The performance plan is designed to help the associate recalibrate and bring performance up to expectations. Through this transparent coaching process, struggling associates can learn how to improve their performance and become engaged, successful contributors in their roles. We believe this process strengthens our associate base while reducing the cost of finding and training new associates.
Retaining Talent
Talented people are always in high demand, and even more so when talent searches align their purpose and values with the organizations and teams they work for and with. From June 1, 2021 through May 31, 2022, our associate turnover rate in the United States and Canada was 17 percent, which we believe is reasonable for our industry and the make-up of our workforce, especially considering the impact of the “great resignation,” which has impacted workforces around the world over the past few years.
To retain our associates, we believe it is crucial to continually focus on making sure our associates are highly engaged and feel valued. We further address retention efforts in several ways, including training our leaders in our solutions such as The 6 Critical Practices for Leading a Team, Multipliers, Unconscious Bias, and Leading Change. Our employee retention practices include holding consistent, compelling one-on-one interviews, where leaders regularly take time to connect with their associates and to understand what is working well for them and what is not. In our 2022 Culture Survey, 86 percent of associates said they had at least one meaningful conversation with their manager in the past year. Though one conversation seems like a low benchmark, these conversations are essential because they are not performance reviews. Our Contribution Conversations are an open, ongoing dialogue focused on how our associates want to contribute and bring their “best selves” to work. Based on these discussions, leaders are encouraged to “clear the path” of those things that may hold the associate back. We aim to establish a culture of feedback where feedback for both leaders and associates is a normal and worthwhile part of how work gets done. Contribution Conversations align with our core value to focus on the whole person and allow our associates to find their voice. We believe these efforts are vital to creating an atmosphere of continuous improvement.
We currently have six Employee Resource Groups (ERGs): Veterans and First Responders, BOLD (Black Originators, Leaders, and Doers), WIN (Womens International Network), Global Wellness, FC Ability, and LGBTQ+. These employee-led networks serve historically underinvested and underrepresented associates and allies. They offer safe spaces for people to come together based on a shared interest in a specific dimension of equity and inclusion while actively working to enhance career opportunities, build cultural competence, and foster community within the organization. We believe our ERGs represent and support our diverse workforce, facilitate networking, and foster connections and engagement within the organization.
The Mentorship Program is company-wide and is for all employees. Mentees and mentors are paired based on self-selected areas of interest and ability, giving the partners a great deal of flexibility for how they can best engage with each other for mutual benefit and professional development. This program started as 30 pairs of mentors and mentees and has now increased to 86 pairs of participants.
Our compensation plans are audited periodically to confirm ongoing pay equity. We provide a generous personal time off benefit as well as a flexible and inclusive holiday schedule, reflecting the diversity of our workforce and the celebration of various cultural and religious affiliations. We also offer 100 percent salary continuance for up to 12 weeks in a rolling 12-month period, for qualifying medical leaves, and provide many other employee-minded benefits.
Our focus on human capital has been a hallmark of Franklin Covey for decades, understanding that people truly are a company’s most valuable asset, and that culture is an organization’s ultimate competitive advantage. In 2017, our Organization and Compensation Committee determined to make Talent Stewardship a standing agenda item at committee meetings, and we recently included diversity, equity, and inclusion efforts as an additional standing agenda item. The Organization and Compensation Committee is actively involved in helping to determine best practices and implement new and innovative ways to help us continually improve in attracting, developing, and retaining top talent for Franklin Covey.
Information About Our Executive Officers
On September 1, 2021, Paul S. Walker was appointed President and Chief Executive Officer of Franklin Covey Co. and Robert A. Whitman transitioned from his role as Chief Executive Officer to Executive Chairman and Chairman of the Board of Directors. Unless noted in the biographical information, the remaining executives served in their described roles throughout the fiscal year ended August 31, 2022.
M. Sean Covey, 58, currently serves as President of the Franklin Covey Education Division, and has led the growth of this Division from its infancy to its status today. The Education Division works with thousands of education entities throughout the world in the K-12 and Higher Education markets. Mr. Covey previously ran the Franklin Covey international licensee network and has been an executive officer since September 2008. Sean also served as the Executive Vice President of Innovations from 2003 to 2018, where he led the development of many of our offerings, including the The 4 Disciplines of Execution and The Leader in Me. Prior to 2006, Sean ran the Franklin Covey retail chain of stores. Previous to Franklin Covey, Sean worked for the Walt Disney Company, Trammel Crow Ventures, and Deloitte Touche Consulting. Mr. Covey is also a New York Times best-selling author and has authored or coauthored several books, including The 4 Disciplines of Execution, The Leader in Me, and the international bestseller The 7 Habits of Highly Effective Teens. Sean graduated from Brigham Young University with a Bachelor’s degree in English and later earned an MBA from Harvard Business School. While at BYU, Sean was the quarterback for the football team where he earned several honors and led his team to two bowl games. Sean is also the founder and Chairman of “Bridle Up Hope,” a global non-profit organization with a mission to inspire hope, confidence, and resilience in young women through equestrian training, life skills development, and service.
Jennifer C. Colosimo, 53, has served as the President of the Enterprise Division since September 2020 and was appointed an executive officer in January 2021. Ms. Colosimo began her career with Andersen Consulting (now Accenture) in 1991 and joined Franklin Covey in 1996 and served in various roles including Client Partner, Delivery Consultant, Chief Operations Officer, and head of the Leadership Practice until 2011. During this time, Jennifer coauthored the book, Great Work, Great Career with Dr. Stephen R. Covey. From May 2011 through April 2016, Ms. Colosimo led teams
responsible for culture, learning, and corporate social responsibility with DaVita and several private equity-backed organizations. Ms. Colosimo returned to Franklin Covey in April 2016 as the Senior Vice President of Sales and Operations in the United States and Canada. Jennifer sits on the Audit and Finance Committee of the Women’s Foundation of Colorado and was a board member of the Girl Scouts of Colorado for 10 years. Ms. Colosimo completed her Bachelor of Science at the University of Utah and received a Master of Science from Purdue University. Jennifer has also completed post-graduate work on Authentic Leadership and Executive Coaching through the Harvard Business School and Columbia University, respectively.
Colleen Dom, 60, was appointed the Executive Vice-President of Operations in September 2013. Ms. Dom began her career with the Company in 1985 and served as the first Client Service Coordinator, providing service and seminar support for some of the Company’s very first clients. Prior to her appointment as an Executive Vice President, Ms. Dom served as Vice President of Domestic Operations since 1997 where she had responsibility for the Company’s North American operations, including client support, supply chain, and feedback operations. During her time at Franklin Covey Co., Colleen has been instrumental in creating and implementing systems and processes that have supported the Company’s strategic objectives and has more than 35 years of experience in client services, sales support, operations, management, and supply chain. Due to her valuable understanding of the Company’s global operations, Ms. Dom has been responsible for numerous key assignments that have enhanced client support, optimized operations, and built capabilities for future growth. Prior to joining the Company, Colleen worked in retail management and in the financial investment industry.
C. Todd Davis, 65, is an Executive Vice President and Chief People Officer, and has been an executive officer since September 2008. Todd has over 35 years of experience in training, training development, sales and marketing, human resources, coaching, and executive recruiting. Mr. Davis has been with Franklin Covey for the past 26 years. Previously, Mr. Davis was a Director of our Innovations Group where he led the development of core offerings including The 7 Habits of Highly Effective People – Signature Program. Todd also worked for several years as our Director of Recruitment and was responsible for attracting, hiring, and retaining top talent for the organization. Prior to joining Franklin Covey, Mr. Davis worked in the medical industry for nine years where he recruited physicians and medical executives along with marketing physician services to hospitals and clinics throughout the country. Todd is the author of The Wall Street Journal’s best-selling book, Get Better: 15 Proven Practices to Build Effective Relationships at Work and a co-author of the books Talent Unleashed and Everyone Deserves A Great Manager – The 6 Critical Practices for Leading A Team.
Paul S. Walker, 47, currently serves as the Company’s President and Chief Executive Officer. Mr. Walker began his career with the Company in 2000 in the role of business developer, and quickly moved to become a Client Partner and then an Area Director. In 2007, Mr. Walker became General Manager of the North America Central Region. In 2014, Paul assumed responsibility for the Company’s United Kingdom operations in addition to his role as General Manager of the Central Region. In 2016, Mr. Walker relocated to the Company’s Salt Lake City, Utah headquarters where he served as Executive Vice President of Global Sales and Delivery and as President of the Company’s Enterprise Division until November 2019 when Paul was appointed President and Chief Operating Officer. During his time at Franklin Covey, Paul has led many digital transformation projects, including the transition to the All Access Pass. Mr. Walker graduated from Brigham Young University with a Bachelor of Arts in Communications.
Robert A. Whitman, 69, has served as Chairman of the Board of Directors since June 1999 and served as Chief Executive Officer of the Company from January 2000 through August 2021. Mr. Whitman currently serves as Executive Chairman and Chairman of the Board of Directors as described above. Bob previously served as a director of the Covey Leadership Center from 1994 to 1997. Prior to joining Franklin Covey, Mr. Whitman served as President and Co-Chief Executive Officer of The Hampstead Group from 1992 to 2000 and is a founding partner at Whitman Peterson. Mr. Whitman received his Bachelor of Arts degree in Finance from the University of Utah and his MBA from the Harvard Business School.
Stephen D. Young, 69, joined Franklin Covey as Executive Vice President of Finance, was appointed Chief Accounting Officer and Controller in January 2001, Chief Financial Officer in November 2002, and Corporate Secretary in March 2005. Prior to joining us, he served as Senior Vice-President of Finance, Chief Financial Officer, and director of international operations for Weider Nutrition for seven years; as Vice-President of Finance at First Health for ten years; and as an auditor
at Fox and Company, a public accounting firm, for four years. Mr. Young has more than 40 years of accounting and management experience and is a Certified Public Accountant. Mr. Young was awarded a Bachelor of Science in Accounting from Brigham Young University.
Available Information
We regularly file reports with the SEC. These reports include, but are not limited to, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and security transaction reports on Forms 3, 4, or 5. The SEC also maintains electronic versions of the Company’s reports, proxy and information statements, and other information that the Company files with the SEC on its website at www.sec.gov.
The Company makes our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and other reports filed or furnished with the SEC available to the public, free of charge, through our website at www.franklincovey.com. These reports are provided through our website as soon as is reasonably practicable after we file or furnish these reports with the SEC.
ITEM 1A. RISK FACTORS
Our business environment, current domestic and international economic conditions, impacts from the ongoing COVID-19 pandemic, geopolitical circumstances, changing social standards, and other specific risks may affect our future business decisions and financial performance. The matters discussed below may cause our future results to differ from past results or those described in forward-looking statements and could have a material effect on our business, financial condition, liquidity, results of operations, and stock price, and should be considered in evaluating our Company.
The risks included here are not exhaustive. Other sections of this report may include additional risk factors which could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing global environment. New risk factors emerge from time to time and it is not possible for 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 factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Further, the disclosure of risks identified below does not imply that the risk has already materialized.
COVID-19 Pandemic Risks
Our results of operations have been adversely affected and could be materially impacted in the future by the ongoing coronavirus (COVID-19) pandemic.
The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption in the United States and elsewhere in the world over the past several quarters. The extent to which the ongoing COVID-19 pandemic impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration, scope, and severity of the pandemic; governmental, business, and individuals’ actions that have been taken, and continue to be taken, in response to the pandemic; the impact of the pandemic on worldwide economic activity, including related supply chain issues (including, for example, shipping delays, capacity constraints, increasing labor costs, and supply shortages), and actions taken in response to such impacts; the effect on our clients, including educational institutions, and client demand for our services; our ability to conduct in-person programs; our ability to sell and provide our services and solutions, including the impact of travel restrictions and from people working from home; the ability of our clients to pay for our services on a timely basis or at all; the ability to maintain sufficient liquidity; and any closure of our offices. Any of these events, or related conditions, could cause or contribute to the risks and uncertainties described in this Annual Report and could materially adversely affect our business, financial condition, results of operations, cash flows, and stock price.
Training Industry and Related Risks
We operate in an intensely competitive industry and our competitors may develop programs, services, or courses that adversely affect our ability to sell our offerings.
The training and consulting services industry is intensely competitive with relatively easy entry. Competitors continually introduce new programs, services, and delivery methods that may compete directly with our offerings, or that may make our offerings uncompetitive or obsolete. Larger competitors may have superior abilities to compete for clients and skilled professionals, reducing our ability to deliver quality work to our clients. Some of our competitors may have greater financial and other resources than we do. In addition, one or more of our competitors may develop and implement training courses or methodologies that may adversely affect our ability to sell our offerings and products to new clients. Any one of these circumstances could have an adverse effect on our ability to obtain new business and successfully deliver our services.
Our results of operations could be adversely affected by economic and political conditions and the effects of these conditions on our clients’ businesses and their levels of business activity.
Global economic and political conditions affect our clients’ businesses and the markets in which they operate. Instability in the global credit markets; the impact of uncertainty regarding global central bank monetary policy; instability in the geopolitical environment in many parts of the world, including international hostilities; inflation; energy shortages and pricing; the current economic challenges in China, including the global economic ramifications of Chinese economic difficulties; and other disruptions may continue to put pressure on global economic conditions. If global economic, political, and market conditions, or conditions in key markets, remain uncertain or deteriorate further, we may experience material adverse impacts on our business, operating results, and financial condition.
Our financial results are somewhat dependent on the amount that current and prospective clients budget for training. A serious and/or prolonged economic downturn combined with a negative or uncertain political climate could adversely affect our clients’ financial condition and the amount budgeted for training by our clients. These conditions may reduce the demand for our services or depress the pricing of those services and have an adverse impact on our results of operations. Changes in global economic conditions may also shift demand to services for which we do not have competitive advantages, and this could negatively affect the amount of business that we are able to obtain. Such economic, political, and client spending conditions are influenced by a wide range of factors that are beyond our control and that we have no comparative advantage in forecasting. If we are unable to successfully anticipate these changing conditions, we may be unable to effectively plan for and respond to those changes, and our business could be adversely affected.
Our business success also depends in part upon continued growth in the use of training and consulting services and the renewal of existing contracts by our clients. In challenging economic environments, our clients may reduce or defer their spending on new services and consulting solutions in order to focus on other priorities. At the same time, many companies have already invested substantial resources in their current means of conducting their business and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel and/or processes. If growth in the general use of training and consulting services in business or our clients’ spending on these items declines, or if we cannot convince our clients or potential clients to embrace new services and solutions, our results of operations could be adversely affected.
In addition, our business tends to lag behind economic cycles and, consequently, the benefits of an economic recovery following a period of economic downturn may take longer for us to realize than other segments of the economy.
Failure to maintain our reputation, brand image, and culture could negatively impact our business.
Our success depends on our ability to maintain and enhance our brand image and reputation. Maintaining, promoting, and growing our brands will depend on our design and marketing efforts, including advertising and consumer campaigns, content and platform innovation and quality, and our efforts in these respects may not have the desired impact on our brand image and reputation. In addition, our success in maintaining, extending, and expanding our brand image depends
on our ability to adapt to a rapidly changing media environment, including our increasing reliance on social media and digital dissemination of advertising campaigns on our digital platforms and through our digital experiences. We could be adversely impacted if we fail to achieve any of these objectives.
Our brand value also depends on our ability to maintain a positive consumer perception of our corporate integrity, purpose, and brand culture. Negative claims or publicity involving us, our culture and values, our products, services and experiences, consumer data, or any of our affiliates could seriously damage our reputation and brand image, regardless of whether such claims are accurate. Further, our reputation and brand image could be damaged as a result of our support of, association with or lack of support or disapproval of certain social causes, as well as any decisions we make to continue to conduct, or change, certain of our activities in response to such considerations. Social media, which accelerates and potentially amplifies the scope of negative publicity, can increase the challenges of responding to negative claims. Adverse publicity about regulatory or legal action against us, or by us, could also damage our reputation and brand image, undermine consumer confidence in us and reduce long-term demand for our products, even if the regulatory or legal action is unfounded or not material to our operations. If the reputation, perception, or image of any of our brands is tarnished or if we receive negative publicity, our financial condition and results of operations could be materially and adversely affected.
Some terminology, language, or content in our offerings may be deemed offensive by certain individuals due to rapidly changing societal norms, which may cause damage to our brand or reputation.
Our mission is to enable greatness in individuals and organizations regardless of race, religion, gender, or other individual characteristics. We write and design our content and materials to accomplish this mission and believe that the principles we teach improve lives. Through our directly owned offices and international licensees, our content is delivered in numerous countries around the world in different languages and in different cultures. The language, graphics, and examples used in our content and materials may be understood and interpreted differently by individuals based on culture, experience, societal norms, and other factors. As a result, some individuals may find some of the content in our materials offensive. While we have developed an ongoing review process to remove potentially offensive terms or images from our materials, a rapidly changing cultural and social environment may create unfavorable interpretations of language or images faster than we can identify and remediate them. Although our intent is to educate and improve individual lives and organizational cultures without offense, an unfavorable interpretation by an individual or organization of the language, concepts, or images used in our content or materials may harm our reputation and brand, cause us to lose business, and adversely affect our business and results of operations.
We have only a limited ability to protect our intellectual property rights, which are important to our success.
Our financial success is partially dependent on our ability to protect our proprietary offerings and other intellectual property. The existing laws of some countries in which we provide services might offer only limited protection of our intellectual property rights. To protect our intellectual property, we rely upon a combination of confidentiality policies, nondisclosure and other contractual arrangements, as well as copyright and trademark laws. The steps we take in this regard may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights, especially in foreign jurisdictions.
The loss of proprietary content or the unauthorized use of our intellectual property may create greater competition, loss of revenue, adverse publicity, and may limit our ability to reuse that intellectual property with other clients. Any limitation on our ability to provide a service or solution could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future engagements.
We depend on key personnel, the loss of whom could harm our business.
Our future success will depend, in part, on the continued service of key executive officers and personnel. The loss of the services of any key individuals could harm our business. Our future success also depends on our ability to identify,
attract, and retain additional qualified senior personnel. Competition for such individuals in the current labor market and in our industry is intense, and we may not be successful in attracting and retaining such personnel.
If we are unable to attract, retain, and motivate high-quality employees, including sales personnel and training consultants, we may not be able to grow our business as projected or may not be able to compete effectively.
Our success and ability to grow are partially dependent on our ability to hire, retain, and motivate sufficient numbers of talented people with the increasingly diverse skills needed to serve our clients and grow our business. Competition for skilled personnel is intense at all levels of experience and seniority. There is a risk that we will find it difficult to hire and retain a sufficient number of employees with the skills or backgrounds we require, or that it will prove difficult to retain them in a competitive and inflationary labor market. If we are unable to hire and retain talented sales and delivery employees with the skills, and in the locations, we require, we might not be able to grow our business at projected levels or may not be able to effectively deliver our content and services. If we need to hire additional personnel to maintain a specified number of sales personnel or are required to re-assign personnel from other geographic areas, it could increase our costs and adversely affect our profit margins. In addition, the inability of newly hired sales personnel to achieve increased sales metrics as they progress may inhibit our ability to attain anticipated sales growth.
Our work with governmental clients exposes us to additional risks that are inherent in the government contracting process.
Our clients include national, state, provincial, and local governmental entities, and our work with these governmental entities has various risks inherent in the governmental contracting process. These risks include, but are not limited to, the following:
Governmental entities typically fund projects through appropriated monies. While these projects are often planned and executed as multi-year projects, the governmental entities usually reserve the right to change the scope of, or terminate, these projects for lack of approved funding, budgetary changes, and other discretionary reasons. Changes in governmental priorities or other political developments, including disruptions in governmental operations, could result in changes in the scope of, or in termination of, our existing contracts.
Governmental entities often reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and investigations of our business practices with respect to our government contracts. Findings from an audit may result in our being required to prospectively adjust previously agreed upon rates for our work, which may affect our future margins.
If a governmental client discovers improper activities in the course of audits or investigations, we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions, or debarment from doing business with other agencies of that government.
Political and economic factors such as pending elections, the outcome of elections, revisions to governmental tax policies, sequestration, debt ceiling negotiations, and reduced tax revenues can affect the number and terms of new governmental contracts signed.
The occurrences or conditions described above could affect not only our business with the particular governmental agency involved, but also our business with other agencies of the same or other governmental entities. Additionally, because of their visibility and political nature, governmental contracts may present a heightened risk to our reputation. Any of these factors could have an adverse effect on our business or our results of operations.
Cybersecurity and Information Technology Risks
The All Access Pass and Leader in Me subscription services are internet-based platforms, and as such we are subject to increased risks of cyber-attacks and other security breaches that could have a material adverse effect on our business.
As part of selling subscription-based services, we collect, process, and retain a limited amount of sensitive and confidential information regarding our customers. Because our subscription services are internet-based platforms, our facilities and systems may be vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, stolen intellectual property, programming or human errors, or other similar events.
The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our customers or our own proprietary information, software, methodologies, and business secrets could result in significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems, products, and services, which could have a material adverse effect on our business, financial condition, or results of operations. To the extent we are involved in any future cyber-attacks or other breaches, our brand and reputation could be affected, and these conditions could also have a material adverse effect on our business, financial condition, or results of operations.
We could incur additional liabilities or our reputation could be damaged if we do not protect client data or if our information systems are breached.
We are dependent on information technology networks and systems to process, transmit, and store electronic information and to communicate between our locations around the world and with our clients. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of personal or confidential information. We are also required at times to manage, utilize, and store personal data, including sensitive or confidential client or employee data. As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state laws governing the protection of personal data. If we, our associates, business partners, or our service providers negligently disregard or intentionally breach our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines, and/or criminal prosecution. Unauthorized disclosure of personal, sensitive, or confidential client or employee data, whether through systems failure, employee negligence, fraud, or misappropriation could damage our reputation and cause us to lose clients.
Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve. For example, in May 2018 the General Data Protection Regulation (GDPR) became effective in the European Union (EU). The GDPR imposed strict requirements on the collection, use, security, and transfer of personal information in and from EU member states. Under GDPR, fines of up to 20 million Euros or up to four percent of the annual global revenues of the infringer, whichever is greater, could be imposed. Although GDPR applies across the European Union, local data protection authorities still have the ability to interpret GDPR, which may create inconsistencies in application on a country-by-country basis. Furthermore, with the United Kingdom’s (UK) transition out of the EU as of January 1, 2021, we may encounter additional complexity with respect to data privacy and data transfers to and from the UK under the UK GDPR. Other countries, such as Brazil and South Africa, have also enacted data protection laws analogous to GDPR. We have implemented controls and procedures, including a team dedicated to data protection, to comply with the requirements of GDPR/UK GDPR and analogous laws. However, these new procedures and controls may not be completely effective in preventing unauthorized breaches of personal data.
In addition, on July 16, 2020, the Court of Justice of the European Union (CJEU) invalidated the EU-U.S. Privacy Shield, a framework that had enabled companies to transfer data from EU member states to the U.S. On September 8, 2020, the Swiss Federal Data Protection and Information Commissioner followed suit, and announced that the Swiss-U.S. Privacy Shield Framework was inadequate for personal information transfers from Switzerland to the U.S. Both cases raised questions about the viability of Standard Contractual Clauses (SCCs) as a Privacy-Shield alternative. On June 4, 2021, the European Commission adopted new SCCs, which imposed on companies additional obligations relating to data transfers, including the obligation to conduct a transfer impact assessment and, depending on a party’s role in the transfer and the laws and practices of the destination country, to implement additional security measures, and to update internal
privacy practices. Regulatory guidance suggests that certain transfers of personal data to the U.S. could be compliant only if the recipient is able to implement specific technical and procedural security controls to protect that personal data, and such controls may not be practical for certain service delivery models, in particular those reliant on cloud services. Decisions in several countries in the EU have created additional uncertainty surrounding the conditions necessary to properly implement the SCCs in the context of U.S. transfers, in particular, the nature of the technical and organizational controls necessary for such transfers to be lawful. To the extent we rely on the SCCs for data transfers, we may be required to incur significant time and resources to update our contractual arrangements and implement the supplementary security measures, necessary to comply with new requirements. Compliance may also require changes in services, business practices, or internal systems that may result in increased costs, lower revenue, reduced efficiency, or greater difficulty in competing with foreign-based firms. Failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged noncompliant activity. The inability to import personal information from Europe to the United States or other countries may decrease demand for our products and services as our customers that are subject to such laws may seek alternatives that do not involve personal information transfers out of Europe. Our inability to import personal information to the United States and other countries may decrease the functionality or effectiveness of our products and services, increase costs, and adversely impact our marketing efforts, plans, and activities.
Further, on August 20, 2021, China adopted the PRC Personal Information Protection Law, or PIPL. The PIPL took effect on November 1, 2021. The PIPL establishes comprehensive requirements relating to the collection, use, transfer, security, and other processing of personal information in or from China. The PIPL incorporates many requirements common to international privacy laws, such as GDPR, and adds unique regulatory requirements relating to data localization, international data transfers, consumer consent, the processing of “sensitive personal information,” and the operations of certain “internet platform services.” While several new regulations and practical guidelines have been published by the PRC in order to implement the PIPL, key regulations are not yet in force, including those concerning contractual clauses for international data transfers and other requirements relating to international data transfers and data localization. Fines and penalties under the PIPL range from fines up to RMB 50,000,000 or five percent of global annual turnover, to the cancellation of business authorizations, personal liability or professional restrictions for responsible company officers, as well as criminal and civil liability. Early enforcement actions under PIPL have included civil actions against companies that fail to obtain proper consent for processing sensitive personal information or other unlawful data collection. Recent regulatory actions have centered on ineffective channels for data subjects to exercise rights, the over-collection of personal information, and deceptive practices. In the event the law requires us to store data in China, or limits our ability to transfer data across borders, we may experience increased costs, business inefficiencies, lost sales, decreased demand, and decreased competitiveness, as we may be unable to provide our services or certain features, or provide them in an efficient or centralized manner. Additionally, local companies may be favored by customers who will not consent to or accept transfer of their data out of China. Fines, corrective actions, or other penalties asserted due to alleged noncompliance may impose additional financial or operational costs, limit our ability to attract and retain local talent, or limit our ability to do business in China. These risks may be magnified due to regulatory uncertainty and short periods to achieve compliance. Additionally, under the PIPL, we may be subject to additional liabilities, claims, penalties, or causes of action in the event of a breach of customer personal information.
Other governmental authorities throughout the U.S. and around the world are considering or have adopted similar types of legislative and regulatory proposals concerning data protection. For example, in June 2018, the State of California enacted the California Consumer Privacy Act of 2018 (the CCPA), which was took effect on January 1, 2020. The CCPA requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, and allows consumers to opt out of data sales, as well as certain data sharing with third parties and provides a new private cause of action for data breaches. Additionally, the California Privacy Rights Act (the CPRA) amendments to the CCPA created additional obligations relating to consumer data beginning on January 1, 2022, with enforcement beginning on July 1, 2023. The CPRA amendments expand the private right of action for consumers, expands the CCPA’s limitation on sharing of personal information, and removes the 30-day window to cure alleged noncompliance before being subject to administrative enforcement. Other states, including Colorado, Virginia, and Utah have also passed comprehensive privacy laws that are now in effect or will come into effect in the coming years. Furthermore, in June 2022, the first draft of a comprehensive federal privacy bill was introduced to congress. If enacted, the proposed American Data Privacy and Protection Act would largely preempt state privacy legislation; however, the scope of preemption and enforcement-related matters remain uncertain. The Federal Trade
Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. These privacy, security, and data protection laws and regulations continue to evolve and enforcement in the U.S. and internationally continues to increase. These developments could impose significant limitations on or require changes to our business, restrict our use or storage of personal information, and increase risks of legal liability, which may in turn increase our compliance risk and expenses, and make our business more costly or less efficient to conduct.
We strive to employ global best practices in securing and monitoring code, applications, systems, processes, and data, and our data protection practices are regularly reviewed and validated by an external auditing firm. However, these efforts may be insufficient to protect sensitive information against illegal activities and we may be exposed to additional liabilities from the various data protection laws enacted within the jurisdictions where we operate.
Our business is becoming increasingly dependent on information technology and will require additional cash investments in order to grow and meet the demands of our clients.
Since the introduction of our online subscription services, our dependence on the use of sophisticated technologies and information systems has increased. Moreover, our technology platforms will require continuing cash investments (including business acquisitions such as the acquisition of Strive in fiscal 2021) by us to expand existing offerings, improve the client experience, and develop complementary offerings. Our future success depends in part on our ability to adapt our services and infrastructure while continuing to improve the performance, features, and reliability of our services in response to the evolving demands of the marketplace. Failure to adapt and improve these areas could have an adverse effect on our business, including our results of operations, financial position, and cash flows.
Liquidity and Capital Resource Risks
We may not be able to generate sufficient cash to service our indebtedness, and we may be forced to take other actions to satisfy our payment obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our indebtedness depends on our future performance, including the performance of our subsidiaries, which will be affected by financial, business and economic conditions, competition, and other factors. We are unable to control many of these factors, such as the general economy, economic conditions in the industries in which we operate, and competitive pressures. Our cash flows may be insufficient to allow us to pay principal and interest on our indebtedness and to meet our other obligations. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may be unsuccessful and we may not meet our scheduled debt service obligations. In addition, the terms of existing or future debt agreements, including our 2019 Credit Agreement (as defined below) and subsequent modifications, may restrict us from pursuing any of these alternatives.
In the event that we need to refinance all or a portion of our outstanding indebtedness before maturity or as it matures, we may not be able to obtain terms as favorable as the terms of our existing indebtedness or refinance our existing indebtedness at all. If interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, we will incur higher interest expense. Furthermore, if any rating agency changes our credit rating or outlook, our debt and equity securities could be negatively affected, which could adversely affect our financial condition and financial results.
Failure to comply with the terms and conditions of our credit facility may have an adverse effect upon our business and operations.
Our secured credit agreement and subsequent modifications require us to be in compliance with customary non-financial terms and conditions as well as specified financial ratios. Failure to comply with these terms and conditions or maintain adequate financial performance to comply with specific financial ratios entitles the lender to certain remedies, including the right to immediately call due any amounts owed on the credit agreement. Such events would have an adverse effect
upon our business and operations as there can be no assurance that we may be able to obtain other forms of financing or raise additional capital on terms that would be acceptable to us.
We may need additional capital in the future, and this capital may not be available to us on favorable terms or at all.
We may need to raise additional funds through public or private debt offerings or equity financings in order to:
Develop new services, programs, or offerings
Take advantage of opportunities, including business acquisitions
Respond to competitive pressures
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 revolving line of credit facility and other financing alternatives, if necessary, for these expenditures. We obtained a new credit agreement in August 2019 (the 2019 Credit Agreement) with our existing lender that expires in August 2024. We expect to regularly renew or amend our lending agreement in the future to maintain the availability of this credit facility. Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources. If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.
Any additional capital raised through the sale of equity could dilute current shareholders’ ownership percentage in us. Furthermore, we may be unable to obtain the necessary capital on terms or conditions that are favorable to us, or at all.
Public Company Risks
We may fail to meet analyst expectations, which could cause the price of our stock to decline.
Our common stock is publicly traded on the New York Stock Exchange (NYSE), and at any given time various securities analysts follow our financial results and issue reports on us. These periodic reports include information about our historical financial results as well as the analysts’ estimates of our future performance. The analysts’ estimates are based on their own opinions and are often different from our estimates or expectations. The price of our common stock could, however, decline if an analyst downgrades our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If analysts do not continue to follow us or if our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. If our stock price is volatile, we may become involved in securities litigation following a decline in price. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.
Our business performance may not be sufficient for us to meet the financial guidance that we provide publicly.
We may provide financial guidance to the public based upon expectations regarding our financial performance. While we believe that our annual financial guidance provides investors and analysts with insight into our view of the Company’s future performance, such financial guidance is based on assumptions that may not always prove to be accurate and may vary from actual results. If we fail to meet the financial guidance that we provide, or if we find it necessary to revise such guidance during the year, the market value of our common stock could be adversely affected.
Our future quarterly operating results are subject to factors that can cause fluctuations in our stock price.
Historically, our stock price has experienced significant volatility. We expect that our stock price may continue to experience volatility in the future due to a variety of potential factors that may include the following:
Fluctuations in our quarterly results of operations and cash flows
Increased overall market volatility
Variations between our actual financial results and market expectations
Changes in key balances, such as cash and cash equivalents
Currency exchange rate fluctuations
Unexpected asset impairment charges
These factors, among others, may have an adverse effect upon our stock price in the future.
General Business Risks
Our results of operations may be adversely impacted by the costs of persistent and rising inflation if we are unable to pass these costs on to our clients.
In recent quarters inflation has increased significantly in the United States and in many of the countries where we conduct business. Inflation increases the cost of many aspects of our business, including the cost of our products sold, benefit costs, travel expenses, and associate salaries since we must increase our compensation to retain key personnel. If we are unable to increase our prices to sufficiently offset the increased costs of doing business, our results of operations and profitability may be adversely impacted.
Unstable market and economic conditions may have serious adverse consequences on our business, financial condition, and operations.
The global credit and financial markets have from time to time experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. The financial markets and the global economy may also be adversely affected by the current or anticipated impact of military conflict, including the conflict between Russia and Ukraine, terrorism, or other geopolitical events. Sanctions imposed by the United States and other countries in response to such conflicts, including the one in Ukraine, may also adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others could exacerbate market and economic instability. There can be no assurance that further deterioration in markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions.
Our global operations pose complex management, foreign currency, legal, tax, and economic risks, which we may not adequately address.
We have sales offices in Australia, China, Japan, Germany, Switzerland, Austria, and the United Kingdom. We also have licensed operations in numerous other foreign countries. As a result of these foreign operations and their impact upon our financial statements, we are subject to a number of risks, including:
Restrictions on the movement of cash
The absence in some jurisdictions of effective laws to protect our intellectual property rights
Political instability
Currency exchange rate fluctuations
In addition, the United Kingdom’s withdrawal from the EU, or Brexit, became effective on January 21, 2020. The UK and EU subsequently signed and EU-UK Trade and Cooperation Agreement. This agreement provides details on how some aspects of the UK and EU’s relationship will operate going forward; however, there continues to be uncertainty over the practical consequences of Brexit. The impact of Brexit depends on the implementation of this agreement, as well as the terms of the UK’s future trade agreements with other countries, and such impact may not be fully realized for several years or longer. This lack of clarity could lead to economic and legal uncertainty, including significant volatility in global stock markets and currency exchange rates among other things. We have experienced or expect we may in the future experience impacts on our operations from the following:
More stringent rules of origin on goods traded between the UK and the EU;
additional procedures related to goods traded between the EU and non-EU countries; and
new product registration requirements applicable including to avoid any new tariffs or quotas, or as a result of REACH and the new UK REACH regime.
While we believe that some of these adverse impacts will be resolved in the coming years as the UK becomes accustomed to operating independent of the EU, we may in the future experience adverse consequences from Brexit, which could have a negative impact on our future operations, operating results, and financial condition.
Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and violation of these regulations could harm our business.
Because we provide services to clients in many countries, we are subject to numerous, and sometimes conflicting, regulations on matters as diverse as import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, government affairs, internal and disclosure control obligations, data privacy, and labor relations. Violations of these regulations in the conduct of our business could result in fines, criminal sanctions against us or our officers, prohibitions on doing business, and damage to our reputation. Violations of these regulations in connection with the performance of our obligations to our clients also could result in liability for monetary damages, fines, unfavorable publicity, and allegations by our clients that we have not performed our contractual obligations. Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws may be insufficient to protect our rights.
In many parts of the world, including countries in which we operate, practices in the local business community might not conform to international business standards and could violate anticorruption regulations, including the United States Foreign Corrupt Practices Act, which prohibits giving anything of value intended to influence the awarding of government contracts. Although we have policies and procedures to ensure legal and regulatory compliance, our employees, licensee operators, and agents could take actions that violate these requirements. Violations of these regulations could subject us to criminal or civil enforcement actions, including fines and suspension or disqualification from United States federal procurement contracting, any of which could have an adverse effect on our business.
We have significant intangible assets, goodwill, and long-term asset balances that may be impaired if cash flows from related activities decline.
Due to the nature of our business, we have significant amounts of intangible assets, including goodwill, resulting from events such as the acquisition of businesses and the licensing of content. Our intangible assets are evaluated for impairment based on qualitative factors or upon cash flows and estimated royalties from revenue streams (indefinite-lived intangible assets) if necessary. Our goodwill is evaluated through qualitative factors and by comparing the fair value of the reporting units to the carrying value of our net assets if necessary. Although our current sales, cash flows, and market capitalization are sufficient to support the carrying basis of these long-lived assets, if our sales, cash flows, or common stock price decline, we may be faced with significant asset impairment charges that would have an adverse impact upon our results of operations.
The Company’s use of accounting estimates involves judgment and could impact our financial results.
Our most critical accounting estimates are described in Management’s Discussion and Analysis found in Item 7 of this report under the section entitled “Use of Estimates and Critical Accounting Policies.” In addition, as discussed in various footnotes to our financial statements as found in Item 8, we make certain estimates for loss contingencies, including decisions related to legal proceedings and reserves. Because, by definition, these estimates and assumptions involve the use of judgment, our actual financial results may differ from these estimates. If our estimates or assumptions underlying such contingencies and reserves prove incorrect, we may be required to record additional adjustments or losses relating to such matters, which would negatively affect our financial results.
Ineffective internal controls could impact our business and operating results.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results may be harmed and we could fail to meet our financial reporting obligations.
Extreme weather conditions and natural disasters could negatively impact our operating results and financial condition.
Extreme weather conditions in the areas in which our suppliers, customers, distribution facilities, offices, and headquarters are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, wildfires, and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, have in the past temporarily disrupted, and could in the future disrupt, our operations, the operations of our customers, vendors and suppliers or have in the past resulted in, and in the future could result in, economic instability that may negatively impact our operating results and financial condition. In particular, if a natural disaster or severe weather event were to occur in an area in which we or our suppliers, customers, distribution facilities and vendors are located, our continued success would depend, in part, on the safety and availability of the relevant personnel and facilities and proper functioning of our or third parties’ computer, network, telecommunication and other systems and operations. If we were to experience a local or regional disaster or other business continuity event or concurrent events, we could experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel. Further, if we are unable to find alternative suppliers, replace capacity at key distribution locations or quickly repair damage to our information technology systems, our ability to serve our customers could be adversely affected. These events could result in reputational damage, lost sales, cancellation charges or markdowns, all of which could have an adverse effect on our business, results of operations, and financial condition.
The impacts of climate change and related regulatory responses could adversely affect our business.
Sustainability and protecting our natural environment are significant priorities at Franklin Covey and we strive to implement practices and policies that support this concern. However, we cannot predict the long-term impacts on us from climate change or related regulatory responses. Complying with regulations relating to climate change, including, for example, disclosure of the impacts of climate change on our business, could require us to expend significant resources, and could adversely affect our results of operations and financial condition. We will continue to monitor the impacts of such issues on our business and consider responsive action as needed.
Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our vendors, suppliers, and customers. For example, the delivery of our services is somewhat dependent on reliable and relatively inexpensive electricity. If electricity is not readily available or affordable, we may not be able to deliver our products and services and our operating results may be adversely impacted. In addition, the physical changes prompted by climate
change could result in changes in regulations or consumer preferences, which could in turn affect our business, operating results, and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of August 31, 2022, our principal executive offices in Salt Lake City, Utah occupy approximately 54,000 square feet of leased office space that is accounted for as a financing arrangement, which expires in 2025. This facility accommodates our executive team and corporate administration, as well as other professionals. The master lease agreement on our principal executive offices contains six five-year renewal options that may be exercised at our discretion. Additionally, we occupy leased sales and administrative offices both in the United States and various countries around the world as shown below. These leased facilities are accounted for as operating leases.
We consider our existing facilities to be in good condition and suitable for our current and expected level of operations in the upcoming fiscal year and in future periods.
International Sales Offices
Banbury, England
Tokyo, Japan
China: Beijing, Shanghai, Guangzhou, and Shenzhen
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are the subject of certain legal actions, which we consider routine to our business activities. At August 31, 2022, we were not party to any litigation or legal proceeding that, in the current opinion of management, could have a material adverse effect on our financial position, liquidity, or results of operations. However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expectations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed and traded on the NYSE under the symbol “FC.”
We did not pay or declare dividends on our common stock during the fiscal years ended August 31, 2022 or 2021. Any determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our results of operations, financial condition, terms of our financing arrangements, and such other factors as the board deems relevant. We currently anticipate that we will retain all available funds to repay our liabilities, finance future growth and business opportunities, and to repurchase outstanding shares of our common stock.
As of October 31, 2022, we had 13,896,516 shares of common stock outstanding, which were held by 488 shareholders of record. A number of our shareholders hold their shares in street name; therefore, we believe that there are substantially more beneficial owners of our common stock.
Purchases of Common Stock by the Issuer
We did not have any purchases of our common stock during the fourth quarter of fiscal 2022.
On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $40.0 million of our outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does not have an expiration date. Through August 31, 2022, we have purchased 504,411 shares of our common stock for $20.5 million under the terms of this Board-approved plan.
The actual timing, number, and value of common shares repurchased under this plan will be determined at our discretion and will depend on a number of factors, including, among others, general market and business conditions, the trading price of common shares, and applicable legal requirements. 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.
Performance Graph
The following graph demonstrates a five-year comparison of cumulative total returns for Franklin Covey Co. common stock, the SP SmallCap 600 Index, and the SP 600 Commercial Professional Services Index. The graph assumes an investment of $100 on August 31, 2017 in each of our common stock, the stocks comprising the SP SmallCap 600 Index, and the stocks comprising the SP 600 Commercial Professional Services Index. Each of the indices assumes that all dividends were reinvested.
The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make or endorse any predictions as to our future stock performance.
The performance graph above is being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Exchange Act, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
ITEM 6.
Reserved.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis is intended to provide a summary of the principal factors affecting the results of operations, liquidity and capital resources, and the critical accounting estimates of Franklin Covey Co. (also referred to as we, us, our, the Company, and Franklin Covey) and subsidiaries. This discussion and analysis should be read together with the accompanying consolidated financial statements and related notes contained in Item 8 of this Annual Report on Form 10-K (Form 10-K) and the Risk Factors discussed in Item 1A of this Form 10-K. Forward-looking statements in this discussion are qualified by the cautionary statement under the heading “Safe Harbor Statement Under the Private Securities Litigation Reform Act Of 1995” contained later in Item 7 of this Form 10-K.
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 or loss excluding the impact of interest expense, 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 this 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 or loss, a related GAAP measure, please refer to Note 16 Segment Information to our consolidated financial statements as presented in Item 8 of this Form 10-K.
EXECUTIVE SUMMARY
General 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. In the training and consulting marketplace, we believe there are three important characteristics that distinguish us from our competitors.
1.World Class Content – Our content is based on timeless principles of human effectiveness and is designed to help people change both their mindset and behavior. When our content is applied consistently in an organization, we believe the culture of that organization will change to enable the organization to get desired results and achieve its own great purposes.
2.Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including: the All Access Pass, 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 deliver our content to clients in a high-quality learning environment whether those clients are working remotely or in a centralized location.
3.Global Capability – We have sales professionals in the United States and Canada who serve clients in the private sector, in government, and in educational institutions; wholly owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria; and we contract with independent licensee partners who deliver our content and provide services in 150 countries and territories around the world.
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, Multipliers, and The 4 Disciplines of Execution, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, Leadership, and Education. We believe that our offerings help individuals, teams, and entire organizations transform their results through achieving systematic, sustainable, and measurable changes in human behavior. Our offerings are described in further detail at www.franklincovey.com. The information contained in, or that can be accessed through, our website does not constitute a part of this Annual Report on Form 10-K, and the descriptions found therein should not be viewed as a warranty or guarantee of results.
Our fiscal year ends on August 31, and unless otherwise indicated, fiscal 2022, fiscal 2021, and fiscal 2020 refer to the twelve-month periods ended August 31, 2022, 2021, 2020, and so forth.
Fiscal 2022 Financial Overview
We were pleased with the strength of our fiscal 2022 financial results, which featured increased sales, strong gross margins, increased income from operations, and improved liquidity compared with fiscal 2021, despite macroeconomic challenges and the continuing difficulties associated with the COVID-19 pandemic, especially in China and Japan. Increased sales during fiscal 2022 were primarily driven by strong subscription and subscription services sales, including the following:
All Access Pass subscription and subscription services sales grew 28 percent to $144.5 million in fiscal 2022 compared with $112.5 million in fiscal 2021. In our Enterprise Division, where most AAP contracts are sold, sales increased 15 percent to $194.4 million compared with $168.6 million in the prior year.
Education Division revenues grew 26 percent to $61.9 million on the strength of increased Leader in Me membership revenues and subscription services, including coaching and consulting, and sales of materials. During fiscal 2022, the Education Division added a record 739 new Leader in Me schools in the United States and Canada.
Total Company deferred revenue at August 31, 2022 topped $100 million for the first time and totaled $102.4 million. The sum of billed subscription and unbilled deferred subscription revenue at August 31, 2022 grew 20 percent to $153.4 million, compared with August 31, 2021. Approximately 46 percent of our AAP subscriptions are now multi-year contracts.
We believe the momentum gained in fiscal 2022 will carry over into fiscal 2023 and generate additional growth. In October 2022, we launched the Impact Platform, which is our new interactive AAP platform based on technology we acquired from Strive Talent, Inc. in fiscal 2021. We believe our investments in technology, content, and people will also generate future growth in fiscal 2023 and beyond.
Our consolidated revenue for fiscal 2022 year grew 17 percent, or $38.7 million, to $262.8 million compared with $224.2 million in the prior year. Our sales in fiscal 2022 increased primarily due to strong sales of subscription and subscription services, including a strong recovery of onsite training days. Despite unfavorable exchange rate fluctuations and ongoing challenges in the macroeconomic and operating environment during fiscal 2022, especially in Asia, our AAP and Leader in Me membership revenues increased compared with fiscal 2021 and each of our operating segments were able to increase sales over the prior year. On a constant currency basis, our sales for fiscal 2022 increased 18 percent to $265.5 million. Our revenue growth in fiscal 2022 was driven primarily by a combination of contract renewals, expansions, and new customers as price increases did not have a material impact on our sales growth over fiscal 2021.
Enterprise Division sales for the year increased 15 percent, or $25.8 million, to $194.4 million compared with $168.6 million in the prior year, and were driven primarily by increased AAP revenues and recovering licensee and international direct office revenues. All Access Pass subscription and subscription services sales grew 28 percent in fiscal 2022, licensee revenues increased 17 percent, or $1.5 million, and international direct office sales increased four percent, or $1.4 million, compared with fiscal 2021. Education Division revenues increased 26 percent, or $13.0 million, to $61.9 million compared with $48.9 million in the prior year. Our Education Division subscription and subscription related revenue, which primarily consists of the Leader in Me membership and consulting days invoiced with the Leader in Me online service, increased 29 percent compared with fiscal 2021. As previously mentioned, the Education Division added a record 739 new Leader in Me schools in the United States and Canada during fiscal 2022.
At August 31, 2022, we had $102.4 million of deferred revenue compared with $88.6 million at August 31, 2021. Our deferred revenue noted above at August 31, 2022 and August 31, 2021 each includes $2.7 million of deferred revenue that was classified as long-term based on expected recognition. Total deferred subscription revenue increased 14 percent, or $11.0 million, to $88.1 million at August 31, 2022. Our unbilled deferred revenue at August 31, 2022 grew 30 percent to $65.4 million compared with $50.4 million at the end of fiscal 2021. At August 31, 2022, the sum of our deferred subscription revenue plus unbilled deferred subscription revenue grew 20 percent, or $26.0 million, to $153.4 million compared with $127.4 million at August 31, 2021. Unbilled deferred revenue represents business that is contracted, but unbilled and therefore excluded from our balance sheet.
The following table sets forth our consolidated net sales by division and by reportable segment for the fiscal years indicated (in thousands):
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| % |
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| % |
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AUGUST 31, |
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| 2022 | Change |
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| 2021 | Change |
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| 2020 |
Enterprise Division: |
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Direct offices |
| $ | 183,845 | 15 |
| $ | 159,608 | 14 |
| $ | 139,780 |
International licensees |
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| 10,551 | 17 |
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| 9,036 | 7 |
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| 8,451 |
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| 194,396 | 15 |
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| 168,644 | 14 |
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| 148,231 |
Education Division |
|
| 61,852 | 26 |
|
| 48,902 | 13 |
|
| 43,405 |
Corporate and other |
|
| 6,593 | - |
|
| 6,622 | (3) |
|
| 6,820 |
Consolidated sales |
| $ | 262,841 | 17 |
| $ | 224,168 | 13 |
| $ | 198,456 |
Gross profit consists of net sales less the cost of services provided or the cost of goods sold. Our cost of sales includes the direct costs of delivering content onsite at client locations, including presenter costs; amortization of previously capitalized curriculum development costs; content royalties; materials used in the production of training products and related assessments; manufacturing labor costs; and freight. Gross profit may be affected by, among other things, the mix of services sold to clients, prices of materials, travel, labor rates, changes in product discount levels, and freight costs. Consolidated cost of sales in fiscal 2022 totaled $60.9 million compared with $51.3 million for fiscal 2021. Our gross profit for the fiscal year ended August 31, 2022 increased 17 percent, or $29.0 million, to $201.9 million, compared with $172.9 million in fiscal 2021, and increased primarily due to increased sales as described above. Our gross margin in fiscal 2022 remained strong at 76.8 percent of sales compared with 77.1 percent in the prior year.
Our operating expenses in fiscal 2022 increased $13.4 million compared with fiscal 2021 primarily due to a $14.8 million increase in selling, general, and administrative (SGA) expenses. Despite the increase in SGA expenses, as a percentage of revenue, our SGA expenses in fiscal 2022 decreased to 60.8 percent compared with 64.7 percent in fiscal 2021. Our SGA expenses increased primarily due to increased associate costs resulting from new personnel and increased salaries; increased commissions on higher sales; increased travel expense; increased curriculum development expense; and increased marketing and advertising expenses. At August 31, 2022, we had 300 client partners compared with 273 at August 31, 2021.
Our fiscal 2022 income from operations improved 192 percent, or $15.6 million, to $23.7 million compared with $8.1 million in the prior year. Fiscal 2022 pre-tax income was $22.1 million compared with $6.1 million in fiscal 2021, reflecting the items noted above.
Our effective income tax rate for fiscal 2022 was approximately 16 percent compared with an effective benefit rate of approximately 124 percent in fiscal 2021 on pre-tax income of $6.1 million. Our unusual income tax benefit in fiscal 2021 was primarily the result of a $10.5 million reduction in the valuation allowance against certain deferred tax assets, based on a return to a three-year cumulative pre-tax income measurement during fiscal 2021, and the outlook for continued strong financial performance. Our effective rate in fiscal 2022 benefitted from decreasing the valuation allowances against other deferred tax assets during the year.
Net income for the year ended August 31, 2022 was $18.4 million, or $1.27 per diluted share, compared with $13.6 million, or $0.96 per diluted share, in the prior year. Our Adjusted EBITDA for fiscal 2022 increased 51 percent, or $14.2 million, to $42.2 million compared with $28.0 million in fiscal 2021, reflecting the above-noted factors.
Further details regarding these items can be found in the comparative analysis of fiscal 2022 with fiscal 2021 as discussed within this Management’s Discussion and Analysis.
Our liquidity, financial position, and capital resources remained strong during fiscal 2022. At August 31, 2022, we had $60.5 million of cash, with no borrowings on our $15.0 million revolving credit facility, compared with $47.4 million of cash, and no borrowings on our revolving credit facility, at August 31, 2021. Cash flows from operating activities remained strong and increased 13 percent to $52.3 million for fiscal 2022 compared with $46.2 million in the prior year. For further information regarding our liquidity and cash flows, refer to the Liquidity and Capital Resources discussion found within this Management’s Discussion and Analysis.
For a discussion of the results of operations and changes in financial condition for fiscal 2021 compared with fiscal 2020, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2021 Form 10-K, which was filed with the United States Securities and Exchange Commission on November 12, 2021.
Impact of the COVID-19 Pandemic on Our Financial Statements
COVID-19 was first identified in China during December 2019, and subsequently declared a pandemic by the World Health Organization. Since its discovery, COVID-19 and its variants have surfaced in nearly all regions around the world and have resulted in government-imposed travel restrictions and business slowdowns or shutdowns in affected areas. These closures had a significant adverse impact on our business beginning in the third quarter of fiscal 2020. After a strong start to fiscal 2020, our sales in the third and fourth quarters decreased 29 percent compared with the third and fourth quarters of fiscal 2019.
However, as individuals and businesses began adapting to pandemic-related circumstances, our business also began to recover. Driven by primarily by previous changes to a subscription-based business model, we were able to quickly pivot to delivering content live-online and through our other digital modalities. As a result, our subscription service clients are able to access content and programs from remote locations, which allows continued engagement of personnel and students during long periods of displacement from normal working or classroom conditions. The ability to deliver high-quality content to our clients, combined with adaptations to the pandemic and loosening restrictions provided a path to recovery in fiscal 2021 and our sales increased 13 percent compared with fiscal 2020. Through successful efforts to contain costs and reduced travel expense, our profitability also improved significantly in fiscal 2021.
The momentum and recovery achieved in fiscal 2021 provided a strong foundation for fiscal 2022 as our sales and profitability improved over fiscal 2021, as previously discussed. However, certain areas of our operations continue to be adversely impacted from the lingering effects of the pandemic. Our direct offices in China and Japan, and many of our international licensee partners continue to experience significant business disruptions from continued governmental and individual efforts to address the ongoing impact of the COVID-19 virus and its variants. While we remain optimistic about the future, continued “zero tolerance” and similar policies may continue to hamper business activity in fiscal 2023 and in future periods in certain countries and geographic regions through implementation of additional lockdowns or
restrictions. We will continue to monitor developments related to the COVID-19 pandemic, including personnel and supply chain issues, and their actual and potential impacts on our financial position, results of operations, and liquidity.
Key Strategic Objectives
We believe following key strategic priorities will position us for continued growth in fiscal 2023 and beyond:
Increase the Impact and Scale of Our Solutions – We intend to build the capabilities to dramatically increase the impact and scale of our solutions with significant investments in people, content, and technology. During fiscal 2023 and future periods, we expect to hire new leaders, salespeople, and team members; offer new and refreshed content and solutions; launch the new Impact Platform, which is built on the technology we acquired from Strive in fiscal 2021; work to integrate content, client personnel, and technology in a manner that will help our clients build winning cultures; and launch a new version of The Leader in Me curriculum through our Education Division. We consistently seek to provide our clients world-class solutions, using the best technology, that will allow them to transform their organizations into high performing entities.
Refresh our Brand and Messaging – We are focused on telling our story more broadly and powerfully, with the goal of helping significantly more people understand what we do and how we can help them. In January 2022, we launched a new brand that was designed to reflect our development into content and technology while retaining our connection to the principles that have driven our growth over the years. The new branding has brought more visitors to our website, registered more people for our marketing events, and generated more thought leadership guide downloads than ever before. We seek to increase the visibility of our services to a much larger audience and believe these efforts will provide added opportunities in the training marketplace.
Accelerate the Flywheel – We seek to build on the momentum of our subscription businesses, which are centered around the All Access Pass in the Enterprise Division and the Leader in Me membership in the Education Division. During fiscal 2022, we achieved our highest logo and revenue retention and delivered the most training and coaching in our history. Additionally, we added the most new schools in our history and had close to the highest level of school retention in history. With millions of AAP users throughout thousands of organizations globally and many thousands of students in schools around the world, we believe that our growth and building momentum have established a strong foundation for future growth and accelerating the “flywheel” of results for our clients, associates, and shareholders.
Invest in and Expand Our Culture – We believe that we are the workplace of choice for achievers with heart. During fiscal 2022 we sought to expand and improve our culture by launching a new set of corporate values, focusing our teams on making a culture commitment, and standardizing our communication and collaboration toolset. We strive to maintain a culture that provides a great place to work and allows individuals to contribute their best talents and abilities. We believe this atmosphere produces better solutions for our clients and feelings of well-being and satisfaction for our associates. Through our efforts to improve our culture, we have made great progress in our diversity, equity, and inclusion initiatives and created a welcoming environment for the many new and talented associates that joined us during fiscal 2022.
We believe the pursuit of these strategic priorities will enable us to be the most trusted leadership company in the world by providing world-class solutions to our clients that will improve their organizations, by creating a rewarding and appealing environment for our associates, and by driving results that will provide return to our shareholders.
Other key factors that influence our operating results include: the number of organizations that are active customers; the number of people trained within those organizations; the continuation or renewal of existing services contracts, especially subscription renewals; the availability of budgeted training spending at our clients and prospective clients, which, in certain content categories, can be significantly influenced by general economic conditions; client satisfaction with our offerings and services; the number and productivity of our international licensee operations; and our ability to manage operating costs necessary to develop and provide meaningful offerings and related products to our clients.
Results of Operations
The following table sets forth, for the fiscal years indicated, the percentage of total sales represented by the line items through income or loss before income taxes in our consolidated statements of operations. This table should be read in conjunction with the accompanying discussion and analysis, the consolidated financial statements, and the related notes to the consolidated financial statements (amounts in percentages).
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| 2022 |
| 2021 |
| 2020 |
Sales |
| 100.0 |
| 100.0 |
| 100.0 |
Cost of sales |
| 23.2 |
| 22.9 |
| 26.7 |
Gross profit |
| 76.8 |
| 77.1 |
| 73.3 |
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| 60.8 |
| 64.7 |
| 65.5 |
Stock-based compensation |
| 3.2 |
| 3.8 |
| (0.3) |
Restructuring costs |
| - |
| - |
| 0.8 |
Depreciation |
| 1.9 |
| 2.8 |
| 3.4 |
Amortization |
| 2.0 |
| 2.2 |
| 2.3 |
Total operating expenses |
| 67.9 |
| 73.5 |
| 71.7 |
Income from operations |
| 8.9 |
| 3.6 |
| 1.6 |
Interest income |
| - |
| - |
| - |
Interest expense |
| (0.6) |
| (0.9) |
| (1.2) |
Income before income taxes |
| 8.4 |
| 2.7 |
| 0.4 |
FISCAL 2022 COMPARED WITH FISCAL 2021 RESULTS OF OPERATIONS
Enterprise Division
Direct Offices Segment
The Direct Office segment includes our sales personnel that serve clients in the United States and Canada; our directly owned international offices in Japan, China, the United Kingdom, Australia, and our offices in Germany, Switzerland, and Austria; and other groups such as our government services office and books and audio sales. The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
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Sales | $ | 183,845 | 100.0 |
| $ | 159,608 | 100.0 |
| $ | 24,237 |
Cost of sales |
| 35,794 | 19.5 |
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| 30,192 | 18.9 |
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| 5,602 |
Gross profit |
| 148,051 | 80.5 |
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| 129,416 | 81.1 |
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| 18,635 |
SGA expenses |
| 110,554 | 60.1 |
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| 101,468 | 63.6 |
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| 9,086 |
Adjusted EBITDA | $ | 37,497 | 20.4 |
| $ | 27,948 | 17.5 |
| $ | 9,549 |
During fiscal 2022, our Direct Office segment sales increased 15 percent to $183.8 million compared with $159.6 million in fiscal 2021. The increase is the result of strong performance in our offices in the United States and Canada which grew 19 percent in fiscal 2022, and sales growth from our international direct offices which increased four percent over the prior year. During fiscal 2022 our AAP subscription and subscription related revenues remained strong and increased 28 percent over fiscal 2021 to $144.5 million, while annual AAP revenue retention remained well above 90 percent. We are encouraged by this momentum as invoiced sales in the U.S./Canada direct offices were the highest ever recorded in a quarterly period during our second quarter of fiscal 2022 and were very strong during the rest of fiscal 2022. Strong AAP sales were reflected by significant increases in billed and unbilled deferred revenue during the fiscal year. We believe the continued increase in invoiced AAP and other subscription sales, which are initially deferred and recognized on the balance sheet, provide a significant base for continued revenue growth in future periods.
The performance of our international direct offices during fiscal 2022 was directly related to the level of recovery from the pandemic and corresponding business activity in each country. For fiscal 2022, sales increased in each of our international direct offices, except for China, which had a resurgence of COVID cases during fiscal 2022 and enacted strict lockdown measures to mitigate the spread of the virus. Sales growth during fiscal 2022 was led by our office in the United Kingdom, which grew 41 percent compared with fiscal 2021 and was followed by strong growth at our offices in Australia, and Germany/Switzerland/Austria. While we remain confident in our international direct offices’ ability to grow in future periods, growth in our China and Japan offices is expected to be slowed by mandated restrictions aimed to curb the ongoing pandemic and prevailing economic conditions in those countries. Foreign exchange rates had a $2.0 million unfavorable impact on our Direct Office sales and a $0.5 million adverse effect on operating income during fiscal 2022.
Gross Profit. Direct Office gross profit increased primarily due to sales growth as previously described. Direct Office gross margin remained strong, and was 80.5 percent compared with 81.1 percent in the prior year.
SGA Expense. Direct Office SGA expense for fiscal 2022 increased primarily due to increased associate costs from new personnel and increased salaries; increased commissions on higher sales; the acquisition of Strive Talent, Inc., which was completed in the third quarter of fiscal 2021; increased platform and content development expense; and increased travel costs.
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):
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| Fiscal Year Ended |
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| Fiscal Year Ended |
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| August 31, | % of |
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| August 31, | % of |
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| 2022 | Sales |
|
| 2021 | Sales |
|
| Change |
Sales | $ | 10,551 | 100.0 |
| $ | 9,036 | 100.0 |
| $ | 1,515 |
Cost of sales |
| 1,169 | 11.1 |
|
| 1,309 | 14.5 |
|
| (140) |
Gross profit |
| 9,382 | 88.9 |
|
| 7,727 | 85.5 |
|
| 1,655 |
SGA expenses |
| 4,418 | 41.9 |
|
| 4,141 | 45.8 |
|
| 277 |
Adjusted EBITDA | $ | 4,964 | 47.0 |
| $ | 3,586 | 39.7 |
| $ | 1,378 |
Sales. Our international licensee revenues are primarily comprised of royalty revenues. During fiscal 2022, 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. The ongoing recovery led to improved licensee royalty revenues and continued increases in our share of AAP sales. Compared with the prior year, our royalty revenues increased 11 percent and our share of AAP revenues increased by 108 percent to $1.4 million. We receive additional revenue from the international licensees for AAP sales to cover a portion of the costs of operating the AAP portal. Partially offsetting these increases were decreased service revenues through our licensee support team and decreased wholesale product sales. Foreign exchange rates had a $0.4 million unfavorable impact on international licensee revenues and operating results during fiscal 2022.
Gross Profit. Gross profit increased primarily due to increased royalty revenues and AAP revenues as previously described. Gross margin improved primarily due to the mix of revenue recognized during fiscal 2022, which included more royalty and AAP revenues and less licensee support and product revenues than the prior year.
SGA Expense. International licensee SGA expenses increased slightly due to additional spending on technology, development, and various other shared service costs.
Education Division
Our Education Division is comprised of our domestic and international Education practice operations, which are focused on sales to educational institutions, and includes our widely acclaimed Leader in Me program designed for students primarily in K-6 elementary schools. The following comparative information is for our Education Division in the periods indicated (in thousands):
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| Fiscal Year Ended |
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| Fiscal Year Ended |
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| August 31, | % of |
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| August 31, | % of |
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| 2022 | Sales |
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| 2021 | Sales |
|
| Change |
Sales | $ | 61,852 | 100.0 |
| $ | 48,902 | 100.0 |
| $ | 12,950 |
Cost of sales |
| 20,646 | 33.4 |
|
| 16,131 | 33.0 |
|
| 4,515 |
Gross profit |
| 41,206 | 66.6 |
|
| 32,771 | 67.0 |
|
| 8,435 |
SGA expenses |
| 32,798 | 53.0 |
|
| 27,953 | 57.2 |
|
| 4,845 |
Adjusted EBITDA | $ | 8,408 | 13.6 |
| $ | 4,818 | 9.9 |
| $ | 3,590 |
Sales. Education Division sales for fiscal 2022 grew 26 percent, or $13.0 million, on the strength of increased Leader in Me subscription revenues and subscription services, including coaching and consulting, and sales of materials used by schools in connection with their membership subscription. During fiscal 2022, the Education Division added a record 739 new Leader in Me schools in the United States and Canada, which is a 29 percent increase over fiscal 2021, and retained nearly 90 percent of its existing Leader in Me schools in the United States and Canada. Education Division subscription and subscription related revenue increased 29 percent compared with fiscal 2021. Following the challenges in the educational environment over the past couple of years related to the pandemic and its recovery, we were very encouraged by the growth of our Education Division during fiscal 2022 and believe this growth sets a strong foundation for future sales growth as schools and districts realize the value of the Leader in Me membership for both students and teachers. Foreign exchange rates had a $0.1 million unfavorable impact on Education Division sales and operating income during fiscal 2022. As of August 31, 2022, the Leader in Me program is used in over 3,300 schools in the United States and Canada, compared with nearly 2,900 schools at August 31, 2021.
Gross Profit. Education Division gross profit increased primarily due to increased sales as previously described. Education segment gross margin remained strong at 66.6 percent of sales compared with 67.0 percent in the prior year.
SGA Expenses. Education SGA expenses increased primarily due to increased associate costs from additional commission expense on improved sales, additional sales support headcount, and increased salaries compared with the prior year. In addition, travel expenses rose due to increased travel days by associates compared with the pandemic periods and an increase in the costs of traveling.
Other Operating Expense Items
Depreciation – Depreciation expense decreased $1.3 million compared with the prior year primarily due to the full depreciation of certain assets during the fiscal year and reduced capital expenditures in the past couple of years. We currently expect depreciation expense will total approximately $5.7 million in fiscal 2023.
Amortization – Amortization expense increased $0.3 million compared with fiscal 2021 primarily due to the acquisition of Strive Talent, Inc. during the third quarter of fiscal 2021. We currently expect amortization expense will total $4.3 million during fiscal 2023.
Interest Expense – Our interest expense during fiscal 2022 decreased $0.4 million primarily due to reduced term loan debt and a reduced principal balance on our financing obligation (long-term lease on our corporate campus) compared with the prior year. However, rising interest rates in future periods may partially offset the benefit of lower debt balances during fiscal 2023 and future periods.
Income Taxes
Our effective income tax expense rate for the fiscal year ended August 31, 2022 was approximately 16 percent, compared with an income tax benefit rate of approximately 124 percent in fiscal 2021. Our effective income tax rate for fiscal 2022 was lower than the statutory rate due primarily to a $2.8 million decrease in the valuation allowance against our deferred income tax assets and a $0.6 million benefit for share-based compensation deductions in excess of the corresponding book expense. These tax benefits were partially offset by tax expense of $1.2 million for non-deductible executive compensation. The income tax benefit rate recognized in fiscal 2021 was primarily due to a $10.5 million decrease in the valuation allowance against our deferred income tax assets and a $0.5 million tax benefit from the exercise of stock options, which were partially offset by a $0.8 million reduction in foreign tax credit carryforwards.
We paid $3.2 million in cash for income taxes during fiscal 2022. We anticipate that our total cash paid for income taxes over the coming three to five years will be less than our total income tax provision to the extent we are able to utilize net operating loss carryforwards, foreign tax credit carryforwards, and other deferred income tax assets.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated financial data for the fiscal years ended August 31, 2022 and 2021. The quarterly consolidated financial data reflects, in the opinion of management, all normal and recurring adjustments necessary to fairly present the results of operations for such periods. Results of any one or more quarters are not necessarily indicative of continuing trends (in thousands, except for per-share amounts).
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YEAR ENDED AUGUST 31, 2022 |
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| November 30 |
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| February 28 |
|
| May 31 |
|
| August 31 |
Net sales |
| $ | 61,259 |
| $ | 56,599 |
| $ | 66,176 |
| $ | 78,806 |
Gross profit |
|
| 47,598 |
|
| 44,114 |
|
| 51,132 |
|
| 59,067 |
Selling, general, and administrative |
|
| 39,343 |
|
| 38,061 |
|
| 42,637 |
|
| 48,027 |
Depreciation |
|
| 1,279 |
|
| 1,190 |
|
| 1,217 |
|
| 1,217 |
Amortization |
|
| 1,431 |
|
| 1,346 |
|
| 1,329 |
|
| 1,160 |
Income from operations |
|
| 5,545 |
|
| 3,517 |
|
| 5,949 |
|
| 8,663 |
Income before income taxes |
|
| 5,114 |
|
| 3,106 |
|
| 5,565 |
|
| 8,280 |
Net income |
|
| 3,812 |
|
| 1,878 |
|
| 7,162 |
|
| 5,578 |
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Net income per share: |
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|
Basic |
| $ | 0.27 |
| $ | 0.13 |
| $ | 0.51 |
| $ | 0.40 |
Diluted |
|
| 0.27 |
|
| 0.13 |
|
| 0.51 |
|
| 0.39 |
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YEAR ENDED AUGUST 31, 2021 |
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| November 30 |
|
| February 28 |
|
| May 31 |
|
| August 31 |
Net sales |
| $ | 48,324 |
| $ | 48,162 |
| $ | 58,736 |
| $ | 68,945 |
Gross profit |
|
| 36,386 |
|
| 37,340 |
|
| 45,907 |
|
| 53,268 |
Selling, general, and administrative |
|
| 33,683 |
|
| 33,623 |
|
| 40,132 |
|
| 46,166 |
Depreciation |
|
| 1,741 |
|
| 1,740 |
|
| 1,423 |
|
| 1,286 |
Amortization |
|
| 1,131 |
|
| 1,133 |
|
| 1,238 |
|
| 1,503 |
Income (loss) from operations |
|
| (169) |
|
| 844 |
|
| 3,114 |
|
| 4,313 |
Income (loss) before income taxes |
|
| (713) |
|
| 320 |
|
| 2,605 |
|
| 3,864 |
Net income (loss) |
|
| (892) |
|
| (46) |
|
| 12,754 |
|
| 1,807 |
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Net income (loss) per share: |
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Basic and diluted |
| $ | (0.06) |
| $ | (0.00) |
| $ | 0.90 |
| $ | 0.13 |
In normal operating years, our fourth quarter typically has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education Division (when school administrators and faculty have professional development days) and from increased sales that typically occur during that quarter resulting from year-end incentive
programs. Overall, subscription service and training sales are moderately seasonal because of the timing of corporate training, which is not typically scheduled as heavily during holiday and certain vacation periods. Quarterly fluctuations may also be affected by other factors including increased subscription sales, the introduction of new offerings, pandemics or other natural disasters, business acquisitions, the addition of new organizational customers, and the elimination of underperforming offerings.
For more information on our quarterly results of operations, refer to our quarterly reports on Form 10-Q as filed with the SEC. Our quarterly reports for the periods indicated are available free of charge at www.sec.gov.
LIQUIDITY AND CAPITAL RESOURCES
Introduction
Our cash balance at August 31, 2022 totaled $60.5 million, with no borrowings on our $15.0 million revolving credit facility. Of our $60.5 million in cash at August 31, 2022, $16.9 million was held outside the U.S. by 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 primary sources of liquidity are cash flows from the sale of services and products in the normal course of business and available proceeds from our credit facility. Our primary uses of liquidity include payments for operating activities, purchases of our common stock, debt payments, capital expenditures (including curriculum development), working capital expansion, business acquisitions, and contingent payments from previous business acquisitions.
The following table summarizes our cash flows from operating, investing, and financing activities for the past three years (in thousands):
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YEAR ENDED |
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|
AUGUST 31, |
| 2022 |
|
| 2021 |
|
| 2020 |
Total cash provided by (used for): |
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|
|
|
|
|
|
|
Operating activities | $ | 52,254 |
| $ | 46,177 |
| $ | 27,563 |
Investing activities |
| (5,331) |
|
| (14,315) |
|
| (11,865) |
Financing activities |
| (32,670) |
|
| (11,479) |
|
| (16,557) |
Effect of exchange rates on cash |
| (1,153) |
|
| (103) |
|
| 297 |
Increase (decrease) in cash and |
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|
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|
|
cash equivalents | $ | 13,100 |
| $ | 20,280 |
| $ | (562) |
Our Current Credit Agreement
On August 7, 2019, we entered into a new credit agreement (the 2019 Credit Agreement) with our existing lender, which replaced our amended and restated credit agreement dated March 2011. The 2019 Credit Agreement provides up to $25.0 million in term loans and a $15.0 million revolving line of credit, which expires in August 2024. Upon entering into the 2019 Credit Agreement, we borrowed $20.0 million through a term loan and used the proceeds to repay all indebtedness under the previous credit agreement. During November 2019, we borrowed the remaining $5.0 million term loan available on the 2019 Credit Agreement.
In anticipation of potential covenant compliance issues associated with the COVID-19 pandemic and uncertainties associated with the economic recovery, on July 8, 2020, we entered into the First Modification Agreement to the 2019 Credit Agreement. The primary purpose of the First Modification Agreement was to provide temporary alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. In connection with the acquisition of Strive Talent, Inc. in April 2021, we entered into a Consent and Second Modification Agreement to the 2019 Credit Agreement. The primary purposes of the Consent and Second Modification Agreement were to:
Consent to the purchase of Strive.
Reinstate the original debt covenants of the 2019 Credit Agreement which were temporarily replaced by alternate debt covenants in the First Modification Agreement to the 2019 Credit Agreement.
Reduce the interest rate for borrowings from LIBOR plus 3.0 percent to LIBOR plus 1.85 percent, which was the original rate on the 2019 Credit Agreement. The unused credit commitment fee also returns to the previously established 0.2 percent. The 2019 Credit Agreement contains provisions for adopting alternative interest rate measures when LIBOR is discontinued, which we do not believe will have a material impact on our interest expense.
The Consent and Second Modification Agreement did not change any repayment or credit availability terms on the 2019 Credit Agreement.
At August 31, 2022, our reinstated debt covenants consist of the following: (i) a Funded Indebtedness to Adjusted EBITDAR Ratio of less than 3.00 to 1.00; (ii) a Fixed Charge Coverage ratio not less than 1.15 to 1.00; (iii) an annual limit on capital expenditures (excluding capitalized curriculum development costs) of $8.0 million; and (iv) consolidated accounts receivable of not less than 150 percent of the aggregate amount of the outstanding borrowings on the revolving line of credit, the undrawn amount of outstanding letters of credit, and the amount of unreimbursed letter of credit disbursements. In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the 2019 Credit Agreement. At August 31, 2022, we believe that we were in compliance with the terms and covenants applicable to the 2019 Credit Agreement and subsequent modifications.
In addition to our term loan obligations and notes payable to the former owners of Strive Talent, Inc., we have a long-term lease on our corporate campus that is accounted for as a financing obligation. For further information on our debt and leasing obligations, refer to the notes to our consolidated financial statements as presented in Item 8 of this Annual Report on Form 10-K.
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 fiscal year ended August 31, 2022.
Cash Flows from Operating Activities
Our primary source of cash from operating activities was the sale of services and products to our customers in the normal course of business. The primary uses of cash for operating activities were payments for selling, general, and administrative expenses; payments for direct costs necessary to conduct training programs; payments to suppliers for materials used in training manuals sold; and to fund working capital needs. During fiscal 2022, our cash provided by operating activities increased 13 percent to $52.3 million compared with $46.2 million in fiscal 2021. The increase was primarily due to improved operating income, strong collections of accounts receivable, and favorable changes in working capital. Despite ongoing pandemic conditions in certain countries, our collection of accounts receivable remained strong during fiscal 2022 and provided the necessary cash to support our operations, pay our obligations, and make critical investments.
Cash Flows from Investing Activities and Capital Expenditures
Our cash used for investing activities during fiscal 2022 totaled $5.3 million. The primary uses of cash for investing activities during the year were purchases of property and equipment in the normal course of business and additional investments in the development of our offerings.
Our purchases of property and equipment during fiscal 2022 consisted primarily of computer hardware and software, and leasehold improvements on our corporate campus. We expect to continue investing in our content and delivery modalities, including the AAP and Leader in Me subscription service portals, and also expect to make required leasehold improvements on our corporate campus in future periods. We currently anticipate that our purchases of property and equipment will total $7.6 million in fiscal 2023.
We spent $2.2 million during fiscal 2022 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. We currently expect that our capital spending for curriculum development will increase in future periods and will total $9.5 million during fiscal 2023.
Cash Flows from Financing Activities
During the fiscal year ended August 31, 2022, our net cash used for financing activities totaled $32.7 million. Our primary uses of financing cash during fiscal 2022 included $23.9 million for purchases of our common stock for treasury, $8.7 million used for principal payments on our term loans, financing obligation, and Strive note payable, and $1.4 million of cash used to pay contingent consideration liabilities from previous business acquisitions. Our purchases of common stock during fiscal 2022 were comprised of $20.3 million from open market purchases and $3.5 million for shares withheld from participants to pay statutory income taxes on stock-based compensation awards which were distributed during fiscal 2022. Partially offsetting these uses of cash were $1.3 million of proceeds from Employee Stock Purchase Plan participants to purchase shares of our stock during fiscal 2022.
On November 15, 2019, our Board of Directors approved a new plan to purchase up to $40.0 million of the Company’s 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. At August 31, 2022, we had $19.5 million of authorized purchases remaining under this board-approved plan. Our uses of financing cash during fiscal 2023 are expected to include required payments on our term loans, financing obligation, note payable from the acquisition of Strive, contingent consideration payments from previous business acquisitions, and may include purchases of our common stock for treasury.
The Inflation Reduction Act of 2022 imposes a one percent excise tax on purchases of our common stock beginning on January 1, 2023. This new tax may reduce the number of shares that we purchase on the open market in future periods through our approved common stock purchase plan. However, the timing and amount of common stock purchases is dependent on a number of factors, including available resources and market conditions, and we are not obligated to make purchases of our common stock during any future period.
Sources of Cash and Liquidity
We expect to meet our projected capital expenditures, repay amounts borrowed on our 2019 Credit Agreement, service our existing financing obligation, and meet other working capital requirements during fiscal 2023 from current cash balances, future cash flows from operating activities, and available borrowings from our revolving line of credit. 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 revolving line of credit and other financing alternatives, if necessary, for these expenditures. At August 31, 2022, we had $15.0 million of available borrowing capacity on our revolving line of credit. Our 2019 Credit Agreement expires in August 2024 and we expect to renew or amend the 2019 Credit Agreement on a regular basis to maintain the long-term borrowing capacity of this credit facility. Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources. If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital. However, the COVID-19 pandemic and other macroeconomic difficulties has created uncertainty in capital markets, which may limit our ability to access liquidity on favorable terms, or at all.
We believe that our existing cash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be sufficient for us to maintain our operations over the next 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, 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 offerings or technology by our competitors.
During the periods presented within this Annual Report, inflation has not had a material effect on our operations. However, economic conditions indicate that future inflationary pressure may have an impact on a variety of our operating costs, including associate compensation, benefit costs, travel costs, and the price of materials used in the production of training products and related accessories, including paper and related raw materials. We may not be able to pass on such increased costs to our customers.
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 Cash Requirements
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. However, we have cash expenditures and are subject to various contractual obligations that are required to run our business. As discussed above, general economic conditions indicate that future inflationary pressure may affect these expenditures. Our material cash requirements include the following:
Associate and Consultant Compensation – Associate and consultant compensation is our largest recurring use of cash. Our compensation plans for associates and delivery consultants include fixed (salaried) and variable (commissions, bonuses, etc.) elements as well as the cost of benefits, and may fluctuate with sales, financial results, and hiring/retention activity. During fiscal 2022, we expensed approximately $161 million for associate and delivery consultant cash compensation. Associate compensation expense is included in SGA expense and consultant compensation is included in our cost of sales. These associate costs include variable compensation such as commissions, incentives, and bonuses, and may fluctuate from year-to-year.
Information Technology – Our business is reliant on computer software and hardware. Our subscription service portals require ongoing development, recurring maintenance, and utilize various software. In addition, we utilize various software programs to run our business, including applications for customer resource management, general ledger, cybersecurity, spreadsheets, word processing, e-mail, etc. Including capitalized hardware and software, we spent approximately $8 million for information technology software and hardware during fiscal 2022. We expect spending related to our AAP subscription and Leader in Me membership service portals to increase in future years.
Content Development – We believe that ongoing investment in our content and offerings is key to our future success. Our innovations group is responsible for the development of new content as well as refreshing and maintaining our existing content. Including capitalized development, we spent approximately $7 million (excluding compensation discussed above) for the development and maintenance of our offerings and content in fiscal 2022.
Income Taxes – We are required to pay income taxes in the various jurisdictions where we operate. During fiscal 2022, we paid $3.2 million in cash for income taxes during fiscal 2022. Our use of cash for income taxes in future periods depends upon our profitability and our ability to utilize tax assets such as net operating loss carryforwards and foreign income tax credits.
Contractual Obligations – In addition to the expenses described above, which we believe are required to successfully run our business, we have other longer-term contractual obligations, which require additional cash payments. We have summarized our significant contractual obligations at August 31, 2022 in the following table (in thousands):
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| Fiscal |
|
| Fiscal |
|
| Fiscal |
|
| Fiscal |
|
| Fiscal |
|
|
|
|
|
|
Description |
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 |
|
| Thereafter |
|
| Total |
Required lease payments on |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
corporate campus |
| $ | 3,952 |
| $ | 4,031 |
| $ | 3,301 |
| $ | - |
| $ | - |
| $ | - |
| $ | 11,284 |
Term loans payable to bank(1) |
|
| 5,308 |
|
| 5,097 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 10,405 |
Strive contingent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation(2)(3) |
|
| 1,133 |
|
| 720 |
|
| 740 |
|
| 760 |
|
| - |
|
| - |
|
| 3,353 |
Strive note payable |
|
| 835 |
|
| 835 |
|
| 835 |
|
| 835 |
|
| - |
|
|
|
|
| 3,340 |
Purchase obligations |
|
| 2,568 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 2,568 |
Minimum operating lease |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payments |
|
| 633 |
|
| 422 |
|
| 97 |
|
| 13 |
|
| - |
|
| - |
|
| 1,165 |
Jhana contingent consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payments(2) |
|
| 729 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 729 |
|
| $ | 15,158 |
| $ | 11,105 |
| $ | 4,973 |
| $ | 1,608 |
| $ | - |
| $ | - |
| $ | 32,844 |
(1)Payment amounts shown include interest at 4.2 percent, which is the current rate on our term loan obligations under the 2019 Credit Agreement and the Consent and Second Modification Agreement.
(2)The payment of contingent consideration resulting from prior business acquisitions is based on current estimates and projections. We reassess the fair value of estimated contingent consideration payments each quarter based on available information. The actual payment of contingent consideration amounts may differ in amount and timing from those shown in the table.
(3)Contingent compensation from the acquisition of Strive Talent, Inc. is based on current estimates and projections and includes a $1.0 million bonus payable to Strive employees that are employed 18 months from the acquisition date. After forfeitures and early payments, this amount is expected to be $0.6 million in fiscal 2023. The actual payment of Strive contingent compensation amounts may differ in amount and timing from those shown in the table and we may pay these obligations with shares of our common stock or in cash at our sole discretion.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting policies that we used to prepare our consolidated financial statements are outlined primarily in Note 1 and in Note 2 (revenue recognition policies) to the consolidated financial statements, which are presented in Part II, Item 8 of this Form 10-K. Some of those accounting policies require us to make assumptions and use judgments that may affect the amounts reported in our consolidated financial statements. Management regularly evaluates its estimates and assumptions and bases those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America. Actual results may differ from these estimates under different assumptions or conditions, including changes in economic and political conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results.
The following items require the most significant judgment and often involve complex estimates:
Revenue Recognition
We account for revenue in accordance with Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). For the All Access Pass, judgment is required to determine whether the intellectual property and web-based functionality and content are considered distinct and accounted for separately, or not distinct and accounted for together.
We have determined to account for the AAP as a single performance obligation and recognize the associated transaction price ratably over the term of the underlying contract beginning on the commencement date of each contract, which is the date the Company’s platforms and resources are made available to the customer. This determination was reached after considering that our web-based functionality and content, in combination with our intellectual property, each represent inputs that transform into a combined output that represents the intended outcome of the AAP, which is to provide a continuously accessible, customized, and dynamic learning and development solution only accessible through the AAP platform.
Judgment is required to determine the stand-alone selling price (SSP) for each distinct performance obligation in a revenue contract. Where we have more than one distinct performance obligation, we must allocate the transaction price to each performance obligation based on its relative SSP. The SSP is the price which we would sell a promised product or service separately to a customer. In determining the SSP, we consider the size and volume of transactions, price lists, historical sales, and contract prices. We may modify our pricing from time-to-time in the future, which could result in changes to the SSP.
Stock-Based Compensation
Our shareholders have approved performance-based long-term incentive plans (LTIPs) that provide for grants of stock-based performance awards to certain managerial personnel and executive management as directed by the Organization and Compensation Committee of the Board of Directors. The number of common shares that are vested and issued to LTIP participants is variable and is based upon the achievement of specified performance objectives during defined service periods. Due to the variable number of common shares that may be issued under the LTIP, we reevaluate our LTIP grants on a quarterly basis and adjust the expected vesting dates and number of shares expected to be awarded based upon actual and estimated financial results of the Company compared with the performance goals set for the award. Adjustments to the number of shares awarded, and to the corresponding compensation expense, are made on a cumulative basis at the adjustment date based upon the new estimated probable number of common shares to be awarded.
The analysis of our LTIP awards contains uncertainties because we are required to make assumptions and judgments about the timing and/or the eventual number of shares that will vest in each LTIP grant. The assumptions and judgments that are essential to the analysis include forecasted sales and operating income levels during the LTIP service periods. These forecasted amounts may be difficult to predict over the life of the LTIP awards due to changes in our business, such as from the introduction of subscription-based services, or other external factors, such as the COVID-19 pandemic, and their impact on our financial results. Events such as these may leave some previously approved performance measures obsolete or unattainable. The evaluation of LTIP performance awards and the corresponding use of estimated amounts may produce additional volatility in our consolidated financial statements as we record cumulative adjustments to the estimated service periods and number of common shares to be awarded under the LTIP grants as described above. For example, uncertainties associated with the impact of and expected recovery from the COVID-19 pandemic resulted in a significant reversal of previously recognized performance award stock-based compensation expense during fiscal 2020.
Accounts Receivable Valuation
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Our allowance for doubtful accounts calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the collectability of customer accounts, which may be influenced by a number of factors that are not within our control, such as the financial health of each customer. We regularly review the collectability assumptions of our allowance for doubtful accounts calculation and compare them against historical collections. Adjustments to the assumptions may either increase or decrease our total allowance for doubtful accounts and may adversely impact our financial results. For example, a 10 percent increase to our allowance for doubtful accounts at August 31, 2022 would decrease our reported income from operations by approximately $0.4 million.
For further information regarding the calculation of our allowance for doubtful accounts, refer to the notes to our financial statements as presented in Item 8 of this Annual Report on Form 10-K.
Valuation of Indefinite-Lived Intangible Assets and Goodwill
Intangible assets that are deemed to have an indefinite life and goodwill balances are not amortized, but rather are tested for impairment on an annual basis, or more often if events or circumstances indicate that a potential impairment exists. The Covey trade name intangible asset originated from the merger with the Covey Leadership Center in 1997 and has been deemed to have an indefinite life. This intangible asset is quantitatively tested for impairment using the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars and related products, and international licensee royalties.
Goodwill is recorded when the purchase price for a business acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. Under current accounting guidance, an annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.
We tested goodwill for impairment at August 31, 2022 at the reporting unit level using a qualitative approach. We determined that it was more likely than not that the fair value of each of our reporting units was more than their carrying values. This determination required judgment to estimate future cash flows and operating results and considered current operating results, expected future operating results, and various other factors such as macroeconomic conditions. Some of these factors are not within our control.
On an interim basis, we consider whether events or circumstances are present that may lead to the determination that goodwill may be impaired. These circumstances include, but are not limited to, the following:
significant underperformance relative to historical or projected future operating results;
significant change in the manner of our use of acquired assets or the strategy for the overall business;
significant change in prevailing interest rates;
significant negative industry or economic trend;
significant change in market capitalization relative to book value; and/or
significant negative change in market multiples of the comparable company set.
If, based on events or changing circumstances, we determine it is more likely than not that the fair value of a reporting unit does not exceed its carrying value, we would be required to test goodwill for impairment.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment. Based on the results of our goodwill impairment analysis during fiscal 2022, we determined that no impairment existed at August 31, 2022, as we determined that it was more likely than not that each reportable operating segment’s estimated fair value exceeded its carrying value. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.
Impairment of Long-Lived Assets
Long-lived tangible assets and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use an estimate of undiscounted future net cash flows of the assets over their remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the anticipated future cash flows of the
assets, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based upon discounted cash flows over the estimated remaining useful life of the asset. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis, which is then depreciated or amortized over the remaining useful life of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets.
Our impairment evaluation calculations contain uncertainties because they require us to make assumptions and apply judgment in order to estimate future cash flows, forecast the useful lives of the assets, and select a discount rate that reflects the risk inherent in future cash flows. Although we have not made any recent material changes to our long-lived assets impairment assessment methodology, if forecasts and assumptions used to support the carrying value of our long-lived tangible and finite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.
Acquisitions and Contingent Consideration Liabilities
We record acquisitions resulting in the consolidation of an enterprise using the purchase method of accounting. Under this method, the acquiring company records the assets acquired, including intangible assets that can be identified and named, and liabilities assumed based on their estimated fair values at the date of acquisition. The purchase price in excess of the fair value of the assets acquired and liabilities assumed is recorded as goodwill. If the assets acquired, net of liabilities assumed, are greater than the purchase price paid, then a bargain purchase has occurred and the Company will recognize the gain immediately in earnings. Among other sources of relevant information, we use independent appraisals or other valuations to assist in determining the estimated fair values of the assets and liabilities. Various assumptions are used in the determination of these estimated fair values including discount rates, market and volume growth rates, product or service selling prices, cost structures, royalty rates, and other prospective financial information.
Additionally, we are required to reassess the fair value of contingent consideration liabilities resulting from business acquisitions at each reporting period. Although subsequent changes to the contingent consideration liabilities do not affect the goodwill generated from the acquisition transaction, the valuation of expected contingent consideration often requires us to estimate future sales and/or profitability. These estimates require the use of numerous assumptions, many of which may change frequently and lead to increased or decreased operating income in future periods. For instance, during fiscal 2022 we recorded $0.1 million of net increases to the fair value of our contingent consideration liabilities compared with $0.2 million of increases during fiscal 2021, and approximately $49,000 of decreases in fiscal 2020. Changes to the fair value of contingent consideration liabilities are recorded as a component of SGA expenses.
Income Taxes
We regularly evaluate our United States federal and various state and foreign jurisdiction income tax exposures. We account for certain aspects of our income tax provision using the provisions of ASC 740-10-05, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon final settlement. The provisions of ASC 740-10-05 also provide guidance on de-recognition, classification, interest, and penalties on income taxes, accounting for income taxes in interim periods, and require increased disclosure of various income tax items. Taxes and penalties are components of our overall income tax provision.
We record previously unrecognized tax benefits in the financial statements when it becomes more likely than not (greater than a 50 percent likelihood) that the tax position will be sustained. To assess the probability of sustaining a tax position, we consider all available evidence. In many instances, sufficient positive evidence may not be available until the expiration of the statute of limitations for audits by taxing jurisdictions, at which time the entire benefit will be recognized as a discrete item in the applicable period.
Our unrecognized tax benefits result from uncertain tax positions about which we are required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions. The calculation of our income tax provision or benefit, as applicable, requires estimates of future taxable income or losses. During the course of the fiscal year, these estimates are compared to actual financial results and adjustments may be made to our tax provision or benefit to reflect these revised estimates. Our effective income tax rate is also affected by changes in tax law and the results of tax audits by various jurisdictions. Although we believe that our judgments and estimates discussed herein are reasonable, actual results could differ, and we could be exposed to losses or gains that could be material.
We establish valuation allowances for deferred tax assets when we estimate it is more likely than not that the tax assets will not be realized. The determination of whether valuation allowances are needed on our deferred income tax assets contains uncertainties because we must project future income, including the use of tax-planning strategies, by individual tax jurisdictions. Changes in industry and economic conditions and the competitive environment may impact the accuracy of our projections. We regularly assess the likelihood that our deferred tax assets will be realized and determine if adjustments to our valuation allowance are necessary. These evaluations may produce additional volatility in our tax provision or benefit, net income or loss, and earnings or loss per share. For example, in consideration of the relevant accounting guidance, we reevaluated our deferred tax assets during fiscal 2020 and considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Because of the cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, which are primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards. Accordingly, we increased the valuation allowance against our deferred tax assets in fiscal 2020. Due to better-than-expected results in fiscal 2021, we reversed a substantial portion of these valuation allowances.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 to the consolidated financial statements for information on recent accounting pronouncements.
REGULATORY COMPLIANCE
We are registered in states in which we do business that have a sales tax and we collect and remit sales or use tax on sales made in these jurisdictions. Compliance with environmental laws and regulations (including new laws and regulations relating to climate change) has not had a material effect on our operations. We believe we are in compliance with applicable governmental regulations in the United States and the countries in which we operate.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements made by the Company in this report are “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,” or words or phrases of similar meaning. In our reports and filings we may make forward-looking statements regarding, among other things, our expectations about future sales levels and financial results, expected effects from the COVID-19 pandemic, including effects on how we conduct our business and our results of operations, the timing and duration of the recovery from the COVID-19 pandemic, future training and consulting sales activity, expected benefits from the All Access Pass and the electronic delivery of our content, anticipated renewals of subscription offerings, the impact of new accounting standards on our financial condition and results of operations, the amount and timing of capital expenditures, anticipated expenses, including SGA 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, our ability to maintain adequate capital for our operations for at least the upcoming 12 months, the seasonality of future sales, future compliance with the terms and conditions of our line of credit, the ability to borrow on our line of credit, expected
collection of accounts receivable, 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 this annual report on Form 10-K for the fiscal year ended August 31, 2022, entitled “Risk Factors.” In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas: cybersecurity risks; unanticipated costs or capital expenditures; delays or unanticipated outcomes relating to our strategic plans; dependence on existing products or services; the rate and consumer acceptance of new product introductions, including the All Access Pass and Impact Platform; 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 relatively 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’s expectations as of the date made, and the Company does 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’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk of Financial Instruments
We are exposed to financial instrument market risk primarily through fluctuations in foreign currency exchange rates and interest rates. To manage risks associated with foreign currency exchange and interest rates, we may make limited use of derivative financial instruments. Derivatives are financial instruments that derive their value from one or more underlying financial instruments. As a matter of policy, our derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures. In addition, we do not enter into derivative contracts for trading or speculative purposes, nor are we party to any leveraged derivative instrument. During the fiscal years ended August 31, 2022, 2021, and 2020, we were not party to any foreign exchange contracts, interest rate swap agreements, or similar derivative instruments.
Foreign Exchange Sensitivity
Due to the global nature of our operations, we are subject to risks associated with transactions that are denominated in currencies other than the United States dollar, as well as the effects of translating amounts denominated in foreign currencies to United States dollars as a normal part of the reporting process. The objective of our foreign currency risk management activities is to reduce foreign currency risk in the consolidated financial statements. In order to manage
foreign currency risks, we may make limited use of foreign currency forward contracts and other foreign currency related derivative instruments.
Interest Rate Sensitivity
Our long-term liabilities primarily consist of term loans payable obtained from the lender on our 2019 Credit Agreement, a long-term lease agreement (financing obligation) associated with the previous sale of our corporate headquarters, a note payable to the former owners of Strive, amounts borrowed on our revolving credit facility, deferred income taxes, and contingent consideration payments resulting from our business acquisitions. Our overall interest rate sensitivity is primarily influenced by any amounts borrowed on term loans or on our revolving line of credit facility, and the prevailing interest rate on these instruments. The effective interest rate on the term loans and our revolving line of credit facility was 4.2 percent at August 31, 2022, and we may incur additional expense if interest rates increase in future periods. For example, a one percent increase in the interest rate on our term loans payable at August 31, 2022 would result in approximately $0.1 million of additional interest expense in fiscal 2023. We did not have borrowings on our revolving credit facility at August 31, 2022 and our other obligations have fixed interest rates. Our financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent and our note payable to the former owners of Strive has a fixed discount rate of 3.6 percent. Our other long-term liabilities do not include an interest component.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franklin Covey Co.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Franklin Covey Co. and subsidiaries (the “Company”) as of August 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended August 31, 2022, of the Company and our report dated November 14, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte Touche LLP
Salt Lake City, Utah
November 14, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franklin Covey Co.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Franklin Covey Co. and subsidiaries (the “Company”) as of August 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows, for each of the three years in the period ended August 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 14, 2022, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Refer to Note 2 to the Financial Statements
Critical Audit Matter Description
The Company recognizes revenue upon the transfer of control of promised products and services to customers in an amount equal to the consideration expected to be received in exchange for those products and services. The Company’s Leader in Me subscription offering contracts often include promises to transfer multiple products or services to a customer that are considered distinct performance obligations that should be accounted for separately. The transaction price is allocated to each performance obligation on a relative standalone selling price (SSP) basis. The SSP is the price which the Company would sell a promised product or service separately to a customer. In determining the SSP, the Company considers the size and volume of transactions, price lists, historical sales, and contract prices.
Given the increased extent of audit effort in evaluating management’s judgments in determining SSP, we identified the determination of SSP for the Leader in Me membership offerings as a critical audit matter.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s determination of SSP for these performance obligations, included the following, among others:
We tested the effectiveness of internal controls over the determination of SSP.
We selected a sample of customer agreements and performed the following:
Obtained and read customer contracts and invoices for each selection to evaluate if relevant contractual terms have been appropriately considered by management.
Assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
Assessed the reasonableness of management’s estimates of stand-alone selling prices for products and services and the allocation of the transaction price to identified performance obligations determined on a relative stand-alone selling basis.
Tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements.
/s/
November 14, 2022
We have served as the Company’s auditor since 2016.
FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS
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AUGUST 31, |
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In thousands, except per-share data |
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ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | |
Accounts receivable, less allowance for doubtful accounts of $ |
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Inventories |
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Prepaid expenses |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Other long-term assets |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of notes payable | $ | | $ | |
Current portion of financing obligation |
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Accounts payable |
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Deferred subscription revenue |
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Other deferred revenue |
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Accrued liabilities |
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Total current liabilities |
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Notes payable, less current portion |
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Financing obligation, less current portion |
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Deferred income tax liabilities |
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Commitments and contingencies (Note 9) |
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Shareholders’ equity: |
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Additional paid-in capital |
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Retained earnings |
| |
| |
Accumulated other comprehensive income (loss) |
| ( |
| |
Treasury stock at cost, |
| ( |
| ( |
Total shareholders’ equity |
| |
| |
| $ | | $ | |
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
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YEAR ENDED AUGUST 31, |
| 2022 |
| 2021 |
| 2020 |
In thousands, except per-share amounts |
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Net sales | $ | | $ | | $ | |
Cost of sales |
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Gross profit |
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Selling, general, and administrative |
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Stock-based compensation |
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| |
| ( |
Restructuring costs |
| - |
| - |
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Depreciation |
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Amortization |
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Income from operations |
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Interest income |
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Interest expense |
| ( |
| ( |
| ( |
Income before income taxes |
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Benefit (provision) for income taxes |
| ( |
| |
| ( |
Net income (loss) | $ | | $ | | $ | ( |
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Net income (loss) per share: |
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Basic | $ | | $ | | $ | ( |
Diluted |
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| ( |
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Weighted average number of common shares: |
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Basic |
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Diluted |
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COMPREHENSIVE INCOME (LOSS): |
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Net income (loss) | $ | | $ | | $ | ( |
Foreign currency translation adjustments, net of income |
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tax benefits of $ |
| ( |
| |
| |
Comprehensive income (loss) | $ | | $ | | $ | ( |
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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YEAR ENDED AUGUST 31, |
| 2022 |
| 2021 |
| 2020 |
In thousands |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) | $ | | $ | | $ | ( |
Adjustments to reconcile net income (loss) to net cash provided |
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by operating activities: |
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Depreciation and amortization |
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| |
Amortization of capitalized curriculum development costs |
| |
| |
| |
Deferred income taxes |
| |
| ( |
| |
Stock-based compensation expense |
| |
| |
| ( |
Change in the fair value of contingent consideration liabilities |
| |
| |
| ( |
Amortization of right-of-use operating lease assets |
| |
| |
| |
Changes in assets and liabilities, net of effect of acquired businesses: |
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Decrease (increase) in accounts receivable, net |
| ( |
| ( |
| |
Decrease (increase) in inventories |
| ( |
| |
| |
Decrease in receivable from related party |
| - |
| - |
| |
Increase in prepaid expenses and other assets |
| ( |
| ( |
| ( |
Increase (decrease) in accounts payable and accrued liabilities |
| |
| |
| ( |
Increase in deferred revenue |
| |
| |
| |
Increase (decrease) in income taxes payable/receivable |
| |
| |
| ( |
Decrease in other liabilities |
| ( |
| ( |
| ( |
Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property and equipment |
| ( |
| ( |
| ( |
Capitalized curriculum development costs |
| ( |
| ( |
| ( |
Acquisition of businesses, net of cash acquired |
| - |
| ( |
| - |
Purchase of note receivable from bank (Note 17) |
| - |
| - |
| ( |
Net cash used for investing activities |
| ( |
| ( |
| ( |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from line of credit borrowings |
| - |
| - |
| |
Payments on line of credit borrowings |
| - |
| - |
| ( |
Proceeds from term notes payable financing |
| - |
| - |
| |
Principal payments on notes payable |
| ( |
| ( |
| ( |
Principal payments on financing obligation |
| ( |
| ( |
| ( |
Purchases of common stock for treasury |
| ( |
| ( |
| ( |
Payment of contingent consideration liabilities |
| ( |
| ( |
| ( |
Proceeds from sales of common stock held in treasury |
| |
| |
| |
Net cash used for financing activities |
| ( |
| ( |
| ( |
Effect of foreign currency exchange rates on cash and cash equivalents |
| ( |
| ( |
| |
Net increase (decrease) in cash and cash equivalents |
| |
| |
| ( |
Cash and cash equivalents at beginning of the year |
| |
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Cash and cash equivalents at end of the year | $ | | $ | | $ | |
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Supplemental disclosure of cash flow information: |
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Cash paid for income taxes | $ | | $ | | $ | |
Cash paid for interest |
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Non-cash investing and financing activities: |
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Purchases of property and equipment financed by accounts payable | $ | | $ | | $ | |
License rights acquired through royalties payable financing |
| - |
| - |
| |
Use of notes receivable to modify revenue contract (Note 17) |
| - |
| - |
| |
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
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| Accumulated |
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| Other |
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| Common |
| Common |
| Additional |
| Retained |
| Comprehensive | Treasury |
| Treasury |
| Stock Shares |
| Stock Amount |
| Paid-In Capital |
| Earnings |
| Income (Loss) | Stock Shares |
| Stock Amount |
In thousands |
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Balance at August 31, 2019 | | $ | | $ | | $ | | $ | | ( | $ | ( |
Issuance of common stock from |
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treasury |
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| ( |
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| |
Purchase of treasury shares |
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| ( |
| ( |
Unvested share award |
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| ( |
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Stock-based compensation |
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| ( |
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Cumulative translation |
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adjustments |
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Net loss |
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| ( |
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Balance at August 31, 2020 | |
| |
| |
| |
| | ( |
| ( |
Issuance of common stock from |
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treasury |
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| ( |
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| |
Purchase of treasury shares |
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| ( |
| ( |
Unvested share award |
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| ( |
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Stock-based compensation |
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Cumulative translation |
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adjustments |
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Net income |
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Balance at August 31, 2021 | |
| |
| |
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| | ( |
| ( |
Isscouance of common stock from |
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treasury |
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| ( |
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| |
Purchase of treasury shares |
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| ( |
| ( |
Unvested share award |
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| ( |
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Stock-based compensation |
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Cumulative translation |
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adjustments |
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| ( |
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Net income |
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Balance at August 31, 2022 | | $ | | $ | | $ | | $ | ( | ( | $ | ( |
See accompanying notes to consolidated financial statements.
FRANKLIN COVEY CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Year
Our fiscal year ends on August 31 of each year and our fiscal quarters end on the last day of November, February, and May. Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, which consist of Franklin Development Corp., and our offices in Japan, China, the United Kingdom, Australia, Germany, Switzerland, and Austria. Intercompany balances and transactions are eliminated in consolidation.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity, revenues, and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
Some of our cash is deposited with financial institutions located throughout the United States of America and at banks in foreign countries where we operate subsidiary offices, and at times may exceed insured limits. We consider all highly liquid debt instruments with an original maturity date of three months or less to be cash equivalents. We did not hold a significant amount of investments that would be considered cash equivalent instruments at either August 31, 2022 or 2021. Of our $
Inventories
Inventories are stated at the lower of cost or net realizable value, cost being determined using the first-in, first-out method. Elements of cost in inventories generally include raw materials and direct labor. Cash flows from the sale of inventory are included in cash flows provided by operating activities in our consolidated statements of cash flows. Our inventories are comprised primarily of training materials, books, training-related accessories, and consisted of the following (in thousands):
|
|
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|
|
|
|
|
|
|
|
|
AUGUST 31, |
| 2022 |
|
| 2021 |
Finished goods | $ | |
| $ | |
Raw materials |
| |
|
| |
| $ | |
| $ | |
Provision is made to reduce excess and obsolete inventories to their estimated net realizable value. In assessing the valuation of our inventories, we make judgments regarding future demand requirements and compare these estimates with current and committed inventory levels. Inventory requirements may change based on projected customer demand, training curriculum life-cycle changes, and other factors that could affect the valuation of our inventories.
Significant components of our other current assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
AUGUST 31, |
| 2022 |
|
| 2021 |
Deferred commissions | $ | |
| $ | |
Other current assets |
| |
|
| |
| $ | |
| $ | |
We defer commission expense on subscription-based sales and recognize the commission expense with the recognition of the corresponding revenue.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense, which includes depreciation on our corporate campus that is accounted for as a financing obligation (Note 7), is calculated using the straight-line method over the lesser of the expected useful life of the asset or the contracted lease period. We generally use the following depreciable lives for our major classifications of property and equipment:
Description | Useful Lives |
Buildings | |
Machinery and equipment | |
Computer hardware and software | |
Furniture, fixtures, and leasehold improvements |
Our property and equipment were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
AUGUST 31, |
| 2022 |
|
| 2021 |
Land and improvements | $ | |
| $ | |
Buildings |
| |
|
| |
Machinery and equipment |
| |
|
| |
Computer hardware and software |
| |
|
| |
Furniture, fixtures, and leasehold |
|
|
|
|
|
improvements |
| |
|
| |
|
| |
|
| |
Less accumulated depreciation |
| ( |
|
| ( |
| $ | |
| $ | |
We expense costs for repairs and maintenance as incurred. Gains and losses resulting from the sale of property and equipment are recorded in income from operations. Depreciation of capitalized subscription portal costs is included in depreciation expense in the accompanying consolidated statements of operations and comprehensive income (loss).
Impairment of Long-Lived Assets
Long-lived tangible assets and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use an estimate of undiscounted future net cash flows of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the anticipated future cash flows of the assets, we recognize an impairment loss equal to the difference between the carrying values of the assets and their estimated fair values. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets. The evaluation of long-lived assets requires us to use estimates of future cash flows. If forecasts and assumptions used to support the realizability of our long-lived tangible and finite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition. There were no long-lived asset impairment charges during any of the periods presented in this report.
Indefinite-Lived Intangible Assets and Goodwill Impairment Testing
Intangible assets that are deemed to have an indefinite life and acquired goodwill are not amortized, but rather are tested for impairment on an annual basis or more often if events or circumstances indicate that a potential impairment exists. The Covey trade name intangible asset has been deemed to have an indefinite life. This intangible asset is tested for impairment using qualitative factors or the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars and work sessions, international licensee sales, and related products. Based on the fiscal 2022 evaluation of the Covey trade name, we believe the fair value of the Covey trade name substantially exceeds its carrying value.
Goodwill is recorded when the purchase price for a business acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. We test goodwill for impairment each year on August 31 or upon the occurrence of events or changes in circumstances which indicate that goodwill may be impaired. Goodwill is assigned to our reporting units, which are our operating segments, where discrete financial information is available that is regularly reviewed by management to evaluate segment performance.
During the annual impairment testing process, we have the option to first perform a qualitative assessment (commonly referred to as Step Zero) over relative events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value or to perform a quantitative assessment where we estimate the fair value of each reporting unit using both an income and market approach. At August 31, 2022, we completed a Step
Zero assessment and concluded there were no indicators of impairment. Refer to Note 5, Intangible Assets and Goodwill for further information on our goodwill.
When we perform a quantitative analysis to assess the recoverability of our goodwill, we determine the estimated fair value of each reporting unit and compare it to the carrying value of the reporting unit, including goodwill. If the fair value is less than the carrying value of the net assets and related goodwill, an impairment charge is recognized for the difference. The estimated fair value of each reporting unit is calculated using a combination of the income approach (discounted cash flows) and the market approach (using market multiples derived from a set of companies with comparable market characteristics). The value estimated using a discounted cash flow model is weighted against the estimated value derived from the guideline company market approach method. This market approach method estimates the price reasonably expected to be realized from the sale of the reporting unit based on comparable companies. In developing the discounted cash flow analysis, our assumptions about future revenues and expenses, capital expenditures, and changes in working capital are based on our internal plan and assume a terminal growth rate thereafter. The discounted cash flow analysis is derived from valuation techniques in which one or more significant inputs are not observable and constitute Level 3 fair value measures.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
During the normal course of business, we develop training courses and related materials that we sell to our clients. Capitalized curriculum development costs include certain expenditures to develop course materials such as video segments, course manuals, and other related materials. Our capitalized curriculum development spending in fiscal 2022, which totaled $
Capitalized development costs are amortized over - to -year useful lives, which are based on numerous factors, including expected cycles of major changes to our content. Capitalized curriculum development costs are reported as a component of other long-term assets in our consolidated balance sheets and totaled $
Accrued Liabilities
Significant components of our accrued liabilities were as follows (in thousands):
|
|
|
|
|
|
AUGUST 31, |
| 2022 |
|
| 2021 |
Accrued compensation | $ | |
| $ | |
Other accrued liabilities |
| |
|
| |
| $ | |
| $ | |
Business acquisitions may include contingent consideration payments based on various future financial measures related to the acquired entity. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired company and estimated
probabilities of achievement. Based on updated estimates and projections, the contingent consideration liabilities are adjusted at each reporting date to their estimated fair value. Changes in fair value subsequent to the acquisition date are reported in selling, general, and administrative expense in our consolidated statements of operations and comprehensive income (loss), and may have a material impact on our operating results. Variations in the fair value of contingent consideration liabilities may result from changes in discount periods or rates, changes in the timing and amount of earnings estimates, and changes in probability assumptions with respect to the likelihood of achieving various payment criteria.
The functional currencies of our foreign operations are the reported local currencies. Translation adjustments result from translating our foreign subsidiaries’ financial statements into United States dollars. The balance sheet accounts of our foreign subsidiaries are translated into United States dollars using the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated using average exchange rates for each month during the fiscal year. The resulting translation differences are recorded as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Foreign currency transaction losses totaled $
Revenue Recognition
We account for revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). For further information on revenue recognition, refer to Note 2, Revenue Recognition.
Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns.
We record the compensation expense for all stock-based payments, including grants of stock options and the compensatory elements of our employee stock purchase plan, in our consolidated statements of operations and comprehensive income (loss) based upon their fair values over the requisite service period. For more information on our stock-based compensation plans, refer to Note 12.
Shipping and Handling Fees and Costs
All shipping and handling fees billed to customers are recorded as a component of net sales. All costs incurred related to the shipping and handling of products are recorded in cost of sales.
Advertising Costs
Costs for advertising are expensed as incurred. Advertising costs included in selling, general, and administrative expenses totaled $
During the fourth quarter of fiscal 2020, we restructured certain information technology, central operations, and marketing functions. We incurred $
Income Taxes
Our income tax provision has been determined using the asset and liability approach of accounting for income taxes. Under this approach, deferred income taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. The income tax provision represents income taxes paid or payable for the current year plus the change in deferred taxes during the year. Deferred income taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for tax rates and tax laws when changes are enacted. A valuation allowance is provided against deferred income tax assets when it is more likely than not that all or some portion of the deferred income tax assets will not be realized. Interest and penalties related to uncertain tax positions are recognized as components of income tax benefit or expense in our consolidated statements of operations and comprehensive income (loss).
We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than
We provide for income taxes, net of applicable foreign tax credits, on temporary differences in our investment in foreign subsidiaries, which consist primarily of unrepatriated earnings.
Comprehensive Income (Loss)
Comprehensive income (loss) includes changes to equity accounts that were not the result of transactions with shareholders. Comprehensive income (loss) is comprised of net income or loss and other comprehensive income and loss items. Our other comprehensive income and losses generally consist of changes in the cumulative foreign currency translation adjustment, net of tax.
Accounting Pronouncements Issued and Adopted
Income Taxes
On September 1, 2021, we adopted Accounting Standards Update (ASU) No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The adoption of ASU 2019-12 did not have a material impact on our consolidated financial statements.
Credit Losses on Financial Instruments
On September 1, 2020, we adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Topic 326). This new standard is intended to improve financial reporting by requiring more timely recognition of credit losses on trade accounts receivable and requires the measurement of all expected credit losses based on historical experience, current economic conditions, and reasonable and supportable forecasts. The adoption of this ASU did not have a material impact on our consolidated financial statements and disclosures. For further information on our receivables, refer to Note 4, Accounts Receivable.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
On September 1, 2020, we adopted ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). This guidance clarifies the accounting for implementation costs in a cloud computing arrangement that is a service contract and aligns the requirements for capitalizing those costs with the capitalization requirements for costs incurred to develop or obtain internal-use software. The Company adopted ASU 2018-15 on a
We earn revenue from contracts with customers primarily through the delivery of our All Access Pass and the Leader in Me membership subscription offerings, through the delivery of training days and training course materials (whether digitally or in person), and through the licensing of rights to sell our content into geographic locations where the Company does not maintain a direct office. We also earn revenues from leasing arrangements that are not accounted for under Topic 606. Returns and refunds are generally immaterial, and we do not have any significant warranty obligations.
We recognize revenue upon the transfer of control of promised products and services to customers in an amount equal to the consideration we expect to receive in exchange for those products or services. Although rare, if the consideration promised in a contract includes variable amounts, we evaluate the estimate of variable consideration to determine whether the estimate needs to be constrained. We include the variable consideration in the transaction price only to the extent that it is probable a significant reversal of the amount of cumulative revenue recognized will not occur.
The Company determines the amount of revenue to be recognized through application of the following steps:
Identification of the contract with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when the Company satisfies the performance obligations
Taxes assessed by a government authority that are collected from a customer are excluded from net revenue.
Subscription Revenues
Subscription revenues primarily relate to the Company’s AAP and the Leader in Me membership offerings. We have determined that it is most appropriate to account for the AAP as a single performance obligation and recognize the associated transaction price ratably over the term of the underlying contract beginning on the commencement date of each contract, which is the date the Company’s platforms and resources are made available to the customer. This determination was reached after considering that our web-based functionality and content, in combination with our intellectual property, each represent inputs that transform into a combined output that represents the intended outcome of the AAP, which is to provide a continuously accessible, customized, and dynamic learning and development solution only accessible through the AAP platform.
We typically invoice our customers annually upon execution of the contract or subsequent renewals. Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue or revenue, depending on whether transfer of control has occurred.
Our Leader in Me membership offering is bifurcated into a portal membership obligation and a coaching delivery obligation. We have determined that it is appropriate to recognize revenue related to the portal membership over the term of the underlying contract and to recognize revenue from coaching as those services are performed. The combined contract amount is recorded in deferred subscription revenue until the performance obligations are satisfied. Any additional coaching or training days which are contracted independent of a Leader in Me membership are recorded as revenue in accordance with our general policy for services and products as described below.
Services and Products
We deliver Company-led training days from our offerings, such as The 7 Habits of Highly Effective People, at a customer’s location or live-online based upon a daily consultant rate and a set price for training materials. These revenues are recognized as the training days occur and the services are performed. Customers also have the option to purchase training materials and present our offerings through internal facilitators and not through the use of a Franklin Covey consultant. Revenue is recognized from these product sales when the materials are shipped. Shipping revenues associated with product sales are recorded in revenue with the corresponding shipping cost being recorded as a component of cost of sales.
Royalties
Our international strategy includes the use of licensees in countries where we do not have a wholly-owned direct office. Licensee companies are unrelated entities that have been granted a license to translate our content and offerings, adapt the content to the local culture, and sell our content in a specific country or region. We recognize revenue on the upfront fees from the sale of a territory to a licensee over the term of the initial contract. Licensees are then required to pay us royalties based upon a percentage of their sales to clients. We recognize royalty income each reporting period based upon the sales information reported to us from our licensees. When sales information is not received from a particular licensee at the end of a reporting period, the Company estimates the amount of royalties to be received for the period that is being reported based upon prior forecasts and historical performance. These estimated royalties are recorded as revenue and are adjusted in the subsequent period. Refer to the disaggregated revenue information presented in Note 16, Segment Information, for our royalty revenues in the fiscal years presented in this report.
Contracts with Multiple Performance Obligations
We periodically enter into contracts that include multiple performance obligations. A performance obligation is a promise in a contract to transfer products or services that are distinct, or that are distinct within the context of the contract. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. Determining whether products and services meet the distinct criteria that should be accounted for separately or combined as one unit of accounting requires significant judgment.
When determining whether goods and services meet the distinct criteria, we consider various factors for each agreement including the availability of the services and the nature of the offerings and services. We allocate the transaction price to each performance obligation on a relative standalone selling price (SSP) basis. Judgment is required to determine the SSP for each distinct performance obligation. The SSP is the price which the Company would sell a promised product or service separately to a customer. In determining the SSP, we consider the size and volume of transactions, price lists, historical sales, and contract prices. We may modify our pricing from time-to-time in the future, which could result in changes to the SSP.
Contract Balances
As described above, our subscription revenue is generally recognized ratably over the term of the underlying contract beginning on the commencement date of each agreement. The timing of when these contracts are invoiced, cash is collected, and revenue is recognized impacts our accounts receivable and deferred subscription revenue accounts. We generally bill our clients in advance for subscription offerings or within the month that the training and products are delivered. As such, consideration due to the Company for work performed is included in accounts receivable and we do not have a significant amount of contract assets. Our receivables are generally collected within
subscription offerings totaled $
Remaining Performance Obligations
When possible, we enter into multi-year non-cancellable contracts which are invoiced either upon execution of the contract or at the beginning of each annual contract period. Our remaining performance obligation represents contracted revenue that has not yet been recognized, including unearned revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price is influenced by factors such as seasonality, the average length of the contract term, and the ability of the Company to continue to enter multi-year non-cancellable contracts. At August 31, 2022 we had $
Costs Capitalized to Obtain Contracts
We capitalize the incremental costs of obtaining non-cancellable subscription revenue, primarily from the All Access Pass and the Leader in Me membership offerings. These incremental costs consist of sales commissions paid to our sales force and include the associated payroll taxes and fringe benefits. As the same commission rates are paid annually when the customer renews their contract, the capitalized commission costs are generally amortized ratably on an annual basis consistent with the recognition of the corresponding subscription revenue. At August 31, 2022, we have $
3. ACQUISITION OF STRIVE TALENT, INC.
On April 26, 2021 (the Closing Date), through our wholly-owned subsidiary Franklin Covey Client Sales, Inc., we purchased all of the issued and outstanding stock of Strive Talent, Inc. (Strive), a San Francisco-based technology company which has developed and markets an innovative learning deployment platform. The Strive platform is expected to enable the seamless integration and deployment of our content, services, technology, and metrics to deliver behavioral impact at scale, primarily through the Company’s All Access Pass subscription. The aggregate consideration for the purchase of Strive may total up to $
Approximately $
Approximately $
A maximum of approximately $
owner of Strive over the first four years of the measurement period. These payments may be made in either cash or shares of our common stock at our sole discretion.
Approximately $
As described above, included in the purchase agreement for the acquisition of Strive are additional contingent payments of up to $
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Cash paid at closing |
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Notes payable |
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Total purchase price |
| $ | |
We have included the operating results of Strive in our financial statements since the Closing Date. However, the acquisition of Strive had an immaterial impact on our results of operations in fiscal 2021 and pro forma financial information for this acquisition was not deemed necessary. For the twelve months ended December 31, 2020, Strive had revenues of $
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Cash acquired |
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Accounts receivable |
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Prepaid and other current assets |
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Property and equipment |
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Intangible assets |
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Goodwill |
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Assets acquired |
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Deferred revenue |
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Accrued liabilities |
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Deferred income tax liability |
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Notes payable, current portion |
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Notes payable, less current portion |
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Liabilities assumed |
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| $ | |
The allocation of the purchase price to the intangible assets acquired was as follows (in thousands):
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| Weighted Average |
Description |
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| Amount |
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Non-compete agreements |
| $ | |
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Content |
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Customer relationships |
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Tradename |
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Internally developed software |
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4. ACCOUNTS RECEIVABLE
Our trade accounts receivable are recorded at net realizable value, which includes an allowance for estimated credit losses as described in Note 1, Nature of Operations and Summary of Significant Accounting Policies. Under the guidance found in ASC Topic 326, the “expected credit loss” model replaced the previous “incurred loss” model and requires consideration of a broader range of information to estimate expected credit losses over the lives of our trade accounts receivable. Our prior methodology for estimating credit losses on our trade accounts receivable did not differ significantly from the new requirements of Topic 326, which was adopted in fiscal 2021.
We maintain an allowance for credit losses related to our trade accounts receivable for future expected credit losses resulting from the inability or unwillingness of our customers to make required payments. We estimate the allowance based upon historical bad debts, current customer receivable balances, age of customer receivable balances, and the customers’ financial condition in relation to a representative pool of assets consisting of customers with similar risk characteristics. The allowance is adjusted as appropriate to reflect differences in current conditions as well as changes in forecasted macroeconomic conditions. Receivables that do not share risk characteristics are evaluated on an individual basis, including those associated with customers that have a higher probability of default. Our estimate of credit losses includes expected current and future economic and market conditions related to the ongoing COVID-19 pandemic. We do not have a significant amount of notes or other receivables.
The following schedule provides a reconciliation of the activity in our allowance for estimated credit losses during the periods indicated (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
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| 2021 |
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| 2020 |
Beginning balance | $ | |
| $ | |
| $ | |
Charged to costs and expenses |
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Deductions |
| ( |
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| ( |
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Ending balance | $ | |
| $ | |
| $ | |
5. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Our intangible assets were comprised of the following (in thousands):
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| Gross Carrying |
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AUGUST 31, 2022 |
| Amount |
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| Amortization |
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Finite-lived intangible assets: |
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Acquired content | $ | |
| $ | ( |
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License rights |
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Customer lists |
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Acquired technology |
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Trade names |
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Non-compete agreements and other |
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Indefinite-lived intangible asset: |
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Covey trade name |
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| - |
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| $ | ( |
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AUGUST 31, 2021 |
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Finite-lived intangible assets: |
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Acquired content | $ | |
| $ | ( |
| $ | |
License rights |
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Customer lists |
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Acquired technology |
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Trade names |
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Non-compete agreements and other |
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Indefinite-lived intangible asset: |
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Covey trade name |
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| - |
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| $ | |
| $ | ( |
| $ | |
In April 2021, we acquired Strive Talent, Inc. (Note 3), which generated $
Our intangible assets are amortized over the estimated useful life of the asset. The range of remaining estimated useful lives and weighted-average amortization period over which we are amortizing the major categories of finite-lived intangible assets at August 31, 2022 were as follows:
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Category of Intangible Asset |
| Range of Remaining Estimated Useful Lives |
| Weighted Average Original Amortization Period |
Acquired content |
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License rights |
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Customer lists |
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Acquired technology |
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Trade names |
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Non-compete agreements and other |
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Our aggregate amortization expense from finite-lived intangible assets totaled $
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YEAR ENDING |
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AUGUST 31, |
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2023 | $ | |
2024 |
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2025 |
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2026 |
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2027 |
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Goodwill
The acquisition of Strive in fiscal 2021 generated $
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Direct offices | $ | |
International licensees |
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Education practice |
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| $ | |
Notes Payable
At August 31, 2022 and 2021, our notes payable consisted of term notes payable to a bank from our amended and secured credit agreement and a note payable to the former owners of Strive Talent, Inc. (Note 3), which was acquired during fiscal 2021. The note payable to the former owners of Strive is recorded at net present value and accrues interest at
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| Current Portion of Notes Payable |
| Notes Payable, Less Current Portion | ||||||||
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| August 31, |
| August 31, |
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| August 31, |
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| August 31, | ||
Description |
| 2022 |
| 2021 |
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| 2022 |
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| 2021 | ||
Bank term notes payable |
| $ | |
| $ | |
| $ | |
| $ | |
Strive acquisition note payable |
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| $ | |
| $ | |
| $ | |
| $ | |
Principal payments of $
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YEAR ENDING |
| Term Notes |
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| Strive Note |
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AUGUST 31, |
| Payable |
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| Payable |
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| Total |
2023 | $ | |
| $ | |
| $ | |
2024 |
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2025 |
| - |
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2026 |
| - |
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2027 |
| - |
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| - |
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| - |
| $ | |
| $ | |
| $ | |
Secured Credit Agreement
On August 7, 2019, we entered into a new credit agreement (the 2019 Credit Agreement) with our existing lender, which replaced the amended and restated credit agreement dated March 2011 (the Original Credit Agreement). The 2019 Credit Agreement provides up to $
The 2019 Credit Agreement is secured by substantially all of the assets of the Company and certain of our subsidiaries, and contains customary representations, warranties, and covenants.
Second Modification Agreement
To address potential covenant compliance issues associated with the uncertainties surrounding the economic recovery from the COVID-19 pandemic, on July 8, 2020, we entered into the First Modification Agreement to the 2019 Credit Agreement. The primary purpose of the First Modification Agreement was to provide temporary alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. In connection with the acquisition of Strive, we entered into a Consent and Second Modification Agreement to the 2019 Credit Agreement. The primary purposes of the Consent and Second Modification Agreement were to:
Consent to the purchase of Strive Talent, Inc.
Reinstate the original debt covenants of the 2019 Agreement which were temporarily replaced by alternate debt covenants in the First Modification Agreement to the 2019 Agreement.
Reduce the interest rate for borrowings from LIBOR plus
The Consent and Second Modification Agreement did not change any repayment or credit availability terms on the 2019 Credit Agreement. Our reinstated debt covenants consist of the following: (i) a Funded Indebtedness to Adjusted EBITDAR Ratio of less than
In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the 2019 Credit Agreement. At August 31, 2022, we believe that we were in compliance with the terms and covenants applicable to the 2019 Credit Agreement and subsequent modifications.
Interest on all borrowings under the 2019 Credit Agreement is due and payable on the first day of each month. The effective interest rate on our term loan obligations was
Revolving Line of Credit
The key terms and conditions of our revolving line of credit associated with the 2019 Credit Agreement are as follows:
Available Credit – $
Maturity Date –
Interest Rate – The effective interest rate is LIBOR plus
7. FINANCING OBLIGATION
We previously sold our corporate headquarters campus located in Salt Lake City, Utah, and entered into a
The financing obligation on our corporate campus was comprised of the following (in thousands):
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AUGUST 31, |
| 2022 |
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| 2021 |
Financing obligation payable in |
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monthly installments of $ |
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August 31, 2022, including |
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principal and interest, with |
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percent annual increases |
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(imputed interest at |
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through | $ | |
| $ | |
Less current portion |
| ( |
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| ( |
Total financing obligation, |
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less current portion | $ | |
| $ | |
Future principal maturities of our financing obligation were as follows at August 31, 2021 (in thousands):
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YEAR ENDING |
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AUGUST 31, |
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2023 | $ | |
2024 |
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2025 |
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Thereafter |
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| $ | |
Our remaining future minimum payments under the financing obligation in the initial
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YEAR ENDING |
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AUGUST 31, |
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2023 | $ | |
2024 |
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2025 |
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Thereafter |
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Total future minimum financing |
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obligation payments |
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Less interest |
| ( |
Present value of future minimum |
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financing obligation payments | $ | |
8. LEASES
Lessee Obligations
In the normal course of business, we lease office space, primarily for international sales administration offices, in commercial office complexes that are conducive to sales and administrative operations. We also rent warehousing and distribution facilities that are designed to provide secure storage and efficient distribution of our training products, books, and accessories, and certain office equipment. These leases are classified as operating leases. Operating lease assets and liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. Since most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Leases with an initial term of 12 months or less are not recorded on the balance sheet. For operating leases, expense is recognized on a straight-line basis over the lease term. We do not have significant amounts of variable lease payments.
Some of our operating leases contain renewal options that may be exercised at our discretion after the completion of the base rental term. At August 31, 2022, we had operating leases with remaining terms ranging from less than
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| Balance Sheet |
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| Caption |
| Amount |
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Assets: |
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Operating lease right of use assets |
| Other long-term assets |
| $ | |
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Liabilities: |
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Current: |
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Operating lease liabilities |
| Accrued liabilities |
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Long-Term: |
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Operating lease liabilities |
| Other long-term liabilities |
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| $ | |
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Weighted Average Remaining Lease Term: |
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Operating leases (years) |
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Weighted Average Discount Rate: |
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Operating leases |
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In fiscal 2022, we obtained $
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YEAR ENDING |
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AUGUST 31, |
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2023 | $ | |
2024 |
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2025 |
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2026 |
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2027 |
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Thereafter |
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Total operating lease payments |
| |
Less imputed interest |
| ( |
Present value of operating lease liabilities | $ | |
We recognize lease expense on a straight-line basis over the life of the lease agreement. Total rent expense recorded in selling, general, and administrative expense from our lease agreements totaled $
Lessor Accounting
We have subleased the majority of our corporate headquarters campus located in Salt Lake City, Utah to multiple tenants. These sublease agreements are accounted for as operating leases. We recognize sublease income on a straight-line basis over the life of the sublease agreement. The cost basis of our corporate campus was $
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YEAR ENDING |
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AUGUST 31, |
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2023 | $ | |
2024 |
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2025 |
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2026 |
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Thereafter |
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9. COMMITMENTS AND CONTINGENCIES
Warehouse Outsourcing Contract
We have a warehousing services agreement with an independent warehouse and distribution company to provide product kitting, warehousing, and order fulfillment services at a facility in Des Moines, Iowa. Under the terms of this contract, we pay a fixed charge of approximately $
During fiscal years ended August 31, 2022, 2021, and 2020, we expensed $
31, 2022, 2021, and 2020, respectively. Because of the variable component of the agreement, our payments for warehouse and distribution services may fluctuate in the future due to changes in sales and levels of specified activities.
Purchase Commitments
During the normal course of business, we issue purchase orders to various vendors for products and services. At August 31, 2022, we had open purchase commitments totaling $
Letters of Credit
At August 31, 2022 and 2021, we had standby letters of credit totaling $
Legal Matters and Loss Contingencies
Preferred Stock
We have
Treasury Stock
On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $
During fiscal 2022, we withheld
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting standards related to fair value measurements include a hierarchy for information and valuations used in measuring fair value that is broken down into the following three levels based on reliability:
Level 1 valuations are based on quoted prices in active markets for identical instruments that the Company can access at the measurement date.
Level 2 valuations are based on inputs other than quoted prices included in Level 1 that are observable for the instrument, either directly or indirectly, for substantially the full term of the asset or liability including the following:
a.quoted prices for similar, but not identical, instruments in active markets;
b.quoted prices for identical or similar instruments in markets that are not active;
c.inputs other than quoted prices that are observable for the instrument; or
d.inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 valuations are based on information that is unobservable and significant to the overall fair value measurement.
The book values of our financial instruments at August 31, 2022 and 2021 approximated their fair values. The assessment of the fair values of our financial instruments is based on a variety of factors and assumptions. Accordingly, the fair values may not represent the actual values of the financial instruments that could have been realized at August 31, 2022 or 2021, or that will be realized in the future, and do not include expenses that could be incurred in an actual sale or settlement. The following methods and assumptions were used to determine the fair values of our financial instruments, none of which were held for trading or speculative purposes.
Cash, Cash Equivalents, and Accounts Receivable – The carrying amounts of cash, cash equivalents, and accounts receivable approximate their fair values due to the liquidity and short-term maturity of these instruments.
Other Assets – Our other assets, including notes receivable, were recorded at the net realizable value of estimated future cash flows from these instruments.
Debt Obligations – At August 31, 2022, our debt obligations consisted primarily of variable-rate term notes payable and a note payable to the former owners of Strive. Our term notes payable and revolving line of credit are negotiated components of our 2019 Credit Agreement, which was completed in August 2019 and modified in April 2021. Since the interest rate for any obligation on our 2019 Credit Agreement is variable, the applicable interest rates on the term loan and revolving line of credit are reflective of current market conditions, and the carrying value of term loan and revolving line of credit (when applicable) obligations therefore approximate their fair value.
Contingent Consideration Liabilities from Business Acquisitions
We have a contingent consideration liability arising from a previous business acquisition. We measure the fair value of our contingent consideration liability at each reporting date based on the valuation model described below. Changes to the fair value of the contingent consideration liabilities are recorded in selling, general, and administrative expenses in the accompanying consolidated statements of operations and comprehensive income (loss) in the period of adjustment. The fair value of the contingent consideration liability from the acquisition of Jhana Education (Jhana) changed as follows during the fiscal year ended August 31, 2022 (in thousands):
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AUGUST 31, |
| 2021 |
| Fair Value |
| Payments |
| 2022 | ||||
Jhana contingent liability |
| $ | |
| $ | |
| $ | ( |
| $ | |
12. STOCK-BASED COMPENSATION PLANS
Overview
We utilize various stock-based compensation plans as integral components of our overall compensation and associate retention strategy. Our shareholders have approved various stock incentive plans that permit us to grant performance awards, unvested stock awards, stock options, fully-vested stock awards, and employee stock purchase plan (ESPP) shares. The Organization and Compensation Committee of the Board of Directors (the Compensation Committee) has responsibility for the approval and oversight of our stock-based compensation plans.
On January 14, 2022, our shareholders approved the Franklin Covey Co. 2022 Omnibus Incentive Plan (the 2022 Plan), which authorized an additional
Our employee stock purchase plan (ESPP) is administered under the terms of the Franklin Covey Co. 2017 Employee Stock Purchase Plan, which was approved by our shareholders at the annual meeting of shareholders held on January 26, 2018. For additional information regarding the Franklin Covey Co. 2017 Employee Stock Purchase Plan, please refer to our definitive Proxy Statement as filed with the SEC on December 22, 2017. At August 31, 2022, we had approximately
The total compensation expense of our various stock-based compensation plans was as follows (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
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| 2021 |
|
| 2020 |
Performance awards | $ | |
| $ | |
| $ | ( |
Strive acquisition compensation |
| |
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| - |
Unvested stock awards |
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Compensation cost of the ESPP |
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Fully vested stock awards |
| |
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| $ | |
| $ | |
| $ | ( |
At each quarterly or annual reporting date, we evaluate the number and probability of shares expected to vest in each of our performance-based long-term incentive plan (LTIP) awards and adjust our stock-based compensation expense to correspond with the number of shares expected to vest over the anticipated service period. Due to the significant impact of the COVID-19 pandemic on our results of operations in the third quarter of fiscal 2020 and the uncertainties surrounding the recovery of the world’s economies and our business, we determined that the LTIP award tranches based on qualified Adjusted EBITDA for outstanding LTIP awards (except the fiscal 2018 LTIP award) would not vest before the end of the respective service periods. We therefore reversed the previously recognized stock-based compensation expense associated with these awards during fiscal 2020, which produced a benefit from stock-based compensation for the year. On October 2, 2020, the Compensation Committee modified the terms of our performance-based LTIP award tranches to extend the service period of each financial-metric based tranche by
The following is a description of our stock-based compensation plans.
Performance Awards
The Compensation Committee has awarded various performance-based stock compensation awards to members of our senior management as long-term incentive-based compensation. These awards vest to the participants based upon the achievement of specified performance criteria. Compensation expense is recognized as we determine it is probable that the shares will vest. Adjustments to compensation expense to reflect the timing of and the number of shares expected to be awarded are made on a cumulative basis at the date of the adjustment. We reevaluate the likelihood and/or the number of shares expected to vest under performance awards at each reporting date. Based on current estimates and projections, we have $
Fiscal 2022 LTIP Award – On February 4, 2022, the Compensation Committee granted a new LTIP award to our executive officers and members of senior management. The fiscal 2022 LTIP award has
achieved. The number of shares that may be earned for achieving
Fiscal 2021 LTIP Award – On October 2, 2020, the Compensation Committee of the Board of Directors granted a new LTIP award to our executive officers and members of senior management. The fiscal 2021 LTIP award has
Strive Acquisition Compensation – We structured two parts of the consideration for the fiscal 2021 acquisition of Strive (Note 3) as potentially payable in shares of our common stock. Each of the following amounts may be payable in shares of our common stock or cash at our sole discretion:
Contingent Consideration – A maximum of approximately $
Bonus Payments – Approximately $
We have reserved
Fiscal 2020 LTIP Award – On October 18, 2019, the Compensation Committee of the Board of Directors granted a new LTIP award to our executive officers and members of senior management. The fiscal 2020 LTIP award has
Fiscal 2019 LTIP Award – On October 1, 2018, the Compensation Committee granted a performance-based LTIP award to our executive officers and members of senior management. The fiscal 2019 LTIP award has
Unvested Stock Awards
The annual Board of Director unvested stock award, which is administered under the terms of the Franklin Covey Co. Omnibus Incentive Plans, is designed to provide our non-employee directors, who are not eligible to participate in our ESPP, an opportunity to obtain an interest in the Company through the acquisition of shares of our common stock as part of their compensation. For fiscal 2022, each eligible director received a whole-share grant equal to $
We issued
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| Weighted- |
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| Average Grant- |
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| Date Fair |
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| Number of |
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Restricted stock awards at |
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August 31, 2021 |
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| $ | |
Granted |
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Forfeited |
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Vested |
| ( |
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Restricted stock awards at |
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August 31, 2022 |
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| $ | |
At August 31, 2022, there was $
Stock Options
On January 12, 2021, our Chief Executive Officer (CEO) exercised his remaining stock options, which would have expired on January 14, 2021. After these stock options were exercised, we do not have any remaining stock options outstanding. The Stock options exercised during fiscal 2021 and 2020 were exercised on a net basis, meaning no cash was paid to exercise the options. For the
Employee Stock Purchase Plan
We have an employee stock purchase plan that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to
of each quarter. ESPP participants purchased a total of
Fully Vested Stock Awards
13. EMPLOYEE BENEFIT PLANS
14. INCOME TAXES
Our benefit (provision) for income taxes consisted of the following (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
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| 2021 |
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| 2020 |
Current: |
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Federal | $ | - |
| $ | - |
| $ | ( |
State |
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Foreign |
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Deferred: |
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Federal |
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State |
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Foreign |
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| ( |
Operating loss carryforward |
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| ( |
Valuation allowance |
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Foreign tax credit carryforward |
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reduction |
| ( |
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| ( |
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| - |
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| ( |
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| ( |
| $ | ( |
| $ | |
| $ | ( |
The allocation of our total income tax benefit (provision) is as follows (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
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| 2021 |
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| 2020 |
Net income (loss) | $ | ( |
| $ | |
| $ | ( |
Other comprehensive income (loss) |
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| $ | ( |
| $ | |
| $ | ( |
Income (loss) before income taxes consisted of the following (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
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| 2021 |
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| 2020 |
United States | $ | |
| $ | |
| $ | |
Foreign |
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| ( |
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| ( |
| $ | |
| $ | |
| $ | |
The differences between income taxes at the statutory federal income tax rate and the consolidated income tax rate reported in our consolidated statements of operations and comprehensive income (loss) were as follows:
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
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| 2021 |
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| 2020 |
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Federal statutory income tax rate |
| ( | % |
| ( | % |
| ( | % |
State income taxes, net of federal effect |
| ( |
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| ( |
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Valuation allowance |
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Foreign tax credit carryforward |
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reduction |
| - |
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| ( |
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| - |
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Executive stock options |
| - |
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Foreign jurisdictions tax differential |
| ( |
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Tax differential on income subject |
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to both U.S. and foreign taxes |
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Uncertain tax positions |
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Non-deductible executive compensation |
| ( |
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Non-deductible meals and entertainment |
| ( |
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| ( |
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Other stock-based compensation |
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| - |
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| - |
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Payout of deferred compensation (NQDC) |
| - |
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| - |
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Other |
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| ( |
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| ( |
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| ( | % |
| | % |
| ( | % |
Our effective income tax expense rate for fiscal 2022 of
Our effective income tax benefit rate for fiscal 2021 of
In consideration of the relevant accounting guidance, we reevaluated our deferred tax assets during fiscal 2020 and considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Because of the cumulative pre-tax losses over the prior three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards. Based on this assessment, we increased the valuation allowance against our deferred tax assets, which generated $
Our strong financial performance during fiscal 2021 produced cumulative three-year pre-tax income through August 31, 2021. Because of better-than-expected earnings during fiscal 2021, as well as a favorable outlook for future earnings, particularly from sales of our All Access Pass, we reduced the valuation allowance against our deferred tax assets by $
We are subject to the anti-deferral provisions on Global Intangible Low-Taxed Income (GILTI) under the Tax Cut and Jobs Act of 2017. We have elected to treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the Period Cost Method). We recorded an insignificant amount of income tax expense in fiscal 2022 and
On August 16, 2022, President Biden signed the Inflation Reduction Act, which includes a new 15 percent corporate minimum tax on certain large corporations and a one percent excise tax on stock repurchases made after December 31, 2022. We do not anticipate this legislation will have a material impact on our consolidated financial statements.
The significant components of our deferred tax assets and liabilities were as follows (in thousands):
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AUGUST 31, |
| 2022 |
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| 2021 |
Deferred income tax assets: |
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Net operating loss carryforward | $ | |
| $ | |
Foreign income tax credit |
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carryforward |
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Sale and financing of corporate |
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headquarters |
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Stock-based compensation |
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Bonus and other accruals |
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Deferred revenue |
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Inventory and bad debt reserves |
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Other |
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Total deferred income tax assets |
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Less: valuation allowance |
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Net deferred income tax assets |
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Deferred income tax liabilities: |
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Intangibles step-ups – indefinite lived |
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Intangibles step-ups – finite lived |
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Intangible asset impairment and |
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amortization |
| ( |
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Self-constructed tangible assets |
| ( |
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| - |
Deferred commissions |
| ( |
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| ( |
Unremitted earnings of foreign |
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subsidiaries |
| ( |
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Property and equipment depreciation |
| ( |
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| ( |
Total deferred income tax liabilities |
| ( |
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| ( |
Net deferred income taxes | $ | |
| $ | |
Deferred income tax amounts are recorded as follows in our consolidated balance sheets (in thousands):
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AUGUST 31, |
| 2022 |
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| 2021 |
Long-term assets | $ | |
| $ | |
Long-term liabilities |
| ( |
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| ( |
Net deferred income tax asset | $ | |
| $ | |
Our U.S. federal net operating loss carryforwards were comprised of the following at August 31, 2022 (in thousands):
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| Loss Carryforward |
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| Loss |
| Loss |
| Operating |
Loss Carryforward |
| Expires |
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| Deductions |
| Deductions |
| Loss Carried |
for Year Ended |
| August 31, |
| Amount |
| in Prior Years |
| in Current Year |
| Forward |
Acquired NOL - Jhana |
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December 31, 2015 |
| $ | | $ | ( | $ | - | $ | | |
December 31, 2016 |
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| - |
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July 15, 2017 |
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| - |
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| ( |
| - |
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Acquired NOL - Strive |
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December 31, 2018 |
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| ( |
| - |
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December 31, 2019 |
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| - |
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December 31, 2020 |
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| - |
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April 25, 2021 |
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| - |
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| ( |
| - |
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August 31, 2022 |
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| - |
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| $ | | $ | ( | $ | - | $ | |
Certain operating loss carryforwards in the table above were obtained through the fiscal 2017 acquisition of Jhana Education (Jhana) and the fiscal 2021 acquisition of Strive (Note 3).
We have U.S. state net operating loss carryforwards generated in fiscal 2009 and before in various jurisdictions that expire primarily between September 1, 2022 and August 31, 2029. The U.S. state net operating loss carryforwards generated in fiscal 2017 and fiscal 2018 primarily expire on August 31, 2037 and 2038, respectively. The state net operating loss carryforwards acquired through the purchase of Jhana stock expire between August 31, 2034 and August 31, 2036. The state net operating loss carryforwards acquired through the purchase of Strive stock expire between August 31, 2038 and August 31, 2041. The state net operating loss carryforwards generated in fiscal 2022 primarily expire on August 31, 2042.
Our U.S. foreign income tax credit carryforwards were comprised of the following at August 31, 2022 (in thousands):
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Credit Generated in |
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| Credits Used |
| Credits |
| Credits Used |
| Credits |
Fiscal Year Ended |
| Credit Expires |
| Credits |
| in Prior |
| Reduced in |
| in Current |
| Carried |
August 31, |
| August 31, |
| Generated |
| Years |
| Current Year |
| Year |
| Forward |
| $ | | $ | ( | $ |
| $ |
| $ | | ||
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| $ | | $ | ( | $ |
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As previously explained, during fiscal 2020 we significantly increased the valuation allowance on our deferred income tax assets. During fiscal 2021 we reversed nearly all of the valuation allowance amounts that we recorded in 2020. The remaining valuation allowance at August 31, 2021 related primarily to the foreign tax credit carryforward from fiscal
2011, which we expected to expire in fiscal 2022, and losses of certain foreign subsidiaries. During fiscal 2022 we were able to utilize the foreign tax credit carryforward from 2011, and the remaining valuation allowance at August 31, 2022 relates primarily to the losses of certain foreign subsidiaries, which we expect will expire.
Activity in our deferred income tax asset valuation allowance was as follows for the periods indicated (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
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| 2021 |
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| 2020 |
Beginning balance | $ | |
| $ | |
| $ | |
Charged to costs and expenses |
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Deductions |
| ( |
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| ( |
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| ( |
Ending balance | $ | |
| $ | |
| $ | |
Except for the deferred tax assets subject to valuation allowances, we have determined that projected future taxable income is adequate to allow for realization of all deferred tax assets. We considered sources of taxable income, including reversals of taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, and reasonable, practical tax-planning strategies to generate additional taxable income. Based on the factors described above, we concluded that realization of our deferred tax assets, except those subject to the valuation allowances described above, is more likely than not at August 31, 2022.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
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| 2021 |
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| 2020 |
Beginning balance | $ | |
| $ | |
| $ | |
Additions based on tax positions |
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related to the current year |
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Additions for tax positions in |
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prior years |
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Reductions for tax positions of prior |
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years resulting from the lapse of |
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applicable statute of limitations |
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Other reductions for tax positions of |
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prior years |
| ( |
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Ending balance | $ | |
| $ | |
| $ | |
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $
We file United States federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The tax years that remain subject to examinations for our major tax jurisdictions are shown below.
2015-2022 | Australia, Canada, and Japan |
| China |
| Germany, Switzerland, and Austria |
| United Kingdom, Singapore |
| United States – state and local income tax |
| United States – federal income tax |
The following schedule shows the calculation of income (loss) per share for the periods presented (in thousands, except per-share amounts).
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
| 2021 |
| 2020 |
Numerator for basic and |
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diluted earnings per share: |
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Net income (loss) | $ | | $ | | $ | ( |
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Denominator for basic and |
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diluted earnings per share: |
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Basic weighted average shares |
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outstanding |
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Effect of dilutive securities: |
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Stock options and other |
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stock-based awards |
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Diluted weighted average shares |
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outstanding |
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EPS Calculations: |
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Net income (loss) per share: |
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Basic | $ | | $ | | $ | ( |
Diluted |
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| ( |
Reportable Segments
Our sales are primarily comprised of training and consulting services and our internal reporting structure is comprised of
Direct Offices – 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 governmental sales channel; our coaching operations; and our books and audio sales channel.
International Licensees – This segment is primarily comprised of our international licensees’ royalty revenues.
Education Practice – This group includes our domestic and international Education practice operations, which are focused on sales to educational institutions.
Corporate and Other – Our corporate and other information includes royalty revenue from Franklin Planner Corporation (Note 17), leasing operations, shipping and handling revenues, and certain corporate administrative expenses.
We have determined that the Company’s chief operating decision maker continues to be the CEO, and the primary measurement tool used in business unit performance analysis is Adjusted EBITDA, which may not be calculated as similarly titled amounts reported by other companies. For reporting purposes, we define Adjusted EBITDA as net income or loss 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, and other unusual or infrequent items.
Our operations are not capital intensive and we do not own any manufacturing facilities or equipment. Accordingly, we do not allocate assets to the divisions 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 our segment information on the same basis as the accompanying consolidated financial statements (in thousands).
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| Sales to |
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Fiscal Year Ended |
| External |
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| Adjusted |
August 31, 2022 |
| Customers |
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| Gross Profit |
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| EBITDA |
Enterprise Division: |
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Direct offices | $ | |
| $ | |
| $ | |
International licensees |
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Education Division |
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Corporate and eliminations |
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| ( |
Consolidated | $ | |
| $ | |
| $ | |
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Fiscal Year Ended |
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August 31, 2021 |
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Enterprise Division: |
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Direct offices | $ | |
| $ | |
| $ | |
International licensees |
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Education Division |
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Corporate and eliminations |
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| ( |
Consolidated | $ | |
| $ | |
| $ | |
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Fiscal Year Ended |
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August 31, 2020 |
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Enterprise Division: |
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Direct offices | $ | |
| $ | |
| $ | |
International licensees |
| |
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| |
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Education Division |
| |
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| ( |
Corporate and eliminations |
| |
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| ( |
Consolidated | $ | |
| $ | |
| $ | |
A reconciliation of Adjusted EBITDA to consolidated net income (loss) is provided below (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
|
| 2021 |
|
| 2020 |
Segment Adjusted EBITDA | $ | |
| $ | |
| $ | |
Corporate expenses |
| ( |
|
| ( |
|
| ( |
Consolidated Adjusted EBITDA |
| |
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| |
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| |
Stock-based compensation |
| ( |
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| ( |
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Reduction (increase) in |
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contingent consideration liabilities |
| ( |
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| ( |
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| |
Restructuring costs |
| - |
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| - |
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| ( |
Gain from insurance settlement |
| - |
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| |
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| |
Government COVID assistance |
| - |
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| |
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| |
Business acquisition costs |
| - |
|
| ( |
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| - |
Knowledge Capital wind-down costs |
| - |
|
| - |
|
| ( |
Depreciation |
| ( |
|
| ( |
|
| ( |
Amortization |
| ( |
|
| ( |
|
| ( |
Income from operations |
| |
|
| |
|
| |
Interest income |
| |
|
| |
|
| |
Interest expense |
| ( |
|
| ( |
|
| ( |
Income before income taxes |
| |
|
| |
|
| |
Benefit (provision) for income taxes |
| ( |
|
| |
|
| ( |
Net income (loss) | $ | |
| $ | |
| $ | ( |
Disaggregated Revenue
Our revenues are derived primarily from the United States. However, we also operate directly-owned offices or contract with licensees to provide our services in various countries throughout the world. Our consolidated revenues were derived from the following countries/regions (in thousands):
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YEAR ENDED |
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AUGUST 31, |
| 2022 |
|
| 2021 |
|
| 2020 |
Americas | $ | |
| $ | |
| $ | |
Asia Pacific |
| |
|
| |
|
| |
Europe/Middle East/Africa |
| |
|
| |
|
| |
| $ | |
| $ | |
| $ | |
The following table presents our revenue disaggregated by our significant revenue generating activities. Sales of services and products include training and consulting services and related products such as training manuals. Subscription sales include revenues from our subscription services such as the All Access Pass and Leader in Me membership. We receive royalty revenue from our international licensees and from other sources such as book publishing arrangements. Corporate royalties are amounts received from Franklin Planner Co. pursuant to a licensing arrangement obtained in fiscal 2020 (Note 17). Leases and other revenue is primarily comprised of lease revenues from sub-leases for space at our corporate headquarters campus and from shipping and handling revenues (in thousands).
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Fiscal Year Ended |
| Services and |
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| Leases and |
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August 31, 2022 |
| Products |
|
| Subscriptions |
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| Royalties |
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| Other |
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| Consolidated |
Enterprise Division: |
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Direct offices | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
International licensees |
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
|
| |
Education Division |
| |
|
| |
|
| |
|
| - |
|
| |
Corporate and eliminations |
| - |
|
| - |
|
| |
|
| |
|
| |
Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
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Fiscal Year Ended |
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August 31, 2021 |
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Enterprise Division: |
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|
Direct offices | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
International licensees |
| |
|
| - |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
|
| |
Education Division |
| |
|
| |
|
| |
|
| - |
|
| |
Corporate and eliminations |
| - |
|
| - |
|
| |
|
| |
|
| |
Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
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Fiscal Year Ended |
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August 31, 2020 |
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Enterprise Division: |
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Direct offices | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
International licensees |
| |
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| - |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| |
|
| - |
|
| |
Education Division |
| |
|
| |
|
| |
|
| - |
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| |
Corporate and eliminations |
| - |
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| - |
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| |
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| |
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| |
Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Inter-segment sales were immaterial for the periods presented and were eliminated in consolidation.
Other Geographic Information
At August 31, 2022, we had wholly owned direct offices in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria. Our long-lived assets, excluding intangible assets and goodwill, were held in the following locations for the periods indicated (in thousands):
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AUGUST 31, |
| 2022 |
|
| 2021 |
United States/Canada | $ | |
| $ | |
China |
| |
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| |
Japan |
| |
|
| |
United Kingdom |
| |
|
| |
Australia |
| |
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| |
Germany, Switzerland, and Austria |
| |
|
| |
Singapore |
| - |
|
| |
| $ | |
| $ | |
17. RELATED PARTY TRANSACTIONS
Knowledge Capital Investment Group
In December 2019, Knowledge Capital Investment Group (Knowledge Capital), an investor which held
FC Organizational Products
We previously owned a
Due to significant operating losses incurred after the establishment of FCOP, we reconsidered whether FCOP was a variable interest entity as defined under ASC 810, and determined that FCOP was a variable interest entity. We further determined that we were not the primary beneficiary of FCOP because we did not have the ability to direct the activities that most significantly impact FCOP’s economic performance, which primarily consisted of the day-to-day sale of planning products and related accessories, and we did not have an obligation to absorb losses or the right to receive benefits from FCOP that could have been significant.
On November 4, 2019, FCOP sold substantially all of its assets to Franklin Planner Corporation (FPC), a new unrelated entity, and FCOP was dissolved. FPC has continued FCOP’s business of selling planners and other related consumer products based on the license agreement which granted FCOP the exclusive rights described below.
In connection with this transaction, we exchanged approximately $
We do not have an ownership interest in FPC, do not have any obligation to provide additional subordinated support to FPC, do not have control over the day-to-day operations of FPC, and accordingly do not account for FPC as a variable interest entity. We receive payments for royalties and rented space from FPC. At August 31, 2022 and August 31, 2021, we had $
each fiscal year. During fiscal 2022 and 2021, we received $
CoveyLink Acquisition and Contractual Payments
We previously acquired the assets of CoveyLink Worldwide, LLC (CoveyLink). CoveyLink conducts training and provides consulting based upon the book The Speed of Trust by Stephen M.R. Covey, who is the brother of one of our executive officers.
Prior to the acquisition date, CoveyLink had granted us a non-exclusive license for content related to The Speed of Trust book and related training courses for which we paid CoveyLink specified royalties. As part of the CoveyLink acquisition, we signed an amended and restated license for intellectual property that granted us an exclusive, perpetual, worldwide, transferable, royalty-bearing license to use, reproduce, display, distribute, sell, prepare derivative works of, and perform the licensed material in any format or medium and through any market or distribution channel. We are required to pay Stephen M.R. Covey royalties for the use of certain intellectual property developed by him. The amount expensed for these royalties totaled $
Other Related Party Transactions
We pay an executive officer of the Company a percentage of the royalty proceeds received from the sales of certain books authored by him in addition to his annual salary. During each of the fiscal years ended August 31, 2022, 2021, and 2020, we expensed $
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in the Company’s reports filed under the Exchange Act, such as this report, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
An evaluation was conducted under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of 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, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
The management of Franklin Covey Co. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (including its consolidated subsidiaries) and all related information appearing in the Company’s Annual Report on Form 10-K. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that:
1.pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
2.provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of management and/or of our Board of Directors; and
3.provide reasonable assurance regarding the prevention or timely detection of any unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness in future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control—Integrated Framework as issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 COSO Framework). Based upon this evaluation, our management concluded that our internal control over financial reporting was effective as of the end of the period covered by this Annual Report on Form 10-K.
Our independent registered public accounting firm, Deloitte Touche LLP, has audited the consolidated financial statements included in this annual report on Form 10-K and, as part of their audit, has issued an audit report, included herein, on the effectiveness of our internal control over financial reporting. Their report is included in Item 8 of this Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the fourth quarter ended August 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information required by this Item is incorporated by reference to the sections entitled “Nominees for Election to the Board of Directors,” “Delinquent Section 16(a) Reports,” “Corporate Governance,” and “Board of Director Committees and Meetings” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 20, 2023. The definitive Proxy Statement will be filed with the SEC pursuant to Regulation 14A of the Exchange Act. Executive officer biographies may be found in Item 1, under the section entitled “Information About Our Executive Officers,” of this Annual Report on Form 10-K.
The Board of Directors has determined that one of the Audit Committee members, Mr. Donald J. McNamara, is a “financial expert” as defined in Regulation S-K 407(d)(5) adopted under the Securities Exchange Act of 1934, as amended. Our Board of Directors has also determined that Mr. McNamara is an “independent director” as defined by the NYSE.
We have adopted a code of ethics for our senior financial officers that include the Chief Executive Officer, the Chief Financial Officer, and other members of our financial leadership team. This code of ethics is available on our website at www.franklincovey.com. We intend to satisfy any disclosure requirements under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by posting such information on our web site at the address and location specified above.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the sections entitled “Compensation Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 20, 2023.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Equity Compensation Plans
|
|
[a]
|
| [b] |
| [c]
|
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants, and rights |
| Weighted-average exercise price of outstanding options, warrants, and rights |
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column [a]) |
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| (in thousands) |
|
|
| (in thousands) |
Equity compensation plans approved by security holders |
|
1,155(1)(2) |
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$- |
|
1,611(3)(4) |
(1)Excludes 13,260 shares of restricted stock awards that are subject to forfeiture.
(2)Amount includes 1,154,709 performance share awards that may be awarded under the terms of various long-term incentive plans, including stock-based compensation plans associated with the acquisition of Strive in fiscal 2021. The number of shares eventually awarded to participants through our long-term incentive plans is generally variable and based upon the achievement of specified financial goals. For performance-based compensation awards where the number of shares may fluctuate within a range based on the achievement of the specified goal, this amount includes the maximum number of shares that may be awarded to participants. The actual number of shares issued to participants therefore, may be less than the amount disclosed. At August 31, 2022 we did not have any unexercised stock options outstanding. For further information on our stock-based compensation plans, refer to the notes to our financial statements as presented in Item 8 of this report.
(3)Amount is comprised of the remaining shares authorized under our 2022 Omnibus Incentive Plan and 2017 Employee Stock Purchase Plan. The number of performance-based plan shares expected to be awarded at August 31, 2022 may change in future periods based upon the achievement of specified goals and revisions to estimates.
(4)At August 31, 2022, we had approximately 773,000 shares authorized for purchase by participants in our Employee Stock Purchase Plan.
Beneficial Ownership of Company Stock
The remaining information required by this Item is incorporated by reference to the section entitled “Principal Holders of Voting Securities” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 20, 2023.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” and “Corporate Governance” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 20, 2023.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the section entitled “Principal Accountant Fees” in our definitive Proxy Statement for the annual meeting of shareholders, which is scheduled to be held on January 20, 2023.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)List of documents filed as part of this report:
1.Financial Statements. The consolidated financial statements of the Company and Report of Independent Registered Public Accounting Firm thereon included in the Annual Report to Shareholders on Form 10-K for the year ended August 31, 2022, are as follows:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at August 31, 2022 and 2021
Consolidated Statements of Operations and Statements of Comprehensive Income (Loss) for the fiscal years ended August 31, 2022, 2021, and 2020
Consolidated Statements of Cash Flows for the fiscal years ended August 31, 2022, 2021, and 2020
Consolidated Statements of Shareholders’ Equity for the fiscal years ended August 31, 2022, 2021, and 2020
Notes to Consolidated Financial Statements
2.Financial Statement Schedules.
Other financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the financial statements or notes thereto, or contained in this report.
3.Exhibit List.
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Exhibit No. | Exhibit | Incorporated By Reference | Filed Herewith |
2.1 | (16) |
| |
3.1 | (4) |
| |
3.2 | Amendment to Amended and Restated Articles of Incorporation of Franklin Covey (Appendix C) | (6) |
|
3.3 | (8) |
| |
4.1 | Specimen Certificate of the Registrant’s Common Stock, par value $.05 per share | (2) |
|
4.2 | (3) |
| |
4.3 | (3) |
| |
4.4 | Description of Securities Registered Under Section 12 of the Exchange Act | (13) |
|
10.1* | Forms of Nonstatutory Stock Options | (1) |
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10.2 | (5) |
| |
10.3 | (5) |
| |
10.4 | (7) |
| |
10.5 | (7) |
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10.6* | (9) |
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10.7* | (10) |
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10.8* | (11) |
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10.9 | (12) |
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10.10 | (12) |
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10.11 | (14) |
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10.12 | (15) |
| |
10.13 | (15) |
| |
10.14 | (15) |
| |
10.15 | (16) |
| |
10.16* | (17) |
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21 |
| éé | |
23 |
| éé |
31.1 |
| éé | |
31.2 |
| éé | |
32 |
| éé | |
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| éé |
101.SCH | Inline XBRL Taxonomy Extension Schema |
| éé |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase |
| éé |
101.DEF | Inline Taxonomy Extension Definition Linkbase |
| éé |
101.LAB | Inline Taxonomy Extension Label Linkbase |
| éé |
101.PRE | Inline Extension Presentation Linkbase |
| éé |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| éé |
_____________________________
(1)Incorporated by reference to Registration Statement on Form S-1 filed with the Commission on April 17, 1992, Registration No. 33-47283.
(2)Incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1 filed with the Commission on May 26, 1992, Registration No. 33-47283.
(3)Incorporated by reference to Schedule 13D (CUSIP No. 534691090 as filed with the Commission on June 14, 1999). Registration No. 005-43123.
(4)Incorporated by reference to Report on Form 8-K filed with the Commission on March 10, 2005.**
(5)Incorporated by reference to Report on Form 8-K filed with the Commission on June 27, 2005.**
(6)Incorporated by reference to the Definitive Proxy Statement on Form DEF 14A filed with the Commission on December 12, 2005.**
(7)Incorporated by reference to Report on Form 10-Q filed with the Commission on April 9, 2009.**
(8)Incorporated by reference to Report on Form 8-K filed with the Commission on February 1, 2012.**
(9)Incorporated by reference to Report on Form 8-K filed with the Commission on March 14, 2012.**
(10)Incorporated by reference to the Definitive Proxy Statement on Form DEF 14A (Appendix A) filed with the Commission on December 22, 2017.**
(11)Incorporated by reference to the Definitive Proxy Statement on Form DEF 14A (Appendix A) filed with the Commission on December 20, 2018.**
(12)Incorporated by reference to Report on Form 8-K filed with the Commission on August 8, 2019.**
(13)Incorporated by reference to Report on Form 10-K/A filed with the Commission on December 12, 2019.**
(14)Incorporated by reference to Report on Form 8-K filed with the Commission on July 10, 2020.**
(15)Incorporated by reference to Report on Form 8-K filed with the Commission on November 5, 2020.**
(16)Incorporated by reference to Report on Form 8-K filed with the Commission on April 29, 2021.**
(17)Incorporated by reference to Report on Form 8-K filed with the Commission on January 14, 2022.**
éé Filed herewith and attached to this report.
* Indicates a management contract or compensatory plan or agreement.
** Registration No. 001-11107.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on November 14, 2022.
FRANKLIN COVEY CO.
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| By: | /s/ Paul S. Walker |
|
| Paul S. Walker President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature | Title | Date |
/s/ Robert A. Whitman |
Executive Chairman and Chairman of the Board |
November 14, 2022 |
Robert A. Whitman |
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/s/ Anne H. Chow |
Director |
November 14, 2022 |
Anne H. Chow |
|
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/s/ Craig Cuffie |
Director |
November 14, 2022 |
Craig Cuffie |
|
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/s/ Donald J. McNamara |
Director |
November 14, 2022 |
Donald J. McNamara |
|
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/s/ Joel C. Peterson |
Director |
November 14, 2022 |
Joel C. Peterson |
|
|
/s/ Nancy Phillips |
Director |
November 14, 2022 |
Nancy Phillips |
|
|
/s/ Derek van Bever |
Director |
November 14, 2022 |
Derek van Bever |
|
|
/s/ Paul S. Walker |
President and Chief Executive Officer |
November 14, 2022 |
Paul S. Walker |
|
|
/s/ Stephen D. Young |
Chief Financial Officer and Chief Accounting Officer |
November 14, 2022 |
Stephen D. Young |
|
|