FRANKLIN COVEY CO
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|
|
[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended February 29, 2020
|
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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 __________
Commission file no. 1-11107
FRANKLIN COVEY CO.
(Exact name of registrant as specified in its charter)
|
Utah
(State of incorporation)
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87-0401551
(I.R.S. employer identification number)
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2200 West Parkway Boulevard
Salt Lake City, Utah
(Address of principal executive offices)
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84119-2099
(Zip Code)
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Registrant’s telephone number,
Including area code
|
(801) 817-1776
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common Stock, $.05 Par Value
|
FC
|
New York Stock Exchange
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
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 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.
|
Large Accelerated Filer
|
☐ |
|
Accelerated Filer
|
☒ |
|
Non-accelerated Filer
|
☐ |
Smaller Reporting Company
|
☒ | |
|
Emerging Growth Company
|
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date:
13,869,729 shares of Common Stock as of March 31, 2020
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share amounts)
|
February 29,
|
August 31,
|
|||||||
|
2020
|
2019
|
|||||||
|
(unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
24,810
|
$
|
27,699
|
||||
|
Accounts receivable, less allowance for doubtful accounts of $4,076 and $4,242
|
48,722
|
73,227
|
||||||
|
Inventories
|
2,795
|
3,481
|
||||||
|
Prepaid expenses and other current assets
|
15,531
|
14,933
|
||||||
|
Total current assets
|
91,858
|
119,340
|
||||||
|
Property and equipment, net
|
18,368
|
18,579
|
||||||
|
Intangible assets, net
|
45,350
|
47,690
|
||||||
|
Goodwill
|
24,220
|
24,220
|
||||||
|
Deferred income tax assets
|
7,066
|
5,045
|
||||||
|
Other long-term assets
|
14,923
|
10,039
|
||||||
|
$
|
201,785
|
$
|
224,913
|
|||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of term notes payable
|
$
|
5,000
|
$
|
5,000
|
||||
|
Current portion of financing obligation
|
2,465
|
2,335
|
||||||
|
Accounts payable
|
8,735
|
9,668
|
||||||
|
Deferred subscription revenue
|
46,746
|
56,250
|
||||||
|
Other deferred revenue
|
7,561
|
5,972
|
||||||
|
Accrued liabilities
|
18,717
|
24,319
|
||||||
|
Total current liabilities
|
89,224
|
103,544
|
||||||
|
Term notes payable, less current portion
|
17,500
|
15,000
|
||||||
|
Financing obligation, less current portion
|
15,379
|
16,648
|
||||||
|
Other liabilities
|
6,587
|
7,527
|
||||||
|
Deferred income tax liabilities
|
180
|
180
|
||||||
|
Total liabilities
|
128,870
|
142,899
|
||||||
|
Shareholders’ equity:
|
||||||||
|
Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued
|
1,353
|
1,353
|
||||||
|
Additional paid-in capital
|
216,045
|
215,964
|
||||||
|
Retained earnings
|
59,956
|
59,403
|
||||||
|
Accumulated other comprehensive income
|
322
|
269
|
||||||
|
Treasury stock at cost, 13,209 shares and 13,087 shares
|
(204,761
|
)
|
(194,975
|
)
|
||||
|
Total shareholders’ equity
|
72,915
|
82,014
|
||||||
|
$
|
201,785
|
$
|
224,913
|
|||||
See notes to condensed consolidated financial statements
2
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per-share amounts)
|
Quarter Ended
|
Two Quarters Ended
|
|||||||||||||||
|
February 29,
|
February 28,
|
February 29,
|
February 28,
|
|||||||||||||
|
2020
|
2019
|
2020
|
2019
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Net sales
|
$
|
53,745
|
$
|
50,356
|
$
|
112,357
|
$
|
104,185
|
||||||||
|
Cost of sales
|
15,079
|
14,990
|
31,662
|
32,037
|
||||||||||||
|
Gross profit
|
38,666
|
35,366
|
80,695
|
72,148
|
||||||||||||
|
Selling, general, and administrative
|
36,221
|
35,925
|
75,620
|
70,568
|
||||||||||||
|
Depreciation
|
1,653
|
1,697
|
3,273
|
3,251
|
||||||||||||
|
Amortization
|
1,170
|
1,300
|
2,340
|
2,538
|
||||||||||||
|
Loss from operations
|
(378
|
)
|
(3,556
|
)
|
(538
|
)
|
(4,209
|
)
|
||||||||
|
Interest income
|
13
|
9
|
18
|
22
|
||||||||||||
|
Interest expense
|
(557
|
)
|
(623
|
)
|
(1,162
|
)
|
(1,255
|
)
|
||||||||
|
Discount accretion on related party receivable
|
-
|
243
|
-
|
258
|
||||||||||||
|
Loss before income taxes
|
(922
|
)
|
(3,927
|
)
|
(1,682
|
)
|
(5,184
|
)
|
||||||||
|
Income tax benefit
|
2,019
|
410
|
2,235
|
310
|
||||||||||||
|
Net income (loss)
|
$
|
1,097
|
$
|
(3,517
|
)
|
$
|
553
|
$
|
(4,874
|
)
|
||||||
|
Net income (loss) per share:
|
||||||||||||||||
|
Basic and diluted
|
$
|
0.08
|
$
|
(0.25
|
)
|
$
|
0.04
|
$
|
(0.35
|
)
|
||||||
|
Weighted average number of common shares:
|
||||||||||||||||
|
Basic
|
13,841
|
13,937
|
13,911
|
13,927
|
||||||||||||
|
Diluted
|
13,990
|
13,937
|
14,118
|
13,927
|
||||||||||||
|
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||||||
|
Net income (loss)
|
$
|
1,097
|
$
|
(3,517
|
)
|
$
|
553
|
$
|
(4,874
|
)
|
||||||
|
Foreign currency translation adjustments,
|
||||||||||||||||
|
net of income tax provision
|
||||||||||||||||
|
of $0, $(11), $0, and $0
|
90
|
438
|
53
|
129
|
||||||||||||
|
Comprehensive income (loss)
|
$
|
1,187
|
$
|
(3,079
|
)
|
$
|
606
|
$
|
(4,745
|
)
|
||||||
See notes to condensed consolidated financial statements
3
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
Two Quarters Ended
|
||||||||
|
February 29,
|
February 28,
|
|||||||
|
2020
|
2019
|
|||||||
|
(unaudited)
|
||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
||||||||
|
Net income (loss)
|
$
|
553
|
$
|
(4,874
|
)
|
|||
|
Adjustments to reconcile net income (loss) to net cash
|
||||||||
|
provided by operating activities:
|
||||||||
|
Depreciation and amortization
|
5,613
|
5,789
|
||||||
|
Amortization of capitalized curriculum costs
|
2,029
|
2,856
|
||||||
|
Stock-based compensation expense
|
3,644
|
1,989
|
||||||
|
Deferred income taxes
|
(2,012
|
)
|
(1,402
|
)
|
||||
|
Change in fair value of contingent consideration liabilities
|
(91
|
)
|
76
|
|||||
|
Loss on disposal of assets
|
38
|
-
|
||||||
|
Changes in assets and liabilities, net of effect of acquired business:
|
||||||||
|
Decrease in accounts receivable, net
|
24,556
|
21,197
|
||||||
|
Decrease in inventories
|
681
|
402
|
||||||
|
Decrease (increase) in prepaid expenses and other assets
|
(180
|
)
|
2,425
|
|||||
|
Decrease in accounts payable and accrued liabilities
|
(6,959
|
)
|
(6,298
|
)
|
||||
|
Decrease in deferred revenue
|
(8,888
|
)
|
(8,842
|
)
|
||||
|
Increase (decrease) in income taxes payable/receivable
|
(1,605
|
)
|
214
|
|||||
|
Decrease in other long-term liabilities
|
(6
|
)
|
(182
|
)
|
||||
|
Net cash provided by operating activities
|
17,373
|
13,350
|
||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
||||||||
|
Purchases of property and equipment
|
(2,516
|
)
|
(2,195
|
)
|
||||
|
Curriculum development costs
|
(2,232
|
)
|
(1,256
|
)
|
||||
|
Purchase of note receivable from bank (Note 12)
|
(2,600
|
)
|
-
|
|||||
|
Acquisition of business, net of cash acquired
|
-
|
(32
|
)
|
|||||
|
Net cash used for investing activities
|
(7,348
|
)
|
(3,483
|
)
|
||||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
||||||||
|
Proceeds from line of credit borrowings
|
-
|
46,032
|
||||||
|
Payments on line of credit borrowings
|
-
|
(48,993
|
)
|
|||||
|
Proceeds from term notes payable financing
|
5,000
|
-
|
||||||
|
Principal payments on term notes payable
|
(2,500
|
)
|
(3,125
|
)
|
||||
|
Principal payments on financing obligation
|
(1,139
|
)
|
(1,020
|
)
|
||||
|
Purchases of common stock for treasury
|
(13,833
|
)
|
(12
|
)
|
||||
|
Payment of contingent consideration liabilities
|
(911
|
)
|
(301
|
)
|
||||
|
Proceeds from sales of common stock held in treasury
|
484
|
444
|
||||||
|
Net cash used for financing activities
|
(12,899
|
)
|
(6,975
|
)
|
||||
|
Effect of foreign currency exchange rates on cash and cash equivalents
|
(15
|
)
|
63
|
|||||
|
Net increase (decrease) in cash and cash equivalents
|
(2,889
|
)
|
2,955
|
|||||
|
Cash and cash equivalents at the beginning of the period
|
27,699
|
10,153
|
||||||
|
Cash and cash equivalents at the end of the period
|
$
|
24,810
|
$
|
13,108
|
||||
|
Supplemental disclosure of cash flow information:
|
||||||||
|
Cash paid for income taxes
|
$
|
1,381
|
$
|
831
|
||||
|
Cash paid for interest
|
1,144
|
1,276
|
||||||
|
Non-cash investing and financing activities:
|
||||||||
|
Purchases of property and equipment financed by accounts payable
|
$
|
985
|
$
|
369
|
||||
|
Use of notes receivable to modify revenue contract (Note 12)
|
3,246
|
-
|
||||||
See notes to condensed consolidated financial statements
4
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands and unaudited)
| Accumulated | ||||||||||||||||||||||||||||
|
Common
|
Common
|
Additional
|
Other
|
Treasury
|
Treasury
|
|||||||||||||||||||||||
|
Stock
|
Stock
|
Paid-In
|
Retained
|
Comprehensive
|
Stock
|
Stock
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Shares
|
Amount
|
||||||||||||||||||||||
|
Balance at August 31, 2019
|
27,056
|
$
|
1,353
|
$
|
215,964
|
$
|
59,403
|
$
|
269
|
(13,087
|
)
|
$
|
(194,975
|
)
|
||||||||||||||
|
Issuance of common stock from
|
||||||||||||||||||||||||||||
|
treasury
|
131
|
9
|
123
|
|||||||||||||||||||||||||
|
Purchase of treasury shares
|
(3
|
)
|
||||||||||||||||||||||||||
|
Stock-based compensation
|
1,851
|
|||||||||||||||||||||||||||
|
Cumulative translation
|
||||||||||||||||||||||||||||
|
adjustments
|
(37
|
)
|
||||||||||||||||||||||||||
|
Net loss
|
(544
|
)
|
||||||||||||||||||||||||||
|
Balance at November 30, 2019
|
27,056
|
1,353
|
217,946
|
58,859
|
232
|
(13,078
|
)
|
(194,855
|
)
|
|||||||||||||||||||
|
Issuance of common stock from
|
||||||||||||||||||||||||||||
|
treasury
|
(3,361
|
)
|
241
|
3,591
|
||||||||||||||||||||||||
|
Purchase of treasury shares
|
(393
|
)
|
(13,830
|
)
|
||||||||||||||||||||||||
|
Stock-based compensation
|
1,793
|
|||||||||||||||||||||||||||
|
Restricted stock award
|
(333
|
)
|
21
|
333
|
||||||||||||||||||||||||
|
Cumulative translation
|
||||||||||||||||||||||||||||
|
adjustments
|
90
|
|||||||||||||||||||||||||||
|
Net income
|
1,097
|
|||||||||||||||||||||||||||
|
Balance at February 29, 2020
|
27,056
|
$
|
1,353
|
$
|
216,045
|
$
|
59,956
|
$
|
322
|
(13,209
|
)
|
$
|
(204,761
|
)
|
||||||||||||||
See notes to condensed consolidated financial statements
5
FRANKLIN COVEY CO.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY – PRIOR FISCAL YEAR
(in thousands and unaudited)
| Accumulated | ||||||||||||||||||||||||||||
|
Common
|
Common
|
Additional
|
Other
|
Treasury
|
Treasury
|
|||||||||||||||||||||||
|
Stock
|
Stock
|
Paid-In
|
Retained
|
Comprehensive
|
Stock
|
Stock
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Shares
|
Amount
|
||||||||||||||||||||||
|
Balance at August 31, 2018
|
27,056
|
$
|
1,353
|
$
|
211,280
|
$
|
63,569
|
$
|
341
|
(13,159
|
)
|
$
|
(196,043
|
)
|
||||||||||||||
|
Issuance of common stock from
|
||||||||||||||||||||||||||||
|
treasury
|
64
|
11
|
166
|
|||||||||||||||||||||||||
|
Purchases of common shares
|
||||||||||||||||||||||||||||
|
for treasury
|
(7
|
)
|
||||||||||||||||||||||||||
|
Stock-based compensation
|
946
|
|||||||||||||||||||||||||||
|
Cumulative translation
|
||||||||||||||||||||||||||||
|
adjustments
|
(309
|
)
|
||||||||||||||||||||||||||
|
Cumulative effect of
|
||||||||||||||||||||||||||||
|
accounting change
|
(3,143
|
)
|
||||||||||||||||||||||||||
|
Net loss
|
(1,357
|
)
|
||||||||||||||||||||||||||
|
Balance at November 30, 2018
|
27,056
|
1,353
|
212,290
|
59,069
|
32
|
(13,148
|
)
|
(195,884
|
)
|
|||||||||||||||||||
|
Issuance of common stock from
|
||||||||||||||||||||||||||||
|
treasury
|
53
|
11
|
162
|
|||||||||||||||||||||||||
|
Purchases of common shares
|
||||||||||||||||||||||||||||
|
for treasury
|
(5
|
)
|
||||||||||||||||||||||||||
|
Stock-based compensation
|
1,043
|
|||||||||||||||||||||||||||
|
Restricted stock award
|
(426
|
)
|
28
|
426
|
||||||||||||||||||||||||
|
Cumulative translation
|
||||||||||||||||||||||||||||
|
adjustments
|
438
|
|||||||||||||||||||||||||||
|
Net loss
|
(3,517
|
)
|
||||||||||||||||||||||||||
|
Balance at February 28, 2019
|
27,056
|
$
|
1,353
|
$
|
212,960
|
$
|
55,552
|
$
|
470
|
(13,109
|
)
|
$
|
(195,301
|
)
|
||||||||||||||
See notes to condensed consolidated financial statements
6
FRANKLIN COVEY CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – BASIS OF PRESENTATION
General
Franklin Covey Co. (hereafter referred to as us, we, our, or the Company) is a global company focused on 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 sustained superior performance through changes in human behavior. We are fundamentally a content and solutions company, and we believe that our offerings and services create the connection
between capabilities and results. Our expertise extends to seven crucial areas: Leadership, Execution, Productivity, Trust, Educational Improvement, Sales Performance, and Customer Loyalty. We believe that our clients are able to utilize our
content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.
In the training and consulting marketplace, we believe there are three important characteristics that distinguish us from our competitors.
|
•
|
World Class Content
– Our content is principle-centered and based on natural laws of human behavior and effectiveness. When our content is applied consistently in an
organization, we believe the culture of that organization will change to enable the organization to achieve their own great purposes. Our content is designed to build new skillsets, establish new mindsets, and provide enabling toolsets to
our clients.
|
|
•
|
Breadth and Scalability of Delivery Options
– We have a wide range of content delivery options, including: subscription offerings, which includes the All Access Pass (available
in multiple languages), the
Leader in Me
membership, and other subscription offerings; intellectual property licenses; on-site training; training led through certified facilitators; on-line
learning; and organization-wide transformational processes, including consulting and coaching services.
|
|
•
|
Global Capability
– We have sales professionals in the United States and Canada who serve clients in the private sector and in governmental organizations; wholly-owned
subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria; and we contract with licensee partners who deliver our content and provide related services in over 140 other countries and territories around
the world.
|
We are committed to, and measure ourselves by, our clients’ achievement of transformational results.
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
,
The Leader in Me
, and
The 4 Disciplines of Execution
, and proprietary content
in the areas of Execution, Sales Performance, Productivity, Educational Improvement, and Customer Loyalty. Our offerings are described in further detail at www.franklincovey.com. The information posted on our website is not incorporated into this
report.
7
The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and results of operations of
the Company as of the dates and for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations. The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and
related notes included in our annual report on Form 10-K for the fiscal year ended August 31, 2019.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Our fiscal year ends on August 31 of each year and our fiscal quarters end on the last day of November, February, and May of each year.
The results of operations for the quarter ended February 29, 2020 are not necessarily indicative of results expected for the entire fiscal year ending August 31, 2020, or for any future periods.
Accounting Pronouncements Issued and Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,
Leases (Topic 842)
, which supersedes FASB Accounting Standards Codification (ASC)
Topic 840, Leases
. The new guidance requires lessees to recognize a lease liability and corresponding right-of-use asset for all leases greater than 12 months. Recognition, measurement, and presentation of
expenses depends upon whether the lease is classified as a finance or operating lease. We adopted the new lease guidance prospectively on September 1, 2019. As part of the adoption of ASU 2016-02, we elected to apply the package of practical
expedients, which allows us to not reassess prior conclusions related to lease classification, not to recognize short-term leases on our balance sheet, and not to separate lease and non-lease components for our leases. On September 1, 2019, the
adoption of ASU 2016-02 resulted in the recognition of $1.5 million of lease liabilities and right-of-use assets on our condensed consolidated balance sheets for operating leases. For lessors, accounting for leases is substantially the same as in
prior periods and there was no impact from the adoption of ASU 2016-02 for those leases where we are the lessor. Refer to Note 5,
Leases
for further information regarding our leasing activity.
The lease for our corporate campus is currently accounted for as a financing obligation and related building asset on our consolidated balance sheets, as the contract represented a failed sale-leaseback under previous leasing guidance. In
transition to Topic 842, we reassessed whether the previously failed sale-leaseback met the sale criteria under the new leasing standard. Based on this assessment, we determined that the sale criteria under the new leasing standard was not met and
we will continue to account for the corporate campus lease as a finance obligation on our consolidated balance sheet in future periods.
8
Accounting Pronouncements Issued Not Yet Adopted
Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. This accounting standard changes the methodology
for measuring credit losses on financial instruments, including trade accounts receivable, and the timing of when such losses are recorded. ASU No. 2016-13 is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. We expect to adopt the provisions of ASU No. 2016-13 on September 1, 2020 and are currently evaluating the
impact of this guidance on our financial position, results of operations, and disclosures.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
In August 2018, the FASB issued ASU No. 2018-15,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's 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 new standard is effective for interim and annual periods beginning after December 15, 2019, and early adoption is permitted. We are currently evaluating
the effects, if any, the adoption of ASU 2018-15 may have on our financial position, results of operations, cash flows, or disclosures.
NOTE 2 – INVENTORIES
Inventories are stated at the lower of cost or net realizable value, cost being determined using the first-in, first-out method, and were comprised of the following (in thousands):
|
February 29,
|
August 31,
|
|||||||
|
2020
|
2019
|
|||||||
|
Finished goods
|
$
|
2,775
|
$
|
3,434
|
||||
|
Raw materials
|
20
|
47
|
||||||
|
$
|
2,795
|
$
|
3,481
|
|||||
NOTE 3 – TERM NOTES PAYABLE
Pursuant to the credit agreement we obtained in August 2019 (the 2019 Credit Agreement), we have the ability to borrow up to $25.0 million in term loans. At August 31, 2019, we had borrowed $20.0 million of the available term loan amount. During
November 2019, we borrowed the remaining $5.0 million term loan available on the 2019 Credit Agreement. The additional $5.0 million term loan has the same terms and conditions as the previous term loan and does not change the amount of our quarterly
principal payments. However, the maturity date of the term loans is extended for one year as a result of the additional payments. At February 29, 2020, our future principal payments on the term loans are as follows (in thousands):
9
|
YEAR ENDING AUGUST 31,
|
Amount
|
|||
|
2020
|
$
|
2,500
|
||
|
2021
|
5,000
|
|||
|
2022
|
5,000
|
|||
|
2023
|
5,000
|
|||
|
2024
|
5,000
|
|||
|
$
|
22,500
|
|||
NOTE 4 – FAIR VALUE OF FINANCIAL INSTRUMENTS
At February 29, 2020, the carrying value of our financial instruments approximated their fair values. The fair values of our contingent consideration liabilities from previous business acquisitions are considered “Level 3” measurements because we
use various estimates in the valuation models to project the timing and amount of future contingent payments. The fair value of the contingent consideration liabilities from the acquisitions of Jhana Education (Jhana) and Robert Gregory Partners
(RGP) changed as follows during the quarter and two quarters ended February 29, 2020 (in thousands):
|
Jhana
|
RGP
|
Total
|
||||||||||
|
Balance at August 31, 2019
|
$
|
3,468
|
$
|
1,761
|
$
|
5,229
|
||||||
|
Change in fair value
|
98
|
(7
|
)
|
91
|
||||||||
|
Payments
|
(282
|
)
|
(500
|
)
|
(782
|
)
|
||||||
|
Balance at November 30, 2019
|
3,284
|
1,254
|
4,538
|
|||||||||
|
Change in fair value
|
153
|
(335
|
)
|
(182
|
)
|
|||||||
|
Payments
|
(129
|
)
|
-
|
(129
|
)
|
|||||||
|
Balance at February 29, 2020
|
$
|
3,308
|
$
|
919
|
$
|
4,227
|
||||||
At each quarterly reporting date, we estimate the fair value of the contingent liabilities from both the Jhana and RGP acquisitions through the use of Monte Carlo simulations. Based on the timing of expected payments, $1.3 million of the Jhana
and $0.5 million of the RGP contingent consideration liabilities were recorded as components of accrued liabilities on our condensed consolidated balance sheet at February 29, 2020. The remainder of our contingent consideration liabilities are
classified as other long-term liabilities. Adjustments to the fair value of our contingent consideration liabilities are included in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations.
NOTE 5 – LEASES
Lessee Obligations
In the normal course of business we rent 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. All of 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.
10
Some of our operating leases contain renewal options that may be exercised at our discretion after the completion of the base rental term. At February 29, 2020, we had operating leases with remaining terms ranging from less than one year to
approximately six years. The amounts of assets and liabilities (in thousands) and other information related to our operating leases follows:
|
Balance Sheet
|
February 29,
|
||||
| Caption | 2020 | ||||
|
Assets:
|
|||||
|
Operating lease right of use assets
|
Other long-term assets
|
$
|
1,662
|
||
|
Liabilities:
|
|||||
|
Current:
|
|||||
|
Operating lease liabilities
|
Accrued liabilities
|
921
|
|||
|
Long-Term:
|
|||||
|
Operating lease liabilities
|
Other long-term liabilities
|
741
|
|||
|
$
|
1,662
|
||||
|
Weighted Average Remaining Lease Term:
|
|||||
|
Operating leases (years)
|
2.7
|
||||
|
Weighted Average Discount Rate:
|
|||||
|
Operating leases
|
4.2
|
%
|
|||
During the quarter and two quarters ended February 29, 2020, lease expense totaled $0.4 million and $0.8 million, respectively. For the quarter and two quarters ended February 28, 2019, lease expense also totaled $0.4 million and $0.8 million.
Operating lease expense is reported in selling, general, and administrative expense in our condensed consolidated statements of operations.
The approximate future minimum lease payments under our operating leases at February 29, 2020, is as follows (in thousands):
|
YEAR ENDING AUGUST 31,
|
Amount
|
|||
|
Remainder of 2020
|
$
|
541
|
||
|
2021
|
727
|
|||
|
2022
|
202
|
|||
|
2023
|
116
|
|||
|
2024
|
93
|
|||
|
Thereafter
|
98
|
|||
|
Total operating lease payments
|
1,777
|
|||
|
Less imputed interest
|
(115
|
)
|
||
|
Present value of operating lease liabilities
|
$
|
1,662
|
||
11
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 $36.0 million, which had a carrying value of $6.6 million at February 29, 2020. The following future minimum lease payments due to us from our sublease agreements at
February 29, 2020, are as follows (in thousands):
|
YEAR ENDING AUGUST 31,
|
Amount
|
|||
|
Remainder of 2020
|
$
|
1,955
|
||
|
2021
|
2,341
|
|||
|
2022
|
1,514
|
|||
|
2023
|
1,514
|
|||
|
2024
|
1,527
|
|||
|
Thereafter
|
1,275
|
|||
|
$
|
10,126
|
|||
For the quarter and two quarters ended February 29, 2020, sublease revenue totaled $1.0 million and $1.9 million, respectively. During the quarter and two quarters ended February 28, 2019, sublease revenue also totaled $1.0 million and $1.9
million. Sublease revenues are included in net sales in the accompanying condensed consolidated statements of operations.
NOTE 6 – SHAREHOLDERS’ EQUITY
In December 2019, Knowledge Capital Investment Group (Knowledge Capital), an investor which held 2.8 million shares of our common stock stemming from its initial investment in Franklin Covey over 20 years ago, wound up its operations and
distributed its assets to investors. On December 9, 2019, prior to the distribution of its assets to investors, we purchased 284,608 shares of our common stock from Knowledge Capital at $35.1361 per share, for an aggregate purchase price of $10.1
million, including legal costs. Our CEO and a member of our Board of Directors each owned a partnership interest in Knowledge Capital. As of the date hereof, Knowledge Capital does not own any shares of our common stock.
NOTE 7 – REVENUE
Contract Balances
Our deferred revenue totaled $56.9 million at February 29, 2020 and $65.8 million at August 31, 2019, of which $2.6 million and $3.6 million were classified as components of other long-term liabilities at February 29, 2020, and August 31, 2019,
respectively. The amount of deferred revenue that was generated from subscription offerings totaled $48.0 million at February 29, 2020 and $58.2 million at August 31, 2019. During the quarter and two quarters ended February 29, 2020, we recognized
$21.4 million and $42.5 million of previously deferred subscription revenue.
Remaining Performance Obligations
When possible, we enter into multi-year non-cancellable contracts which are invoiced either upon execution of the contract or at the beginning of each annual contract period. ASC Topic 606 introduced the concept of remaining transaction price
which 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 February 29, 2020, we had $82.7 million of remaining performance obligations, including the amount of deferred revenue related
to our subscription offerings, of which approximately 75 percent will be recognized over the next 12 months. The remaining performance obligation does not include other deferred revenue, as amounts included in other deferred revenue include items
such as deposits that are generally refundable at the client’s request prior to the satisfaction of the obligation.
12
Disaggregated Revenue Information
Refer to Note 11,
Segment Information
, to these condensed consolidated financial statements for our disaggregated revenue information.
NOTE 8 – STOCK-BASED COMPENSATION
The cost of our stock-based compensation plans is included in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations. Our stock-based compensation expense was comprised of the following
for the periods presented (in thousands):
|
Quarter Ended
|
Two Quarters Ended
|
|||||||||||||||
|
February 29,
|
February 28,
|
February 29,
|
February 28,
|
|||||||||||||
|
2020
|
2019
|
2020
|
2019
|
|||||||||||||
|
Long-term incentive awards
|
$
|
1,566
|
$
|
824
|
$
|
3,201
|
$
|
1,557
|
||||||||
|
Restricted stock awards
|
175
|
175
|
350
|
350
|
||||||||||||
|
Employee stock purchase plan
|
52
|
44
|
93
|
82
|
||||||||||||
|
$
|
1,793
|
$
|
1,043
|
$
|
3,644
|
$
|
1,989
|
|||||||||
During the two quarters ended February 29, 2020, we issued 270,531 shares of our common stock under various stock-based compensation arrangements. Our stock-based compensation plans also allow shares to be withheld to cover statutory income taxes
if so elected by the award recipient. During the first two quarters of fiscal 2020, we withheld 103,117 shares of our common stock for taxes on stock-based compensation arrangements, which had a fair value of $3.6 million. The following is a
description of the developments in our stock-based compensation plans during the quarter and two quarters ended February 29, 2020.
Stock Options
During December 2019, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) exercised stock options. Nearly all of the stock options exercised would have expired in January 2020. The following information applies to our stock
option activity during the two quarters ended February 29, 2020.
|
Weighted
|
||||||||
|
Avg. Exercise
|
||||||||
|
Number of
|
Price Per
|
|||||||
|
Stock Options
|
Share
|
|||||||
|
Outstanding at August 31, 2019
|
568,750
|
$
|
11.67
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Exercised
|
(350,000
|
)
|
(11.73
|
)
|
||||
|
Forfeited
|
-
|
-
|
||||||
|
Outstanding at February 29, 2020
|
218,750
|
$
|
11.57
|
|||||
|
Options vested and exercisable at
|
||||||||
|
February 29, 2020
|
218,750
|
$
|
11.57
|
|||||
13
The stock options were exercised on a net basis (no cash was paid to exercise the options) and we withheld 102,656 shares of our common stock with a fair value of $3.6 million for income taxes. The intrinsic value of the exercised options totaled
$8.0 million and we recognized an income tax benefit of $1.8 million (Note 9) during the quarter ended February 29, 2020. The remaining stock options outstanding at February 29, 2020 expire in January 2021.
Fiscal 2020 Restricted Stock Award
Our annual restricted stock award granted to non-employee members of the Board of Directors is administered under the terms of the 2019 Franklin Covey Co. Omnibus Incentive Plan, and is designed to provide our non-employee directors, who are not
eligible to participate in our employee stock purchase plan, an opportunity to obtain an interest in the Company through the acquisition of shares of our common stock. The annual award is granted in January (following the annual shareholders’
meeting) of each year. For the fiscal 2020 award, each eligible director received a whole-share grant equal to $100,000 with a one-year vesting period. Our restricted stock award activity during the two quarters ended February 29, 2020 consisted of
the following:
|
Weighted-Average
|
||||||||
|
Grant Date
|
||||||||
|
Number of
|
Fair Value
|
|||||||
|
Shares
|
Per Share
|
|||||||
|
Restricted stock awards at
|
||||||||
|
August 31, 2019
|
28,525
|
$
|
24.54
|
|||||
|
Granted
|
21,420
|
32.68
|
||||||
|
Forfeited
|
-
|
-
|
||||||
|
Vested
|
(28,525
|
)
|
24.54
|
|||||
|
Restricted stock awards at
|
||||||||
|
February 29, 2020
|
21,420
|
$
|
32.68
|
|||||
At February 29, 2020, there was $0.6 million of unrecognized compensation expense remaining on the fiscal 2020 Board of Director restricted share award.
Fiscal 2020 Long-Term Incentive Plan Award
On October 18, 2019, the Organization and Compensation Committee of the Board of Directors granted a new long-term incentive plan (LTIP) award to our executive officers and members of senior management. The fiscal 2020 LTIP award is similar to
the fiscal 2019 LTIP award and has three tranches, one of which has a time-based vesting condition and two of which have performance-based vesting conditions as described below:
|
•
|
Time-Based Award Shares
– Twenty-five percent of the 2020 LTIP award shares vest to participants after three years of service. The total number of shares that may be earned by participants after
three years of service is 25,101 shares. The number of shares awarded in this tranche is not variable and will not fluctuate based on financial measures.
|
|
•
|
Performance-Based Award Shares
– The remaining two tranches of the 2020 LTIP award are based on fiscal 2022 qualified adjusted earnings before interest, taxes, depreciation, and amortization
(Adjusted EBITDA) and fiscal 2022 subscription service sales, respectively. The number of shares that will vest to participants for these two tranches is variable and may be 50 percent of the award (minimum award threshold) or up to 200
percent of the participant’s award (maximum threshold) depending on the levels of qualified Adjusted EBITDA and subscription service sales achieved. The number of shares that may be earned for achieving 100 percent of the performance-based
objectives totals 75,315 shares. The maximum number of shares that may be awarded in connection with the performance-based tranches of the 2020 LTIP totals 150,630 shares.
|
14
The fiscal 2020 LTIP has a three-year life and expires on August 31, 2022.
Compensation expense recognized during the quarter and two quarters ended February 29, 2020, for long-term incentive plan awards in the table above includes expense related to awards granted in previous periods for which we believe the performance
conditions are probable of being achieved.
Employee Stock Purchase Plan
We have an employee stock purchase plan (ESPP) that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of
each fiscal quarter. During the quarter and two quarters ended February 29, 2020, we issued 7,293 shares and 15,427 shares of our common stock to
participants in the ESPP.
NOTE 9 – INCOME TAXES
For the two quarters ended February 29, 2020, we recorded an income tax benefit of $2.2 million on a pre-tax loss of $1.7 million, which resulted in an effective tax benefit rate of approximately 133 percent for the first half of fiscal 2020. We
computed income taxes by applying an estimated annual effective income tax rate to the consolidated pre-tax loss for the period, adjusting for discrete items arising during the period, including the exercise of stock options during the second quarter
of fiscal 2020 (Note 8). The exercise of stock options during fiscal 2020 produced an income tax benefit of $1.8 million for the period. Our annual effective rate was greater than our U.S. statutory rate, primarily due to non-deductible expenses
and effective foreign tax rates which are significantly higher than the U.S. statutory rate.
15
NOTE 10 – INCOME (LOSS) PER SHARE
The following schedule shows the calculation of income (loss) per share for the periods presented (in thousands, except per-share amounts).
|
Quarter Ended
|
Two Quarters Ended
|
|||||||||||||||
|
February 29,
|
February 28,
|
February 29,
|
February 28,
|
|||||||||||||
|
2020
|
2019
|
2020
|
2019
|
|||||||||||||
|
Numerator for basic and
|
||||||||||||||||
|
diluted loss per share:
|
||||||||||||||||
|
Net income (loss)
|
$
|
1,097
|
$
|
(3,517
|
)
|
$
|
553
|
$
|
(4,874
|
)
|
||||||
|
Denominator for basic and
|
||||||||||||||||
|
diluted loss per share:
|
||||||||||||||||
|
Basic weighted average shares
|
||||||||||||||||
|
outstanding
|
13,841
|
13,937
|
13,911
|
13,927
|
||||||||||||
|
Effect of dilutive securities:
|
||||||||||||||||
|
Stock options and other
|
||||||||||||||||
|
stock-based awards
|
149
|
-
|
207
|
-
|
||||||||||||
|
Diluted weighted average
|
||||||||||||||||
|
shares outstanding
|
13,990
|
13,937
|
14,118
|
13,927
|
||||||||||||
|
EPS Calculations:
|
||||||||||||||||
|
Net income (loss) per share:
|
||||||||||||||||
|
Basic and diluted
|
$
|
0.08
|
$
|
(0.25
|
)
|
$
|
0.04
|
$
|
(0.35
|
)
|
||||||
NOTE 11 – SEGMENT INFORMATION
Segment Information
Our sales are primarily comprised of training and consulting services. Our internal reporting and operating structure is currently organized around two divisions. The Enterprise Division, which consists of our Direct Office and International
Licensee segments and the Education Division, which is comprised of our Education practice. Based on the applicable guidance, our operations are comprised of three reportable segments and a corporate services group. The following is a brief
description of our reportable segments:
|
•
|
Direct Offices –
Our Direct Office segment has a depth of expertise in helping organizations solve problems that require changes in human behavior, including leadership,
productivity, execution, trust, and sales performance. We have a variety of principle-based offerings that help build winning and profitable cultures. This segment includes our sales personnel that serve the United States and Canada; our
international sales offices located in Japan, China, the United Kingdom, Australia, Germany, Switzerland, and Austria; our government services sales channel; and our public programs operations.
|
|
•
|
International Licensees –
Our independently owned international licensees provide our offerings and services in countries where we do not have a directly-owned office. These
licensee partners allow us to expand the reach of our services to large multinational organizations as well as smaller organizations in their countries. This segment’s results are primarily comprised of royalty revenues received from these
licensees.
|
16
|
•
|
Education Practice –
Centered around the principles found in
The Leader in Me
, the Education practice is dedicated to helping
educational institutions build a culture that will produce great results. We believe these results are manifested by increases in student performance, improved school culture, decreased disciplinary issues, and increased teacher engagement
and parental involvement. This segment includes our domestic and international Education practice operations, which are focused on sales to educational institutions such as elementary schools, high schools, and colleges and universities.
|
|
•
|
Corporate and Other –
Our corporate and other information includes leasing operations, shipping and handling revenues, royalty revenues from Franklin Planner Corp. (Note 12),
and certain corporate administrative functions.
|
We have determined that the Company’s chief operating decision maker is the CEO, and the primary measurement tool used in business unit performance analysis is Adjusted EBITDA, which may not be calculated as similarly titled amounts disclosed by
other companies. Adjusted EBITDA is a non-GAAP financial measure. For reporting purposes, our consolidated Adjusted EBITDA may be calculated as our net income or loss excluding interest expense, income taxes, depreciation expense, amortization
expense, stock-based compensation expense, and certain other charges such as adjustments for changes in the fair value of contingent liabilities arising from business acquisitions. We reference this non-GAAP financial measure in our decision making
because it provides 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.
Our operations are not capital intensive and we do not own any manufacturing facilities or equipment. Accordingly, we do not allocate assets to the reportable segments for analysis purposes. Interest expense and interest income are primarily
generated at the corporate level and are not allocated. Income taxes are likewise calculated and paid on a corporate level (except for entities that operate in foreign jurisdictions) and are not allocated for analysis purposes. We periodically make
minor changes to our reporting structure in the normal course of operations. The segment information presented below reflects certain revisions to our reporting structure which occurred during the second quarter of fiscal 2019. Prior period segment
information has been revised to conform with our current segment reporting.
We account for the following segment information on the same basis as the accompanying condensed consolidated financial statements (in thousands).
17
|
Sales to
|
||||||||||||
|
Quarter Ended
|
External
|
Adjusted
|
||||||||||
|
February 29, 2020
|
Customers
|
Gross Profit
|
EBITDA
|
|||||||||
|
Enterprise Division:
|
||||||||||||
|
Direct offices
|
$
|
37,973
|
$
|
28,702
|
$
|
4,734
|
||||||
|
International licensees
|
2,691
|
2,237
|
1,384
|
|||||||||
|
40,664
|
30,939
|
6,118
|
||||||||||
|
Education practice
|
10,893
|
6,460
|
(1,068
|
)
|
||||||||
|
Corporate and eliminations
|
2,188
|
1,267
|
(994
|
)
|
||||||||
|
Consolidated
|
$
|
53,745
|
$
|
38,666
|
$
|
4,056
|
||||||
|
Quarter Ended
|
||||||||||||
|
February 28, 2019
|
||||||||||||
|
Enterprise Division:
|
||||||||||||
|
Direct offices
|
$
|
36,414
|
$
|
27,294
|
$
|
2,543
|
||||||
|
International licensees
|
2,906
|
2,221
|
1,218
|
|||||||||
|
39,320
|
29,515
|
3,761
|
||||||||||
|
Education practice
|
9,698
|
5,429
|
(909
|
)
|
||||||||
|
Corporate and eliminations
|
1,338
|
422
|
(1,888
|
)
|
||||||||
|
Consolidated
|
$
|
50,356
|
$
|
35,366
|
$
|
964
|
||||||
|
Two Quarters Ended
|
||||||||||||
|
February 29, 2020
|
||||||||||||
|
Enterprise Division:
|
||||||||||||
|
Direct offices
|
$
|
80,085
|
$
|
60,113
|
$
|
10,444
|
||||||
|
International licensees
|
6,411
|
5,357
|
3,419
|
|||||||||
|
86,496
|
65,470
|
13,863
|
||||||||||
|
Education practice
|
21,974
|
13,117
|
(2,171
|
)
|
||||||||
|
Corporate and eliminations
|
3,887
|
2,108
|
(2,675
|
)
|
||||||||
|
Consolidated
|
$
|
112,357
|
$
|
80,695
|
$
|
9,017
|
||||||
|
Two Quarters Ended
|
||||||||||||
|
February 28, 2019
|
||||||||||||
|
Enterprise Division:
|
||||||||||||
|
Direct offices
|
$
|
74,885
|
$
|
54,364
|
$
|
6,183
|
||||||
|
International licensees
|
6,583
|
5,084
|
2,846
|
|||||||||
|
81,468
|
59,448
|
9,029
|
||||||||||
|
Education practice
|
20,044
|
11,822
|
(1,174
|
)
|
||||||||
|
Corporate and eliminations
|
2,673
|
878
|
(3,722
|
)
|
||||||||
|
Consolidated
|
$
|
104,185
|
$
|
72,148
|
$
|
4,133
|
||||||
18
A reconciliation of our consolidated Adjusted EBITDA to consolidated net income (loss) is provided below (in thousands).
|
Quarter Ended
|
Two Quarters Ended
|
|||||||||||||||
|
February 29,
|
February 28,
|
February 29,
|
February 28,
|
|||||||||||||
|
2020
|
2019
|
2020
|
2019
|
|||||||||||||
|
Segment Adjusted EBITDA
|
$
|
5,050
|
$
|
2,852
|
$
|
11,692
|
$
|
7,855
|
||||||||
|
Corporate expenses
|
(994
|
)
|
(1,888
|
)
|
(2,675
|
)
|
(3,722
|
)
|
||||||||
|
Consolidated Adjusted EBITDA
|
4,056
|
964
|
9,017
|
4,133
|
||||||||||||
|
Stock-based compensation expense
|
(1,793
|
)
|
(1,043
|
)
|
(3,644
|
)
|
(1,989
|
)
|
||||||||
|
Decrease (increase) in the fair value of
|
||||||||||||||||
|
contingent consideration liabilities
|
182
|
(52
|
)
|
91
|
(76
|
)
|
||||||||||
|
Knowledge Capital wind-down costs
|
-
|
-
|
(389
|
)
|
-
|
|||||||||||
|
Licensee transition costs
|
-
|
(428
|
)
|
-
|
(488
|
)
|
||||||||||
|
Depreciation
|
(1,653
|
)
|
(1,697
|
)
|
(3,273
|
)
|
(3,251
|
)
|
||||||||
|
Amortization
|
(1,170
|
)
|
(1,300
|
)
|
(2,340
|
)
|
(2,538
|
)
|
||||||||
|
Loss from operations
|
(378
|
)
|
(3,556
|
)
|
(538
|
)
|
(4,209
|
)
|
||||||||
|
Interest income
|
13
|
9
|
18
|
22
|
||||||||||||
|
Interest expense
|
(557
|
)
|
(623
|
)
|
(1,162
|
)
|
(1,255
|
)
|
||||||||
|
Discount accretion on related
|
||||||||||||||||
|
party receivable
|
-
|
243
|
-
|
258
|
||||||||||||
|
Loss before income taxes
|
(922
|
)
|
(3,927
|
)
|
(1,682
|
)
|
(5,184
|
)
|
||||||||
|
Income tax benefit
|
2,019
|
410
|
2,235
|
310
|
||||||||||||
|
Net income (loss)
|
$
|
1,097
|
$
|
(3,517
|
)
|
$
|
553
|
$
|
(4,874
|
)
|
||||||
Revenue by Category
The following table presents our revenue disaggregated by geographic region (in thousands).
|
Quarter Ended
|
Two Quarters Ended
|
|||||||||||||||
|
February 29,
|
February 28,
|
February 29,
|
February 28,
|
|||||||||||||
|
2020
|
2019
|
2020
|
2019
|
|||||||||||||
|
Americas
|
$
|
42,721
|
$
|
39,839
|
$
|
86,756
|
$
|
80,757
|
||||||||
|
Asia Pacific
|
7,089
|
7,398
|
17,228
|
16,678
|
||||||||||||
|
Europe/Middle East/Africa
|
3,935
|
3,119
|
8,373
|
6,750
|
||||||||||||
|
$
|
53,745
|
$
|
50,356
|
$
|
112,357
|
$
|
104,185
|
|||||||||
19
The following table presents our revenue disaggregated by type of service (in thousands).
|
Quarter Ended
|
Services and
|
Leases and
|
||||||||||||||||||
|
February 29, 2020
|
Products
|
Subscriptions
|
Royalties
|
Other
|
Consolidated
|
|||||||||||||||
|
Enterprise Division:
|
||||||||||||||||||||
|
Direct offices
|
$
|
21,644
|
$
|
15,172
|
$
|
1,157
|
$
|
-
|
$
|
37,973
|
||||||||||
|
International licensees
|
410
|
-
|
2,281
|
-
|
2,691
|
|||||||||||||||
|
22,054
|
15,172
|
3,438
|
-
|
40,664
|
||||||||||||||||
|
Education practice
|
2,950
|
6,192
|
1,751
|
-
|
10,893
|
|||||||||||||||
|
Corporate and eliminations
|
-
|
-
|
935
|
1,253
|
2,188
|
|||||||||||||||
|
Consolidated
|
$
|
25,004
|
$
|
21,364
|
$
|
6,124
|
$
|
1,253
|
$
|
53,745
|
||||||||||
|
Quarter Ended
|
||||||||||||||||||||
|
February 28, 2019
|
||||||||||||||||||||
|
Enterprise Division:
|
||||||||||||||||||||
|
Direct offices
|
$
|
23,102
|
$
|
12,416
|
$
|
896
|
$
|
-
|
$
|
36,414
|
||||||||||
|
International licensees
|
517
|
-
|
2,389
|
-
|
2,906
|
|||||||||||||||
|
23,619
|
12,416
|
3,285
|
-
|
39,320
|
||||||||||||||||
|
Education practice
|
2,583
|
5,368
|
1,747
|
-
|
9,698
|
|||||||||||||||
|
Corporate and eliminations
|
-
|
-
|
-
|
1,338
|
1,338
|
|||||||||||||||
|
Consolidated
|
$
|
26,202
|
$
|
17,784
|
$
|
5,032
|
$
|
1,338
|
$
|
50,356
|
||||||||||
|
Two Quarters Ended
|
||||||||||||||||||||
|
February 29, 2020
|
||||||||||||||||||||
|
Enterprise Division:
|
||||||||||||||||||||
|
Direct offices
|
$
|
48,895
|
$
|
29,461
|
$
|
1,729
|
$
|
-
|
$
|
80,085
|
||||||||||
|
International licensees
|
1,000
|
-
|
5,411
|
-
|
6,411
|
|||||||||||||||
|
49,895
|
29,461
|
7,140
|
-
|
86,496
|
||||||||||||||||
|
Education practice
|
6,535
|
13,010
|
2,429
|
-
|
21,974
|
|||||||||||||||
|
Corporate and eliminations
|
-
|
-
|
1,314
|
2,573
|
3,887
|
|||||||||||||||
|
Consolidated
|
$
|
56,430
|
$
|
42,471
|
$
|
10,883
|
$
|
2,573
|
$
|
112,357
|
||||||||||
|
Two Quarters Ended
|
||||||||||||||||||||
|
February 28, 2019
|
||||||||||||||||||||
|
Enterprise Division:
|
||||||||||||||||||||
|
Direct offices
|
$
|
48,111
|
$
|
25,091
|
$
|
1,683
|
$
|
-
|
$
|
74,885
|
||||||||||
|
International licensees
|
1,389
|
-
|
5,194
|
-
|
6,583
|
|||||||||||||||
|
49,500
|
25,091
|
6,877
|
-
|
81,468
|
||||||||||||||||
|
Education practice
|
6,501
|
11,080
|
2,463
|
-
|
20,044
|
|||||||||||||||
|
Corporate and eliminations
|
-
|
-
|
-
|
2,673
|
2,673
|
|||||||||||||||
|
Consolidated
|
$
|
56,001
|
$
|
36,171
|
$
|
9,340
|
$
|
2,673
|
$
|
104,185
|
||||||||||
20
NOTE 12 – INVESTMENT IN FC ORGANIZATIONAL PRODUCTS
We owned a 19.5 percent interest in FC Organizational Products (FCOP), an entity that purchased substantially all of our consumer solutions business unit assets in fiscal 2008 for the purpose of selling planners and related organizational products
under a comprehensive licensing agreement. 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 is expected to continue 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 $3.2 million of receivables from FCOP to amend the
term and royalty provisions of the existing license agreement. The $3.2 million included a $2.6 million note receivable, which represented FCOP’s third-party bank debt that we purchased directly from the bank on the transaction date. The amended
license agreement grants the exclusive right to use certain of our trademarks and other intellectual property in connection with certain consumer products and provides us with minimum royalties of approximately $1.3 million per year. We are also
entitled to receive additional variable royalties if certain FPC financial metrics exceed specified levels. FPC assumed the amended license agreement from FCOP upon the purchase of FCOP assets. We recorded the $3.2 million consideration for the
amendment to the license agreement as a capitalized cost of the license and will reduce our royalty revenue by amortizing this amount over the remainder of the initial term of the license agreement, which ends in approximately 30 years. During the
quarter and two quarters ended February 29, 2020, we recognized $0.9 million and $1.3 million of net royalty revenues from the amended license agreement with FPC.
We do not have an ownership interest in FPC, do not have any obligation to provide additional subordinated support to FPC, and do not have control over the day-to-day operations of FPC, which primarily consist of the sale of planning products and
accessories. We receive payments for royalties and rented space from FPC. At February 29, 2020, we had $0.9 million receivable from FPC and at August 31, 2019, we had $1.0 million receivable from FCOP, each of which are recorded in current assets.
Since most of FPC’s sales and cash flows are seasonal and occur between October and January, we expect to receive the majority of the required cash payments for royalties and outstanding receivables during our second and third quarters of each fiscal
year. During the quarter ended February 29, 2020, we received $1.9 million of cash from FPC as payment for royalties and reimbursable operating costs.
NOTE 13 – SUBSEQUENT EVENTS
Effects of COVID-19 Pandemic
With the rapid spread of COVID-19 around the world and the continuously evolving responses to the pandemic, we have witnessed the significant and growing negative impact of COVID-19 on the global economic and operating environment. Due to the
rapidly changing business and education environment, unprecedented market volatility, and other circumstances resulting from the COVID-19 pandemic, we are currently unable to fully determine the extent of COVID-19’s impact on our business in future
periods. However, we are monitoring the rapidly evolving situation and its potential impacts on our financial position, results of operations, and cash flows.
Revolving Line of Credit
Subsequent to February 29, 2020, we obtained $14.9 million of cash (the available proceeds) from our revolving line of credit. These proceeds will be included in our reported cash balance for future periods until the amount is repaid.
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management’s current expectations and are subject to various
uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading “Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995.”
We suggest that the following discussion and analysis be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form
10-K for the year ended August 31, 2019.
RESULTS OF OPERATIONS
Overview
Franklin Covey Co. is a global company focused on individual and organizational performance improvement. We believe that our content and services create the connection between capabilities and results. Our business is currently structured around
two divisions, the Enterprise Division and the Education Division. The 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 results. Our Education Division is centered around the principles found in
The Leader in Me
and is dedicated to helping educational institutions build cultures that will produce great results, including increased student performance, improved school culture, and increased parental and
teacher involvement.
During 2016, we introduced the All Access Pass (AAP), which we believe is a ground-breaking subscription service that allows our clients unlimited access to our content through an electronic portal. We believe the All Access Pass 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
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. We have also translated All Access Pass materials into numerous additional languages, which allows the AAP to be used effectively by multinational entities and provides for greater international
sales opportunities. The AAP is primarily sold through our Enterprise Division.
In our Education Division, we have launched our
Leader in Me
membership, which provides coaching, 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 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.
Each of our subscription offerings allow clients to participate in training through a variety of delivery modalities, including on-line services and virtual training courses, which allow for presentation of our content to both clients and
classrooms which are working remotely. We believe that our investments in multiple high-quality offerings and content combined with multiple delivery modalities provide a learning environment that can be effectively tailored to both corporate and
individual settings.
22
Our financial performance for the second quarter of fiscal 2020, which ended on February 29, 2020, continued the momentum and growth trajectory that began in the first quarter of fiscal 2020, despite the difficulties from the COVID-19 (or
coronavirus) outbreak that significantly impacted our business at our Asian direct offices and at many of our licensee operations. For the quarter ended February 29, 2020, our consolidated sales increased 7% to $53.7 million compared with $50.4
million in the second quarter of fiscal 2019. Our second quarter sales growth was broad based through both our Enterprise and Education Divisions and was primarily attributable to increased subscription service revenues. Increased sales for the
second quarter led to increased gross profit and significantly improved operating results when compared with the prior year.
For the quarter ended February 29, 2020, our reported subscription and subscription-related revenue grew 24% compared with the second quarter of fiscal 2019. At February 29, 2020, we had $48.0 million of deferred subscription revenue on our
balance sheet, a 21%, or $8.4 million, increase compared with deferred subscription revenue on our balance sheet at February 28, 2019. At February 29, 2020, we had $34.8 million of unbilled deferred revenue compared with $25.0 million of unbilled
deferred revenue at February 28, 2019. Unbilled deferred revenue represents business that is contracted but unbilled, and excluded from our balance sheet.
Our financial results for the quarter ended February 29, 2020 were influenced by a number of factors, which are described in further detail throughout this discussion and analysis. The following is a summary of key financial results for the
second quarter of fiscal 2020:
|
•
|
Sales
–
Our consolidated sales for the second quarter of fiscal 2020 increased 7% to $53.7 million, compared with sales of $50.4 million
in the second quarter of fiscal 2019. Sales growth during the quarter was broad-based across our Divisions. Enterprise Division sales during the second quarter of fiscal 2020 increased 3% to $40.7 million, compared with $39.3 million in
fiscal 2019, despite significant decreases in the Company’s China and Japan direct offices, and certain international licensees related to business disruption from the COVID-19 outbreak. Education Division revenues increased 12% to $10.9
million, compared with $9.7 million in the second quarter of fiscal 2019. Our sales growth was primarily driven by increased sales of subscription services in both the Enterprise and Education Divisions.
|
|
•
|
Cost of Sales/Gross Profit
– Our cost of sales totaled $15.1 million for the quarter ended February 29, 2020, compared with $15.0 million in the prior year. Second quarter 2020
gross profit increased 9%, or $3.3 million, to $38.7 million compared with $35.4 million in fiscal 2019. Our gross margin for the quarter ended February 29, 2020 improved 171 basis points to 71.9% of sales compared with 70.2% in the second
quarter of the prior year, reflecting increased subscription revenues in the mix of services sold when compared with the prior year.
|
|
•
|
Operating Expenses
– Our operating expenses for the quarter ended February 29, 2020 increased $0.1 million compared with the prior year, which was due to increased selling,
general, and administrative (SG&A) expenses. As a percent of sales, SG&A expenses decreased to 67.4 percent compared with 71.3 percent in the second quarter of fiscal 2019. Increased SG&A expense was primarily related to
increased commissions and bonuses on higher sales, increased investments in new sales and sales-related personnel, and a $0.8 million increase in non-cash stock-based compensation. These increases in operating expenses were partially
offset by $0.4 million of decreased licensee transition costs related to the fiscal 2019 acquisition of the Company’s licensee in Germany, Switzerland, and Austria (GSA); a $0.4 million decrease in our China office expenses resulting from
suspended business operations due to the COVID-19 outbreak; and cost savings from various other areas of the Company’s operations. At February 29, 2020, we had 255 client partners compared with 230 client partners at February 28, 2019.
|
23
|
•
|
Operating Loss and Net Income
– Our loss from operations for the quarter ended February 29, 2020 improved to $(0.4) million compared with a loss of $(3.6) million in the second
quarter of the prior year. Our effective income tax benefit rate for the quarter ended February 29, 2020 was approximately 219 percent compared with an effective benefit rate of approximately 10 percent in the second quarter of fiscal
2019. The higher tax benefit rate in fiscal 2020 was primarily due to the exercise of stock options, which produced a $1.8 million tax benefit in the quarter. During the second quarter of fiscal 2020, we recognized net income of $1.1
million, or $.08 per diluted share, compared with a net loss of $(3.5) million, or $(.25) per share, in the prior year.
|
While our first two quarters of fiscal 2020 produced significant growth over the prior year and set the foundation for growth in the second half of fiscal 2020, the COVID-19 pandemic and unprecedented responses to the virus have had a crippling
effect on the economies of the world. The challenges and disruptions associated with the COVID-19 pandemic are expected to have a significantly adverse impact upon our financial results during the second half of fiscal 2020 and in future periods,
depending on the duration and severity of preventative measures and the time needed to return to normal business operations. During such times, normal business and decision-making processes are often interrupted. Though we expect that the COVID-19
pandemic will have a significant adverse impact on our financial results during the second half of fiscal 2020, we believe our offerings will help our clients through these difficult periods by sharpening the focus and execution of their
organizations on their most important priorities, building trust with stakeholders in a time of uncertainty, and transforming fear and uncertainty into high levels of engagement.
While the coming months will be full of uncertainty and challenges, we believe that we have entered this period operationally, strategically, and financially strong: 1)
Operationally Strong
– we had
broad-based momentum in the second quarter and for fiscal 2020, especially in our subscription business; 2)
Strategically Strong
– our subscription model provides clients with the ability to access our
best-in-class content and solutions across a wide variety of delivery modalities, including digital, live on-line, and in weekly micro-learning bursts. Our investments in technology are allowing us to work with clients who have the need to convert
previously-booked onsite services to live-on-line or digital to accommodate employees working remotely; and 3)
Financially Strong
– we entered this period with significant cash balances and a strong balance
sheet.
Further details regarding our second quarter results are provided throughout the following management’s discussion and analysis.
Quarter Ended February 29, 2020 Compared with the Quarter Ended February 28, 2019
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 (GSA) which were acquired in the second quarter of fiscal 2019; and other groups such as our government services office. The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
|
Quarter Ended
|
Quarter Ended
|
|||||||||||||||||||
|
February 29,
|
% of
|
February 28,
|
% of
|
|||||||||||||||||
|
2020
|
Sales
|
2019
|
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
37,973
|
100.0
|
$
|
36,414
|
100.0
|
$
|
1,559
|
||||||||||||
|
Cost of sales
|
9,271
|
24.4
|
9,120
|
25.0
|
151
|
|||||||||||||||
|
Gross profit
|
28,702
|
75.6
|
27,294
|
75.0
|
1,408
|
|||||||||||||||
|
SG&A expenses
|
23,968
|
63.1
|
24,751
|
68.0
|
(783
|
)
|
||||||||||||||
|
Adjusted EBITDA
|
$
|
4,734
|
12.5
|
$
|
2,543
|
7.0
|
$
|
2,191
|
||||||||||||
24
Sales.
For the quarter ending February 29, 2020, our U.S./Canada sales grew 8 percent, or $1.6 million, and government service sales increased $0.9 million compared with the prior year. International
direct office revenues decreased $1.1 million compared with the prior year, primarily due to the impact on our China and Japan offices from the COVID-19 outbreak. Increased direct office sales were primarily attributable to the growth of the All
Access Pass and recognition of previously deferred subscription revenues, as well as new contracts and renewals obtained during the quarter. Our new GSA direct office also contributed $0.4 million of increased sales during the quarter. Foreign
exchange rates had an immaterial impact on Direct Office sales and operating results during the second quarter of fiscal 2020.
Gross Profit.
Gross profit increased due to increased sales in the second quarter as previously described. Direct Office gross margin increased primarily due to the mix of services and products sold
during the quarter, which featured increased subscription revenues.
SG&A Expense.
Decreased Direct Office SG&A expense was primarily due to the office closure in China related to the COVID-19 outbreak, reduced travel and advertising costs, and savings in other
areas of Direct Office operations. These reductions were partially offset by increased associate expenses resulting from increased commissions on higher sales and new sales and sales-related personnel.
International Licensees Segment
In countries or foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations
for the periods indicated (in thousands):
|
Quarter Ended
|
Quarter Ended
|
|||||||||||||||||||
|
February 29,
|
% of
|
February 28,
|
% of
|
|||||||||||||||||
|
2020
|
Sales
|
2019
|
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
2,691
|
100.0
|
$
|
2,906
|
100.0
|
$
|
(215
|
)
|
|||||||||||
|
Cost of sales
|
454
|
16.9
|
685
|
23.6
|
(231
|
)
|
||||||||||||||
|
Gross profit
|
2,237
|
83.1
|
2,221
|
76.4
|
16
|
|||||||||||||||
|
SG&A expenses
|
853
|
31.7
|
1,003
|
34.5
|
(150
|
)
|
||||||||||||||
|
Adjusted EBITDA
|
$
|
1,384
|
51.4
|
$
|
1,218
|
41.9
|
$
|
166
|
||||||||||||
Sales.
International licensee revenues are primarily comprised of royalty revenues. During the quarter ended February 29, 2020, royalty revenues decreased primarily due to lower sales in certain
countries, especially in Asia, which have been impacted by the COVID-19 outbreak. Royalty revenue decreased by $0.1 million compared with the second quarter of fiscal 2019. Sales of materials (primarily kits) to the licensees decreased by $0.1
million compared with the prior year. Many licensees have started to source the production of training kits in locations closer to their area of operations, which have reduced sales of products to the licensees. Foreign exchange rates had an
immaterial impact on international licensee sales and operating results during the quarter ended February 29, 2020.
25
Gross Profit
. Gross profit improved primarily due to a change in the mix of international licensee revenues during the quarter, which included more royalty revenue as a percent of total revenues. This mix
change also improved international licensee gross margin when compared with the prior year.
SG&A Expense.
International licensee SG&A expenses decreased primarily due to cost reduction initiatives implemented in the third and fourth quarters of fiscal 2019.
Education Division
Our Education Division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed
Leader In Me
program
designed for students primarily in K-6 elementary schools. The following comparative information is for our Education Division in the periods indicated (in thousands):
|
Quarter Ended
|
Quarter Ended
|
|||||||||||||||||||
|
February 29,
|
% of
|
February 28,
|
% of
|
|||||||||||||||||
|
2020
|
Sales
|
2019
|
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
10,893
|
100.0
|
$
|
9,698
|
100.0
|
$
|
1,195
|
||||||||||||
|
Cost of sales
|
4,433
|
40.7
|
4,269
|
44.0
|
164
|
|||||||||||||||
|
Gross profit
|
6,460
|
59.3
|
5,429
|
56.0
|
1,031
|
|||||||||||||||
|
SG&A expenses
|
7,528
|
69.1
|
6,338
|
65.4
|
1,190
|
|||||||||||||||
|
Adjusted EBITDA
|
$
|
(1,068
|
)
|
(9.8
|
)
|
$
|
(909
|
)
|
(9.4
|
)
|
$
|
(159
|
)
|
|||||||
Sales.
For the quarter ended February 29, 2020, our Education Division sales increased 12 percent, or $1.2 million, primarily due to increased subscription revenues, the addition of new schools, and
increased sales of training materials. Consistent with prior years, we continue to see increased demand for the
Leader in Me
program throughout the world. As of February 29, 2020, the
Leader in Me
program is used in over 4,400 schools and in over 50 countries.
Gross Profit.
Education Division gross profit increased primarily due to increased sales as previously described. Education segment gross margin improved primarily due to the mix of products and services
sold, including increased subscription offering sales.
SG&A Expenses.
Education SG&A expense increased primarily due to investments in additional sales and sales-related personnel, and increased commissions and related costs on higher sales.
Other Expenses
Amortization
–
Amortization expense decreased by $0.1 million compared with the second quarter of fiscal 2019 due to the full amortization of
certain intangible assets. We expect amortization expense will total $4.6 million during fiscal 2020.
Depreciation –
Depreciation expense did not materially fluctuate compared with the prior year. We currently expect depreciation expense will total approximately $6.7 million in fiscal
2020.
Income Taxes
Our effective income tax benefit rate for the quarter ended February 29, 2020 was approximately 219 percent compared with an effective benefit rate of approximately 10 percent in the second quarter of the prior year. The higher tax benefit rate
in fiscal 2020 was primarily due to the exercise of stock options, which produced a $1.8 million tax benefit in the quarter. The tax benefit rate in the second quarter of fiscal 2019 was decreased significantly by Global Intangible Low-Taxed Income
(GILTI), nondeductible expenses, and effective foreign tax rates which were considerably higher than the U.S. federal statutory rate. These items had a much smaller impact on our effective rate for the second quarter of fiscal 2020.
26
Two Quarters Ended February 29, 2020 Compared with the Two Quarters Ended February 28, 2019
Enterprise Division
Direct Offices Segment
The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
|
Two Quarters
|
Two Quarters
|
|||||||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||||||
|
February 29,
|
% of
|
February 28,
|
% of
|
|||||||||||||||||
|
2020
|
Sales
|
2019
|
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
80,085
|
100.0
|
$
|
74,885
|
100.0
|
$
|
5,200
|
||||||||||||
|
Cost of sales
|
19,972
|
24.9
|
20,521
|
27.4
|
(549
|
)
|
||||||||||||||
|
Gross profit
|
60,113
|
75.1
|
54,364
|
72.6
|
5,749
|
|||||||||||||||
|
SG&A expenses
|
49,669
|
62.0
|
48,181
|
64.3
|
1,488
|
|||||||||||||||
|
Adjusted EBITDA
|
$
|
10,444
|
13.0
|
$
|
6,183
|
8.3
|
$
|
4,261
|
||||||||||||
Sales.
During the first two quarters of fiscal 2020, our U.S./Canada sales grew $4.0 million, government services sales increased $1.2 million, and international direct office revenue grew $0.3 million
compared with the prior year. Increased direct office sales were primarily attributable to the growth of the All Access Pass and recognition of previously deferred subscription revenues, as well as new contracts and renewals of previously existing
AAP contracts. Increased sales in the GSA, Australia, and Japan offices were partially offset by a $1.0 million decrease in sales from our China office, which was adversely impacted by the COVID-19 outbreak. Our GSA direct office recognized $1.1
million of increased sales during the first two quarters of fiscal 2020 when compared with the prior year. Foreign exchange rates had an immaterial impact on Direct Office sales and operating results during the first two quarters of fiscal 2020.
Gross Profit.
Gross profit increased due to increased sales in the first two quarters of fiscal 2020 as previously described. Direct Office gross margin increased primarily due to the mix of services and
products sold during fiscal 2020, including increased subscription sales.
SG&A Expense.
Direct Office operating expenses increased primarily due to new sales and sales related personnel, increased commissions on higher sales, and GSA expenses that totaled $0.5 million
during the first quarter of fiscal 2020. We acquired the GSA office in the second quarter of the prior year.
27
International Licensees Segment
The following comparative information is for our international licensee operations for the periods indicated (in thousands):
|
Two Quarters
|
Two Quarters
|
|||||||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||||||
|
February 29,
|
% of
|
February 28,
|
% of
|
|||||||||||||||||
|
2020
|
Sales
|
2019
|
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
6,411
|
100.0
|
$
|
6,583
|
100.0
|
$
|
(172
|
)
|
|||||||||||
|
Cost of sales
|
1,054
|
16.4
|
1,499
|
22.8
|
(445
|
)
|
||||||||||||||
|
Gross profit
|
5,357
|
83.6
|
5,084
|
77.2
|
273
|
|||||||||||||||
|
SG&A expenses
|
1,938
|
30.2
|
2,238
|
34.0
|
(300
|
)
|
||||||||||||||
|
Adjusted EBITDA
|
$
|
3,419
|
53.3
|
$
|
2,846
|
43.2
|
$
|
573
|
||||||||||||
Sales.
For the two quarters ended February 29, 2020, increased royalty revenues were offset by decreased sales of materials (primarily kits) to the licensees and by reduced revenues from the sale of new
licenses. Royalty revenue increased by $0.2 million compared with the first half of fiscal 2019 as sales increased at certain licensees during the year. Foreign exchange rates had an immaterial impact on international licensee sales and operating
results during the first two quarters of fiscal 2020.
Gross Profit
. Gross profit improved due to increased royalty revenues during the first two quarters of fiscal 2020, which also improved international licensee gross margin when compared with the prior
year.
SG&A Expense.
International licensee SG&A expenses decreased primarily due to cost reduction initiatives implemented in the third and fourth quarters of fiscal 2019. We continue to expect reduced
SG&A expenses, compared with the prior year, during the remainder of fiscal 2020.
Education Division
The following comparative information is for our Education Division in the periods indicated (in thousands):
|
Two Quarters
|
Two Quarters
|
|||||||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||||||
|
February 29,
|
% of
|
February 28,
|
% of
|
|||||||||||||||||
|
2020
|
Sales
|
2019
|
Sales
|
Change
|
||||||||||||||||
|
Sales
|
$
|
21,974
|
100.0
|
$
|
20,044
|
100.0
|
$
|
1,930
|
||||||||||||
|
Cost of sales
|
8,857
|
40.3
|
8,222
|
41.0
|
635
|
|||||||||||||||
|
Gross profit
|
13,117
|
59.7
|
11,822
|
59.0
|
1,295
|
|||||||||||||||
|
SG&A expenses
|
15,288
|
69.6
|
12,996
|
64.8
|
2,292
|
|||||||||||||||
|
Adjusted EBITDA
|
$
|
(2,171
|
)
|
(9.9
|
)
|
$
|
(1,174
|
)
|
(5.9
|
)
|
$
|
(997
|
)
|
|||||||
Sales.
For the two quarters ended February 29, 2020, our Education Division sales increased primarily due to increased subscription revenues and the addition of new schools. Foreign exchange rates reduced
reported Education Division revenues and results of operations by $0.2 million for the two quarters ended February 29, 2020.
Gross Profit.
Education Division gross profit in the first half of fiscal 2020 increased primarily due to increased sales as previously described. Education segment gross margin improved primarily due to
increased subscription revenues in the mix of services sold during fiscal 2020.
28
SG&A Expenses.
Education SG&A expense increased primarily due to investments in additional sales and sales-related personnel, and increased commissions and related costs on higher sales.
Income Taxes
Our effective income tax benefit rate for the two quarters ended February 29, 2020 was approximately 133 percent, compared with a benefit rate of approximately 6 percent in the first two quarters of fiscal 2019. The increased benefit rate in the
current year was primarily due to the exercise of stock options in the second quarter, which produced a tax benefit of $1.8 million in the period. The tax benefit rate for the first two quarters of fiscal 2019 was decreased significantly by GILTI,
nondeductible expenses, and effective foreign tax rates which were considerably higher than the U.S. federal statutory rate. These items had a much smaller impact on the effective benefit rate for the first two quarters of fiscal 2020.
Although we paid $1.4 million in cash for income taxes during the first two quarters of fiscal 2020, we anticipate that our total cash paid for income taxes over the coming three to five years will be less than our total income tax provision as we
utilize net operating loss carryforwards, foreign tax credit carryforwards, and other deferred income tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Introduction
In the current environment, a major priority is the maintenance and preservation of liquidity. Our cash and cash equivalents at February 29, 2020 totaled $24.8 million, with nothing drawn on our $14.9 million revolving line of credit facility.
Subsequent to February 29, 2020, we drew down all of the available funds on our revolving credit facility primarily to maximize our flexibility during this period of uncertainty. Of our $24.8 million in cash at February 29, 2020, $11.6 million was
held at our foreign subsidiaries. We routinely repatriate cash from our foreign subsidiaries and consider cash generated from foreign activities a key component of our overall liquidity position. Our primary sources of liquidity are cash flows from
the sale of services in the normal course of business, available proceeds from our revolving line of credit facility, and term loans. Our primary uses of liquidity include payments for operating activities, capital expenditures (including curriculum
development), debt payments, contingent liability payments from the acquisition of businesses, working capital expansion, and purchases of our common stock.
Pursuant to the credit agreement we obtained in August 2019 (the 2019 Credit Agreement), we had the ability to borrow up to $25.0 million in term loans. At August 31, 2019, we had borrowed $20.0 million of the available term loan amount. During
November 2019, we borrowed the remaining $5.0 million term loan available on the 2019 Credit Agreement. The additional $5.0 million term loan has the same terms and conditions as the previous term loan and does not change our quarterly principal
payments. The additional term loan extended the maturity of our term loan obligation by one year.
We may use the proceeds from our 2019 Credit Agreement for general corporate purposes as well as for other transactions, unless specifically prohibited by the terms of the agreement. Our 2019 Credit Agreement contains customary representations
and guarantees, as well as provisions for repayment and liens. The 2019 Credit Agreement also includes the following financial covenants: (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% 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. We believe that we were in compliance with the financial covenants and other
terms applicable to the 2019 Credit Agreement at February 29, 2020.
29
In addition to our term-loan obligation and borrowings on our revolving line of credit, we have a long-term rental agreement on our corporate campus that is accounted for as a financing obligation.
The following discussion is a description of the primary factors affecting our cash flows and their effects upon our liquidity and capital resources during the two quarters ended February 29, 2020.
Cash Flows From Operating Activities
Our primary source of cash from operating activities was the sale of services to our customers in the normal course of business. Our primary uses of cash for operating activities were payments for selling, general, and administrative expenses,
payments for direct costs necessary to conduct training programs, payments to suppliers for materials used in training manuals sold, and to fund working capital needs. Our cash provided by operating activities for the two quarters ended February 29,
2020 increased 30 percent to $17.4 million compared with $13.4 million in the first half of fiscal 2019. The increase was primarily due to improved operating results and favorable changes in working capital during the first two quarters of fiscal
2020. Our collection of accounts receivable remained strong during the first half of fiscal 2020 and provided a significant amount of cash to support operations, pay our obligations, and make critical investments. Although we are required to defer
AAP and other subscription revenues over the lives of the underlying contracts, we invoice the entire contract amount and collect the associated receivable at the inception of the agreement. However, we anticipate collections of accounts receivable
to slow during the second half of fiscal 2020 due to business disruptions stemming from the COVID-19 pandemic.
Cash Flows From Investing Activities and Capital Expenditures
Our cash used for investing activities during the first two quarters of fiscal 2020 totaled $7.3 million. The primary uses of cash for investing activities included the purchase of a note receivable from a bank used as consideration for an
amended license agreement with FCOP (Note 12), purchases of property and equipment in the normal course of business, and additional investments in the development of our offerings.
In November 2019, we purchased $2.6 million of notes payable from a bank that were the obligations of FCOP. We exchanged the receivables from FCOP to modify the term and royalty provisions of a long-term licensing agreement that is expected to
increase our cash flows over the duration of the license agreement. The licensing arrangement was assumed by Franklin Planner Corp., a new unrelated entity that purchased substantially all of the assets of FCOP in November 2019.
Our purchases of property and equipment, which totaled $2.5 million in the first two quarters of fiscal 2020, consisted primarily of computer hardware, leasehold improvements on leased office space, and software. We currently anticipate that our
purchases of property and equipment will total approximately $5.3 million in fiscal 2020.
We spent $2.2 million during the first two quarters of fiscal 2020 on the development of various content and offerings. We believe continued investment in our offerings is critical to our future success and anticipate that our capital spending
for curriculum development will total $5.0 million during fiscal 2020.
30
Cash Flows From Financing Activities
During the first half of fiscal 2020, our cash used for financing activities totaled $12.9 million. Our primary uses of cash for financing activities during the first two quarters of fiscal 2020 were $13.8 million for purchases of our common
stock for treasury, $3.6 million for principal payments on our term loans and financing obligation, and $0.9 million of cash used to pay contingent liabilities from previous business acquisitions. These uses of cash were partially offset by our
election to obtain the remaining $5.0 million of term loan borrowing capacity associated with the 2019 Credit Agreement, and by $0.5 million of proceeds from participants in the employee stock purchase plan.
In December 2019, we purchased 284,608 shares of our common stock from Knowledge Capital for $10.1 million (Note 6) prior to the distribution of Knowledge Capital assets to its investors. This purchase of shares from Knowledge Capital was
completed under a separate Board of Directors authorization and will not be included in the November 15, 2019 authorized purchase plan described below. We also purchased 103,029 shares of our common stock which were withheld for statutory income
taxes on stock-based compensation awards, primarily stock options, which were exercised during the quarter ended February 29, 2020. These withheld shares were valued at the market price on the date that the shares were distributed to participants.
The total fair value of the withheld shares was $3.6 million.
On November 15, 2019, our Board of Directors approved a new plan to repurchase 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. Our uses of financing cash during the remainder of fiscal 2020 are expected to include required payments on our term loans and financing obligation, contingent consideration payments from previous business
acquisitions, and may include additional purchases of our common stock for treasury. However, the timing and amount of common stock purchases is dependent on a number of factors, including available resources, and we are not obligated to make
purchases of our common stock during any future period.
Sources of Liquidity
We expect to meet our projected capital expenditures, repay amounts borrowed on our 2019 Credit Agreement, service our existing financing obligation, and meet other working capital requirements during fiscal 2020 from current cash balances and
future cash flows from operating activities. Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use additional credit and other financing alternatives, if necessary, for
these expenditures. Our 2019 Credit Agreement expires in August 2024 and we expect to renew and amend the 2019 Credit Agreement on a regular basis to maintain the long-term borrowing capacity of this credit facility. Subsequent to February 29,
2020, we withdrew the remaining $14.9 million of available borrowing capacity on our 2019 Credit Agreement and will include the proceeds in our cash balances in future reporting periods until repaid. 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.
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 on both a short- and long-term basis.
However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, the length and severity of business disruptions associated with the COVID-19
pandemic, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions and the
introduction of new offerings or technology by our competitors. We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital
requirements. However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.
31
Contractual Obligations
We have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. Required contractual payments
primarily consist of rental payments resulting from the sale of our corporate campus (financing obligation); repayment of term loan obligations; repayment of our revolving line of credit; expected contingent consideration payments from business
acquisitions; short-term purchase obligations for inventory items and other products and services used in the ordinary course of business; minimum operating lease payments; and minimum payments for outsourced warehousing and distribution service
charges. For further information on our contractual obligations, please refer to the table included in our annual report on Form 10-K for the fiscal year ended August 31, 2019.
ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED
Refer to the discussion of new accounting pronouncements as found in Note 1 to the financial statements as presented within this report.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. The significant accounting policies used to prepare our consolidated financial statements, including
our revenue recognition policy, are outlined primarily in Note 1 to the consolidated financial statements presented in Part II, Item 8 of our annual report on Form 10-K for the fiscal year ended August 31, 2019. Please refer to these disclosures for
further information regarding our uses of estimates and critical accounting policies. There have been no significant changes to our previously disclosed estimates or critical accounting policies.
Estimates
Some of the accounting guidance we use requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. We regularly evaluate our estimates and assumptions and base those estimates and
assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America. Actual results may differ from these estimates
under different assumptions or conditions, including changes in economic conditions and other circumstances that are not within our control, but which may have an impact on these estimates and our actual financial results.
32
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, timing of the recovery from the COVID-19 pandemic, future training and consulting sales activity, expected benefits from the All Access Pass, 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 SG&A expenses, depreciation, and amortization, future gross margins, the release of new services or products, the
adequacy of existing capital resources, our ability to renew or extend our line of credit facility, the amount of cash expected to be paid for income taxes, 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 our
annual report on Form 10-K for the fiscal year ended August 31, 2019, 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;
competition; the impact of foreign exchange rates; the number and nature of customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our products and services and those of competitors;
adverse publicity; and other factors which may adversely affect our business.
The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing
environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of
factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our
failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our low market capitalization, the price of
our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management’s expectations as of the date made, and we do not undertake any responsibility to update any of these statements in the future except as required by law. Actual future performance and results
will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere
in our filings with the SEC.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
At February 29, 2020, our long-term obligations primarily consisted of term loans payable, a long-term lease agreement (financing obligation) on our corporate headquarters facility, and potential contingent consideration payments resulting from
previous business acquisitions. Our overall interest rate sensitivity is primarily influenced by any amounts borrowed on term loans or our revolving line of credit facility, and the prevailing interest rates on these instruments. The effective
interest rate on our term loans payable and line of credit facility is variable and was 3.5 percent at February 29, 2020. Accordingly, we may incur additional expense if interest rates increase in future periods. For example, a 1% increase in the
effective interest rate on our term loans outstanding at February 29, 2020 and amounts borrowed against our revolving line of credit in March 2020 would result in approximately $0.3 million of additional interest expense over the next 12 months. Our
financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent, and our contingent consideration liabilities are not subject to interest rates.
There have been no other material changes from the information previously reported under Item 7A of our Annual Report on Form 10-K for the fiscal year ended August 31, 2019. We did not utilize any foreign currency or interest rate derivative
instruments during the two quarters ended February 29, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on this evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f)) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
34
PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
Except as discussed below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 14, 2019 (as amended on December 2, 2019).
Our results of operations have been adversely affected and could be materially impacted in the future by the COVID-19 (coronavirus) pandemic.
The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption during fiscal 2020. The extent to which the COVID-19 pandemic impacts our business, operations, and financial results will depend on numerous
evolving factors that we may not be able to accurately predict, including: the duration, scope, and severity of the pandemic; governmental, business, and individuals’ actions that have been taken, and continue to be taken, in response to the
pandemic; the impact of the pandemic on worldwide economic activity and actions taken in response; the effect on our clients, including educational institutions, and client demand for our services; our ability to sell and provide our services and
solutions, including the impact of travel restrictions and from people working from home; the ability of our clients to pay for our services on a timely basis or at all; the ability to maintain sufficient liquidity; and any closure of our offices.
Any of these events, or related conditions, could cause or contribute to the risks and uncertainties described in our Annual Report and could materially adversely affect our business, financial condition, results of operations, cash flows, and
stock price.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the purchases of our common stock during the fiscal quarter ended February 29, 2020:
|
Period
|
Total Number of Shares Purchased
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
(1)
(in thousands)
|
||||||||||||
|
December 1, 2019 to December 31, 2019
|
289,608
|
$
|
35.14
|
5,000
|
$
|
39,824
|
||||||||||
|
January 1, 2020 to January 31, 2020
|
-
|
-
|
-
|
39,824
|
||||||||||||
|
February 1, 2020 to February 29, 2020
|
-
|
-
|
-
|
39,824
|
||||||||||||
|
Total Common Shares
|
289,608
|
$
|
35.14
|
5,000
|
||||||||||||
|
(1)
|
On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $40.0 million of our outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase
plan does not have an expiration date. Under the terms of this new purchase plan, we purchased 5,000 shares of our common stock for $0.2 million during the quarter ended February 29, 2020.
|
35
(1)
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.
The table above includes 284,608 shares of our common stock which were purchased from Knowledge Capital for $10.1 million prior to the distribution of Knowledge Capital assets to its investors. This purchase of shares
from Knowledge Capital was completed under a separate Board of Directors authorization and was not included in the new authorized purchase plan described above.
The table above excludes 103,029 shares of our common stock that were withheld for statutory taxes on stock-based compensation awards that were exercised or awarded during the quarter ended February 29, 2020. The
withheld shares were valued at the market price on the date that the award shares were distributed to participants and were acquired at a weighted average price of $34.73 per share.
Item 6. EXHIBITS
|
(A)
|
Exhibits:
|
|
|
31.1
|
Rule 13a-14(a) Certifications of the Chief Executive Officer.**
|
|
|
31.2
|
Rule 13a-14(a) Certifications of the Chief Financial Officer.**
|
|
|
32
|
Section 1350 Certifications.**
|
|
|
101.INS
|
XBRL Instance Document.
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
101.DEF
|
XBRL Taxonomy Definition Linkbase Document.
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
|
**Filed herewith.
|
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
FRANKLIN COVEY CO.
|
||||
|
Date:
|
April 9, 2020
|
By:
|
/s/ Robert A. Whitman
|
|
|
Robert A. Whitman
|
||||
|
Chief Executive Officer
|
||||
|
(Duly Authorized Officer)
|
||||
|
Date:
|
April 9, 2020
|
By:
|
/s/ Stephen D. Young
|
|
|
Stephen D. Young
|
||||
|
Chief Financial Officer
|
||||
|
(Principal Financial and Accounting Officer)
|
||||
37
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Basis Of PresentationNote 2 InventoriesNote 3 Term Notes PayableNote 4 Fair Value Of Financial InstrumentsNote 5 LeasesNote 6 Shareholders EquityNote 7 RevenueNote 8 Stock-based CompensationNote 9 Income TaxesNote 10 Income (loss) Per ShareNote 11 Segment InformationNote 12 Investment in Fc Organizational ProductsNote 13 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits