10-K 1 form10k_111419.htm FORM 10K FY19



UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 
 

 
Form 10-K 
 


   
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2019
 
 
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO  ___ 
 
 

  
         Franklin Covey Co.
              (Exact name of registrant as specified in its charter) 

 Utah
 
 1-11107
 
 87-0401551
 (State or other jurisdiction of incorporation or organization)
 
 (Commission File No.)
 
 (IRS Employer Identification No.)
 
 
2200 West Parkway Boulevard  
Salt Lake City, Utah 84119-2331  
(Address of principal executive offices, including zip code) 
 
Registrant's telephone number, including area code: (801) 817-1776  
 
Securities registered pursuant to Section 12(b) of the Act: 
 

 Title of Each Class
 
 Name of Each Exchange on Which Registered
 Common Stock, $.05 Par Value
 
 New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: 
None 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ☐     No  ☑    
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐   No ☑


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☑   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ☑   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 ☑

As of February 28, 2019, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $175.4 million, which was based upon the closing price of $26.02 per share as reported by the New York Stock Exchange.

As of October 31, 2019, the Registrant had 13,982,356 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Registrant's Definitive Proxy Statement for the Annual Meeting of Shareholders, which is scheduled to be held on January 24, 2020, are incorporated by reference in Part III of this Form 10-K.








FranklinCovey Co.
TABLE OF CONTENTS

   
2
 
Business
2
 
Risk Factors
9
 
Unresolved Staff Comments
19
 
Properties
20
 
Legal Proceedings
20
 
Mine Safety Disclosures
20
   
21
 
Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
21
 
Selected Financial Data
23
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
 
Quantitative and Qualitative Disclosures About Market Risk
43
 
Financial Statements and Supplementary Data
44
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
92
 
Controls and Procedures
92
 
Other Information
93
   
93
 
Directors, Executive Officers and Corporate Governance
93
 
Executive Compensation
94
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
94
 
Certain Relationships and Related Transactions, and Director Independence
95
 
Principal Accountant Fees and Services
95
   
96
 
Exhibits and Financial Statement Schedules
96
 
Form 10-K Summary
100
       
   
101







PART I

Disclosure Regarding Forward-Looking Statements

 
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and such forward-looking statements involve risks and uncertainties.  Statements about future sales, costs, margins, cost savings, foreign currency exchange rates, earnings, earnings per share, cash flows, plans, objectives, expectations, growth, or profitability are forward-looking statements based on management’s estimates, assumptions, and projections.  Words such as “could,” “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and variations on such words, including similar expressions, are used to identify these forward-looking statements.  These forward-looking statements are only predictions, subject to risks and uncertainties, and actual results could differ materially from those discussed in this, and other reports, filed with the Securities and Exchange Commission (SEC) and elsewhere.  Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict.  Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to, the factors discussed under the section of this report entitled “Risk Factors.”

Forward-looking statements in this report are based on management’s current views and assumptions regarding future events and speak only as of the date when made.  Franklin Covey Co. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the federal securities laws.

In this Annual Report on Form 10-K, unless the context requires otherwise, the terms “the Company,” “Franklin Covey,” “us,” we,” and “our” refer to Franklin Covey Co. and its subsidiaries.

ITEM 1. BUSINESS

General Information

Franklin Covey is a global company focused on organizational performance improvement.  Our mission is to “enable greatness in people and organizations everywhere,” and our global structure is designed to help individuals and organizations achieve sustained superior performance through changes in human behavior.  From the foundational work of Dr. Stephen R. Covey in leadership and personal effectiveness, and Hyrum W. Smith in productivity and time management, we have developed deep expertise that extends to helping organizations and individuals achieve lasting behavioral change in seven crucial areas: Leadership, Execution, Productivity, Trust, Sales Performance, Customer Loyalty, and Educational Improvement.  We believe that our clients are able to utilize our content and offerings 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.

The Company was incorporated in 1983 under the laws of the state of Utah, and we merged with the Covey Leadership Center in 1997 to form Franklin Covey Co.  Our consolidated net sales for the fiscal year ended August 31, 2019 totaled $225.4 million and our shares of common stock are traded on the New York Stock Exchange (NYSE) under the ticker symbol “FC.”

Our fiscal year ends on August 31 of each year.  Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.

The Company’s principal executive offices are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, and our telephone number is (801) 817‑1776.  Our website is www.franklincovey.com.


Business Development

Our business is currently structured around two divisions, the Enterprise Division and the Education Division.  The Enterprise Division consists of our Direct Office and International Licensee segments and is focused on selling our offerings to corporations, governments, not-for-profits, and other related organizations.  Franklin Covey offerings delivered through the Enterprise Division are designed to help organizations and individuals achieve their own great 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.  Since the introduction of the All Access Pass, we have invested in additional implementation specialists to provide our clients with the direction necessary to create meaningful impact journeys using our tools and content.  An impact journey is a customized plan to utilize the content and offerings on the AAP to achieve a client’s specific goals and to provide them with the keys to obtain maximum value from the pass.  We have also translated 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 the 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.

We believe that continued investments in personnel, content, and technological innovation are key to subscription service renewals and the future growth of our offerings.

In addition to the internal development of our offerings as previously described, we have sought to grow through opening new international offices and through acquisitions of businesses and content licenses.  Over the past three years, these activities have included the following:

New Offices in Germany, Switzerland, and Austria – During fiscal 2019, we acquired the former independent licensee that provided services in these countries and transitioned the operations into directly owned offices similar to the fiscal 2017 transition of our China licensee into a direct office operation.  We believe that we will be able to significantly grow our business in these countries through this acquisition.

License of “Multipliers” Leadership Content – During late fiscal 2019, we obtained a license to develop and sell Multipliers leadership content written by Liz Wiseman.  We are currently in the process of developing various offerings based on Multipliers content and are currently expecting to launch these courses in the fall of 2020.

Offices in China – In fiscal 2017, we transitioned the operations of our licensee operations in China into direct offices.  With offices in Shanghai, Beijing, Guangzhou, and Shenzhen, we have grown our operations in China during the past three years and believe we are positioned for significant future growth.

Robert Gregory Partners – In third quarter of fiscal 2017, we acquired the assets of Robert Gregory Partners, LLC (RGP), a corporate coaching firm with expertise in executive coaching, transition acceleration coaching, leadership development coaching, implementation coaching, and consulting.  We believe these coaching services are important components of our various offerings.

Jhana Education – In the fourth quarter of fiscal 2017, we acquired the stock of Jhana Education (Jhana), a company that specializes in the creation and dissemination of relevant, bite-sized content and learning tools for leaders and managers.  These services have been a significant strategic addition to our All Access Pass and Leader in Me online offerings.

Services Overview

We operate globally with one common brand and a business model designed to enable us to provide clients around the world with the same high level of service.  To achieve this high level of service we have sales and support associates in various locations around the United States and Canada, and operate wholly owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria.  In foreign locations where we do not have a directly owned office, we may contract with independent licensee partners who deliver our content and provide services in over 140 other countries and territories around the world.

Our mission is to “enable greatness in people and organizations everywhere,” and we believe that we are experts at solving certain pervasive, intractable problems, each of which requires a change in human behavior.  We seek to consistently deliver world-class content with the broadest and deepest distribution capabilities through the most flexible content delivery modalities.  We believe these characteristics distinguish us from our competitors as follows:

1.
World Class Content – Rather than rely on “flavor of the month” training fads, our content is principle-centered and based on natural laws of human behavior and effectiveness.  Our content is designed to build new skillsets, establish new mindsets, and provide enabling toolsets.  When our content is applied consistently in an organization, we believe the culture of that organization will change to enable the organization to achieve its own great purposes.  Our content is well researched, subjected to numerous field beta tests, and improved through a proven development process.

2.
Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including:  The All Access Pass and Leader in Me membership, other intellectual property licensing arrangements, on-site training, training led through certified facilitators, on-line learning, blended learning, and organization-wide transformational processes, including consulting and coaching services.

3.
Global Capability – We not only operate domestically with sales personnel in the United States and Canada, but we also deliver content through our directly owned international offices and independently owned international licensees who deliver our content in over 140 other countries and territories around the world.  This capability allows us to deliver content to a wide range of customers, from large multinational corporations to smaller local entities.

We hold ourselves responsible for and measure ourselves by our clients’ achievement of transformational results.

Our content and offerings are designed to help our clients achieve their own great purposes through a variety of resources, including best-selling books and audio, innovative and widely recognized thought leadership, and multiple delivery and teaching methods.  These elements allow us to offer our clients training and consulting solutions that are designed to improve individual and organizational behaviors, deliver content that adapts to an organization’s unique needs, and provide meaningful improvements in our clients’ business performance.  Further information about our content and services can be found on our website at www.franklincovey.com.  However, the information contained in, or that can be accessed through, our website does not constitute any part of this Annual Report.

Industry Information

According to the Training magazine 2019 Training Industry Survey, the total size of the U.S. training industry is estimated to be $83 billion.  The training industry is highly fragmented and includes a wide variety of training and service providers of varying sizes.  We believe our competitive advantages in this industry stem from our fully integrated principle-centered training offerings, our wide variety of delivery options, and various implementation tools to help organizations and individuals measurably improve their effectiveness.  These advantages allow us to deliver not only training to corporations, educational institutions, and individuals, but also to implement the training through powerful behavior-changing tools and coaching with the capability to then measure the impact of the delivered content and solutions.

Clients

We have a relatively broad base of clients, which includes thousands of organizational, governmental, educational, and individual clients in both the United States and in other countries that are served through our directly owned operations.  We have thousands of additional organizational clients throughout the world which are served through our global licensee partner network, and we believe that our content, in all its forms, delivers results that encourage strong client loyalty.  Our clients are in a broad array of industries and we are not dependent on a single client or industry group.  During the periods presented in this report, none of our clients were responsible for more than ten percent of our consolidated revenues.

Due to the nature of our business, we do not have a significant backlog of orders.  Nearly all of our deferred revenue is attributable to subscription services for which we recognize revenue over the lives of the corresponding agreements.

Competition

We operate in a highly competitive and rapidly changing global marketplace and compete with a variety of organizations of various sizes that offer services comparable with ours.  The nature of competition in the performance improvement industry, however, is highly fragmented with few large competitors.  Based upon our fiscal 2019 consolidated sales of $225.4 million, we believe that we are a significant competitor in the performance skills and education market.  Other significant comparative companies that compete with our Enterprise Division include: Design Dimension International, GP Strategies Corp., LinkedIn Learning, Center for Creative Leadership, SkillSoft, and Vital Smarts.  Our Education Division competes with entities such as: Character Counts, Responsive Classroom, 7 Mindsets, Second Step, and K12.

We believe that the principal competitive factors in the industry in which we compete include the following:

Quality of offerings, services, and solutions
Skills and capabilities of people
Innovative training and consulting services combined with effective products
Ability to add value to client operations
Reputation and client references
Price
Availability of appropriate resources
Global reach and scale
Branding and name recognition in our marketplace

Given the relative ease of entry into the training market, the number of our competitors could increase, many of whom may imitate existing methods of distribution, or could offer similar content and programs at lower prices.  However, we believe that we have several areas of competitive differentiation in our industry.  We believe that our competitive advantages include: (1) the quality of our content, as indicated by our strong gross margins, branded content, and best-selling books; (2) the breadth of delivery options we are able to offer to customers for utilizing our content, including the All Access Pass and Leader in Me membership, live presentations by our own training consultants, live presentations though Company certified client-employed facilitators, intellectual property licensing, web-based presentations, and film-based presentations; (3) our global reach, which allows truly multinational clients to scale our content uniformly across the globe, through our mix of direct offices and our global licensee network; and (4) the significant impact which our offerings can have on our clients’ results.  Moreover, we believe that we are a market leader in the U.S. in leadership, execution, productivity, individual effectiveness, and educational improvement.

Seasonality

Our fourth quarter of each fiscal year typically has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education Division (when school administrators and faculty have professional development days) and to increased sales that typically occur during that quarter from year-end incentive programs.  Overall, training sales are moderately seasonal because of the timing of corporate training, which is not typically scheduled as heavily during holiday and certain vacation periods.

Manufacturing and Distribution

We do not manufacture any of our products.  We purchase our training materials and related products from various vendors and suppliers located both domestically and internationally, and we are not dependent upon any one vendor for the production of our training and related materials as the raw materials for these products are readily available.  We currently believe that we have good relationships with our suppliers and contractors.  Our materials are primarily warehoused and distributed from an independent warehouse facility located in Des Moines, Iowa.

Trademarks, Copyrights, and Intellectual Property

Our success has resulted in part from our proprietary content, methodologies, and other intellectual property rights.  We seek to protect our intellectual property through a combination of trademarks, copyrights, and confidentiality agreements.  We claim rights for over 630 trademarks in the United States and foreign countries, and we have obtained registration in the United States and numerous foreign countries for many of our trademarks including FranklinCovey, The 7 Habits of Highly Effective People, The 4 Disciplines of Execution, and The 7 Habits.  We consider our trademarks and other proprietary rights to be important and material to our business.

We claim over 230 registered copyrights, and own sole or joint copyrights on our books, manuals, text and other printed information provided in our training programs, and other electronic media products, including audio and video media.  We may license, rather than sell, facilitator workbooks and other seminar and training materials in order to protect our intellectual property rights therein.  We place trademark and copyright notices on our instructional, marketing, and advertising materials.  In order to maintain the proprietary nature of our product information, we enter into written confidentiality agreements with certain executives, product developers, sales professionals, training consultants, other employees, and licensees.

Employees

One of our most important assets is our people.  The diverse and global makeup of our workforce allows us to serve a variety of clients on a worldwide basis.  We are committed to attracting, developing, and retaining quality personnel and actively strive to reinforce our employees’ commitment to our clients, and to our mission, vision, culture, and values through the creation of a motivational and rewarding work environment.  We currently have approximately 940 associates around the world and management believes that its relations with its associates is good.  None of our associates are represented by a union or other collective bargaining group.  While competition is intense for skilled personnel in various functions, we currently do not foresee a shortage in qualified personnel needed to operate and grow our business.

Our benefit programs are designed to be both comprehensive and tailored to the needs of our employee population, such as a paid time off policy that allows for flexibility to meet our associates’ needs.  Our wellness benefits are aimed at encouraging employees to be aware of their current state of health and provides various tools and resources to assist them in maintaining their health given the demanding nature of the work.  Through our offered benefits, including health plans, retirement benefits, stock purchase plan, and other benefit programs, we seek to provide a core sense of security to our employees.

Information About Our Executive Officers

On November 7, 2019, we apointed Paul S. Walker as President and Chief Operating Officer of Franklin Covey Co.  Each of the executive officers of Franklin Covey Co. listed below served with the described responsibilities throughout the fiscal year ended August 31, 2019:

M. Sean Covey, 55, currently serves as President of Franklin Covey Education, and has led the growth of this Division from its infancy to its status today.  The Education Division works with thousands of education entities throughout the world in Higher Education and the K-12 market.  Mr. Covey was previously the Executive Vice President of Global Solutions and Partnerships and Education Practice Leader and has been an Executive Officer since September 2008.  Sean also served as the Senior Vice President of Innovations and Product Development from April 2006 to September 2009, where he led the development of nearly all of the Company’s current organizational offerings, including: The 7 Habits curriculum; The 4 Disciplines of Execution; The Leader in Me; and Leadership Greatness.  Prior to 2006, Sean ran the Franklin Covey retail chain of stores, growing it to $152 million in sales.  Before joining Franklin Covey, Sean worked for the Walt Disney Company, Trammel Crow Ventures, and Deloitte & Touche Consulting.  Mr. Covey is also a New York Times best-selling author and has written several books, including The 4 Disciplines of Execution, The 6 Most Important Decisions You'll Ever Make, The Leader in Me, and the international bestseller The 7 Habits of Highly Effective Teens.  Sean graduated with honors from Brigham Young University with a Bachelor’s degree in English and later earned his MBA from the Harvard Business School.  Sean is the son of the late Dr. Stephen Covey.

Colleen Dom, 57, was appointed to be the Executive Vice-President of Operations in September 2013.  Ms. Dom began her career with the Company in 1985 and served as the first “Client Service Coordinator,” providing service and seminar support for some of the Company’s very first clients.  Prior to her appointment as an Executive Vice President, Ms. Dom served as Vice President of Domestic Operations since 1997 where she had responsibility for the Company’s North American operations, including client support, supply chain, and feedback operations.  During her time at Franklin Covey Co., Colleen has been instrumental in creating and implementing systems and processes that have supported the Company’s strategic objectives and has more than 30 years of experience in client services, sales support, operations, management, and supply chain.  Due to her valuable understanding of the Company’s global operations, Ms. Dom has been responsible for numerous key assignments that have enhanced client support, optimized operations, and built capabilities for future growth.  Prior to joining the Company, Colleen worked in retail management and in the financial investment industry.

C. Todd Davis, 62, is an Executive Vice President and Chief People Officer, and has been an Executive Officer since September 2008.  Todd has over 30 years of experience in training, training development, sales and marketing, human resources, coaching, and executive recruiting.  He has been with Franklin Covey for more than the past 20 years.  Previously, Mr. Davis was a Director of our Innovations Group where he led the development of core offerings including The 7 Habits of Highly Effective People – Signature Program.  Todd also worked for several years as our Director of Recruitment and was responsible for attracting, hiring, and retaining top talent for the organization.  Prior to joining Franklin Covey, Mr. Davis worked in the medical industry for 9 years where he recruited physicians and medical executives along with marketing physician services to hospitals and clinics throughout the country.  Todd is the author of Get Better: 15 Proven Practices to Build Effective Relationships at Work.

Scott J. Miller, 51, is the Executive Vice-President of Thought Leadership at Franklin Covey.  Mr. Miller, who has been with the Company for 23 years, was previously the Executive Vice-President of Business Development and Marketing and has served as an executive of the Company since March 2012.  Scott’s role as Executive Vice-President caps 12 years on our front line, working with thousands of client facilitators across many markets and countries.  Prior to his appointment as Vice-President of Business Development and Marketing, Mr. Miller served as the general manager of our central regional sales office for six years.  Scott originally joined the Covey Leadership Center in 1996 as a client partner with the Education Division.  Mr. Miller started his professional career with the Disney Development Company, the real estate development division of the Walt Disney Company, in 1992.  During his time with the Disney Development Company, Scott identified trends and industry best practices in community development, education, healthcare, architectural design, and technology.  Mr. Miller received a Bachelor of Arts in Organizational Communication from Rollins College in 1996.

Paul S. Walker, 44, is a 19-year veteran of Franklin Covey Co.  Mr. Walker currently serves as the President of the Enterprise Division, which includes the operations of the Direct Office and International Licensee segments.  Mr. Walker was previously the Executive Vice-President of Global Sales and Delivery and began his service as an executive officer on September 1, 2015.  Paul began his career with Franklin Covey in 2000 in the role of business developer, was promoted to a Client Partner, and then to an Area Director.  In 2007, Mr. Walker became General Manager of the Company’s central sales region, an 11-state area that also included Ontario, Canada.  Prior to working for Franklin Covey, Mr. Walker was a senior sales partner for Alexander’s Digital Printing and a middle-market pilot coordinator with New York Life.  Mr. Walker graduated from Brigham Young University with a Bachelor of Arts in Communications.

Robert A. Whitman, 66, has served as Chairman of the Board of Directors since June 1999 and as President and Chief Executive Officer of the Company since January 2000.  Mr. Whitman previously served as a director of the Covey Leadership Center from 1994 to 1997.  Prior to joining us, Mr. Whitman served as President and Co‑Chief Executive Officer of The Hampstead Group from 1992 to 2000 and is a founding partner at Whitman Peterson.  Mr. Whitman received his Bachelor of Arts degree in Finance from the University of Utah and his MBA from the Harvard Business School.

Stephen D. Young, 66, joined FranklinCovey as Executive Vice President of Finance, was appointed Chief Accounting Officer and Controller in January 2001, Chief Financial Officer in November 2002, and Corporate Secretary in March 2005.  Prior to joining us, he served as Senior Vice-President of Finance, Chief Financial Officer, and director of international operations for Weider Nutrition for seven years; as Vice-President of Finance at First Health for ten years; and as an auditor at Fox and Company, a public accounting firm, for four years.  Mr. Young has more than 35 years of accounting and management experience and is a Certified Public Accountant.  Mr. Young was awarded a Bachelor of Science in Accounting from Brigham Young University.

Available Information

We regularly file reports with the SEC.  These reports include, but are not limited to, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and security transaction reports on Forms 3, 4, or 5.  The SEC also maintains electronic versions of the Company’s reports, proxy and information statements, and other information that the Company files with the SEC on its website at www.sec.gov.

The Company makes our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and other reports filed or furnished with the SEC available to the public, free of charge, through our website at www.franklincovey.com.  These reports are provided through our website as soon as is reasonably practicable after we file or furnish these reports with the SEC.



ITEM 1A.  RISK FACTORS

Our business environment, current domestic and international economic conditions, geopolitical circumstances, and other specific risks may affect our future business decisions and financial performance.  The matters discussed below may cause our future results to differ from past results or those described in forward-looking statements and could have a material adverse effect on our business, financial condition, liquidity, results of operations, and stock price, and should be considered in evaluating our Company.

The risks included here are not exhaustive.  Other sections of this report may include additional risk factors which could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing global environment.  New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

We operate in an intensely competitive industry and our competitors may develop programs, services, or courses that adversely affect our ability to sell our offerings.

The training and consulting services industry is intensely competitive with relatively easy entry.  Competitors continually introduce new programs, services, and delivery methods that may compete directly with our offerings, or that may make our offerings uncompetitive or obsolete.  Larger competitors may have superior abilities to compete for clients and skilled professionals, reducing our ability to deliver quality work to our clients.  Some of our competitors may have greater financial and other resources than we do.  In addition, one or more of our competitors may develop and implement training courses or methodologies that may adversely affect our ability to sell our offerings and products to new clients.  Any one of these circumstances could have an adverse effect on our ability to obtain new business and successfully deliver our services.

The introduction of the All Access Pass has been disruptive to our business and may continue to create both operational and financial challenges during the transition to a subscription services-focused business model.

In fiscal 2016, we introduced the All Access Pass, which is an internet-based platform that allows our clients to purchase unlimited access to our intellectual property for a specified period.  We have also introduced The Leader in Me online subscription that provides our Education Division clients with the tools and additional services they need to successfully implement the Leader in Me program in their schools.  As expected, the change to a subscription services-focused business model has been disruptive as we transition our legacy business to this new delivery model, but we believe the benefits of the AAP and the Leader in Me online service to our clients and to our business will ultimately prove beneficial as we continue to emphasize and grow sales of subscription services.

The change to a subscription-focused business model has required a transition both operationally and from an accounting and reporting point of view.  Operationally, we have reorganized our sales forces to focus on and support subscription sales and renewals.  However, we still sell a significant amount of services and related products through our legacy business, which we continue to operate and support.  As such, our selling, general, and administrative expenses have increased to support both the growth of our subscription business and our legacy business.  The applicable accounting guidance for subscription sales requires that we defer subscription contract revenue at the inception of the agreement and then recognize the revenue over the life of the corresponding arrangement.  These changes to a subscription-based business model have produced significant changes in our recent financial statements, including reduced operating income compared with previous years and increased liabilities resulting from deferred revenues.


If we are unable to effectively adapt our sales force and sales strategy to sell subscription services, or if technological development of these services becomes too costly or is not accepted by the market, or we are unable to optimize our costs to support a subscription-based and legacy business model, the transition period to a subscription-focused business model may be lengthened and our ability to achieve previous levels of profitability may be adversely affected.

The All Access Pass and Leader in Me online service are internet-based platforms, and as such we are subject to increased risks of cyber-attacks and other security breaches that could have a material adverse effect on our business.

As part of selling subscription-based services, we collect, process, and retain a limited amount of sensitive and confidential information regarding our customers.  Because our subscription services are internet-based platforms, our facilities and systems may be vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, stolen intellectual property, programming or human errors, or other similar events.

The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our customers or our own proprietary information, software, methodologies, and business secrets could result in significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems, products, and services, which could have a material adverse effect on our business, financial condition, or results of operations.  To the extent we are involved in any future cyber-attacks or other breaches, our brand and reputation could be affected, and these conditions could also have a material adverse effect on our business, financial condition, or results of operations.

Our business is becoming increasingly dependent on information technology and will require additional cash investments in order to grow and meet the demands of our clients.

Since the introduction of our subscription services, our dependence on the use of sophisticated technologies and information systems has increased.  Moreover, our technology platforms will require continuing cash investments by us to expand existing offerings, improve the client experience, and develop complementary offerings.  Our future success depends in part on our ability to adapt our services and infrastructure while continuing to improve the performance, features, and reliability of our services in response to the evolving demands of the marketplace.  Failure to adapt and improve these areas could have an adverse effect on our business, including our results of operations, financial position, and cash flows.

We could incur additional liabilities or our reputation could be damaged if we do not protect client data or if our information systems are breached.

We are dependent on information technology networks and systems to process, transmit, and store electronic information and to communicate between our locations around the world and with our clients.  Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information.  We are also required at times to manage, utilize, and store sensitive or confidential client or employee data.  As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state laws governing the protection of individually identifiable information.  If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines, and/or criminal prosecution.  Unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud, or misappropriation could damage our reputation and cause us to lose clients.


Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve.  For example, the European Union and the U.S. formally entered into a new framework in July 2016 that provides a mechanism for companies to transfer data from European Union member states to the U.S.  This new framework, called the E.U.-U.S. Privacy Shield Framework, is intended to address shortcomings identified by the European Court of Justice in a predecessor mechanism.  The Privacy Shield and other data protection mechanisms face a number of legal challenges by both private parties and regulators, which may lead to uncertainty about the legal basis for data transfers across the Atlantic.  Ongoing legal reviews may result in burdensome or inconsistent requirements affecting the location and movement of our customer and internal employee data as well as the management of that data.  Compliance may require changes in services, business practices, or internal systems that may result in increased costs, lower revenue, reduced efficiency, or greater difficulty in competing with foreign-based firms.  Failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged noncompliant activity.

In addition, during May 2018 the new General Data Protection Regulation (GDPR) became effective in the European Union.  The GDPR imposes strict requirements on the collection, use, security, and transfer of personal information in and from European Union member states.  The GDPR is designed to unify data protection within the European Union under a single law, which may result in significantly greater compliance burdens and costs related to our European Union operations and customers.  Under GDPR, fines of up to 20 million Euros or up to four percent of the annual global revenues of the infringer, whichever is greater, could be imposed.  Although GDPR applies across the European Union, local data protection authorities still have the ability to interpret GDPR, which may create inconsistencies in application on a country-by-country basis.  Furthermore, as the United Kingdom transitions out of the European Union, we may encounter additional complexity with respect to data privacy and data transfers from the United Kingdom.  We implemented new controls and procedures, including a team dedicated to data protection, to comply with the Privacy Shield and the requirements of GDPR, which were effective for us in May 2018.  However, these new procedures and controls may not be completely effective in preventing unauthorized breaches of personal data.

Other governmental authorities throughout the U.S. and around the world are considering similar types of legislative and regulatory proposals concerning data protection.  For example, in June 2018, the State of California enacted the California Consumer Privacy Act of 2018 (the CCPA), which will come into effect on January 1, 2020.  The CCPA requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, and allows consumers to opt out of certain data sharing with third parties and provides a new cause of action for data breaches.  However, legislators have stated that they intend to propose amendments to the CCPA, and it remains unclear what, if any, modifications will be made to the CCPA or how it will be interpreted.  Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data.  Each of these privacy, security, and data protection laws and regulations could impose significant limitations, require changes to our business, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct.


We employ global best practices in securing and monitoring code, applications, systems, processes and data, and our security practices are regularly reviewed and validated by an external auditing firm.  However, these efforts may be insufficient to protect sensitive information against illegal activities and we may be exposed to additional liabilities from the various data protection laws enacted within the jurisdictions where we operate.

The sale of a large number of common shares by Knowledge Capital could depress the market price of our common stock.

Knowledge Capital Investment Group (Knowledge Capital), a related party primarily controlled by a member of our Board of Directors, holds 2.8 million shares, or approximately 20 percent, of our outstanding common shares.  On January 26, 2015, the SEC declared effective a registration statement on Form S-3 to register the resale of shares held by Knowledge Capital.  The sale or prospect of the sale of a substantial number of the shares held by Knowledge Capital may have an adverse effect on the market price of our common stock.

Our results of operations could be adversely affected by economic and political conditions and the effects of these conditions on our clients’ businesses and their levels of business activity.

Global economic and political conditions affect our clients’ businesses and the markets in which they operate.  Our financial results are somewhat dependent on the amount that current and prospective clients budget for training.  A serious and/or prolonged economic downturn combined with a negative or uncertain political climate could adversely affect our clients’ financial condition and the amount budgeted for training by our clients.  These conditions may reduce the demand for our services or depress the pricing of those services and have an adverse impact on our results of operations.  Changes in global economic conditions may also shift demand to services for which we do not have competitive advantages, and this could negatively affect the amount of business that we are able to obtain.  Such economic, political, and client spending conditions are influenced by a wide range of factors that are beyond our control and that we have no comparative advantage in forecasting.  If we are unable to successfully anticipate these changing conditions, we may be unable to effectively plan for and respond to those changes, and our business could be adversely affected.

Our business success also depends in part upon continued growth in the use of training and consulting services and the renewal of existing contracts by our clients.  In challenging economic environments, our clients may reduce or defer their spending on new services and consulting solutions in order to focus on other priorities.  At the same time, many companies have already invested substantial resources in their current means of conducting their business and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel and/or processes.  If growth in the general use of training and consulting services in business or our clients’ spending on these items declines, or if we cannot convince our clients or potential clients to embrace new services and solutions, our results of operations could be adversely affected.

In addition, our business tends to lag behind economic cycles and, consequently, the benefits of an economic recovery following a period of economic downturn may take longer for us to realize than other segments of the economy.


Recent developments in international trade may have a negative effect on global economic conditions and our business, financial results, and financial condition.

The United States recently proposed and enacted certain tariffs.  In addition, there have been ongoing discussions and activities regarding changes to other U.S. trade policies and treaties.  In response, some countries in which we operate, including China, are threatening to implement or have already implemented tariffs on U.S. imports or otherwise imposed non-tariff barriers.  These developments may have a material adverse effect on global economic conditions and the stability of global financial markets, and they may significantly reduce global trade and, in particular, trade between China and the United States.  Any of these factors could depress economic activity, create anti-American consumer sentiment, restrict our access to suppliers or customers, and have a material adverse effect on our business, financial condition, and results of operations.  In addition, any actions by non-U.S. markets to implement further trade policy changes, including limiting foreign investment or trade, increasing regulatory scrutiny or taking other actions which impact U.S. companies’ ability to obtain necessary licenses or approvals could negatively impact our business.

We have only a limited ability to protect our intellectual property rights, which are important to our success.

Our financial success is partially dependent on our ability to protect our proprietary offerings and other intellectual property.  The existing laws of some countries in which we provide services might offer only limited protection of our intellectual property rights.  To protect our intellectual property, we rely upon a combination of confidentiality policies, nondisclosure and other contractual arrangements, as well as copyright and trademark laws.  The steps we take in this regard may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights, especially in foreign jurisdictions.

The loss of proprietary content or the unauthorized use of our intellectual property may create greater competition, loss of revenue, adverse publicity, and may limit our ability to reuse that intellectual property for other clients.  Any limitation on our ability to provide a service or solution could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future engagements.

We depend on key personnel, the loss of whom could harm our business.

Our future success will depend, in part, on the continued service of key executive officers and personnel.  The loss of the services of any key individuals could harm our business.  Our future success also depends on our ability to identify, attract, and retain additional qualified senior personnel.  Competition for such individuals in our industry is intense, and we may not be successful in attracting and retaining such personnel.

If we are unable to attract, retain, and motivate high-quality employees, including sales personnel and training consultants, we may not be able to grow our business as projected or may not be able to compete effectively.

Our success and ability to grow are partially dependent on our ability to hire, retain, and motivate sufficient numbers of talented people with the increasingly diverse skills needed to serve our clients and grow our business.  Competition for skilled personnel is intense at all levels of experience and seniority.  There is a risk that we will find it difficult to hire and retain a sufficient number of employees with the skills or backgrounds we require, or that it will prove difficult to retain them in a competitive labor market.  If we are unable to hire and retain talented sales and delivery employees with the skills, and in the locations, we require, we might not be able to grow our business at projected levels or may not be able to effectively deliver our content and services.  If we need to hire additional personnel to maintain a specified number of sales personnel or are required to re-assign personnel from other geographic areas, it could increase our costs and adversely affect our profit margins.  In addition, the inability of newly hired sales personnel to achieve projected sales levels may inhibit our ability to attain anticipated growth.


Our global operations pose complex management, foreign currency, legal, tax, and economic risks, which we may not adequately address.

We have sales offices in Australia, China, Japan, Germany, Switzerland, Austria, and the United Kingdom.  We also have licensed operations in numerous other foreign countries.  As a result of these foreign operations and their impact upon our financial statements, we are subject to a number of risks, including:

Restrictions on the movement of cash
Burdens of complying with a wide variety of national and local laws, including tax laws
The absence in some jurisdictions of effective laws to protect our intellectual property rights
Political instability
Currency exchange rate fluctuations
Longer payment cycles
Price controls or restrictions on exchange of foreign currencies

For instance, on June 23, 2016, the United Kingdom held a referendum in which a majority of voters chose to exit the European Union, commonly referred to as “Brexit.”  The outcome of this referendum produced significant currency exchange rate fluctuations and volatility in global stock markets.  The British government has commenced negotiations to determine the terms of Brexit, but the terms have not yet been determined and the process and effects of such separation remain uncertain.  Given the lack of comparable precedent, the implications of Brexit or how such implications might affect us are unclear.  Brexit could, among other things, disrupt trade and the free movement of data, goods, services, and people between the United Kingdom and the European Union or other countries as well as create legal and global economic uncertainty.  These and other potential implications of Brexit could adversely affect our business and financial results.

Our global operations expose us to numerous and sometimes conflicting legal and regulatory requirements, and violation of these regulations could harm our business.

Because we provide services to clients in many countries, we are subject to numerous, and sometimes conflicting, regulations on matters as diverse as import/export controls, content requirements, trade restrictions, tariffs, taxation, sanctions, government affairs, internal and disclosure control obligations, data privacy, and labor relations.  Violations of these regulations in the conduct of our business could result in fines, criminal sanctions against us or our officers, prohibitions on doing business, and damage to our reputation.  Violations of these regulations in connection with the performance of our obligations to our clients also could result in liability for monetary damages, fines, unfavorable publicity, and allegations by our clients that we have not performed our contractual obligations.  Due to the varying degrees of development of the legal systems of the countries in which we operate, local laws may be insufficient to protect our rights.


In many parts of the world, including countries in which we operate, practices in the local business community might not conform to international business standards and could violate anticorruption regulations, including the United States Foreign Corrupt Practices Act, which prohibits giving anything of value intended to influence the awarding of government contracts.  Although we have policies and procedures to ensure legal and regulatory compliance, our employees, licensee operators, and agents could take actions that violate these requirements.  Violations of these regulations could subject us to criminal or civil enforcement actions, including fines and suspension or disqualification from United States federal procurement contracting, any of which could have an adverse effect on our business.

We may fail to meet analyst expectations, which could cause the price of our stock to decline.

Our common stock is publicly traded on the NYSE, and at any given time various securities analysts follow our financial results and issue reports on us.  These periodic reports include information about our historical financial results as well as the analysts’ estimates of our future performance.  The analysts’ estimates are based on their own opinions and are often different from our estimates or expectations.  If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.  If our stock price is volatile, we may become involved in securities litigation following a decline in price.  Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.

Our business performance may not be sufficient for us to meet the financial guidance that we provide publicly.

We may provide financial guidance to the public based upon our expectations regarding our financial performance.  While we believe that our annual financial guidance provides investors and analysts with insight into our view of the Company’s future performance, such financial guidance is based on assumptions that may not always prove to be accurate and may vary from actual results.  If we fail to meet the full-year financial guidance that we provide, or if we find it necessary to revise such guidance during the year, the market value of our common stock could be adversely affected.

Our future quarterly operating results are subject to factors that can cause fluctuations in our stock price.

Historically, our stock price has experienced significant volatility.  We expect that our stock price may continue to experience volatility in the future due to a variety of potential factors that may include the following:

Fluctuations in our quarterly results of operations and cash flows
Increased overall market volatility
Variations between our actual financial results and market expectations
Changes in our key balances, such as cash and cash equivalents
Currency exchange rate fluctuations
Unexpected asset impairment charges
Increased or decreased analyst coverage

These factors may have an adverse effect upon our stock price in the future.


Our profitability will suffer if we are not able to maintain our pricing and utilization rates.

The profit margin on our services is largely a function of the rates we are able to recover for our services and the utilization, or chargeability, of our trainers, client partners, and consultants.  Accordingly, if we are unable to maintain sufficient pricing for our services or an appropriate utilization rate for our training professionals without corresponding cost reductions, our profit margin and overall profitability will suffer.  The rates that we are able to recover for our services are affected by a number of factors that we may be unable to control, including:

Our clients’ perceptions of our ability to add value through our programs and content
Competition
General economic conditions
Introduction of new programs or services by us or our competitors

There can be no assurance that we will be able to maintain favorable pricing or utilization rates in future periods.  Additionally, we may not achieve pricing or utilization rates that are optimal for us.  If our utilization rates are too high, it could have an adverse effect on employee engagement and attrition.  If our pricing or utilization rates are too low, our profit margin and profitability may suffer.

Our work with governmental clients exposes us to additional risks that are inherent in the government contracting process.

Our clients include national, state, provincial, and local governmental entities, and our work with these governmental entities has various risks inherent in the governmental contracting process.  These risks include, but are not limited to, the following:

Governmental entities typically fund projects through appropriated monies.  While these projects are often planned and executed as multi-year projects, the governmental entities usually reserve the right to change the scope of, or terminate, these projects for lack of approved funding and other discretionary reasons.  Changes in governmental priorities or other political developments, including disruptions in governmental operations, could result in changes in the scope of, or in termination of, our existing contracts.

Governmental entities often reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and investigations of our business practices with respect to our government contracts. If the governmental entity finds that the costs are not reimbursable, then we will not be allowed to bill for those costs or the cost must be refunded to the client if it has already been paid to us. Findings from an audit also may result in our being required to prospectively adjust previously agreed upon rates for our work, which may affect our future margins.

If a governmental client discovers improper activities in the course of audits or investigations, we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government.  The inherent limitations of internal controls may not prevent or detect all improper or illegal activities, regardless of their adequacy.


Political and economic factors such as pending elections, the outcome of elections, revisions to governmental tax policies, sequestration, debt ceiling negotiations, and reduced tax revenues can affect the number and terms of new governmental contracts signed.

The occurrences or conditions described above could affect not only our business with the particular governmental agency involved, but also our business with other agencies of the same or other governmental entities.  Additionally, because of their visibility and political nature, governmental contracts may present a heightened risk to our reputation.  Any of these factors could have an adverse effect on our business or our results of operations.

Changes in U.S. tax laws could have an adverse effect on our business, cash flows, results of operations, and financial condition.

We are subject to income and other taxes in the U.S. at the state and federal level, and in foreign jurisdictions.  Changes in applicable U.S. state, federal, or foreign tax laws and regulations, or their interpretation and application, could materially affect our tax expense and profitability.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (2017 Tax Reform), a tax reform bill which contains significant changes to corporate taxation, including a reduction in the current corporate federal income tax rate from 35 percent to 21 percent, additional limitations on the deductibility of interest expense, substantial changes to the taxation of foreign earnings, and modification or repeal of many business deductions and credits.  The changes included in the 2017 Tax Reform are broad and complex and any amended legislation or other changes in the U.S. federal income tax laws could adversely affect the U.S. federal taxation of our ongoing operations.  Any such changes and related consequences could have a material adverse impact on our financial results.

The Company’s use of accounting estimates involves judgment and could impact our financial results.

Our most critical accounting estimates are described in Management’s Discussion and Analysis found in Item 7 of this report under the section entitled “Use of Estimates and Critical Accounting Policies.”  In addition, as discussed in various footnotes to our financial statements as found in Item 8, we make certain estimates for loss contingencies, including decisions related to legal proceedings and reserves.  Because, by definition, these estimates and assumptions involve the use of judgment, our actual financial results may differ from these estimates.  If our estimates or assumptions underlying such contingencies and reserves prove incorrect, we may be required to record additional adjustments or losses relating to such matters, which would negatively affect our financial results.

We may not be able to generate sufficient cash to service our indebtedness, and we may be forced to take other actions to satisfy our payment obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our indebtedness depends on our future performance, including the performance of our subsidiaries, which will be affected by financial, business and economic conditions, competition, and other factors.  We are unable to control many of these factors, such as the general economy, economic conditions in the industries in which we operate and competitive pressures.  Our cash flow may not be sufficient to allow us to pay principal and interest on our indebtedness and to meet our other obligations.  If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital, or restructure or refinance our indebtedness.  These alternative measures may be unsuccessful and we may not meet our scheduled debt service obligations.  In addition, the terms of existing or future debt agreements, including our new 2019 Credit Facility, may restrict us from pursuing any of these alternatives.


In the event that we need to refinance all or a portion of our outstanding indebtedness before maturity or as it matures, we may not be able to obtain terms as favorable as the terms of our existing indebtedness or refinance our existing indebtedness at all.  If interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, we will incur higher interest expense.  Furthermore, if any rating agency changes our credit rating or outlook, our debt and equity securities could be negatively affected, which could adversely affect our financial condition and financial results.

Failure to comply with the terms and conditions of our credit facility may have an adverse effect upon our business and operations.

Our secured credit agreement and subsequent modifications require us to be in compliance with customary non-financial terms and conditions as well as specified financial ratios.  Failure to comply with these terms and conditions or maintain adequate financial performance to comply with specific financial ratios entitles the lender to certain remedies, including the right to immediately call due any amounts outstanding on the line of credit.  Such events would have an adverse effect upon our business and operations as there can be no assurance that we may be able to obtain other forms of financing or raise additional capital on terms that would be acceptable to us.

We may need additional capital in the future, and this capital may not be available to us on favorable terms or at all.

We may need to raise additional funds through public or private debt offerings or equity financings in order to:

Develop new services, programs, or offerings
Take advantage of opportunities, including business acquisitions
Respond to competitive pressures

Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit facility and other financing alternatives, if necessary, for these expenditures.  We obtained a new credit agreement in August 2019 with our existing lender that expires in August 2024.  We expect to regularly renew or amend our lending agreement in the future to maintain the availability of this credit facility.  Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources.  If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.


Any additional capital raised through the sale of equity could dilute current shareholders’ ownership percentage in us.  Furthermore, we may be unable to obtain the necessary capital on terms or conditions that are favorable to us, or at all.

We have significant intangible assets, goodwill, and long-term asset balances that may be impaired if cash flows from related activities decline.

Due to the nature of our business, we have significant amounts of intangible assets, including goodwill, resulting from events such as the acquisition of businesses and the licensing of content.  Our intangible assets are evaluated for impairment based on qualitative factors or upon cash flows and estimated royalties from revenue streams (indefinite-lived intangible assets) if necessary.  Our goodwill is evaluated through qualitative factors and by comparing the fair value of the reporting units to the carrying value of our net assets if necessary.  Although our current sales, cash flows, and market capitalization are sufficient to support the carrying basis of these long-lived assets, if our sales, cash flows, or common stock price decline, we may be faced with significant asset impairment charges that would have an adverse impact upon our results of operations.

Ineffective internal controls could impact our business and operating results.

Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.  Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.  If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results may be harmed and we could fail to meet our financial reporting obligations.


ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.










ITEM 2.  PROPERTIES

As of August 31, 2019, our principal executive offices in Salt Lake City, Utah occupy approximately 84,000 square feet of leased office space that is accounted for as a financing arrangement, which expires in 2025.  This facility accommodates our executive team and corporate departments, as well as other professionals.  The master lease agreement on our principal executive offices contains six five-year renewal options that may be exercised at our discretion.  Additionally, we occupy leased sales and administrative offices both in the United States and various countries around the world as shown below.  These leased facilities are accounted for as operating leases.

We consider our existing facilities to be in good condition and suitable for our current and expected level of operations in the upcoming fiscal year and in future periods.

U.S./Canada Sales Offices
Columbus, Ohio

International Sales Offices
Banbury, England
Tokyo, Japan
China:  Beijing, Shanghai, Guangzhou, and Shenzhen

During fiscal 2019, we acquired the licensee operation that serves Germany, Switzerland, and Austria (GSA), which was headquartered in Munich, Germany.  In July 2019, we closed the headquarters office in Munich and our sales personnel in the GSA countries now operate from their homes similar to our sales personnel in the United States, Canada, and in certain other countries.  In fiscal 2017, we restructured the operations of our domestic sales regions to focus on sales and support of the All Access Pass.  As part of this restructuring, we closed our three remaining sales offices in Atlanta, Georgia; Chicago, Illinois; and Irvine, California.  Our remaining sales office in the United States is used by Robert Gregory Partners, which is one of the businesses that we acquired during fiscal 2017.  There were no other significant changes to the properties used for our operations during the periods presented in this report.


ITEM 3.  LEGAL PROCEEDINGS

From time to time, we are the subject of certain legal actions, which we consider routine to our business activities.  At August 31, 2019, we were not party to any litigation or legal proceeding that, in the current opinion of management, could have a material adverse effect on our financial position, liquidity, or results of operations.  However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expectations.


ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.



PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed and traded on the New York Stock Exchange (NYSE) under the symbol “FC.”

We did not pay or declare dividends on our common stock during the fiscal years ended August 31, 2019 or 2018.  Any determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our results of operations, financial condition, terms of our financing arrangements, and such other factors as the board deems relevant.  We currently anticipate that we will retain all available funds to repay our liabilities, finance future growth and business opportunities, and to repurchase outstanding shares of our common stock.

As of October 31, 2019, we had 13,982,356 shares of common stock outstanding, which were held by 528 shareholders of record.  A number of our shareholders hold their shares in street name; therefore, we believe that there are substantially more beneficial owners of our common stock.

Purchases of Common Stock by the Issuer

We did not have any purchases of our common stock during the fourth quarter of fiscal 2019.

On January 23, 2015, our Board of Directors approved a new plan to repurchase up to $10.0 million of the Company’s outstanding common stock.  All previously existing common stock repurchase plans were canceled and the new common share repurchase plan does not have an expiration date.  On March 27, 2015, our Board of Directors increased the aggregate value of shares of Company common stock that may be purchased under the January 2015 plan to $40.0 million so long as we have either $10.0 million in cash and cash equivalents or have access to debt financing of at least $10.0 million.  Under the terms of this expanded common stock repurchase plan, we have purchased 1,539,828 shares of our common stock for $26.8 million through August 31, 2019.

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.  The Company has no obligation to repurchase any common shares under the authorization, and the repurchase plan may be suspended, discontinued, or modified at any time for any reason.

Performance Graph

The following graph demonstrates a five-year comparison of cumulative total returns for Franklin Covey Co. common stock, the S&P SmallCap 600 Index, and the S&P 600 Commercial & Professional Services Index.  The graph assumes an investment of $100 on August 31, 2014 in each of our common stock, the stocks comprising the S&P SmallCap 600 Index, and the stocks comprising the S&P 600 Commercial & Professional Services Index.  Each of the indices assumes that all dividends were reinvested.


The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make nor endorse any predictions as to our future stock performance.

The performance graph above is being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Exchange Act, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.



ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related footnotes as found in Item 8 of this Annual Report on Form 10-K.

August 31,
 
2019
   
2018
   
2017(1)
   
2016
   
2015(2)
 
In thousands, except per-share data
                             
                               
Income Statement Data:
                             
Net sales
 
$
225,356
   
$
209,758
   
$
185,256
   
$
200,055
   
$
209,941
 
Gross profit
   
159,314
     
148,289
     
122,667
     
133,154
     
138,089
 
Income (loss) from operations
   
2,655
     
(3,366
)
   
(8,880
)
   
13,849
     
19,529
 
Income (loss) before income taxes
   
592
     
(5,520
)
   
(10,909
)
   
11,911
     
17,412
 
Income tax benefit (provision)
   
(1,615
)
   
(367
)
   
3,737
     
(4,895
)
   
(6,296
)
Net income (loss)
   
(1,023
)
   
(5,887
)
   
(7,172
)
   
7,016
     
11,116
 
                                         
Earnings (loss) per share:
                                       
Basic and diluted
 
$
(.07
)
 
$
(.43
)
 
$
(.52
)
 
$
.47
   
$
.66
 
                                         
Balance Sheet Data:
                                       
Total current assets
 
$
119,340
   
$
100,163
   
$
91,835
   
$
89,741
   
$
95,425
 
Other long-term assets
   
10,039
     
12,935
     
16,005
     
13,713
     
14,807
 
Total assets
   
224,913
     
213,875
     
210,731
     
190,871
     
200,645
 
                                         
Long-term obligations
   
46,690
     
50,936
     
53,158
     
48,511
     
36,978
 
Total liabilities
   
142,899
     
133,375
     
125,666
     
97,156
     
75,139
 
                                         
Shareholders’ equity
   
82,014
     
80,500
     
85,065
     
93,715
     
125,506
 
                                         
Cash flows from operating activities
 
$
30,452
   
$
16,861
   
$
17,357
   
$
32,665
   
$
26,190
 
_______________________

(1)
During fiscal 2017 we decided to allow new All Access Pass agreements to receive updated content throughout the contracted period.  Accordingly, we defer substantially all AAP revenues at the inception of the agreements and recognize the revenue over the lives of the arrangements.  The transition to the AAP model resulted in significantly reduced revenues and operating income during fiscal 2017.

(2)
We elected to amend previously filed U.S. federal income tax returns to claim foreign tax credits instead of foreign tax deductions and recognized significant income tax benefits which reduced our effective income tax rate during these years.





ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis is intended to provide a summary of the principal factors affecting the results of operations, liquidity and capital resources, contractual obligations, and the critical accounting policies of Franklin Covey Co. (also referred to as we, us, our, the Company, and Franklin Covey) and subsidiaries.  This discussion and analysis should be read together with the accompanying consolidated financial statements and related notes contained in Item 8 of this Annual Report on Form 10-K (Form 10-K) and the Risk Factors discussed in Item 1A of this Form 10-K.  Forward-looking statements in this discussion are qualified by the cautionary statement under the heading “Safe Harbor Statement Under the Private Securities Litigation Reform Act Of 1995” contained later in Item 7 of this Form 10-K.

Non-GAAP Measures

This management’s discussion and analysis includes the concepts of adjusted earnings before interest, income taxes, depreciation, and amortization (Adjusted EBITDA) and “constant currency,” which are non-GAAP measures.  We define Adjusted EBITDA as net income or loss excluding the impact of interest expense, income taxes, intangible asset amortization, depreciation, stock-based compensation expense, and certain other items such as adjustments to the fair value of expected contingent consideration liabilities arising from business acquisitions.  Constant currency is a non-GAAP financial measure that removes the impact of fluctuations in foreign currency exchange rates and is calculated by translating the current period’s financial results at the same average exchange rates in effect during the prior year and then comparing this amount to the prior year.

We reference these non-GAAP financial measures in our decision making because they provide supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and we believe they provide investors with greater transparency to evaluate operational activities and financial results.  For a reconciliation of our segment Adjusted EBITDA to net loss, the nearest comparable GAAP measure, please refer to Note 17 (Segment Information) to our consolidated financial statements as presented in Item 8 of this Form 10-K.


EXECUTIVE SUMMARY

General Overview

Franklin Covey Co. is a global company focused on individual and organizational performance improvement.  Our mission is to “enable greatness in people and organizations everywhere,” and our worldwide resources are organized to help individuals and organizations achieve sustained superior performance through changes in human behavior.  We believe that our content and services create the connection between capabilities and results.  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.

1.
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 offerings are designed to build new skillsets, establish new mindsets, and provide enabling toolsets.

2.
Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including: the All Access Pass, the Leader in Me membership, and other intellectual property licenses, on-site training, training led through certified facilitators, on-line learning, blended learning, and organization-wide transformational processes, including consulting and coaching.

3.
Global Capability – We have sales professionals in the United States and Canada who serve clients in the private sector, in government, and in educational institutions; wholly owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria; and we contract with independent licensee partners who deliver our content and provide services in over 140 countries and territories around the world.

We hold ourselves responsible for 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, and The 4 Disciplines of Execution, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, and Education.  We believe that our offerings help individuals, teams, and entire organizations transform their results through achieving systematic, sustainable, and measurable changes in human behavior.  Our offerings are described in further detail at www.franklincovey.com.  The information contained in, or that can be accessed through, our website does not constitute a part of this annual report, and the descriptions found therein should not be viewed as a warranty or guarantee of results.

Our fiscal year ends on August 31, and unless otherwise indicated, fiscal 2019, fiscal 2018, and fiscal 2017 refer to the twelve-month periods ended August 31, 2019, 2018, 2017, and so forth.

Financial Overview

Our fiscal 2019 financial results reflect strong growth in revenues, operating results, and cash flows over the prior year.  Increased sales were driven by strong performance from both our Enterprise and Education Divisions during fiscal 2019 as shown in the table below.  We believe that the ongoing transition to a subscription-based business model is working well and results for fiscal 2019 reflect the momentum that began in fiscal 2018.  For the fiscal year ended August 31, 2019, our consolidated sales increased seven percent to $225.4 million compared with $209.8 million in fiscal 2018, despite $2.0 million of unfavorable foreign exchange impact on our sales during the fiscal year.  In constant currency, our sales in fiscal 2019 grew eight percent compared with the prior year.  Increased sales, combined with continued strong gross margins and controlled operating expense growth, produced significant improvements in our operating results and cash flows during fiscal 2019 when compared with the prior year.

For fiscal 2019, our subscription and subscription-related revenue grew 23 percent compared with fiscal 2018.  At August 31, 2019, we had $65.8 million of deferred revenue compared with $52.9 million at August 31, 2018.  Total deferred revenue reported above at August 31, 2019 and August 31, 2018 includes $3.6 million and $1.0 million, respectively, of deferred revenue that was reclassified to other long-term liabilities based on expected recognition.  At August 31, 2019, our unbilled deferred revenue grew 22 percent to $29.9 million compared with $24.5 million at the end of fiscal 2018.  Unbilled deferred revenue represents business that is contracted, but unbilled and therefore excluded from our balance sheet.


The following table sets forth our consolidated net sales by division and by reportable segment for the fiscal years indicated (in thousands):

YEAR ENDED
AUGUST 31,
 
2019
   
%
change
   
2018
   
%
change
   
2017
 
Enterprise Division:
                             
Direct offices
 
$
157,754
     
8
   
$
145,890
     
19
   
$
122,309
 
International licensees
   
12,896
     
(3)

   
13,226
     
(3)

   
13,571
 
     
170,650
     
7
     
159,116
     
17
     
135,880
 
Education Division
   
48,880
     
8
     
45,272
     
3
     
44,122
 
Corporate and other
   
5,826
     
8
     
5,370
     
2
     
5,254
 
Consolidated sales
 
$
225,356
     
7
   
$
209,758
     
13
   
$
185,256
 

Gross profit consists of net sales less the cost of services provided or the cost of goods sold.  Our cost of sales includes the direct costs of delivering content onsite at client locations, including presenter costs, materials used in the production of training products and related assessments, assembly, manufacturing labor costs, and freight.  Gross profit may be affected by, among other things, the mix of services sold to clients, prices of materials, labor rates, changes in product discount levels, and freight costs.  Consolidated cost of sales in fiscal 2019 totaled $66.0 million compared with $61.5 million in fiscal 2018.  Our gross profit for the fiscal year ended August 31, 2019 increased to $159.3 million, compared with $148.3 million in fiscal 2018.  The increase in gross profit was primarily due to increased sales as described above.  Our gross margin, which is gross profit as a percent of sales, remained strong and was consistent with the prior year at 70.7 percent.

For the fiscal year ended August 31, 2019, our operating expenses increased $5.0 million compared with the prior year.  The increase was primarily due to a $4.2 million increase in selling, general, and administrative (SG&A) expenses, and a $1.2 million increase in depreciation expense primarily related to capital spending on our AAP portal and new ERP system in prior years.  These increases were partially offset by a $0.4 million decrease in amortization expense.  Increased SG&A expenses during fiscal 2019 were primarily due to associate costs resulting from increased commissions and bonuses on higher sales, new sales and sales related personnel, a $1.9 million increase in non-cash stock-based compensation, and the addition of GSA personnel, who were formerly employed by a licensee.  Although SG&A expenses increased compared with the prior year, as a percent of revenues, SG&A expenses decreased to 64.5 percent compared with 67.3 percent in fiscal 2018.

Our results of operations in fiscal 2019 improved $6.0 million to $2.7 million of income compared with a loss from operations in fiscal 2018 of $(3.4) million.  Fiscal 2019 pre-tax income increased $6.1 million to $0.6 million compared with a pre-tax loss of $(5.5) million in fiscal 2018.

Our effective income tax rate for fiscal 2019 was approximately 273 percent compared with an effective tax rate of approximately 7 percent in fiscal 2018.  The increased effective tax rate in fiscal 2019 was primarily due to the relatively small amount of our 2019 pre-tax income, which greatly amplified the effect of non-temporary items on our effective tax rate.  Our effective tax rate was also increased by tax expense from Global Intangible Low-Taxed Income (GILTI), nondeductible expenses, and effective foreign tax rates which were significantly higher than the U.S. federal statutory rate, offset by a much smaller increase in our valuation allowance against deferred income tax assets during fiscal 2019 than the increase recorded during fiscal 2018.  In addition, we recorded a one-time benefit during fiscal 2018 resulting from the 2017 Tax Act’s reduction of the U.S. federal income tax rate.  This income tax benefit did not repeat in fiscal 2019.

Net loss for the year ended August 31, 2019 was $(1.0) million, or $(.07) per share, compared with a loss of $(5.9) million, or $(.43) per share, in fiscal 2018.

Further details regarding these items can be found in the comparative analysis of fiscal 2019 with fiscal 2018 as discussed within this management’s discussion and analysis.

Our liquidity position remained strong during fiscal 2019 and we had $27.7 million of cash at August 31, 2019, with no borrowings on our $15.0 million revolving credit facility, compared with $10.2 million of cash at August 31, 2018.  During August 2019, we obtained a new credit agreement with our existing lender, which included a new $20.0 million term loan.  For further information regarding our liquidity and cash flows refer to the Liquidity and Capital Resources discussion found later in this management’s discussion and analysis.


Key Growth Objectives

We believe that our best-in-class offerings, combined with flexible delivery modalities and worldwide sales and distribution capabilities are the foundation for future growth at Franklin Covey.  Building on this foundation, we have identified the following key drivers of growth in fiscal 2020 and beyond:

New Subscription Service Sales and the Renewal of Existing Client Contracts – We are striving to fully integrate the subscription model throughout our Enterprise and Education Division operations.  We believe the subscription-based business model creates strategic and structural durability with our clients while providing significant visibility and predictability into future revenue and earnings.  These factors contribute to higher margins, high recurring revenue, and predictable cash flow-through of sales to earnings.  Accordingly, we are focused on sales of multi-year subscription contracts and have restructured our sales force and sales support functions to more effectively sell and support subscription services.

Aggressive Expansion of the Client Partner Model – We are focused on consistently increasing the number of new client partners to increase our sales force and market penetration.  We believe our client partner model is a key driver of future growth as new client partners on average break even during their first year and make significant contributions to sales growth thereafter.  At August 31, 2019, we had 245 client partners compared with 214 at the end of fiscal 2018.

Content Expansion – We believe that our offerings are based on best-in-class content driven by best-selling books and world-class thought leadership.  Our content is focused on performance improvement through behavior-changing outcome oriented training.  The Company’s vision is to profoundly impact the way billions of people throughout the world live, work, and achieve their own great purposes.  We believe ongoing investment in our existing and new content will allow us to achieve this vision.

Continued Emphasis on Client Loyalty – Another of our underlying strategic objectives is to consistently deliver quality results to our clients.  This concept is focused on ensuring that our content and offerings are best-in-class, and that they have a measurable, lasting impact on our clients’ results.  We believe that measurable improvement in our clients’ organizations is key to retaining current clients and to obtaining new sales opportunities.

Other key factors that influence our operating results include:  the number and productivity of our international licensee operations; the number of organizations that are active customers; the number of people trained within those organizations; the continuation or renewal of existing services contracts, especially subscription renewals; the availability of budgeted training spending at our clients and prospective clients, which, in certain content categories, can be significantly influenced by general economic conditions; and our ability to manage operating costs necessary to develop and provide meaningful training and related services and products to our clients.


Results of Operations

The following table sets forth, for the fiscal years indicated, the percentage of total sales represented by the line items through income or loss before income taxes in our consolidated statements of operations.  This table should be read in conjunction with the accompanying discussion and analysis, the consolidated financial statements, and the related notes to the consolidated financial statements (amounts in percentages).

YEAR ENDED
AUGUST 31,
 
2019
   
2018
   
2017
 
Sales
   
100.0
     
100.0
     
100.0
 
Cost of sales
   
29.3
     
29.3
     
33.8
 
Gross profit
   
70.7
     
70.7
     
66.2
 
                         
Selling, general, and administrative
   
64.5
     
67.3
     
65.4
 
Contract termination costs
   
-
     
-
     
0.8
 
Restructuring costs
   
-
     
-
     
0.8
 
Depreciation
   
2.8
     
2.4
     
2.1
 
Amortization
   
2.2
     
2.6
     
1.9
 
Total operating expenses
   
69.5
     
72.3
     
71.0
 
Income (loss) from operations
   
1.2
     
(1.6
)
   
(4.8
)
Interest income
   
0.0
     
0.0
     
0.1
 
Interest expense
   
(1.0
)
   
(1.2
)
   
(1.3
)
Discount accretion on related party receivables
   
0.1
     
0.2
     
0.1
 
Income (loss) before income taxes
   
0.3
     
(2.6
)
   
(5.9
)


FISCAL 2019 COMPARED FISCAL 2018 RESULTS OF OPERATIONS

Enterprise Division

Direct Offices Segment
The Direct Office segment includes our sales personnel that serve clients in the United States and Canada; our directly owned international offices in Japan, China, the United Kingdom, Australia, and our new offices in Germany, Switzerland, and Austria; plus other groups such as our government services office.  The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
                               
   
Year Ended August 31, 2019
   
% of
Sales
   
Year Ended August 31, 2018
   
% of
Sales
   
Change
 
Sales
 
$
157,754
     
100.0
   
$
145,890
     
100.0
   
$
11,864
 
Cost of sales
   
40,999
     
26.0
     
37,750
     
25.9
     
3,249
 
Gross profit
   
116,755
     
74.0
     
108,140
     
74.1
     
8,615
 
SG&A expenses
   
97,300
     
61.7
     
94,886
     
65.0
     
2,414
 
Adjusted EBITDA
 
$
19,455
     
12.3
   
$
13,254
     
9.1
   
$
6,201
 

Sales.  During fiscal 2019, sales grew at nearly all of our Direct Office segment delivery channels compared with the prior year.  Our U.S./Canada sales grew $8.4 million, international direct office sales grew $2.6 million, government services sales increased $1.4 million, and coaching sales increased $0.5 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 obtained during the fiscal year.  During fiscal 2019, sales increased at each of our international direct offices, except Japan (which was essentially flat compared with the prior year) despite the impact of unfavorable foreign exchange rates.  For the fiscal year ended August 31, 2019, foreign exchange rates had a $1.5 million unfavorable impact on Direct Office segment sales and a $0.5 million unfavorable impact on Direct Office operating results.  The adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) did not have a significant impact on our Direct Office sales.

Gross Profit.  Gross profit increased due to increased sales in fiscal 2019 as previously described.  Gross margin remained strong and was consistent with fiscal 2018.

SG&A Expenses.  Direct Office operating expenses increased primarily due to increased commissions on higher sales, new sales and sales related personnel, and new GSA direct office expenses, which totaled $1.3 million.  These increases were partially offset by reductions and cost savings initiatives in various other areas of our Direct Office operations.


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):
                               

 
Year Ended August 31, 2019
   
% of
Sales
   
Year Ended August 31, 2018
   
% of
Sales
   
Change
 
Sales
 
$
12,896
     
100.0
   
$
13,226
     
100.0
   
$
(330
)
Cost of sales
   
2,665
     
20.7
     
3,195
     
24.2
     
(530
)
Gross profit
   
10,231
     
79.3
     
10,031
     
75.8
     
200
 
SG&A expenses
   
4,159
     
32.3
     
4,950
     
37.4
     
(791
)
Adjusted EBITDA
 
$
6,072
     
47.0
   
$
5,081
     
38.4
   
$
991
 

Sales.  International licensee revenues are primarily comprised of royalty revenues received from our international licensees.  Licensee revenues declined during fiscal 2019 primarily due to the conversion of our GSA licensee to a direct office, which produced $0.4 million of royalty revenues in the prior year, the unfavorable impact of foreign exchange rates, and reduced sales of wholesale materials (primarily kits) and consulting services to the licensees.  Foreign exchange rates had a $0.3 million unfavorable impact on licensee revenues and operating results during fiscal 2019.  These decreases were partially offset by higher royalty revenues from certain licensees during the fiscal year.

Gross Profit.  Licensee gross profit increased primarily due to decreased sales of wholesale materials and consulting services to the licensees.  These products and services have much lower margins than licensee royalty revenues.

SG&A Expenses.  International licensee SG&A expenses decreased primarily due to the implementation of various cost savings initiatives during fiscal 2019 to improve the operating results of this segment.

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.  The following comparative information is for our Education Division in the periods indicated (in thousands):
                               
   
Year Ended August 31, 2019
   
% of
Sales
   
Year Ended August 31, 2018
   
% of
Sales
   
Change
 
Sales
 
$
48,880
     
100.0
   
$
45,272
     
100.0
   
$
3,608
 
Cost of sales
   
18,507
     
37.9
     
16,618
     
36.7
     
1,889
 
Gross profit
   
30,373
     
62.1
     
28,654
     
63.3
     
1,719
 
SG&A expenses
   
26,820
     
54.8
     
25,944
     
57.3
     
876
 
Adjusted EBITDA
 
$
3,553
     
7.3
   
$
2,710
     
6.0
   
$
843
 

Sales.  For the fiscal year ended August 31, 2019, our Education Practice sales increased primarily due to increased subscription revenues and the addition of new schools.  Partially offsetting these increases was the previous expiration of a large six-year funding commitment from a charitable educational foundation, which significantly reduced the number of open grants in fiscal 2019 and 2018.  This contract expiration reduced revenues in the Education Division by $1.1 million, and gross profit by approximately $0.7 million during fiscal 2019.  International Education licensee sales and operating results were also adversely affected by $0.2 million of unfavorable exchange rates during fiscal 2019.  The adoption of ASC 606 had a net $0.1 million favorable impact on Education Division sales and operating results during fiscal 2019.  Consistent with prior years, we continue to see increased demand for the Leader in Me program throughout the world.  As of August 31, 2019, the Leader in Me program is used in over 4,000 schools and in over 50 countries.


Gross Profit.  Education segment gross profit increased primarily due to increased sales as previously described.  Education Division gross margin was slightly lower than the prior year primarily due to increased costs associated with the Leader in Me online offering.

SG&A Expenses.  The increase in Education Division SG&A expense was primarily due to investments in new sales personnel, increased commissions on higher sales, and the cost of developing new materials to provide growth opportunities in future periods.

Other Expenses

DepreciationDepreciation expense increased due to the acquisition of capital assets, including significant technology related investments in fiscal 2018, and purchases during fiscal 2019.  Based on previous property and equipment acquisitions, and expected capital additions during fiscal 2020, we expect depreciation expense will total approximately $6.7 million in fiscal 2020.

Amortization – Our amortization expense decreased compared with the prior year primarily due to the full amortization of certain intangible assets during fiscal 2019.  We expect the amortization of intangible assets will total approximately $4.6 million during fiscal 2020.

Accretion of Discount on Related Party Receivables – We have receivables from FC Organizational Products (FCOP), an entity in which we own a 19.5 percent interest.  We classify these receivables as current or long-term based on expected payment dates, and discounted the long-term receivables at a rate of 15 percent, which we believe is an approximation of FCOP’s incremental borrowing rate.  During the second quarter of fiscal 2019, we received $1.4 million of cash from FCOP as payment on outstanding receivables.  This payment was larger than previously anticipated and we accelerated the accretion of the remaining discount on the long-term FCOP receivable during fiscal 2019.

Income Taxes

Our effective income tax rate for the fiscal year ended August 31, 2019 was approximately 273 percent, compared with approximately 7 percent in fiscal 2018.  The increased effective tax rate in fiscal 2019 was primarily due to the relatively small amount of our 2019 pre-tax income, which greatly amplified the effect of non-temporary items on our effective tax rate.  Our effective tax rate was also increased by tax expense from GILTI, nondeductible expenses, and effective foreign tax rates which were significantly higher than the U.S. federal statutory rate.  These increases were partially offset by changes in our valuation allowance against deferred income tax assets in 2019 compared with fiscal 2018.  During fiscal 2019, our valuation allowance against deferred tax assets increased by $0.5 million, which was significantly less than the $2.8 million net increase in fiscal 2018.  In addition, we recorded a one-time benefit in fiscal 2018 from the 2017 Tax Act’s reduction of the U.S. federal income tax rate.  This benefit did not repeat in fiscal 2019.

Although we paid $1.8 million in cash for income taxes during fiscal 2019, 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.


FISCAL 2018 COMPARED WITH FISCAL 2017 RESULTS OF OPERATIONS

Enterprise Division

Direct Offices Segment
The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):
                               
   
Year Ended August 31, 2018
   
% of
Sales
   
Year Ended August 31, 2017
   
% of
Sales
   
Change
 
Sales
 
$
145,890
     
100.0
   
$
122,309
     
100.0
   
$
23,581
 
Cost of sales
   
37,750
     
25.9
     
40,609
     
33.2
     
(2,859
)
Gross profit
   
108,140
     
74.1
     
81,700
     
66.8
     
26,440
 
SG&A expenses
   
94,886
     
65.0
     
77,458
     
63.3
     
17,428
 
Adjusted EBITDA
 
$
13,254
     
9.1
   
$
4,242
     
3.5
   
$
9,012
 

Sales.  During fiscal 2018, our Direct Office segment sales increased primarily due to increased sales of subscription services and recognition of previously deferred subscription sales.  In addition, our government services sales increased $4.1 million, and we had $4.0 million of increased revenue from businesses acquired in the third and fourth quarters of fiscal 2017.  These increases were partially offset by decreased facilitator sales, as many of these clients have transitioned to the AAP, and decreased onsite training revenues.

International direct office sales increased $4.9 million when compared with the prior year.  Sales increased at all of our international offices compared with fiscal 2017.  Our sales in the United Kingdom and Australia were favorably impacted by the recognition of previously deferred AAP revenues and new contracts.  Our offices in China continued to perform well and we recognized a $1.3 million increase in sales compared with the prior year.  Our Japan office sales increased by $0.2 million despite our decision to exit the publishing business in the third quarter of fiscal 2017.  Foreign exchange rates had a $1.0 million favorable impact on our international direct offices sales and a $0.2 million favorable impact on our international direct office results of operations during fiscal 2018.

Gross Profit.  Gross profit increased due to increased sales during fiscal 2018 as described above.  Gross margin increased primarily due to increased subscription service sales, which generally have higher gross margins than our other services, and our decision to exit the publishing business in Japan during fiscal 2017.  During fiscal 2017, we recorded a $2.1 million charge in cost of goods sold to exit this business and write off the majority of our book inventory in Japan.

SG&A Expenses.  Direct Office operating expenses increased primarily due to increased commissions on higher sales; new sales and sales related personnel, including implementation specialists; and new personnel from businesses acquired during the third and fourth quarters of fiscal 2017.

International Licensees Segment
The following comparative information is for our international licensee operations in the periods indicated (in thousands):
                               
   
Year Ended August 31, 2018
   
% of
Sales
   
Year Ended August 31, 2017
   
% of
Sales
   
Change
 
Sales
 
$
13,226
     
100.0
   
$
13,571
     
100.0
   
$
(345
)
Cost of sales
   
3,195
     
24.2
     
3,088
     
22.8
     
107
 
Gross profit
   
10,031
     
75.8
     
10,483
     
77.2
     
(452
)
SG&A expenses
   
4,950
     
37.4
     
4,068
     
30.0
     
882
 
Adjusted EBITDA
 
$
5,081
     
38.4
   
$
6,415
     
47.3
   
$
(1,334
)


Sales.  Our international licensee revenues decreased $0.3 million compared with the prior year, which was primarily due to decreased sales of training materials during the year.  Foreign exchange rates had a $0.3 million favorable impact on licensee revenues for fiscal 2018.

Gross Profit.  Gross profit decreased due to decreased sales during fiscal 2018 as described above.  Gross margin decreased slightly due to the mix of wholesale products and consulting services provided during the fiscal year.

SG&A Expenses.  Operating expenses increased primarily due to marketing and events to launch the All Access Pass to our licensee partners during fiscal 2018.  We had recently completed the translation of AAP materials into various different languages, which made the AAP available for sale by our international licensees.

Education Division

The following comparative information is for our Education Division in the periods indicated (in thousands):
                               
   
Year Ended August 31, 2018
   
% of
Sales
   
Year Ended August 31, 2017
   
% of
Sales
   
Change
 
Sales
 
$
45,272
     
100.0
   
$
44,122
     
100.0
   
$
1,150
 
Cost of sales
   
16,618
     
36.7
     
16,206
     
36.7
     
412
 
Gross profit
   
28,654
     
63.3
     
27,916
     
63.3
     
738
 
SG&A expenses
   
25,944
     
57.3
     
20,721
     
47.0
     
5,223
 
Adjusted EBITDA
 
$
2,710
     
6.0
   
$
7,195
     
16.3
   
$
(4,485
)

Sales.  Our Education Division has grown consistently over the past several years, from $8.4 million of sales in fiscal 2010 to $44.1 million in sales during fiscal 2017.  However, in fiscal 2018, the Education Division’s revenues increased only three percent to $45.3 million.  The primary reason for the slowdown in Education Division revenues was the expiration of a large six-year funding commitment from a charitable educational foundation focused on funding new Leader in Me schools.  This contract expiration reduced revenues in the Education Division by $2.8 million, and gross profit by approximately $1.6 million during fiscal 2018.

SG&A Expenses.  Education Division SG&A expense increased primarily due to investments in new sales and sales related personnel.  During fiscal 2018 we also made the decision to expand the Leader in Me program to high schools and made substantial investments in both sales personnel and new materials to drive increased Education segment sales in the future.

Other Expenses

Contract Termination Costs – During fiscal 2017, we entered into a new 10-year license agreement for Education practice content in a foreign country, with minimum required royalties payable to us that total approximately $13 million over the life of the arrangement.  Under the previously existing profit-sharing agreement, we would have been obligated to pay one-third of the royalty to an international licensee partner that owns the rights in that country.  For a $1.5 million cash payment, we terminated the previously existing profit sharing arrangement and we will owe no further royalty payments to the licensee.  Based on the guidance for contract termination costs, we expensed the $1.5 million payment in fiscal 2017.  This charge did not repeat in fiscal 2018.

Restructuring Costs – During the third quarter of fiscal 2017, we decided to exit the publishing business in Japan and we restructured our U.S./Canada direct office operations to transition to an AAP-focused business model.  We expensed $3.6 million related to these changes during fiscal 2017.  Due to a change in strategy designed to focus resources and efforts on sales of the All Access Pass in Japan, and declining sales and profitability of the publishing business, we decided to exit the publishing business in Japan.  As a result of this determination, we wrote off the majority of our book inventory located in Japan and expensed $2.1 million, which was recorded in cost of sales.  We also restructured the operations of our U.S/Canada direct offices to create new smaller regional market teams that are focused on selling the All Access Pass.  Accordingly, we determined that our three remaining regional sales offices were unnecessary since most client partners work from home-based offices, we restructured the operations of the Sales Performance and Winning Customer Loyalty Practices, and we eliminated certain functions to reduce costs in future periods.  We expensed $1.5 million for these restructuring costs in fiscal 2017.  We did not engage in any significant restructuring activities during fiscal 2018.



DepreciationDepreciation expense increased due to the acquisition of assets in fiscal 2018, including our new ERP software and significantly upgraded AAP portal.

Amortization – Our consolidated amortization expense increased compared with the prior year primarily due to the fiscal 2017 acquisitions of Robert Gregory Partners, LLC and Jhana Education, and the amortization of acquired intangible assets.

Accretion of Discount on Related Party Receivables – During fiscal 2018, FCOP paid its long-term receivables sooner than expected and we accelerated the accretion of the discount on these receivables during the year.

Income Taxes

Our effective income tax provision rate for the fiscal year ended August 31, 2018 was approximately 7 percent compared with a benefit rate of approximately 34 percent in the prior year.

The unfavorable change in tax rate for fiscal 2018 was primarily due to the recognition of a $3.0 million valuation allowance against our foreign tax credit carryforward from fiscal 2011.  Our sales of the All Access Pass and other subscription services have generated, and will likely continue to generate, substantial amounts of deferred revenue for both book and tax purposes.  This situation has produced taxable losses for the past two fiscal years and a more-likely-than-not presumption that insufficient taxable income will be available to realize the fiscal 2011 foreign tax carryforward, which expires at the end of fiscal 2021.  We also recognized additional income tax expense from unrecognized tax benefits and disallowed travel and entertainment expenses in fiscal 2018.  Partially offsetting these unfavorable factors were tax benefits from the Tax Cut and Jobs Act (the 2017 Tax Act), which was signed into law on December 22, 2017.  The 2017 Tax Act decreased the U.S. federal statutory tax rate applicable to our net deferred tax liabilities, resulting in a $1.7 million benefit, which was partially offset by $0.5 million of reduced benefits resulting from the decrease in the U.S. federal statutory tax rate applied to our pre-tax loss.

Our effective tax rate in fiscal 2018 was also affected by $0.5 million of previously unrecognized tax benefits that were partially offset by additional valuation allowances against the deferred tax assets of a foreign subsidiary and disallowed travel and entertainment expenses.



QUARTERLY RESULTS

The following tables set forth selected unaudited quarterly consolidated financial data for the fiscal years ended August 31, 2019 and 2018.  The quarterly consolidated financial data reflects, in the opinion of management, all normal and recurring adjustments necessary to fairly present the results of operations for such periods.  Results of any one or more quarters are not necessarily indicative of continuing trends (in thousands, except for per-share amounts).

YEAR ENDED AUGUST 31, 2019 (unaudited)
                       
   
November 30
   
February 28
   
May 31
   
August 31
 
Net sales
 
$
53,829
   
$
50,356
   
$
56,006
   
$
65,165
 
Gross profit
   
36,783
     
35,366
     
39,664
     
47,502
 
Selling, general, and administrative
   
34,644
     
35,925
     
38,713
     
36,037
 
Depreciation
   
1,554
     
1,697
     
1,556
     
1,558
 
Amortization
   
1,238
     
1,300
     
1,259
     
1,179
 
Income (loss) from operations
   
(653
)
   
(3,556
)
   
(1,864
)
   
8,728
 
Income (loss) before income taxes
   
(1,257
)
   
(3,927
)
   
(2,418
)
   
8,194
 
Net income (loss)
   
(1,357
)
   
(3,517
)
   
(2,024
)
   
5,875
 
                                 
Net income (loss) per share:
                               
Basic
 
$
(.10
)
 
$
(.25
)
 
$
(.14
)
 
$
.42
 
Diluted
   
(.10
)
   
(.25
)
   
(.14
)
   
.41
 
                                 
YEAR ENDED AUGUST 31, 2018 (unaudited)
                               
   
November 30
   
February 28
   
May 31
   
August 31
 
Net sales
 
$
47,932
   
$
46,547
   
$
50,461
   
$
64,818
 
Gross profit
   
32,868
     
32,744
     
34,916
     
47,761
 
Selling, general, and administrative
   
33,824
     
35,097
     
34,910
     
37,294
 
Depreciation
   
901
     
1,379
     
1,267
     
1,615
 
Amortization
   
1,395
     
1,395
     
1,326
     
1,251
 
Income (loss) from operations
   
(3,252
)
   
(5,127
)
   
(2,587
)
   
7,601
 
Income (loss) before income taxes
   
(3,740
)
   
(5,765
)
   
(3,088
)
   
7,074
 
Net income (loss)
   
(2,392
)
   
(2,740
)
   
(2,534
)
   
1,779
 
                                 
Net income (loss) per share:
                               
Basic and diluted
 
$
(.17
)
 
$
(.20
)
 
$
(.18
)
 
$
.13
 

Our fourth quarter of each fiscal year typically has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education practice (when school administrators and faculty have professional development days) and to increased sales that typically occur during that quarter resulting from year-end incentive programs.  Overall, training sales are moderately seasonal because of the timing of corporate training, which is not typically scheduled as heavily during holiday and certain vacation periods.  Quarterly fluctuations may also be affected by other factors including the introduction of new offerings, business acquisitions, the addition of new organizational customers, and the elimination of underperforming offerings.

For more information on our quarterly results of operations, refer to our quarterly reports on Form 10-Q as filed with the SEC.  Our quarterly reports for the periods indicated are available free of charge at www.sec.gov.

LIQUIDITY AND CAPITAL RESOURCES

Introduction

Our cash balance at August 31, 2019 totaled $27.7 million, with no borrowings on our $15.0 million revolving credit facility, compared with $10.2 million of cash at August 31, 2018.  Our cash balance increased primarily due our new credit facility obtained in August 2019, which included a new $20.0 million term note as discussed below.  Of our $27.7 million in cash at August 31, 2019, $10.6 million was held outside the U.S. by our foreign subsidiaries.  We routinely repatriate cash from our foreign subsidiaries and consider cash generated from foreign activities a key component of our overall liquidity position.  Our primary sources of liquidity are cash flows from the sale of services in the normal course of business and available proceeds from our credit facility.  Our primary uses of liquidity include payments for operating activities, capital expenditures (including curriculum development), debt payments, contingent payments from the prior acquisition of businesses, working capital expansion, and purchases of our common stock.


The following table summarizes our cash flows from operating, investing, and financing activities for the past three years (in thousands):

YEAR ENDED AUGUST 31,
 
2019
   
2018
   
2017
 
Total cash provided by (used for):
                 
Operating activities
 
$
30,452
   
$
16,861
   
$
17,357
 
Investing activities
   
(6,873
)
   
(10,634
)
   
(21,675
)
Financing activities
   
(5,932
)
   
(4,679
)
   
3,134
 
Effect of exchange rates on cash
   
(101
)
   
(319
)
   
(348
)
Increase (decrease) in cash and cash equivalents
 
$
17,546
   
$
1,229
   
$
(1,532
)

2019 Credit Agreement

On August 7, 2019, we entered into a new credit agreement (the 2019 Credit Agreement) with our existing lender, which replaced the amended and restated credit agreement, dated March 2011 (the Original Credit Agreement).  The 2019 Credit Agreement provides up to $25.0 million in term loans and a $15.0 million revolving line of credit which expires in August 2024.  Upon entering into the 2019 Credit Agreement, we borrowed $20.0 million through a term loan and used the proceeds to repay all indebtedness under the Original Credit Agreement.  The proceeds from the 2019 Credit Agreement may be used for general corporate purposes as well as for other transactions, unless specifically prohibited by the terms of the agreement.  Surplus proceeds from the $20.0 million term note were classified as cash and cash equivalents on our consolidated balance sheet at August 31, 2019.  Within one year of the date of the 2019 Credit Agreement, we may request an additional $5.0 million term loan.  Interest on all borrowings under the 2019 Credit Agreement is equal to LIBOR plus 1.85 percent, which pricing matches the Original Credit Agreement.

The 2019 Credit Agreement preserves existing debt covenants that include (i) a funded debt to EBITDAR ratio of less than 3.0 to 1.0; (ii) a fixed charge coverage ratio greater than 1.15 to 1.0; (iii) an annual limit on capital expenditures (excluding capitalized curriculum development) 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 August 31, 2019.

In addition to our revolving line of credit facility and term loan obligations, we have a long-term lease on our corporate campus that is accounted for as a financing obligation.  For further information on our operating lease obligations, which are not currently recorded on our consolidated balance sheet, refer to the notes to our consolidated financial statements as presented in Item 8 of this report on Form 10-K.

The following discussion is a description of the primary factors affecting our cash flows and their effects upon our liquidity and capital resources during the fiscal year ended August 31, 2019.

Cash Flows from Operating Activities

Our primary source of cash from operating activities was the sale of services and products to our customers in the normal course of business.  The primary uses of cash for operating activities were payments for selling, general, and administrative expenses, payments for direct costs necessary to conduct training programs, payments to suppliers for materials used in training manuals sold, and to fund working capital needs.  For the fiscal year ended August 31, 2019, our cash provided by operating activities increased 81 percent to $30.5 million compared with $16.9 million for the fiscal year ended August 31, 2018.  The increase was primarily due to improved operating results during the year and from cash used to support changes in working capital balances.  Our collection of accounts receivable remained strong during fiscal 2019 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.


Cash Flows from Investing Activities and Capital Expenditures

Our cash used for investing activities during the fiscal year ended August 31, 2019 totaled $6.9 million.  The primary uses of cash for investing activities included purchases of property and equipment in the normal course of business and additional investments in our offerings.

Our fiscal 2019 purchases of property and equipment, which totaled $4.2 million, consisted primarily of computer software, hardware, and leasehold improvements on our corporate campus.  We currently anticipate that our purchases of property and equipment will total approximately $5.8 million in fiscal 2020.

We spent $2.7 million during fiscal 2019 on the development of various 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.

During the first quarter of fiscal 2018, we paid $1.1 million to the former owners of Jhana Education for contingent consideration related to this acquisition.  Due to the close proximity of this payment to the acquisition date, we classified the $1.1 million as a component of investing activities in our consolidated statement of cash flows.  Other contingent consideration payments from this acquisition are classified as components of financing activities in our consolidated statements of cash flows.

Cash Flows from Financing Activities

During the fiscal year ended August 31, 2019, we used $5.9 million of net cash for financing activities.  Our primary uses of financing cash during fiscal 2019 included $14.9 million of cash used for principal payments on the term loans from our Original Credit Agreement and the financing obligation on our corporate campus; $11.3 million used to reduce the balance on our revolving line of credit obligation, which had a zero balance prior to completing the 2019 Credit Agreement; and $0.7 million of cash paid to the former owners of Jhana Education for contingent acquisition consideration.  These uses of financing cash were partially offset by $20.0 million of proceeds from a term loan on our 2019 Credit Agreement and $1.0 million of cash received from participants in our employee stock purchase program to acquire shares of our common stock.

During fiscal 2017, we completed the acquisitions of RGP and Jhana as previously described.  Each of these acquisitions have contingent consideration that may be earned by their former owners based on specified performance criteria.  As the operations of these acquisitions reach the specified milestones for required contingent payments, our uses of cash for financing activities may increase.

On January 23, 2015, our Board of Directors approved a new plan to repurchase up to $10.0 million of the Company’s outstanding common stock.  All previously existing common stock repurchase plans were canceled and the new common share repurchase plan does not have an expiration date.  On March 27, 2015, our Board of Directors increased the aggregate value of shares of Company common stock that may be purchased under the January 2015 plan to $40.0 million so long as we have either $10.0 million in cash and cash equivalents or have access to debt financing of at least $10.0 million.  Under the terms of this expanded common stock repurchase plan, we have purchased 1,539,828 shares of our common stock for $26.8 million through August 31, 2019.  Our cash used for financing activities will increase as we make purchases of shares under the terms of this plan or other share purchase plans in the future.

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, future cash flows from operating activities, and available borrowings from our recently completed 2019 Credit Agreement.  Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit and other financing alternatives, if necessary, for these expenditures.  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.  At August 31, 2019, we had $19.9 million of available borrowing capacity on our 2019 Credit Agreement, which consisted of $14.9 million of credit on our revolving credit facility (amount reduced by $0.1 million of open standby letters of credit) and an additional $5.0 million term loan.  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, 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.

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 lease payments resulting from the sale of our corporate campus (financing obligation); repayment of term loan obligations; 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.  At August 31, 2019, our expected payments on these obligations over the next five fiscal years and thereafter are as follows (in thousands):

   
Fiscal
   
Fiscal
   
Fiscal
   
Fiscal
   
Fiscal
             
Contractual Obligations
 
2020
   
2021
   
2022
   
2023
   
2024
   
Thereafter
   
Total
 
Required lease payments on corporate campus
 
$
3,724
   
$
3,798
   
$
3,874
   
$
3,952
   
$
4,031
   
$
3,301
   
$
22,680
 
Term loan payable to bank(1)
   
5,653
     
5,504
     
5,299
     
5,094
     
-
     
-
     
21,550
 
Purchase obligations
   
4,510
     
-
     
-
     
-
     
-
     
-
     
4,510
 
Jhana contingent consideration payments(2)
   
888
     
1,076
     
1,282
     
588
     
-
     
-
     
3,834
 
Minimum operating lease payments
   
752
     
472
     
112
     
97
     
79
     
92
     
1,604
 
RGP contingent consideration payments(2)
   
1,000
     
500
     
-
     
-
     
-
     
-
     
1,500
 
Minimum required payments for warehousing services(3)
   
195
     
-
     
-
     
-
     
-
     
-
     
195
 
Total expected contractual
obligation payments
 
$
16,722
   
$
11,350
   
$
10,567
   
$
9,731
   
$
4,110
   
$
3,393
   
$
55,873
 

(1)
Payment amounts shown include interest at 4.1 percent, which is the current rate on our term loan obligation under the 2019 Credit Agreement.

(2)
The payment of contingent consideration resulting from prior business acquisitions is based on current estimates and projections.  We reassess the fair value of estimated contingent consideration payments each quarter based on information available.  The actual payment of contingent consideration amounts may differ in amount and timing from those shown in the table.

(3)
The warehousing services contract expires in June 2020.

Our contractual obligations presented above exclude uncertain tax positions totaling $1.9 million for which we cannot make a reasonably reliable estimate of the amount and period of payment.  For further information regarding our uncertain tax positions, refer to the notes to our consolidated financial statements as presented in Part II, Item 8 of this report on Form 10-K.

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 that we used to prepare our consolidated financial statements are outlined primarily in Note 1 and in Note 2 (new revenue recognition guidance) to the consolidated financial statements, which are presented in Part II, Item 8 of this Annual Report on Form 10-K.  Some of those accounting policies require us to make assumptions and use judgments that may affect the amounts reported in our consolidated financial statements.  Management regularly evaluates its estimates and assumptions and bases those estimates and assumptions on historical experience, factors that are believed to be reasonable under the circumstances, and requirements under accounting principles generally accepted in the United States of America.  Actual results may differ from these estimates under different assumptions or conditions, including changes in economic and political conditions and other circumstances that are not in our control, but which may have an impact on these estimates and our actual financial results.

The following items require the most significant judgment and often involve complex estimates:

Revenue Recognition

We adopted ASC Topic 606 on September 1, 2018.  For the AAP, judgment is required to determine whether the intellectual property and web-based functionality and content are considered distinct and accounted for separately, or not distinct and accounted for together.

We have determined to account for the AAP as a single performance obligation and recognize the associated transaction price ratably over the term of the underlying contract beginning on the commencement date of each contract, which is the date the Company’s platforms and resources are made available to the customer.  This determination was reached after considering that our web-based functionality and content, in combination with our intellectual property, each represent inputs that transform into a combined output that represents the intended outcome of the AAP, which is to provide a continuously accessible, customized, and dynamic learning and development solution only accessible through the AAP platform.

Judgment is required to determine the stand-alone selling price (SSP) for each distinct performance obligation.  Where we have more than one distinct performance obligation, we must allocate the transaction price to each performance obligation based on its relative SSP.  The SSP is the price which we would sell a promised product or service separately to a customer. In determining the SSP, we consider the size and volume of transactions, price lists, historical sales, and contract prices.  We may modify our pricing from time-to-time in the future, which could result in changes to the SSP.
Stock-Based Compensation

Our shareholders have approved performance-based long-term incentive plans (LTIPs) that provide for grants of stock-based performance awards to certain managerial personnel and executive management as directed by the Organization and Compensation Committee of the Board of Directors.  The number of common shares that are vested and issued to LTIP participants is variable and is based upon the achievement of specified performance objectives during defined performance periods.  Due to the variable number of common shares that may be issued under the LTIP, we reevaluate our LTIP grants on a quarterly basis and adjust the expected vesting dates and number of shares expected to be awarded based upon actual and estimated financial results of the Company compared with the performance goals set for the award.  Adjustments to the number of shares awarded, and to the corresponding compensation expense, are made on a cumulative basis at the adjustment date based upon the estimated probable number of common shares to be awarded.

The analysis of our LTIP awards contains uncertainties because we are required to make assumptions and judgments about the timing and eventual number of shares that will vest in each LTIP grant.  The assumptions and judgments that are essential to the analysis include forecasted sales and operating income levels during the LTIP service periods.  These forecasted amounts may be difficult to predict over the life of the LTIP awards due to changes in our business, such as from the introduction of subscription-based services and their impact on our financial results.  These business changes may also leave some previously approved performance measures obsolete or unattainable.  The evaluation of LTIP performance awards and the corresponding use of estimated amounts may produce additional volatility in our consolidated financial statements as we record cumulative adjustments to the estimated service periods and number of common shares to be awarded under the LTIP grants as described above.

Accounts Receivable Valuation

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  Our allowance for doubtful accounts calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the collectability of customer accounts, which may be influenced by a number of factors that are not within our control, such as the financial health of each customer.  We regularly review the collectability assumptions of our allowance for doubtful accounts calculation and compare them against historical collections.  Adjustments to the assumptions may either increase or decrease our total allowance for doubtful accounts and may adversely impact our financial results.  For example, a 10 percent increase to our allowance for doubtful accounts at August 31, 2019 would decrease our reported income from operations by approximately $0.4 million.

For further information regarding the calculation of our allowance for doubtful accounts, refer to the notes to our financial statements as presented in Item 8 of this report on Form 10-K.

Valuation of Indefinite-Lived Intangible Assets and Goodwill

Intangible assets that are deemed to have an indefinite life and goodwill balances are not amortized, but rather are tested for impairment on an annual basis, or more often if events or circumstances indicate that a potential impairment exists.  The Covey trade name intangible asset originated from the merger with the Covey Leadership Center in 1997 and has been deemed to have an indefinite life.  This intangible asset is quantitatively tested for impairment using the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars, and related products, and international licensee royalties.

Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired.  Under current accounting guidance, an annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

We tested goodwill for impairment at August 31, 2019 at the reporting unit level using a quantitative approach.  The estimated fair value of each reporting unit was calculated using a combination of the income approach (discounted cash flows) and the market approach (using market multiples derived from a set of companies with comparable market characteristics).  The estimated fair values of the reporting units from these approaches were weighted in the determination of the total fair value.


On an interim basis, we consider whether events or circumstances are present that may lead to the determination that goodwill may be impaired.  These circumstances include, but are not limited to, the following:

significant underperformance relative to historical or projected future operating results;
significant change in the manner of our use of acquired assets or the strategy for the overall business;
significant change in prevailing interest rates;
significant negative industry or economic trend;
significant change in market capitalization relative to book value; and/or
significant negative change in market multiples of the comparable company set.

If, based on events or changing circumstances, we determine it is more likely than not that the fair value of a reporting unit does not exceed its carrying value, we would be required to test goodwill for impairment.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions.  These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables.  We base our fair value estimates on assumptions we believe to be reasonable, but that are unpredictable and inherently uncertain.  Actual future results may differ from those estimates.  In addition, we make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.  The timing and frequency of our goodwill impairment tests are based on an ongoing assessment of events and circumstances that would indicate a possible impairment.  Based on the results of our goodwill impairment testing during fiscal 2019, we determined that no impairment existed at August 31, 2019, as each reportable operating segment’s estimated fair value exceeded its carrying value.  We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.

Acquisitions and Contingent Consideration Liabilities

We record acquisitions resulting in the consolidation of an enterprise using the purchase method of accounting.  Under this method, the acquiring company records the assets acquired, including intangible assets that can be identified and named, and liabilities assumed based on their estimated fair values at the date of acquisition.  The purchase price in excess of the fair value of the assets acquired and liabilities assumed is recorded as goodwill.  If the assets acquired, net of liabilities assumed, are greater than the purchase price paid, then a bargain purchase has occurred and the company will recognize the gain immediately in earnings.  Among other sources of relevant information, we use independent appraisals or other valuations to assist in determining the estimated fair values of the assets and liabilities.  Various assumptions are used in the determination of these estimated fair values including discount rates, market and volume growth rates, product or service selling prices, cost structures, royalty rates, and other prospective financial information.

Additionally, we are required to reassess the fair value of contingent consideration liabilities resulting from business acquisitions at each reporting period.  Although subsequent changes to the contingent consideration liabilities do not affect the goodwill generated from the acquisition transaction, the valuation of expected contingent consideration often requires us to estimate future sales and profitability.  These estimates require the use of numerous assumptions, many of which may change frequently and lead to increased or decreased operating income in future periods.  For instance, during fiscal 2019 we recorded $1.3 million of increases to the fair value of the contingent consideration liabilities from our previous business acquisitions, which resulted in a corresponding increase in selling, general, and administrative expenses.


Impairment of Long-Lived Assets

Long-lived tangible assets and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  We use an estimate of undiscounted future net cash flows of the assets over their remaining useful lives in determining whether the carrying value of the assets is recoverable.  If the carrying values of the assets exceed the anticipated future cash flows of the assets, we calculate an impairment loss.  The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based upon discounted cash flows over the estimated remaining useful life of the asset.  If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis, which is then depreciated or amortized over the remaining useful life of the asset.  Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets.

Our impairment evaluation calculations contain uncertainties because they require us to make assumptions and apply judgment in order to estimate future cash flows, forecast the useful lives of the assets, and select a discount rate that reflects the risk inherent in future cash flows.  Although we have not made any material recent changes to our long-lived assets impairment assessment methodology, if forecasts and assumptions used to support the carrying value of our long-lived tangible and finite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.

Income Taxes

We regularly evaluate our United States federal and various state and foreign jurisdiction income tax exposures.  We account for certain aspects of our income tax provision using the provisions of ASC 740-10-05, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon final settlement.  The provisions of ASC 740-10-05 also provide guidance on de-recognition, classification, interest, and penalties on income taxes, accounting for income taxes in interim periods, and require increased disclosure of various income tax items.  Taxes and penalties are components of our overall income tax provision.

We record previously unrecognized tax benefits in the financial statements when it becomes more likely than not (greater than a 50 percent likelihood) that the tax position will be sustained.  To assess the probability of sustaining a tax position, we consider all available evidence.  In many instances, sufficient positive evidence may not be available until the expiration of the statute of limitations for audits by taxing jurisdictions, at which time the entire benefit will be recognized as a discrete item in the applicable period.

Our unrecognized tax benefits result from uncertain tax positions about which we are required to make assumptions and apply judgment to estimate the exposures associated with our various tax filing positions.  The calculation of our income tax provision or benefit, as applicable, requires estimates of future taxable income or losses.  During the course of the fiscal year, these estimates are compared to actual financial results and adjustments may be made to our tax provision or benefit to reflect these revised estimates.  Our effective income tax rate is also affected by changes in tax law and the results of tax audits by various jurisdictions.  Although we believe that our judgments and estimates discussed herein are reasonable, actual results could differ, and we could be exposed to losses or gains that could be material.

We establish valuation allowances for deferred tax assets when we estimate it is more likely than not that the tax assets will not be realized.  The determination of whether valuation allowances are needed on our deferred income tax assets contains uncertainties because we must project future income, including the use of tax-planning strategies, by individual tax jurisdictions.  Changes in industry and economic conditions and the competitive environment may impact the accuracy of our projections.  We regularly assess the likelihood that our deferred tax assets will be realized and determine if adjustments to our valuation allowance are necessary.


RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 to the consolidated financial statements for information on recent accounting pronouncements.

REGULATORY COMPLIANCE

We are registered in states in which we do business that have a sales tax and we collect and remit sales or use tax on sales made in these jurisdictions.  Compliance with environmental laws and regulations has not had a material effect on our operations.

INFLATION AND CHANGING PRICES

Inflation has not had a material effect on our operations.  However, future inflation may have an impact on the price of materials used in the production of training products and related accessories, including paper and related raw materials.  We may not be able to pass on such increased costs to our customers.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain written and oral statements made by us 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 our expectations about future reported revenues and operating results, future sales growth, the expected introduction of new or refreshed offerings, including additions to the All Access Pass, future training and consulting sales activity, the impact of multi-year contracts for the All Access Pass, renewal of existing contracts, the release and success of new publications, the expected growth of our business in various markets, anticipated expenses, the adequacy of existing capital resources, projected cost reduction and strategic initiatives, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuations, the seasonality of future sales, the seasonal fluctuations in cash used for and provided by operating activities, future compliance with the terms and conditions of our 2019 Credit Agreement, the ability to borrow on, and renew, our 2019 Credit Agreement, expectations regarding income tax expenses as well as tax assets and credits and the amount of cash expected to be paid for income taxes, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets.  These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K.  Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended August 31, 2019, entitled “Risk Factors.”  In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas:  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 new AAP portal; foreign currency exchange rates; competition; 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; adverse effects on certain licensee’s performance due to civil unrest in some of the countries where our licensees operate; and other factors which may adversely affect our business.

The risks included here are not exhaustive.  Other sections of this report may include additional factors that could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements.  Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.


The market price of our common stock has been and may remain volatile.  In addition, the stock markets in general have experienced increased volatility.  Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock.  In addition, the price of our common stock can change for reasons unrelated to our performance.  Due to our relatively low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.

Forward-looking statements are based on management’s expectations as of the date made, and the Company does not undertake any responsibility to update any of these statements in the future except as required by law.  Actual future performance and results will differ and may differ materially from that contained in or suggested by forward-looking statements as a result of the factors set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in our filings with the SEC.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk of Financial Instruments

We are exposed to financial instrument market risk primarily through fluctuations in foreign currency exchange rates and interest rates.  To manage risks associated with foreign currency exchange and interest rates, we may make limited use of derivative financial instruments.  Derivatives are financial instruments that derive their value from one or more underlying financial instruments.  As a matter of policy, our derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions that are independent of those exposures.  In addition, we do not enter into derivative contracts for trading or speculative purposes, nor are we party to any leveraged derivative instrument.  However, during the fiscal years ended August 31, 2019, 2018, and 2017, we were not party to any foreign exchange contracts, interest rate swap agreements, or similar derivative instruments.

Foreign Exchange Sensitivity

Due to the global nature of our operations, we are subject to risks associated with transactions that are denominated in currencies other than the United States dollar, as well as the effects of translating amounts denominated in foreign currencies to United States dollars as a normal part of the reporting process.  The objective of our foreign currency risk management activities is to reduce foreign currency risk in the consolidated financial statements.  In order to manage foreign currency risks, we may make limited use of foreign currency forward contracts and other foreign currency related derivative instruments.

Interest Rate Sensitivity

Our long-term liabilities primarily consist of term loans payable obtained from the lender on our 2019 Credit Agreement, a long-term lease agreement (financing obligation) associated with the previous sale of our corporate headquarters, amounts borrowed on our revolving credit facility, deferred income taxes, and contingent consideration payments resulting from our business acquisitions.  Our overall interest rate sensitivity is primarily influenced by any amounts borrowed on term loans or on our revolving line of credit facility, and the prevailing interest rate on these instruments.  The effective interest rate on the term loans and our revolving line of credit facility was 4.1 percent at August 31, 2019, and we may incur additional expense if interest rates increase in future periods.  For example, a one percent increase in the interest rate on our term loans payable at August 31, 2019 would result in approximately $0.2 million of additional interest expense in fiscal 2020.  We did not have borrowings on our revolving credit facility at August 31, 2019.  Our financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franklin Covey Co.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Franklin Covey Co. and subsidiaries (the “Company”) as of August 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended August 31, 2019, of the Company and our report dated November 14, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the Company’s change in method of accounting for revenue from contracts with customers in fiscal year 2019 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.  We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP

Salt Lake City, Utah
November 14, 2019





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franklin Covey Co.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Franklin Covey Co. and subsidiaries (the “Company”) as of August 31, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended August 31, 2019, and the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 14, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company changed its method of accounting for revenue from contracts with customers in fiscal year 2019 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP

Salt Lake City, Utah
November 14, 2019

We have served as the Company’s auditor since 2016.



FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS

AUGUST 31,
 
2019
   
2018
 
In thousands, except per-share data
           
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
27,699
   
$
10,153
 
Accounts receivable, less allowance for doubtful accounts of $4,242 and $3,555
   
73,227
     
71,914
 
Inventories
   
3,481
     
3,160
 
Income taxes receivable
   
-
     
179
 
Prepaid expenses
   
3,906
     
3,864
 
Other current assets
   
11,027
     
10,893
 
Total current assets
   
119,340
     
100,163
 
                 
Property and equipment, net
   
18,579
     
21,401
 
Intangible assets, net
   
47,690
     
51,934
 
Goodwill
   
24,220
     
24,220
 
Deferred income tax assets
   
5,045
     
3,222
 
Other long-term assets
   
10,039
     
12,935
 
   
$
224,913
   
$
213,875
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of term notes payable
 
$
5,000
   
$
10,313
 
Current portion of financing obligation
   
2,335
     
2,092
 
Accounts payable
   
9,668
     
9,790
 
Income taxes payable
   
764
     
-
 
Deferred subscription revenue
   
56,250
     
47,417
 
Other deferred revenue
   
5,972
     
4,471
 
Accrued liabilities
   
23,555
     
20,761
 
Total current liabilities
   
103,544
     
94,844
 
                 
Line of credit
   
-
     
11,337
 
Term notes payable, less current portion
   
15,000
     
2,500
 
Financing obligation, less current portion
   
16,648
     
18,983
 
Other liabilities
   
7,527
     
5,501
 
Deferred income tax liabilities
   
180
     
210
 
Total liabilities
   
142,899
     
133,375
 
                 
Commitments and contingencies (Notes 6, 8 and 9)
               
                 
Shareholders’ equity:
               
Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued
   
1,353
     
1,353
 
Additional paid-in capital
   
215,964
     
211,280
 
Retained earnings
   
59,403
     
63,569
 
Accumulated other comprehensive income
   
269
     
341
 
Treasury stock at cost, 13,087 shares and 13,159 shares
   
(194,975
)
   
(196,043
)
Total shareholders’ equity
   
82,014
     
80,500
 
   
$
224,913
   
$
213,875
 


See accompanying notes to consolidated financial statements.


FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

YEAR ENDED AUGUST 31,
 
2019
   
2018
   
2017
 
In thousands, except per-share amounts
                 
                   
Net sales
 
$
225,356
   
$
209,758
   
$
185,256
 
Cost of sales
   
66,042
     
61,469
     
62,589
 
Gross profit
   
159,314
     
148,289
     
122,667
 
                         
Selling, general, and administrative
   
145,319
     
141,126
     
121,148
 
Contract termination costs
   
-
     
-
     
1,500
 
Restructuring costs
   
-
     
-
     
1,482
 
Depreciation
   
6,364
     
5,161
     
3,879
 
Amortization
   
4,976
     
5,368
     
3,538
 
Income (loss) from operations
   
2,655
     
(3,366
)
   
(8,880
)
                         
Interest income
   
37
     
104
     
223
 
Interest expense
   
(2,358
)
   
(2,676
)
   
(2,408
)
Discount accretion on related-party receivables
   
258
     
418
     
156
 
Income (loss) before income taxes
   
592
     
(5,520
)
   
(10,909
)
Benefit (provision) for income taxes
   
(1,615
)
   
(367
)
   
3,737
 
Net loss
 
$
(1,023
)
 
$
(5,887
)
 
$
(7,172
)
                         
Net loss per share:
                       
Basic and diluted
 
$
(0.07
)
 
$
(0.43
)
 
$
(0.52
)
                         
Weighted average number of common shares:
                       
Basic and diluted
   
13,948
     
13,849
     
13,819
 
                         
                         
COMPREHENSIVE LOSS:
                       
Net loss
 
$
(1,023
)
 
$
(5,887
)
 
$
(7,172
)
Foreign currency translation adjustments, net of income
                       
   tax benefit (provision) of $(5), $(75), and $37
   
(72
)
   
(326
)
   
(555
)
Comprehensive loss
 
$
(1,095
)
 
$
(6,213
)
 
$
(7,727
)










See accompanying notes to consolidated financial statements.


FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED AUGUST 31,
 
2019
   
2018
   
2017
 
In thousands
                 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
 
$
(1,023
)
 
$
(5,887
)
 
$
(7,172
)
Adjustments to reconcile net loss to net cash provided
                       
by operating activities:
                       
Depreciation and amortization
   
11,359
     
10,525
     
7,443
 
Amortization of capitalized curriculum development costs
   
4,954
     
5,280
     
3,745
 
Deferred income taxes
   
(1,051
)
   
(2,535
)
   
(5,594
)
Stock-based compensation expense
   
4,789
     
2,846
     
3,658
 
Excess tax benefit from stock-based compensation
   
-
     
-
     
(168
)
Increase (decrease) in contingent consideration liabilities
   
1,334
     
1,014
     
(1,936
)
Changes in assets and liabilities, net of effect of acquired businesses:
                       
Decrease (increase) in accounts receivable, net
   
(1,770
)
   
(5,679
)
   
164
 
Decrease (increase) in inventories
   
(260
)
   
157
     
1,583
 
Decrease in receivable from related party
   
535
     
213
     
1,421
 
Decrease (increase) in prepaid expenses and other assets
   
32
     
(1,335
)
   
(4,861
)
Increase in accounts payable and accrued liabilities
   
2,932
     
1,746
     
676
 
Increase in deferred revenue
   
8,828
     
11,613
     
19,142
 
Increase (decrease) in income taxes payable/receivable
   
889
     
109
     
(249
)
Decrease in other liabilities
   
(1,096
)
   
(1,206
)
   
(495
)
Net cash provided by operating activities
   
30,452
     
16,861
     
17,357
 
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchases of property and equipment
   
(4,153
)
   
(6,528
)
   
(7,187
)
Capitalized curriculum development costs
   
(2,688
)
   
(2,998
)
   
(6,466
)
Acquisition of businesses, net of cash acquired
   
(32
)
   
(1,108
)
   
(7,272
)
Acquisition of license rights
   
-
     
-
     
(750
)
Net cash used for investing activities
   
(6,873
)
   
(10,634
)
   
(21,675
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from line of credit borrowings
   
82,282
     
93,391
     
34,320
 
Payments on line of credit borrowings
   
(93,619
)
   
(86,431
)
   
(29,943
)
Proceeds from term notes payable financing
   
20,000
     
-
     
10,000
 
Principal payments on term notes payable
   
(12,813
)
   
(6,250
)
   
(5,000
)
Principal payments on financing obligation
   
(2,092
)
   
(1,868
)
   
(1,662
)
Purchases of common stock for treasury
   
(12
)
   
(2,006
)
   
(5,431
)
Payment of contingent consideration liabilities
   
(653
)
   
(2,323
)
   
-
 
Income tax benefit recorded in paid-in capital
   
-
     
-
     
168
 
Proceeds from sales of common stock held in treasury
   
975
     
808
     
682
 
Net cash provided by (used for) financing activities
   
(5,932
)
   
(4,679
)
   
3,134
 
Effect of foreign currency exchange rates on cash and cash equivalents
   
(101
)
   
(319
)
   
(348
)
Net increase (decrease) in cash and cash equivalents
   
17,546
     
1,229
     
(1,532
)
Cash and cash equivalents at beginning of the year
   
10,153
     
8,924
     
10,456
 
Cash and cash equivalents at end of the year
 
$
27,699
   
$
10,153
   
$
8,924
 
                         
Supplemental disclosure of cash flow information:
                       
Cash paid for income taxes
 
$
1,778
   
$
2,512
   
$
2,562
 
Cash paid for interest
   
2,386
     
2,655
     
2,314
 
                         
Non-cash investing and financing activities:
                       
Purchases of property and equipment financed by accounts payable
 
$
410
   
$
1,018
   
$
697
 
Consideration for business acquisition from liabilities of acquiree
   
798
     
-
     
-
 



See accompanying notes to consolidated financial statements.
  
FRANKLIN COVEY CO. 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 

                           
Accumulated
             
                           
Other
             
   
Common
   
Common
   
Additional
   
Retained
   
Comprehensive
   
Treasury
   
Treasury
 
   
Stock Shares
   
Stock Amount
   
Paid-In Capital
   
Earnings
   
Income
   
Stock Shares
   
Stock Amount
 
In thousands
                                         
Balance at August 31, 2016
   
27,056
   
$
1,353
   
$
211,203
   
$
76,628
   
$
1,222
     
(13,332
)
 
$
(196,691
)
Issuance of common stock from
                                                       
treasury
                   
(2,103
)
                   
188
     
2,785
 
Purchase of treasury shares
                                           
(300
)
   
(5,431
)
Restricted share award
                   
(442
)
                   
30
     
442
 
Stock-based compensation
                   
3,658
                                 
Cumulative translation
                                                       
adjustments
                                   
(555
)
               
Tax benefit recorded in
                                                       
paid-in capital
                   
168
                                 
Net loss
                           
(7,172
)
                       
Balance at August 31, 2017
   
27,056
     
1,353
     
212,484
     
69,456
     
667
     
(13,414
)
   
(198,895
)
Issuance of common stock from
                                                       
treasury
                   
(3,702
)
                   
337
     
4,510
 
Purchase of treasury shares