10-K 1 form10k_11132020.htm FORM 10K FY20 11-13-20
Franklin Covey Co.
10-K on 11/16/2020   Download
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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, 2020
 
 
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
Trading
Symbol
 Name of Each Exchange on Which Registered
Common Stock, $.05 Par Value
FC
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, 2020, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant was approximately $378.2 million, which was based upon the closing price of $31.45 per share as reported by the New York Stock Exchange.

As of October 31, 2020, the Registrant had 14,025,413 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 22, 2021, are incorporated by reference in Part III of this Form 10-K.





Franklin Covey Co.
 
TABLE OF CONTENTS
 
 
   
2
 
Business
2
 
Risk Factors
10
 
Unresolved Staff Comments
19
 
Properties
20
 
Legal Proceedings
20
 
Mine Safety Disclosures
20
   
20
 
Market for the Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
20
 
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
45
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
91
 
Controls and Procedures
91
 
Other Information
92
   
92
 
Directors, Executive Officers and Corporate Governance
92
 
Executive Compensation
93
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
93
 
Certain Relationships and Related Transactions, and Director Independence
94
 
Principal Accountant Fees and Services
94
   
95
 
Exhibits and Financial Statement Schedules
95
 
Form 10-K Summary
98
       
   
99






PART I

Disclosure Regarding Forward-Looking Statements

 
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), and such forward-looking statements involve risks and uncertainties.  Statements about future sales, costs, margins, cost savings, foreign currency exchange rates, earnings, earnings per share, cash flows, plans, objectives, expectations, growth, profitability, or recovery from the COVID-19 pandemic are forward-looking statements based on management’s estimates, assumptions, and projections.  Words such as “could,” “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and variations on such words, including similar expressions, are used to identify these forward-looking statements.  These forward-looking statements are only predictions, subject to risks and uncertainties, and actual results could differ materially from those discussed in this, and other reports, filed with the Securities and Exchange Commission (SEC) and elsewhere.  Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict.  Risks, uncertainties, and other factors that might cause such differences, some of which could be material, include, but are not limited to, the factors discussed under the section of this report entitled “Risk Factors.”

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

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

ITEM 1. BUSINESS

General Information

Franklin Covey is a global company focused on organizational performance improvement.  Our mission is to “enable greatness in people and organizations everywhere,” and our global structure is designed to help individuals and organizations achieve 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.  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, 2020 totaled $198.5 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 AAP is a revolutionary and innovative way to deliver our content to clients of various sizes, including large, multinational organizations, in a flexible and cost-effective manner.  Clients may utilize complete offerings such as The 7 Habits of Highly Effective People 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 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 our sales through acquisitions of businesses and content licenses, and opening new international offices.  Over previous years, these activities have included the following:

License of “Multipliers” Leadership Content – During late fiscal 2019, we obtained a license to develop and sell leadership offerings based on the bestselling book Multipliers by Liz Wiseman.  We launched the new programs based on Multipliers content in August 2020.  The initial term of this license will expire on August 31, 2029.

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.  We believe that we will be able to significantly grow our business in these countries through this acquisition.

Impact of COVID-19 on Franklin Covey

COVID-19 was first identified in China during December 2019, and subsequently declared a pandemic by the World Health Organization.  Since its discovery, COVID-19 has surfaced in nearly all regions of the world and has produced travel restrictions and business slowdowns or shutdowns in affected areas.  As a result, COVID-19 has impacted our business globally, including our licensees, through office, government, and school closures.  In particular, these closures impacted our third and fourth quarters of fiscal 2020 as described throughout this Annual Report on Form 10-K for fiscal 2020.


After strong financial performance during the first two quarters of fiscal 2020, our financial results in the third and fourth quarters of fiscal 2020 were adversely impacted by the COVID-19 pandemic.  We closed our corporate offices and restricted travel to protect the health and safety of our associates and clients in an effort to slow the spread of the pandemic.  Our international direct offices also followed the same pattern of closures and restrictions on associate travel and delivery of our offerings.  These actions, and similar steps taken by most of our clients, resulted in decreased sales during the third and fourth quarters as previously scheduled onsite events, client-facilitated presentations, and coaching days were postponed or canceled.

However, during the widespread closure of offices, schools, and other gathering places, we accelerated our connection and engagement with clients through the use of our digital delivery systems, including the All Access Pass in the Enterprise Division and the Leader in Me subscription service in the Education Division.  Our subscription service clients are able to access content and programs from remote locations, which allows continued engagement of personnel and students during long periods of displacement from normal working or classroom conditions.  To be successful in our industry, it is important to create effective learning environments for our clients and students, and we believe our previous investments in digital and remote delivery modalities are key to surviving and then thriving in the current environment.  According to the Training magazine 2020 Training Industry Report, most companies expect to retain at least some aspects of remote learning after the COVID-19 pandemic is over.  We believe our ability to deliver content and offerings over a broad array of modalities to suit a client’s needs will prove to be a valuable strategic advantage, and we believe these capabilities will accelerate our recovery from the effects of the pandemic and will generate increased opportunities in future periods.

Franklin Covey Services and Offerings

We operate globally with one common brand and a business model designed to enable us to provide clients around the world with the same high level of service.  To achieve this high level of service we have sales and support associates in various locations around the United States and Canada, and operate wholly owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria.  In foreign locations where we do not have a directly owned office, we may contract with independent licensee partners who deliver our content and provide services in 150 other countries and territories around the world.

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 countries not covered by a directly owned office.  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.  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.

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.

Our Industry and Clients

According to the Training magazine 2020 Training Industry Survey, the total size of the U.S. training industry is estimated to be $82.5 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.

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.  Based upon our annual sales, we believe that we are a significant competitor in the performance skills and education market.  Other significant comparative companies that compete with our Enterprise Division include: 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
Pricing
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 AAP and Leader in Me membership, digital presentations hosted by live presenters, live presentations by our own training consultants, live presentations though Company certified client-employed facilitators, intellectual property licensing, other 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.


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

Our Intellectual Property

Our success has resulted in part from our proprietary content, methodologies, and other intellectual property rights.  We seek to protect our intellectual property through a combination of trademarks, copyrights, and confidentiality agreements.  We claim rights for over 640 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 220 registered copyrights, and own sole or joint copyrights on our books, manuals, text and other printed information provided in our training programs, and other electronic media products, including audio and video media.  We may license, rather than sell, facilitator workbooks and other seminar and training materials in order to protect our intellectual property rights therein.  We place trademark and copyright notices on our instructional, marketing, and advertising materials.  In order to maintain the proprietary nature of our product information, we enter into written confidentiality agreements with certain executives, product developers, sales professionals, training consultants, other employees, and licensees.

Our Products and Sustainability

We offer training materials and related accessories in either digital or paper formats.  Our printed training materials are primarily comprised of paper, which we believe is a renewable and sustainable resource.  We purchase our training materials and related products from various vendors and suppliers located both domestically and internationally, and we are not dependent upon any one vendor for the production of our training and related materials as the raw materials for these products are readily available.  Our training materials are primarily warehoused and distributed from an independent warehouse facility located in Des Moines, Iowa.

Human Capital

Our mission is to enable greatness in people and organizations everywhere.  To fulfill that mission and successfully implement our strategy, we must attract, develop, and retain highly qualified associates for each role in the organization.  Our goal is to have every employee feel they are a valued member of a winning team doing meaningful work in an environment of trust.  To accomplish this goal, we are focused on attracting, developing, and retaining talent while looking through the lens of diversity, equity, and inclusion in each area.  The following is a description of our efforts to manage human capital within our organization.

Attracting Talent

Our recruiting team and hiring managers begin with the creation of detailed job descriptions, containing clearly outlined skills and experience, necessary for success in each role.  We believe these steps are essential to effectively interview for identifiable skillsets and not just “personality fits.”  We have historically attracted “mission driven” people who care deeply about making a difference in the world.  Our recruiting and hiring efforts cast a wide net when looking for candidates by partnering with many groups and agencies including, alumni organizations, multiple diversity job boards, diversity career fairs, the Utah Governor’s Committee on Employment of People with Disabilities and Business Relations, and ElevatHER – an organization designed to promote women in leadership.  Through these efforts, from June 1, 2019 through May 31, 2020, which are the annual dates of our Affirmative Action Plan year, over 71 percent of our new hires were women.  Currently, over 64 percent of our employee population are women and over 76 percent of our promotions during this same time period were women.


We also remain steadfast in our commitment to being an Affirmative Action Employer and have an objective to increase the population of our Black, Indigenous, and People of Color (BIPOC) employees.  In an effort to increase the population of BIPOC employees, we have expanded our recruitment efforts.  We hope to increase the number of BIPOC applicants to ensure we are hiring the most qualified people while increasing our diversity.  We are also actively engaged in ensuring that out employee promotions are fair and equitable.

Developing Talent

We currently have approximately 940 associates, nearly all of whom are full-time employees, around the world who are dedicated to providing the best service possible for our clients.  The diverse and global makeup of our workforce allows us to serve a variety of clients with different needs on a worldwide basis.  We believe that creating an environment which encourages continual learning and development is essential for us to maintain a high level of service and to achieve our goal to have every employee feel they are a valued member of a winning team doing meaningful work in an environment of trust.  Franklin Covey is one of the premier training and consulting organizations in the world, and we develop and deliver various offerings, including leadership and individual effectiveness, to clients around the globe.  Our associates have unlimited access to our content and training through the All Access Pass, where they are able to experience the same high-quality solutions available to our clients.  During their first year, we encourage new associates to participate in our foundational offering, The 7 Habits of Highly Effective People, which is used as the cultural operating system for our organization.  We are currently delivering our new Unconscious Bias training to our associates.  This program is designed to strengthen organizations by promoting the inclusion of various viewpoints from the natural talents and abilities of its people regardless of race, sexual orientation, gender, religion, or other differences.

In the event an employee is struggling with reaching their goals or producing the results required of their role, a thoughtful and thorough performance plan is created and implemented by their manager and our Chief People Officer.  The intent of the performance plan is to help the associate recalibrate and bring their performance up to expectations.  Through this transparent coaching process, struggling employees have been able to learn how to improve their performance and become engaged, successful contributors in their role.  We believe this process strengthens our associate base while reducing the cost of finding and training new associates.

Retaining Talent

The war for talent is real, and talented people are always in high demand.  During the period of June 1, 2019 through May 31, 2020, our employee turnover rate in the United States and Canada was 10.7 percent, which we believe is reasonable for our industry and the make-up of our workforce.  To retain our associates, we believe it is critical to continually focus on making sure our employees are highly engaged and feel valued.  We address these retention efforts in a number of ways, including training our leaders in our solution entitled, The 6 Critical Practices for Leading a Team.  Our employee retention practices include holding consistent, effective one-on-one interviews, where leaders regularly take time to connect with their employees, and to understand what is working well for them and what is not working so well.  Based on these interviews, leaders are encouraged to “clear the path” of those things which may be holding the employee back.  We are also focused on creating a culture of feedback, where feedback for both leaders and employees is a normal and helpful part of how work gets done.  We believe these efforts are key to creating an atmosphere of continuous improvement.

Our compensation plans are audited periodically to confirm ongoing pay equity.  We provide a generous personal time off benefit as well as a flexible and inclusive holiday schedule, reflecting the diversity of our workforce and the celebration of various cultural and religious affiliations.  We also offer 100% salary continuance for up to 12 weeks in a rolling 12-month period, for qualifying medical leaves, and provide many other “employee minded” benefits.


Our focus on human capital has been a hallmark of FranklinCovey for decades, understanding that people truly are a company’s most valuable asset, and that culture is an organization’s ultimate competitive advantage.  In 2017, our Organization and Compensation Committee determined to make Talent Stewardship a standing agenda item at committee meetings.  The committee is actively involved in helping to determine best practices and implement new and innovative ways to help us continually improve in attracting, developing, and retaining top talent for Franklin Covey.

Information About Our Executive Officers

On November 7, 2019, we appointed Paul S. Walker as President and Chief Operating Officer of Franklin Covey Co. and on November 1, 2020, Scott J. Miller transitioned from his role as Executive Vice-President of Thought Leadership to that of an independent contractor and senior advisor to the Company’s thought leadership and marketing operations.  Each of the executive officers of Franklin Covey Co. listed below served with the described responsibilities throughout the fiscal year ended August 31, 2020:

M. Sean Covey, 56, currently serves as President of the Franklin Covey Education Division, and has led the growth of this Division from its infancy to its status today.  The Education Division works with thousands of education entities throughout the world in Higher Education and the K-12 market.  Mr. Covey previously ran the Franklin Covey international licensee network and has been an Executive Officer since September 2008.  Sean also served as the Executive Vice President of Innovations from 2003 to 2018, where he led the development of many of the Company’s offerings, including the The 4 Disciplines of Execution and The Leader in Me. Prior to 2006, Sean ran the Franklin Covey retail chain of stores.  Previous to Franklin Covey, Sean worked for the Walt Disney Company, Trammel Crow Ventures, and Deloitte & Touche Consulting.  Mr. Covey is also a New York Times best-selling author and has authored or coauthored several books, including The 4 Disciplines of Execution and the international bestseller The 7 Habits of Highly Effective Teens.  Sean graduated from Brigham Young University with a Bachelor’s degree in English and earned an MBA from Harvard Business School.

Colleen Dom, 58, 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 35 years of experience in client services, sales support, operations, management, and supply chain.  Due to her valuable understanding of the Company’s global operations, Ms. Dom has been responsible for numerous key assignments that have enhanced client support, optimized operations, and built capabilities for future growth.  Prior to joining the Company, Colleen worked in retail management and in the financial investment industry.

C. Todd Davis, 63, 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 the past 24 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 The Wall Street Journal’s best-selling book, Get Better: 15 Proven Practices to Build Effective Relationships at Work and co-author of The Wall Street Journal’s best-selling book, Everyone Deserves A Great Manager – The 6 Critical Practices for Leading A Team.


Scott J. Miller, 52, is the Executive Vice-President of Thought Leadership at Franklin Covey.  Mr. Miller, who has been with the Company for 24 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, 45, is beginning his twenty-first year with Franklin Covey Co.  Today, Mr. Walker serves as the Company’s President and Chief Operating Officer.  Paul began his career with the Company in 2000 in the role of business developer, and quickly moved to become a Client Partner and then an Area Director.  In 2007, Mr. Walker became General Manager of the North America Central Region.  In 2014, Paul assumed responsibility for the Company’s United Kingdom operations in addition to his role as General Manager of the Central Region.  In 2016, Mr. Walker relocated to the Company’s Salt Lake City, Utah headquarters where, prior to his current role, he served as Executive Vice President Global Sales and Delivery and as President of the Company’s Enterprise Division.  Mr. Walker graduated from Brigham Young University with a Bachelor of Arts in Communications.

Robert A. Whitman, 67, has served as Chairman of the Board of Directors since June 1999 and as 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, 67, 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 40 years of accounting and management experience and is a Certified Public Accountant.  Mr. Young was awarded a Bachelor of Science in Accounting from Brigham Young University.

Available Information

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

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



ITEM 1A.  RISK FACTORS

Our business environment, current domestic and international economic conditions, ongoing impacts from the COVID-19 pandemic, 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 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.

COVID-19 Pandemic Risks

Our results of operations have been adversely affected and could be materially impacted in the future by the COVID-19, or coronavirus, pandemic.

The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption during fiscal 2020.  The extent to which the COVID-19 pandemic impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including:  the duration, scope, and severity of the pandemic; the ability to create effective vaccines and effective therapeutic treatments; governmental, business, and individuals’ actions that have been taken, and continue to be taken, in response to the pandemic; the impact of the pandemic on worldwide economic activity and actions taken in response; the effect on our clients, including educational institutions, and client demand for our services; our ability to sell and provide our services and solutions, including the impact of travel restrictions and from people working from home; the ability of our clients to pay for our services on a timely basis or at all; the ability to maintain sufficient liquidity and to access credit and capital markets as needed; and any closure of our offices.  Any of these events, or related conditions, could cause or contribute to the risks and uncertainties described in this section of our Annual Report and could materially adversely affect our business, financial condition, results of operations, cash flows, and stock price.

Training Industry and Related Risks

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

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


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

Global economic and political conditions affect our clients’ businesses and the markets in which they operate.  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.

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 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.  Findings from an audit may result in our being required to prospectively adjust previously agreed upon rates for our work, which may affect our future margins.

If a governmental client discovers improper activities in the course of audits or investigations, we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions, or debarment from doing business with other agencies of that government.


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

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

Cybersecurity and Information Technology Risks

The All Access Pass and Leader in Me 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.

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 provided a mechanism for companies to transfer data from European Union member states to the U.S.  On July 16, 2020, the Court of Justice of the European Union (the Court of Justice) invalidated the E.U.-U.S. Privacy Shield Framework on the grounds that the Privacy Shield failed to offer adequate protections to E.U. personal data transferred to the United States.  On August 10, 2020, the U.S. Department of Commerce and the European Commission announced new discussions to evaluate the potential for an enhanced E.U.-U.S. Privacy Shield framework to comply with the July 16 judgment of the Court of Justice.  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 have 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 was effective 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.

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.

Liquidity and Capital Resource Risks

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

Our ability to make scheduled payments on or to refinance our indebtedness depends on our future performance, including the performance of our subsidiaries, which will be affected by financial, business and economic conditions, competition, and other factors.  We are unable to control many of these factors, such as the general economy, economic conditions in the industries in which we operate, and competitive pressures.  Our cash 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 2019 Credit Facility and subsequent modifications, may restrict us from pursuing any of these alternatives.

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

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

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


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

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

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

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

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

Public Company Risks

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

Our common stock is publicly traded on the 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 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.

General Business Risks

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.

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

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


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

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

Ineffective internal controls could impact our business and operating results.

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


ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.






ITEM 2.  PROPERTIES

As of August 31, 2020, 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 administration, as well as other professionals.  The master lease agreement on our principal executive offices contains six five-year renewal options that may be exercised at our discretion.  Additionally, we occupy leased sales and administrative offices both in the United States and various countries around the world as shown below.  These leased facilities are accounted for as operating leases.

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

U.S./Canada Sales Office
Columbus, Ohio

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


ITEM 3.  LEGAL PROCEEDINGS

From time to time, we are the subject of certain legal actions, which we consider routine to our business activities.  At August 31, 2020, 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, 2020 or 2019.  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, 2020, we had 14,025,413 shares of common stock outstanding, which were held by 523 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 2020.

On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $40.0 million of our outstanding common stock.  The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does not have an expiration date.  Through August 31, 2020, we have purchased 5,000 shares of our common stock for $0.2 million under the terms of this Board approved plan.

The actual timing, number, and value of common shares repurchased under this plan will be determined at our discretion and will depend on a number of factors, including, among others, general market and business conditions, the trading price of common shares, and applicable legal requirements.  We have no obligation to repurchase any common shares under the authorization, and the repurchase plan may be suspended, discontinued, or modified at any time for any reason.

Performance Graph

The following graph demonstrates a five-year comparison of cumulative total returns for Franklin Covey Co. common stock, the S&P SmallCap 600 Index, and the S&P 600 Commercial & Professional Services Index.  The graph assumes an investment of $100 on August 31, 2015 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 or endorse any predictions as to our future stock performance.

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



ITEM 6.  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,
 
2020(1)
   
2019
   
2018
   
2017(2)
   
2016
 
In thousands, except per-share data
                             
                               
Income Statement Data:
                             
Net sales
 
$
198,456
   
$
225,356
   
$
209,758
   
$
185,256
   
$
200,055
 
Gross profit
   
145,370
     
159,314
     
148,289
     
122,667
     
133,154
 
Income (loss) from operations
   
3,058
     
2,655
     
(3,366
)
   
(8,880
)
   
13,849
 
Income (loss) before income taxes
   
796
     
592
     
(5,520
)
   
(10,909
)
   
11,911
 
Income tax benefit (provision)
   
(10,231
)
   
(1,615
)
   
(367
)
   
3,737
     
(4,895
)
Net income (loss)
   
(9,435
)
   
(1,023
)
   
(5,887
)
   
(7,172
)
   
7,016
 
                                         
Earnings (loss) per share:
                                       
Basic and diluted
 
$
(.68
)
 
$
(.07
)
 
$
(.43
)
 
$
(.52
)
 
$
.47
 
                                         
Balance Sheet Data:
                                       
Total current assets
 
$
101,664
   
$
119,340
   
$
100,163
   
$
91,835
   
$
89,741
 
Other long-term assets
   
15,611
     
10,039
     
12,935
     
16,005
     
13,713
 
Total assets
   
205,437
     
224,913
     
213,875
     
210,731
     
190,871
 
                                         
Long-term obligations
   
51,056
     
46,690
     
50,936
     
53,158
     
48,511
 
Total liabilities
   
145,984
     
142,899
     
133,375
     
125,666
     
97,156
 
                                         
Shareholders’ equity
   
59,453
     
82,014
     
80,500
     
85,065
     
93,715
 
                                         
Cash flows from operating activities
 
$
27,563
   
$
30,452
   
$
16,861
   
$
17,357
   
$
32,665
 
_______________________

(1)
Our fiscal 2020 financial results were impacted by the COVID-19 pandemic, which adversely impacted sales during our third and fourth quarters as governments and individuals implemented measures to slow the spread of the virus, including widespread shut downs of economies, businesses, and schools.  We reevaluated our deferred tax assets during fiscal 2020.  Because of cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards.  Accordingly, we added $11.3 million to the valuation allowances on our deferred tax assets in fiscal 2020.  For more information on our income taxes, refer to the notes to our financial statements found in Item 8 of this report on Form 10-K.

(2)
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.




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, a comparable GAAP measure, please refer to Note 16 Segment Information to our consolidated financial statements as presented in Item 8 of this Form 10-K.


EXECUTIVE SUMMARY

General Overview

Franklin Covey Co. is a global company focused on individual and organizational performance improvement.  Our mission is to “enable greatness in people and organizations everywhere,” and our worldwide resources are organized to help individuals and organizations achieve sustained superior performance 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, digital online learning, on-site training, training led through certified facilitators, blended learning, and organization-wide transformational processes, including consulting and coaching.  We believe our investments in digital delivery modalities over the past few years have enabled us to deliver our content to clients in a high-quality learning environment whether those clients are working remotely or in a centralized location.

3.
Global Capability – We have sales professionals in the United States and Canada who serve clients in the private sector, in government, and in educational institutions; wholly owned subsidiaries in Australia, China, Japan, the United Kingdom, Germany, Switzerland, and Austria; and we contract with independent licensee partners who deliver our content and provide services in 150 countries and territories around the world.

We 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, Multipliers, and The 4 Disciplines of Execution, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, Leadership, and Education.  We believe that our offerings help individuals, teams, and entire organizations transform their results through achieving systematic, sustainable, and measurable changes in human behavior.  Our offerings are described in further detail at www.franklincovey.com.  The information contained in, or that can be accessed through, our website does not constitute a part of this annual report, 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 2020, fiscal 2019, and fiscal 2018 refer to the twelve-month periods ended August 31, 2020, 2019, 2018, and so forth.

Impact of COVID-19 Pandemic on Fiscal 2020

COVID-19 was first identified in China during December 2019, and subsequently declared a pandemic by the World Health Organization.  Since its discovery, COVID-19 has surfaced in nearly all regions around the world and has resulted in government-imposed travel restrictions and business slowdowns or shutdowns in affected areas.  As a result, COVID-19 has impacted our business globally, including our licensees, through office and school closures.  In particular, these closures impacted our third and fourth quarters of fiscal 2020 as described throughout this Annual Report on Form 10-K for fiscal 2020.

After strong financial performance during the first two quarters of fiscal 2020, our financial results in the third and fourth quarters of fiscal 2020 were adversely impacted by the COVID-19 pandemic and the resulting closure of offices and educational institutions throughout the United States and in the countries where we operate direct offices and contract with licensee partners to deliver our offerings.  We closed our corporate offices and restricted travel to protect the health and safety of our associates and clients in an effort to slow the spread of the pandemic.  Our international direct offices also followed the same pattern of closures and restrictions on associate travel and delivery of our offerings.  These actions, and similar steps taken by most of our clients, resulted in decreased sales during the third and fourth quarters as previously scheduled onsite events, client-facilitated presentations, and coaching days were postponed or canceled.


Despite the difficult economic environment in the second half of fiscal 2020, we were pleased with the continued strength of our subscription sales and the quick pivot to delivering content live-online and through our other digital modalities.  Our subscription service clients are able to access content and programs from remote locations, which allows continued engagement of personnel and students during long periods of displacement from normal working or classroom conditions.  To be successful in our industry, it is important to create effective learning environments for our clients and students, and we believe our previous investments in digital and remote delivery modalities are key to surviving and then thriving in the current environment.  According to the Training magazine 2020 Training Industry Report, most companies expect to retain at least some aspects of remote learning after the COVID-19 pandemic is over.  We believe our ability to deliver content and offerings over a broad array of modalities to suit a client’s needs will prove to be a valuable strategic advantage, and we believe these capabilities will accelerate our recovery from the effects of the pandemic and will generate increased opportunities in future periods.  However, our recovery from the COVID-19 pandemic is dependent upon a number of factors, many of which are not within our control, such as the timing of re-opening national, state, and local economies; continuing effects of the pandemic on client operations; and other governmental responses to address the impacts of the pandemic.  We will continue to monitor these developments and their actual and potential impacts on our financial position, results of operations, and liquidity.

On March 27, 2020, in response to COVID-19, the United States government enacted the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).  The CARES Act is a relief package consisting of various stimulus measures, such as tax payment deferrals, various business incentives, and makes certain technical corrections to the U.S. Tax Cuts and Jobs Act of 2017.  While beneficial to the economy and business overall, the enactment of the CARES Act and similar legislation in other countries throughout the world did not have a material impact on our fiscal 2020 consolidated financial statements.

Financial Overview

Our fiscal 2020 financial results are a tale of two halves.  After strong financial performance during the first two quarters of fiscal 2020, our financial results in the third and fourth quarters of fiscal 2020 were adversely impacted by the COVID-19 pandemic.  Financial results in the first two quarters of fiscal 2020 showed strong growth in revenues, operating results, and cash flows over the prior year.  Consolidated sales through February 29, 2020 grew 8 percent, with Enterprise Division sales increasing $5.0 million, or 6 percent, and Education Division revenues increasing $1.9 million, or 10 percent, compared with the prior year.  Cash flows from operating activities increased 30 percent over the first two quarters of fiscal 2019.  Then, as the COVID-19 outbreak expanded in March 2020 and developed into a global pandemic, most of the world’s governments enacted strict measures to prevent people from gathering or meeting in person.  While we were able to continue to deliver content through our digital modalities and recognize subscription revenues, the in-person meeting restrictions had a significant impact on all of our segment operations during the third and fourth quarters of fiscal 2020 as our clients transitioned to remote learning environments and previously scheduled training and coaching events were postponed or canceled.

Although the second half of fiscal 2020 was a difficult economic environment, our revenues were favorably impacted by the continued strength of our subscription business, including the All Access Pass (AAP) in the Enterprise Division and the Leader in Me membership in the Education Division.  Throughout the pandemic, our AAP sales have been strong and resilient as new pass sales and multi-year contract sales increased over the prior year.  During the third and fourth quarters of fiscal 2020, All Access Pass sales grew 15 percent compared with the prior year.  All Access Pass revenue retention remained strong and was over 90 percent for fiscal 2020.  Following the initial impact of the pandemic, our U.S.\Canada and governmental clients quickly transitioned to our digital delivery options, and by July our booking pace for add-on coaching and services was equal to that achieved in the prior year and then exceeded last year’s pace through August.  We remain optimistic that sales and revenue retention for All Access Pass subscription sales, and the booking pace for AAP-related add-on services will continue to be strong in future periods.  Our China and Japan direct offices and many of our licensee partners had just started to sell the All Access Pass and had not developed a strong base of subscription revenue at the onset of the pandemic.  These operations were highly dependent on the delivery of in-person training and stay-at-home restrictions made it necessary to reschedule nearly all of their training and coaching events.  As a result, sales declined disproportionately at these operations compared with our U.S./Canada operations.  However, these foreign offices are beginning to recover and we are optimistic that international momentum will continue to rebuild in fiscal 2021.  We were also encouraged by the performance of the Education Division in the third and fourth quarters of fiscal 2020.  Despite the significant uncertainties in educational funding as a result of the pandemic, nearly 2,200 schools renewed their Leader in Me memberships (a higher number than in fiscal 2019) and the Company added 320 new schools to the Leader in Me program.  We believe this performance from the Education Division was remarkable in the current education and economic environment.



Our subscription revenue grew 16 percent in fiscal 2020 compared with the prior year.  At August 31, 2020, we had $68.9 million of deferred revenue compared with $65.8 million at August 31, 2019.  Consolidated deferred revenue reported above at August 31, 2020 and August 31, 2019 includes $2.2 million and $3.6 million, respectively, of deferred revenue that was classified as long-term based on expected recognition.  At August 31, 2020, our unbilled deferred revenue grew 32 percent to $39.6 million compared with $29.9 million at the end of fiscal 2019.  At August 31, 2020, our deferred subscription revenue plus unbilled deferred subscription revenue totaled $100.2 million.  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,
 
2020
   
%
change
   
2019
   
%
change
   
2018
 
Enterprise Division:
                             
Direct offices
 
$
139,780
     
(11)

 
$
157,754
     
8
   
$
145,890
 
International licensees
   
8,451
     
(34)

   
12,896
     
(3)

   
13,226
 
     
148,231
     
(13)

   
170,650
     
7
     
159,116
 
Education Division
   
43,405
     
(11)

   
48,880
     
8
     
45,272
 
Corporate and other
   
6,820
     
17
     
5,826
     
8
     
5,370
 
Consolidated sales
 
$
198,456
     
(12)

 
$
225,356
     
7
   
$
209,758
 

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 2020 totaled $53.1 million compared with $66.0 million in fiscal 2019.  The decrease was primarily due to decreased sales in fiscal 2020 resulting from the COVID-19 pandemic as described above.  Our gross profit for the fiscal year ended August 31, 2020 was $145.4 million, compared with $159.3 million in fiscal 2019.  Our gross margin, which is gross profit as a percent of sales, increased to 73.3 percent compared with 70.7 percent primarily due to increased subscription and digital delivery revenues when compared with the prior year.

Our operating expenses in fiscal 2020 decreased $14.3 million compared with fiscal 2019.  The decrease was primarily due to a $10.6 million decrease in selling, general, and administrative (SG&A) expenses, and a $5.4 million decrease in stock-based compensation expense.  These decreases were partially offset by $1.6 million of restructuring costs.  Decreased SG&A expense was primarily related to decreased variable compensation such as commissions, bonuses, and incentives; decreased travel and entertainment; decreased contingent consideration liability expense; and cost savings from various areas of the Company’s operations in response to the pandemic-related reduction in sales.  We reevaluate our stock-based compensation instruments at each reporting date.  Due to the adverse impact of COVID-19 and uncertainties related to the expected recovery, we determined that certain tranches of previously granted performance awards would not vest prior to their expiration.  Based on our analyses, we reversed previously recognized stock-based compensation expense for these tranches during the third quarter of fiscal 2020, which resulted in a $0.6 million net credit to stock-based compensation for the year.  During the fourth quarter of fiscal 2020 we restructured certain areas of our operations to reflect changes in our strategy and client needs.  The restructuring costs totaled $1.6 million, which were comprised of severance costs for impacted personnel.


Our fiscal 2020 income from operations improved to $3.1 million compared with $2.7 million in fiscal 2019.  Fiscal 2020 pre-tax income was $0.8 million compared with $0.6 million in fiscal 2019, reflecting the items noted above.

Our effective income tax rate for fiscal 2020 was approximately 1,284 percent compared with an effective tax rate of approximately 273 percent in fiscal 2019.  The increased effective tax rate in fiscal 2020 was primarily due to $11.3 million of additional income tax expense from an increase in the valuation allowance against our deferred income tax assets, which was partially offset by a tax benefit resulting from the exercise of stock options by our CEO and CFO.  Our near break-even pre-tax income during fiscal years 2020 and 2019 greatly amplified the effect of non-temporary items on our effective tax rate in those years.

Net loss for the year ended August 31, 2020 was $(9.4) million, or $(.68) per share, compared with a loss of $(1.0) million, or $(.07) per share, in fiscal 2019.  Our Adjusted EBITDA in fiscal 2020 totaled $14.3 million compared with $20.6 million in fiscal 2019, reflecting the above-noted factors.  In constant currency, our fiscal 2020 Adjusted EBITDA was $14.7 million.

Further details regarding these items can be found in the comparative analysis of fiscal 2020 with fiscal 2019 as discussed within this management’s discussion and analysis.

Our liquidity, financial position, and capital resources remained strong during fiscal 2020.  At August 31, 2020, we had $27.1 million of cash, with no borrowings on our $15.0 million revolving credit facility, compared with $27.7 million of cash at August 31, 2019.  Cash flows from operating activities remained strong and totaled $27.6 million for fiscal 2020.  For further information regarding our liquidity and cash flows, refer to the Liquidity and Capital Resources discussion found in this management’s discussion and analysis.

For a discussion of the results of operations and changes in financial condition for fiscal 2019 compared with fiscal 2018, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2019 Form 10-K, which was filed with the United States Securities and Exchange Commission on November 14, 2019.

Key Growth Objectives

As economies and businesses reopen and recover from the COVID-19 pandemic, we are optimistic that opportunities for growth and expansion will return both domestically and internationally.  In addition to recovery from the pandemic, we believe the following key factors will drive our growth in fiscal 2021 and beyond:

Best in Class Content and Solutions – 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.  These offerings are designed to build great and enduring organizations, build winning cultures, promote execution on major strategic initiatives, build leaders at all levels of an organization, and increase the individual and interpersonal effectiveness of people.  Our 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.

New Subscription Service Sales and the Renewal of Existing Client Contracts – Prior to the onset of the COVID-19 pandemic, we invested heavily in digital delivery of our content through our All Access Pass and Leader in Me subscription services.  These digital delivery platforms allow our content and offerings to be accessible at scale in a wide variety of organizations and schools, and provide compelling value propositions to our clients.  As organizations implement and utilize the content on the AAP and schools realize the benefits of the Leader in Me program, we believe that we create durable strategic relationships with our clients that encourage the renewal of subscription contracts.  We are focused on building strategic relationships with both new and existing clients to provide new subscription sales opportunities and renewal or expansion of existing subscription services with current clients.


Expand our Global Reach and Distribution – We are focused on consistently increasing the number of new client partners, consultants, coaches, and implementation specialists to increase our global reach and sales opportunities.  We have recently opened direct offices in Germany, Switzerland, and Austria, and we continue to seek out strong international licensees who can adapt and deliver our offerings in diverse geographic and cultural regions.  We believe our existing 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, 2020, we had 254 client partners compared with 245 at the end of fiscal 2019.

Most Impactful Thought Leadership – We believe that our offerings address some of the most significant challenges that organizations and individuals face.  However, we are not comfortable resting on past successes and we seek to engage individuals who can provide timely and impactful thought leadership on a variety of topics.  Over the past couple of years we have released six new bestselling books, including Get Better, Everyone Deserves a Great Manager, and Leading Loyalty.  During fiscal 2020 we developed and released new offerings based on the bestselling book Multipliers, by Liz Wiseman.  We also released a new offering entitled Unconscious Bias and will be releasing a new book to support this offering in early fiscal 2021.  To increase the visibility of our thought leadership, we have increased the number of books that we publish each year and we have significantly expanded our presence in podcasts, relevant white papers, and digital media.  We believe our ongoing efforts to strengthen our thought leadership will provide added opportunities in the training marketplace.

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

Results of Operations

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



YEAR ENDED
AUGUST 31,
 
2020
   
2019
   
2018
 
Sales
   
100.0
     
100.0
     
100.0
 
Cost of sales
   
26.7
     
29.3
     
29.3
 
Gross profit
   
73.3
     
70.7
     
70.7
 
                         
Selling, general, and administrative
   
65.5
     
62.4
     
65.9
 
Stock-based compensation
   
(0.3
)
   
2.1
     
1.4
 
Restructuring costs
   
0.8
     
-
     
-
 
Depreciation
   
3.4
     
2.8
     
2.4
 
Amortization
   
2.3
     
2.2
     
2.6
 
Total operating expenses
   
71.7
     
69.5
     
72.3
 
Income (loss) from operations
   
1.6
     
1.2
     
(1.6
)
Interest income
   
0.0
     
0.0
     
0.0
 
Interest expense
   
(1.2
)
   
(1.0
)
   
(1.2
)
Discount accretion on related party receivables
   
-
     
0.1
     
0.2
 
Income (loss) before income taxes
   
0.4
     
0.3
     
(2.6
)


FISCAL 2020 COMPARED WITH FISCAL 2019 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, Germany, Switzerland, and Austria; our government services office; and other groups such as our coaching operations and books and audio media sales.  The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):

   
Year Ended
August 31, 2020
   
% of
Sales
   
Year Ended
August 31, 2019
   
% of
Sales
   
Change
 
Sales
 
$
139,780
     
100.0
   
$
157,754
     
100.0
   
$
(17,974
)
Cost of sales
   
31,636
     
22.6
     
40,999
     
26.0
     
(9,363
)
Gross profit
   
108,144
     
77.4
     
116,755
     
74.0
     
(8,611
)
SG&A expenses
   
90,450
     
64.7
     
97,300
     
61.7
     
(6,850
)
Adjusted EBITDA
 
$
17,694
     
12.7
   
$
19,455
     
12.3
   
$
(1,761
)

Sales.  Our Direct Office segment had a strong start to fiscal 2020 in the first and second quarters of the fiscal year.  For the first two quarters of fiscal 2020, our U.S./Canada sales grew by $4.0 million, or 9 percent; government sales increased by $1.2 million, or 18 percent; and international direct office revenue grew by $0.3 million, or two percent, despite the early closure of our offices in China at the onset of COVID-19.  During the third and fourth quarters of fiscal 2020, our Direct Office segment sales were adversely impacted by the COVID-19 pandemic and restrictions on in-person training and gatherings.  However, sales of the Company’s AAP subscription service remained strong and increased 15 percent in the third and fourth quarters of fiscal 2020 compared with the prior year, and revenue retention remained above 90 percent for fiscal 2020.  We were very encouraged by sales of the All Access Pass in the second half of fiscal 2020 as clients were able to successfully utilize the digital delivery options available through the AAP.  Our foreign direct offices were significantly impacted by the COVID-19 pandemic as each of our foreign offices were closed for portions of the third and fourth quarters as mandated by their national governments.  As previously mentioned, our China and Japan offices had just started to sell AAP and had not built a significant base of deferred subscription revenue.  As a result, these offices were highly impacted by the closure of offices and restrictions on in-person gatherings and were a disproportionate share of the Direct Office decreased sales.  For fiscal 2020, our foreign direct office sales decreased $10.8 million or 28 percent, compared with the prior year and foreign exchange rates had a $0.3 million unfavorable impact on our direct office sales during the fiscal year.  We anticipate the events of fiscal 2020 will accelerate our Direct Offices’ transition to the All Access Pass in future periods, especially in China and Japan.  While we are optimistic about the future of our direct office channel and AAP revenues, our future financial performance is highly dependent upon economic recovery from the COVID-19 pandemic and the opening of national and regional economies.


Gross Profit.  Gross profit decreased due to sales activity during fiscal 2020 as described above.  Direct Office gross margin increased primarily due to the mix of services and products sold during fiscal 2020, which featured increased subscription sales as a percent of total sales and decreased onsite and facilitator sales.

SG&A Expenses.  Direct Office operating expenses decreased primarily due to reduced variable associate costs, including commissions, incentives, and bonuses on lower sales and reduced travel costs during the second half of the year.  These reductions were partially offset by associate costs from new sales and support personnel during the year.  Foreign exchange rates had a $0.1 million adverse impact on our direct office segment operating results during fiscal 2020.

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, 2020
   
% of
Sales
   
Year Ended
August 31, 2019
   
% of
Sales
   
Change
 
Sales
 
$
8,451
     
100.0
   
$
12,896
     
100.0
   
$
(4,445
)
Cost of sales
   
1,772
     
21.0
     
2,665
     
20.7
     
(893
)
Gross profit
   
6,679
     
79.0
     
10,231
     
79.3
     
(3,552
)
SG&A expenses
   
4,273
     
50.6
     
4,159
     
32.3
     
114
 
Adjusted EBITDA
 
$
2,406
     
28.4
   
$
6,072
     
47.0
   
$
(3,666
)

Sales.  International licensee revenues are primarily comprised of royalty revenues received from our licensee partners.  For fiscal 2020, our licensee revenues were impacted by the COVID-19 pandemic, which significantly reduced sales in the second half of the year as many licensee countries enacted economic and social restrictions that prohibited in-person presentations.  Prior to the full onset of the pandemic, our international licensee royalty revenue during the first two quarters of fiscal 2020 increased by $0.2 million compared with the prior year.  Many of our international licensees had just started to sell the All Access Pass at the onset of the pandemic and did not have a substantial base of deferred subscription revenue as these operations were primarily dependent upon live onsite training and coaching.  Due to the benefits of the All Access Pass, including its digital delivery platform and high revenue retention rates, we believe that our licensees will accelerate their transition to the All Access Pass in future periods, which we believe will provide significant benefits for our licensee partners and their clients.

Gross Profit.  Gross profit decreased due to an overall decrease in licensee revenues during fiscal 2020 as described above.  Licensee gross margin remained strong in fiscal 2020 and was consistent with the prior year.

SG&A Expenses.  International licensee SG&A expenses increased primarily due to additional bad debt expense related to expected collection issues in the wake of the COVID-19 pandemic.  Foreign exchange rates had an insignificant impact on our licensee sales and results of operations during fiscal 2020.


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, 2020
   
% of
Sales
   
Year Ended
August 31, 2019
   
% of
Sales
   
Change
 
Sales
 
$
43,405
     
100.0
   
$
48,880
     
100.0
   
$
(5,475
)
Cost of sales
   
16,306
     
37.6
     
18,507
     
37.9
     
(2,201
)
Gross profit
   
27,099
     
62.4
     
30,373
     
62.1
     
(3,274
)
SG&A expenses
   
27,189
     
62.6
     
26,820
     
54.9
     
369
 
Adjusted EBITDA
 
$
(90
)
   
(0.2)

 
$
3,553
     
7.3
   
$
(3,643
)

Sales.  Growth in our Education Division during the first half of fiscal 2020 was offset by decreased sales during the third and fourth quarters, which are generally the busiest months for our Education Division, resulting from the COVID-19 pandemic.  Despite the significant headwinds faced by educational institutions during the third and fourth quarters as schools closed, teaching moved online, and budgets were constrained, nearly 2,200 existing Leader in Me schools renewed their Leader in Me subscriptions (a number higher than in fiscal 2019) and 320 new schools became Leader in Me schools.  We believe these were remarkable achievements in the current education and economic environment.  During fiscal 2020, Leader in Me subscription revenues increased 11 percent compared with the prior year and our coaches delivered two percent more coaching days as clients pivoted to live on-line delivery of these days.  Although pandemic-related issues slowed the growth of new schools entering into Leader in Me agreements in fiscal 2020, we are optimistic that continued demand for the Leader in Me program will drive sales growth in future periods.  As of August 31, 2020, the Leader in Me program is used in over 4,200 schools and in over 50 countries.

Gross Profit.  Education segment cost of sales and gross profit decreased primarily due to sales activity as previously described.  Education Division gross margin remained strong at 62.4 percent and was consistent with the prior year’s 62.1 percent.

SG&A Expenses.  Education division SG&A expense increased primarily due to investments in additional sales and sales-related personnel in late fiscal 2019 and early fiscal 2020 to fuel growth that was eventually dampened by the continuing COVID-19 pandemic, and increased bad debt expense.  These increased costs were partially offset by reduced travel and commission expense resulting from travel restrictions and reduced revenues.  Education Division results of operations were adversely impacted by $0.2 million of unfavorable exchange rates compared with the prior year.

Other Expenses

Restructuring Costs – During the fourth quarter of fiscal 2020 we restructured certain information technology, corporate operational, and marketing functions.  We incurred $1.6 million of severance costs related to these restructuring activities.  At August 31, 2020, we had $1.2 million of remaining accrued restructuring costs, which are expected to be paid during fiscal 2021.

DepreciationDepreciation expense increased $0.3 million compared with fiscal 2019 primarily due to the addition of new assets and investments in technology during fiscal 2020 and in prior years.  Based on previous property and equipment acquisitions, and expected capital additions during fiscal 2021, we expect depreciation expense will total approximately $6.5 million in fiscal 2021.

Amortization – Our amortization expense decreased $0.4 million compared with the prior year primarily due to the full amortization of certain intangible assets.  We expect the amortization of intangible assets will total approximately $4.5 million during fiscal 2021.


Income Taxes

Our effective income tax rate for fiscal 2020 was approximately 1,284 percent compared with an effective tax rate of approximately 273 percent in fiscal 2019.  The increased effective tax rate in fiscal 2020 was primarily due to $11.3 million of additional income tax expense from an increase in the valuation allowance against our deferred income tax assets, which was partially offset by the tax benefit resulting from the exercise of stock options by our CEO and CFO.  Our near break-even pre-tax income during fiscal years 2020 and 2019 greatly amplified the effect of non-temporary items on our effective tax rate in those years.

Although we paid $2.1 million in cash for income taxes during fiscal 2020, we anticipate that our total cash paid for income taxes over the coming three to five years will be less than our total income tax provision as we utilize available net operating loss carryforwards and other deferred income tax assets.


QUARTERLY RESULTS

The following tables set forth selected unaudited quarterly consolidated financial data for the fiscal years ended August 31, 2020 and 2019.  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, 2020 (unaudited)
                       
   
November 30
   
February 29
   
May 31
   
August 31
 
Net sales
 
$
58,613
   
$
53,745
   
$
37,105
   
$
48,994
 
Gross profit
   
42,029
     
38,666
     
26,821
     
37,854
 
Selling, general, and administrative
   
39,399
     
36,221
     
24,150
     
29,636
 
Restructuring costs
   
-
     
-
     
-
     
1,636
 
Depreciation
   
1,619
     
1,653
     
1,652
     
1,739
 
Amortization
   
1,170
     
1,170
     
1,164
     
1,102
 
Income (loss) from operations
   
(159
)
   
(378
)
   
(145
)
   
3,741
 
Income (loss) before income taxes
   
(760
)
   
(922
)
   
(748
)
   
3,226
 
Net income (loss)
   
(544
)
   
1,097
     
(10,968
)
   
980
 
                                 
Net income (loss) per share:
                               
Basic and diluted
 
$
(.04
)
 
$
.08
   
$
(.79
)
 
$
.07
 
                                 
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
 

In normal operating years, our fourth quarter typically has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education Division (when school administrators and faculty have professional development days) and from increased sales that typically occur during that quarter resulting from year-end incentive programs.  Overall, 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, pandemics and other natural disasters, business acquisitions, the addition of new organizational customers, and the elimination of underperforming offerings.

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



LIQUIDITY AND CAPITAL RESOURCES

Introduction

Our cash balance at August 31, 2020 totaled $27.1 million, with no borrowings on our $15.0 million revolving credit facility.  Of our $27.1 million in cash at August 31, 2020, $12.2 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 consideration 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,
 
2020
   
2019
   
2018
 
Total cash provided by (used for):
                 
Operating activities
 
$
27,563
   
$
30,452
   
$
16,861
 
Investing activities
   
(11,865
)
   
(6,873
)
   
(10,634
)
Financing activities
   
(16,557
)
   
(5,932
)
   
(4,679
)
Effect of exchange rates on cash
   
297
     
(101
)
   
(319
)
Increase (decrease) in cash and cash equivalents
 
$
(562
)
 
$
17,546
   
$
1,229
 

Our Current Credit Agreement

On August 7, 2019, we entered into a new credit agreement (the 2019 Credit Agreement) with our existing lender, which replaced the amended and restated credit agreement, dated March 2011.  The 2019 Credit Agreement provides up to $25.0 million in term loans and a $15.0 million revolving line of credit, which expires in August 2024.  Upon entering into the 2019 Credit Agreement, we borrowed $20.0 million through a term loan and used the proceeds to repay all indebtedness under the Original Credit Agreement.  During November 2019, we borrowed the remaining $5.0 million term loan available on the 2019 Credit Agreement.

In anticipation of potential covenant compliance issues associated with the COVID-19 pandemic and the uncertainty of the economic recovery, on July 8, 2020, we entered into the First Modification Agreement to the 2019 Credit Agreement.  The primary purpose of the First Modification Agreement is to provide temporary alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021.  These new covenants consist of the following:

1.
Minimum Liquidity – We must maintain consolidated minimum liquidity of not less than $13.0 million from August 31, 2020 through February 28, 2021 and $8.0 million at May 31, 2021.

2.
Minimum Adjusted EBITDA – We must maintain rolling four-quarter Adjusted EBITDA not less than the amount set forth below at the end of the specified quarter (in thousands).

QUARTER ENDING
 
AMOUNT
 
August 31, 2020
 
$
11,000
 
November 30, 2020
   
8,500
 
February 28, 2021
   
5,000
 
May 31, 2021
   
15,000
 


Adjusted EBITDA for purposes of this calculation is not the same as generally reported by the Company in its quarterly earnings.  The amounts in the table above exclude amortization of capitalized development costs which is classified in cost of sales.

3.
Capital Expenditures – We may not make capital expenditures, including capitalized development costs, in an amount exceeding $8.5 million in aggregate for any fiscal year.

In addition to the new financial covenants described above, we are prohibited from making certain restricted payments, including dividend payments on our common stock and open-market purchases of our common stock until we have been in compliance with the previously existing financial covenants for two consecutive quarters.

In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the 2019 Credit Agreement.  At August 31, 2020, we believe that we were in compliance with the terms and covenants applicable to the 2019 Credit Agreement and the First Modification Agreement.

The previously existing financial covenants on the 2019 Credit Agreement, which include (i) a Funded Indebtedness to Adjusted EBITDAR Ratio of less than 3.00 to 1.00; (ii) a Fixed Charge Coverage ratio not less than 1.15 to 1.00; (iii) an annual limit on capital expenditures (excluding capitalized curriculum development costs) of $8.0 million; and (iv) consolidated accounts receivable of not less than 150% of the aggregate amount of the outstanding borrowings on the revolving line of credit, the undrawn amount of outstanding letters of credit, and the amount of unreimbursed letter of credit disbursements remain in effect except for the quarterly periods covered by the First Modification Agreement.

In addition to our 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 leasing obligations, 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, 2020.

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, 2020, our cash provided by operating activities was $27.6 million compared with $30.5 million in fiscal 2019.  The decrease was primarily due to changes in working capital balances during fiscal 2020.  Our collection of accounts receivable remained strong during fiscal 2020, despite the COVID-19 pandemic, and provided a significant amount of cash to support operations, pay our obligations, and make critical investments.  Although we defer the recognition of AAP and other subscription revenues over the lives of the underlying contracts, we invoice the annual 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, 2020 totaled $11.9 million.  The primary uses of cash for investing activities included additional investments in the development of our offerings, purchases of property and equipment in the normal course of business, and the purchase of a note receivable from a bank used as consideration for an amended license agreement with FC Organizational Products (FCOP).


We spent $5.1 million during fiscal 2020 on the development of various content and offerings.  During fiscal 2020 we developed additional offerings for our Education Division and leadership content based on the best-selling book Multipliers, by Liz Wiseman.  The new Multipliers content was launched in August 2020.  We believe continued investment in our content and offerings is critical to our future success and we anticipate that our capital spending for curriculum development will total $4.5 million during fiscal 2021.

Our purchases of property and equipment totaled $4.2 million in fiscal 2020, and consisted primarily of computer hardware, new furnishings to replace assets destroyed by a flood at our corporate headquarters, software, and leasehold improvements on leased office space.  Our previous and ongoing investments in our digital delivery modalities, including the AAP and Leader in Me subscription services proved valuable as many of our clients have moved to remote workplaces due to the COVID-19 pandemic.  We will continue to invest in hardware and software to improve our digital delivery modalities, and currently anticipate that our purchases of property and equipment will total approximately $2.8 million in fiscal 2021.

In November 2019, we purchased $2.6 million of notes payable from a bank that were the obligations of FCOP.  We exchanged $3.2 million of receivables from FCOP, including the note payable purchased from the bank, to modify the term and royalty provisions of a long-term licensing agreement that is expected to increase our cash flows over the duration of the license agreement.  The licensing arrangement was assumed by Franklin Planner Corp., a new unrelated entity that purchased substantially all of the assets of FCOP in November 2019 (Refer to Note 17 to our consolidated financial statements for more information).

Cash Flows from Financing Activities

During the fiscal year ended August 31, 2020, we used $16.6 million of net cash for financing activities.  Our primary uses of financing cash during fiscal 2020 included $14.0 million for purchases of our common stock for treasury, $7.3 million for principal payments on our term loans and financing obligation, and $1.3 million of cash used to pay contingent consideration liabilities from previous business acquisitions.  These uses of cash were partially offset by proceeds from a $5.0 million term loan which was available on our 2019 Credit Agreement, and $1.0 million of proceeds from participants in our employee stock purchase plan.

In December 2019, we purchased 284,608 shares of our common stock from Knowledge Capital for $10.1 million prior to the distribution of Knowledge Capital assets to its investors.  This purchase of shares from Knowledge Capital was completed under a separate Board of Directors authorization and is not included in the November 15, 2019 authorized purchase plan described below.  We also purchased 109,896 shares of our common stock that were withheld for statutory income taxes on stock-based compensation instruments, primarily stock options, which were exercised during fiscal 2020.  These withheld shares were valued at the market price on the date that the shares were distributed to participants.  The total fair value of the withheld shares was $3.7 million.

On November 15, 2019, our Board of Directors approved a new plan to repurchase up to $40.0 million of the Company’s outstanding common stock.  The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does not have an expiration date.   Our uses of financing cash during fiscal 2021 are expected to include required payments on our term loans and financing obligation, contingent consideration payments from previous business acquisitions, and may include purchases of our common stock for treasury.  However, the timing and amount of common stock purchases is dependent on a number of factors, including available resources, and we are not obligated to make purchases of our common stock during any future period.


Sources of Liquidity

We expect to meet our projected capital expenditures, repay amounts borrowed on our 2019 Credit Agreement, service our existing financing obligation, and meet other working capital requirements during fiscal 2021 from current cash balances, future cash flows from operating activities, and available borrowings from our revolving line of credit.  Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit and other financing alternatives, if necessary, for these expenditures.  At August 31, 2020, we had $15.0 million of available borrowing capacity on our revolving line of credit.  Our 2019 Credit Agreement expires in August 2024 and we expect to renew and amend the 2019 Credit Agreement on a regular basis to maintain the long-term borrowing capacity of this credit facility.  Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources.  If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.  The COVID-19 pandemic has created uncertainty in capital markets, which may limit our ability to access liquidity on terms favorable to us, or at all.

We believe that our existing cash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be sufficient for us to maintain our operations over the next 12 months.  However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors.  Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new offerings or technology by our competitors.  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 repayment of term loan obligations; lease payments on our corporate headquarters campus (reported as a financing obligation); short-term purchase obligations for inventory items and other products and services used in the ordinary course of business; expected contingent consideration payments from business acquisitions; and minimum lease payments.  At August 31, 2020, 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
 
2021
   
2022
   
2023
   
2024
   
2025
   
Thereafter
   
Total
 
Term loans payable to bank(1)
 
$
5,605
   
$
5,430
   
$
5,255
   
$
5,080
   
$
-
   
$
-
   
$
21,370
 
Required lease payments on corporate campus
   
3,798
     
3,874
     
3,952
     
4,031
     
3,301
     
-
     
18,956
 
Purchase obligations
   
4,761
     
-
     
-
     
-
     
-
     
-
     
4,761
 
Jhana contingent consideration payments(2)
   
845
     
998
     
1,128
     
381
     
-
     
-
     
3,352
 
Minimum operating lease payments
   
751
     
208
     
121
     
97
     
87
     
14
     
1,278
 
RGP contingent consideration payments(2)
   
816
     
-
     
-
     
-
     
-
     
-
     
816
 
Total expected contractual
obligation payments
 
$
16,576
   
$
10,510
   
$
10,456
   
$
9,589
   
$
3,388
   
$
14
   
$
50,533
 

(1)
Payment amounts shown include interest at 3.5 percent, which is the current rate on our term loan obligations under the 2019 Credit Agreement and the First Modification Agreement.

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


Our contractual obligations presented above exclude uncertain tax positions totaling $1.6 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 (revenue recognition policies) 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 within our control, but which may have an impact on these estimates and our actual financial results.

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

Revenue Recognition

We account for revenue in accordance with Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606).  For the All Access Pass, judgment is required to determine whether the intellectual property and web-based functionality and content are considered distinct and accounted for separately, or not distinct and accounted for together.

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

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

Stock-Based Compensation

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


The analysis of our LTIP awards contains uncertainties because we are required to make assumptions and judgments about the timing and eventual number of shares that will vest in each LTIP grant.  The assumptions and judgments that are essential to the analysis include forecasted sales and operating income levels during the LTIP service periods.  These forecasted amounts may be difficult to predict over the life of the LTIP awards due to changes in our business, such as from the introduction of subscription-based services, or other external factors, such as the COVID-19 pandemic, and their impact on our financial results.  Events such as these may leave some previously approved performance measures obsolete or unattainable.  The evaluation of LTIP performance awards and the corresponding use of estimated amounts may produce additional volatility in our consolidated financial statements as we record cumulative adjustments to the estimated service periods and number of common shares to be awarded under the LTIP grants as described above.  For example, the impact of and expected recovery from the COVID-19 pandemic resulted in a significant reversal of previously recognized performance award stock-based compensation expense during the third quarter of fiscal 2020.

Accounts Receivable Valuation

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  Our allowance for doubtful accounts calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the collectability of customer accounts, which may be influenced by a number of factors that are not within our control, such as the financial health of each customer.  We regularly review the collectability assumptions of our allowance for doubtful accounts calculation and compare them against historical collections.  Adjustments to the assumptions may either increase or decrease our total allowance for doubtful accounts and may adversely impact our financial results.  For example, a 10 percent increase to our allowance for doubtful accounts at August 31, 2020 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.

Due to the impact of COVID-19, we tested goodwill for impairment during the third quarter of fiscal 2020 and at August 31, 2020 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 2020, we determined that no impairment existed at August 31, 2020, 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.

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.


Acquisitions and Contingent Consideration Liabilities

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

Additionally, we are required to reassess the fair value of contingent consideration liabilities resulting from business acquisitions at each reporting period.  Although subsequent changes to the contingent consideration liabilities do not affect the goodwill generated from the acquisition transaction, the valuation of expected contingent consideration often requires us to estimate future sales and/or profitability.  These estimates require the use of numerous assumptions, many of which may change frequently and lead to increased or decreased operating income in future periods.  For instance, during fiscal 2020 we recorded approximately $49,000 of net decreases to the fair value of our contingent consideration liabilities compared with $1.3 million of increases during fiscal 2019.  Changes to the fair value of contingent consideration liabilities are recorded as a component of selling, general, and administrative expenses.

Income Taxes

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

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

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

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

For example, in consideration of the relevant accounting guidance, we reevaluated our deferred tax assets during fiscal 2020 and considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized.  Because of the cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, which are primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards.  Accordingly, we increased the valuation allowance against our deferred tax assets in fiscal 2020.

RECENT ACCOUNTING PRONOUNCEMENTS

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

REGULATORY COMPLIANCE

We are registered in states in which we do business that have a sales tax and we collect and remit sales or use tax on sales made in these jurisdictions.  Compliance with environmental laws and regulations 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 statements made by the Company in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the Exchange Act).  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or phrases of similar meaning.  In our reports and filings we may make forward-looking statements regarding, among other things, our expectations about future sales levels and financial results, expected effects from the COVID-19 pandemic, including effects on how we conduct our business and our results of operations, the timing and duration of the recovery from the COVID-19 pandemic, future training and consulting sales activity, expected benefits from the All Access Pass and the electronic delivery of our content, anticipated renewals of subscription offerings, the impact of new accounting standards on our financial condition and results of operations, the amount and timing of capital expenditures, anticipated expenses, including SG&A expenses, depreciation, and amortization, future gross margins, the release of new services or products, the adequacy of existing capital resources, our ability to renew or extend our line of credit facility, the amount of cash expected to be paid for income taxes, our ability to maintain adequate capital for our operations for at least the upcoming 12 months, the seasonality of future sales, future compliance with the terms and conditions of our line of credit, the ability to borrow on our line of credit, expected collection of accounts receivable, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets.  These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K.  Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended August 31, 2020, entitled “Risk Factors.”  In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas:  cybersecurity risks; unanticipated costs or capital expenditures; delays or unanticipated outcomes relating to our strategic plans; dependence on existing products or services; the rate and consumer acceptance of new product introductions, including the All Access Pass; competition; the impact of foreign exchange rates; the number and nature of customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our products and services and those of competitors; adverse publicity; and other factors which may adversely affect our business.


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

The market price of our common stock has been and may remain volatile.  In addition, the stock markets in general have experienced increased volatility.  Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock.  In addition, the price of our common stock can change for reasons unrelated to our performance.  Due to our 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, 2020, 2019, and 2018, 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 3.5 percent at August 31, 2020, 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, 2020 would result in approximately $0.2 million of additional interest expense in fiscal 2021.  We did not have borrowings on our revolving credit facility at August 31, 2020.  Our financing obligation has a payment structure equivalent to a long-term leasing arrangement with a fixed interest rate of 7.7 percent.  Our other long-term liabilities do not include an interest component.





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franklin Covey Co.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Franklin Covey Co. and subsidiaries (the “Company”) as of August 31, 2020, 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, 2020, 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, 2020, of the Company and our report dated November 16, 2020, 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 16, 2020  




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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2020, 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, 2020, 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 16, 2020, 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 16, 2020  

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



FRANKLIN COVEY CO.
CONSOLIDATED BALANCE SHEETS

             
AUGUST 31,
 
2020
   
2019
 
In thousands, except per-share data
           
             
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
27,137
   
$
27,699
 
Accounts receivable, less allowance for doubtful accounts of $4,159 and $4,242
   
56,407
     
73,227
 
Inventories
   
2,974
     
3,481
 
Prepaid expenses
   
3,646
     
3,906
 
Other current assets
   
11,500
     
11,027
 
Total current assets
   
101,664
     
119,340
 
                 
Property and equipment, net
   
15,723
     
18,579
 
Intangible assets, net
   
47,125
     
47,690
 
Goodwill
   
24,220
     
24,220
 
Deferred income tax assets
   
1,094
     
5,045
 
Other long-term assets
   
15,611
     
10,039
 
   
$
205,437
   
$
224,913
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of term notes payable
 
$
5,000
   
$
5,000
 
Current portion of financing obligation
   
2,600
     
2,335
 
Accounts payable
   
5,622
     
9,668
 
Income taxes payable
   
-
     
764
 
Deferred subscription revenue
   
59,289
     
56,250
 
Other deferred revenue
   
7,389
     
5,972
 
Accrued liabilities
   
22,628
     
23,555
 
Total current liabilities
   
102,528
     
103,544
 
                 
Term notes payable, less current portion
   
15,000
     
15,000
 
Financing obligation, less current portion
   
14,048
     
16,648
 
Other liabilities
   
9,110
     
7,527
 
Deferred income tax liabilities
   
5,298
     
180
 
Total liabilities
   
145,984
     
142,899
 
                 
Commitments and contingencies (Note 9)
               
                 
Shareholders’ equity:
               
Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued
   
1,353
     
1,353
 
Additional paid-in capital
   
211,920
     
215,964
 
Retained earnings
   
49,968
     
59,403
 
Accumulated other comprehensive income
   
641
     
269
 
Treasury stock at cost, 13,175 shares and 13,087 shares
   
(204,429
)
   
(194,975
)
Total shareholders’ equity
   
59,453
     
82,014
 
   
$
205,437
   
$
224,913
 




See accompanying notes to consolidated financial statements.


FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

                   
YEAR ENDED AUGUST 31,
 
2020
   
2019
   
2018
 
In thousands, except per-share amounts
                 
                   
Net sales
 
$
198,456
   
$
225,356
   
$
209,758
 
Cost of sales
   
53,086
     
66,042
     
61,469
 
Gross profit
   
145,370
     
159,314
     
148,289
 
                         
Selling, general, and administrative
   
129,979
     
140,530
     
138,280
 
Stock-based compensation
   
(573
)
   
4,789
     
2,846
 
Restructuring costs
   
1,636
     
-
     
-
 
Depreciation
   
6,664
     
6,364
     
5,161
 
Amortization
   
4,606
     
4,976
     
5,368
 
Income (loss) from operations
   
3,058
     
2,655
     
(3,366
)
                         
Interest income
   
56
     
37
     
104
 
Interest expense
   
(2,318
)
   
(2,358
)
   
(2,676
)
Discount accretion on related-party receivables
   
-
     
258
     
418
 
Income (loss) before income taxes
   
796
     
592
     
(5,520
)
Provision for income taxes
   
(10,231
)
   
(1,615
)
   
(367
)
Net loss
 
$
(9,435
)
 
$
(1,023
)
 
$
(5,887
)
                         
Net loss per share:
                       
Basic and diluted
 
$
(0.68
)
 
$
(0.07
)
 
$
(0.43
)
                         
Weighted average number of common shares:
                       
Basic and diluted
   
13,892
     
13,948
     
13,849
 
                         
                         
COMPREHENSIVE LOSS:
                       
Net loss
 
$
(9,435
)
 
$
(1,023
)
 
$
(5,887
)
Foreign currency translation adjustments, net of income
                       
   tax benefit (provision) of $16, $(5), and $(75)
   
372
     
(72
)
   
(326
)
Comprehensive loss
 
$
(9,063
)
 
$
(1,095
)
 
$
(6,213
)















See accompanying notes to consolidated financial statements.


FRANKLIN COVEY CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS

                   
YEAR ENDED AUGUST 31,
 
2020
   
2019
   
2018
 
In thousands
                 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
 
$
(9,435
)
 
$
(1,023
)
 
$
(5,887
)
Adjustments to reconcile net loss to net cash provided
                       
by operating activities:
                       
Depreciation and amortization
   
11,270
     
11,359
     
10,525
 
Amortization of capitalized curriculum development costs
   
3,949
     
4,954
     
5,280
 
Deferred income taxes
   
9,094
     
(1,051
)
   
(2,535
)
Stock-based compensation expense
   
(573
)
   
4,789
     
2,846
 
Change in the fair value of contingent consideration liabilities
   
(49
)
   
1,334
     
1,014
 
       Amortization of right-of-use operating lease assets
                 331
      -
      -
 
Changes in assets and liabilities, net of effect of acquired businesses:
                       
Decrease (increase) in accounts receivable, net
   
17,142
     
(1,770
)
   
(5,679
)
Decrease (increase) in inventories
   
552
     
(260
)
   
157
 
Decrease in receivable from related party
   
26
     
535
     
213
 
Decrease (increase) in prepaid expenses and other assets
   
(767
)
   
32
     
(1,335
)
Increase (decrease) in accounts payable and accrued liabilities
   
(5,464
)
   
2,932
     
1,746
 
Increase in deferred revenue
   
2,806
     
8,828
     
11,613
 
Increase (decrease) in income taxes payable/receivable
   
(794
)
   
889
     
109
 
Decrease in other liabilities
   
(525
)
   
(1,096
)
   
(1,206
)
Net cash provided by operating activities
   
27,563
     
30,452
     
16,861
 
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Purchases of property and equipment
   
(4,183
)
   
(4,153
)
   
(6,528
)
Capitalized curriculum development costs
   
(5,082
)
   
(2,688
)
   
(2,998
)
Purchase of note receivable from bank (Note 17)
   
(2,600
)
   
-
     
-
 
Acquisition of businesses, net of cash acquired
   
-
     
(32
)
   
(1,108
)
Net cash used for investing activities
   
(11,865
)
   
(6,873
)
   
(10,634
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from line of credit borrowings
   
14,870
     
82,282
     
93,391
 
Payments on line of credit borrowings
   
(14,870
)
   
(93,619
)
   
(86,431
)
Proceeds from term notes payable financing
   
5,000
     
20,000
     
-
 
Principal payments on term notes payable
   
(5,000
)
   
(12,813
)
   
(6,250
)
Principal payments on financing obligation
   
(2,335
)
   
(2,092
)
   
(1,868
)
Purchases of common stock for treasury
   
(13,971
)
   
(12
)
   
(2,006
)
Payment of contingent consideration liabilities
   
(1,297
)
   
(653
)
   
(2,323
)
Proceeds from sales of common stock held in treasury
   
1,046
     
975
     
808
 
Net cash used for financing activities
   
(16,557
)
   
(5,932
)
   
(4,679
)
Effect of foreign currency exchange rates on cash and cash equivalents
   
297
     
(101
)
   
(319
)
Net increase (decrease) in cash and cash equivalents
   
(562
)
   
17,546
     
1,229
 
Cash and cash equivalents at beginning of the year
   
27,699
     
10,153
     
8,924
 
Cash and cash equivalents at end of the year
 
$
27,137
   
$
27,699
   
$
10,153
 
                         
Supplemental disclosure of cash flow information:
                       
Cash paid for income taxes
 
$
2,057
   
$
1,778
   
$
2,512
 
Cash paid for interest
   
2,280
     
2,386
     
2,655
 
                         
Non-cash investing and financing activities:
                       
Purchases of property and equipment financed by accounts payable
 
$
35
   
$
410
   
$
1,018
 
License rights acquired through royalties payable financing
   
4,009
     
-
     
-
 
Use of notes receivable to modify revenue contract (Note 17)
   
3,246
     
-
     
-
 
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              
   
Common
   
Common
   
Additional
   

   
Other
   
Treasury
   
Treasury
 
   
Stock
Shares
   
Stock
Amount
   
Paid-In
Capital
   
Retained
Earnings
   
Comprehensive
Income
   
Stock
Shares
   
Stock
Amount
 
In thousands
                                         
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
                                           
(105
)
   
(2,006
)
Restricted share award
                   
(348
)
                   
23
     
348
 
Stock-based compensation
                   
2,846
                                 
Cumulative translation
                                                       
adjustments
                                   
(326
)
               
Net loss
                           
(5,887
)
                       
Balance at August 31, 2018
   
27,056
     
1,353
     
211,280
     
63,569
     
341
     
(13,159
)
   
(196,043
)
Issuance of common stock from
                                                       
treasury
                   
321
                     
43
     
654
 
Purchase of treasury shares
                                           
1
     
(12
)
Restricted share award
                   
(426
)
                   
28
     
426
 
Stock-based compensation
                   
4,789
                                 
Cumulative translation
                                                       
adjustments
                                   
(72
)
               
Cumulative effect of new
                                                       
accounting principle
                           
(3,143
)
                       
Net loss
                           
(1,023
)
                       
Balance at August 31, 2019
   
27,056
     
1,353
     
215,964
     
59,403
     
269
     
(13,087
)
   
(194,975
)
Issuance of common stock from
                                                       
treasury
                   
(3,138
)
                   
291
     
4,184
 
Purchase of treasury shares
                                           
(400
)
   
(13,971
)
Restricted share award
                   
(333
)
                   
21
     
333
 
Stock-based compensation
                   
(573
)
                               
Cumulative translation
                                                       
adjustments
                                   
372
                 
Net loss
                           
(9,435
)
                       
                                                         
Balance at August 31, 2020
   
27,056
   
$
1,353
   
$
211,920
   
$
49,968
   
$
641
     
(13,175
)
 
$
(204,429
)












See accompanying notes to consolidated financial statements.


FRANKLIN COVEY CO.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Franklin Covey Co. (hereafter referred to as we, us, our, or the Company) is a global company specializing in organizational performance improvement.  We help individuals and organizations achieve results that require a change in human behavior and our mission is to “enable greatness in people and organizations everywhere.”  We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training and products based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, The Leader In Me, The Four Disciplines of Execution, and Multipliers, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, and Educational improvement.  Our offerings are described in further detail at www.franklincovey.com and elsewhere in this report.  Through our organizational research and curriculum development efforts, we seek to consistently create, develop, and introduce new services and products that help individuals and organizations achieve their own great purposes.

Fiscal Year

Our fiscal year ends on August 31 of each year and our fiscal quarters end on the last day of November, February, and May.  Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and our wholly-owned subsidiaries, which consist of Franklin Development Corp., and our offices in Japan, China, the United Kingdom, Australia, Germany, Switzerland, and Austria.  Intercompany balances and transactions are eliminated in consolidation.

Pervasiveness of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, shareholders’ equity, revenues, and expenses.  Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made in our prior period financial statements to conform with the current period presentation.  On our consolidated statements of operations and comprehensive loss for the fiscal years ended August 31, 2019 and 2018, we have separately presented stock-based compensation, which was previously included within selling, general, and administrative expense (Note 12).

Cash and Cash Equivalents

Some of our cash is deposited with financial institutions located throughout the United States of America and at banks in foreign countries where we operate subsidiary offices, and at times may exceed insured limits.  We consider all highly liquid debt instruments with a maturity date of three months or less to be cash equivalents.  We did not hold a significant amount of investments that would be considered cash equivalent instruments at either August 31, 2020 or 2019.  Of our $27.1 million in cash at August 31, 2020, $12.2 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.


Inventories

Inventories are stated at the lower of cost or net realizable value, cost being determined using the first-in, first-out method.  Elements of cost in inventories generally include raw materials and direct labor.  Cash flows from the sale of inventory are included in cash flows provided by operating activities in our consolidated statements of cash flows.  Our inventories are comprised primarily of training materials, books, and training-related accessories, and consisted of the following (in thousands):
             
AUGUST 31,
 
2020
   
2019
 
Finished goods
 
$
2,947
   
$
3,434
 
Raw materials
   
27
     
47
 
   
$
2,974
   
$
3,481
 

Provision is made to reduce excess and obsolete inventories to their estimated net realizable value.  In assessing the valuation of our inventories, we make judgments regarding future demand requirements and compare these estimates with current and committed inventory levels.  Inventory requirements may change based on projected customer demand, training curriculum life-cycle changes, and other factors that could affect the valuation of our inventories.

Other Current Assets

Significant components of our other current assets were as follows (in thousands):

             
AUGUST 31,
 
2020
   
2019
 
Deferred commissions
 
$
8,897
   
$
8,337
 
Other current assets
   
2,603
     
2,690
 
   
$
11,500
   
$
11,027
 

We defer commission expense on subscription-based sales and recognize the commission expense with the recognition of the corresponding revenue.

Property and Equipment

Property and equipment are recorded at cost.  Depreciation expense, which includes depreciation on our corporate campus that is accounted for as a financing obligation (Note 7), is calculated using the straight-line method over the lesser of the expected useful life of the asset or the contracted lease period.  We generally use the following depreciable lives for our major classifications of property and equipment:

Description
Useful Lives
Buildings
20 years
Machinery and equipment
5–7 years
Computer hardware and software
3–5 years
Furniture, fixtures, and leasehold improvements
5–7 years



Our property and equipment were comprised of the following (in thousands):

             
AUGUST 31,
 
2020
   
2019
 
Land and improvements
 
$
1,312
   
$
1,312
 
Buildings
   
30,038
     
30,038
 
Machinery and equipment
   
900
     
1,162
 
Computer hardware and software
   
29,691
     
28,665
 
Furniture, fixtures, and leasehold
               
improvements
   
9,129
     
8,409
 
     
71,070
     
69,586
 
Less accumulated depreciation
   
(55,347
)
   
(51,007
)
   
$
15,723
   
$
18,579
 

We expense costs for repairs and maintenance as incurred.  Gains and losses resulting from the sale of property and equipment are recorded in income or (loss) from operations.  Depreciation of capitalized subscription portal costs is included in depreciation expense in the accompanying consolidated statements of operations and comprehensive loss.  During fiscal 2018, we capitalized $0.1 million of interest expense in connection with the installation of our new enterprise resource planning system and the development of our improved All Access Pass (AAP) portal.

Impairment of Long-Lived Assets

Long-lived tangible assets and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  We use an estimate of undiscounted future net cash flows of the assets over the remaining useful lives in determining whether the carrying value of the assets is recoverable.  If the carrying values of the assets exceed the anticipated future cash flows of the assets, we recognize an impairment loss equal to the difference between the carrying values of the assets and their estimated fair values.  Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent from other groups of assets.  The evaluation of long-lived assets requires us to use estimates of future cash flows.  If forecasts and assumptions used to support the realizability of our long-lived tangible and finite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.

Indefinite-Lived Intangible Assets and Goodwill Impairment Testing

Intangible assets that are deemed to have an indefinite life and acquired goodwill are not amortized, but rather are tested for impairment on an annual basis or more often if events or circumstances indicate that a potential impairment exists.  The Covey trade name intangible asset has been deemed to have an indefinite life.  This intangible asset is tested for impairment using qualitative factors or the present value of estimated royalties on trade name related revenues, which consist primarily of training seminars and work sessions, international licensee sales, and related products.  Based on the fiscal 2020 evaluation of the Covey trade name, we believe the fair value of the Covey trade name substantially exceeds its carrying value.  No impairment charges were recorded against the Covey trade name during the periods presented in this report.

Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired.  An annual (or interim test if events and circumstances indicate a test should be performed) 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, 2020 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).


On an interim basis, we consider whether events or circumstances are present that may lead to the determination that goodwill may be impaired.  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 are 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, we determined that no impairment existed at either of August 31, 2020 or 2019 as each reporting unit’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.  For more information regarding our intangible assets and goodwill, refer to Note 5.

Capitalized Curriculum Development Costs

During the normal course of business, we develop training courses and related materials that we sell to our clients.  Capitalized curriculum development costs include certain expenditures to develop course materials such as video segments, course manuals, and other related materials.  Our capitalized curriculum development spending in fiscal 2020, which totaled $5.1 million, was primarily for various Education practice offerings and courses for the All Access Pass, including new Multipliers content.  Curriculum costs are capitalized when there is a major revision to an existing course that requires a significant re-write of the course materials.  Costs incurred to maintain existing offerings are expensed when incurred.  In addition, development costs incurred in the research and development of new offerings and software products to be sold, leased, or otherwise marketed are expensed as incurred until economic and technological feasibility has been established.

Capitalized development costs are amortized over three- to five-year useful lives, which are based on numerous factors, including expected cycles of major changes to our content.  Capitalized curriculum development costs are reported as a component of other long-term assets in our consolidated balance sheets and totaled $8.1 million and $7.0 million at August 31, 2020 and 2019.  Amortization of capitalized curriculum development costs is reported as a component of cost of sales in the accompanying consolidated statements of operations and comprehensive loss.

Accrued Liabilities

Significant components of our accrued liabilities were as follows (in thousands):

             
AUGUST 31,
 
2020
   
2019
 
Accrued compensation
 
$
9,597
   
$
14,003
 
Other accrued liabilities
   
13,031
     
9,552
 
   
$
22,628
   
$
23,555
 



Contingent Consideration Payments from Business Acquisitions

Business acquisitions may include contingent consideration payments based on various future financial measures related to the acquired entity.  Contingent consideration is required to be recognized at fair value as of the acquisition date.  We estimate the fair value of these liabilities based on financial projections of the acquired company and estimated probabilities of achievement.  Based on updated estimates and projections, the contingent consideration liabilities are adjusted at each reporting date to their estimated fair value.  Changes in fair value subsequent to the acquisition date are reported in selling, general, and administrative expense in our consolidated statements of operations and comprehensive loss, and may have a material impact on our operating results.  Variations in the fair value of contingent consideration liabilities may result from changes in discount periods or rates, changes in the timing and amount of earnings estimates, and changes in probability assumptions with respect to the likelihood of achieving various payment criteria.

Foreign Currency Translation and Transactions

The functional currencies of our foreign operations are the reported local currencies.  Translation adjustments result from translating our foreign subsidiaries’ financial statements into United States dollars.  The balance sheet accounts of our foreign subsidiaries are translated into United States dollars using the exchange rate in effect at the balance sheet dates.  Revenues and expenses are translated using average exchange rates for each month during the fiscal year.  The resulting translation differences are recorded as a component of accumulated other comprehensive income in shareholders’ equity.  Foreign currency transaction losses totaled $0.1 million, $0.2 million, and $0.5 million for the fiscal years ended August 31, 2020, 2019, and 2018, respectively, and are included as a component of selling, general, and administrative expenses in our consolidated statements of operations and comprehensive loss.

Revenue Recognition

We account for revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which we adopted on September 1, 2018 using the modified retrospective method (see also Note 2).

Prior to the adoption of Topic 606, we recognized revenue when: 1) persuasive evidence of an arrangement existed, 2) delivery of the product occurred or the services were rendered, 3) the price to the customer was fixed or determinable, and 4) collectability was reasonably assured.  These principles governed our revenue recognition policies and procedures for fiscal 2018 as presented in this report.  For training and service sales, these conditions were generally met upon presentation of the training seminar or delivery of the consulting services based upon daily rates.  For most of our product sales, these conditions were met upon shipment of the product to the customer.  For intellectual property license sales, the revenue recognition conditions were generally met at the later of delivery of the content to the client or the effective date of the arrangement.  Our subscription revenues from the All Access Pass and the Leader in Me membership were recognized over the duration of the underlying contracts since our clients had the right to content updates during the contracted period.

Revenue recognition for multiple-element arrangements required judgment to determine if multiple elements existed, whether elements could be accounted for as separate units of accounting, and if so, the fair value for each of the elements.  A deliverable constituted a separate unit of accounting when it had standalone value to our clients.  We entered into arrangements that included various combinations of multiple training offerings, consulting services, and intellectual property licenses.  The timing of delivery and performance of the elements typically varied from contract to contract.  Generally, these items qualified as separate units of accounting because they had value to the customer on a standalone basis.  We determined the fair value to be used for allocating revenue to the elements based on (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence (TPE), and (iii) best estimate of selling price (BESP).

Our international strategy includes the use of licensees in countries where we do not have a wholly-owned direct office.  Licensee companies are unrelated entities that have been granted a license to translate our content and offerings, adapt the content to the local culture, and sell our content in a specific country or region.  Licensees are required to pay us royalties based upon a percentage of their sales to clients.  We recognize royalty income each period based upon the sales information reported to us from our licensees.  Refer to the disaggregated revenue information presented in Note 16 for our royalty revenues in the fiscal years presented in this report.


Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns.

Stock-Based Compensation

We record the compensation expense for all stock-based payments, including grants of stock options and the compensatory elements of our employee stock purchase plan, in our consolidated statements of operations and comprehensive loss based upon their fair values over the requisite service period.  For more information on our stock-based compensation plans, refer to Note 12.

Shipping and Handling Fees and Costs

All shipping and handling fees billed to customers are recorded as a component of net sales.  All costs incurred related to the shipping and handling of products are recorded in cost of sales.

Advertising Costs

Costs for advertising are expensed as incurred.  Advertising costs included in selling, general, and administrative expenses totaled $3.3 million, $4.6 million, and $6.9 million for the fiscal years ended August 31, 2020, 2019, and 2018.

Restructuring Costs

During the fourth quarter of fiscal 2020, we restructured certain information technology, central operations, and marketing functions.  We incurred $1.6 million of severance costs related to these restructuring activities.  At August 31, 2020, we had $1.2 million of remaining accrued restructuring costs, which are expected to be paid during fiscal 2021.

Income Taxes

Our income tax provision has been determined using the asset and liability approach of accounting for income taxes.  Under this approach, deferred income taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid.  The income tax provision represents income taxes paid or payable for the current year plus the change in deferred taxes during the year.  Deferred income taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for tax rates and tax laws when changes are enacted.  A valuation allowance is provided against deferred income tax assets when it is more likely than not that all or some portion of the deferred income tax assets will not be realized.  Interest and penalties related to uncertain tax positions are recognized as components of income tax benefit or expense in our consolidated statements of operations and comprehensive loss.

We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.

We provide for income taxes, net of applicable foreign tax credits, on temporary differences in our investment in foreign subsidiaries, which consist primarily of unrepatriated earnings.



Comprehensive Loss

Comprehensive loss includes changes to equity accounts that were not the result of transactions with shareholders.  Comprehensive loss is comprised of net income or loss and other comprehensive income and loss items.  Our other comprehensive income and losses generally consist of changes in the cumulative foreign currency translation adjustment, net of tax.

Accounting Pronouncements Issued and Adopted

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB Accounting Standards Codification (ASC) Topic 840, Leases.  The new guidance requires lessees to recognize a lease liability and corresponding right-of-use asset for all leases greater than 12 months.  Recognition, measurement, and presentation of expenses depends upon whether the lease is classified as a finance or operating lease.  We adopted the new lease guidance prospectively on September 1, 2019.  As part of the adoption of ASU 2016-02, we elected to apply the package of practical expedients, which allows us to not reassess prior conclusions related to lease classification, not to recognize short-term leases on our balance sheet, and not to separate lease and non-lease components for our leases.  On September 1, 2019, the adoption of ASU 2016-02 resulted in the recognition of $1.5 million of lease liabilities and right-of-use assets on our consolidated balance sheets for operating leases.  For lessors, accounting for leases is substantially the same as in prior periods and there was no impact from the adoption of ASU 2016-02 for those leases where we are the lessor.  Refer to Note 8, Leases for further information on our leasing activity.

The lease on our corporate campus has historically been accounted for as a financing obligation and related building asset on our consolidated balance sheets, as the contract did not meet the criteria for application of sale-leaseback accounting under previous leasing guidance.  In transition to Topic 842, we reassessed whether the contract met the sale criteria under the new leasing standard.  Based on this assessment, we determined that the sale criteria under the new leasing standard was not met and we will continue to account for the corporate campus lease as a finance obligation on our consolidated balance sheet in future periods.

Revenue Recognition

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This new standard was issued in conjunction with the International Accounting Standards Board (IASB) and is designed to create a single, principles-based process by which all businesses calculate revenue.  The core principle of this standard is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services.  The new standard replaces numerous individual, industry-specific revenue rules found in generally accepted accounting principles in the United States.  We adopted ASU No. 2014-09 on September 1, 2018 using the “modified retrospective” approach.  Under this transition method, we applied the new standard to contracts that were not completed as of the adoption date and recognized a cumulative effect adjustment which reduced our retained earnings by $4.1 million ($3.1 million, net of tax) on September 1, 2018, which primarily consisted of initial licensing fees on international locations.  The comparative period information for fiscal 2018 has not been restated and continues to be presented according to accounting standards for revenue recognition in effect during that fiscal year.

The primary impact of ASU No. 2014-09 on our revenue recognition policies is a change in the way we account for our initial license fee associated with licensing an international location.  The Company previously recorded the non-refundable initial license fee from licensing an international location as revenue at the time the license period begins if all other revenue requirements had been met.  However, under Topic 606, the Company recognizes revenue on the upfront license fees over the duration of the contract.


Under Topic 606, we account for the All Access Pass as a single performance obligation and recognize the associated transaction price on a straight-line basis over the term of the underlying contract.  This determination was reached after considering that our web-based functionality and content, in combination with our intellectual property, each represent inputs that transform into a combined output that represents the intended outcome of the AAP, which is to provide a continuously accessible, customized, and dynamic learning and development solution only accessible through the AAP platform.

We do not expect the accounting for fulfillment costs or costs incurred to obtain a contract to be materially affected in any period due to the adoption of ASU 2014-09.  Refer to Note 2 for further details regarding our revenue recognition accounting policies under Topic 606.

The cumulative after-tax effects of the changes made to our consolidated balance sheet from the adoption of Topic 606 were as follows (in thousands):

                   
   
August 31,
   
ASC 606
   
September 1,
 
   
2018
   
Adjustments
   
2018
 
Assets:
                 
Other current assets
 
$
10,893
   
$
109
   
$
11,002
 
Deferred income tax assets
   
3,222
     
1,005
     
4,227