Company Quick10K Filing
Quick10K
Franklin Covey
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$27.99 14 $391
10-Q 2019-05-31 Quarter: 2019-05-31
10-Q 2019-02-28 Quarter: 2019-02-28
10-Q 2018-11-30 Quarter: 2018-11-30
10-K 2018-08-31 Annual: 2018-08-31
10-Q 2018-05-31 Quarter: 2018-05-31
10-Q 2018-02-28 Quarter: 2018-02-28
10-Q 2018-01-09 Quarter: 2018-01-09
10-K 2017-08-31 Annual: 2017-08-31
10-Q 2017-05-31 Quarter: 2017-05-31
10-Q 2017-02-28 Quarter: 2017-02-28
10-Q 2016-11-26 Quarter: 2016-11-26
10-K 2016-08-31 Annual: 2016-08-31
10-Q 2016-05-28 Quarter: 2016-05-28
10-Q 2016-02-27 Quarter: 2016-02-27
10-Q 2015-11-28 Quarter: 2015-11-28
10-K 2015-08-31 Annual: 2015-08-31
10-Q 2015-05-30 Quarter: 2015-05-30
10-Q 2015-02-28 Quarter: 2015-02-28
10-Q 2014-11-29 Quarter: 2014-11-29
10-K 2014-08-31 Annual: 2014-08-31
10-Q 2014-07-09 Quarter: 2014-07-09
10-Q 2014-04-10 Quarter: 2014-04-10
10-Q 2013-11-30 Quarter: 2013-11-30
8-K 2019-06-27 Earnings, Other Events, Exhibits
8-K 2019-06-13 Other Events
8-K 2019-04-04 Earnings, Other Events, Exhibits
8-K 2019-03-21 Other Events
8-K 2019-01-25 Officers, Shareholder Vote, Exhibits
8-K 2019-01-09 Earnings, Other Events, Exhibits
8-K 2018-12-20 Other Events
8-K 2018-11-08 Earnings, Other Events, Exhibits
8-K 2018-10-25 Other Events
8-K 2018-08-17 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-27 Earnings, Other Events, Exhibits
8-K 2018-06-14 Other Events
8-K 2018-04-04 Earnings, Other Events, Exhibits
8-K 2018-03-22 Other Events
8-K 2018-01-26 Officers, Shareholder Vote, Exhibits
8-K 2018-01-04 Earnings, Other Events, Exhibits
FDX Fedex 46,790
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TPX Tempur Sealy 3,390
ARD Ardagh Group 3,340
CWT California Water Service Group 2,360
SIBN SI-BONE 414
ACMR ACM Research 298
CWCO Consolidated Water 194
EVER Everquote 105
BKIT Blake Insomnia Therapeutics 0
FC 2019-05-31
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Revenue Recognition
Note 3 - Acquisition of Germany, Switzerland, and Austria Licensee
Note 4 - Inventories
Note 5 - Fair Value of Financial Instruments
Note 6 - Stock-Based Compensation
Note 7 - Income Taxes
Note 8 - Loss per Share
Note 9 - Segment Information
Note 10 - Investment in Fc Organizational Products
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 exhibit31_1.htm
EX-31.2 exhibit31_2.htm
EX-32 exhibit_32.htm

Franklin Covey Earnings 2019-05-31

FC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q-070919.htm FORM 10Q Q3FY19




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

FORM 10-Q

(Mark One)


[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2019


[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file no. 1-11107
FRANKLIN COVEY CO.
(Exact name of registrant as specified in its charter)


Utah
(State of incorporation)

 
87-0401551
(I.R.S. employer identification number)
2200 West Parkway Boulevard
Salt Lake City, Utah
(Address of principal executive offices)
 
 
84119-2099
(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(s)
Name of each exchange on which registered
Common Stock, $.05 Par Value
FC
New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   ☒  No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 ☐

   
Accelerated filer
 ☒    

Non-accelerated filer
 ☐

   
Smaller reporting company
 ☒    

Emerging growth company
 ☐          
   


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ☐  No   ☒

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date:

13,974,222 shares of Common Stock as of June 30, 2019




PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per-share amounts)

             
   
May 31,
   
August 31,
 
   
2019
   
2018
 
   
(unaudited)
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
10,858
   
$
10,153
 
Accounts receivable, less allowance for doubtful accounts of $4,170 and $3,555
   
52,113
     
71,914
 
Inventories
   
3,072
     
3,160
 
Income taxes receivable
   
-
     
179
 
Prepaid expenses and other current assets
   
13,016
     
14,757
 
Total current assets
   
79,059
     
100,163
 
                 
Property and equipment, net
   
19,171
     
21,401
 
Intangible assets, net
   
48,873
     
51,934
 
Goodwill
   
24,220
     
24,220
 
Deferred income tax assets
   
6,455
     
3,222
 
Other long-term assets
   
10,086
     
12,935
 
   
$
187,864
   
$
213,875
 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of term notes payable
 
$
6,563
   
$
10,313
 
Current portion of financing obligation
   
2,273
     
2,092
 
Accounts payable
   
7,428
     
9,790
 
Income taxes payable
   
415
     
-
 
Deferred revenue
   
45,168
     
51,888
 
Accrued liabilities
   
20,505
     
20,761
 
Total current liabilities
   
82,352
     
94,844
 
                 
Line of credit
   
4,123
     
11,337
 
Term notes payable, less current portion
   
1,562
     
2,500
 
Financing obligation, less current portion
   
17,258
     
18,983
 
Other liabilities
   
8,193
     
5,501
 
Deferred income tax liabilities
   
210
     
210
 
Total liabilities
   
113,698
     
133,375
 
                 
Shareholders’ equity:
               
Common stock, $.05 par value; 40,000 shares authorized, 27,056 shares issued
   
1,353
     
1,353
 
Additional paid-in capital
   
214,092
     
211,280
 
Retained earnings
   
53,528
     
63,569
 
Accumulated other comprehensive income
   
326
     
341
 
Treasury stock at cost, 13,097 shares and 13,159 shares
   
(195,133
)
   
(196,043
)
Total shareholders’ equity
   
74,166
     
80,500
 
   
$
187,864
   
$
213,875
 



See notes to condensed consolidated financial statements
2


FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, except per-share amounts)

                         
   
Quarter Ended
   
Three Quarters Ended
 
   
May 31,
   
May 31,
   
May 31,
   
May 31,
 
   
2019
   
2018
   
2019
   
2018
 
   
(unaudited)
   
(unaudited)
 
                         
Net sales
 
$
56,006
   
$
50,461
   
$
160,191
   
$
144,939
 
Cost of sales
   
16,342
     
15,545
     
48,379
     
44,411
 
Gross profit
   
39,664
     
34,916
     
111,812
     
100,528
 
                                 
Selling, general, and administrative
   
38,713
     
34,910
     
109,282
     
103,830
 
Depreciation
   
1,556
     
1,267
     
4,806
     
3,547
 
Amortization
   
1,259
     
1,326
     
3,797
     
4,117
 
Loss from operations
   
(1,864
)
   
(2,587
)
   
(6,073
)
   
(10,966
)
                                 
Interest income
   
8
     
35
     
30
     
94
 
Interest expense
   
(562
)
   
(738
)
   
(1,817
)
   
(1,979
)
Discount accretion on related party receivable
   
-
     
202
     
258
     
258
 
Loss before income taxes
   
(2,418
)
   
(3,088
)
   
(7,602
)
   
(12,593
)
Income tax benefit
   
394
     
554
     
704
     
4,927
 
Net loss
 
$
(2,024
)
 
$
(2,534
)
 
$
(6,898
)
 
$
(7,666
)
                                 
Net loss per share:
                               
Basic and diluted
 
$
(0.14
)
 
$
(0.18
)
 
$
(0.49
)
 
$
(0.55
)
                                 
Weighted average number of common shares:
                               
Basic and diluted
   
13,963
     
13,896
     
13,939
     
13,829
 
                                 
                                 
COMPREHENSIVE LOSS
                               
Net loss
 
$
(2,024
)
 
$
(2,534
)
 
$
(6,898
)
 
$
(7,666
)
Foreign currency translation adjustments,
                               
net of income tax benefit (provision)
                               
of $8, $50, $8, and $(44)
   
(144
)
   
(187
)
   
(15
)
   
165
 
Comprehensive loss
 
$
(2,168
)
 
$
(2,721
)
 
$
(6,913
)
 
$
(7,501
)















See notes to condensed consolidated financial statements
3


FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

             
   
Three Quarters Ended
 
   
May 31,
   
May 31,
 
   
2019
   
2018
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
 
$
(6,898
)
 
$
(7,666
)
Adjustments to reconcile net loss to net cash provided
               
by operating activities:
               
Depreciation and amortization
   
8,619
     
7,725
 
Amortization of capitalized curriculum costs
   
3,951
     
3,923
 
Stock-based compensation expense
   
3,040
     
2,182
 
Deferred income taxes
   
(2,207
)
   
(6,605
)
Change in fair value of contingent consideration liabilities
   
1,145
     
789
 
Changes in assets and liabilities, net of effect of acquired business:
               
Decrease in accounts receivable, net
   
19,461
     
15,489
 
Decrease (increase) in inventories
   
158
     
(401
)
Decrease in prepaid expenses and other assets
   
2,585
     
1,545
 
Decrease in accounts payable and accrued liabilities
   
(2,792
)
   
(4,541
)
Decrease in deferred revenue
   
(8,384
)
   
(2,219
)
Increase (decrease) in income taxes payable/receivable
   
358
     
(564
)
Decrease in other long-term liabilities
   
(412
)
   
(1,065
)
Net cash provided by operating activities
   
18,624
     
8,592
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of property and equipment
   
(2,996
)
   
(4,981
)
Curriculum development costs
   
(1,821
)
   
(2,445
)
Acquisition of business, net of cash acquired
   
(32
)
   
(1,108
)
Net cash used for investing activities
   
(4,849
)
   
(8,534
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from line of credit borrowings
   
66,451
     
71,107
 
Payments on line of credit borrowings
   
(73,665
)
   
(59,619
)
Principal payments on term notes payable
   
(4,688
)
   
(4,687
)
Principal payments on financing obligation
   
(1,544
)
   
(1,378
)
Purchases of common stock for treasury
   
(12
)
   
(2,005
)
Payment of contingent consideration liabilities
   
(483
)
   
(1,188
)
Proceeds from sales of common stock held in treasury
   
694
     
559
 
Net cash provided by (used for) financing activities
   
(13,247
)
   
2,789
 
Effect of foreign currency exchange rates on cash and cash equivalents
   
177
     
3
 
Net increase in cash and cash equivalents
   
705
     
2,850
 
Cash and cash equivalents at the beginning of the period
   
10,153
     
8,924
 
Cash and cash equivalents at the end of the period
 
$
10,858
   
$
11,774
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid for income taxes
 
$
1,247
   
$
2,118
 
Cash paid for interest
   
1,855
     
1,947
 
                 
Non-cash investing and financing activities:
               
Purchases of property and equipment financed by accounts payable
 
$
597
   
$
1,344
 
Consideration for business acquisition from liabilities of acquiree
   
798
     
-
 


See notes to condensed consolidated financial statements
4


FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands and unaudited)


                             Accumulated              
   
Common
   
Common
   
Additional
         
Other
   
Treasury
   
Treasury
 
   
Stock
   
Stock
   
Paid-In
   
Retained
   
Comprehensive
   
Stock
   
Stock
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income
   
Shares
   
Amount
 
                                           
Balance at August 31, 2018
   
27,056
   
$
1,353
   
$
211,280
   
$
63,569
   
$
341
     
(13,159
)
 
$
(196,043
)
Issuance of common stock from
                                                       
treasury
                   
64
                     
11
     
166
 
Purchase of treasury shares
                                                   
(7
)
Stock-based compensation
                   
946
                                 
Cumulative translation
                                                       
adjustments
                                   
(309
)
               
Cumulative effect of
                                                       
accounting change
                           
(3,143
)
                       
Net loss
                           
(1,357
)
                       
Balance at November 30, 2018
   
27,056
     
1,353
     
212,290
     
59,069
     
32
     
(13,148
)
   
(195,884
)
                                                         
Issuance of common stock from
                                                       
treasury
                   
53
                     
11
     
162
 
Purchase of treasury shares
                                                   
(5
)
Stock-based compensation
                   
1,043
                                 
Restricted stock award
                   
(426
)
                   
28
     
426
 
Cumulative translation
                                                       
adjustments
                                   
438
                 
Net loss
                           
(3,517
)
                       
Balance at February 28, 2019
   
27,056
     
1,353
     
212,960
     
55,552
     
470
     
(13,109
)
   
(195,301
)
                                                         
Issuance of common stock from
                                                       
treasury
                   
81
                     
12
     
168
 
Stock-based compensation
                   
1,051
                                 
Cumulative translation
                                                       
adjustments
                                   
(144
)
               
Net loss
                           
(2,024
)
                       
Balance at May 31, 2019
   
27,056
   
$
1,353
   
$
214,092
   
$
53,528
   
$
326
     
(13,097
)
 
$
(195,133
)















See notes to condensed consolidated financial statements
5


FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY – PRIOR FISCAL YEAR
(in thousands and unaudited)


                           
Accumulated
             
   
Common
   
Common
   
Additional
         
Other
   
Treasury
   
Treasury
 
   
Stock
   
Stock
   
Paid-In
   
Retained
   
Comprehensive
   
Stock
   
Stock
 
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income
   
Shares
   
Amount
 
                                           
Balance at August 31, 2017
   
27,056
   
$
1,353
   
$
212,484
   
$
69,456
   
$
667
     
(13,414
)
 
$
(198,895
)
Issuance of common stock from
                                                       
treasury
                   
(3,600
)
                   
256
     
3,758
 
Purchases of common shares
                                                       
   for treasury
                                           
(103
)
   
(1,968
)
Stock-based compensation
                   
956
                                 
Cumulative translation
                                                       
adjustments
                                   
(77
)
               
Net loss
                           
(2,392
)
                       
Balance at November 30, 2017
   
27,056
     
1,353
     
209,840
     
67,064
     
590
     
(13,261
)
   
(197,105
)
                                                         
Issuance of common stock from
                                                       
treasury
                   
(264
)
                   
61
     
456
 
Purchases of common shares
                                                       
   for treasury
                                           
(2
)
   
(38
)
Stock-based compensation
                   
779
                                 
Restricted stock award
                   
(348
)
                   
23
     
348
 
Cumulative translation
                                                       
adjustments
                                   
429
                 
Net loss
                           
(2,740
)
                       
Balance at February 28, 2018
   
27,056
   

1,353
   

210,007
   

64,324
   

1,019
     
(13,179
)
 

(196,339
)
                                                         
Issuance of common stock from
                                                       
treasury
                   
68
                     
10
     
142
 
Stock-based compensation
                   
446
                                 
Cumulative translation
                                                       
adjustments
                                   
(187
)
               
Net loss
                           
(2,534
)
                       
Balance at May 31, 2018
   
27,056
   
$
1,353
   
$
210,521
   
$
61,790
   
$
832
     
(13,169
)
 
$
(196,197
)












See notes to condensed consolidated financial statements
6


FRANKLIN COVEY CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


NOTE 1 – BASIS OF PRESENTATION

General

Franklin Covey Co. (hereafter referred to as us, we, our, or the Company) is a global company focused on organizational performance improvement.  Our mission is to “enable greatness in people and organizations everywhere,” and our global structure is designed to help individuals and organizations achieve sustained superior performance through changes in human behavior.  We are fundamentally a content and solutions company, and we believe that our offerings and services create the connection between capabilities and results.  Our expertise extends to seven crucial areas: Leadership, Execution, Productivity, Trust, Educational Improvement, Sales Performance, and Customer Loyalty.  We believe that our clients are able to utilize our content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.

In the training and consulting marketplace, we believe there are three important characteristics that distinguish us from our competitors.

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 content is designed to build new skillsets, establish new mindsets, and provide enabling toolsets to our clients.

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

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

We are committed to, and measure ourselves by, our clients’ achievement of transformational results.

We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, The Leader in Me, and The 4 Disciplines of Execution, and proprietary content in the areas of Execution, Sales Performance, Productivity, Educational Improvement, and Customer Loyalty.  Our offerings are described in further detail at www.franklincovey.com.  The information posted on our website is not incorporated into this report.
7


The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and results of operations of the Company as of the dates and for the periods indicated.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to Securities and Exchange Commission (SEC) rules and regulations.  The information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the fiscal year ended August 31, 2018.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Our fiscal year ends on August 31 of each year and our fiscal quarters end on the last day of November, February, and May of each year.

The results of operations for the quarter and three quarters ended May 31, 2019 are not necessarily indicative of results expected for the entire fiscal year ending August 31, 2019, or for any future periods.

Accounting Pronouncements Issued and Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 prior period information has not been restated and continues to be presented according to accounting standards for revenue recognition in effect during the periods presented.

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 will recognize revenue on the upfront fees over the duration of the contract.

Under Topic 606, we will account for the All Access Pass (AAP) 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.
8


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.  While we do not believe the adoption of ASU 2014-09 will materially impact our annual financial statements, the change in the timing of revenue recognition of certain contracts could result in significant quarter-to-quarter fluctuations in revenue.  See 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
 
                         
Liabilities and Shareholders' Equity:
                       
Deferred revenue
   
51,888
     
2,008
     
53,896
 
Other liabilities
   
5,501
     
2,249
     
7,750
 
Retained earnings
   
63,569
     
(3,143
)
   
60,426
 

The following line items in our condensed consolidated statement of operations were impacted by the adoption of the new standard for the quarter ended May 31, 2019 (in thousands, except per-share data):

                   
   
May 31,
   
May 31,
       
   
2019
   
2019
   
Impact of
 
   
As Reported
   
Without ASC 606
   
ASC 606
 
Revenue
 
$
56,006
   
$
56,160
   
$
(154
)
Cost of sales
   
16,342
     
16,342
     
-
 
Selling, general, and administrative
   
38,713
     
38,686
     
27
 
Income tax benefit
   
394
     
349
     
45
 
Net loss
   
(2,024
)
   
(1,888
)
   
(136
)
                         
Net loss per share:
                       
   Basic and diluted
 
$
(0.14
)
 
$
(0.14
)
       

9


The following line items in our condensed consolidated statements of operations were impacted by the adoption of Topic 606 for the three quarters ended May 31, 2019 (in thousands, except per-share data):

                   
   
Three Quarters
   
Three Quarters
       
   
Ended May 31,
   
Ended May 31,
       
   
2019
   
2019
   
Impact of
 
   
As Reported
   
Without ASC 606
   
ASC 606
 
Revenue
 
$
160,191
   
$
158,813
   
$
1,378
 
Cost of sales
   
48,379
     
48,379
     
-
 
Selling, general, and administrative
   
109,282
     
109,173
     
109
 
Income tax benefit
   
704
     
387
     
317
 
Net loss
   
(6,898
)
   
(8,484
)
   
1,586
 
                         
Net loss per share:
                       
   Basic and diluted
 
$
(0.49
)
 
$
(0.61
)
       

Selected condensed consolidated balance sheet line items as of May 31, 2019, which were impacted by the adoption of the new standard, are as follows (in thousands):


   
May 31,
   
May 31,
       
   
2019
   
2019
   
Impact of
 
   
As Reported
   
Without ASC 606
   
ASC 606
 
Assets:
                 
Prepaid expenses and other current assets
 
$
13,016
   
$
12,907
   
$
109
 
Deferred income tax assets
   
6,455
     
6,772
     
(317
)
Total assets
   
187,864
     
188,072
     
(208
)
                         
Liabilities and Shareholders' Equity:
                       
Deferred revenue
   
45,168
     
43,715
     
1,453
 
Other liabilities
   
8,193
     
8,268
     
(75
)
Retained earnings
   
53,528
     
55,114
     
(1,586
)
Total liabilities and shareholders' equity
   
187,864
     
188,072
     
(208
)

The adoption of ASC Topic 606 did not have a material impact on our cash flows from operating, investing, or financing activities.

Accounting Pronouncements Issued Not Yet Adopted

Leases (Topic 842)

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB Accounting Standards Codification (ASC) Topic 840, Leases.  The new lease accounting standard is the result of a collaborative effort with the IASB (similar to the new revenue standard described above) and establishes a comprehensive new lease accounting model.  This new standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee.  The lease liability will be equal to the present value of lease payments.  The right-of-use asset will be based on the liability, subject to adjustment, such as for initial direct costs.  For lessors, accounting for leases is substantially the same as in prior periods.  In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases.  ASU No. 2018-10 clarifies or corrects unintended application of certain guidance found in ASU No. 2016-02.
10


We are required to adopt the provisions of ASU No. 2016-02 and ASU No. 2018-10 on September 1, 2019, which is the beginning of fiscal 2020.  We expect to adopt the new accounting guidance using the additional modified retrospective transition method provided by ASU No. 2018-11, Leases (Topic 842): Targeted Improvements.  Under this approach, the cumulative effect of the transition adjustments is applied to the related opening balances on our consolidated balance sheet in the period of adoption.  However, comparative periods prior to the adoption date and their respective disclosures will be presented using the legacy leasing guidance found in Topic 840.

At May 31, 2019, our leases primarily consist of the lease on our corporate campus, which is accounted for as a financing obligation on our consolidated balance sheets and operating leases for office space, office equipment, and warehousing space.  We expect the adoption of this new standard will increase our reported assets and liabilities since we will record the lease obligation and a corresponding right of use asset on our balance sheet for leases that are currently accounted for as operating leases.  However, as of May 31, 2019, we have not yet determined the full impact that the adoption of ASU 2016-02 will have on our consolidated financial statements.

Stock-Based Compensation (Topic 718):  Improvements to Nonemployee Share-Based Payment Accounting

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation:  Improvements to Nonemployee Share-Based Payment Accounting (Topic 718).  ASU No. 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  The amendments in this update specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards.  The amendments also clarify that Topic 718 does not apply to share-based payments used effectively to provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.  The new guidance is effective for interim and annual periods beginning after December 15, 2018, with early application permitted.  We expect to adopt the provisions of ASU No. 2018-07 on June 1, 2019.  However, we have not previously granted awards to non-employees (except for members of the Board of Directors) and we do not expect any cumulative impact from the adoption ASU No. 2018-07.  We do not believe the adoption of ASU No. 2018-07 will have any impact on our financial position, results of operations, cash flows, or disclosures.




NOTE 2 – REVENUE RECOGNITION

We account for revenue in accordance with Topic 606, which was adopted on September 1, 2018 using the modified retrospective method (Note 1).  We earn revenue from contracts with customers primarily through the delivery of our All Access Pass and The Leader in Me subscription offerings, through the delivery of training days and training course materials, and through the licensing of rights to sell our content into geographic locations where the Company does not maintain a direct office.  We also earn revenues from leasing arrangements that are not accounted for under Topic 606.  Returns and refunds are generally immaterial, and we do not have any significant warranty obligations.

Under Topic 606, we recognize revenue upon the transfer of control of promised products and services to customers in an amount equal to the consideration the Company expects to receive in exchange for those products or services.  Although rare, if the consideration promised in a contract includes variable amounts, we evaluate the estimate of variable consideration to determine whether the estimate needs to be constrained.  We include the variable consideration in the transaction price only to the extent that it is probable a significant reversal of the amount of cumulative revenue recognized will not occur.
11


We determine the amount of revenue to be recognized through application of the following steps:

Identification of the contract with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when the Company satisfies the performance obligations

Taxes assessed by a government authority that are collected from a customer are excluded from net revenue.

Subscription and Support Revenues

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

We typically invoice our customers annually upon execution of the contract or subsequent renewals.  Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue or revenue, depending on whether transfer of control has occurred.

Training Days and Product Sales

We deliver Company-led training days from our offerings, such as The 7 Habits of Highly Effect People, at a customer’s location based upon a daily consultant rate and a set price for training materials.  These revenues are recognized as the training days occur and the services are performed.  Customers also have the option to purchase training materials and present our offerings through internal facilitators and not through the use of a Franklin Covey consultant.  Revenue is recognized from these product sales when the materials are shipped.  Shipping revenues associated with product sales are recorded in revenue with the corresponding shipping cost being recorded as a component of cost of sales.

Geographic Location License Rights

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 reporting period based upon the sales information reported to us from our licensees.  When sales information is not received from a particular licensee at the end of a reporting period, the Company estimates the amount of royalties to be received for the period that is being reported based upon prior forecasts and historical performance.  These estimated royalties are recorded as revenue and are adjusted, if necessary, in the subsequent period.
12


The primary impact of ASU No. 2014-09 on our financial statements is a change in the way we account for the 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 began if all other revenue requirements had been met.  However, under Topic 606, we recognize revenue on the upfront fees over the term of the initial contract.

Contracts with Multiple Performance Obligations

We periodically enter into contracts that include multiple performance obligations.  A performance obligation is a promise in a contract to transfer products or services that are distinct, or that are distinct within the context of the contract.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied.  Determining whether products and services meet the distinct criteria that should be accounted for separately or combined as one unit of accounting requires significant judgment.

When determining whether goods and services meet the distinct criteria we consider various factors for each agreement including the availability of the services and the nature of the offerings and services.  We allocate the transaction price to each performance obligation on a relative standalone selling price (SSP) basis.  Significant judgment is required to determine the SSP for each distinct performance obligation.  The SSP is the price which the Company would sell a promised product or service separately to a customer.  In determining the SSP, we consider the size and volume of transactions, the geographic location, price lists, historical sales, and contract prices.  We may modify our pricing from time-to-time in the future, which could result in changes to the SSP.

Contract Balances

As described above, subscription revenue is generally recognized ratably over the term of the underlying contract beginning on the commencement date of each contract.  The timing of when these contracts are invoiced, cash is collected, and revenue is recognized impacts our accounts receivable and deferred revenue accounts.  We generally bill our clients in advance for subscription offerings or within the month that the training and products are delivered.  As such, consideration due to the Company for work performed is included in accounts receivable and we do not have a significant amount of contract assets.  Our receivables are generally collected within 30 to 120 days but typically no longer than 12 months.  Deferred revenue primarily consists of billings or payments received in advance of revenue being recognized from our subscription offerings.  Furthermore, our clients, to expend funds in a particular budget cycle, may prepay for services or products which are also a component of our consolidated deferred revenue.  Our deferred revenue totaled $48.7 million at May 31, 2019 and $52.9 million at August 31, 2018, of which $3.5 million and $1.0 million were classified as components of other long-term liabilities at May 31, 2019 and August 31, 2018, respectively.  The amount of deferred revenue that was generated from subscription offerings totaled $39.9 million at May 31, 2019 and $48.4 million at August 31, 2018.  During the quarter and three quarters ended May 31, 2019, we recognized $18.9 million and $55.1 million of previously deferred subscription revenue.

Remaining Performance Obligations

When possible, we enter into multi-year non-cancellable contracts which are invoiced either upon execution of the contract or at the beginning of each annual contract period.  Topic 606 introduced the concept of remaining transaction price which represents contracted revenue that has not yet been recognized, including unearned revenue and unbilled amounts that will be recognized as revenue in future periods.  Transaction price is influenced by factors such as seasonality, the average length of the contract term, and the ability of the Company to continue to enter multi-year non-cancellable contracts.  At May 31, 2019 we had $63.7 million of remaining performance obligations, including the amount of deferred revenue related to our subscription offerings, of which approximately 75 percent will be recognized over the next 12 months.
13


Costs Capitalized to Obtain Contracts

We capitalize the incremental costs of obtaining non-cancellable subscription revenue, primarily from the All Access Pass and The Leader in Me subscription offerings.  These incremental costs consist of sales commissions paid to our direct sales force and include the associated payroll taxes and fringe benefits.  As the same commission rates are paid annually when the customer renews their contract, the capitalized commission costs are amortized ratably on an annual basis.  At May 31, 2019 the Company has capitalized $6.2 million of direct sales commissions, which are included as a component of other current assets on our condensed consolidated balance sheet.  During the quarter and three quarters ended May 31, 2019, we capitalized $4.0 million and $7.8 million of costs to obtain revenue contracts and amortized $4.0 million and $8.8 million to selling, general, and administrative expense, respectively.

Refer to Note 9 (Segment Information) to these condensed consolidated financial statements for our disaggregated revenue information.


NOTE 3 – ACQUISITION OF GERMANY, SWITZERLAND, AND AUSTRIA LICENSEE

On December 5, 2018, we purchased all of the equity of Leadership Institut GmbH, a Munich, Germany based company with wholly owned subsidiary companies in Switzerland and Austria.  Leadership Institut GmbH previously operated as an independent licensee that provided our training and products to Germany, Switzerland, and Austria (GSA).  We are transitioning the GSA licensee operation into a directly owned office operation similar to the fiscal 2017 transition of the licensee operation in China.  The purchase price was $0.2 million in cash, plus $0.8 million in forgiveness of liabilities owed to the Company from the pre-existing relationship at the purchase date.  There is no contingent or other additional consideration associated with the purchase of the former GSA licensee.  We accounted for the acquisition of Leadership Institut Gmbh as a business combination in the second quarter of fiscal 2019.  We also expect to incur additional costs for severance, legal, and other related acquisition expenses.  These additional costs are expected to total approximately $0.8 million and will be expensed as incurred in selling, general, and administrative expense.  The acquisition of the GSA licensee will provide us with the opportunity to operate a directly owned office in one of the world’s largest economic markets and is expected to provide significant future growth opportunities.  The total purchase price consisted of the following (in thousands):

       
Cash paid at closing
 
$
159
 
Accounts receivable from GSA licensee
   
798
 
   Total purchase price
 
$
957
 

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows (in thousands):

       
Cash acquired
 
$
127
 
Accounts receivable
   
564
 
Inventories
   
80
 
Prepaid and other current assets
   
45
 
Intangible assets
   
741
 
Property and equipment
   
27
 
Other long-term assets
   
11
 
   Assets acquired
   
1,595
 
Accounts payable
   
(208
)
Accrued liabilities
   
(383
)
Income taxes payable
   
(47
)
   Liabilities assumed
   
(638
)
   
$
957
 

14


The preliminary allocation of the purchase price to the intangible assets acquired was as follows (in thousands):

            
       
Weighted Average
Description
 
Amount
 
Life
Reacquisition of license rights
 
$
360
 
3 years
Localized content
   
202
 
3 years
Customer relationships
   
179
 
3 years
   
$
741
   

We have included the financial results of the former GSA licensee in our financial results since the date of acquisition.  Since the date of the acquisition, the new direct office that serves the GSA region had $1.1 million of sales and a $0.3 million operating loss.  During the second and third quarters of the prior year, we recognized $0.4 million of royalty revenue from the GSA licensee.  For the twelve months ended August 31, 2018, the former GSA licensee had $3.3 million of sales and a $1.3 million pre-tax tax loss.


NOTE 4 – INVENTORIES

Inventories are stated at the lower of cost or net realizable value, cost being determined using the first-in, first-out method, and were comprised of the following (in thousands):
             
   
May 31,
   
August 31,
 
   
2019
   
2018
 
Finished goods
 
$
3,041
   
$
3,130
 
Raw materials
   
31
     
30
 
   
$
3,072
   
$
3,160
 



NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

At May 31, 2019, the carrying value of our financial instruments approximated their fair values.  The fair values of our contingent consideration liabilities from business acquisitions are considered “level 3” measurements because we use various estimates in the valuation models to project the timing and amount of future contingent payments.  The valuation models described in our annual report on Form 10-K for the fiscal year ended August 31, 2018 were utilized during the current period (with updated estimates) to arrive at the estimated fair values of the contingent consideration liabilities on the reporting date.  During the quarter ended May 31, 2019, we amended the Robert Gregory Partners (RGP) acquisition agreement to reflect events and implementation issues that have occurred since the acquisition date.  The amended contract increased the contingent consideration liability from the RGP acquisition by $1.1 million during the quarter ended May 31, 2019.  The fair value of the contingent consideration liabilities from the acquisitions of RGP and Jhana Education (Jhana) changed as follows during the three quarters ended May 31, 2019 (in thousands):
15



   
Balance at
   
Change in
         
Balance at
 
   
August 31, 2018
   
Fair Value
   
Payments
   
May 31, 2019
 
RGP Acquisition
 
$
606
   
$
1,096
   
$
-
   
$
1,702
 
Jhana Acquisition
   
3,942
     
49
     
(483
)
   
3,508
 
   
$
4,548
   
$
1,145
   
$
(483
)
 
$
5,210
 

Approximately $0.9 million of the Jhana and $0.5 million of the RGP contingent consideration liabilities were recorded as components of accrued liabilities on our condensed consolidated balance sheet at May 31, 2019.  The remainder of our contingent consideration liabilities are classified as other long-term liabilities.  Adjustments to the fair value of our contingent consideration liabilities are included in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations.


NOTE 6 – STOCK-BASED COMPENSATION

The cost of our stock-based compensation plans is included in selling, general, and administrative expense in the accompanying condensed consolidated statements of operations.  Our stock-based compensation expense was comprised of the following for the periods presented (in thousands):
                         
   
Quarter Ended
   
Three Quarters Ended
 
   
May 31,
   
May 31,
   
May 31,
   
May 31,
 
   
2019
   
2018
   
2019
   
2018
 
Long-term incentive awards
 
$
826
   
$
227
   
$
2,384
   
$
1,601
 
Restricted stock awards
   
175
     
175
     
525
     
467
 
Employee stock purchase plan
   
50
     
44
     
131
     
114
 
   
$
1,051
   
$
446
   
$
3,040
   
$
2,182
 

During the quarter and three quarters ended May 31, 2019, we issued 11,249 shares and 62,181 shares of our common stock under various stock-based compensation arrangements.  Our stock-based compensation plans also allow shares to be withheld to cover statutory income taxes if so elected by the award recipient.  During fiscal 2019, we withheld 561 shares of our common stock for taxes on stock-based compensation arrangements.  The following is a description of the developments in our stock-based compensation plans during the quarter and three quarters ended May 31, 2019.

Fiscal 2019 Restricted Stock Award

Our annual restricted stock award granted to non-employee members of the Board of Directors is administered under the terms of the 2019 Franklin Covey Co. Omnibus Incentive Plan, and is designed to provide our non-employee directors, who are not eligible to participate in our employee stock purchase plan, an opportunity to obtain an interest in the Company through the acquisition of shares of our common stock.  The annual award is granted in January (following the annual shareholders’ meeting) of each year.  For the fiscal 2019 award, each eligible director received a whole-share grant equal to $100,000 with a one-year vesting period.  Our restricted stock award activity during the three quarters ended May 31, 2019 consisted of the following:
16



         
Weighted-Average
 
         
Grant Date
 
   
Number of
   
Fair Value
 
   
Shares
   
Per Share
 
Restricted stock awards at
           
August 31, 2018
   
23,338
   
$
30.00
 
Granted
   
28,525
     
24.54
 
Forfeited
   
-
     
-
 
Vested
   
(23,338
)
   
30.00
 
Restricted stock awards at
               
May 31, 2019
   
28,525
   
$
24.54
 

At May 31, 2019, there was $0.4 million of unrecognized compensation expense remaining on the fiscal 2019 Board of Director restricted share award.

Fiscal 2019 Time-Based Award

On January 25, 2019, the Organization and Compensation Committee (the Compensation Committee) of the Board of Directors approved a new incentive plan award for the Chief Executive Officer, Chief Financial Officer, and Chief People Officer that has a two-year time-based vesting (service) condition.  A total of 11,915 shares were issued to the participants in connection with this award.  The fair value of this award was calculated by multiplying the number of shares times the closing price of the Company’s common stock on the grant date, which was $24.54 per share.  The fair value of this award totals $0.3 million, which will be expensed evenly over the two-year service period.

Fiscal 2019 Long-Term Incentive Plan Award

On October 1, 2018, the Compensation Committee of the Board of Directors granted a new long-term incentive plan (LTIP) award to our executive officers and members of senior management.  The fiscal 2019 LTIP award is similar to the fiscal 2018 LTIP award and has three tranches, one of which has a time-based vesting condition and two of which have performance-based vesting conditions as described below:

Time-Based Award Shares – Twenty-five percent of the 2019 LTIP award shares vest to participants after three years of service.  The total number of shares that may be earned by participants after three years of service is 36,470 shares.  The number of shares awarded in this tranche is not variable and will not fluctuate based on financial measures.

Performance-Based Award Shares – The remaining two tranches of the 2019 LTIP award are based on fiscal 2021 qualified adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA) and fiscal 2021 subscription service sales, respectively.  The number of shares that will vest to participants for these two tranches is variable and may be 50 percent of the award (minimum award threshold) up to 200 percent of the participant’s award (maximum threshold).  The number of shares that may be earned for achieving 100 percent of the performance-based objectives (target award threshold) totals 109,409 shares.  The maximum number of shares that may be awarded in connection with the performance-based tranches of the 2019 LTIP totals 218,818 shares.




The fiscal 2019 LTIP has a three-year life and expires on August 31, 2021.
17


Compensation expense recognized during the quarter and three quarters ended May 31, 2019, for long-term incentive plan awards in the table above includes expense related to awards granted in previous periods for which the performance conditions we believe are probable of being achieved.

Employee Stock Purchase Plan

We have an employee stock purchase plan (ESPP) that offers qualified employees the opportunity to purchase shares of our common stock at a price equal to 85 percent of the average fair market value of our common stock on the last trading day of each fiscal quarter.  During the quarter and three quarters ended May 31, 2019, we issued 11,249 shares and 32,467 shares of our common stock to participants in the ESPP.


NOTE 7 – INCOME TAXES

The Tax Cut and Jobs Act (the 2017 Tax Act) was signed into law on December 22, 2017.  The 2017 Tax Act significantly revises the U.S. corporate income tax code by, among other things, lowering the statutory corporate tax rate from 35 percent to 21 percent; eliminating certain deductions; imposing a mandatory one-time transition tax, or deemed repatriation tax, on accumulated earnings of foreign subsidiaries as of 2017 that were previously tax deferred; introducing new tax regimes; and changing how foreign earnings are subject to U.S. tax.

Since we have an August 31 fiscal year end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 25.7 percent during fiscal 2018 and a 21 percent rate for fiscal 2019 and subsequent fiscal years.  Other provisions of the 2017 Tax Act, which were not effective for us in fiscal 2018, are now effective for fiscal 2019 and future years, including limitations on the deductibility of interest and executive compensation as well as anti-deferral provisions on Global Intangible Low-Taxed Income (GILTI).

We recorded an income tax benefit of $0.7 million for the three quarters ended May 31, 2019 on a pre-tax loss of $7.6 million, resulting in an effective tax benefit rate of 9.3 percent.  Our effective benefit rate was adversely affected by GILTI tax expense, non-deductible expenses, and effective foreign tax rates which are significantly higher than the U.S. statutory rate.  We recorded GILTI tax expense totaling $0.3 million during the first three quarters of fiscal 2019, based on the earnings of our foreign subsidiaries.  Net operating loss carryforwards prevented us from using foreign tax credits against this tax.  Unlike regular foreign tax credits, we permanently forego any unused foreign tax credits applicable to GILTI.


18


NOTE 8 – LOSS PER SHARE

The following schedule shows the calculation of loss per share for the periods presented (in thousands, except per-share amounts).

                         
   
Quarter Ended
   
Three Quarters Ended
 
   
May 31,
   
May 31,
   
May 31,
   
May 31,
 
   
2019
   
2018
   
2019
   
2018
 
Numerator for basic and
                       
diluted loss per share:
                       
Net loss
 
$
(2,024
)
 
$
(2,534
)
 
$
(6,898
)
 
$
(7,666
)
                                 
Denominator for basic and
                               
diluted loss per share:
                               
Basic weighted average shares
                               
outstanding
   
13,963
     
13,896
     
13,939
     
13,829
 
Effect of dilutive securities:
                               
Stock options and other
                               
stock-based awards
   
-
     
-
     
-
     
-
 
Diluted weighted average
                               
shares outstanding
   
13,963
     
13,896
     
13,939
     
13,829
 
                                 
EPS Calculations:
                               
Net loss per share:
                               
Basic and diluted
 
$
(0.14
)
 
$
(0.18
)
 
$
(0.49
)
 
$
(0.55
)

Since we incurred a net loss for the quarter and three quarters ended May 31, 2019, no potentially dilutive securities are included in the calculations of diluted loss per share because such effect would be anti-dilutive.  The number of dilutive stock options and other stock-based awards for the quarter ended May 31, 2019 would have been approximately 213,000 shares.


NOTE 9 – SEGMENT INFORMATION

Segment Information

Our sales are primarily comprised of training and consulting services.  Our internal reporting and operating structure is currently organized around two divisions.  The Enterprise Division, which consists of our Direct Office and International Licensee segments and the Education Division, which is comprised of our Education practice.  Based on the applicable guidance, our operations are comprised of three reportable segments and a corporate services group.  The following is a brief description of our reportable segments:

Direct Offices – Our Direct Office segment has a depth of expertise in helping organizations solve problems that require changes in human behavior, including leadership, productivity, execution, trust, and sales performance.  We have a variety of principle-based offerings that help build winning and profitable cultures.  This segment includes our sales personnel that serve the United States and Canada; our international sales offices located in Japan, China, the United Kingdom, Australia, and our new operations in Germany, Switzerland, and Austria; our government services sales channel; and our public programs operations.
19


International Licensees – Our independently owned international licensees provide our offerings and services in countries where we do not have a directly-owned office.  These licensee partners allow us to expand the reach of our services to large multinational organizations as well as smaller organizations in their countries.  This segment’s results are primarily comprised of royalty revenues received from these licensees.

Education Practice – Centered around the principles found in The Leader in Me, the Education practice is dedicated to helping educational institutions build a culture that will produce great results.  We believe these results are manifested by increases in student performance, improved school culture, decreased disciplinary issues, and increased teacher engagement and parental involvement.  This segment includes our domestic and international Education practice operations, which are focused on sales to educational institutions such as elementary schools, high schools, and colleges and universities.

Corporate and Other – Our corporate and other information includes leasing operations, shipping and handling revenues, and certain corporate administrative expenses.

We determined that the Company’s chief operating decision maker is the Chief Executive Officer (CEO), and the primary measurement tool used in business unit performance analysis is Adjusted EBITDA, which may not be calculated as similarly titled amounts disclosed by other companies.  Adjusted EBITDA is a non-GAAP financial measure.  For reporting purposes, our consolidated Adjusted EBITDA may be calculated as our income or loss from operations excluding stock-based compensation, depreciation expense, amortization expense, and certain other charges such as adjustments for changes in the fair value of contingent liabilities from business acquisitions.  The Company references this non-GAAP financial measure in its decision making because it provides supplemental information that facilitates consistent internal comparisons to the historical operating performance of prior periods and we believe it provides investors with greater transparency to evaluate operational activities and financial results.

Our operations are not capital intensive and we do not own any manufacturing facilities or equipment.  Accordingly, we do not allocate assets to the reportable segments for analysis purposes.  Interest expense and interest income are primarily generated at the corporate level and are not allocated.  Income taxes are likewise calculated and paid on a corporate level (except for entities that operate in foreign jurisdictions) and are not allocated for analysis purposes.  We peridically make minor changes to our reporting structure in the normal course of operations.  The segment information presented below reflects certain revisions to our reporting structure which occurred during fiscal 2019.  Prior period segment information has been revised to conform with our current reporting.

We account for the following segment information on the same basis as the accompanying condensed consolidated financial statements (in thousands).
20



   
Sales to
             
Quarter Ended
 
External
         
Adjusted
 
May 31, 2019
 
Customers
   
Gross Profit
   
EBITDA
 
                   
Enterprise Division:
                 
Direct offices
 
$
40,387
   
$
29,836
   
$
4,520
 
International licensees
   
3,014
     
2,432
     
1,281
 
     
43,401
     
32,268
     
5,801
 
Education practice
   
11,088
     
6,846
     
(181
)
Corporate and eliminations
   
1,517
     
550
     
(2,549
)
Consolidated
 
$
56,006
   
$
39,664
   
$
3,071
 
                         
Quarter Ended
                       
May 31, 2018
                       
                         
Enterprise Division:
                       
Direct offices
 
$
36,331
   
$
26,444
   
$
2,190
 
International licensees
   
3,543
     
2,735
     
1,651
 
     
39,874
     
29,179
     
3,841
 
Education practice
   
9,235
     
5,501
     
(901
)
Corporate and eliminations
   
1,352
     
236
     
(2,352
)
Consolidated
 
$
50,461
   
$
34,916
   
$
588
 
                         
Three Quarters Ended
                       
May 31, 2019
                       
                         
Enterprise Division:
                       
Direct offices
 
$
115,271
   
$
84,200
   
$
10,703
 
International licensees
   
9,598
     
7,515
     
4,127
 
     
124,869
     
91,715
     
14,830
 
Education practice
   
31,132
     
18,668
     
(1,355
)
Corporate and eliminations
   
4,190
     
1,429
     
(6,272
)
Consolidated
 
$
160,191
   
$
111,812
   
$
7,203
 
                         
Three Quarters Ended
                       
May 31, 2018
                       
                         
Enterprise Division:
                       
Direct offices
 
$
103,802
   
$
75,886
   
$
5,913
 
International licensees
   
9,909
     
7,601
     
4,222
 
     
113,711
     
83,487
     
10,135
 
Education practice
   
27,418
     
16,094
     
(2,894
)
Corporate and eliminations
   
3,810
     
947
     
(6,717
)
Consolidated
 
$
144,939
   
$
100,528
   
$
524
 

21


A reconciliation of our consolidated Adjusted EBITDA to consolidated net loss is provided below (in thousands).

                         
   
Quarter Ended
   
Three Quarters Ended
 
   
May 31,
   
May 31,
   
May 31,
   
May 31,
 
   
2019
   
2018
   
2019
   
2018
 
Segment Adjusted EBITDA
 
$
5,620
   
$
2,940
   
$
13,475
   
$
7,241
 
Corporate expenses
   
(2,549
)
   
(2,352
)
   
(6,272
)
   
(6,717
)
Consolidated Adjusted EBITDA
   
3,071
     
588
     
7,203
     
524
 
Stock-based compensation expense
   
(1,051
)
   
(446
)
   
(3,040
)
   
(2,182
)
Increase in contingent consideration liabilities
   
(1,069
)
   
(136
)
   
(1,145
)
   
(789
)
Licensee transition costs
   
-
     
-
     
(488
)
   
-
 
ERP system implementation costs
   
-
     
-
     
-
     
(855
)
Depreciation
   
(1,556
)
   
(1,267
)
   
(4,806
)
   
(3,547
)
Amortization
   
(1,259
)
   
(1,326
)
   
(3,797
)
   
(4,117
)
Loss from operations
   
(1,864
)
   
(2,587
)
   
(6,073
)
   
(10,966
)
Interest income
   
8
     
35
     
30
     
94
 
Interest expense
   
(562
)
   
(738
)
   
(1,817
)
   
(1,979
)
Discount accretion on related
                               
   party receivable
   
-
     
202
     
258
     
258
 
Loss before income taxes
   
(2,418
)
   
(3,088
)
   
(7,602
)
   
(12,593
)
Income tax benefit
   
394
     
554
     
704
     
4,927
 
Net loss
 
$
(2,024
)
 
$
(2,534
)
 
$
(6,898
)
 
$
(7,666
)

Revenue by Category

The following table presents our revenue disaggregated by geographic region (in thousands).

                         
   
Quarter Ended
   
Three Quarters Ended
 
   
May 31,
   
May 31,
   
May 31,
   
May 31,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Americas
 
$
44,919
   
$
38,531
   
$
125,676
   
$
109,283
 
Asia Pacific
   
7,914
     
8,337
     
24,592
     
25,827
 
Europe/Middle East/Africa
   
3,173