FRANKLIN COVEY CO. Management's discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in forward-looking statements are set forth below under the heading "Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995."
We suggest that the following discussion and analysis be read in conjunction
with the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the fiscal year ended
RESULTS OF OPERATIONS
Overview
Our financial results for the quarter ended
?Strong growth of All Access Pass and Related Services. All Access Pass (AAP)
and related sales increased 27 percent in the first quarter of fiscal 2022 to
?International sales improvement. Sales increased at all of our international direct offices compared with the first quarter of the prior year and international licensee revenues increased 15 percent over the prior year, reflecting increased sales and improving economic conditions in many of the licensee countries.
?Education Division performance improvement. Education Division revenues grew 56% on the strength of increased Leader in Me subscription sales compared with fiscal 2021, increased subscription coaching and consulting services, and increased material sales.
As areas of our operations continue to recover and grow, we believe the strength of our subscription-based offerings and services led the Company to higher levels of profitability than experienced in prior periods, including the pre-pandemic first half of fiscal 2020. We are optimistic these trends will continue through fiscal 2022 and will continue to produce improved earnings and cash flows compared with the prior year. However, these expectations are dependent upon continued recovery from the COVID-19 pandemic and improving international economic stability.
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The first quarter of fiscal 2021 included the relatively early stages of the
COVID-19 pandemic in
?Sales - Our consolidated sales for the quarter ended
At
?Cost of Sales/Gross Profit - Our cost of sales totaled
?Operating Expenses - Our operating expenses for the quarter ended
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?Operating Income, Net Income, and Adjusted EBITDA - As a result of increased
sales and improved gross margin, our income from operations for the quarter
ended
?Cash Flows from Operating Activities and Liquidity - Our cash flows from
operating activities remained strong at
Further details regarding our results for the quarter ended
Quarter Ended
Enterprise Division Direct Offices Segment
The Direct Office segment includes our sales personnel that serve clients in
Quarter Ended Quarter Ended
November 30, % of November 30, % of
2021 Sales 2020 Sales Change
Sales $ 45,119 100.0 $ 36,743 100.0 $ 8,376
Cost of sales 8,917 19.8 7,304 19.9 1,613
Gross profit 36,202 80.2 29,439 80.1 6,763
SG&A expenses 26,248 58.2 22,736 61.9 3,512
Adjusted EBITDA $ 9,954 22.1 $ 6,703 18.2 $ 3,251 During the first quarter of fiscal 2022, Direct Office segment revenue increased
23 percent to
While our operations in
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--------------------------------------------------------------------------------performance is highly dependent upon economic recovery from the pandemic, including the opening of national and regional economies and other factors which may not be within in our control.
Gross Profit. Gross profit increased primarily due to increased recognition of previously deferred subscription revenues in the mix of overall sales, which also increased Direct Office gross margin percentage when compared with the prior year.
SG&A Expense. Increased Direct Office SG&A expense was primarily due to
associate costs from increased commissions on improved sales, increased bonus
and incentive pay on improved operating results, and increased headcount from
the acquisition of
International Licensees Segment
In foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations for the periods indicated (in thousands):
Quarter Ended Quarter Ended
November 30, % of November 30, % of
2021 Sales 2020 Sales Change
Sales $ 2,997 100.0 $ 2,596 100.0 $ 401
Cost of sales 296 9.9 311 12.0 (15)
Gross profit 2,701 90.1 2,285 88.0 416
SG&A expenses 1,030 34.4 1,001 38.6 29
Adjusted EBITDA $ 1,671 55.8 $ 1,284 49.5 $ 387 Sales. International licensee revenues are primarily comprised of royalty
revenues. Our licensee revenues increased compared with the prior year primarily
due to the recovery of economies in many of the countries where our licensees
operate. The ongoing recovery led to improved licensee royalty revenues and
continued increases in AAP sales. During the first quarter of fiscal 2022, our
royalty revenues increased 15 percent and our share of AAP revenues increased by
45 percent compared with the prior year. We receive additional revenue from the
international licensees for AAP sales to cover a portion of the costs of
operating the AAP portal. Partially offsetting these increases were decreased
product sales to the licensees. Despite the ongoing difficulties associated with
the pandemic and the varying impacts on each country's business environment, we
continue to be encouraged by the recovery of our licensee operations as they are
adapting to conditions, improving digital delivery capabilities, and increasing
sales of the All Access Pass subscription. The continued recovery of our
licensee segment is highly dependent upon the ability or willingness of people
to meet together in groups and increasing AAP sales to clients. We have
translated AAP content into multiple languages, and we believe the electronic
availability of our offerings through this platform may accelerate the recovery
of licensee operations if they can effectively market, adapt, and sell this
online technology to their clients. Foreign exchange rates had an immaterial
impact on international licensee sales and operating results during the quarter
ended
Gross Profit. Gross profit increased due to increased sales as previously described. Gross margin improved primarily due to the mix of revenue recognized during the quarter, which included more royalty revenues than in the prior year.
SG&A Expense. International licensee SG&A expenses increased by three percent primarily due the normalization of certain operating costs, such as travel, compared with operations in the early months of the pandemic. However, as a percent of sales, licensee SG&A expenses decreased compared with the prior year due to increased revenues.
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):
Quarter Ended Quarter Ended
November 30, % of November 30, % of
2021 Sales 2020 Sales Change
Sales $ 11,697 100.0 $ 7,498 100.0 $ 4,199
Cost of sales 3,837 32.8 3,512 46.8 325
Gross profit 7,860 67.2 3,986 53.2 3,874
SG&A expenses 7,625 65.2 6,271 83.6 1,354
Adjusted EBITDA $ 235 2.0 $ (2,285) (30.5) $ 2,520
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Sales. Education Division sales for the quarter ended
Gross Profit. Education Division gross profit increased primarily due to increased sales as previously described. Education segment gross margin improved compared with the prior year primarily due to increased coaching and consulting sales with little variable cost increase as most coaches are salaried. The Education Division gross margin was also favorably impacted by increased sales of high-margin materials compared with the prior year.
SG&A Expenses. Education SG&A expenses increased primarily due to increased associate costs from more commission expense on improved sales and additional sales support headcount compared with the prior year.
Other Operating Expense Items
Depreciation - Depreciation expense decreased
Amortization - Amortization expense increased
Income Taxes
Our income tax provision for the quarter ended
LIQUIDITY AND CAPITAL RESOURCES
Introduction
In the continued uncertain economic environment of COVID-19 and the unclear path
to national and global economic recovery, a major priority of ours has been the
continued maintenance and preservation of liquidity. We believe our expense
reduction efforts during the pandemic have been successful and provided the
ability to maintain operations and make strategic investments over the past
several quarters. Our cash and cash equivalents at
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At
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 credit agreement
entered into on
In addition to our term-loan obligation and borrowings on our revolving line of credit, we have a long-term rental agreement on our corporate campus that is accounted for as a financing obligation.
The following discussion is a description of the primary factors affecting our
cash flows and their effects upon our liquidity and capital resources during the
quarter ended
Cash Flows Provided By Operating Activities
Our primary source of cash from operating activities was the sale of services to
our customers in the normal course of business. Our primary uses of cash for
operating activities were payments for SG&A expenses, to fund changes in working
capital, payments for direct costs necessary to conduct training programs, and
payments to suppliers for materials used in training manuals sold. Our cash
provided by operating activities for the first quarter remained strong at
Cash Flows Used For Investing Activities and Capital Expenditures
For the first quarter of fiscal 2022, our cash used for investing activities
totaled
Our purchases of property and equipment during the first quarter of fiscal 2022
consisted primarily of computer software and hardware. We expect to continue our
investing in our content and delivery modalities, including the AAP and Leader
in Me subscription services, and currently anticipate that our purchases of
property and equipment will total
We spent
Cash Flows Used For Financing Activities
During the quarter ended
On
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--------------------------------------------------------------------------------share repurchase plan does not have an expiration date. Our uses of financing cash during the remainder of fiscal 2022 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. 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 obligations on the 2019 Credit Agreement, service our
existing financing obligation, pay for projected capital expenditures, and meet
other obligations during fiscal 2022 from current cash balances and future cash
flows from operating activities. Going forward, we will continue to incur costs
necessary for the day-to-day operation of the business and may use additional
credit and other financing alternatives, if necessary, for these expenditures.
Our 2019 Credit Agreement expires in
We believe that our existing cash and cash equivalents, cash generated by operating activities, and the availability of external funds as described above, will be sufficient for us to maintain our operations for at least the upcoming 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, the length and severity of business disruptions associated with the COVID-19 pandemic (and new variants), 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.
Material Uses of Cash Contractual Obligations
We do not operate any manufacturing, mining, or other capital-intensive facilities, and we have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. However, we have normal ongoing cash expenditures and are subject to various contractual obligations that are required to run our business. Our material cash requirements include the following:
?Associate and Consultant Compensation
?Information Technology Expenditures
?Content Development Costs ?Income Taxes ?Contractual Obligations
These material cash requirements are discussed in more detail in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the fiscal year ended
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--------------------------------------------------------------------------------ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED
Refer to the discussion of new accounting pronouncements as found in Note 1 to the financial statements as presented within this report.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements were prepared in accordance with
accounting principles generally accepted in
Estimates
Some of the accounting guidance we use requires us to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements. We regularly evaluate our estimates and assumptions and base those
estimates and assumptions on historical experience, factors that are believed to
be reasonable under the circumstances, and requirements under accounting
principles generally accepted in
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, our financial performance during fiscal 2022, expected and
lingering 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 AAP 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
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
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--------------------------------------------------------------------------------changing environment. New risk factors may emerge and it is not possible for our management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any single factor, or combination of factors, may cause actual results to differ materially from those contained in forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results.
The market price of our common stock has been and may remain volatile. In addition, the stock markets in general have experienced increased volatility. Factors such as quarter-to-quarter variations in revenues and earnings or losses and our failure to meet expectations could have a significant impact on the market price of our common stock. In addition, the price of our common stock can change for reasons unrelated to our performance. Due to our low market capitalization, the price of our common stock may also be affected by conditions such as a lack of analyst coverage and fewer potential investors.
Forward-looking statements are based on management's expectations as of the date
made, and we do not undertake any responsibility to update any of these
statements in the future except as required by law. Actual future performance
and results will differ and may differ materially from that contained in or
suggested by forward-looking statements as a result of the factors set forth in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in our filings with the
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