FRANKLIN COVEY CO - Annual Report: 2019 (Form 10-K)

Table of Contents

Disclosure Regarding Forward-Looking Statements

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

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

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

Franklin Covey is a global company focused on organizational performance improvement.  Our mission is to “enable greatness in people and organizations everywhere,” and our global structure is designed to help individuals and organizations achieve sustained superior performance through changes in human behavior.  From the foundational work of Dr. Stephen R. Covey in leadership and personal effectiveness, and Hyrum W. Smith in productivity and time management, we have developed deep expertise that extends to helping organizations and individuals achieve lasting behavioral change in seven crucial areas: Leadership, Execution, Productivity, Trust, Sales Performance, Customer Loyalty, and Educational Improvement.  We believe that our clients are able to utilize our content and offerings to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.

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

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Business Development

Our business is currently structured around two divisions, the Enterprise Division and the Education Division.  The Enterprise Division consists of our Direct Office and International Licensee segments and is focused on selling our offerings to corporations, governments, not-for-profits, and other related organizations.  Franklin Covey offerings delivered through the Enterprise Division are designed to help organizations and individuals achieve their own great results.  Our Education Division is centered around the principles found in the Leader in Me and is dedicated to helping educational institutions build cultures that will produce great results, including increased student performance, improved school culture, and increased parental and teacher involvement.

During 2016, we introduced the All Access Pass (AAP), which we believe is a ground-breaking subscription service that allows our clients unlimited access to our content through an electronic portal.  We believe the All Access Pass is a revolutionary and innovative way to deliver our content to clients of various sizes, including large, multinational organizations in a flexible and cost-effective manner.  Clients may utilize complete offerings such as The 7 Habits of Highly Effective People and The 5 Choices to Extraordinary Productivity, or use individual concepts from any of our well-known offerings to create a custom solution to fit their organizational or individual training needs.  Since the introduction of the All Access Pass, we have invested in additional implementation specialists to provide our clients with the direction necessary to create meaningful impact journeys using our tools and content.  An impact journey is a customized plan to utilize the content and offerings on the AAP to achieve a client’s specific goals and to provide them with the keys to obtain maximum value from the pass.  We have also translated All Access Pass materials into numerous additional languages, which allows the AAP to be used effectively by multinational entities and provides for greater international sales opportunities.  The AAP is primarily sold through our Enterprise Division.

In our Education Division, we have launched the Leader in Me membership, which provides coaching, access to the Leader in Me online service, and authorizes use of Franklin Covey’s proprietary intellectual property.  The Leader in Me online service provides access to student leadership guides, leadership lessons, illustrated leadership stories, and a variety of other resources to enable an educational institution to effectively implement and utilize the Leader in Me program.  We believe that the tools and resources available through the Leader in Me membership will provide measurable results that are designed to develop student leadership, improve school culture, and increase academic proficiency.

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

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

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

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

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

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

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

Services Overview

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

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

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

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

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

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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.

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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.

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

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

Non-GAAP Measures

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

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

EXECUTIVE SUMMARY

General Overview

Franklin Covey Co. is a global company focused on individual and organizational performance improvement.  Our mission is to “enable greatness in people and organizations everywhere,” and our worldwide resources are organized to help individuals and organizations achieve sustained superior performance through changes in human behavior.  We believe that our content and services create the connection between capabilities and results.  We believe that our clients are able to utilize our content to create cultures whose hallmarks are high-performing, collaborative individuals, led by effective, trust-building leaders who execute with excellence and deliver measurably improved results for all of their key stakeholders.

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

1.

World Class Content – Our content is principle-centered and based on natural laws of human behavior and effectiveness.  When our content is applied consistently in an organization, we believe the culture of that organization will change to enable the organization to achieve their own great purposes.  Our offerings are designed to build new skillsets, establish new mindsets, and provide enabling toolsets.

2.

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

3.

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

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

We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, and The 4 Disciplines of Execution, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, and Education.  We believe that our offerings help individuals, teams, and entire organizations transform their results through achieving systematic, sustainable, and measurable changes in human behavior.  Our offerings are described in further detail at www.franklincovey.com.  The information contained in, or that can be accessed through, our website does not constitute a part of this annual report, and the descriptions found therein should not be viewed as a warranty or guarantee of results.

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

Financial Overview

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

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

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

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

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

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

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

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

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

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

Key Growth Objectives

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

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

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

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

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

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

Results of Operations

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

FISCAL 2019 COMPARED FISCAL 2018 RESULTS OF OPERATIONS

Enterprise Division

The Direct Office segment includes our sales personnel that serve clients in the United States and Canada; our directly owned international offices in Japan, China, the United Kingdom, Australia, and our new offices in Germany, Switzerland, and Austria; plus other groups such as our government services office.  The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):

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

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

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

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):

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

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

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

Education Division

Our Education Division is comprised of our domestic and international Education practice operations (focused on sales to educational institutions) and includes our widely acclaimed Leader In Me program.  The following comparative information is for our Education Division in the periods indicated (in thousands):

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

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

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

Other Expenses

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

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

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

Income Taxes

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

Although we paid $1.8 million in cash for income taxes during fiscal 2019, we anticipate that our total cash paid for income taxes over the coming three to five years will be less than our total income tax provision as we utilize net operating loss carryforwards, foreign tax credit carryforwards and other deferred income tax assets.

FISCAL 2018 COMPARED WITH FISCAL 2017 RESULTS OF OPERATIONS

Enterprise Division

The following comparative information is for our Direct Offices segment for the periods indicated (in thousands):

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

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

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

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

The following comparative information is for our international licensee operations in the periods indicated (in thousands):

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

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

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

Education Division

The following comparative information is for our Education Division in the periods indicated (in thousands):

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

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

Other Expenses

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

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

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

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

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

Income Taxes

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

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

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

QUARTERLY RESULTS

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

Introduction

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

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

2019 Credit Agreement

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

The 2019 Credit Agreement preserves existing debt covenants that include (i) a funded debt to EBITDAR ratio of less than 3.0 to 1.0; (ii) a fixed charge coverage ratio greater than 1.15 to 1.0; (iii) an annual limit on capital expenditures (excluding capitalized curriculum development) of $8.0 million; and (iv) consolidated accounts receivable of not less than 150% of the aggregate amount of the outstanding borrowings on the revolving line of credit, the undrawn amount of outstanding letters of credit, and the amount of unreimbursed letter of credit disbursements.  We believe that we were in compliance with the financial covenants and other terms applicable to the 2019 Credit Agreement at August 31, 2019.

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

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

Cash Flows from Operating Activities

Our primary source of cash from operating activities was the sale of services and products to our customers in the normal course of business.  The primary uses of cash for operating activities were payments for selling, general, and administrative expenses, payments for direct costs necessary to conduct training programs, payments to suppliers for materials used in training manuals sold, and to fund working capital needs.  For the fiscal year ended August 31, 2019, our cash provided by operating activities increased 81 percent to $30.5 million compared with $16.9 million for the fiscal year ended August 31, 2018.  The increase was primarily due to improved operating results during the year and from cash used to support changes in working capital balances.  Our collection of accounts receivable remained strong during fiscal 2019 and provided a significant amount of cash to support operations, pay our obligations, and make critical investments.  Although we are required to defer AAP and other subscription revenues over the lives of the underlying contracts, we invoice the entire contract amount and collect the associated receivable at the inception of the agreement.

Cash Flows from Investing Activities and Capital Expenditures

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

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

We spent $2.7 million during fiscal 2019 on the development of various offerings.  We believe continued investment in our offerings is critical to our future success and anticipate that our capital spending for curriculum development will total $5.0 million during fiscal 2020.

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

Cash Flows from Financing Activities

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

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

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

Sources of Liquidity

We expect to meet our projected capital expenditures, repay amounts borrowed on our 2019 Credit Agreement, service our existing financing obligation, and meet other working capital requirements during fiscal 2020 from current cash balances, future cash flows from operating activities, and available borrowings from our recently completed 2019 Credit Agreement.  Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit and other financing alternatives, if necessary, for these expenditures.  Our 2019 Credit Agreement expires in August 2024 and we expect to renew and amend the 2019 Credit Agreement on a regular basis to maintain the long-term borrowing capacity of this credit facility.  At August 31, 2019, we had $19.9 million of available borrowing capacity on our 2019 Credit Agreement, which consisted of $14.9 million of credit on our revolving credit facility (amount reduced by $0.1 million of open standby letters of credit) and an additional $5.0 million term loan.  Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources.  If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.

We believe that our existing cash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be sufficient for us to maintain our operations on both a short- and long-term basis.  However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors.  Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new offerings or technology by our competitors.  We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements.  However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.

Contractual Obligations

We have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity.  Required contractual payments primarily consist of lease payments resulting from the sale of our corporate campus (financing obligation); repayment of term loan obligations; expected contingent consideration payments from business acquisitions; short-term purchase obligations for inventory items and other products and services used in the ordinary course of business; minimum operating lease payments; and minimum payments for outsourced warehousing and distribution service charges.  At August 31, 2019, our expected payments on these obligations over the next five fiscal years and thereafter are as follows (in thousands):

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

(2)

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

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

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

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

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

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

Revenue Recognition

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

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

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

Stock-Based Compensation

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

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

Accounts Receivable Valuation

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

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

Valuation of Indefinite-Lived Intangible Assets and Goodwill

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

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

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

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

•	significant underperformance relative to historical or projected future operating results;

•	significant change in the manner of our use of acquired assets or the strategy for the overall business;

•	significant change in prevailing interest rates;

•	significant negative industry or economic trend;

•	significant change in market capitalization relative to book value; and/or

•	significant negative change in market multiples of the comparable company set.

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

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

Acquisitions and Contingent Consideration Liabilities

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

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

Impairment of Long-Lived Assets

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

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

Income Taxes

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

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

REGULATORY COMPLIANCE

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

INFLATION AND CHANGING PRICES

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

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

Certain written and oral statements made by us in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the Exchange Act).  Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or phrases of similar meaning.  In our reports and filings we may make forward-looking statements regarding our expectations about future reported revenues and operating results, future sales growth, the expected introduction of new or refreshed offerings, including additions to the All Access Pass, future training and consulting sales activity, the impact of multi-year contracts for the All Access Pass, renewal of existing contracts, the release and success of new publications, the expected growth of our business in various markets, anticipated expenses, the adequacy of existing capital resources, projected cost reduction and strategic initiatives, expected levels of depreciation and amortization expense, expectations regarding tangible and intangible asset valuations, the seasonality of future sales, the seasonal fluctuations in cash used for and provided by operating activities, future compliance with the terms and conditions of our 2019 Credit Agreement, the ability to borrow on, and renew, our 2019 Credit Agreement, expectations regarding income tax expenses as well as tax assets and credits and the amount of cash expected to be paid for income taxes, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets.  These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements.  These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K.  Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended August 31, 2019, entitled “Risk Factors.”  In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas:  unanticipated costs or capital expenditures; delays or unanticipated outcomes relating to our strategic plans; dependence on existing products or services; the rate and consumer acceptance of new product introductions, including the new AAP portal; foreign currency exchange rates; competition; the number and nature of customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our products and services and those of competitors; adverse publicity; adverse effects on certain licensee’s performance due to civil unrest in some of the countries where our licensees operate; and other factors which may adversely affect our business.

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

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

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk of Financial Instruments

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

Foreign Exchange Sensitivity

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

Interest Rate Sensitivity

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

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

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

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

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

AUGUST 31,		2019				2018
Finished goods		$	3,434			$	3,130
Raw materials			47				30
		$	3,481			$	3,160

AUGUST 31,		2019				2018
Deferred commissions		$	8,337			$	6,958
Other current assets			2,690				3,935
		$	11,027			$	10,893

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

AUGUST 31,		2019				2018
Land and improvements		$	1,312			$	1,312
Buildings			30,038				30,038
Machinery and equipment			1,162				1,723
Computer hardware and software			28,665				27,066
Furniture, fixtures, and leasehold
improvements			8,409				8,272
			69,586				68,411
Less accumulated depreciation			(51,007	)			(47,010	)
		$	18,579			$	21,401

AUGUST 31,		2019				2018
Accrued compensation		$	14,003			$	11,858
Other accrued liabilities			9,552				8,903
		$	23,555			$	20,761

		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 subscription revenue			47,417				1,453				48,870
Other deferred revenue			4,471				555				5,026
Other liabilities			5,501				2,249				7,750
Retained earnings			63,569				(3,143	)			60,426

		August 31,				August 31,
		2019				2019				Impact of
		As Reported				Without ASC 606				ASC 606
Net sales		$	225,356			$	225,222			$	134
Cost of sales			66,042				66,042				-
Selling, general, and administrative			145,319				145,329				(10	)
Income tax provision			(1,615	)			(1,580	)			(35	)
Net loss			(1,023	)			(1,132	)			109
Net loss per share:
Basic and diluted		$	(0.07	)		$	(0.08	)

		August 31,				August 31,
		2019				2019				Impact of
		As Reported				Without ASC 606				ASC 606
Assets:
Other current assets		$	11,027			$	10,908			$	119
Deferred income tax assets			5,045				4,075				970
Total assets			224,913				223,824				1,089
Liabilities and Shareholders' Equity:
Deferred subscription revenue		$	56,250			$	55,247			$	1,003
Other deferred revenue			5,972				5,417				555
Other liabilities			7,527				4,961				2,566
Retained earnings			59,403				62,438				(3,035	)
Total liabilities and shareholders' equity			224,913				223,824				1,089

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

Cash acquired				$	127
Accounts receivable					564
Inventories					80
Prepaid expenses 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

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

Cash paid to RGP at closing		$	3,500
Fair value of contingent consideration			1,413
Total purchase price		$	4,913

Accounts receivable		$	458
Prepaid expenses			136
Intangible assets			3,811
Goodwill			1,232
Assets acquired			5,637
Accounts payable			(51	)
Accrued liabilities			(80	)
Deferred revenues			(593	)
Liabilities assumed			(724	)
		$	4,913

					Weighted Average
Description		Amount			Life
Customer list		$	2,249		10 years
Content			461		5 years
Trade name			341		5 years
Non-compete agreements			328		2 years
Deferred contract revenue			237		2 years
Coach relationships			150		10 years
Acquired technology			45		3 years
		$	3,811		8 years

Cash paid to Jhana at closing		$	3,525
Fair value of contingent consideration			6,052
Total purchase price		$	9,577

Cash		$	253
Accounts receivable			195
Prepaid expenses and other current assets			86
Deferred tax asset			3,138
Intangible assets			6,076
Goodwill			3,085
Assets acquired			12,833
Accounts payable			(185	)
Accrued liabilities			(19	)
Deferred tax liability			(2,257	)
Deferred revenues			(795	)
Liabilities assumed			(3,256	)
		$	9,577

					Weighted Average
Description		Amount			Life
Content		$	3,097		5 years
Acquired technology			1,474		3 years
Customer list			1,016		5 years
Trade name			445		5 years
Non-compete agreements			44		3 years
		$	6,076		5 years

YEAR ENDED
AUGUST 31,		2017
Revenue		$	187,745
Net loss			(7,976	)
Diluted loss per share			(0.58	)

YEAR ENDED
AUGUST 31,		2019				2018				2017
Beginning balance		$	3,555			$	2,310			$	1,579
Charged to costs and expenses			1,212				2,029				1,747
Deductions			(525	)			(784	)			(1,016	)
Ending balance		$	4,242			$	3,555			$	2,310

		Gross Carrying				Accumulated				Net Carrying
AUGUST 31, 2019		Amount				Amortization				Amount
Finite-lived intangible assets:
License rights		$	28,099			$	(20,063	)		$	8,036
Acquired content			62,307				(48,449	)			13,858
Customer lists			20,266				(18,450	)			1,816
Acquired technology			3,568				(3,149	)			419
Trade names			2,036				(1,602	)			434
Non-compete agreements and other			758				(631	)			127
			117,034				(92,344	)			24,690
Indefinite-lived intangible asset:
Covey trade name			23,000				-				23,000
		$	140,034			$	(92,344	)		$	47,690
AUGUST 31, 2018
Finite-lived intangible assets:
License rights		$	27,750			$	(18,889	)		$	8,861
Acquired content			62,102				(46,147	)			15,955
Customer lists			20,092				(17,835	)			2,257
Acquired technology			3,568				(2,642	)			926
Trade names			2,036				(1,441	)			595
Non-compete agreements and other			758				(418	)			340
			116,306				(87,372	)			28,934
Indefinite-lived intangible asset:
Covey trade name			23,000				-				23,000
		$	139,306			$	(87,372	)		$	51,934

Category of Intangible Asset		Range of Remaining Estimated Useful Lives		Weighted Average Original Amortization Period
License rights		3 to 8 years		29 years
Acquired content		2 to 8 years		25 years
Customer lists		2 to 8 years		12 years
Acquired technology		1 year		3 years
Trade names		1 to 4 years		5 years
Non-compete agreements and other		1 to 9 years		4 years

YEAR ENDING
AUGUST 31,
2020		$	4,564
2021			4,049
2022			3,557
2023			2,612
2024			2,612

Direct offices		$	16,825
International licensees			5,065
Education practice			2,330
		$	24,220

YEAR ENDING
AUGUST 31,
2020		$	5,000
2021			5,000
2022			5,000
2023			5,000
		$	20,000

AUGUST 31,		2019				2018
Financing obligation payable in
monthly installments of $309 at
August 31, 2019, including
principal and interest, with two
percent annual increases
(imputed interest at 7.7%),
through June 2025		$	18,983			$	21,075
Less current portion			(2,335	)			(2,092	)
Total financing obligation,
less current portion		$	16,648			$	18,983

YEAR ENDING
AUGUST 31,
2020		$	2,335
2021			2,600
2022			2,887
2023			3,199
2024			3,538
Thereafter			4,424
		$	18,983

YEAR ENDING
AUGUST 31,
2020		$	3,724
2021			3,798
2022			3,874
2023			3,952
2024			4,031
Thereafter			3,301
Total future minimum financing
obligation payments			22,680
Less interest			(5,009	)
Present value of future minimum
financing obligation payments		$	17,671

YEAR ENDING
AUGUST 31,
2020		$	752
2021			472
2022			112
2023			97
2024			79
Thereafter			92
		$	1,604

YEAR ENDING
AUGUST 31,
2020		$	3,890
2021			2,341
2022			1,514
2023			1,514
2024			1,527
Thereafter			1,275
		$	12,061

					Increase in
AUGUST 31,	2018				Fair Value				Payments				2019
RGP contingent liability		$	606			$	1,155			$	-			$	1,761
Jhana contingent liability			3,942				179				(653	)			3,468
		$	4,548			$	1,334			$	(653	)		$	5,229

		Likely				Minimum				Maximum
RGP growth rate - Year 1			14.8	%			(12.0	)%			35.0	%
RGP growth rate - Year 2			10.0	%			(12.0	)%			35.0	%
RGP growth rate - Year 3			10.0	%			(12.0	)%			35.0	%
Add-on services growth rate - Year 1			60.0	%			(20.0	)%			130.0	%
Add-on services growth rate - Year 2			50.0	%			(20.0	)%			130.0	%
Add-on services growth rate - Year 3			40.0	%			(20.0	)%			130.0	%

YEAR ENDED
AUGUST 31,		2019				2018				2017
Performance awards		$	3,853			$	2,034			$	2,902
Restricted stock awards			700				642				500
Fully vested stock awards			60				15				135
Compensation cost of the ESPP			176				155				121
		$	4,789			$	2,846			$	3,658

						Weighted-
						Average Grant-
						Date Fair
		Number of				Value Per
		Shares				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
August 31, 2019			28,525			$	24.54

										Weighted
						Weighted				Average
						Avg. Exercise				Remaining				Aggregate
		Number of				Price Per				Contractual				Intrinsic Value
		Stock Options				Share				Life (Years)				(thousands)
Outstanding at August 31, 2018			568,750			$	11.67
Granted			-				-
Exercised			-				-
Forfeited			-				-
Outstanding at August 31, 2019			568,750			$	11.67				0.8			$	14,287
Options vested and exercisable at
August 31, 2019			568,750			$	11.67				0.8			$	14,287

								Weighted
				Number				Average								Options
				Outstanding				Remaining				Weighted				Exercisable at				Weighted
				at August 31,				Contractual				Average				August 31,				Average
Exercise Prices				2019				Life (Years)				Exercise Price				2019				Exercise Price
$	9.00				62,500				1.4			$	9.00				62,500			$	9.00
$	10.00				168,750				0.8			$	10.00				168,750			$	10.00
$	12.00				168,750				0.8			$	12.00				168,750			$	12.00
$	14.00				168,750				0.8			$	14.00				168,750			$	14.00
					568,750												568,750

Description		Amount
Severance costs		$	986
Office closure costs			496
		$	1,482

YEAR ENDED
AUGUST 31,		2019				2018				2017
Current:
Federal		$	93			$	29			$	69
State			(14	)			210				(71	)
Foreign			(2,745	)			(2,947	)			(2,320	)
			(2,666	)			(2,708	)			(2,322	)
Deferred:
Federal			3,112				1,426				(1,227	)
State			102				(314	)			(17	)
Foreign			(120	)			(281	)			468
Operating loss carryforward			(1,625	)			2,636				6,964
Adjustment for changes in U.S.
income tax rates			-				1,654				-
Valuation allowance			(418	)			(2,780	)			(129	)
			1,051				2,341				6,059
		$	(1,615	)		$	(367	)		$	3,737

YEAR ENDED
AUGUST 31,		2019				2018				2017
Net income (loss)		$	(1,615	)		$	(367	)		$	3,737
Other comprehensive income			(5	)			(75	)			37
		$	(1,620	)		$	(442	)		$	3,774

YEAR ENDED
AUGUST 31,		2019				2018				2017
United States		$	(1,910	)		$	(8,960	)		$	(10,126	)
Foreign			2,502				3,440				(783	)
		$	592			$	(5,520	)		$	(10,909	)

YEAR ENDED  AUGUST 31,		2019				2018				2017
Federal statutory income tax rate			(21.0	)%			25.7	%			35.0	%
State income taxes, net of federal effect			(5.4	)			2.6				2.3
Effect of change in U.S. federal tax rate			-				30.0				-
Valuation allowance			(70.8	)			(50.4	)			(1.2	)
Foreign jurisdictions tax differential			(72.8	)			(6.8	)			(1.9	)
Tax differential on income subject to both U.S. and foreign taxes			(64.7	)			2.3				0.4
Uncertain tax positions			34.0				(5.1	)			4.4
Non-deductible executive compensation			(8.8	)			(2.7	)			(1.6	)
Non-deductible meals and entertainment			(52.9	)			(8.9	)			(2.2	)
Payout of deferred compensation (NQDC)			0.3				4.4				-
Other			(10.7	)			2.2				(0.9	)
			(272.8	)%			(6.7	)%			34.3	%

AUGUST 31,		2019				2018
Deferred income tax assets:
Net operating loss carryforward		$	7,516			$	9,039
Foreign income tax credit
carryforward			8,140				6,562
Sale and financing of corporate
headquarters			4,431				4,919
Stock-based compensation			1,973				1,174
Bonus and other accruals			1,622				1,511
Inventory and bad debt reserves			1,376				1,046
Deferred revenue			829				236
Other			264				323
Total deferred income tax assets			26,151				24,810
Less: valuation allowance			(3,815	)			(3,397	)
Net deferred income tax assets			22,336				21,413
Deferred income tax liabilities:
Intangibles step-ups – indefinite lived			(5,424	)			(5,427	)
Intangibles step-ups – finite lived			(3,406	)			(4,103	)
Intangible asset impairment and
amortization			(2,906	)			(3,023	)
Property and equipment depreciation			(2,880	)			(3,518	)
Deferred commissions			(2,056	)			(1,596	)
Unremitted earnings of foreign
subsidiaries			(456	)			(380	)
Other			(343	)			(354	)
Total deferred income tax liabilities			(17,471	)			(18,401	)
Net deferred income taxes		$	4,865			$	3,012

AUGUST 31,		2019				2018
Long-term assets		$	5,045			$	3,222
Long-term liabilities			(180	)			(210	)
Net deferred income tax asset		$	4,865			$	3,012

							Loss				Loss				Operating
Loss Carryforward	Expires						Deductions				Deductions				Loss Carried
for Year Ended	August 31,		Amount				in Prior Years				in Current Year				Forward
December 31, 2012	2031		$	243			$	-			$	(243	)		$	-
December 31, 2013	2032			553				-				(553	)			-
December 31, 2014	2033			1,285				-				(1,019	)			266
December 31, 2015	2034			1,491				-				-				1,491
December 31, 2016	2035			3,052				-				-				3,052
July 15, 2017
Acquired NOL	2036			1,117				-				-				1,117
				7,741				-				(1,815	)			5,926
August 31, 2017	2037			16,361				-				(6,834	)			9,527
August 31, 2018	No expiration			10,506				-				-				10,506
			$	34,608			$	-			$	(8,649	)		$	25,959

Credit Generated in							Credits Used				Credits Used				Credits
Fiscal Year Ended	Credit Expires		Credits				in Prior				in Fiscal				Carried
August 31,	August 31,		Generated				Years				2019				Forward
2011	2021		$	3,445			$	(414	)		$	-			$	3,031
2012	2022			2,563				(2,563	)			-				-
2013	2023			2,815				(2,815	)			-				-
2014	2024			1,378				(1,378	)			-				-
2015	2025			1,422				(1,422	)			-				-
2016	2026			1,569				(1,569	)			-				-
2017	2027			1,804				-				-				1,804
2018	2028			1,727				-				-				1,727
2019	2029			1,578				-				-				1,578
			$	18,301			$	(10,161	)		$	-			$	8,140

YEAR ENDED
AUGUST 31,		2019				2018				2017
Beginning balance		$	2,111			$	2,359			$	3,024
Additions based on tax positions
related to the current year			157				27				10
Additions for tax positions in
prior years			7				367				85
Reductions for tax positions of prior
years resulting from the lapse of
applicable statute of limitations			(370	)			(253	)			(634	)
Other reductions for tax positions of
prior years			(10	)			(389	)			(126	)
Ending balance		$	1,895			$	2,111			$	2,359

	2012-2019		Canada and Australia
	2013-2019		Japan
	2014-2019		Germany, Switzerland, and Austria
	2015-2019		United Kingdom
	2015-2019		United States – state and local income tax
	2016-2019		United States – federal income tax
	2016-2019		China
	2017-2019		Singapore

YEAR ENDED
AUGUST 31,		2019				2018				2017
Numerator for basic and
diluted earnings per share:
Net loss		$	(1,023	)		$	(5,887	)		$	(7,172	)
Denominator for basic and
diluted earnings per share:
Basic weighted average shares
outstanding			13,948				13,849				13,819
Effect of dilutive securities:
Stock options and other
stock-based awards			-				-				-
Diluted weighted average shares
outstanding			13,948				13,849				13,819
EPS Calculations:
Net loss per share:
Basic and diluted		$	(0.07	)		$	(0.43	)		$	(0.52	)

		Sales to
Fiscal Year Ended		External								Adjusted
August 31, 2019		Customers				Gross Profit				EBITDA
Enterprise Division:
Direct offices		$	157,754			$	116,755			$	19,455
International licensees			12,896				10,231				6,072
			170,650				126,986				25,527
Education Division			48,880				30,373				3,553
Corporate and eliminations			5,826				1,955				(8,474	)
Consolidated		$	225,356			$	159,314			$	20,606
Fiscal Year Ended
August 31, 2018
Enterprise Division:
Direct offices		$	145,890			$	108,140			$	13,254
International licensees			13,226				10,031				5,081
			159,116				118,171				18,335
Education Division			45,272				28,654				2,710
Corporate and eliminations			5,370				1,464				(9,167	)
Consolidated		$	209,758			$	148,289			$	11,878
Fiscal Year Ended
August 31, 2017
Enterprise Division:
Direct offices		$	122,309			$	81,700			$	4,242
International licensees			13,571				10,483				6,415
			135,880				92,183				10,657
Education Division			44,122				27,916				7,195
Corporate and eliminations			5,254				2,568				(10,153	)
Consolidated		$	185,256			$	122,667			$	7,699

YEAR ENDED
AUGUST 31,		2019				2018				2017
Segment Adjusted EBITDA		$	29,080			$	21,045			$	17,852
Corporate expenses			(8,474	)			(9,167	)			(10,153	)
Consolidated Adjusted EBITDA			20,606				11,878				7,699
Stock-based compensation			(4,789	)			(2,846	)			(3,658	)
Reduction (increase) in
contingent consideration liabilities			(1,334	)			(1,014	)			1,936
Costs to exit Japan publishing business			-				-				(2,107	)
Contract termination costs			-				-				(1,500	)
Restructuring costs			-				-				(1,482	)
ERP system implementation costs			-				(855	)			(1,404	)
Licensee transition costs			(488	)			-				(505	)
Business acquisition costs			-				-				(442	)
Depreciation			(6,364	)			(5,161	)			(3,879	)
Amortization			(4,976	)			(5,368	)			(3,538	)
Income (loss) from operations			2,655				(3,366	)			(8,880	)
Interest income			37				104				223
Interest expense			(2,358	)			(2,676	)			(2,408	)
Accretion of discount on related
party receivable			258				418				156
Income (loss) before income taxes			592				(5,520	)			(10,909	)
Benefit (provision) for income taxes			(1,615	)			(367	)			3,737
Net loss		$	(1,023	)		$	(5,887	)		$	(7,172	)

YEAR ENDED
AUGUST 31,		2019				2018				2017
United States		$	166,696			$	151,022			$	136,206
Japan			14,227				15,670				14,482
China			13,586				14,176				11,552
United Kingdom			7,763				7,411				4,754
Canada			5,424				4,722				4,372
Australia			3,690				4,148				2,704
Western Europe			3,211				2,016				1,679
Thailand			1,340				1,219				1,147
Brazil			1,141				1,285				1,423
Middle East			951				840				723
Singapore			877				865				722
Mexico/Central America			842				872				751
Denmark/Scandinavia			710				752				775
India			707				647				701
Indonesia			696				715				614
Central/Eastern Europe			637				757				638
The Philippines			401				353				324
Malaysia			356				338				364
Others			2,101				1,950				1,325
		$	225,356			$	209,758			$	185,256

Fiscal Year Ended		Services and												Leases and
August 31, 2019		Products				Subscriptions				Royalties				Other				Consolidated
Enterprise Division:
Direct offices		$	102,557			$	52,536			$	2,661			$	-			$	157,754
International licensees			2,439				-				10,457				-				12,896
			104,996				52,536				13,118				-				170,650
Education Division			23,779				22,151				2,950				-				48,880
Corporate and eliminations			-				-				-				5,826				5,826
Consolidated		$	128,775			$	74,687			$	16,068			$	5,826			$	225,356
Fiscal Year Ended
August 31, 2018
Enterprise Division:
Direct offices		$	100,730			$	42,465			$	2,695			$	-			$	145,890
International licensees			2,484				-				10,742				-				13,226
			103,214				42,465				13,437				-				159,116
Education Division			26,061				15,587				3,624				-				45,272
Corporate and eliminations			-				-				-				5,370				5,370
Consolidated		$	129,275			$	58,052			$	17,061			$	5,370			$	209,758
Fiscal Year Ended
August 31, 2017
Enterprise Division:
Direct offices		$	99,616			$	20,452			$	2,241			$	-			$	122,309
International licensees			2,938				-				10,633				-				13,571
			102,554				20,452				12,874				-				135,880
Education Division			31,017				10,440				2,665				-				44,122
Corporate and eliminations			-				-				-				5,254				5,254
Consolidated		$	133,571			$	30,892			$	15,539			$	5,254			$	185,256

AUGUST 31,		2019				2018
United States/Canada		$	31,129			$	34,237
Japan			1,456				1,450
China			441				581
Singapore			370				315
United Kingdom			207				276
Australia			164				250
Germany, Switzerland, and Austria			10				-
		$	33,777			$	37,109

AUGUST 31,		2019				2018
Other current assets		$	999			$	1,123
Other long-term assets			-				411
		$	999			$	1,534