NOTE 1 – BASIS OF PRESENTATION

General

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

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

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

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

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

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

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

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

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

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

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

Accounting Pronouncements Issued and Adopted

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

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

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

We do not expect the accounting for fulfillment costs or costs incurred to obtain a contract to be materially affected in any period due to the adoption of ASU 2014-09. While we do not believe the adoption of ASU 2014-09 will materially impact our annual financial statements, the change in the timing of revenue recognition of certain contracts could result in significant quarter-to-quarter fluctuations in revenue. See Note 2 for further details regarding our revenue recognition accounting policies under Topic 606.

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




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

Liabilities and Shareholders' Equity:
Deferred revenue		51,888		2,008		53,896
Other liabilities		5,501		2,249		7,750
Retained earnings		63,569		(3,143)		60,426

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



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

Net loss per share:
Basic and diluted	$	(0.14)	$	(0.14)

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



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

Net loss per share:
Basic and diluted	$	(0.49)	$	(0.61)

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


		May 31,		May 31,
		2019		2019		Impact of
		As Reported		Without ASC 606		ASC 606
Assets:
Prepaid expenses and other current assets	$	13,016	$	12,907	$	109
Deferred income tax assets		6,455		6,772		(317)
Total assets		187,864		188,072		(208)

Liabilities and Shareholders' Equity:
Deferred revenue		45,168		43,715		1,453
Other liabilities		8,193		8,268		(75)
Retained earnings		53,528		55,114		(1,586)
Total liabilities and shareholders' equity		187,864		188,072		(208)

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

Accounting Pronouncements Issued Not Yet Adopted

Leases (Topic 842)

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

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

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

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

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