FRANKLIN COVEY CO (FC) FY 2022 MD&A

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, and the critical accounting estimates 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 it provides investors with greater transparency to evaluate operational activities and financial results. For a reconciliation of our segment Adjusted EBITDA to net income or loss, a related GAAP measure, please refer to Note 16 Segment Information to our consolidated financial statements as presented in Item 8 of this Form 10-K.

EXECUTIVE SUMMARY

General Overview

Franklin Covey Co. is a global company focused on individual and organizational performance improvement. Our mission is to “enable greatness in people and organizations everywhere,” and our worldwide resources are organized to help individuals and organizations achieve sustained superior performance at scale through changes in human behavior. We believe that our content and services create the connection between capabilities and results. 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 based on timeless principles of human effectiveness and is designed to help people change both their mindset and behavior. When our content is applied consistently in an organization, we believe the culture of that organization will change to enable the organization to get desired results and achieve its own great purposes.

2.Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including: the All Access Pass, the Leader in Me membership, and other intellectual property licenses, digital online learning, on-site training, training led through certified facilitators, blended learning, and organization-wide transformational processes, including consulting and coaching. We believe our investments in digital delivery modalities over the past few years have enabled us to deliver our content to clients in a high-quality learning environment whether those clients are working remotely or in a centralized location.

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

We have some of the best-known offerings in the training industry, including a suite of individual-effectiveness and leadership-development training content based on the best-selling books, The 7 Habits of Highly Effective People, The Speed of Trust, Multipliers, and The 4 Disciplines of Execution, and proprietary content in the areas of Execution, Sales Performance, Productivity, Customer Loyalty, Leadership, and Education. We believe that our offerings help individuals, teams, and entire organizations transform their results through achieving systematic, sustainable, and measurable changes in human behavior. Our offerings are described in further detail at www.franklincovey.com. The information contained in, or that can be accessed through, our website does not constitute a part of this Annual Report on Form 10-K, 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 2022, fiscal 2021, and fiscal 2020 refer to the twelve-month periods ended August 31, 2022, 2021, 2020, and so forth.

Fiscal 2022 Financial Overview

We were pleased with the strength of our fiscal 2022 financial results, which featured increased sales, strong gross margins, increased income from operations, and improved liquidity compared with fiscal 2021, despite macroeconomic challenges and the continuing difficulties associated with the COVID-19 pandemic, especially in China and Japan. Increased sales during fiscal 2022 were primarily driven by strong subscription and subscription services sales, including the following:

All Access Pass subscription and subscription services sales grew 28 percent to $144.5 million in fiscal 2022 compared with $112.5 million in fiscal 2021. In our Enterprise Division, where most AAP contracts are sold, sales increased 15 percent to $194.4 million compared with $168.6 million in the prior year.

Education Division revenues grew 26 percent to $61.9 million on the strength of increased Leader in Me membership revenues and subscription services, including coaching and consulting, and sales of materials. During fiscal 2022, the Education Division added a record 739 new Leader in Me schools in the United States and Canada.

Total Company deferred revenue at August 31, 2022 topped $100 million for the first time and totaled $102.4 million. The sum of billed subscription and unbilled deferred subscription revenue at August 31, 2022 grew 20 percent to $153.4 million, compared with August 31, 2021. Approximately 46 percent of our AAP subscriptions are now multi-year contracts.

We believe the momentum gained in fiscal 2022 will carry over into fiscal 2023 and generate additional growth. In October 2022, we launched the Impact Platform, which is our new interactive AAP platform based on technology we acquired from Strive Talent, Inc. in fiscal 2021. We believe our investments in technology, content, and people will also generate future growth in fiscal 2023 and beyond.

Our consolidated revenue for fiscal 2022 year grew 17 percent, or $38.7 million, to $262.8 million compared with $224.2 million in the prior year. Our sales in fiscal 2022 increased primarily due to strong sales of subscription and subscription services, including a strong recovery of onsite training days. Despite unfavorable exchange rate fluctuations and ongoing challenges in the macroeconomic and operating environment during fiscal 2022, especially in Asia, our AAP and Leader in Me membership revenues increased compared with fiscal 2021 and each of our operating segments were able to increase sales over the prior year. On a constant currency basis, our sales for fiscal 2022 increased 18 percent to $265.5 million. Our revenue growth in fiscal 2022 was driven primarily by a combination of contract renewals, expansions, and new customers as price increases did not have a material impact on our sales growth over fiscal 2021.

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Enterprise Division sales for the year increased 15 percent, or $25.8 million, to $194.4 million compared with $168.6 million in the prior year, and were driven primarily by increased AAP revenues and recovering licensee and international direct office revenues. All Access Pass subscription and subscription services sales grew 28 percent in fiscal 2022, licensee revenues increased 17 percent, or $1.5 million, and international direct office sales increased four percent, or $1.4 million, compared with fiscal 2021. Education Division revenues increased 26 percent, or $13.0 million, to $61.9 million compared with $48.9 million in the prior year. Our Education Division subscription and subscription related revenue, which primarily consists of the Leader in Me membership and consulting days invoiced with the Leader in Me online service, increased 29 percent compared with fiscal 2021. As previously mentioned, the Education Division added a record 739 new Leader in Me schools in the United States and Canada during fiscal 2022.

At August 31, 2022, we had $102.4 million of deferred revenue compared with $88.6 million at August 31, 2021. Our deferred revenue noted above at August 31, 2022 and August 31, 2021 each includes $2.7 million of deferred revenue that was classified as long-term based on expected recognition. Total deferred subscription revenue increased 14 percent, or $11.0 million, to $88.1 million at August 31, 2022. Our unbilled deferred revenue at August 31, 2022 grew 30 percent to $65.4 million compared with $50.4 million at the end of fiscal 2021. At August 31, 2022, the sum of our deferred subscription revenue plus unbilled deferred subscription revenue grew 20 percent, or $26.0 million, to $153.4 million compared with $127.4 million at August 31, 2021. 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; amortization of previously capitalized curriculum development costs; content royalties; materials used in the production of training products and related assessments; manufacturing labor costs; and freight. Gross profit may be affected by, among other things, the mix of services sold to clients, prices of materials, travel, labor rates, changes in product discount levels, and freight costs. Consolidated cost of sales in fiscal 2022 totaled $60.9 million compared with $51.3 million for fiscal 2021. Our gross profit for the fiscal year ended August 31, 2022 increased 17 percent, or $29.0 million, to $201.9 million, compared with $172.9 million in fiscal 2021, and increased primarily due to increased sales as described above. Our gross margin in fiscal 2022 remained strong at 76.8 percent of sales compared with 77.1 percent in the prior year.

Our operating expenses in fiscal 2022 increased $13.4 million compared with fiscal 2021 primarily due to a $14.8 million increase in selling, general, and administrative (SG&A) expenses. Despite the increase in SG&A expenses, as a percentage of revenue, our SG&A expenses in fiscal 2022 decreased to 60.8 percent compared with 64.7 percent in fiscal 2021. Our SG&A expenses increased primarily due to increased associate costs resulting from new personnel and increased salaries; increased commissions on higher sales; increased travel expense; increased curriculum development expense; and increased marketing and advertising expenses. At August 31, 2022, we had 300 client partners compared with 273 at August 31, 2021.

Our fiscal 2022 income from operations improved 192 percent, or $15.6 million, to $23.7 million compared with $8.1 million in the prior year. Fiscal 2022 pre-tax income was $22.1 million compared with $6.1 million in fiscal 2021, reflecting the items noted above.

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Our effective income tax rate for fiscal 2022 was approximately 16 percent compared with an effective benefit rate of approximately 124 percent in fiscal 2021 on pre-tax income of $6.1 million. Our unusual income tax benefit in fiscal 2021 was primarily the result of a $10.5 million reduction in the valuation allowance against certain deferred tax assets, based on a return to a three-year cumulative pre-tax income measurement during fiscal 2021, and the outlook for continued strong financial performance. Our effective rate in fiscal 2022 benefitted from decreasing the valuation allowances against other deferred tax assets during the year.

Net income for the year ended August 31, 2022 was $18.4 million, or $1.27 per diluted share, compared with $13.6 million, or $0.96 per diluted share, in the prior year. Our Adjusted EBITDA for fiscal 2022 increased 51 percent, or $14.2 million, to $42.2 million compared with $28.0 million in fiscal 2021, reflecting the above-noted factors.

Further details regarding these items can be found in the comparative analysis of fiscal 2022 with fiscal 2021 as discussed within this Management’s Discussion and Analysis.

Our liquidity, financial position, and capital resources remained strong during fiscal 2022. At August 31, 2022, we had $60.5 million of cash, with no borrowings on our $15.0 million revolving credit facility, compared with $47.4 million of cash, and no borrowings on our revolving credit facility, at August 31, 2021. Cash flows from operating activities remained strong and increased 13 percent to $52.3 million for fiscal 2022 compared with $46.2 million in the prior year. For further information regarding our liquidity and cash flows, refer to the Liquidity and Capital Resources discussion found within this Management’s Discussion and Analysis.

For a discussion of the results of operations and changes in financial condition for fiscal 2021 compared with fiscal 2020, refer to Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2021 Form 10-K, which was filed with the United States Securities and Exchange Commission on November 12, 2021.

Impact of the COVID-19 Pandemic on Our Financial Statements

COVID-19 was first identified in China during December 2019, and subsequently declared a pandemic by the World Health Organization. Since its discovery, COVID-19 and its variants have surfaced in nearly all regions around the world and have resulted in government-imposed travel restrictions and business slowdowns or shutdowns in affected areas. These closures had a significant adverse impact on our business beginning in the third quarter of fiscal 2020. After a strong start to fiscal 2020, our sales in the third and fourth quarters decreased 29 percent compared with the third and fourth quarters of fiscal 2019.

However, as individuals and businesses began adapting to pandemic-related circumstances, our business also began to recover. Driven by primarily by previous changes to a subscription-based business model, we were able to quickly pivot to delivering content live-online and through our other digital modalities. As a result, our subscription service clients are able to access content and programs from remote locations, which allows continued engagement of personnel and students during long periods of displacement from normal working or classroom conditions. The ability to deliver high-quality content to our clients, combined with adaptations to the pandemic and loosening restrictions provided a path to recovery in fiscal 2021 and our sales increased 13 percent compared with fiscal 2020. Through successful efforts to contain costs and reduced travel expense, our profitability also improved significantly in fiscal 2021.

The momentum and recovery achieved in fiscal 2021 provided a strong foundation for fiscal 2022 as our sales and profitability improved over fiscal 2021, as previously discussed. However, certain areas of our operations continue to be adversely impacted from the lingering effects of the pandemic. Our direct offices in China and Japan, and many of our international licensee partners continue to experience significant business disruptions from continued governmental and individual efforts to address the ongoing impact of the COVID-19 virus and its variants. While we remain optimistic about the future, continued “zero tolerance” and similar policies may continue to hamper business activity in fiscal 2023 and in future periods in certain countries and geographic regions through implementation of additional lockdowns or

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restrictions. We will continue to monitor developments related to the COVID-19 pandemic, including personnel and supply chain issues, and their actual and potential impacts on our financial position, results of operations, and liquidity.

Key Strategic Objectives

We believe following key strategic priorities will position us for continued growth in fiscal 2023 and beyond:

Increase the Impact and Scale of Our Solutions – We intend to build the capabilities to dramatically increase the impact and scale of our solutions with significant investments in people, content, and technology. During fiscal 2023 and future periods, we expect to hire new leaders, salespeople, and team members; offer new and refreshed content and solutions; launch the new Impact Platform, which is built on the technology we acquired from Strive in fiscal 2021; work to integrate content, client personnel, and technology in a manner that will help our clients build winning cultures; and launch a new version of The Leader in Me curriculum through our Education Division. We consistently seek to provide our clients world-class solutions, using the best technology, that will allow them to transform their organizations into high performing entities.

Refresh our Brand and Messaging – We are focused on telling our story more broadly and powerfully, with the goal of helping significantly more people understand what we do and how we can help them. In January 2022, we launched a new brand that was designed to reflect our development into content and technology while retaining our connection to the principles that have driven our growth over the years. The new branding has brought more visitors to our website, registered more people for our marketing events, and generated more thought leadership guide downloads than ever before. We seek to increase the visibility of our services to a much larger audience and believe these efforts will provide added opportunities in the training marketplace.

Accelerate the Flywheel – We seek to build on the momentum of our subscription businesses, which are centered around the All Access Pass in the Enterprise Division and the Leader in Me membership in the Education Division. During fiscal 2022, we achieved our highest logo and revenue retention and delivered the most training and coaching in our history. Additionally, we added the most new schools in our history and had close to the highest level of school retention in history. With millions of AAP users throughout thousands of organizations globally and many thousands of students in schools around the world, we believe that our growth and building momentum have established a strong foundation for future growth and accelerating the “flywheel” of results for our clients, associates, and shareholders.

Invest in and Expand Our Culture – We believe that we are the workplace of choice for achievers with heart. During fiscal 2022 we sought to expand and improve our culture by launching a new set of corporate values, focusing our teams on making a culture commitment, and standardizing our communication and collaboration toolset. We strive to maintain a culture that provides a great place to work and allows individuals to contribute their best talents and abilities. We believe this atmosphere produces better solutions for our clients and feelings of well-being and satisfaction for our associates. Through our efforts to improve our culture, we have made great progress in our diversity, equity, and inclusion initiatives and created a welcoming environment for the many new and talented associates that joined us during fiscal 2022.

We believe the pursuit of these strategic priorities will enable us to be the most trusted leadership company in the world by providing world-class solutions to our clients that will improve their organizations, by creating a rewarding and appealing environment for our associates, and by driving results that will provide return to our shareholders.

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

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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 2022 COMPARED WITH FISCAL 2021 RESULTS OF OPERATIONS

Enterprise Division

Direct Offices Segment

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

During fiscal 2022, our Direct Office segment sales increased 15 percent to $183.8 million compared with $159.6 million in fiscal 2021. The increase is the result of strong performance in our offices in the United States and Canada which grew 19 percent in fiscal 2022, and sales growth from our international direct offices which increased four percent over the prior year. During fiscal 2022 our AAP subscription and subscription related revenues remained strong and increased 28 percent over fiscal 2021 to $144.5 million, while annual AAP revenue retention remained well above 90 percent. We are encouraged by this momentum as invoiced sales in the U.S./Canada direct offices were the highest ever recorded in a quarterly period during our second quarter of fiscal 2022 and were very strong during the rest of fiscal 2022. Strong AAP sales were reflected by significant increases in billed and unbilled deferred revenue during the fiscal year. We believe the continued increase in invoiced AAP and other subscription sales, which are initially deferred and recognized on the balance sheet, provide a significant base for continued revenue growth in future periods.

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The performance of our international direct offices during fiscal 2022 was directly related to the level of recovery from the pandemic and corresponding business activity in each country. For fiscal 2022, sales increased in each of our international direct offices, except for China, which had a resurgence of COVID cases during fiscal 2022 and enacted strict lockdown measures to mitigate the spread of the virus. Sales growth during fiscal 2022 was led by our office in the United Kingdom, which grew 41 percent compared with fiscal 2021 and was followed by strong growth at our offices in Australia, and Germany/Switzerland/Austria. While we remain confident in our international direct offices’ ability to grow in future periods, growth in our China and Japan offices is expected to be slowed by mandated restrictions aimed to curb the ongoing pandemic and prevailing economic conditions in those countries. Foreign exchange rates had a $2.0 million unfavorable impact on our Direct Office sales and a $0.5 million adverse effect on operating income during fiscal 2022.

Gross Profit. Direct Office gross profit increased primarily due to sales growth as previously described. Direct Office gross margin remained strong, and was 80.5 percent compared with 81.1 percent in the prior year.

SG&A Expense. Direct Office SG&A expense for fiscal 2022 increased primarily due to increased associate costs from new personnel and increased salaries; increased commissions on higher sales; the acquisition of Strive Talent, Inc., which was completed in the third quarter of fiscal 2021; increased platform and content development expense; and increased travel costs.

International Licensees Segment

In foreign locations where we do not have a directly owned office, our training and consulting services are delivered through independent licensees. The following comparative information is for our international licensee operations in the periods indicated (in thousands):

Sales. Our international licensee revenues are primarily comprised of royalty revenues. During fiscal 2022, our licensee revenues increased primarily due to increased royalty revenues from certain licensees as economies in many of the countries where our licensees operate continue to recover from the pandemic. The ongoing recovery led to improved licensee royalty revenues and continued increases in our share of AAP sales. Compared with the prior year, our royalty revenues increased 11 percent and our share of AAP revenues increased by 108 percent to $1.4 million. We receive additional revenue from the international licensees for AAP sales to cover a portion of the costs of operating the AAP portal. Partially offsetting these increases were decreased service revenues through our licensee support team and decreased wholesale product sales. Foreign exchange rates had a $0.4 million unfavorable impact on international licensee revenues and operating results during fiscal 2022.

Gross Profit. Gross profit increased primarily due to increased royalty revenues and AAP revenues as previously described. Gross margin improved primarily due to the mix of revenue recognized during fiscal 2022, which included more royalty and AAP revenues and less licensee support and product revenues than the prior year.

SG&A Expense. International licensee SG&A expenses increased slightly due to additional spending on technology, development, and various other shared service costs.

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Education Division

Our Education Division is comprised of our domestic and international Education practice operations, which are focused on sales to educational institutions, and includes our widely acclaimed Leader in Me program designed for students primarily in K-6 elementary schools. The following comparative information is for our Education Division in the periods indicated (in thousands):

Sales. Education Division sales for fiscal 2022 grew 26 percent, or $13.0 million, on the strength of increased Leader in Me subscription revenues and subscription services, including coaching and consulting, and sales of materials used by schools in connection with their membership subscription. During fiscal 2022, the Education Division added a record 739 new Leader in Me schools in the United States and Canada, which is a 29 percent increase over fiscal 2021, and retained nearly 90 percent of its existing Leader in Me schools in the United States and Canada. Education Division subscription and subscription related revenue increased 29 percent compared with fiscal 2021. Following the challenges in the educational environment over the past couple of years related to the pandemic and its recovery, we were very encouraged by the growth of our Education Division during fiscal 2022 and believe this growth sets a strong foundation for future sales growth as schools and districts realize the value of the Leader in Me membership for both students and teachers. Foreign exchange rates had a $0.1 million unfavorable impact on Education Division sales and operating income during fiscal 2022. As of August 31, 2022, the Leader in Me program is used in over 3,300 schools in the United States and Canada, compared with nearly 2,900 schools at August 31, 2021.

Gross Profit. Education Division gross profit increased primarily due to increased sales as previously described. Education segment gross margin remained strong at 66.6 percent of sales compared with 67.0 percent in the prior year.

SG&A Expenses. Education SG&A expenses increased primarily due to increased associate costs from additional commission expense on improved sales, additional sales support headcount, and increased salaries compared with the prior year. In addition, travel expenses rose due to increased travel days by associates compared with the pandemic periods and an increase in the costs of traveling.

Other Operating Expense Items

Depreciation – Depreciation expense decreased $1.3 million compared with the prior year primarily due to the full depreciation of certain assets during the fiscal year and reduced capital expenditures in the past couple of years. We currently expect depreciation expense will total approximately $5.7 million in fiscal 2023.

Amortization – Amortization expense increased $0.3 million compared with fiscal 2021 primarily due to the acquisition of Strive Talent, Inc. during the third quarter of fiscal 2021. We currently expect amortization expense will total $4.3 million during fiscal 2023.

Interest Expense – Our interest expense during fiscal 2022 decreased $0.4 million primarily due to reduced term loan debt and a reduced principal balance on our financing obligation (long-term lease on our corporate campus) compared with the prior year. However, rising interest rates in future periods may partially offset the benefit of lower debt balances during fiscal 2023 and future periods.

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Income Taxes

Our effective income tax expense rate for the fiscal year ended August 31, 2022 was approximately 16 percent, compared with an income tax benefit rate of approximately 124 percent in fiscal 2021. Our effective income tax rate for fiscal 2022 was lower than the statutory rate due primarily to a $2.8 million decrease in the valuation allowance against our deferred income tax assets and a $0.6 million benefit for share-based compensation deductions in excess of the corresponding book expense. These tax benefits were partially offset by tax expense of $1.2 million for non-deductible executive compensation. The income tax benefit rate recognized in fiscal 2021 was primarily due to a $10.5 million decrease in the valuation allowance against our deferred income tax assets and a $0.5 million tax benefit from the exercise of stock options, which were partially offset by a $0.8 million reduction in foreign tax credit carryforwards.

We paid $3.2 million in cash for income taxes during fiscal 2022. 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 to the extent we are able to utilize net operating loss carryforwards, foreign tax credit carryforwards, and other deferred income tax assets.

QUARTERLY RESULTS

The following tables set forth selected unaudited quarterly consolidated financial data for the fiscal years ended August 31, 2022 and 2021. 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).

In normal operating years, our fourth quarter typically has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education Division (when school administrators and faculty have professional development days) and from increased sales that typically occur during that quarter resulting from year-end incentive

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programs. Overall, subscription service and 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 increased subscription sales, the introduction of new offerings, pandemics or other natural disasters, business acquisitions, the addition of new organizational customers, and the elimination of underperforming offerings.

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

LIQUIDITY AND CAPITAL RESOURCES

Introduction

Our cash balance at August 31, 2022 totaled $60.5 million, with no borrowings on our $15.0 million revolving credit facility. Of our $60.5 million in cash at August 31, 2022, $16.9 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 and products in the normal course of business and available proceeds from our credit facility. Our primary uses of liquidity include payments for operating activities, purchases of our common stock, debt payments, capital expenditures (including curriculum development), working capital expansion, business acquisitions, and contingent payments from previous business acquisitions.

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

Our Current Credit Agreement

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

In anticipation of potential covenant compliance issues associated with the COVID-19 pandemic and uncertainties associated with the economic recovery, on July 8, 2020, we entered into the First Modification Agreement to the 2019 Credit Agreement. The primary purpose of the First Modification Agreement was to provide temporary alternative borrowing covenants for the fiscal quarters ending August 31, 2020 through May 31, 2021. In connection with the acquisition of Strive Talent, Inc. in April 2021, we entered into a Consent and Second Modification Agreement to the 2019 Credit Agreement. The primary purposes of the Consent and Second Modification Agreement were to:

Consent to the purchase of Strive.

Reinstate the original debt covenants of the 2019 Credit Agreement which were temporarily replaced by alternate debt covenants in the First Modification Agreement to the 2019 Credit Agreement.

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Reduce the interest rate for borrowings from LIBOR plus 3.0 percent to LIBOR plus 1.85 percent, which was the original rate on the 2019 Credit Agreement. The unused credit commitment fee also returns to the previously established 0.2 percent. The 2019 Credit Agreement contains provisions for adopting alternative interest rate measures when LIBOR is discontinued, which we do not believe will have a material impact on our interest expense.

The Consent and Second Modification Agreement did not change any repayment or credit availability terms on the 2019 Credit Agreement.

At August 31, 2022, our reinstated debt covenants consist of the following: (i) a Funded Indebtedness to Adjusted EBITDAR Ratio of less than 3.00 to 1.00; (ii) a Fixed Charge Coverage ratio not less than 1.15 to 1.00; (iii) an annual limit on capital expenditures (excluding capitalized curriculum development costs) of $8.0 million; and (iv) consolidated accounts receivable of not less than 150 percent 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. In the event of noncompliance with these financial covenants and other defined events of default, the lender is entitled to certain remedies, including acceleration of the repayment of any amounts outstanding on the 2019 Credit Agreement. At August 31, 2022, we believe that we were in compliance with the terms and covenants applicable to the 2019 Credit Agreement and subsequent modifications.

In addition to our term loan obligations and notes payable to the former owners of Strive Talent, Inc., we have a long-term lease on our corporate campus that is accounted for as a financing obligation. For further information on our debt and leasing obligations, refer to the notes to our consolidated financial statements as presented in Item 8 of this Annual 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, 2022.

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. During fiscal 2022, our cash provided by operating activities increased 13 percent to $52.3 million compared with $46.2 million in fiscal 2021. The increase was primarily due to improved operating income, strong collections of accounts receivable, and favorable changes in working capital. Despite ongoing pandemic conditions in certain countries, our collection of accounts receivable remained strong during fiscal 2022 and provided the necessary cash to support our operations, pay our obligations, and make critical investments.

Cash Flows from Investing Activities and Capital Expenditures

Our cash used for investing activities during fiscal 2022 totaled $5.3 million. The primary uses of cash for investing activities during the year were purchases of property and equipment in the normal course of business and additional investments in the development of our offerings.

Our purchases of property and equipment during fiscal 2022 consisted primarily of computer hardware and software, and leasehold improvements on our corporate campus. We expect to continue investing in our content and delivery modalities, including the AAP and Leader in Me subscription service portals, and also expect to make required leasehold improvements on our corporate campus in future periods. We currently anticipate that our purchases of property and equipment will total $7.6 million in fiscal 2023.

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We spent $2.2 million during fiscal 2022 on the development of various content and offerings. We believe continued investment in our content and offerings is key to future growth and the development of our subscription offerings. We currently expect that our capital spending for curriculum development will increase in future periods and will total $9.5 million during fiscal 2023.

Cash Flows from Financing Activities

During the fiscal year ended August 31, 2022, our net cash used for financing activities totaled $32.7 million. Our primary uses of financing cash during fiscal 2022 included $23.9 million for purchases of our common stock for treasury, $8.7 million used for principal payments on our term loans, financing obligation, and Strive note payable, and $1.4 million of cash used to pay contingent consideration liabilities from previous business acquisitions. Our purchases of common stock during fiscal 2022 were comprised of $20.3 million from open market purchases and $3.5 million for shares withheld from participants to pay statutory income taxes on stock-based compensation awards which were distributed during fiscal 2022. Partially offsetting these uses of cash were $1.3 million of proceeds from Employee Stock Purchase Plan participants to purchase shares of our stock during fiscal 2022.

On November 15, 2019, our Board of Directors approved a new plan to purchase up to $40.0 million of the Company’s outstanding common stock. The previously existing common stock repurchase plan was canceled and the new common share repurchase plan does not have an expiration date. At August 31, 2022, we had $19.5 million of authorized purchases remaining under this board-approved plan. Our uses of financing cash during fiscal 2023 are expected to include required payments on our term loans, financing obligation, note payable from the acquisition of Strive, contingent consideration payments from previous business acquisitions, and may include purchases of our common stock for treasury.

The Inflation Reduction Act of 2022 imposes a one percent excise tax on purchases of our common stock beginning on January 1, 2023. This new tax may reduce the number of shares that we purchase on the open market in future periods through our approved common stock purchase plan. However, the timing and amount of common stock purchases is dependent on a number of factors, including available resources and market conditions, and we are not obligated to make purchases of our common stock during any future period.

Sources of Cash and 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 2023 from current cash balances, future cash flows from operating activities, and available borrowings from our revolving line of credit. Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit and other financing alternatives, if necessary, for these expenditures. At August 31, 2022, we had $15.0 million of available borrowing capacity on our revolving line of credit. Our 2019 Credit Agreement expires in August 2024 and we expect to renew or amend the 2019 Credit Agreement on a regular basis to maintain the long-term borrowing capacity of this credit facility. Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources. If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital. However, the COVID-19 pandemic and other macroeconomic difficulties has created uncertainty in capital markets, which may limit our ability to access liquidity on favorable terms, or at all.

We believe that our existing cash and cash equivalents, cash generated by operating activities, and availability of external funds as described above, will be sufficient for us to maintain our operations over the next 12 months. However, our ability to maintain adequate capital for our operations in the future is dependent upon a number of factors, including sales trends, macroeconomic activity, our ability to contain costs, levels of capital expenditures, collection of accounts receivable, and other factors. Some of the factors that influence our operations are not within our control, such as general economic conditions and the introduction of new offerings or technology by our competitors.

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During the periods presented within this Annual Report, inflation has not had a material effect on our operations. However, economic conditions indicate that future inflationary pressure may have an impact on a variety of our operating costs, including associate compensation, benefit costs, travel costs, and 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.

We will continue to monitor our liquidity position and may pursue additional financing alternatives, as described above, to maintain sufficient resources for future growth and capital requirements. However, there can be no assurance such financing alternatives will be available to us on acceptable terms, or at all.

Material Cash Requirements

We do not operate any manufacturing, mining, or other capital-intensive facilities, and we have not structured any special purpose entities, or participated in any commodity trading activities, which would expose us to potential undisclosed liabilities or create adverse consequences to our liquidity. However, we have cash expenditures and are subject to various contractual obligations that are required to run our business. As discussed above, general economic conditions indicate that future inflationary pressure may affect these expenditures. Our material cash requirements include the following:

Associate and Consultant Compensation – Associate and consultant compensation is our largest recurring use of cash. Our compensation plans for associates and delivery consultants include fixed (salaried) and variable (commissions, bonuses, etc.) elements as well as the cost of benefits, and may fluctuate with sales, financial results, and hiring/retention activity. During fiscal 2022, we expensed approximately $161 million for associate and delivery consultant cash compensation. Associate compensation expense is included in SG&A expense and consultant compensation is included in our cost of sales. These associate costs include variable compensation such as commissions, incentives, and bonuses, and may fluctuate from year-to-year.

Information Technology – Our business is reliant on computer software and hardware. Our subscription service portals require ongoing development, recurring maintenance, and utilize various software. In addition, we utilize various software programs to run our business, including applications for customer resource management, general ledger, cybersecurity, spreadsheets, word processing, e-mail, etc. Including capitalized hardware and software, we spent approximately $8 million for information technology software and hardware during fiscal 2022. We expect spending related to our AAP subscription and Leader in Me membership service portals to increase in future years.

Content Development – We believe that ongoing investment in our content and offerings is key to our future success. Our innovations group is responsible for the development of new content as well as refreshing and maintaining our existing content. Including capitalized development, we spent approximately $7 million (excluding compensation discussed above) for the development and maintenance of our offerings and content in fiscal 2022.

Income Taxes – We are required to pay income taxes in the various jurisdictions where we operate. During fiscal 2022, we paid $3.2 million in cash for income taxes during fiscal 2022. Our use of cash for income taxes in future periods depends upon our profitability and our ability to utilize tax assets such as net operating loss carryforwards and foreign income tax credits.

Contractual Obligations – In addition to the expenses described above, which we believe are required to successfully run our business, we have other longer-term contractual obligations, which require additional cash payments. We have summarized our significant contractual obligations at August 31, 2022 in the following table (in thousands):

‎

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(1)Payment amounts shown include interest at 4.2 percent, which is the current rate on our term loan obligations under the 2019 Credit Agreement and the Consent and Second Modification Agreement.

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

(3)Contingent compensation from the acquisition of Strive Talent, Inc. is based on current estimates and projections and includes a $1.0 million bonus payable to Strive employees that are employed 18 months from the acquisition date. After forfeitures and early payments, this amount is expected to be $0.6 million in fiscal 2023. The actual payment of Strive contingent compensation amounts may differ in amount and timing from those shown in the table and we may pay these obligations with shares of our common stock or in cash at our sole discretion.

CRITICAL ACCOUNTING ESTIMATES

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

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

Revenue Recognition

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

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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 in a revenue contract. Where we have more than one distinct performance obligation, we must allocate the transaction price to each performance obligation based on its relative SSP. The SSP is the price which we would sell a promised product or service separately to a customer. In determining the SSP, we consider the size and volume of transactions, price lists, historical sales, and contract prices. We may modify our pricing from time-to-time in the future, which could result in changes to the 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 service periods. Due to the variable number of common shares that may be issued under the LTIP, we reevaluate our LTIP grants on a quarterly basis and adjust the expected vesting dates and number of shares expected to be awarded based upon actual and estimated financial results of the Company compared with the performance goals set for the award. Adjustments to the number of shares awarded, and to the corresponding compensation expense, are made on a cumulative basis at the adjustment date based upon the new estimated probable number of common shares to be awarded.

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

Accounts Receivable Valuation

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Our allowance for doubtful accounts calculations contain uncertainties because the calculations require us to make assumptions and judgments regarding the collectability of customer accounts, which may be influenced by a number of factors that are not within our control, such as the financial health of each customer. We regularly review the collectability assumptions of our allowance for doubtful accounts calculation and compare them against historical collections. Adjustments to the assumptions may either increase or decrease our total allowance for doubtful accounts and may adversely impact our financial results. For example, a 10 percent increase to our allowance for doubtful accounts at August 31, 2022 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 Annual Report on Form 10-K.

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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 a business 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, 2022 at the reporting unit level using a qualitative approach. We determined that it was more likely than not that the fair value of each of our reporting units was more than their carrying values. This determination required judgment to estimate future cash flows and operating results and considered current operating results, expected future operating results, and various other factors such as macroeconomic conditions. Some of these factors are not within our control.

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 analysis during fiscal 2022, we determined that no impairment existed at August 31, 2022, as we determined that it was more likely than not that each reportable operating segment’s estimated fair value exceeded its carrying value. We will continue to monitor our goodwill and intangible assets for impairment and conduct formal tests when impairment indicators are present.

Impairment of Long-Lived Assets

Long-lived tangible assets and finite-lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We use an estimate of undiscounted future net cash flows of the assets over their remaining useful lives in determining whether the carrying value of the assets is recoverable. If the carrying values of the assets exceed the anticipated future cash flows of the

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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 recent material changes to our long-lived assets impairment assessment methodology, if forecasts and assumptions used to support the carrying value of our long-lived tangible and finite-lived intangible assets change in the future, significant impairment charges could result that would adversely affect our results of operations and financial condition.

Acquisitions and Contingent Consideration Liabilities

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

Additionally, we are required to reassess the fair value of contingent consideration liabilities resulting from business acquisitions at each reporting period. Although subsequent changes to the contingent consideration liabilities do not affect the goodwill generated from the acquisition transaction, the valuation of expected contingent consideration often requires us to estimate future sales and/or profitability. These estimates require the use of numerous assumptions, many of which may change frequently and lead to increased or decreased operating income in future periods. For instance, during fiscal 2022 we recorded $0.1 million of net increases to the fair value of our contingent consideration liabilities compared with $0.2 million of increases during fiscal 2021, and approximately $49,000 of decreases in fiscal 2020. Changes to the fair value of contingent consideration liabilities are recorded as a component of SG&A expenses.

Income Taxes

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

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

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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. These evaluations may produce additional volatility in our tax provision or benefit, net income or loss, and earnings or loss per share. For example, in consideration of the relevant accounting guidance, we reevaluated our deferred tax assets during fiscal 2020 and considered both positive and negative evidence in determining whether it is more likely than not that some portion or all of our deferred tax assets will be realized. Because of the cumulative pre-tax losses over the past three fiscal years, combined with the expected continued disruptions and negative impact to our business resulting from uncertainties related to the recovery from the pandemic, we were unable to overcome accounting guidance indicating that it is more-likely-than-not that insufficient taxable income will be available to realize all of our deferred tax assets before they expire, which are primarily foreign tax credit carryforwards and a portion of our net operating loss carryforwards. Accordingly, we increased the valuation allowance against our deferred tax assets in fiscal 2020. Due to better-than-expected results in fiscal 2021, we reversed a substantial portion of these valuation allowances.

RECENT ACCOUNTING PRONOUNCEMENTS

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

REGULATORY COMPLIANCE

We are registered in states in which we do business that have a sales tax and we collect and remit sales or use tax on sales made in these jurisdictions. Compliance with environmental laws and regulations (including new laws and regulations relating to climate change) has not had a material effect on our operations. We believe we are in compliance with applicable governmental regulations in the United States and the countries in which we operate.

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

Certain statements made by the Company in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 as amended (the Exchange Act). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “project,” or words or phrases of similar meaning. In our reports and filings we may make forward-looking statements regarding, among other things, our expectations about future sales levels and financial results, expected effects from the COVID-19 pandemic, including effects on how we conduct our business and our results of operations, the timing and duration of the recovery from the COVID-19 pandemic, future training and consulting sales activity, expected benefits from the All Access Pass and the electronic delivery of our content, anticipated renewals of subscription offerings, the impact of new accounting standards on our financial condition and results of operations, the amount and timing of capital expenditures, anticipated expenses, including SG&A expenses, depreciation, and amortization, future gross margins, the release of new services or products, the adequacy of existing capital resources, our ability to renew or extend our line of credit facility, the amount of cash expected to be paid for income taxes, our ability to maintain adequate capital for our operations for at least the upcoming 12 months, the seasonality of future sales, future compliance with the terms and conditions of our line of credit, the ability to borrow on our line of credit, expected

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collection of accounts receivable, estimated capital expenditures, and cash flow estimates used to determine the fair value of long-lived assets. These, and other forward-looking statements, are subject to certain risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. These risks and uncertainties are disclosed from time to time in reports filed by us with the SEC, including reports on Forms 8-K, 10-Q, and 10-K. Such risks and uncertainties include, but are not limited to, the matters discussed in Item 1A of this annual report on Form 10-K for the fiscal year ended August 31, 2022, entitled “Risk Factors.” In addition, such risks and uncertainties may include unanticipated developments in any one or more of the following areas: cybersecurity risks; unanticipated costs or capital expenditures; delays or unanticipated outcomes relating to our strategic plans; dependence on existing products or services; the rate and consumer acceptance of new product introductions, including the All Access Pass and Impact Platform; competition; the impact of foreign exchange rates; the number and nature of customers and their product orders, including changes in the timing or mix of product or training orders; pricing of our products and services and those of competitors; adverse publicity; and other factors which may adversely affect our business.

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

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

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