false--08-31Q120210000886206YesYes0000886206us-gaap:TreasuryStockMember2020-11-300000886206us-gaap:TreasuryStockMember2020-08-310000886206us-gaap:TreasuryStockMember2019-11-300000886206us-gaap:TreasuryStockMember2019-08-310000886206us-gaap:TreasuryStockMember2020-09-012020-11-300000886206us-gaap:TreasuryStockMember2019-09-012019-11-300000886206us-gaap:RetainedEarningsMember2020-11-300000886206us-gaap:AdditionalPaidInCapitalMember2020-11-300000886206us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-11-300000886206us-gaap:RetainedEarningsMember2020-08-310000886206us-gaap:AdditionalPaidInCapitalMember2020-08-310000886206us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-08-310000886206us-gaap:RetainedEarningsMember2019-11-300000886206us-gaap:AdditionalPaidInCapitalMember2019-11-300000886206us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-11-300000886206us-gaap:RetainedEarningsMember2019-08-310000886206us-gaap:AdditionalPaidInCapitalMember2019-08-310000886206us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-08-310000886206us-gaap:CommonStockMember2020-11-300000886206us-gaap:CommonStockMember2020-08-310000886206us-gaap:CommonStockMember2019-11-300000886206us-gaap:CommonStockMember2019-08-310000886206us-gaap:PerformanceSharesMemberfc:Fiscal2021LongTermIncentivePlanAwardMemberfc:ShareBasedCompensationAwardTrancheTwoAndThreeMember2020-10-022020-10-020000886206fc:EmployeeStockPurchasePlanMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:SubscriptionsMemberfc:EnterpriseDivisionMemberfc:DirectOfficesMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:ServicesAndProductsMemberfc:EnterpriseDivisionMemberfc:InternationalLicenseesMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:ServicesAndProductsMemberfc:EnterpriseDivisionMemberfc:DirectOfficesMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:RoyaltiesMemberfc:EnterpriseDivisionMemberfc:InternationalLicenseesMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:RoyaltiesMemberfc:EnterpriseDivisionMemberfc:DirectOfficesMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:SubscriptionsMemberfc:EnterpriseDivisionMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:SubscriptionsMemberfc:EducationPracticeMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:ServicesAndProductsMemberfc:EnterpriseDivisionMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:ServicesAndProductsMemberfc:EducationPracticeMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:RoyaltiesMemberfc:EnterpriseDivisionMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:RoyaltiesMemberfc:EducationPracticeMember2020-09-012020-11-300000886206fc:RoyaltiesMemberus-gaap:CorporateMember2020-09-012020-11-300000886206fc:LeasesAndOtherMemberus-gaap:CorporateMember2020-09-012020-11-300000886206srt:AsiaPacificMember2020-09-012020-11-300000886206srt:AmericasMember2020-09-012020-11-300000886206fc:SubscriptionsMember2020-09-012020-11-300000886206fc:ServicesAndProductsMember2020-09-012020-11-300000886206fc:RoyaltiesMember2020-09-012020-11-300000886206fc:LeasesAndOtherMember2020-09-012020-11-300000886206fc:EuropeMiddleEastAfricaMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:SubscriptionsMemberfc:EnterpriseDivisionMemberfc:DirectOfficesMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:ServicesAndProductsMemberfc:EnterpriseDivisionMemberfc:InternationalLicenseesMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:ServicesAndProductsMemberfc:EnterpriseDivisionMemberfc:DirectOfficesMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:RoyaltiesMemberfc:EnterpriseDivisionMemberfc:InternationalLicenseesMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:RoyaltiesMemberfc:EnterpriseDivisionMemberfc:DirectOfficesMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:SubscriptionsMemberfc:EnterpriseDivisionMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:SubscriptionsMemberfc:EducationPracticeMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:ServicesAndProductsMemberfc:EnterpriseDivisionMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:ServicesAndProductsMemberfc:EducationPracticeMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:RoyaltiesMemberfc:EnterpriseDivisionMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:RoyaltiesMemberfc:EducationPracticeMember2019-09-012019-11-300000886206fc:RoyaltiesMemberus-gaap:CorporateMember2019-09-012019-11-300000886206fc:LeasesAndOtherMemberus-gaap:CorporateMember2019-09-012019-11-300000886206srt:AsiaPacificMember2019-09-012019-11-300000886206srt:AmericasMember2019-09-012019-11-300000886206fc:SubscriptionsMember2019-09-012019-11-300000886206fc:ServicesAndProductsMember2019-09-012019-11-300000886206fc:RoyaltiesMember2019-09-012019-11-300000886206fc:LeasesAndOtherMember2019-09-012019-11-300000886206fc:EuropeMiddleEastAfricaMember2019-09-012019-11-300000886206us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-012020-11-300000886206us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-012019-11-300000886206us-gaap:RetainedEarningsMember2020-09-012020-11-300000886206us-gaap:RetainedEarningsMember2019-09-012019-11-300000886206us-gaap:PerformanceSharesMember2020-10-022020-10-020000886206fc:SubscriptionMember2020-09-012020-11-300000886206fc:SubscriptionMember2020-11-300000886206fc:SubscriptionMember2020-08-3100008862062019-11-3000008862062019-08-310000886206us-gaap:OtherNoncurrentLiabilitiesMemberfc:JhanaEducationMember2020-11-300000886206fc:JhanaAndRgpMemberus-gaap:AccruedLiabilitiesMember2020-11-300000886206fc:RobertGregoryPartnersLlcMember2020-11-300000886206fc:JhanaEducationMember2020-11-300000886206fc:RobertGregoryPartnersLlcMember2020-08-310000886206fc:JhanaEducationMember2020-08-310000886206us-gaap:RestrictedStockMember2020-09-012020-11-300000886206fc:LongTermIncentiveAwardsMember2020-09-012020-11-300000886206fc:EmployeeStockPurchasePlanMember2020-09-012020-11-300000886206us-gaap:RestrictedStockMember2019-09-012019-11-300000886206fc:LongTermIncentiveAwardsMember2019-09-012019-11-300000886206fc:EmployeeStockPurchasePlanMember2019-09-012019-11-300000886206us-gaap:AdditionalPaidInCapitalMember2020-09-012020-11-300000886206us-gaap:AdditionalPaidInCapitalMember2019-09-012019-11-3000008862062020-11-3000008862062020-08-310000886206us-gaap:CommonStockMember2020-09-012020-11-300000886206fc:TimeBasedAwardMemberfc:Fiscal2021LongTermIncentivePlanAwardMemberus-gaap:ShareBasedCompensationAwardTrancheOneMember2020-10-022020-10-020000886206srt:MinimumMemberus-gaap:PerformanceSharesMemberfc:Fiscal2021LongTermIncentivePlanAwardMemberfc:ShareBasedCompensationAwardTrancheTwoAndThreeMember2020-10-022020-10-020000886206srt:MaximumMemberus-gaap:PerformanceSharesMemberfc:Fiscal2021LongTermIncentivePlanAwardMemberfc:ShareBasedCompensationAwardTrancheTwoAndThreeMember2020-10-022020-10-020000886206us-gaap:PerformanceSharesMemberfc:Fiscal2021LongTermIncentivePlanAwardMemberfc:ShareBasedCompensationAwardTrancheTwoAndThreeMember2020-10-020000886206fc:TimeBasedAwardMemberfc:Fiscal2021LongTermIncentivePlanAwardMember2020-10-022020-10-020000886206fc:Fiscal2021LongTermIncentivePlanAwardMember2020-10-022020-10-020000886206us-gaap:PerformanceSharesMember2020-10-020000886206us-gaap:OperatingSegmentsMemberfc:EnterpriseDivisionMemberfc:InternationalLicenseesMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:EnterpriseDivisionMemberfc:DirectOfficesMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:EnterpriseDivisionMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:EducationPracticeMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMember2020-09-012020-11-300000886206us-gaap:CorporateMember2020-09-012020-11-300000886206us-gaap:OperatingSegmentsMemberfc:EnterpriseDivisionMemberfc:InternationalLicenseesMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:EnterpriseDivisionMemberfc:DirectOfficesMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:EnterpriseDivisionMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMemberfc:EducationPracticeMember2019-09-012019-11-300000886206us-gaap:OperatingSegmentsMember2019-09-012019-11-300000886206us-gaap:CorporateMember2019-09-012019-11-300000886206fc:RobertGregoryPartnersLlcMember2020-09-012020-11-300000886206fc:JhanaEducationMember2020-09-012020-11-3000008862062019-09-012019-11-3000008862062020-12-3100008862062020-09-012020-11-30fc:segmentiso4217:USDxbrli:sharesxbrli:purefc:itemiso4217:USDxbrli:shares

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 30, 2020

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

For the transition period from __________ to __________

Commission file no. 1-11107

Picture 1

FRANKLIN COVEY CO.

(Exact name of registrant as specified in its charter)

Utah

 

87-0401551

(State of incorporation)

 

(I.R.S. employer identification number)

 

2200 West Parkway Boulevard

 

84119-2099

Salt Lake City, Utah

 

(Zip Code)

(Address of principal executive offices)

 

 

Registrant’s telephone number,

 

(801) 817-1776

Including area code

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $.05 Par Value

FC

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past

90 days.  Yes T  No  £

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

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

Large Accelerated Filer

£

Accelerated Filer

T

Non-accelerated Filer

£

Smaller Reporting Company

£

Emerging Growth Company

£

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

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

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

14,036,458 shares of Common Stock as of December 31, 2020


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share amounts)

November 30,

August 31,

2020

2020

(unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

34,260 

$

27,137 

Accounts receivable, less allowance for doubtful accounts of $3,751 and $4,159

43,066 

56,407 

Inventories

2,675 

2,974 

Prepaid expenses and other current assets

15,430 

15,146 

Total current assets

95,431 

101,664 

Property and equipment, net

14,169 

15,723 

Intangible assets, net

45,996 

47,125 

Goodwill

24,220 

24,220 

Deferred income tax assets

1,028 

1,094 

Other long-term assets

15,516 

15,611 

$

196,360 

$

205,437 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of term notes payable

$

5,000 

$

5,000 

Current portion of financing obligation

2,670 

2,600 

Accounts payable

3,691 

5,622 

Deferred subscription revenue

55,681 

59,289 

Other deferred revenue

7,654 

7,389 

Accrued liabilities

21,902 

22,628 

Total current liabilities

96,598 

102,528 

Term notes payable, less current portion

13,750 

15,000 

Financing obligation, less current portion

13,350 

14,048 

Other liabilities

8,820 

9,110 

Deferred income tax liabilities

5,089 

5,298 

Total liabilities

137,607 

145,984 

Shareholders’ equity:

Common stock, $0.05 par value; 40,000 shares authorized, 27,056 shares issued

1,353 

1,353 

Additional paid-in capital

209,667 

211,920 

Retained earnings

49,076 

49,968 

Accumulated other comprehensive income

948 

641 

Treasury stock at cost, 13,028 shares and 13,175 shares

(202,291)

(204,429)

Total shareholders’ equity

58,753 

59,453 

$

196,360 

$

205,437 

See notes to condensed consolidated financial statements


2


 

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS

OF COMPREHENSIVE LOSS

(in thousands, except per-share amounts)

Quarter Ended

November 30,

November 30,

2020

2019

(unaudited)

Net sales

$

48,324 

$

58,613 

Cost of sales

11,938 

16,584 

Gross profit

36,386 

42,029 

Selling, general, and administrative

33,683 

39,399 

Depreciation

1,741 

1,619 

Amortization

1,131 

1,170 

Loss from operations

(169)

(159)

Interest income

24 

5 

Interest expense

(568)

(606)

Loss before income taxes

(713)

(760)

Income tax benefit (provision)

(179)

216 

Net loss

$

(892)

$

(544)

Net loss per share:

Basic and diluted

$

(0.06)

$

(0.04)

Weighted average number of common shares:

Basic and diluted

13,977 

13,982 

COMPREHENSIVE LOSS

Net loss

$

(892)

$

(544)

Foreign currency translation adjustments,

net of income tax benefit

of $0 and $0

307 

(37)

Comprehensive loss

$

(585)

$

(581)

See notes to condensed consolidated financial statements

3


 

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Quarter Ended

November 30,

November 30,

2020

2019

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$

(892)

$

(544)

Adjustments to reconcile net loss to net cash

provided by operating activities:

Depreciation and amortization

2,872 

2,789 

Amortization of capitalized curriculum costs

889 

1,029 

Stock-based compensation

1,158 

1,851 

Deferred income taxes

(111)

(115)

Change in fair value of contingent consideration liabilities

62 

91 

Amortization of right-of-use operating lease assets

259 

-

Loss on disposal of assets

-

35 

Changes in assets and liabilities, net of effect of acquired business:

Decrease in accounts receivable, net

13,482 

20,090 

Decrease in inventories

309 

328 

Decrease (increase) in prepaid expenses and other assets

(176)

656 

Decrease in accounts payable and accrued liabilities

(2,721)

(9,333)

Decrease in deferred revenue

(3,625)

(9,006)

Increase (decrease) in income taxes payable/receivable

(111)

(1,029)

Decrease in other long-term liabilities

(519)

(6)

Net cash provided by operating activities

10,876 

6,836 

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property and equipment

(185)

(1,408)

Curriculum development costs

(263)

(458)

Purchase of note receivable from bank

-

(2,600)

Net cash used for investing activities

(448)

(4,466)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from term notes payable

-

5,000 

Principal payments on term notes payable

(1,250)

(1,250)

Principal payments on financing obligation

(628)

(564)

Purchases of common stock for treasury

(1,530)

(3)

Payment of contingent consideration liabilities

(329)

(782)

Proceeds from sales of common stock held in treasury

256 

254 

Net cash provided by (used for) financing activities

(3,481)

2,655 

Effect of foreign currency exchange rates on cash and cash equivalents

176 

37 

Net increase in cash and cash equivalents

7,123 

5,062 

Cash and cash equivalents at the beginning of the period

27,137 

27,699 

Cash and cash equivalents at the end of the period

$

34,260 

$

32,761 

Supplemental disclosure of cash flow information:

Cash paid for income taxes

$

403 

$

932 

Cash paid for interest

562 

580 

Non-cash investing and financing activities:

Purchases of property and equipment financed by accounts payable

$

20 

$

249 

Acquisition of right-of-use operating lease assets for operating lease liabilities

726 

-

Use of notes receivable to modify revenue contract

-

3,246 

See notes to condensed consolidated financial statements

4


 

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands and unaudited)

Accumulated

Common

Common

Additional

Other

Treasury

Treasury

Stock

Stock

Paid-In

Retained

Comprehensive

Stock

Stock

Shares

Amount

Capital

Earnings

Income

Shares

Amount

Balance at August 31, 2020

27,056 

$

1,353 

$

211,920 

$

49,968 

$

641 

(13,175)

$

(204,429)

Issuance of common stock from

treasury

(3,411)

236 

3,668 

Purchase of treasury shares

(89)

(1,530)

Stock-based compensation

1,158 

Cumulative translation

adjustments

307 

Net loss

(892)

Balance at November 30, 2020

27,056 

$

1,353 

$

209,667 

$

49,076 

$

948 

(13,028)

$

(202,291)

FRANKLIN COVEY CO.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY –

PRIOR FISCAL YEAR

(in thousands and unaudited)

Accumulated

Common

Common

Additional

Other

Treasury

Treasury

Stock

Stock

Paid-In

Retained

Comprehensive

Stock

Stock

Shares

Amount

Capital

Earnings

Income

Shares

Amount

Balance at August 31, 2019

27,056 

$

1,353 

$

215,964 

$

59,403 

$

269 

(13,087)

$

(194,975)

Issuance of common stock from

treasury

131 

9 

123 

Purchases of common shares

for treasury

(3)

Stock-based compensation

1,851 

Cumulative translation

adjustments

(37)

Net loss

(544)

Balance at November 30, 2019

27,056 

$

1,353 

$

217,946 

$

58,859 

$

232 

(13,078)

$

(194,855)

See notes to condensed consolidated financial statements

5


 

FRANKLIN COVEY CO.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – BASIS OF PRESENTATION

General

Franklin Covey Co. (hereafter referred to as us, we, our, or the Company) is a global company focused on organizational performance improvement. Our mission is to “enable greatness in people and organizations everywhere,” and our global structure is designed to help individuals and organizations achieve sustained superior performance through changes in human behavior. We are fundamentally a content and solutions company, and we believe that our offerings and services create the connection between capabilities and results. We have a wide range of content delivery options, including: the All Access Pass (AAP), 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. 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.

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, 2020.

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.

The results of operations for the quarter ended November 30, 2020 are not necessarily indicative of results expected for the entire fiscal year ending August 31, 2021, or for any future periods.

Note on the COVID-19 Pandemic

With the rapid spread of COVID-19 around the world and the continuously evolving responses to the pandemic, we have witnessed the significant and growing negative impact of COVID-19 on the global economic and operating environment. These negative impacts significantly reduced our consolidated sales during the quarter ended November 30, 2020 as workplaces and schools were closed in response to the pandemic. In light of these events, we have taken measures to reduce our costs and to maintain adequate liquidity. However, due to the rapidly changing business and education environment, unprecedented market volatility, and other circumstances resulting from the COVID-19 pandemic, we are currently unable to fully determine the extent of COVID-19’s impact on our business in future periods. Our business in future periods will be heavily influenced by the timing, length, and intensity of the economic recoveries in the United

6


 

States and in other countries around the world. We continue to monitor evolving economic and general business conditions and the actual and potential impacts on our financial position, results of operations, and cash flows.

Accounting Pronouncements Issued and Adopted

Credit Losses on Financial Instruments

On September 1, 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Topic 326). This new standard is intended to improve financial reporting by requiring more timely recognition of credit losses on our trade accounts receivable and requires the measurement of all expected credit losses based on historical experience, current economic conditions, and reasonable and supportable forecasts. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and disclosures. For further information on our receivables, refer to Note 3, Receivables.

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement

On September 1, 2020, we adopted ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). This guidance clarifies the accounting for implementation costs in a cloud computing arrangement that is a service contract and aligns the requirements for capitalizing those costs with the capitalization requirements for costs incurred to develop or obtain internal-use software. The Company adopted ASU 2018-15 on a prospective basis and the adoption of this new standard did not have a material impact on our condensed consolidated financial statements or disclosures.

Accounting Pronouncements Issued Not Yet Adopted

In December 2019, the Financial Accounting Standards Board issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The guidance in ASU 2019-12 is effective for fiscal years beginning after December 15, 2021, although early adoption is permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impact of the provisions of ASU 2019-12 on our consolidated financial statements.

NOTE 2 – INVENTORIES

Inventories are stated at the lower of cost or net realizable value, cost being determined using the first-in, first-out method, and were comprised of the following (in thousands):

November 30,

August 31,

2020

2020

Finished goods

$

2,647 

$

2,947 

Raw materials

28 

27 

$

2,675 

$

2,974 

NOTE 3 – RECEIVABLES

Our trade accounts receivables are recorded at net realizable value, which includes an allowance for estimated credit losses as described in Note 1, Basis of Presentation. Under the guidance found in ASC Topic 326, the “expected credit loss” model replaces the previous “incurred loss” model and requires consideration of a broader range of information to estimate expected credit losses over the lives of our trade accounts receivable. Our prior methodology for estimating credit losses on our trade accounts receivable did not differ significantly from the new requirements of Topic 326.

7


 

We maintain an allowance for credit losses related to our trade accounts receivable for future expected credit losses resulting from the inability or unwillingness of our customers to make required payments. We estimate the allowance based upon historical bad debts, current customer receivable balances, age of customer receivable balances and the customers’ financial condition in relation to a representative pool of assets consisting of customers with similar risk characteristics. The allowance is adjusted as appropriate to reflect differences in current conditions as well as changes in forecasted macroeconomic conditions. Receivables that do not share risk characteristics are evaluated on an individual basis, including those associated with customers that have a higher probability of default. Our estimate of credit losses includes expected current and future economic and market conditions surrounding the COVID-19 pandemic, which did not significantly impact our allowance. We do not have a significant amount of notes or other receivables.

The following provides a reconciliation of the activity in our allowance for estimated credit losses during the quarter ended November 30, 2020 (in thousands):