FC 10-K & 10-Q changes, risk factors and insider trading

Our industry and business environment, domestic and international economic conditions, governmental actions, geopolitical circumstances, changinginternational socialrelationships, standards,cybersecurity cybersecurity,threats, and other specific risks may affect our future business decisions and financial performance. The matters discussed below may cause our future results to differ from past results or those described in forward-looking statements and could have a material effect on our business, financial condition, liquidity, results of operations, and stock price, and should be considered in evaluating Franklin Covey Co.

The risks included here are not exhaustive. Other sections of this report may include additional risk factors which could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing industry and global environment. New risk factors emerge from time to time and it is not possible for 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 factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Further, the disclosure of risks identified below does not imply that the risk has already materialized.

The training and consulting services industry is intensely competitive with relatively easy entry. Competitors continually introduce new programs, services, and delivery methods that may compete directly with our offerings, or that may make our offerings uncompetitive or obsolete. Larger competitors may have superior abilities to compete for clients and skilled professionals, reducing our ability to deliver quality work to our clients. Some of our competitors may have greater financial and other resources than we do. In addition, one or more of our competitors may develop and implement training courses or methodologies that may adversely affect our ability to sell our offerings and products to new clients. Any one of these circumstances could have an adverse effect on our ability to obtain new businessbusiness, keep existing clients, and successfully deliver our services.

A large portion of our success depends on our ability to generate renewals of our subscription-based offerings, which primarily consist of the AAP and the Leader in Me membership, and produce new sales of our offerings and products to both new and existing clients. Currently, the majority of our revenue is generated from subscription-based offerings and related materials sales. Generating new sales of our subscription-based offerings and products, both to new and existing clients, is a challenging, costly, and often time-consuming process. If we are unable to generate new sales, due to competitioncompetition, economic uncertainty, or other factors, our revenues will be adversely affected.

Our financial success is partially dependent on our ability to protect our proprietary offerings and other intellectual property. The existing laws of some countries in which we provide services might offer only limited protection of our intellectual property rights. To protect our intellectual property, we rely upon a combination of confidentiality policies, nondisclosure and other contractual arrangements, as well as copyright and trademark laws. In addition, the rapid growth and utilization of artificial intelligence (AI) may infringe on our trademarked and copyrighted materials. The steps we take into thisprotect regardour intellectual property may not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we might not be able to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights, especially in foreign jurisdictions.rights.

Schools in the United States benefit from governmental funding initiatives, such as the Elementary and Secondary School Emergency Relief (ESSER) program, which provide additional funding for schools to pursue improvement programs such as our Leader in Me offering. In addition, we partner with charitable organizations to fund the Leader in Me programs in many schools across the country. Supported by numerous studies and endorsements, we believe the Leader in Me program provides meaningful and measurable improvement to the academic environment of schools, which enable the educational institutions to utilize governmental funding and attract additional support from charitable organizations to implement our Leader in Me offering. If governmental funding for school improvement expires or is reduced, or charitable organizations decide not to continue to support the Leader in Me programs in schools, our results of operations, cash flows, and financial position may be adversely impacted.

Our future success will depend, in part, on the continued service of key executive officers and personnel. The loss of the services of any key individuals could harm our business. Our future success also depends on our ability to identify, attract, and retain additional qualified senior personnel. Competition for such individuals in the current labor market and in our industry is intense, and we may not be successful in attracting and retaining such personnel.

If a governmental client discovers improper activities in the course of audits or investigations, then we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions, or debarment from doing business with other agencies of that government.

LegalGlobal legal requirements relating to the collection, storage, handling, and transferprocessing of personal data continue to proliferate and evolve. The violation of these laws can result in significant penalties. For example, under the privacy law in Maythe 2018EU and UK, the General Data Protection Regulation (GDPR) became effective in the European Union (EU) and other countries within the European Economic Area. The GDPR imposes strict requirements on the collection, use, security, and transfer of personal data in and from applicable countries. Under GDPR,, fines of up to 20 million Euros or up to 4% of the annual global revenues of the infringer, whichever is greater, could be imposed. AlthoughIn GDPRaddition, appliesover acrosstwenty theU.S. European Economic Area, local data protection authorities stillstates have theenacted abilitygeneral to interpret GDPR, and in some areas to legislate requirements even more stringent than those in the GDPR, which occasionally creates inconsistencies in application on a country-by-country basis. Furthermore, with the United Kingdom’s (UK) transition out of the EU as of January 1, 2021, we may encounter additional complexity with respect toconsumer data privacy andlaws datasince transfers to and from the UK under the UK GDPR. Other countries, such as Brazil, Australia, Canada, Japan, and South Africa, have also enacted data protection laws, some of which are analogous to GDPR and others which have different and additional requirements, which may include data localization.2018. We have implemented policies, controls, and procedures, including a team dedicated to data protection, to comply with the requirements of GDPR/UKthese GDPRnew and analogousprivacy laws. However, these new procedures and controls may not be completely effective in preventing breaches or unauthorized processing of personal data. In addition, aswe continue to see jurisdictions around the world make new laws inas certainthey countriesrevise areand fairlyenforce new,their there may not always be sufficient guidance from the applicable regulators, or case law interpreting theprivacy laws. Accordingly, we will need to continue evolving our compliance measures over time, and there is some risk that common interpretations of the requirements in such laws may not necessarily align with opinions of applicable regulators or potential litigants, such that the risk of fines and litigation may be increased in countries with newer laws.

DueIn toaddition, thesome invalidationprivacy oflaws, theparticularly PrivacyGDPR, Shieldimpose and the current and likely future additional challenges to the DPF, we will continue to utilize the newer Standard Contractual Clauses (SCCs), adopted by the European Commissionrestrictions on Junecross-border 4, 2021, as a GDPR-compliant mechanism for the transfertransfers of personal data from the EU, UK and Switzerland to the U.S.,United inStates. additionCurrent toregulatory theguidance DPF.regarding Thethose newtransfers SCCsimposes imposedheightened additionalprivacy obligations relating to data transfers,obligations, including the obligation to conduct a transfer impact assessment and, depending on a party’s role in the transfer and the laws and practices of the destination country, to implement additional security measures, and to update internal privacy practices. RegulatoryPrivacy guidanceadvocates suggestsin thatthe certainEU and UK have filed lawsuits seeking to impose even more stringent restrictions on cross-border transfers due to concerns about the ability of the U.S. government to compel recipients in the U.S. to provide personal data tofor thenational U.S.intelligence and law enforcement purposes. If successful, these measures could be compliant only if the recipient is able to implement specific technical and procedural security controls to protect that personal data, and such controls may not be practical for certain service delivery models, in particular those reliant on cloud services. To the extent we rely on the SCCs for data transfers, we may be required to incur significant time and resources to updateimpair our contractual arrangements and implement the supplementary security measures necessary to comply with new requirements. Compliance may also require changes in services, business practices, or internal systems that may result in increased costs, lower revenue, reduced efficiency, or greater difficulty in competing with foreign-based firms. Failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged noncompliant activity. The inabilityability to import personal data from Europe to the United States or other countries and may thereby decrease demand for our products and services as our customers that are subject to such laws may seek alternatives that do not involve personal data transfers out of Europe.Europe or the UK. In addition, we are subject to regulations in China relating to the collection, use, transfer, security, and other processing of personal information in or from China. Our inability to transfer personal data to the United States and other countries may decrease the functionality or effectiveness of our products and services, increase costs, and adversely impact our marketing efforts, plans, and activities.

WeOur striveefforts to employeffectively global best practices in securingsecure and monitoringmonitor code, applications, systems, processes, and data, and ourother data protection practices are regularly reviewed and validated by an external auditing firm. However, no information security program is perfect, and these efforts may be insufficient to protect sensitive information against illegal activities. We are exposed to additional risks and liabilities from the various data protection laws enacted within the jurisdictions where we operate, as well as a risk of litigation in jurisdictions where there is a private right of action related to violations.

Our use of artificial intelligenceAI technologies may not be successful and may present business, compliance, and reputational risks.

We are working to integrate artificial intelligence (AI) technologies in some of our productsofferings and processes. If we fail to keep pace with rapidly evolving AI technological developments, our competitive position and business results may be negatively impacted. Our use of AI technologies will require resources to develop, test, and maintain such products, which could be costly. Third parties may be able to use AI to create technology that could reduce demand for our products. In addition, the introduction of AI technologies, particularly generative AI, into new or existing offerings may result in new or expanded risks and liabilities, due to enhanced governmental or regulatory scrutiny, litigation, compliance issues, ethical concerns, confidentiality, data privacy or security risks, as well as other factors that could adversely affect our business, reputation, and financial results. For example, the use of AI technologies could lead to unintended consequences, such as accuracy issues, cybersecurity risks, unintended biases, and discriminatory outputs, which could impact our ability to protect our data, intellectual property, and client information, or could expose us to intellectual property infringement claims.

We may need to raise additional funds through public or private debt offerings or equity financingsfinancing in order to:

Take advantage of opportunities, including business acquisitions Respond to competitive pressures 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 facility and other financing alternatives, if necessary, for these expenditures. We obtained a new credit agreement in March 2023 (the 2023 Credit Agreement) with a new lender that expires in March 2028. We expect to regularly renew or amend our lending agreement in the future to maintain the availability 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.

Our ability to make scheduled payments on or to refinance our indebtedness depends on our future performance, including the performance of our subsidiaries, which will be affected by financial, business and economic conditions, competition, and other factors. We are unable to control many of these factors, such as the general economy, economic conditions in the industries in which we operate, and competitive pressures. Our cash flowsflow may be insufficient to allow us to pay principal and interest on our indebtedness and to meet our other obligations. If our cash flows and capital resources are insufficient to fund our debt service obligations, then we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may be unsuccessful, and we may not meet our scheduled debt service obligations. In addition, the terms of existing or future debt agreements, including our 2023 Credit Agreement and subsequent modifications, may restrict us from pursuing any of these alternatives.

In the event that we need to refinance all or a portion of our outstanding indebtedness before maturity or as it matures, we may not be able to obtain terms as favorable as the terms of our existing indebtedness or refinance our existing indebtedness at all. If interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, then we will incur higher interest expense. Furthermore, if any rating agency changes our credit rating or outlook, our debt and equity securities could be negatively affected, which could adversely affect our financial condition and financial results.

The global credit and financial markets have from time to time experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. The financial markets and the global economy may also be adversely affected by various factors, including the current or anticipated impact of military conflict, including the conflict between Russia and Ukraine, terrorism, or other geopolitical events.events, such as war, natural or environmental disasters, international economic instability, public health emergencies, market uncertainty, debt crises and downgrades, embargoes, tariffs, sanctions and other trade barriers, and other governmental trade or market control programs. Sanctions imposed by the United States and other countries in response to such conflicts, including the one in Ukraine, may also adversely impact the financial markets and the global economy, and any economic countermeasures by the affected countries or others could exacerbate market and economic instability. There can be no assurance that a deterioration in markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment, long-term government shut down, or continued unpredictable and unstable market conditions.

In recent years, inflation has increased significantly in the United States and in many of the countries where we conduct business. Inflation increases the cost of many aspects of our business, including the cost of our products and materials sold, benefit costs, travel expenses, and associate salaries since we must increase our compensation to retain key personnel. If we are unable to increase our prices to sufficiently offset the increased costs of doing business, our results of operations and profitability may be adversely impacted.

We have directly owned offices that serve clients in Austria, Australia, China, France, Germany, Ireland, Japan, New Zealand, Switzerland, and the United Kingdom. We also have licensed operations in numerous other foreign countries. As a result of these foreign operations and their impact upon our financial statements, we are subject to a number of risks, including, but not limited to:

Operating in China exposes us to political, legal, and economic risks. In particular, the political, legal, and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in U.S. and Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, intellectual property, currency controls, network security, employee benefits, and other matters. In addition, we or third parties with whom we contract, may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In other cases, we may be forced to expendspend a significant amount of resources to obtain the requisite legal permits or otherwise be required to forfeit such permits. Moreover, the Chinese government may impose additional regulations regarding our business. The government may regulate or apply a substantially different set of requirements to our business than anticipated, in which case we may need to invest a significant amount of resources and time before we can operate in the country. Any of these events may materially and adversely affect our business, financial condition, and results of operations. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs, and duties in China. Furthermore, third parties that we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. If any of these events occur, our business, financial condition, and results of operations could be materially and adversely affected.

Extreme weather conditions in the areas in which our suppliers, customers, distribution facilities, offices, and headquarters are located could adversely affect our operating results and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, wildfires, and tsunamis, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages and public health issues, have in the past temporarily disrupted, and could in the future disrupt, our operations, the operations of our customers, vendors, and suppliers or have in the past resulted in, and in the future could result in, economic instability that may negatively impact our operating results and financial condition. In particular, if a natural disaster or severe weather event were to occur in an area in which we or our suppliers, customers, distribution facilities, and vendors are located, our continued success would depend, in part, on the safety and availability of the relevant personnel and facilities and proper functioning of our or third parties’ computer, network, telecommunication, and other systems and operations. If we were to experience a local or regional disaster or other business continuity event or concurrent events, then we could experience operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel. Further, if we are unable to find alternative suppliers, replace capacity at key distribution locations, or quickly repair damage to our information technology systems, our ability to serve our customers could be adversely affected. These events could result in reputational damage, lost sales, cancellation charges, or markdowns, all of which could have an adverse effect on our business, results of operations, and financial condition.

Further, climate change may increase both the frequency and severity of extreme weather conditions and natural disasters, which may affect our business operations, either in a particular region or globally, as well as the activities of our vendors, suppliers, and customers. For example, the delivery of our services is dependent on reliable and relatively inexpensive electricity. If electricity is not readily available or affordable, we may not be able to deliver our products and services and therefore our operating results may be adversely impacted. In addition, the physical changes prompted by climate change could result in changes in regulations or consumer preferences, which could in turn affect our business, operating results, and financial condition.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (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, FranklinCovey, 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 and the Risk Factors discussed in Item 1A of this Annual Report on 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 Annual Report on Form 10-K.

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, income taxes, intangible asset amortization, depreciation, stock-based compensation expense, and certain other items such as restructuring costscharges and impairedbuilding assetexit charges.costs. 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 periodsperiods, 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 netincome income,before income taxes, a related GAAP measure, please refer to Note 1617 Segment Information to our consolidated financial statements as presented in Item 8 of this Annual Report on Form 10-K.

2.Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including: the All Access Pass and Leader in Me membership subscriptions, coaching and consulting, organization-wide transformational processes, intellectual property licenses, digital online learning, on-site training, training led through certified facilitators, and blended learning, and organization-wide transformational processes, including consulting and coaching.learning. We believe our expert delivery consultants combined with 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.

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 that serve clients in Australia, Austria, China, France, Germany, Ireland, Japan, New Zealand, China,Switzerland, Japan,and the United Kingdom, Ireland, Germany, Switzerland, and AustriaKingdom; and we contract with independent licensee partners who deliver our content and provide services in approximately 150 countries and territories around the world. Our capabilities allow us to serve a wide range of clients from small locally owned entities to large multinational enterprises.

We believe the pursuit of these strategic priorities will enable us to make more progress toward our mission of enabling greatness in both people and organizations and our vision to impact billions. In addition, we believe that successful implementation of these objectives will provide our associates with additional resources and opportunities for growth and impact in the future and will drive results that willare expected to provide return to our shareholders.

Other key factors that influence our operating results include: the number of organizations that are active customers; the scale and duration of our engagements with them; the number of people trainedengaged in our solution implementations within those organizations; the continuation or renewal of existing services contracts, especially subscription renewals; the availability of budgeted training spending atin our solution areas among 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.

For the fiscal year ended August 31, 2024,2025, Education Division revenue increased 5% to $73.5$74.6 million compared with $69.7$74.2 million in fiscalthe 2023.prior Educationyear. DivisionFiscal 2025 revenue growth for the year was drivenprimarily attributable to increased coaching and consulting revenue and increased membership subscription revenue, which were partially offset by increaseddecreased revenuessales fromof classroom and training materials, membershipprimarily subscriptions,due to a new state-wide initiative and coachingdistrict andcontracts consulting.that included large training materials orders in fiscal 2024. Delivery of training and coaching days remained strong during fiscal 2024,2025 as the Education Division delivered nearlya 400similar morenumber of training and coaching days thanwhen compared with fiscal 2024. Education subscription and subscription services revenues in fiscal 2025 increased 4% compared with the prior year.year Inand fiscalEducation 2024,deferred subscription revenue at August 31, 2025, increased 13% over the Education Division added 728 new Leader in Me schools in the United States and Canada. Year-over-year Leader in Me school retention remained high during fiscal 2024balance at approximatelyAugust 84%.31, 2024.

At August 31, 2024,2025, we had $107.9$111.7 million of deferred subscription revenue compared with $99.0$107.9 million at August 31, 2023.2024. Our deferred subscription revenue noted above at August 31, 20242025 and August 31, 20232024 includes $6.7$5.1 million and $3.7$6.7 million, respectively, of deferred subscription revenue that was classified as long-term based on expected recognition. Our unbilled deferred revenue at August 31, 20242025 was $75.2$72.8 million compared with $87.4$75.2 million at the end of fiscal 2023.2024. Unbilled deferred revenue represents business that is contracted, but unbilled and therefore excluded from our balance sheet.

Gross profit consists of net revenue less the cost of services provided or the cost of goods sold. Our cost of revenue 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; manufacturingamortization laborof previously capitalized curriculum development 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. Our consolidated cost of revenue in fiscal 20242025 totaled $66.2$63.5 million compared with $67.0$66.2 million in fiscal 2023.2024. Consolidated gross profit for the fiscal year ended August 31, 20242025 increasedwas $7.6$203.6 million to $221.1 million, compared with $213.5$221.1 million in fiscalthe 2023,prior year and increaseddecreased primarily due to higherlower revenue as described above. Our gross margin for fiscal 2025 decreased slightly to 76.2% compared with 77.0% in fiscal 2024 remainedprimarily strong and increaseddue to 77.0% compared with 76.1%changes in the priormix of services and products sold during the year.

Our effective income tax rate for fiscal 20242025 was approximately 29%49% compared with an effective income tax rate of approximately 31%29% in fiscal 2023.2024. Our effective tax rate for fiscal 20242025 was higher than the statutory tax rate primarily due to an increase in the valuation allowance against our deferred income tax assets in some foreign jurisdictions and non-deductible executive compensation, which were partially offset by the tax differential on foreign income. Our effective rate in fiscal 2024 was higher than statutory rates primarily due to non-deductible executive compensation and an increase in the valuation allowance against our deferred income tax assets,assets in some foreign jurisdictions, which were partially offset by benefits for share-based compensation deductions in excess of the corresponding book expense and the tax differential on income subject to both U.S. and foreign taxes. Our effective rate in fiscal 2023 was higher than statutory rates primarily due to tax expense from non-deductible executive compensation.

Net income for the year ended August 31, 20242025 was $3.1 million, or $0.24 per diluted share, compared with $23.4 million, or $1.74 per diluted share, compared with $17.8 million, or $1.24 per diluted share, forin fiscal 2023.2024. Our Adjusted EBITDA forin fiscal 20242025 increasedwas 15% to $55.3$28.8 million compared with $48.1$55.3 million in thefiscal prior year,2024, reflecting the above-noted factors. In constant currency, our fiscal 2025 Adjusted EBITDA for fiscal 2024 was $55.8$29.0 million. Adjusted EBITDA and constant currency Adjusted EBITDA are non-GAAP financial measures. For additional information regarding our use of non-GAAP financial measures, see the discussion under the heading Non-GAAP Measures above.

Our liquidity, financial position, and capital resources remained strong throughout fiscal 2024.2025. At August 31, 2024,2025, we had $48.7$31.7 million of cash, with no borrowings on our $62.5 million revolving credit facility, even after spending $30.7$26.4 million on purchases of our common stock and $15.8 million on capital assets during fiscal 2024.2025. At August 31, 20232024 we had $38.2$48.7 million of cash, and no borrowings on our revolving credit facility. Cash flows from operating activities remained strong and increased 69% to $60.3 million in fiscal 2024 compared with $35.7 million in fiscal 2023. 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.

The following table sets forth, for the fiscal years indicated, the percentage of total sales represented by the line items through income before income taxes in our consolidated income statements. 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).statements.

DirectNorth OfficesAmerica Segment

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

Gross Profit. Gross profit increasedwas primarilyimpacted dueby tolower sales performancerevenue as previouslydescribed described.above. DirectNorth OfficeAmerica gross margin remained strong during fiscal 2025 and increasedwas to 82.2%83.1% of salesrevenue compared with 80.9%83.5% in the prior year. Our Direct Office gross margin improved primarily due to the mix of services and products sold to clients compared with the prior year.

SG&A Expense. DirectNorth OfficeAmerica SG&A expenseexpenses decreasedincreased primarily due to reduced associate costs resulting from decreasednew headcountsales comparedand withsales support personnel primarily related to our new go-to-market strategy and the priorreorganization year.of our North America sales force in fiscal 2025.

Sales.Revenue. International licensee revenue is primarily comprised of royalties on sales of our content by the licensees. In fiscal 2024,2025, our internationalInternational licensees’Licensees’ revenue decreased by 4%, or $0.4 million, which was primarily due to a $0.3 million decrease in royalty revenues and a $0.1 million decreasedecreases in our share of AAP revenue.revenue Licenseeand a 2% decrease in royalty revenuerevenue. declinedThroughout primarilyfiscal due2025, toour economicforeign challengeslicensees have encountered ongoing macroeconomic uncertainty and geopolitical instability in many of the countriesregions inwhere they operate, which ourhave licenseesadversely operateimpacted and staffing issues at some of the licenseetheir operations. While we remain optimistic that our licensees’ sales and our corresponding royalty revenues will grow in future periods, difficult macroeconomic conditions, such as slowing economic growth and regional conflicts may negatively impact our licensees’ operations and reduce growth compared with our expectations. Foreign exchange rates had aan $0.2 million adverseimmaterial impact on internationalInternational licenseeLicensee revenues and operating results during fiscal 2024.2025.

SG&A Expense. International licensee SG&A expenses decreased by $0.3$0.1 million compared with fiscalthe 2023prior year primarily due to reducedcost variable compensation on lower revenue and operating results, andcutting efforts to reduce operating expenses in the international licensee segment that were initiatedimplemented during fiscal 2024.2025 in response to decreased revenue.

Gross Profit. Education Division gross profit increased primarily due to increased revenue as previously described. Education segment gross margin remained strong and increasedwas to 64.1% compared with 63.7%64.0% in theeach priorof yearfiscal 2025 and improved primarily due to increased margin on materials sold, decreased product amortization costs, and improved Symposium event margins during fiscal 2024.

Depreciation – Depreciation expense decreasedincreased $0.4$0.2 million to $4.1 million compared with $3.9 million in the prior yearyear. The increase was primarily due to thenew full depreciation of certaincapital assets duringpurchased thein fiscal year.2025. We currently expect depreciation expense will total approximately $3.5$4.5 million in fiscal 2025.2026.

Amortization – Amortization expense decreasedincreased $0.1to $4.4 million compared with $4.2 million in fiscal 20232024. The increase was primarily due to the full amortizationreacquisition of certainlicense intangiblerights assetsfor fromour previousFrance businessoperations, acquisitions.which occurred in the first quarter of fiscal 2025. We currently expect definite-lived intangible asset amortization expense will total $4.2approximately $3 million during fiscal 2025.2026.

Interest Expense – Our interest expenseexpense, forwhich totaled $0.6 million in fiscal 20242025, decreased $0.5 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.

Our income tax provision fiscal 2025 totaled $3.0 million on pre-tax income of $6.1 million for an effective income tax rate of 49% compared with income tax expense of $9.6 million on pre-tax income of $33.0 million for an effective tax rate of approximately 29% for the fiscal year ended August 31, 20242024. wasOur approximately 29%, compared with aneffective income tax expenserate for fiscal 2025 was higher than the statutory tax rate primarily due to tax expense of approximately$1.5 31%million for increases to the valuation allowance against deferred tax assets in fiscalsome 2023.foreign jurisdictions and $0.9 million related to non-deductible executive compensation, which were partially offset by a $0.5 million benefit in tax differential on foreign income. Our effective income tax rate for fiscal 2024 was higher than the statutory tax rate primarily due to tax expense of $3.2 million for non-deductible executive compensation and a $1.2 million increase in the valuation allowance against our deferred income tax assets, which were partially offset by a $2.6 million benefit for share-based compensation deductions in excess of the corresponding book expense and a $0.5 million benefit in tax differential on income subject to both U.S. and foreign taxes. Our effective income tax rate for fiscal 2023 was higher than the statutory tax rate primarily due to tax expense of $0.9 million for non-deductible executive compensation and $0.4 million in tax differential on income subject to both U.S. and foreign taxes, which were partially offset by a $0.4 million decrease in the valuation allowance against our deferred income tax assets.

We paid $4.2$7.7 million in cash for income taxes during fiscal 2024. As of August 31, 2024, we have utilized all of our foreign tax credit forwards and nearly all of our net operating loss carryforwards.2025. We anticipate our total cash paid for income taxes over the coming years to approximate our total income tax provision.

Our cash at August 31, 20242025 totaled $48.7$31.7 million, with no borrowings on our $62.5 million revolving credit facility. Of our $48.7$31.7 million of cash at August 31, 2024,2025, $13.9$12.2 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, working capital expansion, capital expenditures (including curriculum development), working capital expansion, debt payments, business acquisitions, and contingent payments from previouspotential business acquisitions.

On March 27, 2023, we entered into a new credit agreement (the 2023 Credit Agreement) with KeyBank National Association (KeyBank) leading a group of financial institutions (collectively, the Lenders), which replaced our previous credit agreement with JPMorgan Chase Bank, N.A. (the 2019 Credit Agreement).agreement. The 2023 Credit Agreement provides up to $70.0 million in total credit, of which $7.5 million was used to replace the outstanding term loan balance from the 2019previous Creditcredit Agreement.agreement. The remaining $62.5 million is available as a revolving line of credit or for future term loans. Principal payments on the term loans consisted of quarterly payments totaling $1.25 million that were due and payable on the last business day of each March, June, September, and December until the term loan obligation was repaid in the fourth quarter of fiscal 2024. We believe the 2023 Credit Agreement provides significant flexibility and financial resources to allow us to grow the business in future periods.

The 2023 Credit Agreement matures on March 27, 2028, and interest on term loan borrowings under the 2023 Credit Agreement was due and payable when the term loan principal payments were due and payable. Interest on all other borrowings is due and payable on the last day of each month. The interest rate for borrowings on the 2023 Credit Agreement is based on the Secured Overnight Financing Rate (SOFR) and is a tiered structure that varies according to the Leverage Ratio as defined 2023 Credit Agreement (refer to Note 5, Secured Credit Agreement to our consolidated financial statements for the interest rate structure).

At August 31, 20242025 our debt structure was relatively simple and consisted of notes payable to the former owners of Strive Talent, Inc., and a long-term lease on our corporate campus that is accountedobligations for asleased aoffice financingand obligation.warehousing space. For further information on our notes payable 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.

Refer to Part I, Item 1A, Risk Factors, of our Annual Report for a detailed description of our significant risk factors. Other than the risk factor disclosed in this Item 1A below, there have been no significant changes to these risk factors during the first twothree quarters of fiscal 2026.

For Franklin Covey, fiscal 2025 was a year of transition and transformation as we initiated a new go-to-market and sales strategy in North America. In addition, our fiscal 2025 results of operations were adversely impacted by various macroeconomic factors, including reduced U.S. federal government spending and geopolitical tensions that produced instability in certain regions of the world. This resulted in a reduction of invoiced amounts and net revenue for fiscal 2025, which will continue to impact fiscal 2026 as we recognize a lower base of previously deferred revenue. Despite these headwinds, we have retained the vast majority of our client base and now with the bulk of our revenue-generating transformation investments nearly completed, we believe these efforts are beginning to produce growth in invoiced amounts the first half ofin fiscal 2026. We view fiscal 2026 to be a year of executionexecution, andgenerating asolid returngrowth toof growth,invoiced amounts in Enterprise North America, and believe fiscal 2027 will continue the momentum and provide acceleratingincreased andreported compoundingrevenue, growthAdjusted EBITDA, and cash flow. We believe the transformative investments made in our Enterprise North America go-to-market strategy plus our continued investments in content and technology position us for meaningful growth in the future.

During the secondthird quarter of fiscal 2026, we continued to be encouraged by strong growth in Enterprise North America invoiced amounts, which also saw growth in the first quarter.half of fiscal 2026. The Education Division also saw invoiced growth during the third quarter despite an unexpected budget reduction for education spending in a state which has a state-wide Leader in Me initiative. We believe invoiced amounts are a primary lead metric that demonstrates the positive momentum building from our go-to-market investments and which we expect to continue in the second half of fiscal 2026.investments. In the secondthird quarter of fiscal 2026, we were able to translate this operational momentum into improvedincreased cash flowsrevenue and increased Adjusted EBITDA compared with the prior year.

Our consolidated revenue for the quarter ended FebruaryMay 28,31, 2026, wasincreased essentially1% flatto $67.8 million compared with $67.1 million in the secondprior quarter of fiscal 2025 at $59.6 million,year, and reflected increased invoiced amounts and increased subscription revenue. Revenue growth in the impactthird ofquarter fiscalwas 2025partially conditionsoffset asby previouslya described.$0.5 million decrease in sublease revenue following the exit from our previous headquarters campus. Foreign exchange rates had a $0.7$0.3 million favorable impact on our consolidated revenues and aan $0.2 million favorableinsignificant impact on operating results and Adjusted EBITDA in the secondthird quarter of fiscal 2026. The Company’s revenue performance for the quarter ended FebruaryMay 28,31, 2026, included the following key metrics:

Enterprise Division revenues for the secondthird quarter of fiscal 2026 totaledincreased $41.62% to $48.1 million compared with $43.6$47.3 million in thefiscal second quarter of the prior year.2025. Enterprise Division revenue performance wasbenefitted impacted byfrom a $2.0$1.0 million decreaseincrease in North America segment revenuesrevenues, andwhich awere $0.1partially millionoffset increaseby indecreased International segment revenues.revenues in the quarter. Revenue performance in our North America segment was adverselyfavorably impacted by increased invoiced amounts in the first half of fiscal 2026, but growth was still muted by the effects of canceled government contracts, ongoing geopolitical tensions, and other macroeconomic difficulties, which hamperedsignificantly subscriptionlowered revenueinvoiced growthamounts in fiscal 2025 and whichcontinues nowto flowimpact throughrevenue in fiscal 2026 as we recognize previously deferred revenue.amounts. Despite theseongoing difficultuncertainties conditions,and difficulties in the macroeconomic environment, we were encouraged by continued growth in invoiced amounts in the North America segment in both the first and secondthree quarters of fiscal 2026, which we believe will translate to increased reported revenue in future quarters.2026.

Consolidated subscription and subscription services revenues for the secondthird quarter of fiscal 2026 increasedtotaled to $50.9$57.5 million compared with $49.5$57.7 million in the secondthird quarter of fiscal 2025. For the quarter ended FebruaryMay 28,31, 2026, subscription and contractually committed invoiced amounts increased $5.4$5.3 million, or 16%,17%, to $39.3$37.0 million compared with $33.9$31.7 million in the same period of fiscal 2025.

Consolidated deferred revenue on FebruaryMay 28,31, 2026, increased $7.1$6.7 million, or 7%, to $101.5$96.0 million compared with $94.4$89.3 million on FebruaryMay 28,31, 2025.

As of FebruaryMay 28,31, 2026, 59% of our North America AAP contracts are for at least two years, compared with 55%58% at FebruaryMay 28,31, 2025, and the percentage of contracted amounts represented by multi-year contracts was 62%60% compared with 61%62% at FebruaryMay 28,31, 2025.

Unbilled deferred revenue on FebruaryMay 28,31, 2026, increasedwas to $64.9$61.1 million compared with $64.5$62.0 million on FebruaryMay 28,31, 2025. Unbilled deferred revenue represents business that is contracted, but unbilled and therefore excluded from our balance sheet.

The following is a summary of other unaudited consolidated financial information from the secondthird quarter of fiscal 2026, which ended on FebruaryMay 28,31, 2026:

Cost of Revenue/Gross Profit – For the quarter ended FebruaryMay 28,31, 2026, our cost of revenue totaled $14.4$17.7 million compared with $13.9$15.8 million in the prior year. Gross profit in the secondthird quarter of fiscal 2026 was $45.3$50.1 million compared with $45.7$51.3 million in the prior year. The decrease in gross profit was primarily due to increased costs which led to a slight decreasedecline in our gross margin forto the second quarter of fiscal 2026, which remained strong at 75.9%73.9% of revenue compared with 76.7%76.5% in the prior year. The decrease in our gross margin was primarily due to increased amortizationcosts related to the delivery of capitalized curriculum expensetraining and coaching services, a shiftchange in the mix of services delivered and products sold during the quarter.quarter, and increased amortization of capitalized curriculum expense.

Income Taxes – Our income tax benefitprovision for the quarter ended FebruaryMay 28,31, 2026, was $0.1$1.1 million on pre-tax income of $4.2 million, for an effective tax rate of 25.9%. In the third quarter of fiscal 2025, our income tax benefit was $0.7 million on a pre-tax loss of $(2.1) million, for an effective benefit rate of 3.9%. In the second quarter of fiscal 2025, our income tax benefit was $0.3 million on a pre-tax loss of $(1.3) million, for an effective benefit rate of 20.2%.33.8%. The effective tax benefit rate for the secondthird quarter of fiscal 2026 was lower than the effective tax benefit rate infor the third quarter of the prior year primarily due to increasedthe non-deductibleimpact stockof basedcreditable compensation.foreign taxes.

Net Income (Loss) and Adjusted EBITDA – For the secondthird quarter of fiscal 2026, we realized arecognized net lossincome of $(2.0)$3.1 million, or $(0.17)$0.27 per diluted share, compared with a net loss of $(1.11.4) million, or $(0.080.11) per share, in the secondthird quarter of fiscal 2025, reflecting the factors previously discussed. Our Adjusted EBITDA for the quarter ended FebruaryMay 28,31, 2026, increased $2.0$1.0 million, or 99%,14%, to $4.1$8.3 million compared with $2.1$7.3 million in thefiscal prior year.2025. Foreign exchange rates had a $0.2$0.3 million favorable impact on our Adjusted EBITDA for the quarter ended FebruaryMay 28,31, 2026.

Liquidity and Financial Position – Our liquidity and financial position remained strong throughout the first twothree quarters of fiscal 2026. At FebruaryMay 28,31, 2026, we had over $76$74 million of available liquidity which consisted of $13.7$12.0 million of cash and our full available $62.5 million line of credit even after using $28.1 million of cash to purchase shares of our common stock for treasury during the first twothree quarters of fiscal 2026.

Further details regarding our results for the quarter and three quarters ended FebruaryMay 28,31, 2026, are provided throughout the following Management’s Discussion and Analysis.

The North America segment includes our personnel that serve clients in the United States and Canada. The following third quarter comparative information is for our North America segment in the periods indicated (in thousands):

Gross Profit. Gross profit in the International segment increased slightly infor the secondthird quarter of fiscal 2026 decreased primarily due to improvedless revenuesrevenue as previously described.described and decreased gross margin in the quarter. Gross margin for the second quarter ofended fiscalMay 202631, remained2026, strongwas at 77.3%75.8% of revenue compared with 78.2%77.1% in fiscal 2025. Gross profit for the first three quarters of fiscal 2026 also declined due to decreased revenue and lower gross margins. Gross margin for the three quarters ended May 31, 2026, remained strong, but decreased to 76.8% compared with 77.9% in the prior yearyear. andOur international segment gross margins decreased in fiscal 2026 primarily due to the mix of services delivered and products sold, and increased direct costs to deliver programs in certain direct offices and reduced high-margin licensee royalty revenue in the quarter compared with the prior year.offices.

SG&A Expenses. Third quarter fiscal 2026 International segment SG&A expenses decreased $0.5$0.7 million compared with the prior year,year. asFor wethe continuedfirst tothree implementquarters of fiscal 2026, International segment SG&A expenses decreased $2.5 million compared with fiscal 2025. Reduced SG&A expense in our International segment was driven by ongoing cost reduction and efficiency initiatives acrosswhich ourproduced internationalincreased operations.Adjusted EBITDA during fiscal 2026.

Gross Profit. For the quarter ended May 31, 2026, Education Division gross profit increaseddecreased primarily due to increased revenuecosts aswhich previouslyresulted described.in lower gross margins. Our Education segmentDivision gross margin remainedwas strong62.8% atin 61.6%the third quarter of fiscal 2026 compared with 61.9%65.6% in fiscal 2025. For the first three quarters of fiscal 2026, Education Division gross margin was 62.0% compared with 63.7% in the first three quarters of the prior year. TheOur slightfiscal decline2026 fromEducation priorDivision yeargross wasmargins primarilywere dueadversely toimpacted by increased delivery, platform, product amortization, and materials costs combined with a change in the mix of services delivered and products sold duringwhen compared with the quarter.prior year.

SG&A Expenses. For the quarter ended May 31, 2026, Education Division SG&A expenses increased primarily due to increased cost allocations from shared services and increased associate expenses from new personnel, including changes to compensation plans,plans. For the first three quarters of fiscal 2026, Education Division SG&A expenses increased primarily due to increased commissions on previously deferred revenue,revenue and increased costassociate allocationsexpenses from sharednew services.personnel.

Depreciation Expense – Our depreciation expense for the quarter ended FebruaryMay 28,31, 2026, increased $0.1$0.2 million to $1.1$1.2 million, compared with $1.0 million in the prior year,year. For the three quarters ended May 31, 2026, our depreciation expense was $3.4 million compared with $3.0 million in the first three quarters of fiscal 2025. The increase in our depreciation expense during fiscal 2026 was primarily due to assets acquired in connection with our new headquarters office. We currently anticipate that depreciation expense will total approximately $4.5 million in fiscal 2026.

Amortization Expense – ComparedOur amortization expense from definite-lived intangible assets for the quarter ended May 31, 2026, decreased $0.5 million to $0.6 million compared with the third quarter of the prior year,year. For the three quarters ended May 31, 2026, our amortization expense decreasedtotaled $0.4$2.0 million tocompared $0.7with $3.3 million in fiscal 2025. The decrease in our amortization expense was primarily due to the re-evaluation of the useful lives of content and license rights originally acquired in the merger with the Covey Leadership Center. These intangible assets continue to be some of our primary revenue and cash flow generating assets. Based on the re-evaluation of these intangible assets, we extended the useful lives of these assets by approximately 5 years. We currently anticipate our finite-lived intangible asset amortization expense will total $3.0 million in fiscal 2026.

Interest Income – Our interest income for the quarter ended May 31, 2026, decreased by $0.2 million in the second quarter of fiscal 2026 compared with the prior yearyear. For the first three quarters of fiscal 2026, our interest income decreased $0.6 million to $0.2 million. The decrease in interest income was primarily due to decreased cash and lower interest rates on those balances.balances throughout fiscal 2026.

Interest Expense – Interest expense for the secondthird quarter of fiscal 2026 of $0.1 million decreased by $0.1 million compared with the prior yearyear. For the three quarters ending May 31, 2026, our interest expense decreased $0.2 million to $0.2 million compared with the prior year. The decrease in our interest expense during fiscal 2026 was primarily due to decreased debt balances compared with the prior year as payments have been made in the normal course of business.