Barnes & Noble Education, Inc. 10-Q

Item 1: Financial Statements BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (In thousands, except per share data) (unaudited) 13 weeks ended August 1, 2020 July 27, 2019 Sales: Product sales and other $ 193,210 $ 302,227 Rental income 10,804 17,430 Total sales 204,014 319,657 Cost of sales: Product and other cost of sales 165,765 238,331 Rental cost of sales 7,387 9,669 Total cost of sales 173,152 248,000 Gross profit 30,862 71,657 Selling and administrative expenses 70,043 97,691 Depreciation and amortization expense 14,063 15,879 Impairment loss (non-cash) — 433 Restructuring and other charges 5,671 1,466 Operating loss ( 58,915 ) ( 43,812 ) Interest expense, net 2,653 2,532 Loss before income taxes ( 61,568 ) ( 46,344 ) Income tax benefit ( 14,916 ) ( 14,189 ) Net loss $ ( 46,652 ) $ ( 32,155 ) Loss per share of common stock: Basic $ ( 0.96 ) $ ( 0.68 ) Diluted $ ( 0.96 ) $ ( 0.68 ) Weighted average shares of common stock outstanding: Basic 48,411 47,582 Diluted 48,411 47,582 See accompanying notes to condensed consolidated financial statements. 3 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands, except per share data) August 1, 2020 July 27, 2019 May 2, 2020 (unaudited) (unaudited) (audited) ASSETS Current assets: Cash and cash equivalents $ 7,471 $ 8,222 $ 8,242 Receivables, net 107,522 98,547 90,851 Merchandise inventories, net 575,246 717,765 428,939 Textbook rental inventories 16,482 5,221 40,710 Prepaid expenses and other current assets 22,415 18,069 16,177 Total current assets 729,136 847,824 584,919 Property and equipment, net 94,102 105,902 97,739 Operating lease right-of-use assets 320,287 314,355 250,837 Intangible assets, net 170,466 189,183 175,125 Goodwill 4,700 4,700 4,700 Deferred tax assets, net 8,459 — 7,805 Other noncurrent assets 33,646 40,457 35,307 Total assets $ 1,360,796 $ 1,502,421 $ 1,156,432 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 291,496 $ 443,134 $ 143,678 Accrued liabilities 75,084 75,876 95,420 Current operating lease liabilities 131,525 111,155 92,571 Short-term borrowings — 100,000 75,000 Total current liabilities 498,105 730,165 406,669 Long-term deferred taxes, net — 598 — Long-term operating lease liabilities 209,867 226,534 186,142 Other long-term liabilities 45,986 50,270 46,170 Long-term borrowings 234,560 74,100 99,700 Total liabilities 988,518 1,081,667 738,681 Commitments and contingencies — — — Stockholders' equity: Preferred stock, $ 0.01 par value; authorized, 5,000 shares; 0 shares issued and 0 shares outstanding — — — Common stock, $ 0.01 par value; authorized, 200,000 shares; issued, 52,654 , 51,086 and 52,140 shares, respectively; outstanding, 48,633 , 47,607 and 48,298 shares, respectively 526 511 521 Additional paid-in capital 734,474 728,651 732,958 Accumulated deficit ( 329,479 ) ( 276,732 ) ( 282,827 ) Treasury stock, at cost ( 33,243 ) ( 31,676 ) ( 32,901 ) Total stockholders' equity 372,278 420,754 417,751 Total liabilities and stockholders' equity $ 1,360,796 $ 1,502,421 $ 1,156,432 See accompanying notes to condensed consolidated financial statements. 4 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) 13 weeks ended August 1, 2020 July 27, 2019 Cash flows from operating activities: Net loss $ ( 46,652 ) $ ( 32,155 ) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization expense 14,063 15,879 Content amortization expense 1,164 911 Amortization of deferred financing costs 270 270 Impairment loss (non-cash) — 433 Deferred taxes ( 654 ) 3,023 Stock-based compensation expense 1,521 2,321 Changes in other long-term liabilities ( 266 ) ( 3,244 ) Changes in operating lease right-of-use assets and liabilities ( 6,770 ) 5,614 Changes in other operating assets and liabilities, net ( 17,515 ) ( 33,295 ) Net cash flows used in operating activities ( 54,839 ) ( 40,243 ) Cash flows from investing activities: Purchases of property and equipment ( 7,055 ) ( 8,309 ) Net change in other noncurrent assets 1,605 2,204 Net cash flows used in investing activities ( 5,450 ) ( 6,105 ) Cash flows from financing activities: Proceeds from borrowings under Credit Agreement 186,700 120,300 Repayments of borrowings under Credit Agreement ( 126,840 ) ( 79,700 ) Purchase of treasury shares ( 342 ) ( 40 ) Net cash flows provided by financing activities 59,518 40,560 Net decrease in cash, cash equivalents and restricted cash ( 771 ) ( 5,788 ) Cash, cash equivalents and restricted cash at beginning of period 9,008 14,768 Cash, cash equivalents and restricted cash at end of period $ 8,237 $ 8,980 Changes in other operating assets and liabilities, net: Receivables, net $ ( 16,671 ) $ ( 377 ) Merchandise inventories ( 146,307 ) ( 297,443 ) Textbook rental inventories 24,228 41,780 Prepaid expenses and other current assets ( 6,238 ) ( 6,291 ) Accounts payable and accrued liabilities 127,473 229,036 Changes in other operating assets and liabilities, net $ ( 17,515 ) $ ( 33,295 ) See accompanying notes to condensed consolidated financial statements. 5 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Equity (In thousands) (unaudited) Additional Common Stock Paid-In Accumulated Treasury Stock Total Shares Amount Capital Deficit Shares Amount Equity Balance at April 27, 2019 51,030 $ 510 $ 726,331 $ ( 244,577 ) 3,467 $ ( 31,636 ) $ 450,628 Stock-based compensation expense 2,321 2,321 Vested equity awards 56 1 ( 1 ) — Shares repurchased for tax withholdings for vested stock awards 12 ( 40 ) ( 40 ) Net loss ( 32,155 ) ( 32,155 ) Balance at July 27, 2019 51,086 $ 511 $ 728,651 $ ( 276,732 ) 3,479 $ ( 31,676 ) $ 420,754 Additional Common Stock Paid-In Accumulated Treasury Stock Total Shares Amount Capital Deficit Shares Amount Equity Balance at May 2, 2020 52,140 $ 521 $ 732,958 $ ( 282,827 ) 3,842 $ ( 32,901 ) $ 417,751 Stock-based compensation expense 1,521 1,521 Vested equity awards 514 5 ( 5 ) — Shares repurchased for tax withholdings for vested stock awards 179 ( 342 ) ( 342 ) Net loss ( 46,652 ) ( 46,652 ) Balance August 1, 2020 52,654 $ 526 $ 734,474 $ ( 329,479 ) 4,021 $ ( 33,243 ) $ 372,278 See accompanying notes to condensed consolidated financial statements. 6 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) Unless the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Barnes & Noble Education or "BNED", Inc., a Delaware corporation. References to “Barnes & Noble College” refer to our college bookstore business operated through our subsidiary Barnes & Noble College Booksellers, LLC. References to “MBS” refer to our virtual bookstore and wholesale textbook distribution business operated through our subsidiary MBS Textbook Exchange, LLC. References to “Student Brands” refer to our direct-to-student subscription-based writing services business operated through our subsidiary Student Brands, LLC. This Form 10-Q should be read in conjunction with our Audited Consolidated Financial Statements and accompanying Notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended May 2, 2020, which includes consolidated financial statements for the Company for each of the three fiscal years ended May 2, 2020, April 27, 2019 and April 28, 2018 (Fiscal 2020, Fiscal 2019 and Fiscal 2018, respectively). Note 1. Organization Description of Business Barnes & Noble Education, Inc. (“BNED”) is one of the largest contract operators of physical and virtual bookstores for college and university campuses and K-12 institutions across the United States. We are also one of the largest textbook wholesalers, inventory management hardware and software providers, and a leading provider of digital education solutions. We operate 1,442 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content and tools within a dynamic omni channel retail environment. Additionally, we offer direct-to-student products and services to help students study more effectively and improve academic performance. The strengths of our business include our ability to compete by developing new products and solutions to meet market needs, our large operating footprint with direct access to students and faculty, our well-established, deep relationships with academic partners and stable, long-term contracts and our well-recognized brands. We expect to continue to introduce scalable and advanced digital solutions focused largely on the student, expand our general merchandise e-commerce capabilities, increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect general merchandise sales to continue to increase over the long term, as our product assortments continue to emphasize and reflect the changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, as we improve our e-commerce capabilities through investments we are making in new systems, processes and people. We believe the BNC and MBS brands are synonymous with innovation in bookselling and campus retail, and, are widely recognized and respected brands in the United States. Our large college footprint, reputation, and credibility in the marketplace not only support our marketing efforts to universities, students, and faculty, but are also important for leading publishers who rely on us as one of their primary distribution channels, and for being a trusted source for students in our direct-to-student digital solutions business. We have three reportable segments: Retail, Wholesale and DSS. For additional information related to our strategies, operations and segments, see Part I - Item 1. Business and Part II - Item 8. Financial Statements and Supplementary Data - Note 6. Segment Reporting in our Annual Report on Form 10-K for the fiscal year ended May 2, 2020 . In Fiscal 2020, we retained Morgan Stanley & Co. LLC to serve as a financial advisor in connection with our review of strategic opportunities. The review was designed to accelerate the execution of customer-focused strategic initiatives and enhance value for our shareholders, including, but not limited to, continued execution of our current business plan, new partnerships, joint ventures and other potential opportunities. On August 24, 2020, we announced that we had concluded our review of strategic opportunities. After extensive evaluation and deliberation, and in consultation with its financial and legal advisors, the Board unanimously determined that the continued execution of the Company’s current business plan is the best path forward for the Company and its shareholders. COVID-19 Business Impact Our business experienced an unprecedented and significant impact as a result of COVID-19 related campus store closures. Beginning in March 2020, colleges and universities nationwide began to close their campuses in light of safety concerns and as a result of local and state issued stay-at-home orders. By mid-March, during our fiscal fourth quarter, we closed the majority of our physical campus stores to protect the health and safety of our customers and employees. 7 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) While our campus stores were closed, we continued to serve institutions and students through our campus websites, providing free shipping on all orders and an expanded digital content offering to provide immediate access to course materials to students at our campuses that closed due to COVID-19. We developed and implemented plans to safely reopen our campus stores based on national, state and local guidelines, as well as the campus policies set by the school administration. Colleges and universities in the United States continue to adjust their plans for the upcoming fall term, with some implementing shortened semesters or choosing to remain fully virtual in order to best protect students and faculty. The first quarter is historically a low revenue period and our first quarter results were significantly impacted by the COVID-19 pandemic. As many schools shifted from an on-campus to a remote learning model, we were able to serve students through our Custom Store Solutions “CSS” model, virtual bookstores, individual school websites and digital offerings to ensure students were equipped with their course materials to continue their education, wherever they may be. The COVID-19 impact on higher education remains a fluid situation, and we are committed to supporting our campus partners through our flexible offerings and our ability to quickly pivot to ensure uninterrupted service as institutions manage the safety of their campuses. Note 2. Summary of Significant Accounting Policies Basis of Presentation and Consolidation Our condensed consolidated financial statements reflect our condensed consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position and the results of its operations and cash flows for the periods reported. These condensed consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by GAAP. All material intercompany accounts and transactions have been eliminated in consolidation. Our business is highly seasonal. Our quarterly results also may fluctuate depending on the timing of the start of the various schools' semesters, as well as shifts in our fiscal calendar dates. These shifts in timing may affect the comparability of our results across periods. Our fiscal year is comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of April. Due to the seasonal nature of the business, the results of operations for the 13 weeks ended August 1, 2020 are not indicative of the results expected for the 52 weeks ending May 1, 2021 (Fiscal 2021). For certain of our retail operations, sales are generally highest in the second and third fiscal quarters, when students purchase and rent textbooks and other course materials for the typical academic year, and lowest in the first and fourth fiscal quarters. Sales attributable to our wholesale business are generally highest in our first, second and third quarters, as MBS sells textbooks and other course materials for retail distribution. Our DSS segment sales and operating profit are realized relatively consistently throughout the year. Use of Estimates In preparing financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Merchandise Inventories Merchandise inventories, which consist of finished goods, are stated at the lower of cost or market. Market value of our inventory, which is all purchased finished goods, is determined based on its estimated net realizable value, which is generally the selling price less normally predictable costs of disposal and transportation. Reserves for non-returnable inventory are based on our history of liquidating non-returnable inventory. Cost is determined primarily by the retail inventory method for our Retail segment and last-in first out, or “LIFO”, method for our Wholesale segment. Our textbook inventories, for Retail and Wholesale, and trade book inventories are valued using the LIFO method and the related reserve was not material to the recorded amount of our inventories. For our physical bookstores, we also estimate and accrue shortage for the period between the last physical count of inventory and the balance sheet date. Shortage rates are estimated and accrued based on historical rates and can be affected by changes in merchandise mix and changes in actual shortage trends. 8 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) Textbook Rental Inventories Physical textbooks out on rent are categorized as textbook rental inventories. At the time a rental transaction is consummated, the book is removed from merchandise inventories and moved to textbook rental inventories at cost. The cost of the book is amortized down to its estimated residual value over the rental period. The related amortization expense is included in cost of goods sold. At the end of the rental period, upon return, the book is removed from textbook rental inventories and recorded in merchandise inventories at its amortized cost. Leases We recognize lease assets and lease liabilities on the condensed consolidated balance sheet for all operating lease arrangements based on the present value of future lease payments as required by Accounting Standards Codification ("ASC") Topic 842, Leases . We do not recognize lease assets or lease liabilities for short-term leases (i.e., those with a term of twelve months or less). We recognize lease expense on a straight-line basis over the lease term for contracts with fixed lease payments, including those with fixed annual minimums, or over a rolling twelve-month period for leases where the annual guarantee resets at the start of each contract year, in order to best reflect the pattern of usage of the underlying leased asset. For additional information, see Note 5. Leases . Revenue Recognition and Deferred Revenue Product sales and rentals The majority of our revenue is derived from the sale of products through our bookstore locations, including virtual bookstores, and our bookstore affiliated e-commerce websites, and contains a single performance obligation. Revenue from sales of our products is recognized at the point in time when control of the products is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for the products. For additional information, see Note 4. Revenue. Retail product revenue is recognized when the customer takes physical possession of our products, which occurs either at the point of sale for products purchased at physical locations or upon receipt of our products by our customers for products ordered through our websites and virtual bookstores. Wholesale product revenue is recognized upon shipment of physical textbooks at which point title passes and risk of loss is transferred to the customer. Additional revenue is recognized for shipping charges billed to customers and shipping costs are accounted for as fulfillment costs within cost of goods sold. Revenue from the rental of physical textbooks, which contains a single performance obligation, is deferred and recognized over the rental period based on the passage of time commencing at the point of sale, when control of the product transfers to the customer. Rental periods are typically for a single semester and are always less than one year in duration. We offer a buyout option to allow the purchase of a rented physical textbook at the end of the rental period if the customer desires to do so. We record the buyout purchase when the customer exercises and pays the buyout option price which is determined at the time of the buyout. In these instances, we accelerate any remaining deferred rental revenue at the point of sale. Revenue from the rental of digital textbooks, which contains a single performance obligation, is recognized at the point of sale. A software feature is embedded within the content of our digital textbooks, such that upon expiration of the rental term the customer is no longer able to access the content. While the digital rental allows the customer to access digital content for a fixed period of time, once the digital content is delivered to the customer, our performance obligation is complete. We estimate returns based on an analysis of historical experience. A provision for anticipated merchandise returns is provided through a reduction of sales and cost of goods sold in the period that the related sales are recorded. For sales and rentals involving third-party products, we evaluate whether we are acting as a principal or an agent. Our determination is based on our evaluation of whether we control the specified goods or services prior to transferring them to the customer. There are significant judgments involved in determining whether we control the specified goods or services prior to transferring them to the customer including whether we have the ability to direct the use of the good or service and obtain substantially all of the remaining benefits from the good or service. For those transactions where we are the principal, we record revenue on a gross basis, and for those transactions where we are an agent to a third-party, we record revenue on a net basis. We do not have gift card or customer loyalty programs. We do not treat any promotional offers as expenses. Sales tax collected from our customers is excluded from reported revenues. Our payment terms are generally 30 days and do not extend beyond one year. 9 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) Service and other revenue Service and other revenue is primarily derived from DSS segment subscription-based service revenues and partnership marketing services which includes promotional activities and advertisements within our physical bookstores and web properties performed on behalf of third-party customers. Subscription-based revenue, which contains a single performance obligation, is deferred and recognized based on the passage of time over the subscription period commencing at the point of sale, when control of the service transfers to the customer. The majority of subscriptions sold are one month in duration. Partnership marketing agreements often include multiple performance obligations which are individually negotiated with our customers. For these arrangements that contain distinct performance obligations, we allocate the transaction price based on the relative standalone selling price method by comparing the standalone selling price (“SSP”) of each distinct performance obligation to the total value of the contract. The revenue is recognized as each performance obligation is satisfied, typically at a point in time for partnership marketing service and overtime for advertising efforts as measured based upon the passage of time for contracts that are based on a stated period of time or the number of impressions delivered for contracts with a fixed number of impressions. Cost of Sales Our cost of sales primarily includes costs such as merchandise costs, textbook rental amortization, content development cost amortization, warehouse costs related to inventory management and order fulfillment, insurance, certain payroll costs, and management service agreement costs, including rent expense, related to our college and university contracts and other facility related expenses. Selling and Administrative Expenses Our selling and administrative expenses consist primarily of store payroll and store operating expenses. Selling and administrative expenses also include stock-based compensation and general office expenses, such as merchandising, procurement, field support, finance and accounting, and operating costs related to our DSS segment subscription-based services business. Shared-service costs such as human resources, legal, treasury, information technology, and various other corporate level expenses and other governance functions, are not allocated to any specific reporting segment and are recorded in Corporate Services. Evaluation of Goodwill and Other Long-Lived Assets As of August 1, 2020, we had $ 0 , $ 0 and $ 4,700 of goodwill on our condensed consolidated balance sheet related to our Retail, Wholesale and DSS reporting units, respectively. In accordance with ASC 350-10, Intangibles - Goodwill and Other, we complete our annual goodwill impairment test as of the first day of the third quarter of each fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of the reporting unit exceeds its fair value. During the third quarter of Fiscal 2020, we completed our annual goodwill impairment test and concluded that the fair value of the DSS reporting unit was determined to exceed the carrying value of the reporting unit; therefore, no goodwill impairment was recognized. In performing the valuation, we used cash flows that reflected management’s forecasts and discount rates that included risk adjustments consistent with the current market conditions. Our other long-lived assets include property and equipment and amortizable intangibles. As of August 1, 2020, we had $ 94,102 and $ 170,466 of property and equipment and amortizable intangible assets, net of depreciation and amortization, respectively, on our condensed consolidated balance sheet. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long -Lived Assets . During the fourth quarter of Fiscal 2020, in conjunction with COVID-19 related campus store closures, we evaluated certain of our long-lived assets associated with our Retail and Wholesale segments for impairment. Based on the results of the tests, for the Retail segment, we recognized an impairment loss of $587 during the fourth quarter of Fiscal 2020, related to store-level assets in restructuring and other charges. These long-lived assets were not recoverable and had a de minimis fair value, as determined using an income approach (Level 3 input), resulting in a non-cash impairment charge for the full carrying value of those long-lived assets. 10 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) During the 13 weeks ended August 1, 2020, COVID-19 related closed campus stores began to re-open with sales fulfilled either from the stores, from our Wholesale operations, or drop ship programs, as well as online direct-to-student services. We believe indicators of impairment do not exist and the carrying amount of our long-lived assets and property and equipment are recoverable and the fair value of the DSS reporting unit continues to exceed the carrying value of the reporting unit resulting in no goodwill impairment during the quarter. During the 13 weeks ended July 27, 2019, we recorded an impairment loss (non-cash) of $ 433 in the Retail segment related to net capitalized development costs for a project which are not recoverable. Income Taxes As of August 1, 2020, other long-term liabilities includes $ 25,748 related to the long-term tax payable associated with the LIFO reserve. The LIFO reserve is impacted by changes in the consumer price index (“CPI”) and is dependent on the inventory levels at the end of our tax year (on or about January 31st) which is in the middle of our second largest selling cycle. At the end of the most recent tax year, inventory levels declined as compared to the prior year resulting in approximately $ 7,597 of the LIFO reserve becoming currently payable. Given recent trends relating to the pricing and rental of textbooks, management believes that an additional portion of the remaining long-term tax payable associated with the LIFO reserve could be payable within the next twelve months. We are unable to predict future trends for CPI and inventory levels, therefore it is difficult to project with reasonable certainty how much of this liability will become payable within the next twelve months. Note 3. Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13 , Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The ASU replaces the existing incurred loss impairment model for trade receivables with an expected loss model which requires the use of forward-looking information to calculate expected credit loss estimates. These changes may result in earlier recognition of credit losses. We adopted this guidance during the first quarter of Fiscal 2021 with no cumulative-effect adjustment to retained earnings. The guidance does not have a material impact on our condensed consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance seeks to simplify the accounting for income taxes by removing the following exceptions: 1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, 2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, 3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary and 4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. Additionally, the guidance seeks to further simplify the accounting for income taxes by: 1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, 2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, 3) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements (although the entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority), 4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date and 5) making minor improvements for income tax accounting related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. This guidance will be effective for fiscal years and interim periods beginning after December 15, 2020. Different components of the guidance require retrospective, modified retrospective or prospective adoption, and early adoption is permitted. We are currently assessing whether we will early adopt this guidance, and the impact on our condensed consolidated financial statements is not currently estimable. 11 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) Note 4. Revenue Revenue from sales of our products and services is recognized either at the point in time when control of the products is transferred to our customers or over time as services are provided in an amount that reflects the consideration we expect to be entitled to in exchange for the products or services. See Note 2. Summary of Significant Accounting Policies for additional information related to our revenue recognition policies and Note 6. Segment Reporting for a description of each segment's product and service offerings. Disaggregation of Revenue The following table disaggregates the revenue associated with our major product and service offerings: 13 weeks ended August 1, 2020 July 27, 2019 Retail Product Sales $ 141,826 $ 246,375 Rental Income 10,804 17,430 Service and Other Revenue (a) 6,146 10,851 Retail Total Sales $ 158,776 $ 274,656 Wholesale Sales $ 80,294 $ 72,309 DSS Sales (b) $ 5,872 $ 5,374 Eliminations (c) $ ( 40,928 ) $ ( 32,682 ) Total Sales $ 204,014 $ 319,657 (a) Service and other revenue primarily relates to brand partnerships and other service revenues. (b) DSS sales primarily relate to direct-to-student subscription-based revenue. (c) The sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale . Contract Assets and Contract Liabilities Contract assets represent the sale of goods or services to a customer before we have the right to obtain consideration from the customer. Contract assets consist of unbilled amounts at the reporting date and are transferred to accounts receivable when the rights become unconditional. Contract assets (unbilled receivables) were $ 0 as of August 1, 2020, July 27, 2019 and May 2, 2020 on our condensed consolidated balance sheets. Contract liabilities represent an obligation to transfer goods or services to a customer for which we have received consideration and consists of our deferred revenue liability (deferred revenue). Deferred revenue primarily consists of advanced payments from customers related to textbook rental and subscription-based performance obligations that have not yet been satisfied, as well as unsatisfied performance obligations associated with partnership marketing services. Deferred revenue is recognized ratably over the terms of the related rental or subscription periods, or when the contracted services are provided to our partnership marketing customers. Deferred revenue of $ 16,270 , $ 14,188 , and $ 13,373 is recorded within Accrued Liabilities on our condensed consolidated balance sheets for the periods ended August 1, 2020, July 27, 2019 and May 2, 2020, respectively. The following table presents changes in contract liabilities: 13 weeks ended August 1, 2020 July 27, 2019 Deferred revenue at the beginning of period $ 13,373 $ 20,418 Additions to deferred revenue during the period 21,411 18,083 Reductions to deferred revenue for revenue recognized during the period ( 18,514 ) ( 24,313 ) Deferred revenue balance at the end of period $ 16,270 $ 14,188 As of August 1, 2020, we expect to recognize $ 16,270 of the deferred revenue balance within the next 12 months. 12 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) Note 5. Leases We recognize lease assets and lease liabilities on the condensed consolidated balance sheets for substantially all lease arrangements as required by FASB ASC 842, Leases (Topic 842). Our portfolio of leases consists of operating leases comprised of operations agreements which grant us the right to operate on-campus bookstores at colleges and universities; real estate leases for office and warehouse operations; and vehicle leases. We do not have finance leases or short-term leases (i.e., those with a term of twelve months or less). We recognize a right of use ("ROU") asset and lease liability in our condensed consolidated balance sheets for leases with a term greater than twelve months. Options to extend or terminate a lease are included in the determination of the ROU asset and lease liability when it is reasonably certain that such options will be exercised. Our lease terms generally range from one year to fifteen years and a number of agreements contain minimum annual guarantees, many of which are adjusted at the start of each contract year based on the actual sales activity of the leased premises for the most recently completed contract year. Payment terms are based on the fixed rates explicit in the lease, including minimum annual guarantees, and/or variable rates based on: i) a percentage of revenues or sales arising at the relevant premises ("variable commissions"), and/or ii) operating expenses, such as common area charges, real estate taxes and insurance. For contracts with fixed lease payments, including those with minimum annual guarantees, we recognize lease expense on a straight-line basis over the lease term or over the contract year in order to best reflect the pattern of usage of the underlying leased asset and our minimum obligations arising from these types of leases. Our lease agreements do not contain any material residual value guarantees, material restrictions or covenants. We used our incremental borrowing rates to determine the present value of fixed lease payments based on the information available at the lease commencement date, as the rate implicit in the lease is not readily determinable. We utilized an estimated collateralized incremental borrowing rate as of the effective date or the commencement date of the lease, whichever is later. The following table summarizes lease expense: 13 weeks ended August 1, 2020 July 27, 2019 Variable lease expense $ 7,407 $ 16,589 Operating lease expense 9,796 17,905 Net lease expense $ 17,203 $ 34,494 The decrease in lease expense is primarily due to lower sales for contracts based on a percentage of revenue and the impact of the timing and reduction of minimum contractual guarantees. The following table summarizes our minimum fixed lease obligations, excluding variable commissions, as of August 1, 2020: As of August 1, 2020 Remainder of Fiscal 2021 $ 140,218 Fiscal 2022 52,489 Fiscal 2023 44,574 Fiscal 2024 36,159 Fiscal 2025 29,706 Thereafter 88,023 Total lease payments 391,169 Less: imputed interest ( 49,777 ) Operating lease liabilities at period end $ 341,392 13 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) Future lease payment obligations related to leases that were entered into, but did not commence as of August 1, 2020, were not material. The following summarizes additional information related to our operating leases: As of August 1, 2020 Weighted average remaining lease term (in years) 5.4 years Weighted average discount rate 4.4 % Supplemental cash flow information: Cash payments for lease liabilities within operating activities $ 16,676 ROU assets obtained in exchange for lease liabilities from initial recognition $ 89,167 Note 6. Segment Reporting We have three reportable segments: Retail, Wholesale and DSS. Additionally, unallocated shared-service costs, which include various corporate level expenses and other governance functions, continue to be presented as “Corporate Services”. We identify our segments in accordance with the way our business is managed (focusing on the financial information distributed) and the manner in which our chief operating decision maker allocates resources and assesses financial performance. The following summarizes the three segments. For additional information about each segment's operations, see Part I - Item 1. Business in our Annual Report on Form 10-K for the fiscal year ended May 2, 2020 . Retail The Retail Segment operates 1,442 college, university, and K-12 school bookstores, comprised of 772 physical bookstores and 670 virtual bookstores. Our bookstores typically operate under agreements with the college, university, or K-12 schools to be the official bookstore and the exclusive seller of course materials and supplies, including physical and digital products. The majority of the physical campus bookstores have school-branded e-commerce sites which we operate and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment also offers inclusive access programs, in which course materials, including e-content, are offered at a reduced price through a course materials fee, and delivered to students on or before the first day of class. Additionally, the Retail Segment offers a suite of digital content and services to colleges and universities, including a variety of open educational resource-based courseware. Wholesale The Wholesale Segment is comprised of our wholesale textbook business and is one of the largest textbook wholesalers in the country. The Wholesale Segment centrally sources, sells, and distributes new and used textbooks to approximately 3,400 physical bookstores (including our Retail Segment's 772 physical bookstores) and sources and distributes new and used textbooks to our 670 virtual bookstores. Additionally, the Wholesale Segment sells hardware and a software suite of applications that provides inventory management and point-of-sale solutions to approximately 400 college bookstores. DSS The Digital Student Solutions (“DSS”) Segment includes direct-to-student products and services to assist students to study more effectively and improve academic performance. The DSS Segment is comprised of the operations of Student Brands, LLC, a leading direct-to-student subscription-based writing services business, and bartleby ® , a direct-to-student subscription-based offering providing textbook solutions, expert questions and answers, writing and tutoring. Corporate Services represents unallocated shared-service costs which include corporate level expenses and other governance functions, including executive functions, such as accounting, legal, treasury, information technology, and human resources. 14 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) Intercompany Eliminations The eliminations are primarily related to the following intercompany activities: • The sales eliminations represent the elimination of Wholesale sales and fulfillment service fees to Retail and the elimination of Retail commissions earned from Wholesale, and • These cost of sales eliminations represent (i) the recognition of intercompany profit for Retail inventory that was purchased from Wholesale in a prior period that was subsequently sold to external customers during the current period and the elimination of Wholesale service fees charged for fulfillment of inventory for virtual store sales, net of (ii) the elimination of intercompany profit for Wholesale inventory purchases by Retail that remain in ending inventory at the end of the current period. Our international operations are not material and the majority of the revenue and total assets are within the United States. Summarized financial information for our reportable segments is reported below: 13 weeks ended August 1, 2020 July 27, 2019 Sales: Retail $ 158,776 $ 274,656 Wholesale 80,294 72,309 DSS 5,872 5,374 Elimination ( 40,928 ) ( 32,682 ) Total Sales $ 204,014 $ 319,657 Gross Profit Retail $ 16,135 $ 62,139 Wholesale 16,757 14,918 DSS 4,746 4,414 Elimination ( 6,776 ) ( 9,814 ) Total Gross Profit $ 30,862 $ 71,657 Depreciation and Amortization Retail $ 10,570 $ 11,977 Wholesale 1,295 1,565 DSS 2,165 2,304 Corporate Services 33 33 Total Depreciation and Amortization $ 14,063 $ 15,879 Operating Loss (Income) Retail $ ( 54,816 ) $ ( 35,042 ) Wholesale 11,671 8,594 DSS ( 1,455 ) ( 2,003 ) Corporate Services ( 7,552 ) ( 5,550 ) Elimination ( 6,763 ) ( 9,811 ) Total Operating Loss $ ( 58,915 ) $ ( 43,812 ) 15 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) 13 weeks ended August 1, 2020 July 27, 2019 The following is a reconciliation of segment Operating Loss to consolidated Loss Before Income Taxes: Total Operating Loss $ ( 58,915 ) $ ( 43,812 ) Interest Expense, net 2,653 2,532 Loss Before Income Taxes $ ( 61,568 ) $ ( 46,344 ) Note 7. Equity and Earnings Per Share Equity Share Repurchases On December 14, 2015, our Board of Directors authorized a stock repurchase program of up to $ 50,000 , in the aggregate, of our outstanding Common Stock. The stock repurchase program is carried out at the direction of management (which may include a plan under Rule 10b5-1 of the Securities Exchange Act of 1934). The stock repurchase program may be suspended, terminated, or modified at any time. Any repurchased shares will be held as treasury stock and will be available for general corporate purposes. During the 13 weeks ended August 1, 2020, we did not repurchase shares of our Common Stock under the program and as of August 1, 2020, approximately $ 26,669 remains available under the stock repurchase program. During the 13 weeks ended August 1, 2020, we repurchased 178,669 shares of our Common Stock outside of the stock repurchase program in connection with employee tax withholding obligations for vested stock awards. Earnings Per Share Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of unvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company. During the 13 weeks ended August 1, 2020 and July 27, 2019 average shares of 2,665,779 and 3,746,663 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively. The following is a reconciliation of the basic and diluted earnings (loss) per share calculation: 13 weeks ended (shares in thousands) August 1, 2020 July 27, 2019 Numerator for basic and diluted earnings per share: Net loss available to common shareholders $ ( 46,652 ) $ ( 32,155 ) Denominator for basic and diluted earnings per share: Basic and diluted weighted average shares of Common Stock 48,411 47,582 Loss per share of Common Stock: Basic $ ( 0.96 ) $ ( 0.68 ) Diluted $ ( 0.96 ) $ ( 0.68 ) 16 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) Note 8. Fair Values of Financial Instruments In accordance with ASC No. 820, Fair Value Measurements and Disclosures , the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1—Observable inputs that reflect quoted prices in active markets Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable Level 3—Unobservable inputs in which little or no market data exists, therefore requiring us to develop our own assumptions Our financial instruments include cash and cash equivalents, receivables, accrued liabilities and accounts payable. The fair values of cash and cash equivalents, receivables, accrued liabilities and accounts payable approximates their carrying values because of the short-term nature of these instruments, which are all considered Level 1. The fair value of short-term and long-term debt approximates its carrying value. Note 9. Credit Facility We have a credit agreement (the “Credit Agreement”), amended March 1, 2019, under which the lenders committed to provide us with a 5 -year asset-backed revolving credit facility in an aggregate committed principal amount of $ 400,000 (the “Credit Facility”) effective from the date of the amendment. We have the option to request an increase in commitments under the Credit Facility of up to $ 100,000 , subject to certain restrictions. Proceeds from the Credit Facility are used for general corporate purposes, including seasonal working capital needs. The agreement includes an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $ 100,000 incremental facility maintaining the maximum availability under the Credit Agreement at $ 500,000 . On March 2, 2020, we were granted a waiver to the condition to the upcoming draw under the FILO Facility, scheduled for April 2020, that Consolidated EBITDA (as defined in the Credit Agreement) minus Restricted Payments (as defined in the Credit Agreement) equal at least $90,000. For additional information including interest terms and covenant requirements related to the Credit Facility, refer to Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity in our Annual Report on Form 10-K for the fiscal year ended May 2, 2020. During the 13 weeks ended August 1, 2020, we borrowed $ 186,700 and repaid $ 126,840 under the Credit Agreement, with $ 234,560 of outstanding borrowings as of August 1, 2020, comprised entirely of borrowings under the Credit Facility. During the 13 weeks ended July 27, 2019, we borrowed $ 120,300 and repaid $ 79,700 under the Credit Agreement, with $ 174,100 of outstanding borrowings as of July 27, 2019, comprised of $ 74,100 and $ 100,000 under the Credit Facility and FILO Facility, respectively. As of both August 1, 2020 and July 27, 2019, we have issued $ 4,759 in letters of credit under the Credit Facility. Note 10. Supplementary Information Impairment Loss (non-cash) We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets . During the 13 weeks ended July 27, 2019, we recognized an impairment loss (non-cash) of $ 433 in the Retail segment related to net capitalized development costs for a project which are not recoverable. Restructuring and other charges During the 13 weeks ended August 1, 2020, we recognized restructuring and other charges totaling $ 5,671 comprised of $ 3,396 for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives ($ 10,562 is included in accrued liabilities in the consolidated balance sheet as of August 1, 2020), $ 2,103 for professional service costs related to restructuring, process improvements, and shareholder activist activities, and $ 172 related to liabilities for a facility closure. During the 13 weeks ended July 27, 2019, we recognized restructuring and other charges totaling $ 1,466 comprised of $ 631 for severance and other employee termination and benefit costs associated with several management changes and the 17 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) elimination of various positions as part of cost reduction objectives, and $ 735 related to professional service costs related to restructuring and process improvements. Note 11. Employee Benefit Plans We sponsor defined contribution plans for the benefit of substantially all of the employees of BNC and DSS. MBS maintains a profit sharing plan covering substantially all full-time employees of MBS. For all plans, we are responsible to fund the employer contributions directly. Total employee benefit expense for these plans was $ 0 and $ 1,538 during the 13 weeks ended August 1, 2020 and July 27, 2019, respectively. Effective April 2020, due to the significant impact as a result of COVID-19 related campus store closures, we have temporarily suspended employer matching contributions into our 401(k) plans through the end of December 2020 (the first 9 months of Fiscal 2021). Note 12. Stock-Based Compensation We recognize compensation expense for awards ratably over the requisite service period of the award, which is generally three years. We recognize compensation expense based on the number of awards expected to vest using an estimated average forfeiture rate. We calculate the fair value of stock-based awards based on the closing price on the date the award was granted for those awards with only service or performance conditions. For those awards with market conditions, we have determined the grant date fair value using the Monte Carlo simulation model. During the 13 weeks ended August 1, 2020, no awards were granted under the Equity Incentive Plan. We recognized stock-based compensation expense for equity-based awards in selling and administrative expenses as follows: 13 weeks ended August 1, 2020 July 27, 2019 Restricted stock expense $ 30 $ 30 Restricted stock units expense 1,359 1,990 Performance shares expense — 12 Performance share units expense 132 289 Stock-based compensation expense $ 1,521 $ 2,321 Total unrecognized compensation cost related to unvested awards as of August 1, 2020 was $ 4,884 and is expected to be recognized over a weighted-average period of 1.5 years. Note 13. Income Taxes We recorded income tax benefit of $( 14,916 ) on a pre-tax loss of $( 61,568 ) during the 13 weeks ended August 1, 2020, which represented an effective income tax rate of 24.2 % and income tax benefit of $( 14,189 ) on pre-tax loss of $( 46,344 ) during the 13 weeks ended July 27, 2019, which represented an effective income tax rate of 30.6 %. The effective tax rate for the 13 weeks ended August 1, 2020 is lower as compared to the prior year comparable period due to permanent differences. Note 14. Legal Proceedings We are involved in a variety of claims, suits, investigations and proceedings that arise from time to time in the ordinary course of our business, including actions with respect to contracts, intellectual property, taxation, employment, benefits, personal injuries and other matters. The results of these proceedings in the ordinary course of business are not expected to have a material adverse effect on our condensed consolidated financial position, results of operations, or cash flows. Between January 22, 2020 and July 23, 2020, thirteen purported class action complaints were filed in the United States District Court for the District of Delaware, the United States District Court for the District of New Jersey, and the United States District Court for the Northern District of Illinois against the Company, along with several publishers, another collegiate bookstore retailer, and an industry association. The plaintiffs are retailers of collegiate course materials or current or former college students. Although the specific allegations vary, they claim, on their own behalf and on behalf of the purported classes, 18 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 weeks ended August 1, 2020 and July 27, 2019 (Thousands of dollars, except share and per share data) (unaudited) that the Company and the other defendants violated Section 1 of the Sherman Act (15 U.S.C. § 1), Section 2 of the Sherman Act (15 U.S.C. § 2), Section 13(a) of the Robinson-Patman Act (15 U.S.C. §13(a)), and various state antitrust and unfair trade practices laws for alleged activities in connection with inclusive access and the sale of course materials to universities and their students. The United States Judicial Panel on Multidistrict Litigation has consolidated these and other related cases in a consolidated proceeding before the Hon. Denise L. Cote of the United States District Court for the Southern District of New York. We intend to vigorously defend this matter and are currently unable to estimate any potential losses. 19 Table of Contents