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 26 weeks ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Sales: Product sales and other $ 575,764 $ 577,329 $ 828,710 $ 805,099 Rental income 41,334 49,648 52,246 62,672 Total sales 617,098 626,977 880,956 867,771 Cost of sales (exclusive of depreciation and amortization expense): Product and other cost of sales 449,322 453,070 643,427 627,231 Rental cost of sales 22,941 28,348 29,206 34,952 Total cost of sales 472,263 481,418 672,633 662,183 Gross profit 144,835 145,559 208,323 205,588 Selling and administrative expenses 107,086 107,902 205,572 194,137 Depreciation and amortization expense 10,759 11,952 23,292 24,576 Restructuring and other charges 260 1,116 635 3,021 Operating income (loss) 26,730 24,589 ( 21,176 ) ( 16,146 ) Interest expense, net 4,886 2,264 8,754 4,758 Income (loss) before income taxes 21,844 22,325 ( 29,930 ) ( 20,904 ) Income tax (benefit) expense ( 300 ) ( 203 ) 633 196 Net income (loss) $ 22,144 $ 22,528 $ ( 30,563 ) $ ( 21,100 ) Income (Loss) per share of common stock: Basic $ 0.42 $ 0.43 $ ( 0.58 ) $ ( 0.41 ) Diluted $ 0.42 $ 0.41 $ ( 0.58 ) $ ( 0.41 ) Weighted average shares of common stock outstanding: Basic 52,438 51,666 52,305 51,570 Diluted 53,195 54,568 52,305 51,570 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) October 29, 2022 October 30, 2021 April 30, 2022 (unaudited) (unaudited) (audited) ASSETS Current assets: Cash and cash equivalents $ 19,129 $ 10,996 $ 10,388 Receivables, net 210,009 218,053 137,039 Merchandise inventories, net 371,570 370,529 293,854 Textbook rental inventories 49,355 50,642 29,612 Prepaid expenses and other current assets 54,924 68,965 61,709 Total current assets 704,987 719,185 532,602 Property and equipment, net 96,096 91,875 94,072 Operating lease right-of-use assets 291,704 252,650 286,584 Intangible assets, net 121,487 141,847 129,624 Goodwill 4,700 4,700 4,700 Deferred tax assets, net — 15,943 — Other noncurrent assets 20,980 26,010 23,971 Total assets $ 1,239,954 $ 1,252,210 $ 1,071,553 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 326,168 $ 333,099 $ 182,790 Accrued liabilities 118,689 122,734 95,387 Current operating lease liabilities 130,802 118,434 97,143 Short-term borrowings — — 40,000 Total current liabilities 575,659 574,267 415,320 Long-term deferred taxes, net 1,430 — 1,430 Long-term operating lease liabilities 190,758 171,341 219,594 Other long-term liabilities 19,643 51,113 21,135 Long-term borrowings 252,000 183,300 185,700 Total liabilities 1,039,490 980,021 843,179 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, 55,132 , 54,162 and 54,234 shares, respectively; outstanding, 52,599 , 51,976 and 52,046 shares, respectively 551 541 542 Additional paid-in capital 744,339 736,886 740,838 Accumulated deficit ( 522,057 ) ( 443,737 ) ( 491,494 ) Treasury stock, at cost ( 22,369 ) ( 21,501 ) ( 21,512 ) Total stockholders' equity 200,464 272,189 228,374 Total liabilities and stockholders' equity $ 1,239,954 $ 1,252,210 $ 1,071,553 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) 26 weeks ended October 29, 2022 October 30, 2021 Cash flows from operating activities: Net loss $ ( 30,563 ) $ ( 21,100 ) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization expense 23,292 24,576 Content amortization expense 3,195 2,586 Amortization of deferred financing costs 1,200 725 Merchandise inventory loss — 434 Stock-based compensation expense 3,510 2,600 Changes in other long-term assets and liabilities, net 319 1,596 Changes in operating lease right-of-use assets and liabilities ( 298 ) 286 Changes in other operating assets and liabilities, net 8,721 12,573 Net cash flows provided by operating activities 9,376 24,276 Cash flows from investing activities: Purchases of property and equipment ( 20,573 ) ( 21,264 ) Net change in other noncurrent assets 255 326 Net cash flows used in investing activities ( 20,318 ) ( 20,938 ) Cash flows from financing activities: Proceeds from borrowings 348,200 259,720 Repayments of borrowings ( 321,900 ) ( 254,020 ) Payment of deferred financing costs ( 1,716 ) — Purchase of treasury shares ( 857 ) ( 2,359 ) Proceeds from the exercise of stock options, net — 37 Net cash flows provided by financing activities 23,727 3,378 Net increase in cash, cash equivalents and restricted cash 12,785 6,716 Cash, cash equivalents and restricted cash at beginning of period 21,934 16,814 Cash, cash equivalents and restricted cash at end of period $ 34,719 $ 23,530 Changes in other operating assets and liabilities, net: Receivables, net $ ( 72,970 ) $ ( 96,981 ) Merchandise inventories ( 77,716 ) ( 89,851 ) Textbook rental inventories ( 19,743 ) ( 21,950 ) Prepaid expenses and other current assets 12,538 ( 3,288 ) Accounts payable and accrued liabilities 166,612 224,643 Changes in other operating assets and liabilities, net $ 8,721 $ 12,573 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 May 1, 2021 53,327 $ 533 $ 734,257 $ ( 422,637 ) 1,948 $ ( 19,142 ) $ 293,011 Stock-based compensation expense 1,122 1,122 Vested equity awards 338 3 ( 3 ) — Shares repurchased for tax withholdings for vested stock awards 130 ( 1,215 ) ( 1,215 ) Net loss ( 43,628 ) ( 43,628 ) Balance July 31, 2021 53,665 $ 536 $ 735,376 $ ( 466,265 ) 2,078 $ ( 20,357 ) $ 249,290 Stock-based compensation expense 1,478 1,478 Vested equity awards 487 5 ( 5 ) — Shares repurchased for tax withholdings for vested stock awards 108 ( 1,144 ) ( 1,144 ) Issuance of common stock upon exercise of stock options 10 — 37 37 Net income 22,528 22,528 Balance October 30, 2021 54,162 $ 541 $ 736,886 $ ( 443,737 ) 2,186 $ ( 21,501 ) $ 272,189 Additional Common Stock Paid-In Accumulated Treasury Stock Total Shares Amount Capital Deficit Shares Amount Equity Balance at April 30, 2022 54,234 $ 542 $ 740,838 $ ( 491,494 ) 2,188 $ ( 21,512 ) $ 228,374 Stock-based compensation expense 1,791 1,791 Vested equity awards 540 5 ( 5 ) — Shares repurchased for tax withholdings for vested stock awards 238 ( 612 ) ( 612 ) Net loss ( 52,707 ) ( 52,707 ) Balance July 30, 2022 54,774 $ 547 $ 742,624 $ ( 544,201 ) 2,426 $ ( 22,124 ) $ 176,846 Stock-based compensation expense 1,719 1,719 Vested equity awards 357 4 ( 4 ) — Shares repurchased for tax withholdings for vested stock awards 107 ( 245 ) ( 245 ) Net income 22,144 22,144 Balance October 29, 2022 55,131 $ 551 $ 744,339 $ ( 522,057 ) 2,533 $ ( 22,369 ) $ 200,464 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 and 26 weeks ended October 29, 2022 and October 30, 2021 (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. 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 April 30, 2022, which includes consolidated financial statements for the Company as of April 30, 2022 and May 1, 2021 and for each of the three fiscal years ended April 30, 2022, May 1, 2021 and May 2, 2020 (Fiscal 2022, Fiscal 2021 and Fiscal 2020, respectively) and the unaudited condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the quarter ended July 30, 2022. 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 1,399 physical, virtual, and custom bookstores and serve more than 6 million students, delivering essential educational content, tools and general merchandise within a dynamic omnichannel 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 e-commerce capabilities and accelerate such capabilities through our merchandising partnership with Fanatics Retail Group Fulfillment, LLC, Inc. (“Fanatics”) and Fanatics Lids College, Inc. (“FLC”) (collectively referred to herein as the “FLC Partnership”), increase market share with new accounts, and expand our strategic opportunities through acquisitions and partnerships. We expect gross general merchandise sales to increase over the long term, as our product assortments continue to emphasize and reflect changing consumer trends, and we evolve our presentation concepts and merchandising of products in stores and online, which we expect to be further enhanced and accelerated through the FLC Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our logo and emblematic general merchandise business. The Barnes & Noble brand (licensed from our former parent) along with our subsidiary brands, BNC and MBS, are synonymous with innovation in bookselling and campus retailing, 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 to our relationship with 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 in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 . First Day Inclusive and Equitable Access Programs We provide product and service offerings designed to address the most pressing issues in higher education, including equitable access, enhanced convenience and improved affordability through innovative course material delivery models designed to drive improved student experiences and outcomes. We offer our BNC First Day ® inclusive and equitable access programs, consisting of First Day Complete and First Day , in which course materials, including both physical and digital content, are offered at a reduced price through a course fee or included in tuition, and delivered to students on or before the first day of class. • First Day Complete is adopted by an institution and includes all classes, providing students both physical and digital materials. The First Day Complete model drives substantially greater unit sales and sell-through for the bookstore. 7 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) • Through First Day , digital course materials are adopted by a faculty member for a single course, and students receive their materials through their school's learning management system. Offering courseware sales through our inclusive and equitable access First Day Complete and First Day models is a key, and increasingly important strategic initiative of ours to meet the market demands of substantially reduced pricing to students, as well as the opportunity to improve student outcomes, while, at the same time, increasing our market share, revenue and relative gross profits of courseware sales given the higher volumes of units sold in such models as compared to historical sales models that rely on individual student marketing and sales. We expect these programs to allow us to ultimately reverse historical long-term trends in courseware revenue declines, which has occurred at those schools where such programs have been adopted. We are moving quickly and decisively to accelerate our First Day Complete strategy. We plan to move many institutions to First Day Complete for the Fall of 2023 and the majority of schools by Fall 2024. Approximately 111 campus stores adopted our First Day Complete course materials delivery program for the 2022 Fall Term, representing approximately 545,000 (as reported by National Center for Education Statistics) in total undergraduate student enrollment, a growth rate of 85% over Fall 2021. During the 13 weeks ended October 29, 2022, First Day Complete sales increased by $44,301 to $89,892, or 97%, as compared to $45,591 in the prior year period. During the 26 weeks ended October 29, 2022, First Day Complete sales increased by $54,732 to $106,314, or 106%, as compared to $51,582 in the prior year period. Partnership with Fanatics and FLC In December 2020, we entered into the FLC Partnership. Through this partnership, we receive unparalleled product assortment, e-commerce capabilities and powerful digital marketing tools to drive increased value for customers and accelerate growth of our general merchandise business. Fanatics’ cutting-edge e-commerce and technology expertise offers our campus stores expanded product selection, a world-class online and mobile experience, and a progressive direct-to-consumer platform. Coupled with Lids (FLC's parent company), the leading standalone brick and mortar retailer focused exclusively on licensed fan and alumni products, our campus stores have improved access to trend and sales performance data on licensees, product styles, and design treatments. We maintain our relationships with campus partners and remain responsible for staffing and managing the day-to-day operations of our campus bookstores. We also work closely with our campus partners to ensure that each campus store maintains unique aspects of in-store merchandising, including localized product assortments and specific styles and designs that reflect each campus’s brand. We leverage Fanatics’ e-commerce technology and expertise for the operational management of the emblematic merchandise and gift sections of our campus store websites. FLC manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores, and FLC owns the inventory it manages, relieving us of the obligation to finance inventory purchases from working capital. COVID-19 Business Impact Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. We cannot accurately predict the duration or extent of the impact of the COVID-19 virus, including variants, on enrollments, campus activities, university budgets, athletics and other areas that directly affect our business operations . Although most four year schools returned to a traditional on-campus environment, there is still uncertainty about the duration and extent of the impact of the COVID-19 pandemic, including on enrollments at community colleges and by international students, the continuation of remote and hybrid class offerings, and its effect on our ability to source products, including textbooks and general merchandise offerings. 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. 8 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) 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. 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. 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 and 26 weeks ended October 29, 2022 are not indicative of the results expected for the 52 weeks ending April 29, 2023 (Fiscal 2023). 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. Restricted Cash As of October 29, 2022 and October 30, 2021, we had restricted cash of $ 15,590 and $ 12,534 , respectively, comprised of $ 14,686 and $ 11,637 , respectively, in prepaid and other current assets in the condensed consolidated balance sheet related to segregated funds for commission due to FLC for logo merchandise sales as per the FLC Partnership's merchandising agreement, and $ 904 and $ 897 , respectively, in other noncurrent assets in the condensed consolidated balance sheet related to amounts held in trust for future distributions related to employee benefit plans. 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, which includes certain significant assumptions, including markdowns, sales below cost, inventory aging and expected demand. 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. The Retail Segment courseware fulfillment order is directed first to our wholesale business before other sources of inventory are utilized. The products that we sell originate from a wide variety of domestic and international vendors. After internal sourcing, the bookstore purchases courseware from outside suppliers and publishers. As contemplated by the FLC Partnership merchandising agreement, we sold our logo and emblematic general merchandise inventory to FLC and received proceeds of $ 41,773 , and recognized a merchandise inventory loss on the sale of $ 10,262 in cost of goods sold in the condensed consolidated statement of operations during the 52 weeks ended May 1, 2021 for the Retail Segment. The final inventory sale price was determined during the first quarter of Fiscal 2022, at which time, we received additional proceeds of $ 1,906 , and recognized a merchandise inventory loss on the sale of $ 434 in cost of goods sold in the condensed consolidated statement of operations for the Retail Segment. 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. 9 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) 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 8. 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 3. 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. Effective in April 2021, as contemplated by the FLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. The transition to FLC for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior to the transition. 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. 10 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (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 long-term incentive plan compensation expense 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 October 29, 2022, we had $ 4,700 of goodwill on our condensed consolidated balance sheet related to our DSS reporting unit. 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. 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 . As of October 29, 2022, our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of $ 96,096 , $ 291,704 , $ 121,487 , and $ 20,980 , respectively, on our condensed consolidated balance sheet. Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Despite the introduction of COVID-19 vaccines, the pandemic remains highly volatile and continues to evolve. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. In Fiscal 2022, we continued to experience the ongoing effects of COVID-19 with the surge of the Omicron variant further impacting students return to campus and on-campus activities. While the majority of schools brought students back to campus, some schools chose to conduct classes virtually. Income Taxes The provision for income taxes includes federal, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities. The deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We regularly review deferred tax assets for recoverability and establish a valuation allowance, if determined to be necessary. 11 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) Note 3. 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 4. 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 26 weeks ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Retail Course Materials Product Sales $ 419,879 $ 433,734 $ 547,476 $ 555,954 General Merchandise Product Sales (a) 122,648 106,200 211,472 171,623 Service and Other Revenue (b) 14,749 19,370 23,923 29,172 Retail Product and Other Sales sub-total 557,276 559,304 782,871 756,749 Course Materials Rental Income 41,334 49,648 52,246 62,672 Retail Total Sales $ 598,610 $ 608,952 $ 835,117 $ 819,421 Wholesale Sales $ 21,120 $ 21,669 $ 58,203 $ 66,153 DSS Sales (c) $ 8,465 $ 8,279 $ 17,649 $ 16,582 Eliminations (d) $ ( 11,097 ) $ ( 11,923 ) $ ( 30,013 ) $ ( 34,385 ) Total Sales $ 617,098 $ 626,977 $ 880,956 $ 867,771 (a) Effective in April 2021, as contemplated by the FLC Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo and emblematic general merchandise sales to FLC and Fanatics. The transition to FLC for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo and emblematic general merchandise sales are fulfilled by FLC and Fanatics, we recognize commission revenue earned for these sales on a net basis in our condensed consolidated financial statements, as compared to the recognition of logo and emblematic sales on a gross basis in the periods prior to the transition. (b) Service and other revenue primarily relates to brand partnerships and other service revenues. (c) DSS sales primarily relate to direct-to-student subscription-based revenue. (d) 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 Liabilities 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 consists of the following: • advanced payments from customers related to textbook rental and subscription-based performance obligations, which are recognized ratably over the terms of the related rental or subscription periods; • unsatisfied performance obligations associated with partnership marketing services, which are recognized when the contracted services are provided to our partnership marketing customers; and • unsatisfied performance obligations associated with the premium paid for the sale of treasury shares, which are expected to be recognized over the term of the e-commerce and merchandising contracts for Fanatics and FLC, respectively . 12 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) The following table presents changes in deferred revenue associated with our contract liabilities: 26 weeks ended October 29, 2022 October 30, 2021 Deferred revenue at the beginning of period $ 19,722 $ 18,139 Additions to deferred revenue during the period 114,975 82,515 Reductions to deferred revenue for revenue recognized during the period ( 83,651 ) ( 66,364 ) Deferred revenue balance at the end of period: $ 51,046 $ 34,290 Balance Sheet classification: Accrued liabilities $ 46,610 $ 29,820 Other long-term liabilities 4,436 4,470 Deferred revenue balance at the end of period: $ 51,046 $ 34,290 As of October 29, 2022, we expect to recognize $ 46,610 of the deferred revenue balance within the next 12 months. Note 4. 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 April 30, 2022 . Retail The Retail Segment operates 1,399 college, university, and K-12 school bookstores, comprised of 793 physical bookstores and 606 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 websites which we operate independently or along with our merchant partners, and which offer students access to affordable course materials and affinity products, including emblematic apparel and gifts. The Retail Segment also offers inclusive and equitable access programs, in which course materials are offered at a reduced price through a fee charged by the institution or included in tuition, 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 3,100 physical bookstores (including our Retail Segment's 793 physical bookstores) and sources and distributes new and used textbooks to our 606 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 350 college bookstores. DSS The Digital Student Solutions (“DSS”) Segment includes 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 ® , an institutional and 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. 13 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (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. 14 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) Summarized financial information for our reportable segments is reported below: 13 weeks ended 26 weeks ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Sales: Retail $ 598,610 $ 608,952 $ 835,117 $ 819,421 Wholesale 21,120 21,669 58,203 66,153 DSS 8,465 8,279 17,649 16,582 Elimination ( 11,097 ) ( 11,923 ) ( 30,013 ) ( 34,385 ) Total Sales $ 617,098 $ 626,977 $ 880,956 $ 867,771 Gross Profit Retail (a) $ 129,502 $ 128,825 $ 183,495 $ 176,968 Wholesale 5,455 5,620 12,354 16,025 DSS 6,694 6,906 14,177 13,936 Elimination 3,184 4,208 ( 1,703 ) ( 1,341 ) Total Gross Profit $ 144,835 $ 145,559 $ 208,323 $ 205,588 Selling and Administrative Expenses Retail $ 90,086 $ 89,486 $ 169,090 $ 157,851 Wholesale 3,867 4,387 7,998 8,378 DSS 8,132 7,305 16,277 13,752 Corporate Services 5,075 6,809 12,289 14,253 Elimination ( 74 ) ( 85 ) ( 82 ) ( 97 ) Total Selling and Administrative Expenses $ 107,086 $ 107,902 $ 205,572 $ 194,137 Depreciation and Amortization Retail $ 8,869 $ 8,669 $ 18,398 $ 18,076 Wholesale 1,370 1,364 2,719 2,664 DSS 503 1,902 2,140 3,801 Corporate Services 17 17 35 35 Total Depreciation and Amortization $ 10,759 $ 11,952 $ 23,292 $ 24,576 Operating Income (Loss) Retail $ 30,547 $ 29,595 $ ( 3,993 ) $ ( 1,042 ) Wholesale 218 ( 131 ) 1,637 4,983 DSS ( 1,941 ) ( 2,301 ) ( 4,240 ) ( 3,617 ) Corporate Services ( 5,352 ) ( 6,867 ) ( 12,959 ) ( 15,226 ) Elimination 3,258 4,293 ( 1,621 ) ( 1,244 ) Total Operating Income (Loss) $ 26,730 $ 24,589 $ ( 21,176 ) $ ( 16,146 ) 13 weeks ended 26 weeks ended Reconciliation of segment Operating Income (Loss) to consolidated Income (Loss) Before Income Taxes: October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Total Operating Income (Loss) $ 26,730 $ 24,589 $ ( 21,176 ) $ ( 16,146 ) Interest Expense, net 4,886 2,264 8,754 4,758 Income (Loss) Before Income Taxes $ 21,844 $ 22,325 $ ( 29,930 ) $ ( 20,904 ) 15 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) (a) For the 26 weeks ended October 30, 2021, gross margin includes a merchandise inventory loss of $ 434 in the Retail Segment. See Note 2. Summary of Significant Accounting Policies - Merchandise Inventories . Note 5. Equity and Earnings Per Share Equity Share Repurchases During the 26 weeks ended October 29, 2022, we did not repurchase shares of our Common Stock under the stock repurchase program and as of October 29, 2022, approximately $ 26,669 remains available under the stock repurchase program. During the 26 weeks ended October 29, 2022, we repurchased 344,587 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 October 29, 2022 and October 30, 2021, average shares of 3,153,516 and 523,447 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively. During the 26 weeks ended October 29, 2022 and October 30, 2021, average shares of 4,898,303 and 3,771,594 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively. 16 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) The following is a reconciliation of the basic and diluted earnings per share calculation: 13 weeks ended 26 weeks ended (shares in thousands) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Numerator for basic earnings per share: Net income (loss) available to common shareholders $ 22,144 $ 22,528 $ ( 30,563 ) $ ( 21,100 ) Less allocation of earnings to participating securities ( 11 ) ( 64 ) — — Net income (loss) available to common shareholders $ 22,133 $ 22,464 $ ( 30,563 ) $ ( 21,100 ) Numerator for diluted earnings per share: Net income (loss) available to common shareholders $ 22,133 $ 22,464 $ ( 30,563 ) $ ( 21,100 ) Allocation of earnings to participating securities 11 64 — — Less diluted allocation of earnings to participating securities ( 11 ) ( 61 ) — — Net income (loss) available to common shareholders $ 22,133 $ 22,467 $ ( 30,563 ) $ ( 21,100 ) Denominator for basic earnings per share: Basic weighted average shares of Common Stock 52,438 51,666 52,305 51,570 Denominator for diluted earnings per share: Basic weighted average shares of Common Stock 52,438 51,666 52,305 51,570 Average dilutive restricted stock units 141 611 — — Average dilutive performance shares — — — — Average dilutive restricted shares 10 126 — — Average dilutive performance share units — 255 — — Average dilutive stock options 606 1,910 — — Diluted weighted average shares of Common Stock 53,195 54,568 52,305 51,570 Earnings (Loss) per share of Common Stock: Basic $ 0.42 $ 0.43 $ ( 0.58 ) $ ( 0.41 ) Diluted $ 0.42 $ 0.41 $ ( 0.58 ) $ ( 0.41 ) Note 6. Fair Value Measurements 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. 17 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) Non-Financial Assets and Liabilities Our non-financial assets include goodwill, property and equipment, operating lease right-of-use assets, and intangible assets. Such assets are reported at their carrying values and are not subject to recurring fair value measurements. 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 . Other Non-Financial Liabilities We granted phantom share units as long-term incentive awards which are settled in cash based on the fair market value of a share of common stock of the Company at each vesting date. The fair value of the liability for the cash-settled phantom share unit awards will be remeasured at the end of each reporting period through settlement to reflect current risk-free rate and volatility assumptions. As of October 29, 2022, we recorded a liability of $ 1,398 (Level 2 input) which is reflected in accrued liabilities ($ 1,318 ) and other long-term liabilities ($ 80 ) on the condensed consolidated balance sheet. As of October 30, 2021, we recorded a liability of $ 3,474 (Level 2 input) which is reflected in accrued liabilities ($ 2,345 ) and other long-term liabilities ($ 1,129 ) on the condensed consolidated balance sheet. For additional information, see Note 10. Long-Term Incentive Plan Compensation Expense . Note 7. Debt Credit Facility We have a credit agreement (the “Credit Agreement”), amended March 31, 2021 and 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 March 1, 2019 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 . As of October 29, 2022, we were in compliance with all debt covenants under the Credit Agreement. On March 4, 2022, we were granted a waiver to the condition to the draw scheduled for April 2022 under the FILO Facility, that Consolidated EBITDA (as defined in the Credit Agreement) minus Restricted Payments (as defined in the Credit Agreement) equal at least $110,000. Under the waiver amendment, the commitment under the FILO Facility of $25,000 was increased to $40,000, with all remaining terms unchanged. 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 April 30, 2022. During the 26 weeks ended October 29, 2022, we borrowed $ 318,200 and repaid $ 321,900 under the Credit Agreement, with $ 222,000 of outstanding borrowings as of October 29, 2022, comprised entirely of borrowings under the Credit Facility. During the 26 weeks ended October 30, 2021, we borrowed $ 259,720 and repaid $ 254,020 under the Credit Agreement, with $ 183,300 of outstanding borrowings as of October 30, 2021, comprised entirely of borrowings under the Credit Facility. As of both October 29, 2022 and October 30, 2021, we have issued $ 4,759 in letters of credit under the Credit Facility. Term Loan On June 7, 2022, we entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) with TopLids LendCo, LLC and Vital Fundco, LLC and we entered an amendment to our existing Credit Agreement. For additional information, see the Company’s Report on Form 8-K dated June 7, 2022 and filed with the SEC on June 10, 2022. The Term Loan Credit Agreement provides for term loans in an amount equal to $ 30,000 (the “Term Loan Facility” and, the loans thereunder, the “Term Loans”). The proceeds of the Term Loans are being used to finance working capital, and to pay fees and expenses related to the Term Loan Facility. During the 26 weeks ended October 29, 2022, we borrowed $ 30,000 and repaid $ 0 under the Term Loan Credit Agreement, with $ 30,000 of outstanding borrowings as of October 29, 2022. 18 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) We incurred debt issuance costs totaling $ 1,964 related to the Term Loan Credit Agreement. The debt issuance costs have been deferred and are presented as prepaid and other current assets and other noncurrent assets in the consolidated balance sheets, and subsequently amortized ratably over the term of the Term Loan Facility. The Term Loans accrue interest at a rate equal to 11.25%, payable quarterly, and mature on June 7, 2024. We have the right, through December 31, 2022, to pay all or a portion of the interest on the Term Loans in kind. To date, all interest on the term loan has been paid in cash. The Term Loans do not amortize prior to maturity. Solely to the extent that any Term Loans remain outstanding on June 7, 2023, we must pay a fee of 1.5% of the outstanding principal amount of the Term Loans on such date. The Term Loans are required to be repaid (i) after repayment of the FILO Facility under the Credit Agreement, with up to 100% of the proceeds of the sale of a non-core business line of the Company generating net proceeds in excess of $1,000, other than ordinary course dispositions and (ii) in full in connection with a debt or equity financing transaction generating net proceeds in excess of an amount sufficient to repay the FILO Facility under the Credit Agreement. The Term Loan Credit Agreement does not contain a financial covenant, but otherwise contains representations and warranties, covenants and events of default that are substantially the same as those in the Credit Agreement, including restrictions on the ability of the Company and its subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in asset sales and make dividends and distributions. The Term Loan Facility is secured by second-priority liens on all assets securing the obligations under the Credit Agreement, which is all of the assets of the Company and the Guarantors, subject to customary exclusions and limitations set forth in the Term Loan Credit Agreement and the other loan documents executed in connection therewith. The Credit Agreement amendment permitted us to incur the Term Loan Facility and also provides that, upon repayment of the Term Loan Credit Agreement (and, if applicable, any replacement credit facility thereof), we may incur second lien secured debt in an aggregate principal amount not to exceed $75,000. Note 8. 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. 19 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) The following table summarizes lease expense: 13 weeks ended 26 weeks ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Variable lease expense $ 25,281 $ 30,738 $ 40,465 $ 42,440 Operating lease expense 52,998 48,990 75,860 65,363 Net lease expense $ 78,279 $ 79,728 $ 116,325 $ 107,803 The increase in lease expense during the 26 weeks ended October 29, 2022 is primarily due to higher sales for contracts based on a percentage of revenue during the 26 weeks ended October 29, 2022, the impact of the timing due to contract renewals, and the increase in minimum contractual guarantees which were temporarily eliminated in the prior year due to limited on campus store traffic resulting from the COVID pandemic. The following table summarizes our minimum fixed lease obligations, excluding variable commissions, as of October 29, 2022: As of October 29, 2022 Remainder of Fiscal 2023 $ 102,628 Fiscal 2024 58,137 Fiscal 2025 50,811 Fiscal 2026 38,301 Fiscal 2027 30,161 Thereafter 83,321 Total lease payments 363,359 Less: imputed interest ( 41,799 ) Operating lease liabilities at period end $ 321,560 Future lease payment obligations related to leases that were entered into, but did not commence as of October 29, 2022, were not material. The following summarizes additional information related to our operating leases: As of October 29, 2022 October 30, 2021 Weighted average remaining lease term (in years) 5.3 years 5.3 years Weighted average discount rate 4.4 % 4.6 % Supplemental cash flow information: Cash payments for lease liabilities within operating activities $ 75,876 $ 64,103 Right-of-use assets obtained in exchange for lease liabilities from initial recognition $ 86,045 $ 77,811 Note 9. Supplementary Information Restructuring and other charges During the 13 and 26 weeks ended October 29, 2022, we recognized restructuring and other charges totaling $ 260 and $ 635 , respectively, comprised primarily of costs associated with professional service costs for restructuring and process improvements. During the 13 and 26 weeks ended October 30, 2021, we recognized restructuring and other charges totaling $ 1,116 and $ 3,021 , respectively, comprised primarily of $ 418 and $ 1,250 , respectively, for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives, ($ 754 is included in accrued liabilities in the condensed consolidated balance sheet as of October 30, 2021), $ 698 and $ 1,771 , respectively, for costs associated with professional service costs for restructuring, process improvements, development and integration associated with the FLC Partnership, shareholder activist activities, and liabilities for a facility closure. 20 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) Note 10. Long-Term Incentive Plan Compensation Expense We recognize compensation expense for restricted stock awards and performance share awards ratably over the requisite service period of the award, which is generally three years. We recognize compensation expense for these awards based on the number of awards expected to vest, which includes an estimated average forfeiture rate. We calculate the fair value of these awards based on the closing stock price on the date the award was granted. For those awards with market conditions, we have determined the grant date fair value using the Monte Carlo simulation model and compensation expense is recognized ratably over the requisite service period regardless of whether the market condition is satisfied. For stock options granted with an "at market" exercise price, we determined the grant fair value using the Black-Scholes model and for stock options granted with "a premium" exercise price, we determined the grant date fair value using the Monte Carlo simulation model. The fair value models for stock options use assumptions that include the risk-free interest rate, expected volatility, expected dividend yield and expected term of the options. During the 26 weeks ended October 29, 2022, we granted the following awards: • 82,628 restricted stock units ("RSU") awards and 11,804 restricted stock ("RS") awards with a one year vesting period to the Board of Directors ("BOD") members for annual compensation. • 878,247 restricted stock units ("RSU") awards to employees with a three year vesting period. • 322,495 stock options with an exercise price of $ 2.36 per stock option, which was the fair market value on the date of grant (Stock Option Grant #1) and 348,723 stock options with an exercise price of $ 4.86 per stock option, which was above the fair market value on the date of grant, (Stock Option Grant #2) granted to employees. The stock options are exercisable in four equal annual installments commencing one year after the date of grant and have a ten year term. Holders are not entitled to receive dividends (if any) prior to vesting and exercise of the options. The following summarizes the stock option fair value assumptions: Stock Option Grant #1 Stock Option Grant #2 Exercise Price $ 2.36 $ 4.86 Valuation method utilized Black-Scholes Monte Carlo Risk-free interest rate 3.28 % 3.28 % Expected option term 6.3 years 10.0 years Company volatility 74 % 74 % Dividend yield — % — % Grant date fair value per award $ 1.61 $ 1.28 The risk-free interest rate is based on United States Treasury yields in effect at the date of grant for periods corresponding to the expected stock option term. For Stock Option Grant #1, we are permitted to use the simplified approach to estimate the expected term of the stock options, which typically assumes exercise occurs at the mid-point between the end of the vesting period and the expiration date. The simplified approach is not allowed for premium-priced options (Stock Option Grant #2), which were estimated using a stock price multiple, as there is no option exercise history which to base an early exercise option. The expected stock option term represents the weighted average period of time that stock options granted are expected to be outstanding, based on vesting schedules and the contractual term of the stock options. Volatility is based on the historical volatility of the Company’s common stock over a period of time corresponding to the expected stock option term. 21 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) We recognized compensation expense for long-term incentive plan awards in selling and administrative expenses as follows: 13 weeks ended 26 weeks ended October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Stock-based awards Restricted stock expense $ 64 $ 119 $ 158 $ 207 Restricted stock units expense 990 931 2,013 1,661 Performance share units expense — 29 10 63 Stock option expense 665 399 1,329 669 Sub-total stock-based awards: $ 1,719 $ 1,478 $ 3,510 $ 2,600 Cash settled awards Phantom share units expense $ 66 $ 2,452 $ 268 $ 4,924 Total compensation expense for long-term incentive awards $ 1,785 $ 3,930 $ 3,778 $ 7,524 Total unrecognized compensation cost related to unvested awards as of October 29, 2022 was $ 13,077 and is expected to be recognized over a weighted-average period of 2.3 years. 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 $ 1,069 and $ 1,004 during the 13 weeks ended October 29, 2022 and October 30, 2021, respectively. Total employee benefit expense for these plans was $ 2,394 and $ 1,048 during the 26 weeks ended October 29, 2022 and October 30, 2021, respectively. Effective April 2020, due to the significant impact as a result of COVID-19 related campus store closures, we temporarily suspended employer matching contributions into our 401(k) plans. The matching contributions were reinstated effective July 25, 2021. Note 12. Income Taxes We recorded an income tax benefit of $( 300 ) on pre-tax income of $ 21,844 during the 13 weeks ended October 29, 2022, which represented an effective income tax rate of ( 1.4 )% and an income tax benefit of $( 203 ) on pre-tax income of $ 22,325 during the 13 weeks ended October 30, 2021, which represented an effective income tax rate of ( 0.9 )%. We recorded an income tax expense of $ 633 on pre-tax loss of $( 29,930 ) during the 26 weeks ended October 29, 2022, which represented an effective income tax rate of ( 2.1 )% and an income tax expense of $ 196 on pre-tax loss of $( 20,904 ) during the 26 weeks ended October 30, 2021, which represented an effective income tax rate of ( 0.9 )%. In assessing the realizability of the deferred tax assets, management considered whether it is more likely than not that some or all of the deferred tax assets would be realized. As of October 29, 2022, we determined that it was more likely than not that we would not realize all deferred tax assets and our tax rate for the current fiscal year reflects this determination. We will continue to evaluate this position. The effective tax rate for the 13 and 26 weeks ended October 29, 2022 is lower as compared to the prior year comparable period due to foreign taxes and lower projected annual taxable loss in the current year. Note 13. 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. 22 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 26 weeks ended October 29, 2022 and October 30, 2021 (Thousands of dollars, except share and per share data) (unaudited) Note 14. Subsequent Event On December 2, 2022, the Board of Directors approved a company-wide initiative to drive efficiencies, streamline operations, simplify the organizational structure and further reduce non-essential costs. These actions are expected to be substantially implemented within thirty days. The Company expects to incur restructuring charges, primarily related to severance, of approximately $5,000 to $6,000 in the third quarter of fiscal 2023 and expects to save $10,000 to $15,000 in fiscal year 2023. These initiatives are expected to provide annualized savings of $30,000 to $35,000 once fully implemented. The restructuring charges are excluded from non-GAAP adjusted EBITDA and from the annualized and fiscal year 2023 savings. 23 Table of Contents