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 39 weeks ended January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 Sales: Product sales and other $ 402,755 $ 377,713 $ 1,231,465 $ 1,182,812 Rental income 44,309 25,085 96,555 87,757 Total sales 447,064 402,798 1,328,020 1,270,569 Cost of sales (exclusive of depreciation and amortization expense): Product and other cost of sales 319,644 297,693 963,071 924,924 Rental cost of sales 23,210 18,144 52,416 53,096 Total cost of sales 342,854 315,837 1,015,487 978,020 Gross profit 104,210 86,961 312,533 292,549 Selling and administrative expenses 99,473 101,460 305,045 295,597 Depreciation and amortization expense 10,618 12,179 33,910 36,755 Impairment loss (non-cash) 6,008 6,411 6,008 6,411 Restructuring and other charges 5,975 46 6,610 3,067 Operating loss ( 17,864 ) ( 33,135 ) ( 39,040 ) ( 49,281 ) Interest expense, net 6,918 3,051 15,672 7,809 Loss before income taxes ( 24,782 ) ( 36,186 ) ( 54,712 ) ( 57,090 ) Income tax expense 267 615 900 811 Net loss $ ( 25,049 ) $ ( 36,801 ) $ ( 55,612 ) $ ( 57,901 ) Loss per share of common stock: Basic $ ( 0.48 ) $ ( 0.71 ) $ ( 1.06 ) $ ( 1.12 ) Diluted $ ( 0.48 ) $ ( 0.71 ) $ ( 1.06 ) $ ( 1.12 ) Weighted average shares of common stock outstanding: Basic 52,602 52,003 52,404 51,714 Diluted 52,602 52,003 52,404 51,714 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) January 28, 2023 January 29, 2022 April 30, 2022 (unaudited) (unaudited) (audited) ASSETS Current assets: Cash and cash equivalents $ 11,137 $ 9,967 $ 10,388 Receivables, net 277,513 250,187 137,039 Merchandise inventories, net 408,924 403,646 293,854 Textbook rental inventories 35,468 40,976 29,612 Prepaid expenses and other current assets 57,036 60,615 61,709 Total current assets 790,078 765,391 532,602 Property and equipment, net 92,225 93,752 94,072 Operating lease right-of-use assets 259,470 229,259 286,584 Intangible assets, net 114,947 133,975 129,624 Goodwill 4,700 4,700 4,700 Deferred tax assets, net — 15,613 — Other noncurrent assets 19,686 24,040 23,971 Total assets $ 1,281,106 $ 1,266,730 $ 1,071,553 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 355,348 $ 359,743 $ 182,790 Accrued liabilities 138,179 150,754 95,387 Current operating lease liabilities 116,051 100,773 97,143 Short-term borrowings — — 40,000 Total current liabilities 609,578 611,270 415,320 Long-term deferred taxes, net 1,601 — 1,430 Long-term operating lease liabilities 188,466 168,924 219,594 Other long-term liabilities 19,375 48,676 21,135 Long-term borrowings 285,600 200,400 185,700 Total liabilities 1,104,620 1,029,270 843,179 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, 55,140 , 54,234 and 54,234 shares, respectively; outstanding, 52,604 , 52,046 and 52,046 shares, respectively 551 542 542 Additional paid-in capital 745,417 738,968 740,838 Accumulated deficit ( 547,106 ) ( 480,538 ) ( 491,494 ) Treasury stock, at cost ( 22,376 ) ( 21,512 ) ( 21,512 ) Total stockholders' equity 176,486 237,460 228,374 Total liabilities and stockholders' equity $ 1,281,106 $ 1,266,730 $ 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) 39 weeks ended January 28, 2023 January 29, 2022 Cash flows from operating activities: Net loss $ ( 55,612 ) $ ( 57,901 ) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization expense 33,910 36,755 Content amortization expense 4,882 3,984 Amortization of deferred financing costs 2,058 1,087 Impairment loss (non-cash) 6,008 6,411 Merchandise inventory loss — 434 Deferred taxes 171 330 Stock-based compensation expense 4,588 4,463 Changes in other long-term assets and liabilities, net 362 260 Changes in operating lease right-of-use assets and liabilities 13,196 1,808 Changes in other operating assets and liabilities, net ( 32,145 ) 10,270 Net cash flows (used in) provided by operating activities ( 22,582 ) 7,901 Cash flows from investing activities: Purchases of property and equipment ( 26,899 ) ( 33,393 ) Net change in other noncurrent assets 572 734 Net cash flows used in investing activities ( 26,327 ) ( 32,659 ) Cash flows from financing activities: Proceeds from borrowings 512,000 463,220 Repayments of borrowings ( 452,100 ) ( 440,420 ) Payment of deferred financing costs ( 2,614 ) — Purchase of treasury shares ( 864 ) ( 2,370 ) Proceeds from the exercise of stock options, net — 256 Net cash flows provided by financing activities 56,422 20,686 Net increase (decrease) in cash, cash equivalents and restricted cash 7,513 ( 4,072 ) Cash, cash equivalents and restricted cash at beginning of period 21,934 16,814 Cash, cash equivalents and restricted cash at end of period $ 29,447 $ 12,742 Changes in other operating assets and liabilities, net: Receivables, net $ ( 140,474 ) $ ( 129,115 ) Merchandise inventories ( 115,070 ) ( 122,968 ) Textbook rental inventories ( 5,856 ) ( 12,284 ) Prepaid expenses and other current assets 14,034 ( 4,697 ) Accounts payable and accrued liabilities 215,221 279,334 Changes in other operating assets and liabilities, net $ ( 32,145 ) $ 10,270 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 Stock-based compensation expense 1,863 1,863 Vested equity awards 4 — — — Shares repurchased for tax withholdings for vested stock awards 2 ( 11 ) ( 11 ) Issuance of common stock upon exercise of stock options 68 1 219 220 Net loss ( 36,801 ) ( 36,801 ) Balance January 29, 2022 54,234 $ 542 $ 738,968 $ ( 480,538 ) 2,188 $ ( 21,512 ) $ 237,460 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 Stock-based compensation expense 1,078 1,078 Vested equity awards 9 — — — Shares repurchased for tax withholdings for vested stock awards 3 ( 7 ) ( 7 ) Net loss ( 25,049 ) ( 25,049 ) Balance January 28, 2023 55,140 $ 551 $ 745,417 $ ( 547,106 ) 2,536 $ ( 22,376 ) $ 176,486 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 39 weeks ended January 28, 2023 and January 29, 2022 (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 Reports on Form 10-Q for the quarter ended July 30, 2022, and for the quarter ended October 29, 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 1,388 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. D/B/A "Lids" (“Lids”) (collectively referred to herein as the “F/L 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 F/L 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 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 39 weeks ended January 28, 2023 and January 29, 2022 (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. As of January 28, 2023, 116 campus stores adopted our First Day Complete course materials delivery program for the 2023 Spring Term, representing approximately 580,000 in total undergraduate student enrollment (as reported by National Center for Education Statistics), compared to 76 campus stores representing approximately 380,000 in total undergraduate student enrollment for the 2022 Spring Term. During the 13 weeks ended January 28, 2023, First Day Complete sales increased by $28,912 to $66,901, or 76%, as compared to $37,989 in the prior year period. During the 39 weeks ended January 28, 2023, First Day Complete sales increased by $83,752 to $173,380, or 94%, as compared to $89,628 in the prior year period. Partnership with Fanatics and Lids In December 2020, we entered into the F/L 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, 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. Lids manages in-store assortment planning and merchandising of emblematic apparel, headwear, and gift products for our partner campus stores, and Lids 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. However, on campus traffic continues to grow from increased campus events and activities, as compared to the last two years. Our third quarter 2022 results were negatively impacted by a Covid variant experienced on campuses across the country during the 2022 Spring Term which did not recur during the 2023 Spring Term. While the impact of the COVID-19 pandemic is lessening, 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 8 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) 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. 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 39 weeks ended January 28, 2023 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 January 28, 2023 and January 29, 2022, we had restricted cash of $ 18,309 and $ 2,775 , respectively, comprised of $ 17,397 and $ 1,878 , respectively, in prepaid and other current assets in the condensed consolidated balance sheet related to segregated funds for commission due to Lids for logo merchandise sales as per the F/L Partnership's merchandising agreement, and $ 912 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 F/L Partnership merchandising agreement, we sold our logo general merchandise inventory to Lids 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 Fiscal 2022 condensed consolidated statement of operations for the Retail Segment. 9 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (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 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 F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids and Fanatics, we recognize commission revenue earned for these sales on a net 10 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) basis in our condensed consolidated financial statements, as compared to the recognition of logo general merchandise 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. 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 January 28, 2023, 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 completed our annual goodwill impairment test as of the first day of the third quarter of Fiscal 2023. 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. 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. We review our long-lived assets for impairment whenever events or changes in circumstances, including but not limited to contractual changes, renewals or amendments are made to agreements with our college, university, or K-12 schools, 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 January 28, 2023, our other long-lived assets include property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets of $ 92,225 , $ 259,470 , $ 114,947 , and $ 19,686 , respectively, on our condensed consolidated balance sheet. 11 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) Our business has been significantly negatively impacted by the COVID-19 pandemic, as many schools adjusted their learning models and on-campus activities. Although most academic institutions have since reopened, some are providing alternatives to traditional in-person instruction, including online and hybrid learning options and significantly reduced classroom sizes. Enrollment trends have been negatively impacted overall by COVID-19 concerns at physical campuses. While many athletic conferences resumed their sport activities, other events, such as parent and alumni weekends and prospective student campus tour activities, some may still be curtailed or offer a virtual option. These combined events continue to impact the Company’s course materials and general merchandise business. During the 13 weeks ended January 28, 2023, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $ 6,008 (both pre-tax and after-tax), comprised of $ 708 , $ 1,697 , $ 3,599 and $ 4 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the condensed consolidated statement of operations. During the 13 weeks ended January 29, 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $ 6,411 (both pre-tax and after-tax), comprised of $ 739 , $ 1,793 , $ 3,668 and $ 211 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the condensed consolidated statement of operations. The fair value of the impaired long-lived assets were determined using an income approach (Level 3 input), using the Company’s best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations. For additional information, see Note 6. Fair Value Measurements . 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. 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 39 weeks ended January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 Retail Course Materials Product Sales $ 286,714 $ 262,895 $ 834,190 $ 818,849 General Merchandise Product Sales (a) 81,813 76,777 293,285 248,400 Service and Other Revenue (b) 8,423 9,983 32,346 39,155 Retail Product and Other Sales sub-total 376,950 349,655 1,159,821 1,106,404 Course Materials Rental Income 44,309 25,085 96,555 87,757 Retail Total Sales $ 421,259 $ 374,740 $ 1,256,376 $ 1,194,161 Wholesale Sales $ 38,958 $ 37,039 $ 97,161 $ 103,192 DSS Sales (c) $ 9,010 $ 9,430 $ 26,659 $ 26,012 Eliminations (d) $ ( 22,163 ) $ ( 18,411 ) $ ( 52,176 ) $ ( 52,796 ) Total Sales $ 447,064 $ 402,798 $ 1,328,020 $ 1,270,569 12 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) (a) Effective in April 2021, as contemplated by the F/L Partnership's merchandising agreement and e-commerce agreement, we began to transition the fulfillment of logo general merchandise sales to Lids and Fanatics. The transition to Lids for campus stores was effective in April 2021, and the e-commerce websites transitioned to Fanatics throughout Fiscal 2022. As the logo general merchandise sales are fulfilled by Lids 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 general merchandise 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 Lids, respectively . The following table presents changes in deferred revenue associated with our contract liabilities: 39 weeks ended January 28, 2023 January 29, 2022 Deferred revenue at the beginning of period $ 19,722 $ 18,139 Additions to deferred revenue during the period 177,150 141,071 Reductions to deferred revenue for revenue recognized during the period ( 139,704 ) ( 103,619 ) Deferred revenue balance at the end of period: $ 57,168 $ 55,591 Balance Sheet classification: Accrued liabilities $ 52,891 $ 51,125 Other long-term liabilities 4,277 4,466 Deferred revenue balance at the end of period: $ 57,168 $ 55,591 As of January 28, 2023, we expect to recognize $ 52,891 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 1,388 college, university, and K-12 school bookstores, comprised of 785 physical bookstores and 603 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, 13 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) 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 3,000 physical bookstores (including our Retail Segment's 785 physical bookstores) and sources and distributes new and used textbooks to our 603 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 340 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. 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 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) Summarized financial information for our reportable segments is reported below: 13 weeks ended 39 weeks ended January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 Sales Retail $ 421,259 $ 374,740 $ 1,256,376 $ 1,194,161 Wholesale 38,958 37,039 97,161 103,192 DSS 9,010 9,430 26,659 26,012 Elimination ( 22,163 ) ( 18,411 ) ( 52,176 ) ( 52,796 ) Total Sales $ 447,064 $ 402,798 $ 1,328,020 $ 1,270,569 Gross Profit Retail (a) $ 88,926 $ 69,161 $ 272,421 $ 246,129 Wholesale 6,668 8,104 19,022 24,129 DSS 7,199 7,932 21,376 21,868 Elimination 1,417 1,764 ( 286 ) 423 Total Gross Profit $ 104,210 $ 86,961 $ 312,533 $ 292,549 Selling and Administrative Expenses Retail $ 82,753 $ 84,626 $ 251,843 $ 242,477 Wholesale 3,563 3,941 11,561 12,319 DSS 7,632 7,775 23,909 21,527 Corporate Services 5,572 5,154 17,861 19,407 Elimination ( 47 ) ( 36 ) ( 129 ) ( 133 ) Total Selling and Administrative Expenses $ 99,473 $ 101,460 $ 305,045 $ 295,597 Depreciation and Amortization Retail $ 8,749 $ 8,939 $ 27,147 $ 27,015 Wholesale 1,357 1,396 4,076 4,060 DSS 506 1,826 2,646 5,627 Corporate Services 6 18 41 53 Total Depreciation and Amortization $ 10,618 $ 12,179 $ 33,910 $ 36,755 Impairment loss (non-cash) - Retail (b) $ 6,008 $ 6,411 $ 6,008 $ 6,411 Restructuring and Other Charges (b) Retail $ 1,452 $ 30 $ 1,452 $ 2,113 Wholesale 931 — 931 — DSS 1,848 — 1,848 — Corporate Services 1,744 16 2,379 954 Total Restructuring and Other Charges $ 5,975 $ 46 $ 6,610 $ 3,067 Operating Loss Retail $ ( 10,036 ) $ ( 30,845 ) $ ( 14,029 ) $ ( 31,887 ) Wholesale 817 2,767 2,454 7,750 DSS ( 2,787 ) ( 1,669 ) ( 7,027 ) ( 5,286 ) Corporate Services ( 7,322 ) ( 5,188 ) ( 20,281 ) ( 20,414 ) Elimination 1,464 1,800 ( 157 ) 556 Total Operating Loss $ ( 17,864 ) $ ( 33,135 ) $ ( 39,040 ) $ ( 49,281 ) 15 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) 13 weeks ended 39 weeks ended Reconciliation of segment Operating Loss to Loss Before Income Taxes: January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 Total Operating Loss $ ( 17,864 ) $ ( 33,135 ) $ ( 39,040 ) $ ( 49,281 ) Interest Expense, net 6,918 3,051 15,672 7,809 Loss Before Income Taxes $ ( 24,782 ) $ ( 36,186 ) $ ( 54,712 ) $ ( 57,090 ) (a) For the 39 weeks ended January 29, 2022, gross margin includes a merchandise inventory loss of $ 434 in the Retail Segment. See Note 2. Summary of Significant Accounting Policies - Merchandise Inventories . (b) For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022, operating loss includes an impairment loss (non-cash) and restructuring and other charges. For additional information, see Note 9. Supplementary Information. Note 5. Equity and Earnings Per Share Equity Share Repurchases During the 39 weeks ended January 28, 2023, we did not repurchase shares of our Common Stock under the stock repurchase program and as of January 28, 2023, approximately $ 26,669 remains available under the stock repurchase program. During the 39 weeks ended January 28, 2023, we repurchased 347,808 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 January 28, 2023 and January 29, 2022, average shares of 4,677,926 and 4,233,063 were excluded from the diluted earnings per share calculation as their inclusion would have been antidilutive, respectively. During the 39 weeks ended January 28, 2023 and January 29, 2022, average shares of 4,824,844 and 3,295,417 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 per share calculation: 13 weeks ended 39 weeks ended (shares in thousands) January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 Numerator for basic and diluted earnings per share: Net loss available to common shareholders $ ( 25,049 ) $ ( 36,801 ) $ ( 55,612 ) $ ( 57,901 ) Denominator for basic and diluted earnings per share: Basic and diluted weighted average shares of Common Stock 52,602 52,003 52,404 51,714 Loss per share of Common Stock: Basic $ ( 0.48 ) $ ( 0.71 ) $ ( 1.06 ) $ ( 1.12 ) Diluted $ ( 0.48 ) $ ( 0.71 ) $ ( 1.06 ) $ ( 1.12 ) 16 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) 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. 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 . During the 13 weeks ended January 28, 2023 and January 29, 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment and based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $ 6,008 and $ 6,411 (both pre-tax and after-tax), respectively, on the condensed consolidated statement of operations. The fair value of the impaired long-lived assets were determined using an income approach (Level 3 input), using our best estimates of the amount and timing of future discounted cash flows, based on historical experience, market conditions, current trends and performance expectations. For additional information, see Note 2. Summary of Significant Accounting Policies . The following table shows the fair values of our non-financial assets and liabilities that were required to be remeasured at fair value on a non-recurring basis for each respective period and the total impairments recorded as a result of the remeasurement process: 13 and 39 weeks ended January 28, 2023 13 and 39 weeks ended January 29, 2022 Carrying Value Prior to Impairment Fair Value Impairment Loss (non-cash) Carrying Value Prior to Impairment Fair Value Impairment Loss (non-cash) Property and equipment, net $ 708 $ — $ 708 $ 742 $ 3 $ 739 Operating lease right-of-use assets 3,002 1,305 1,697 3,299 1,506 1,793 Intangible assets, net 3,599 — 3,599 3,745 77 3,668 Other noncurrent assets 4 — 4 211 — 211 Total $ 7,313 $ 1,305 $ 6,008 $ 7,997 $ 1,586 $ 6,411 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 January 28, 2023, we recorded a liability of $ 1,261 (Level 2 input) which is reflected in accrued liabilities ($ 1,205 ) and other long-term liabilities ($ 56 ) on the condensed consolidated balance sheet. As of January 29, 2022, we recorded a liability of $ 3,666 (Level 2 input) which is reflected in accrued liabilities ($ 2,397 ) and other long-term liabilities ($ 1,269 ) on the condensed consolidated balance sheet. For additional information, see Note 10. Long-Term Incentive Plan Compensation Expense . 17 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) Note 7. Debt Credit Facility We have a credit agreement (the “Credit Agreement”), amended from time to time including on 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 included an incremental first in, last out seasonal loan facility (the “FILO Facility”) for a $ 100,000 maintaining the maximum availability under the Credit Agreement at $ 500,000 . From and after July 31, 2022, commitments under the FILO Facility were reduced to $ 0 . As of January 28, 2023, we were in compliance with all debt covenants under the Credit Agreement. On March 8, 2023, subsequent to quarter end, we amended our existing Credit Agreement to, among other things, extend the maturity date thereunder by six months to August 29, 2024. The amendment also reduces the commitments under the Credit Agreement by $20,000 to $380,000. For additional information, see Note 14. Subsequent Event. 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 39 weeks ended January 28, 2023, we borrowed $ 512,000 and repaid $ 452,100 under the Credit Agreement, with $ 255,600 of outstanding borrowings as of January 28, 2023, comprised entirely of borrowings under the Credit Facility. During the 39 weeks ended January 29, 2022, we borrowed $ 463,220 and repaid $ 440,420 under the Credit Agreement, with $ 200,400 of outstanding borrowings as of January 29, 2022, comprised entirely of borrowings under the Credit Facility. As of both January 28, 2023 and January 29, 2022, 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 into an amendment to our existing Credit Agreement, which permitted us to incur the Term Loan Facility (as defined below). 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 39 weeks ended January 28, 2023, we borrowed $ 30,000 and repaid $ 0 under the Term Loan Credit Agreement, with $ 30,000 of outstanding borrowings as of January 28, 2023. On March 8, 2023, subsequent to quarter end, we amended the Term Loan Credit Agreement to, among other things, extend the maturity date thereunder by six months to December 7, 2024. For additional information, see Note 14. Subsequent Event. We incurred debt issuance costs totaling $ 2,614 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 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 18 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) 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. The following table summarizes lease expense: 13 weeks ended 39 weeks ended January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 Variable lease expense $ 17,242 $ 18,306 $ 57,707 $ 60,746 Operating lease expense 38,593 33,838 114,453 99,201 Net lease expense $ 55,835 $ 52,144 $ 172,160 $ 159,947 The increase in lease expense during the 39 weeks ended January 28, 2023 is primarily due to higher sales for contracts based on a percentage of revenue during the 39 weeks ended January 28, 2023, 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. 19 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) The following table summarizes our minimum fixed lease obligations, excluding variable commissions, as of January 28, 2023: As of January 28, 2023 Remainder of Fiscal 2023 $ 78,142 Fiscal 2024 60,526 Fiscal 2025 52,264 Fiscal 2026 38,777 Fiscal 2027 30,469 Thereafter 83,443 Total lease payments 343,621 Less: imputed interest ( 39,104 ) Operating lease liabilities at period end $ 304,517 Future lease payment obligations related to leases that were entered into, but did not commence as of January 28, 2023, were not material. The following summarizes additional information related to our operating leases: As of January 28, 2023 January 29, 2022 Weighted average remaining lease term (in years) 5.2 years 5.2 years Weighted average discount rate 4.5 % 4.6 % Supplemental cash flow information: Cash payments for lease liabilities within operating activities $ 100,130 $ 95,042 Right-of-use assets obtained in exchange for lease liabilities from initial recognition $ 91,365 $ 86,900 Note 9. 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 and 39 weeks ended January 28, 2023, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $ 6,008 (both pre-tax and after-tax), comprised of $ 708 , $ 1,697 , $ 3,599 and $ 4 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the condensed consolidated statement of operations. During the 13 and 39 weeks ended January 29, 2022, we evaluated certain of our store-level long-lived assets in the Retail segment for impairment. Based on the results of the impairment tests, we recognized an impairment loss (non-cash) of $ 6,411 (both pre-tax and after-tax), comprised of $ 739 , $ 1,793 , $ 3,668 and $ 211 of property and equipment, operating lease right-of-use assets, amortizable intangibles, and other noncurrent assets, respectively, on the condensed consolidated statement of operations. For additional information, see Note 2. Summary of Significant Accounting Policies and Note 6. Fair Value Measurements . Restructuring and other charges During the 13 and 39 weeks ended January 28, 2023, we recognized restructuring and other charges totaling $ 5,975 and $ 6,610 , respectively, comprised primarily of $ 4,696 in each period for severance and other employee termination and benefit costs associated with elimination of various positions as part of cost reduction objectives, ($ 781 is included in accrued liabilities in the condensed consolidated balance sheet as of January 28, 2023), and $ 1,279 and $ 1,914 , respectively, for costs primarily associated with professional service costs for restructuring and process improvements. 20 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) During the 13 and 39 weeks ended January 29, 2022, we recognized restructuring and other charges totaling $ 46 and $ 3,067 , respectively, comprised primarily of $ 0 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, ($ 202 is included in accrued liabilities in the condensed consolidated balance sheet as of January 29, 2022), $ 46 and $ 1,817 , respectively, for costs primarily associated with professional service costs for restructuring, process improvements, development and integration associated with the F/L Partnership. 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 39 weeks ended January 28, 2023, 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. • 908,247 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 39 weeks ended January 28, 2023 and January 29, 2022 (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 39 weeks ended January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 Stock-based awards Restricted stock expense $ 7 $ 94 $ 165 $ 301 Restricted stock units expense 679 1,106 2,692 2,767 Performance share units expense — 28 10 91 Stock option expense 392 635 1,721 1,304 Sub-total stock-based awards: $ 1,078 $ 1,863 $ 4,588 $ 4,463 Cash settled awards Phantom share units expense $ ( 138 ) $ 192 $ 130 $ 5,116 Total compensation expense for long-term incentive awards $ 940 $ 2,055 $ 4,718 $ 9,579 Total unrecognized compensation cost related to unvested awards as of January 28, 2023 was $ 9,838 and is expected to be recognized over a weighted-average period of 2.1 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 $ 1,151 and $ 1,155 during the 13 weeks ended January 28, 2023 and January 29, 2022, respectively. Total employee benefit expense for these plans was $ 3,545 and $ 2,203 during the 39 weeks ended January 28, 2023 and January 29, 2022, 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 expense of $ 267 on pre-tax loss of $( 24,782 ) during the 13 weeks ended January 28, 2023, which represented an effective income tax rate of ( 1.1 )% and an income tax expense of $ 615 on pre-tax loss of $( 36,186 ) during the 13 weeks ended January 29, 20221, which represented an effective income tax rate of ( 1.7 )%. We recorded an income tax expense of $ 900 on pre-tax loss of $( 54,712 ) during the 39 weeks ended January 28, 2023, which represented an effective income tax rate of ( 1.6 )% and an income tax expense of $ 811 on pre-tax loss of $( 57,090 ) during the 39 weeks ended January 29, 2022, which represented an effective income tax rate of ( 1.4 )%. 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 January 28, 2023, 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 weeks ended January 28, 2023 is higher as compared to the prior year comparable period due to state tax adjustments recorded in the prior year. The effective tax rate for the 39 weeks ended January 28, 2023 is lower as compared to the prior year comparable period due to foreign taxes and lower projected annual taxable loss in the current year. 22 Table of Contents BARNES & NOBLE EDUCATION, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements For the 13 and 39 weeks ended January 28, 2023 and January 29, 2022 (Thousands of dollars, except share and per share data) (unaudited) 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. Note 14. Subsequent Event Credit Agreement Amendment On March 8, 2023, subsequent to quarter end, we amended our existing Credit Agreement to (i) extend the maturity date of the Credit Agreement by six months to August 29, 2024, (ii) reduce the commitments under the Credit Agreement by $20,000 to $380,000, (iii) increase the applicable margin with respect to the interest rate under the Credit Agreement to 3.375% per annum, in the case of interest accruing based on a Secured Overnight Financing Rate, and 2.375%, in the case of interest accruing based on an alternative base rate, in each case, without regard to a pricing grid, (iv) reduce advance rates with respect to the borrowing base (x) by 500 basis points upon the achievement of certain liquidity events, which may include a sale of equity interests or of assets (a “Specified Event”), or, if such a Specified Event shall not have occurred, on May 31, 2023 and (y) by an additional 500 basis points on September 29, 2023, (v) amend certain negative covenants and add certain additional covenants, (vi) amend the financial maintenance covenant to require Availability (as defined in the Credit Agreement) to be at all times greater than the greater of 10% of the Aggregate Loan Cap (as defined in the Credit Agreement) and $32,500 and (vii) require repayment of the loans under the Credit Agreement upon a Specified Event. In addition, the amendment requires the achievement of a Special Event by no later than May 31, 2023 (as such date may be extended pursuant to the terms of the Credit Agreement). We paid a fee of 0.25% of the outstanding principal amount of the commitments under the Credit Agreement on the amendment closing date and we will pay an additional fee of 1.00% of the outstanding principal amount of the commitments under the Credit Agreement on September 29, 2023. Term Loan Agreement Amendment On March 8, 2023, subsequent to quarter end, we amended the Term Loan Credit Agreement to (i) extend the maturity date of the Term Loan Credit Agreement by six months to December 7, 2024, (ii) permit the application of certain proceeds to the repayment of the loans under Credit Agreement and (iii) amend certain negative covenants and add certain additional covenants to conform to the Credit Agreement. In addition, the amendment requires the achievement of a Specified Event (as described above) by no later than May 31, 2023 (as such date may be extended under the Credit Agreement, but no later than August 31, 2023 without consent from lenders under the Term Loan Credit Agreement). We paid a fee of $50 on the amendment closing date to the lenders under the Term Loan Credit Agreement. For additional information related to the Credit Agreement amendment and the Term Loan Agreement amendment, see the Company’s Report on Form 8-K dated March 8, 2023 and filed with the SEC on March 9, 2023. 23 Table of Contents