What changed in this filing

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Item 1. Financial Statements

2021-10-07 compared with 2021-07-08 · 166 added, 102 removed, 401 unchanged (40% of the section changed)

5 unchanged sentences

Accounts receivable, less allowance for doubtful accounts of

$ 360,400 (May 31) and $ 331,900 (February 28)

$ 388,100 (August 31) and $ 331,900 (February 28)

Inventories - net

21 unchanged sentences

Authorized 16,000,000 shares;

Issued 12,410,080 shares;

Outstanding 8,348,314 (May 31) and 8,346,600 (February 28) shares

Issued 12,702,080 (August 31) and 12,410,080 (February 28) shares;

Outstanding 8,650,229 (August 31) and 8,346,600 (February 28) shares

Capital in excess of par value

6 unchanged sentences

CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)

Three Months Ended May 31,

Three Months Ended

Six Months Ended

Less discounts and allowances

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CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 31, 2021

FOR THE SIX MONTHS ENDED AUGUST 31, 2021

(par value $0.20 per share)

4 unchanged sentences

Dividends declared ($ 0.10 /share)

Share-based compensation expense (see Note 6)

Stock-based compensation (see note 6)

BALANCE - May 31, 2021

FOR THE THREE MONTHS ENDED MAY 31, 2020

Sales of treasury stock

Issuance of restricted share awards for vesting

Dividends declared ($ 0.10 /share)

Share-based compensation expense (see Note 6)

BALANCE - August 31, 2021

FOR THE SIX MONTHS ENDED AUGUST 31, 2020

(par value $0.20 per share)

7 unchanged sentences

BALANCE - May 31, 2020

Sales of treasury stock

Dividends declared ($ 0.06 /share)

Share-based compensation expense (see Note 6)

BALANCE - August 31, 2020

See notes to condensed financial statements (unaudited).

1 unchanged sentence

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended May 31,

Six Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES

31 unchanged sentences

Cash paid for income taxes

NON-CASH TRANSACTIONS

Accrued capital expenditures

See notes to condensed financial statements (unaudited).

13 unchanged sentences

We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business.

While the Company did not experience a decrease in net revenues during fiscal year 2021, the severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted.

While the Company did not experience a decrease in net revenues during fiscal year 2021, and the year-to-date result of fiscal 2022 are more normalized, the long-term severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact COVID-19 had during the current fiscal period.

22 unchanged sentences

Inventories consist of the following:

August 31, 2021

February 28, 2021

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Inventories net – noncurrent

Book inventory includes inventory in transit which totaled $ 4,114,600 and $ 6,467,400 at May 31, 2021 and February 28, 2021, respectively.

Book inventory includes inventory in transit which totaled $ 2,796,900 and $ 6,467,400 at August 31, 2021 and February 28, 2021, respectively.

Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2½ years of anticipated sales, are included in noncurrent inventory.

Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing, Ltd.

Purchases received from this company were $ 12,288,300 and $ 3,974,400 for the three months ended May 31, 2021 and 2020, respectively.

Total inventory purchases received from all suppliers were $ 17,785,200 and $ 5,846,600 for the three months ended May 31, 2021 and 2020, respectively.

Purchases received from this company were $ 12,127,000 and $ 7,357,600 for the three months ended August 31, 2021 and 2020, respectively.

Total inventory purchases received from all suppliers were $ 18,779,100 and $ 12,370,600 for the three months ended August 31, 2021 and 2020, respectively.

Purchases received from Usborne were $ 24,415,300 and $ 11,332,000 for the six months ended August 31, 2021 and 2020, respectively.

Total inventory purchases received from all suppliers were $ 36,564,300 and $ 18,217,200 for the six months ended August 31, 2021 and 2020, respectively.

Note 3 – LEASES

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Years ending February 28 (29),

The cost of the leased space was approximately $ 10,826,400 as of May 31, 2021 and February 28, 2021, respectively.

The accumulated depreciation associated with the leased assets was $ 2,312,100 and $ 2,216,700 as of May 31, 2021 and February 28, 2021, respectively.

The cost of the leased space was $ 10,828,600 and $ 10,826,400 as of August 31, 2021 and February 28, 2021, respectively.

The accumulated depreciation associated with the leased assets was $ 2,407,600 and $ 2,216,700 as of August 31, 2021 and February 28, 2021, respectively.

Both the leased assets and accumulated depreciation are included in property, plant and equipment-net on the condensed balance sheets.

1 unchanged sentence

Debt consists of the following:

August 31, 2021

February 28, 2021

9 unchanged sentences

Term Loan #1 is secured by the primary office, warehouse and land.

The outstanding borrowings on Term Loan #1 were $ 10,842,300 and $ 10,984,700 as of May 31, 2021 and February 28, 2021, respectively.

The Loan Agreement also provides a $ 15.0 million revolving loan (“line of credit”) through August 15, 2022 with interest payable monthly at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75% (the effective rate was 2.75 % at May 31, 2021).

Our borrowings outstanding on our line of credit at May 31, 2021 and February 28, 2021, were $ 8,732,500 and $ 5,245,300 , respectively.

Available credit under the revolving line of credit was approximately $ 6,267,500 and $ 9,570,200 at May 31, 2021 and February 28, 2021, respectively.

The outstanding borrowings on Term Loan #1 were $ 10,678,900 and $ 10,984,700 as of August 31, 2021 and February 28, 2021, respectively.

The Loan Agreement also provides a $ 20.0 million revolving loan (“line of credit”) through August 15, 2022 with interest payable monthly at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75% (the effective rate was 2.75 % at August 31, 2021).

On July 16, 2021, the Company executed the Second Amendment to the Loan Agreement which increased the Maximum Revolving Principal Amount from $15.0 million to $ 20.0 million.

On August 31, 2021, the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate.

Our borrowings outstanding on our line of credit as of August 31, 2021 and February 28, 2021, were $ 16,653,800 and $ 5,245,300 , respectively.

Available credit under the revolving line of credit was approximately $ 3,346,200 and $ 9,570,200 at August 31, 2021 and February 28, 2021, respectively.

In addition, the Loan Agreement provides a $ 6.0 million Advancing Term Loan to be used to finance planned equipment purchases.

The Advancing Term Loan requires interest-only payments through July 15, 2021, at which time it will convert to a 60-month amortizing term loan maturing July 15, 2026.

The Advancing Term Loan accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75% (the effective rate was 2.75 % at May 31, 2021).

Our borrowings outstanding under the Advancing Term Loan at May 31, 2021 were $ 3,896,200 and we had no borrowings at February 28, 2021.

The Advancing Term Loan required interest-only payments through July 15, 2021, at which time it was converted to a 60-month amortizing term loan maturing July 15, 2026.

Our borrowings outstanding under the Advancing Term Loan at August 31, 2021 were $ 5,244,700 and we had no borrowings at February 28, 2021.

Adjusted Funded Debt is defined as all long-term and short-term bank debt less the outstanding balance of Term Loan #1.

EBITDA is defined in the Loan Agreement as net income plus interest expense, income tax expense (benefit) and depreciation and amortization expenses.

The Adjusted Funded Debt to EBITDA ratio includes Adjusted Funded Debt to trailing twelve month EBITDA, reduced by specific rental income received from a non-related third party, see Note 3.

The Adjusted Funded Debt to EBITDA ratio includes Adjusted Funded Debt to trailing twelve months EBITDA, reduced by specific rental income received from a non-related third party, see Note 3.

The $20.0 million line of credit is limited to advance rates on eligible receivables and eligible inventory levels.

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The Bank agrees to issue or obtain issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than August 15, 2022, and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.

As of May 31, 2021, we had no letters of credit outstanding.

As of August 31, 2021, we had no letters of credit outstanding.

The Loan Agreement also contains provisions that require the Company to maintain specified financial ratios and limits any additional debt with other lenders.

7 unchanged sentences

The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below.

Three Months Ended May 31,

Three Months Ended

Six Months Ended

Net earnings applicable to common shareholders

1 unchanged sentence

Weighted average shares outstanding-basic

Issued unvested restricted stock and assumed shares issuable

under granted unvested restricted stock awards

Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards

Weighted average shares outstanding-diluted

7 unchanged sentences

In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”).

The 2019 LTI Plan establishes up to 600,000 shares of restricted stock which can be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 or 2021.

The 2019 LTI Plan established up to 600,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 or 2021.

The Company exceeded all defined metrics during these fiscal years and 600,000 shares were granted to members of management according to the Plan.

The granted shares under the 2019 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.

In July 2021, our shareholders approved the Company’s 2022 Long-Term Incentive Plan (“2022 LTI Plan”).

The 2022 LTI Plan establishes up to 300,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2022 and 2023.

The number of restricted shares to be distributed depends on attaining the performance metrics defined by the 2022 LTI Plan and may result in the distribution of a number of shares that is less than, but not greater than, the number of restricted shares outlined in the terms of the 2022 LTI Plan.

Restricted shares granted under the 2019 LTI Plan “cliff vest” after five years .

Restricted shares granted under the 2022 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.

During fiscal year 2019, the Company granted 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $ 9.94 per share.

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The remaining compensation expense for the outstanding awards, totaling approximately $ 980,200 , will be recognized ratably over the remaining vesting period of approximately 18 months.

During fiscal year 2021, the Company initially granted 151,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $ 6.30 per share.

8,000 of these shares were granted, forfeited and re-granted to remaining participants in fiscal year 2021.

In the third quarter of fiscal year 2021, the Company increased the number of shares granted for fiscal year 2021 from 151,000 to 305,000 due to revised performance expectations for the year.

During fiscal year 2021, the Company granted 297,000 restricted shares under the 2019 LTI Plan, including the 5,000 aforementioned shares that were previously forfeited and held in Treasury, with an average grant-date fair value of $ 6.30 per share.

The remaining compensation expense of these awards, totaling approximately $ 1,374,800 , will be recognized ratably over the remaining vesting period of approximately 42 months.

As of May 31, 2021, there are no restricted shares available for issuance as future awards under the 2019 LTI Plan.

As of August 31, 2021, no shares have been granted under the 2022 LTI Plan.

A summary of compensation expense recognized in connection with restricted share awards follows:

Three Months Ended May 31,

Three Months Ended August 31,

Six Months Ended August 31,

Share-based compensation expense

The following table summarizes stock award activity during the first three months of fiscal year 2022 under the 2019 LTI Plan:

The following table summarizes stock award activity during the first six months of fiscal year 2022 under the 2019 LTI Plan:

Weighted Average Fair Value (per share)

Outstanding at February 28, 2021

Outstanding at May 31, 2021

As of May 31, 2021, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $ 2,616,600 , which we expect to recognize over a weighted-average period of 34.5 months.

Outstanding at August 31, 2021

As of August 31, 2021, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $ 2,355,000 , which we expect to recognize over a weighted-average period of 32.0 months.

Note 7 – SHIPPING AND HANDLING COSTS

1 unchanged sentence

Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies.

These costs were $ 6,356,400 and $ 6,315,300 for the three months ended May 31, 2021 and 2020, respectively.

These costs were $ 5,036,000 and $ 9,984,600 for the three months ended August 31, 2021 and 2020, respectively.

These costs were $ 11,392,400 and $ 16,299,900 for the six months ended August 31, 2021 and 2020, respectively.

Note 8 – BUSINESS SEGMENTS

10 unchanged sentences

Our assets and liabilities are not allocated on a segment basis.

Information by reporting segment for the three-month periods ended May 31, 2021 and 2020, are as follows:

Information by reporting segment for the three and six-month periods ended August 31, 2021 and 2020, are as follows:

Three Months Ended

Six Months Ended

EARNINGS (LOSS) BEFORE INCOME TAXES

Three Months Ended

Six Months Ended

Note 9 – FAIR VALUE MEASUREMENTS

7 unchanged sentences

We do not report any assets or liabilities at fair value in the financial statements.

However, the estimated fair value of our term notes payable is estimated by management to approximate $ 14,329,100 and $ 11,078,800 at May 31, 2021 and February 28, 2021, respectively.

However, the estimated fair value of our term notes payable is estimated by management to approximate $ 15,654,000 and $ 11,078,800 at August 31, 2021 and February 28, 2021, respectively.

Management’s estimates are based on the obligations’ characteristics, including floating interest rate, maturity, and collateral.

2 unchanged sentences

The Company’s UBAM division receives payments on orders in advance of shipment.

Any payments received prior to the end of the period that were not shipped as of May 31, 2021 or February 28, 2021 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 1,627,000 and $ 1,914,100 as of May 31, 2021 and February 28, 2021, respectively, in payments for sales orders which were shipped out subsequent to the end of the period.

Any payments received prior to the end of the period that were not shipped as of August 31, 2021 or February 28, 2021 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 751,400 and $ 1,914,100 , as of August 31, 2021 and February 28, 2021, respectively, in payments for sales orders which were shipped out subsequent to the end of the period.

Orders that were included in deferred revenues predominantly shipped within the first few days of the next fiscal period.

Note 11 – SUBSEQUENT EVENTS

On July 7, 2021 , the Board of Directors approved a $ 0.10 dividend that will be paid to shareholders of record on Tuesday, August 24, 2021 .

On October 6, 2021 , the Board of Directors approved a $ 0.10 dividend that will be paid to shareholders of record on Thursday, November 18, 2021 .

MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

14 unchanged sentences

The following table shows our condensed statements of earnings data:

Three Months Ended May 31,

Three Months Ended

Six Months Ended

Cost of goods sold

8 unchanged sentences

The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods.

Non-Segment Operating Results for the Three Months Ended May 31, 2021

Total operating expenses not associated with a reporting segment increased $0.7 million, or 18.4%, to $4.5 million for the three-month period ended May 31, 2021, when compared to $3.8 million for the same quarterly period a year ago.

Operating expenses increased primarily as a result of a $0.5 million increase in labor in our warehouse associated with increased gross sales, a $0.1 million increase in rent for additional warehouse space associated with our increased inventory and a $0.1 million increase in other expenses.

Interest expense remained consistent at $0.2 million for the three months ended May 31, 2021, when compared to $0.2 million for the same quarterly period a year ago.

Income taxes increased $0.5 million, or 71.4%, to $1.2 million for the three months ended May 31, 2021, from $0.7 million for the same quarterly period a year ago.

Our effective tax rate decreased 0.8%, to 26.2% for the quarter ended May 31, 2021, from 27.0% for the quarter ended May 31, 2020 due to sales mix fluctuations between states.

Non-Segment Operating Results for the Three Months Ended August 31, 2021

Total operating expenses not associated with a reporting segment decreased $0.8 million, or 16.0%, to $4.2 million for the three-month period ended August 31, 2021, when compared to $5.0 million for the same quarterly period a year ago.

Operating expenses decreased primarily as a result of a $0.6 million decrease in warehouse labor and a $0.4 million decrease in freight handling expenses, both resulting from a decrease in gross sales, offset by a $0.2 million increase in other various expenses.

Interest expense increased $0.1 million, or 100.0%, to $0.2 million for the three months ended August 31, 2021, when compared to $0.1 million for the same quarterly period a year ago associated with the increase in our line of credit and the addition of the Advancing Term Loan in the current fiscal year.

Income taxes decreased $0.7 million, or 46.7%, to $0.8 million for the three months ended August 31, 2021, from $1.5 million for the same quarterly period a year ago.

Our effective tax rate increased to 28.6% for the quarter ended August 31, 2021, from 26.6% for the quarter ended August 31, 2020 due to sales mix fluctuations between states.

Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

UBAM Operating Results for the Three Months Ended May 31, 2021

Non-Segment Operating Results for the Six Months Ended August 31, 2021

Total operating expenses remained consistent at $8.7 million for the six-month periods ended August 31, 2021 and August 31, 2020.

Warehouse labor decreased $0.2 million and freight handling decreased $0.4 million for the six months ended August 31, 2021, both associated with reduced sales.

These changes were offset by increased warehouse rental of $0.2 million and property insurance of $0.1 million associated with increased inventory levels along with a $0.3 million increase in other various expenses.

Interest expense increased $0.1 million, or 33.3%, to $0.4 million for the six months ended August 31, 2021, when compared to $0.3 million for the same period a year ago as a result of the increase in our line of credit and the addition of the Advancing Term Loan in the current fiscal year.

Income taxes decreased $0.3 million, or 13.0%, to $2.0 million for the six months ended August 31, 2021, from $2.3 million for the same period a year ago.

Our effective tax rate increased to 27.1% for the six months ended August 31, 2021, from 26.7% for the six months ended August 31, 2020 due to sales mix fluctuations between states.

Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

UBAM Operating Results for the Three and Six Months Ended August 31, 2021

The following table summarizes the operating results of the UBAM segment:

Three Months Ended May 31,

Three Months Ended

Six Months Ended

Less discounts and allowances

8 unchanged sentences

Average number of active consultants

UBAM net revenues increased $0.7 million, or 1.9%, to $37.6 million during the three months ended May 31, 2021, when compared to $36.9 million during the same period a year ago.

The average number of active consultants in the first quarter of fiscal 2022 was 55,100, an increase of 22,000 or 66.5%, from 33,100 average active consultants selling in the first quarter of fiscal 2021.

UBAM Operating Results for the Three Months Ended August 31, 2021

UBAM net revenues decreased $27.4 million, or 48.2%, to $29.5 million during the three months ended August 31, 2021, when compared to $56.9 million during the same period a year ago.

The average number of active consultants in the second quarter of fiscal 2022 was 46,100, an increase of 700, or 1.5%, from 45,400 selling in the second quarter of fiscal 2021.

The Company reports the average number of active consultants each quarter as a key indicator for this division.

UBAM's increase in active consultants resulted from several factors, including:

an increase in families looking for non-traditional income streams to supplement or replace income lost from the COVID-19 pandemic;

a change in new consultant kits which offered lower introductory prices;

the restructure of our UBAM consultant success program, which was introduced during the first quarter of fiscal 2021;

and technology improvements that have enhanced the customer experience and streamlined the proprietary systems that our consultants use to run their business.

Our increase in active consultants and our ability to receive orders online and deliver directly to our customers’ homes resulted in our increased revenues during the quarter.

Gross margin increased $1.2 million, or 4.6%, to $27.4 million during the three months ended May 31, 2021, when compared to $26.2 million during the same period a year ago, primarily associated with the growth in net revenues.

Gross margin as a percentage of net revenues increased 1.7%, to 72.8% for the three-month period ended May 31, 2021, when compared to 71.1% the same period a year ago.

The increase in gross margin as a percentage of net revenues resulted from increased volume rebates from our largest supplier and increased freight revenues due to rate change made in our fiscal 2021 fourth quarter that applies to a majority of shipments to our customers.

During the quarter ended August 31, 2020 our sales per average number of active consultants increased significantly to due to the increase in demand for our products resulting from the impacts of the COVID-19 pandemic.

During last summer, school closings and public interaction restrictions increased the need for educational materials in the home and our consultants were positioned to fill this increased demand.

During the quarter ended August 31, 2021, our sales per average number of active consultants remained consistent with years prior to the COVID-19 pandemic.

Gross margin decreased $19.9 million, or 48.8%, to $20.9 million during the three months ended August 31, 2021, when compared to $40.8 million during the same period a year ago, primarily associated with the decrease in net revenues.

Gross margin as a percentage of net revenues decreased 1.0%, to 70.7% for the three-month period ended August 31, 2021, when compared to 71.7% the same period a year ago.

The decrease in gross margin as a percentage of net revenues resulted from a change in order mix partially offset by reduced cost of goods sold.

During the quarter ended August 31, 2021 sales through book fairs, booths and home parties increased over the second quarter last year when these sales types were challenged.

These sales types have higher sales discounts and pay less sales commissions to our consultants, resulting in similar operating income.

Reduced cost of goods sold resulted from larger volume discounts and vendor rebates associated with increased purchasing volumes over pre-COVID-19 levels.

UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses.

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General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the UBAM segment.

Total operating expenses decreased $0.9 million, or 4.4%, to $19.5 million during the three-month period ended May 31, 2021, when compared to $20.4 million reported in the same quarter a year ago.

Operating and selling expenses decreased $0.1 million, to $5.3 million during the three-month period ended May 31, 2021, when compared to $5.4 million reported in the same quarter a year ago, primarily due to a decrease in postage and freight expenses.

Sales commissions decreased $0.7 million, to $12.9 million during the three-month period ended May 31, 2021, when compared to $13.6 million reported in the same quarter a year ago, due primarily to the change in order type mix.

School and Library orders were stronger in the first quarter of fiscal 2022 as schools were primarily closed during the first quarter of last year.

School and Library orders have larger discounts and pay less commissions than web sale orders.

General and administrative expenses decreased $0.1 million, to $1.3 million during the three months ended May 31, 2021, when compared to $1.4 million during the same period a year ago.

Operating income of the UBAM segment increased $2.1 million, or 36.2%, to $7.9 million during the three months ended May 31, 2021, when compared to $5.8 million reported in the same quarter a year ago, primarily due to the change in gross margin and order type mix.

Operating income of the UBAM division as a percentage of net revenues for the three months ended May 31, 2021 increased to 20.9%, compared to 15.8% for the three months ended May 31, 2020.

Publishing Operating Results for the Three Months Ended May 31, 2021

Total operating expenses decreased $15.8 million, or 50.8%, to $15.3 million during the three-month period ended August 31, 2021, when compared to $31.1 million reported in the same quarter a year ago.

Operating and selling expenses decreased $4.9 million, or 53.8%, to $4.2 million during the three-month period ended August 31, 2021, when compared to $9.1 million reported in the same quarter a year ago, primarily due to a decrease in net revenues and a decrease in postage and freight peak charges we experienced in the second quarter last year.

Sales commissions decreased $10.3 million, or 51.0%, to $9.9 million during the three-month period ended August 31, 2021, when compared to $20.2 million reported in the same quarter a year ago, due primarily to the decrease in net revenues.

General and administrative expenses decreased $0.6 million, or 35.3%, to $1.1 million during the three months ended August 31, 2021, when compared to $1.7 million during the same period a year ago, due primarily to reduced bank fees from less credit card transactions during the quarter ended August 31, 2021.

Operating income of the UBAM segment decreased $4.1 million, or 42.3%, to $5.6 million during the three months ended August 31, 2021, when compared to $9.7 million reported in the same quarter a year ago, primarily due to the change in net revenues.

Operating income of the UBAM division as a percentage of net revenues for the three months ended August 31, 2021 increased to 18.9%, compared to 17.0% for the three months ended August 31, 2020, primarily from reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes and reduced outbound shipping peak charges experienced in the second quarter last year.

UBAM Operating Results for the Six Months Ended August 31, 2021

UBAM net revenues decreased $26.7 million, or 28.5%, to $67.1 million during the six-month period ended August 31, 2021, compared to $93.8 million from the same period a year ago.

The average number of active consultants in the six-month period ended August 31, 2021 was 50,200, an increase of 10,900, or 27.7%, from 39,300 selling in same period a year ago.

During the six months ended August 31, 2020 our sales per average number of active consultants increased significantly due to the increase in demand for our products resulting from the impacts of the COVID-19 pandemic.

School closings and quarantine restrictions increased the need for educational materials in the home and our consultants were positioned to fill this increased demand.

During the six months ended August 31, 2021, our sales per average number of active consultants remained consistent with years prior to the COVID-19 pandemic.

Gross margin decreased $18.8 million, or 28.1%, to $48.2 million during the six-month period ended August 31, 2021, when compared to $67.0 million during the same period a year ago, due primarily to a decrease in net revenues.

Gross margin as a percentage of net revenues increased to 71.9% for the six-month period ended August 31, 2021, when compared to 71.4% for the same period a year ago.

During the six months ended August 31, 2021 , sales through book fairs, booths and home increased over the first six months of fiscal year 2021 when these sales types were challenged.

These sales types have higher sales discounts and pay less sales commissions to our consultants, resulting in similar operating income.

The decrease in gross margin percentage associated with the mix from these sales types was offset by reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes over pre-COVID-19 levels.

Total operating expenses decreased $16.7 million, or 32.4%, to $34.8 million during the six-month period ended August 31, 2021, from $51.5 million for the same period a year ago.

Operating and selling expenses decreased $5.0 million, or 34.2%, to $9.6 million during the six-month period ended August 31, 2021, when compared to $14.6 million reported in the same period a year ago, primarily due to a decrease in shipping costs associated with the decrease in volume of orders shipped.

Sales commissions decreased $11.0 million, or 32.5%, to $22.8 million during the six-month period ended August 31, 2021, when compared to $33.8 million reported in the same period a year ago, primarily due to the decrease in net revenues along with a lower percentage of internet-based sales, which offer fewer discounts and higher sales commissions to consultants.

General and administrative expenses decreased $0.7 million, or 21.9%, to $2.5 million, from $3.2 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes.

Operating income of the UBAM segment decreased $2.1 million, or 13.5%, to $13.4 million during the six months ended August 31, 2021, when compared to $15.5 million reported in the same period last year.

Operating income of the UBAM division as a percentage of net revenues for the six months ended August 31, 2021 was 20.0%, compared to 16.5% for the six months ended August 31, 2020, a change of 3.5%.

Operating income as a percentage of net revenues increased from the prior year primarily from reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes and reduced outbound shipping peak charges experienced during the first six months of the prior fiscal year.

Publishing Operating Results for the Three and Six Months Ended August 31, 2021

The following table summarizes the operating results of the Publishing segment:

Three Months May 31,

Three Months Ended

Six Months Ended

Less discounts and allowances

3 unchanged sentences

Operating income

Our Publishing division’s net revenues increased $1.8 million, or 128.6%, to $3.2 million during the three-month period ended May 31, 2021, from $1.4 million reported in the same period a year ago.

Many Publishing customers began to re-open in the latter half of fiscal year 2021 after closing in the first quarter of fiscal year 2021 due to the COVID-19 pandemic.

Gross margin increased $0.7 million, or 100.0%, to $1.4 million during the three-month period ended May 31, 2021, from $0.7 million reported in the same quarter a year ago, primarily due to the increase in net revenues.

Gross margin as a percentage of net revenues decreased 4.0%, to 44.2% during the three-month period ended May 31, 2021, from 48.2% reported in the same quarter a year ago.

Publishing Operating Results for the Three Months Ended August 31, 2021

Our Publishing division’s net revenues increased $1.2 million, or 52.2%, to $3.5 million during the three-month period ended August 31, 2021, from $2.3 million reported in the same period a year ago.

Many Publishing customers began to reopen in the latter half of fiscal year 2021 after closing in the first quarter of fiscal year 2021 due to the COVID-19 pandemic.

Gross margin increased $0.4 million, or 33.3%, to $1.6 million during the three-month period ended August 31, 2021, from $1.2 million reported in the same quarter a year ago, primarily due to the increase in net revenues.

Gross margin as a percentage of net revenues decreased to 46.4% during the three-month period ended August 31, 2021, from 49.5% reported in the same quarter a year ago.

Gross margin as a percentage of net revenues fluctuates primarily from the different discount levels offered to customers as well as changes in the mix of products sold between Kane Miller and Usborne.

Total operating expenses of the Publishing segment increased $0.2 million to $0.5 million, from $0.3 million, during the three-month periods ended May 31, 2021 and 2020, primarily as a result of increased freight expenses due to increased sales.

Operating income of the Publishing segment increased to $0.9 million from $0.3 million for the three-month periods ended May 31, 2021 and 2020, primarily driven by the increase in gross margin.

Total operating expenses of the Publishing segment increased $0.2 million, or 50.0%, to $0.6 million, from $0.4 million, during the three-month periods ended August 31, 2021 and 2020, primarily as a result of increased freight expenses from an increase in sales.

Operating income of the Publishing segment increased $0.3 million, or 42.9%, to $1.0 million from $0.7 million for the three-month periods ended August 31, 2021 and 2020, primarily driven by the increase in net revenues.

Publishing Operating Results for the Six Months Ended August 31, 2021

Our Publishing division’s net revenues increased $3.0 million, or 81.1%, to $6.7 million during the six-month period ended August 31, 2021, from $3.7 million reported in the same period a year ago.

The increase in sales resulted from temporary store closures impacted by the COVID-19 pandemic in fiscal year 2021.

Many Publishing customers temporarily closed during the first quarter of fiscal year 2021, following the guidance from their local authorities to slow the spread of the pandemic, and began reopening at varying times in the latter half of fiscal year 2021.

Gross margin increased $1.2 million, or 66.7%, to $3.0 million during the six-month period ended August 31, 2021, from $1.8 million reported in the same period a year ago, primarily due to the increase in net revenues.

Gross margin as a percentage of net revenues decreased to 45.4%, during the six-month period ended August 31, 2021, from 49.1% reported in the same period a year ago.

The decrease in gross margin percentage results primarily from a change in our customer mix.

Customers receive varying discounts due to sales volumes and contract terms.

Total operating expenses of the Publishing segment increased $0.5 million, or 71.4%, to $1.2 million during the six-month period ended August 31, 2021, from $0.7 million reported in the same period a year ago, resulting from a $0.3 million increase in postage and freight from an increase in sales volumes and a $0.2 million increase in sales commissions from an increase in sales volumes.

Operating income of the Publishing segment increased $0.7 million, or 63.6%, to $1.8 million during the six-month period ended August 31, 2021 when compared to $1.1 million reported in the same period a year ago, due primarily to the increase in net revenues.

Liquidity and Capital Resources

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We have utilized a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures, when necessary.

During the first three months of fiscal 2022, we generated negative cash flows from our operations of $4,876,400.

These cash flows resulted from:

During the first six months of fiscal year 2022, we experienced cash outflows from operations of $12,422,100.

These cash outflows resulted from:

●net earnings of $5,336,300

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●share-based compensation expense of $523,300

●deferred income taxes of $237,500

●provision for inventory valuation allowance of $120,000

●provision for doubtful accounts of $61,600

Positively impacted by:

●increase in income tax payable of $967,700

●deferred income taxes of $48,500

Negatively impacted by:

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●decrease in accrued salaries and commissions, and other liabilities of $4,076,900

●increase in accounts receivable of $665,100

●decrease in accounts payable of $577,400

●decrease in deferred revenues of $1,162,700

●increase in accounts receivable of $609,300

●increase in prepaid expenses and other assets of $158,200

●decrease in accounts payable of $104,700

●decrease in income taxes payable of $4,100

Cash used in investing activities was $3,210,200 for capital expenditures, which were comprised of $2,849,700 in equipment purchased to increase our daily shipping capacity, $280,500 in software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders and $80,000 in building and building improvements.

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Term Loan #1 was amended on April 1, 2021 by executing the First Amendment to the Loan Agreement which reduced the fixed interest rate to 3.12% and removed the prepayment premium from the Loan Agreement.

The outstanding borrowings on Term Loan #1 were $10.8 million and $11.0 million as of May 31, 2021 and February 28, 2021, respectively.

The outstanding borrowings on Term Loan #1 were $10.7 million and $11.0 million as of August 31, 2021 and February 28, 2021, respectively.

In addition, the Amended and Restated Loan Agreement provides a $6.0 million Advancing Term Loan to be used to finance planned equipment purchases.

The Advancing Term Loan requires interest-only payments through July 15, 2021, at which time it will convert to a 60-month amortizing term loan maturing July 15, 2026.

Our borrowings outstanding under the Advancing Term Loan at May 31, 2021 were $3.9 million.

The Advancing Term Loan required interest-only payments through July 15, 2021, at which time it was converted to a 60-month amortizing term loan maturing July 15, 2026.

The Advancing Term Loan accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75%.

Our borrowings outstanding under the Advancing Term Loan at August 31, 2021 were $5.2 million.

The Amended and Restated Loan Agreement also provides a $20.0 million revolving loan (“line of credit”) through August 15, 2022 with interest payable monthly at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75%.

Our borrowings outstanding on our line of credit at May 31, 2021 and February 28, 2021 were $8.7 million and $5.2 million.

Available credit under the revolving line of credit was approximately $6.3 million and $9.6 million at May 31, 2021 and February 28, 2021, respectively.

On July 16, 2021, the Company executed the Second Amendment to the Loan Agreement which increased the Maximum Revolving Principal Amount from $15.0 million to $20.0 million.

On August 31, 2021, the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate.

Our borrowings outstanding on our line of credit at August 31, 2021 and February 28, 2021 were $16.7 million and $5.2 million, respectively.

Available credit under the revolving line of credit was approximately $3.3 million and $9.6 million at August 31, 2021 and February 28, 2021, respectively.

The Amended and Restated Loan Agreement also contains a provision for our use of the Bank’s letters of credit.

The Bank agrees to issue or obtain issuance of commercial or stand-by letters of credit provided that the sum of the line of credit plus the letters of credit issued would not exceed the borrowing base in effect at the time.

As of May 31, 2021, we had no letters of credit outstanding.

As of August 31, 2021, we had no letters of credit outstanding.

The agreement contains provisions that require us to maintain specified financial ratios, place limitations on additional debt with other banks, limit the amounts of dividends declared and limits the number of shares that can be repurchased using funding from the line of credit.

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It is industry practice to accept non-damaged returns from retail customers.

Management has estimated and included a reserve for sales returns of $0.2 million as of May 31, 2021 and February 28, 2021.

Management has estimated and included a reserve for sales returns of $0.2 million as of August 31, 2021 and February 28, 2021.

Allowance for Doubtful Accounts

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An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends.

Management has estimated and included an allowance for doubtful accounts of $0.4 million at May 31, 2021, and $0.3 million at February 28, 2021.

Included within this allowance is $0.1 million of reserve for vendor discounts to sell remaining inventory as of May 31, 2021 and February 28, 2021.

Management has estimated and included an allowance for doubtful accounts of $0.4 million at August 31, 2021, and $0.3 million at February 28, 2021.

Included within this allowance is $0.1 million of reserve for vendor discounts to sell remaining inventory as of August 31, 2021 and February 28, 2021.

Our inventory contains over 2,000 titles, each with different sell through rates depending upon the nature and popularity of the title.

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These inventory quantities have exposure of becoming out of date, and therefore have higher obsolescence reserves.

Noncurrent inventory balances prior to valuation allowances were $1.0 million and $0.9 million at May 31, 2021 and February 28, 2021, respectively.

Noncurrent inventory valuation allowances were $0.2 million at May 31, 2021 and February 28, 2021.

Noncurrent inventory balances prior to valuation allowances were $1.1 million and $0.9 million at August 31, 2021 and February 28, 2021, respectively.

Noncurrent inventory valuation allowances were $0.3 million and $0.2 million at August 31, 2021 and February 28, 2021, respectively.

Our principal supplier, based in England, generally requires a minimum re-order of 6,500 or more of a title in order to get a solo print run.

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in summary, having consignment inventory leads to additional sales opportunities.

Approximately 4.2% of our active consultants maintained consignment inventory at the end of the first quarter of fiscal 2022.

Approximately 4.8% of our active consultants maintained consignment inventory at the end of the second quarter of fiscal 2022.

Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company.

The total cost of inventory on consignment with consultants was $1.1 million for both May 31, 2021 and February 28, 2021.

The total cost of inventory on consignment with consultants was $1.2 million and $1.1 million at August 31, 2021 and February 28, 2021, respectively.

Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company.

Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory.

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.7 million for both May 31, 2021 and February 28, 2021.

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.8 million and $0.7 million at August 31, 2021 and February 28, 2021, respectively.

Share-Based Compensation

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Shares purchased with cash dividends will also retain the same restrictions until the completion of the original vesting period associated with the awarded shares.

The restricted share awards granted under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) contain both service and performance conditions.

The restricted share awards under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) and 2022 Long-Term Incentive Plan (“2022 LTI Plan”) contain both service and performance conditions.

The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting.

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The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.

During the first three months of fiscal year 2022, the Company recognized $0.3 million of compensation expense associated with the shares granted.

During the first six months of fiscal year 2022, the Company recognized $0.5 million of compensation expense associated with the shares granted.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements