EDUCATIONAL DEVELOPMENT CORP 10-K

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management ’ s Discussion and Analysis of Financial Condition and Results of Operations contains a discussion of our business, including a general overview of our segments, our results of operations, our liquidity and capital resources, and our quantitative and qualitative disclosures about market risk. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of our control. Our actual results could differ materially from those discussed in these forward-looking statements. See “ Cautionary Remarks Regarding Forward Looking Statements ” in the front of this Annual Report on Form 10-K. Management Summary We are the exclusive United States trade co-publisher of Usborne children’s books and the owner of Kane Miller. We operate two separate segments; UBAM and Publishing, to sell our Usborne and Kane Miller children’s books. These two segments each have their own customer base. The Publishing segment markets its products on a wholesale basis to various retail accounts. The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, social media platform events (called “online parties”) and book fairs. All other supporting administrative activities are recognized as other expenses outside of our two segments. Other expenses are primarily compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate offices and distribution facilities. 7 Table of Contents UBAM Division Our UBAM division uses a multi-level direct selling platform to market books through independent sales representatives (“consultants”) located throughout the United States. The customer base of UBAM consists of individual purchasers, as well as schools and public libraries. Revenues are primarily generated through book showings in individual homes, on social media collaboration platforms, through book fairs with school and public libraries and other events. An important factor in the continued growth of the UBAM division is the addition of new sales consultants and the retention of existing consultants. Current active consultants (defined as those with sales during the past six months) often recruit new sales consultants. UBAM makes it easy to recruit by providing sign-up kits for which new consultants can earn rewards including discounted books and cash based on exceeding certain sales criteria. In addition, our UBAM division provides our consultants with an extensive operational handbook, valuable training and an individual website they can customize and use to operate their business. Consultants FY 2022 FY 2021 New Consultants Added During Fiscal Year 26,100 56,100 Active Consultants at End of Fiscal Year 36,100 57,600 Our UBAM division’s multi-level marketing platform presently has eight levels of sales representatives: ● Consultants ● Team Leaders ● Advanced Leaders ● Senior Leaders ● Executive Leaders ● Senior Executive Leaders ● Directors ● Senior Directors Upon signing up, sales representatives begin as “Consultants”. Consultants receive “weekly commissions” from each sale they make; the commission rate they receive on each sale is determined by the marketing program under which the sale is made. In addition, Consultants receive a monthly sales bonus once their sales reach an established monthly goal and other awards (called “Home Office Challenges”) for meeting other individual sales and recruiting goals for the month. Consultants who recruit a specified number of other consultants into their downline “central group” become “Team Leaders”. Upon reaching this Team Leader level, consultants become eligible to receive “monthly override payments” which are calculated on sales made from their downline central group of recruits. Team Leaders that recruit and promote other Team Leaders, and meet other established criteria, are eligible to become “Advanced Leaders”. Once Advanced Leaders promote a second level consultant, add additional recruits and meet other established criteria, they become “Senior Leaders”, “Executive Leaders”, “Senior Executive Leaders”, “Directors” or “Senior Directors”. One-time bonus payments are made to consultants at each promotion level. Executive Leaders and higher receive an additional monthly override payment based upon the sales of their downline groups. Directors and higher receive an additional bonus payment if they promote an Advanced Leader to a Senior Leader from their central group. The maximum override payment a leader can receive is calculated on three levels below their downline central group. During fiscal year 2022, internet sales continued to be the largest sales channel within our UBAM division. The use of social media and party plan platforms, such as those available on Facebook, continue to be popular sales tools. These platforms allow consultants to “present” and customers to “attend” online purchasing events from any geographical location. 8 Table of Contents Customer’s internet orders are primarily received via the consultant’s customized website, which is hosted by the Company. Consultants contact hosts or hostesses (collectively “hostess”) who then provide a list of contacts to invite to an online party. During the online party, the consultant answers attendee’s questions and provides product recommendations. These attendees then select desired products and place orders via the consultant’s customized website. Internet orders are processed through a standard online “shopping cart checkout” and the consultant receives sales credit and commission on the transaction. All internet orders are shipped directly to the end customer. The hostess earns discounted books based on the total sales from the attendees at the online party. Home parties occur when consultants contact hostesses to hold book shows in their homes. The consultant assists the hostess in setting up the details for the show, makes a presentation at the show and takes orders for the books. The hostess earns discounted books based on the total sales at the party, including internet orders for those customers who can only attend via online access. Home party orders are typically shipped to the hostess who then distributes the books to the end customer. Customer specials are also available when customers, or their party, order above a specified amount. Additionally, home shows often provide an excellent opportunity for recruiting new consultants. UBAM net revenues also includes sales to schools and libraries through educational consultants. The school and library program includes book fairs which are held with an organization as the sponsor. The consultant provides promotional materials to introduce our books to parents. Parents turn in their orders at a designated time. The book fair program generates discounted books for the sponsoring organization. UBAM also has various fundraiser programs. Reach for the Stars is a pledge-based reading incentive program that provides cash and books to the sponsoring organization and books for the participating children. An additional fundraising program, Cards for a Cause , offers our consultants the opportunity to help members of the community by sharing proceeds from the sale of specific items. Organizations sell variety boxes of greeting-type cards and donate a portion of the proceeds to help support their related causes. Publishing Division Our Publishing division operates in a market that is highly competitive, with a large number of retail companies engaged in the selling of books. The Publishing division’s customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To reach these markets, the Publishing division utilizes a combination of commissioned sales representatives located throughout the country and a commissioned in-house sales group located at our headquarters. The table below shows the percentage of net revenues from our Publishing division based on market type. Publishing Division Net Revenues by Market Type FY 2022 FY 2021 National chain bookstores 2 % 5 % All other 98 % 95 % Total net revenues 100 % 100 % Publishing uses a variety of methods to attract potential new customers and maintain current customers. Our employees attend many of the national trade shows held by the book selling industry each year, allowing us to contact potential buyers who may be unfamiliar with our books. We actively target the national book chains through joint promotional efforts and institutional advertising in trade publications. Our products are then featured in promotions, such as catalogs, offered by the vendor. We may also seek to acquire, for a fee, an end cap position (our products are placed on the end of a shelf) in a bookstore, which we and the publishing industry consider an advantageous location in the bookstore. Publishing’s in-house sales group targets the smaller independent book and gift store customers. This market has seen continued growth over the past several years as our sales to large bookstore chains have fluctuated based primarily on the number of promotions that we are able to run in the national chain stores. Our semi-annual, full-color, 200-page catalogs, are mailed to over 4,000 customers and potential customers. We also offer two display racks to assist stores in displaying our products. Our Publishing division activities and sales were significantly impacted during fiscal year 2021 due to the COVID-19 pandemic. Many of the national trade shows were canceled and a significant number of our retail customers temporarily closed to comply with their local health department recommendations. However, Publishing sales significantly increased this fiscal year due to the addition of new customers and stores opening back up to pre-pandemic levels. 9 Table of Contents Result of Operations The following table shows our statements of earnings data: Twelve Months Ended February 28, 2022 2021 Net revenues $ 142,228,800 $ 204,635,100 Cost of goods sold 44,297,500 60,037,000 Gross margin 97,931,300 144,598,100 Operating expenses Operating and selling 23,010,400 36,123,700 Sales commissions 44,377,500 69,977,200 General and administrative 20,302,200 22,541,500 Total operating expenses 87,690,100 128,642,400 Other (income) expense Interest expense 916,400 561,000 Other income (1,911,100 ) (1,836,100 ) Earnings before income taxes 11,235,900 17,230,800 Income taxes 2,929,100 4,606,800 Net earnings $ 8,306,800 $ 12,624,000 See the detailed discussion of net revenues, gross margin and operating expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related operating expenses, other income and expenses and income taxes during the respective periods. Non-Segment Operating Results Total operating expenses not associated with a reporting segment were $17.8 million for fiscal year ended February 28, 2022, compared to $19.4 million for the same period a year ago. Operating expenses decreased $1.6 million primarily related to a decrease in warehouse labor of $1.6 million driven by efficiencies gained from the addition of two new pick-pack-ship lines in fiscal year 2022 and lower sales, plus a $1.0 million decrease in freight-handling costs from the decrease in number of outbound shipments, offset by a $0.5 million increase in depreciation expense related to the addition of the new pick-pack-ship lines and a $0.5 million increase in warehouse rent for the increase in inventory. Interest expense increased $0.3 million, to $0.9 million for fiscal year ended February 28, 2022, compared to $0.6 million reported for fiscal year ended February 28, 2021 due primarily to the increase in our line of credit and the addition of the advancing term loans in the current fiscal year. Income taxes decreased $1.7 million, to $2.9 million for fiscal year ended February 28, 2022, from $4.6 million for the same period a year ago. This decrease was primarily related to a decrease in taxable income for the current fiscal year compared to the prior fiscal year. The effective tax rate decreased by 0.6%, to 26.1% for fiscal year ended February 28, 2022, as compared to 26.7% for fiscal year ended February 28, 2021 primarily 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. 10 Table of Contents UBAM Operating Results The following table summarizes the operating results of the UBAM segment for the twelve months ended February 28: Twelve Months Ended February 28, 2022 2021 Gross sales $ 159,303,800 $ 237,317,700 Less discounts and allowances (44,187,200 ) (65,099,100 ) Transportation revenue 13,861,900 23,790,700 Net revenues 128,978,500 196,009,300 Cost of goods sold 37,150,600 55,603,000 Gross margin 91,827,900 140,406,300 Operating expenses Operating and selling 18,800,300 31,182,700 Sales commissions 43,801,300 69,707,200 General and administrative 4,788,800 6,695,800 Total operating expenses 67,390,400 107,585,700 Operating income $ 24,437,500 $ 32,820,600 Average number of active consultants 44,900 48,700 UBAM net revenues decreased $67.0 million, or 34.2%, to $129.0 million for fiscal year ended February 28, 2022, when compared with net revenues of $196.0 million reported for fiscal year ended February 28, 2021. The average number of active consultants in fiscal year 2022 was 44,900, a decrease of 3,800, or 7.8%, from 48,700 in fiscal year 2021. The Company reports the average number of active consultants as a key indicator for this division. During fiscal year 2021, our active consultants grew from 29,600 at the beginning of the year to 57,600 at the end of the fiscal year. This active consultant growth resulted from pandemic-related events such as seeking replacement income from loss of full-time employment, an increase in the need for work-from-home opportunities and an increased demand for educational products in the home. During fiscal year 2022 our active consultant count has declined due to consultants returning to full-time work, as well as families experiencing children returning to the classroom, therefore requiring less learning-from-home materials than they had in the prior year. While a decrease in sales and consultants has occurred in fiscal year 2022, our UBAM division’s active consultants and sales continue to exceed pre-pandemic levels. UBAM gross margin decreased $48.6 million, or 34.6%, to $91.8 million for fiscal year ended February 28, 2022, from $140.4 million reported for fiscal year ended February 28, 2021. Gross margin as a percentage of net revenues decreased 0.4% to 71.2% for fiscal year 2022 when compared to 71.6% for fiscal year 2021. The decrease in gross margin as a percentage of net revenues was due to the change in mix of order types received. In the current fiscal year, our web sales, which have the lowest discounts and pay the highest commissions decreased, while book fairs, school and library sales and other in-person sale types increased year over year, due to the lessening of COVID-19 restrictions and the reopening of schools and other in-person activities. Total UBAM operating expenses decreased $40.2 million, or 37.4%, to $67.4 million during the fiscal year ended February 28, 2022, when compared with $107.6 million reported for fiscal year ended February 28, 2021. Operating and selling expenses decreased $12.4 million, to $18.8 million for fiscal year ended February 28, 2022, from $31.2 million reported in the same period a year ago due to a $11.4 million decrease in shipping costs associated with the decrease in volume of orders shipped and a $1.0 million decrease in accruals for the Company’s annual incentive trip and other consultant rewards associated with the decrease in UBAM sales. Sales commissions decreased $25.9 million, to $43.8 million during the fiscal year ended February 28, 2022, when compared to $69.7 million reported in the same period a year ago primarily due to the decrease in net revenues. General and administrative expenses decreased $1.9 million, to $4.8 million during the fiscal year ended February 28, 2022, when compared with $6.7 million reported for fiscal year ended February 28, 2021. This decrease was due to $1.5 million of decreased credit card transaction fees associated with decreased sales volumes and a $0.4 million decrease in promotions and marketing expenses associated with decreased consultant counts. 11 Table of Contents Operating income of our UBAM division decreased $8.4 million, or 25.6%, to $24.4 million for fiscal year ended February 28, 2022, as compared to $32.8 million reported for fiscal year ended February 28, 2021. Operating income of the UBAM division as a percentage of net revenues for the year ended February 28, 2022 was 18.9%, compared to 16.7% for the year ended February 28, 2021, a change of 2.2%. Operating income as a percentage of net revenues changed from the prior year primarily due to $1.3 million of reduced freight handling costs primarily from reduced peak surcharges in the current fiscal year due to lower shipping volumes, a $0.4 million decrease in accrual expenses for the Company’s annual incentive trip and other consultant rewards resulting from less award earners, offset by a $0.6 million increase in cost of goods sold resulting from fewer rebates and discounts associated with purchase volumes as well as increased ocean freight costs on inbound inventory and $0.3 million in other various cost changes. Publishing Operating Results The following table summarizes the operating results of the Publishing segment for the twelve months ended February 28: Twelve Months Ended February 28, 2022 2021 Gross sales $ 28,163,000 $ 18,271,900 Less discounts and allowances (14,922,100 ) (9,715,600 ) Transportation revenue 9,400 69,500 Net revenues 13,250,300 8,625,800 Cost of goods sold 7,146,900 4,434,000 Gross margin 6,103,400 4,191,800 Total operating expenses 2,463,600 1,620,200 Operating income $ 3,639,800 $ 2,571,600 Our Publishing division’s net revenues increased $4.7 million, or 54.7%, to $13.3 million for fiscal year ended February 28, 2022, when compared with net revenues of $8.6 million reported for fiscal year ended February 28, 2021. Many Publishing customers closed their stores during the first and second quarters of fiscal year 2021 due to the COVID-19 pandemic and did not reopen until the third or fourth quarter of fiscal year 2021. As such, much of the sales increase resulted from the return of customer activity to pre-pandemic levels in fiscal year 2022. Gross margin increased $1.9 million, to $6.1 million for fiscal year ended February 28, 2022, from $4.2 million reported for fiscal year ended February 28, 2021. The increase in gross margin primarily resulted from the increase in net revenues. Gross margin as a percentage of net revenues decreased 2.5%, to 46.1% for fiscal year 2022, compared to 48.6% reported the same period a year ago. The decrease in gross margin percentage resulted primarily from the increase in cost of goods sold resulting from fewer rebates and discounts associated with purchase volumes as well as increased ocean freight costs on inbound inventory and a change in our customer mix. Customers receive varying discounts due to higher sales volumes and contract terms. Operating income for the segment increased $1.0 million, or 38.5%, to $3.6 million for fiscal year ended February 28, 2022, from $2.6 million reported during the same period last year. The increase in operating income resulted primarily from increased gross margin from increased sales partially offset by increased inside sales commissions due to the addition of new retail customers. Liquidity and Capital Resources EDC has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate. We also use available cash to pay down outstanding bank loan balances, for capital expenditures, to pay dividends and to acquire treasury stock. We 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. As of the end of fiscal year 2022, our revolving bank credit facility loan balance was $17.7 million with $2.3 million in available capacity. 12 Table of Contents During fiscal year 2022, we experienced negative cash flows from operations of $21,143,300. These cash flows resulted from: ● net earnings of $8,306,800 Adjusted for: ● depreciation expense of $2,126,700 ● share-based compensation expense of $1,046,500 ● provision for inventory valuation allowance of $235,700 ● provision for doubtful accounts of $115,800 Offset by: ● deferred income taxes of $208,600 Positively impacted by: ● increase in income taxes payable of $111,700 Negatively impacted by: ● increase in inventories, net of $21,396,900 ● decrease in accounts payable of $6,201,300 ● decrease in accrued salaries, commissions, and other liabilities of $2,868,300 ● decrease in deferred revenue of $1,794,300 ● increase in accounts receivable of $407,900 ● increase in prepaid expenses and other assets of $209,200 During the year our inventories increased significantly as we replenished quantities at volumes based on fiscal year 2021 sales. As sales during fiscal year 2022 have decreased, we have reduced purchase order quantities back to more historical sales levels. We expect our inventory levels to decline in fiscal year 2023 to more normalized levels. Cash used in investing activities was $3,940,900 for capital expenditures, which were comprised of $2,722,900 in equipment purchased to increase our daily shipping capacity, $618,300 in software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders, $376,000 in other building and equipment improvements, and $223,700 in patents and trademarks from the purchase of Learning Wrap-Ups. Cash provided by financing activities was $23,633,200 which was comprised of proceeds from term debt of $15,244,700, increase in borrowings on the line of credit of $12,478,200 and net cash received in treasury stock transactions of $617,100, offset by payments of $3,429,100 for dividends and payments on term debt of $1,277,700. We continue to expect the cash generated from our operations and cash available through our line of credit with our Bank will provide us the liquidity we need to support ongoing operations. Cash generated from operations will be used to pay down our line of credit, expand our product offerings, to liquidate existing debt, and any excess cash is expected to be distributed to our shareholders. On February 15, 2021, the Company executed the Amended and Restated Loan Agreement with MidFirst Bank which replaced the prior loan agreement and includes multiple loans. Term Loan #1 Tranche A (“Term Loan #1”), originally totaling $13.4 million, was part of the prior loan agreement. Term Loan #1 had a fixed interest rate of 4.23%, with principal and interest payable monthly and a stated maturity date of December 1, 2025. Term Loan #1 is secured by the primary office, warehouse and land. 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 $10.3 million and $11.0 million as of February 28, 2022 and February 28, 2021, respectively. In addition, the Amended and Restated Loan Agreement provides a $6.0 million Advancing Term Loan #1 to be used to finance planned equipment purchases. The Advancing Term Loan #1 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 #1 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 3.00%. Our borrowings outstanding under the Advancing Term Loan #1 at February 28, 2022 were $4.8 million. 13 Table of Contents 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 3.00%. 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 February 28, 2022 and February 28, 2021 were $17.7 million and $5.2 million, respectively. Available credit under the revolving line of credit was approximately $2.3 million and $9.6 million at February 28, 2022 and February 28, 2021, respectively. On November 19, 2021, the Company executed the Fourth Amendment to the Loan Agreement which established Advancing Term Loan #2 in the principal amount of $10.0 million, amended the definition of LIBO Rate and LIBOR Margin and added Benchmark Replacement Provisions. The Advancing Term Loan #2 is a 120-month amortizing loan maturing November 19, 2031 and 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 3.00%. Our borrowings outstanding under the Advancing Term Loan #2 at February 28, 2022 were $9.9 million. 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. For the year ended February 28, 2022, 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 amount of shares that can be repurchased using funding from the line of credit. The following table reflects aggregate future maturities of long-term debt during the next five fiscal years as follows: Years ending February 28 (29), 2023 $ 2,542,200 2024 2,591,800 2025 2,638,500 2026 10,489,800 2027 1,518,700 Thereafter 5,219,100 Total $ 25,000,100 During fiscal year 2022 we continued our quarterly dividend payments of $0.10. In April 2008, our Board of Directors amended our 1998 stock repurchase plan, establishing that we may purchase up to an additional 1,000,000 shares as market conditions warrant. In February 2019, our Board of Directors approved a new stock repurchase plan to replace the amended 2008 plan. Under the new 2019 plan, the Company is authorized to purchase up to 800,000 shares of common stock, which represented approximately 9% of the outstanding shares as of February 28, 2022, of which 514,594 remains available to purchase as of February 28, 2022. Management believes using excess liquidity to purchase outstanding shares enhances the value to the remaining shareholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity. Contractual Obligations We are a smaller reporting company and are not required to provide this information. Off Balance Sheet Arrangements As of February 28, 2022, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Seasonality The Company experiences increased sales in the Fall season. Historically, we have experienced an increase in inventory during the Summer in anticipation for the Fall increase in sales. In addition, new titles are typically released twice a year, in the Spring and Fall, which increases our inventory the months preceding these scheduled releases. The Company uses available cash or working capital borrowings to fund these increases in inventory. 14 Table of Contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions. Share-Based Compensation We account for share-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant. For awards subject to service conditions, compensation expense is recognized over the vesting period on a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche. Forfeitures are recognized when they occur. Any cash dividends declared after the restricted stock award is issued, but before the vesting period is completed, will be reinvested in Company shares at the opening trading price on the dividend payment date. 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 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. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. 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 fiscal years 2022 and 2021, the Company recognized $1.0 million and $0.9 million, respectively, of compensation expense associated with the shares granted. Revenue Recognition Sales associated with product orders are recognized and recorded when products are shipped. Products are shipped FOB- Shipping Point. UBAM’s sales are generally paid at the time the product is ordered. Sales which have been paid for but not shipped are classified as deferred revenue on the balance sheet. Sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted. Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped. Estimated allowances for sales returns are recorded as sales are recognized. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily received from the retail customers of our Publishing division. Those damages occur in the stores, not in shipping to the stores, and we typically do not offer credit for damaged returns. 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 for the fiscal years ended February 28, 2022 and February 28, 2021. 15 Table of Contents Allowance for Doubtful Accounts We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns, when applicable (collectively “allowance for doubtful accounts”). 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 $0.3 million for the fiscal years ended February 28, 2022 and February 28, 2021. Inventory Our inventory contains over 2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future. Most of our products are printed in China, Europe, Singapore, India, Malaysia and Dubai typically resulting in a four to six-month lead-time to have a title printed and delivered to us. Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to the minimum order requirements of our suppliers. Noncurrent inventory was estimated by management using the current year turnover ratio by title and anticipated sales of specific titles. Inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory. Noncurrent inventory balances prior to valuation allowances were $2.4 million and $0.9 million at February 28, 2022 and February 28, 2021, respectively. Noncurrent inventory valuation allowances were $0.4 million and $0.2 million at February 28, 2022 and February 28, 2021, respectively. Consultants that meet certain eligibility requirements may request and receive inventory on consignment. We believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events; in summary, having consignment inventory leads to additional sales opportunities. Approximately 6.4% of our active consultants have maintained consignment inventory at the end of fiscal year 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 $1.4 million and $1.1 million at February 28, 2022 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 $0.9 million and $0.7 million at February 28, 2022 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. Smaller orders would require a shared print run with the supplier’s other customers, which can result in lengthy delays to receive the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series. We then place the initial order or re-order based upon this analysis. These factors and historical analysis have led our management to determine that 2½ years represents a reasonable estimate of the normal operating cycle for our products. New Accounting Pronouncements See the New Accounting Pronouncements section of Note 1 to our financial statements, included in Part IV, Item 15 of this report, for further details of recent accounting pronouncements. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company and are not required to provide this information. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 begins at page 25. 16 Table of Contents Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None