What changed in this filing

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Item 1. Financial Statements

2023-01-06 compared with 2022-10-06 · 191 added, 166 removed, 398 unchanged (47% of the section changed)

5 unchanged sentences

Accounts receivable, less allowance for doubtful accounts of

$ 238,600 (August 31) and $ 336,700 (February 28)

$ 247,400 (November 30) and $ 336,700 (February 28)

Inventories - net

7 unchanged sentences

Accounts payable

Current maturities of long-term debt

Line of credit

Deferred revenues

Current maturities of long-term debt

Accrued salaries and commissions

4 unchanged sentences

LONG-TERM DEBT - net

DEFERRED INCOME TAX LIABILITY

OTHER LONG-TERM LIABILITIES

3 unchanged sentences

Authorized 16,000,000 shares;

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

Outstanding 8,685,289 (August 31) and 8,707,247 (February 28) shares

Issued 12,702,080 (November 30 and February 28) shares;

Outstanding 8,713,289 (November 30) and 8,707,247 (February 28) shares

Capital in excess of par value

7 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Less discounts and allowances

15 unchanged sentences

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED AUGUST 31, 2022

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2022

(par value $0.20 per share)

9 unchanged sentences

BALANCE - August 31, 2022

FOR THE SIX MONTHS ENDED AUGUST 31, 2021

Issuance of restricted share awards for vesting

Share-based compensation expense - net

BALANCE - November 30, 2022

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2021

(par value $0.20 per share)

11 unchanged sentences

BALANCE - August 31, 2021

Sales of treasury stock

Dividends declared ($ 0.10 /share)

Share-based compensation expense - net

BALANCE - November 30, 2021

See notes to condensed financial statements (unaudited).

1 unchanged sentence

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended August 31,

Nine Months Ended November 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Net earnings (loss)

Adjustments to reconcile net earnings (loss) to net cash used in operating activities:

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

Deferred income taxes

9 unchanged sentences

Deferred revenues

Income taxes payable

Income taxes payable/receivable

Total adjustments

Net cash used in operating activities

Net cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

4 unchanged sentences

Payments on term debt

Payments on debt issue costs

Proceeds from term debt

Sales of treasury stock

Net borrowings (payments) on line of credit

Net payments on line of credit

Dividends paid

6 unchanged sentences

Cash paid for income taxes (net of refunds)

NON-CASH TRANSACTIONS

Accrued capital expenditures

See notes to condensed financial statements (unaudited).

21 unchanged sentences

Significant Accounting Policies

Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented herein and unless other disclosed, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 28, 2022 included in our Form 10-K.

Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented herein and unless otherwise disclosed, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 28, 2022 included in our Form 10-K.

New Accounting Pronouncements

6 unchanged sentences

Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date.

This ASU is effective March 12, 2020 through December 31, 2022.

This ASU was effective March 12, 2020 through December 31, 2022 (updated to December 31, 2024 by the December 2022 issuance of ASU 2022-06).

With the execution of the Company’s new Credit Agreement with BOKF, NA on August 9, 2022, the Company no longer has a loan agreement utilizing interest rates that reference LIBOR.

2 unchanged sentences

Inventories consist of the following:

August 31, 2022

November 30, 2022

February 28, 2022

5 unchanged sentences

Inventories net – noncurrent

Inventory in transit totaled $ 442,800 and $ 2,732,400 at August 31, 2022 and February 28, 2022, respectively.

Inventory in transit totaled $ 291,900 and $ 2,732,400 at November 30, 2022 and February 28, 2022, 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 Limited (“Usborne”).

Our distribution agreement includes annual minimum purchase volumes along with specific payment terms, which if not met or payments are not received timely may result in termination of the agreement.

Should termination of the agreement occur, the Company will be allowed to sell through their remaining Usborne inventory over the twelve months following the termination date.

Purchases received from Usborne were $ 1,206,200 and $ 12,127,000 for the three months ended August 31, 2022 and 2021, respectively.

Total inventory purchases received from all suppliers were $ 3,163,100 and $ 18,779,100 for the three months ended August 31, 2022 and 2021, respectively.

Purchases received from Usborne were $ 4,783,500 and $ 24,415,300 for the six months ended August 31, 2022 and 2021, respectively.

Total inventory purchases received from all suppliers were $ 9,141,700 and $ 36,564,300 for the six months ended August 31, 2022 and 2021, respectively.

Note 3 – LEASES

3 unchanged sentences

Our lessee arrangements include two rental agreements where we have the exclusive use of dedicated office space in San Diego, California, as well as warehouse and office space in Layton, Utah, and both qualify as an operating lease.

Our lessor arrangements include three rental agreements for warehouse and office space in Tulsa, Oklahoma, and each qualify as an operating lease under ASC 842.

Our lessor arrangements include two rental agreements for warehouse and office space in Tulsa, Oklahoma, and each qualify as an operating lease under ASC 842.

Operating Leases – Lessor

2 unchanged sentences

Years ending February 28 (29),

The cost of the leased space was $ 10,834,300 for both August 31, 2022 and February 28, 2022, respectively.

The accumulated depreciation associated with the leased assets was $ 2,796,700 and $ 2,603,300 as of August 31, 2022 and February 28, 2022, respectively.

The cost of the leased space was $ 10,637,900 and $ 10,834,300 at November 30, 2022 and February 28, 2022, respectively.

The accumulated depreciation associated with the leased assets was $ 2,759,700 and $ 2,603,300 as of November 30, 2022 and February 28, 2022, 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, 2022

November 30, 2022

February 28, 2022

19 unchanged sentences

Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26 %

Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75 % (effective rate was 4.03 % at August 31, 2022)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50 % (effective rate was 4.78 % at August 31, 2022)

Revolving Loan allows for Letters of Credit up to $ 7,500,000 (none were outstanding at August 31, 2022)

Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75 % (effective rate was 5.48 % at November 30, 2022)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50 % (effective rate was 6.23 % at November 30, 2022)

Revolving Loan allows for Letters of Credit up to $ 7,500,000 upon bank approval (none were outstanding at November 30, 2022)

The Loan Agreement also contains provisions that require the Company to maintain a minimum fixed charge ratio and limits any additional debt with other lenders.

Available credit under the current $ 15,000,000 revolving line of credit with the Lender was approximately $ 2,939,100 at August 31, 2022.

Available credit under the current $ 15,000,000 revolving line of credit with the Lender was approximately $ 6,005,500 at November 30, 2022.

The following table reflects aggregate future scheduled maturities of long-term debt during the next five fiscal years and thereafter as follows:

Years ending February 28 (29),

Note 5 – BUSINESS CONCENTRATION

Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing Limited (“Usborne”).

During fiscal 2023, we entered into a new distribution agreement (“Agreement”) with Usborne.

The Agreement includes annual minimum purchase volumes along with specific payment terms, which if not met or payments are not received timely may result in termination of the agreement.

Should termination of the agreement occur, the Company will be allowed to sell through the remaining Usborne inventory for an agreed upon term not less than twelve months following the termination date.

Under the terms in the Agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne will use a different distributor to supply retail accounts with its products.

The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023.

Usborne’s products sold within the Publishing Division accounted for 85.6 % and 89.2 % of all products sold during the three and nine months ended November 30, 2022, respectively.

Additionally, an inventory purchase volume rebate from Usborne of $ 900,000 , which was earned for purchases in fiscal 2022 and due to the Company, has been disputed.

As a result of that dispute, the realization of that rebate became uncertain, resulting in the Company reversing the recorded rebate until the uncertainty is resolved.

Purchases received from Usborne were $ 4,782,200 and $ 10,728,800 for the three months ended November 30, 2022 and 2021, respectively.

Total inventory purchases received from all suppliers were $ 6,738,100 and $ 15,946,700 for the three months ended November 30, 2022 and 2021, respectively.

Purchases received from Usborne were $ 9,565,700 and $ 35,144,100 for the nine months ended November 30, 2022 and 2021, respectively.

Total inventory purchases received from all suppliers were $ 15,879,800 and $ 52,511,000 for the nine months ended November 30, 2022 and 2021, respectively.

Note 6 – EARNINGS PER SHARE

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Earnings (loss):

7 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Weighted average shares:

15 unchanged sentences

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.

In fiscal year 2021, 5,000 of these restricted shares were forfeited.

These shares were made available to be reissued to remaining participants upon forfeiture.

During fiscal year 2023, 10,000 of these restricted shares were forfeited, along with 969 additional shares purchased with dividends received from the original issue date.

The fiscal year 2023 forfeitures are available for reissue to remaining participants under the 2019 LTI Plan.

The remaining compensation expense for the outstanding awards, totaling approximately $ 315,300 as of August 31, 2022, will be recognized ratably over the remaining vesting period of approximately 6 months.

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.

During fiscal year 2023, 18,000 of these restricted shares were forfeited, along with 760 additional shares purchased with dividends received from the original issue date.

These shares are available for reissue to remaining participants under the 2019 LTI Plan.

The remaining compensation expense of these awards, totaling approximately $ 922,600 as of August 31, 2022, will be recognized ratably over the remaining vesting period of approximately 30 months.

Total shares available for reissue to remaining participants under the 2019 LTI Plan was 28,000 at August 31, 2022.

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

In fiscal year 2021, 5,000 restricted shares were forfeited and later regranted to other participants.

During fiscal year 2023, 10,000 restricted shares were forfeited, along with 969 additional shares purchased with dividends received from the original issue date.

The 10,000 forfeited shares were re-granted to participants during the fiscal 2023 third quarter with an average grant-date fair value of $ 2.08 .

The 969 shares purchased with dividends were not reissued.

The remaining compensation expense for the outstanding awards, totaling approximately $ 171,500 as of November 30, 2022, will be recognized ratably over the remaining vesting period of approximately 3 months.

During fiscal year 2021, the Company granted 297,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $ 6.30 per share.

During fiscal year 2023, 18,000 restricted shares were forfeited, along with 760 additional shares purchased with dividends received from the original issue date.

The 18,000 forfeited shares were re-granted to participants during the fiscal 2023 third quarter with an average grant-date fair value of $ 2.08 .

The 760 shares purchased with dividends were not reissued.

The remaining compensation expense of these awards, totaling approximately $ 865,800 as of November 30, 2022, will be recognized ratably over the remaining vesting period of approximately 27 months.

As of November 30, 2022, 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 August 31,

Six Months Ended August 31,

Three Months Ended November 30,

Nine Months Ended November 30,

Share-based compensation expense

1 unchanged sentence

Share-based compensation expense - net

The following table summarizes stock award activity during the first six months of fiscal year 2023 under the 2019 LTI Plan:

The following table summarizes stock award activity during the first nine months of fiscal year 2023 under the 2019 LTI Plan:

Weighted Average Fair Value (per share)

Outstanding at February 28, 2022

Outstanding at August 31, 2022

As of August 31, 2022, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $ 1,237,900 , which we expect to recognize over a weighted-average period of 23.9 months.

Outstanding at November 30, 2022

As of November 30, 2022, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $ 1,037,300 , which we expect to recognize over a weighted-average period of 23.0 months.

Note 8 – 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 $ 3,123,700 and $ 5,036,000 for the three months ended August 31, 2022 and 2021, respectively.

These costs were $ 6,686,300 and $ 11,392,400 for the six months ended August 31, 2022 and 2021, respectively.

These costs were $ 4,506,500 and $ 6,924,800 for the three months ended November 30, 2022 and 2021, respectively.

These costs were $ 11,192,800 and $ 18,317,200 for the nine months ended November 30, 2022 and 2021, respectively.

Note 9 – BUSINESS SEGMENTS

10 unchanged sentences

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

Information by reporting segment for the three and six-month periods ended August 31, 2022 and 2021, are as follows:

Information by reporting segment for the three- and nine-month periods ended November 30, 2022 and 2021, are as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

EARNINGS (LOSS) BEFORE INCOME TAXES

Three Months Ended

Six Months Ended

Nine Months Ended

Note 10 – FINANCIAL INSTRUMENTS

1 unchanged sentence

The carrying amounts reported in the condensed balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.

The estimated fair value of our term notes payable is estimated by management to approximate $ 35,475,900 and $ 24,521,600 as of August 31, 2022 and February 28, 2022, respectively.

The term notes payable reflected on the Company’s condensed balance sheets were $ 36,000,000 and $ 25,000,100 as of August 31, 2022 and February 28, 2022, respectively.

The estimated fair value of our term notes payable is estimated by management to approximate $ 34,781,100 and $ 24,521,600 as of November 30, 2022 and February 28, 2022, respectively.

The term notes payable reflected on the Company’s condensed balance sheets were $ 35,550,000 and $ 25,000,100 as of November 30, 2022 and February 28, 2022, respectively.

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

1 unchanged sentence

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 August 31, 2022 or February 28, 2022 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 785,500 and $ 681,600 , as of August 31, 2022 and February 28, 2022, respectively, in payments for sales orders which will be shipped subsequent to the end of the period.

Any payments received prior to the end of the period that were not shipped as of November 30, 2022 or February 28, 2022 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 1,409,900 and $ 681,600 , as of November 30, 2022 and February 28, 2022, respectively, in payments for sales orders which will be shipped subsequent to the end of the period.

Note 12 – SUBSEQUENT EVENTS

On December 22, 2022, the Company executed the First Amendment to our Credit Agreement with BOKF, NA.

This amendment clarified the definition of the Fixed Charge Coverage Ratio to exclude dividends paid prior to November 30, 2022, and placed restrictions on acquisitions and cash dividends.

The Company completed rebranding its Home Business Division, replacing the name Usborne Books & More (“UBAM”) with its new name, PaperPie.

PaperPie was announced on December 21, 2022 and the new name, website URL’s and rebranding was completed on January 3, 2023.

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

6 unchanged sentences

See “ Cautionary Remarks Regarding Forward-Looking Statements ” in the front of this Quarterly Report on Form 10-Q.

We are the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books and the owner and exclusive publisher of Kane Miller Book Publisher (“Kane Miller”).

We are the owner and exclusive publisher of Kane Miller children’s books;

Learning Wrap-Ups, maker of educational manipulatives;

and SmartLab Toys, maker of STEAM-based toys and games.

We are also the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books.

Significant portions of our inventory purchases are concentrated with Usborne.

Our distribution agreement includes annual minimum purchase volumes along with specific payment terms, which if not met or payments are not received timely may result in termination of the agreement.

Should termination of the agreement occur, the Company will be allowed to sell through their remaining Usborne inventory over the twelve months following the termination date.

We operate two separate segments, UBAM and Publishing, to sell our Usborne and Kane Miller children’s books.

Should termination of the agreement occur, the Company will be allowed, at a minimum, to sell through their remaining Usborne inventory over the twelve months following the termination date.

We operate two separate segments, UBAM and Publishing, to sell our products.

These two segments each have their own customer base.

The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, internet party plan events and book fairs.

The Publishing segment markets its products on a wholesale basis to various retail accounts.

The UBAM segment markets our complete line of products through a network of independent sales consultants using a combination of home shows, internet party plan events and book fairs.

The Publishing segment markets Kane Miller, Learning Wrap-Ups and SmartLab Toys on a wholesale basis to various retail accounts.

All other supporting administrative activities are recognized as other expenses outside of our two segments.

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of goods sold

9 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 August 31, 2022

Total operating expenses not associated with a reporting segment decreased $0.7 million, or 16.7%, to $3.5 million for the three-month period ended August 31, 2022, when compared to $4.2 million for the same quarterly period a year ago.

Operating expenses decreased primarily as a result of a $0.6 million decrease in labor, primarily within our warehouse operations, and a $0.2 million decrease in freight handling expenses, both resulting from a decrease in gross sales.

These expense reductions were offset by a $0.1 million increase in depreciation expense primarily driven by last year’s addition of two new pick/pack/ship lines.

Interest expense increased $0.3 million, or 150.0%, to $0.5 million for the three months ended August 31, 2022, when compared to $0.2 million for the same quarterly period a year ago, due to increased borrowings with our Lenders which resulted primarily from our increased inventory levels and recent increases in floating interest rates.

Income taxes decreased $1.1 million, or 137.5%, to a tax benefit of $0.3 million for the three months ended August 31, 2022, from an expense of $0.8 million for the same quarterly period a year ago, primarily resulting from operating losses in the second quarter ended August 31, 2022.

Our effective tax rate decreased to 27.5% for the quarter ended August 31, 2022, from 28.6% for the quarter ended August 31, 2021 due to sales mix fluctuations between states.

Non-Segment Operating Results for the Three Months Ended November 30, 2022

Total operating expenses not associated with a reporting segment decreased $1.3 million, or 24.5%, to $4.0 million for the three-month period ended November 30, 2022, when compared to $5.3 million for the same quarterly period a year ago.

Operating expenses decreased primarily as a result of a $0.8 million decrease in labor expenses, primarily within our warehouse operations, and a $0.3 million decrease in freight handling expenses, both resulting from a decrease in gross sales, along with a decrease of $0.2 million in other various cost changes.

Interest expense increased $0.4 million, or 200.0%, to $0.6 million for the three months ended November 30, 2022, when compared to $0.2 million for the same quarterly period a year ago, due to increased borrowings with our Lenders primarily associated with inventory and increases in floating interest rates.

Income taxes decreased $1.0 million, or 100.0%, to $0.0 million for the three months ended November 30, 2022, from $1.0 million for the same quarterly period a year ago, resulting from a decrease in gross sales.

Our effective tax rate decreased to 25.0% for the quarter ended November 30, 2022, from 26.5% for the quarter ended November 30, 2021 due primarily 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.

Non-Segment Operating Results for the Six Months Ended August 31, 2022

Total operating expenses not associated with a reporting segment decreased $1.4 million, or 16.1%, to $7.3 million for the six-month period ended August 31, 2022, when compared to $8.7 million for the same period a year ago.

Labor expenses decreased $1.3 million, primarily within our warehouse operations, and freight handling costs decreased $0.5 million for the six months ended August 31, 2022, both associated with reduced sales.

These expense reductions were offset by a $0.3 million increase in depreciation expense primarily driven by last year’s addition of two new pick/pack/ship lines and a $0.1 million increase in other various expenses.

Interest expense increased $0.5 million, or 125.0%, to $0.9 million for the six months ended August 31, 2022, when compared to $0.4 million for the same period a year ago, due to increased borrowings with our Lenders which resulted primarily from our increased inventory levels.

Income taxes decreased $2.2 million, or 110.0%, to a tax benefit of $0.2 million for the six months ended August 31, 2022, from a tax expense of $2.0 million for the same period a year ago, primarily resulting from operating losses for the six months ended August 31, 2022.

Our effective tax rate increased to 28.6% for the six months ended August 31, 2022, from 27.1% for the six months ended August 31, 2021 due to sales mix fluctuations between states.

Non-Segment Operating Results for the Nine Months Ended November 30, 2022

Total operating expenses not associated with a reporting segment decreased $2.7 million, or 19.3%, to $11.3 million for the nine-month period ended November 30, 2022, when compared to $14.0 million for the same period a year ago.

Operating expenses decreased primarily as a result of a reduction in labor expenses of $2.1 million, primarily within our warehouse operations, and a decrease in freight handling costs of $0.8 million, both associated with a decrease in gross sales.

Other various expenses in this segment decreased by $0.1 million.

These expense reductions were offset by a $0.3 million increase in depreciation expense primarily driven by last year’s addition of two new pick/pack/ship lines.

Interest expense increased $0.9 million, or 150.0%, to $1.5 million for the nine months ended November 30, 2022, when compared to $0.6 million for the same period a year ago, due to increased borrowings with our Lenders primarily associated with inventory and increases in floating interest rates.

Income taxes decreased $3.1 million, or 106.9%, to a tax benefit of $0.2 million for the nine months ended November 30, 2022, from a tax expense of $2.9 million for the same period a year ago, primarily resulting from operating losses experienced during our fiscal 2023 second quarter.

Our effective tax rate increased to 28.6% for the nine months ended November 30, 2022, from 26.9% for the nine months ended November 30, 2021 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, 2022

UBAM Operating Results for the Three and Nine Months Ended November 30, 2022

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

Three Months Ended

Six Months Ended

Nine Months Ended

Less discounts and allowances

8 unchanged sentences

Average number of active consultants

UBAM Operating Results for the Three Months Ended August 31, 2022

UBAM net revenues decreased $13.6 million, or 46.1%, to $15.9 million during the three months ended August 31, 2022, when compared to $29.5 million during the same period a year ago.

The average number of active consultants in the second quarter of fiscal 2023 was 26,800, a decrease of 19,300, or 41.9%, from 46,100 average active consultants selling in the second quarter of fiscal 2022.

Our consultant numbers declined during this period due to consultants returning to full-time employment, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials than they had in the prior year.

UBAM Operating Results for the Three Months Ended November 30, 2022

UBAM net revenues decreased $15.9 million, or 38.4%, to $25.5 million during the three months ended November 30, 2022, when compared to $41.4 million during the same period a year ago.

The average number of active consultants in the third quarter of fiscal 2023 was 27,100, a decrease of 14,400, or 34.7%, from 41,500 average active consultants selling in the third quarter of fiscal 2022.

Our consultant numbers have declined due to consultants returning to full-time employment, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials than they had in the prior year.

We also saw new consultant recruiting negatively impacted by the recent change in our distribution agreement with Usborne Publishing Limited.

The new agreement caused a temporary level of confusion with our consultants until we were able to effectively communicate the continuation of our relationship within the UBAM division.

In addition, sales during the second quarter of fiscal 2023 were negatively impacted by recent record inflation, which resulted in high fuel cost and food price increases that has impacted the disposable income of our customers.

The new agreement created a level of uncertainty with our consultants until we were able to effectively communicate the continuation of our relationship within the Direct Sales division.

In addition, sales during the third quarter of fiscal 2023 continued to be negatively impacted by recent record inflation, resulting in high fuel cost and food price increases that continues to impact the disposable income of our customers.

We expect this impact on sales to continue as inflationary pressures persist.

Historically, when we have experienced these difficult inflationary times, our UBAM active consultant numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living.

Gross margin decreased $10.1 million, or 48.3%, to $10.8 million during the three months ended August 31, 2022, when compared to $20.9 million during the same period a year ago.

Gross margin as a percentage of net revenues for the three months ended August 31, 2022 decreased to 68.1%, compared to 70.7% the same period a year ago.

The decrease in gross margin as a percentage of net revenues is attributed to a change in order mix resulting in higher discounts totaling approximately $0.1 million, rising ocean freight costs on inbound inventory totaling approximately $0.2 million and reduced purchasing volume discounts/rebates totaling approximately $0.1 million.

Historically, when we have experienced these difficult inflationary times, our active consultant numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living.

Gross margin decreased $12.3 million, or 41.8%, to $17.1 million during the three months ended November 30, 2022, when compared to $29.4 million during the same period a year ago.

Gross margin as a percentage of net revenues for the three months ended November 30, 2022 decreased to 67.1%, compared to 71.1% the same period a year ago.

The decrease in gross margin as a percentage of net revenues is primarily attributed to higher discounts being offered to induce sales impacting margins by approximately $0.4 million, rising ocean freight costs on inbound inventory totaling approximately $0.3 million and reduced purchasing volume discounts/rebates totaling approximately $0.3 million.

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

2 unchanged sentences

These operating expenses are directly tied to the sales volumes of the UBAM segment.

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

Total operating expenses decreased $6.2 million, or 40.5%, to $9.1 million during the three-month period ended August 31, 2022, when compared to $15.3 million reported in the same quarter a year ago.

Operating and selling expenses decreased $1.2 million, or 28.6%, to $3.0 million during the three-month period ended August 31, 2022, when compared to $4.2 million reported in the same quarter a year ago, primarily due to a decrease in outbound freight from fewer sales and shipments totaling approximately $2.0 million.

This expense reduction was partially offset by increased freight costs of approximately $0.3 million due to increased freight rates and fuel surcharges, as well as $0.3 million in increased consultant incentive trip expenses and convention expense increases of $0.2 million.

The June 2022 annual UBAM convention was the first hybrid “in-person & virtual” convention.

While our in-person convention attendance numbers were promising, net profits were down from the prior two years, when our convention costs were minimal given we were 100% virtual.

Sales commissions decreased $4.4 million, or 44.4%, to $5.5 million during the three-month period ended August 31, 2022, when compared to $9.9 million reported in the same quarter a year ago, due primarily to the decrease in net revenues.

General and administrative expenses decreased $0.4 million, or 36.4%, to $0.7 million during the three months ended August 31, 2022, when compared to $1.1 million during the same period a year ago, due primarily to $0.2 million of reduced bank fees from fewer credit card transactions and a $0.2 million reduction in consultant bonus awards, both resulting from the decrease in sales during the quarter ended August 31, 2022.

Operating income of the UBAM segment decreased $3.9 million, or 69.6% to $1.7 million during the three months ended August 31, 2022, when compared to $5.6 million reported in the same quarter a year ago.

Operating income of the UBAM division as a percentage of net revenues for the three months ended August 31, 2022 decreased to 10.7%, compared to 18.9% for the three months ended August 31, 2021.

This change primarily resulted from increased cost of goods sold, increased freight costs and other increased operating and selling expenses.

UBAM Operating Results for the Six Months Ended August 31, 2022

UBAM net revenues decreased $31.2 million, or 46.5%, to $35.9 million during the six-month period ended August 31, 2022, compared to $67.1 million from the same period a year ago.

The average number of active consultants in the six-month period ended August 31, 2022 was 29,500, a decrease of 20,700, or 41.2%, from 50,200 selling in same period a year ago.

In addition, sales during the first six months of fiscal 2023 were negatively impacted by recent record inflation, which resulted in fuel cost and food price increases that has impacted the disposable income of our customers.

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

Total operating expenses decreased $7.8 million, or 35.6%, to $14.1 million during the three-month period ended November 30, 2022, when compared to $21.9 million reported in the same quarter a year ago.

Operating and selling expenses decreased $1.8 million, or 29.5%, to $4.3 million during the three-month period ended November 30, 2022, when compared to $6.1 million reported in the same quarter a year ago, primarily due to a decrease in outbound freight from fewer sales and shipments totaling approximately $2.2 million.

This expense reduction was partially offset by a $0.4 million increase in consultant incentive trip accruals associated with promotions to bolster sales.

Sales commissions decreased $5.6 million, or 38.9%, to $8.8 million during the three-month period ended November 30, 2022, when compared to $14.4 million reported in the same quarter a year ago, due primarily to the decrease in net revenues.

General and administrative expenses decreased $0.5 million, or 33.3%, to $1.0 million during the three months ended November 30, 2022, when compared to $1.5 million during the same period a year ago, due primarily to $0.2 million of reduced bank fees from fewer credit card transactions, a $0.2 million reduction in consultant bonus awards, both resulting from the decrease in sales, as well as a $0.1 million reduction in payroll costs.

Operating income of the UBAM segment decreased $4.5 million, or 60.0% to $3.0 million during the three months ended November 30, 2022, when compared to $7.5 million reported in the same quarter a year ago.

Operating income of the UBAM division as a percentage of net revenues for the three months ended November 30, 2022 decreased to 11.9%, compared to 18.2% for the three months ended November 30, 2021.

This change primarily resulted from increased cost of goods sold, increased freight costs and increased operating and selling expenses as a percent of net revenues.

UBAM Operating Results for the Nine Months Ended November 30, 2022

UBAM net revenues decreased $47.1 million, or 43.4%, to $61.4 million during the nine-month period ended November 30, 2022, compared to $108.5 million from the same period a year ago.

The average number of active consultants in the nine-month period ended November 30, 2022 was 28,700, a decrease of 18,600, or 39.3%, from 47,300 selling in same period a year ago.

Our consultant numbers declined from the prior period due to consultants returning to full-time employment, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials.

In addition, sales during the first nine months of fiscal 2023 were negatively impacted by recent record inflation, resulting in fuel cost and food price increases impacting the disposable income of our customers.

We expect this impact on sales to continue as inflationary pressures persist.

Gross margin decreased $23.5 million, or 48.8%, to $24.7 million during the six-month period ended August 31, 2022, when compared to $48.2 million during the same period a year ago, due primarily to a decrease in net revenues.

Gross margin as a percentage of net revenues decreased to 68.7% for the six-month period ended August 31, 2022, when compared to 71.9% for the same period a year ago.

During the six months ended August 31, 2022, sales through book fairs, booths and home parties increased compared to the six-month period ended August 31, 2021 when these traditional sales types were challenged by the effects of the pandemic.

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

Gross margin, as a percentage of net revenues was also impacted negatively by rising ocean freight costs on inbound inventory totaling approximately $0.3 million and reduced purchasing volume discounts/rebates totaling approximately $0.5 million.

Total operating expenses decreased $15.1 million, or 43.4%, to $19.7 million during the six-month period ended August 31, 2022, from $34.8 million for the same period a year ago.

Operating and selling expenses decreased $3.7 million, or 38.5%, to $5.9 million during the six-month period ended August 31, 2022, when compared to $9.6 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 totaling approximately $5.5 million.

This expense reduction was partially offset by increased freight costs of approximately $1.2 million due to increased freight rates and fuel surcharges, as well as $0.4 million in increased consultant incentive trip expenses and increases in convention expense of $0.2 million.

The June 2022 annual UBAM convention was the first hybrid “in-person & virtual” convention.

While our in-person convention attendance numbers were promising, net profits were down from the prior two years, when our convention costs were minimal given we were 100% virtual.

Sales commissions decreased $10.6 million, or 46.5%, to $12.2 million during the six-month period ended August 31, 2022, when compared to $22.8 million reported in the same period a year ago, primarily due to the decrease in net revenues.

General and administrative expenses decreased $1.0 million, or 40.0%, to $1.5 million, from $2.5 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes of $0.6 million and a $0.3 million reduction in consultant bonus awards, both resulting from the decrease in sales during the six months ended August 31, 2022.

Operating income of the UBAM segment decreased $8.4 million, or 62.7%, to $5.0 million during the six months ended August 31, 2022, when compared to $13.4 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, 2022 was 14.0%, compared to 20.0% for the six months ended August 31, 2021.

This change primarily resulted from increased cost of goods sold, increased freight costs and other increased operating and selling expenses.

Publishing Operating Results for the Three and Six Months Ended August 31, 2022

Gross margin decreased $35.9 million, or 46.2%, to $41.8 million during the nine-month period ended November 30, 2022, when compared to $77.7 million during the same period a year ago, due primarily to a decrease in net revenues.

Gross margin as a percentage of net revenues decreased to 68.0% for the nine-month period ended November 30, 2022, when compared to 71.6% for the same period a year ago.

The decrease in gross margin as a percentage of net revenues is attributed to higher discounts being offered to induce sales impacting margins by approximately $0.6 million, rising ocean freight costs on inbound inventory totaling approximately $0.7 million and reduced purchasing volume discounts/rebates totaling approximately $0.9 million.

Total operating expenses decreased $23.0 million, or 40.6%, to $33.7 million during the nine-month period ended November 30, 2022, from $56.7 million for the same period a year ago.

Operating and selling expenses decreased $5.3 million, or 34.0%, to $10.3 million during the nine-month period ended November 30, 2022, when compared to $15.6 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 totaling approximately $6.4 million.

This expense reduction was partially offset by a $1.1 million increase in consultant incentive trip expenses and convention expenses.

Sales commissions decreased $16.1 million, or 43.4%, to $21.0 million during the nine-month period ended November 30, 2022, when compared to $37.1 million reported in the same period a year ago, primarily due to the decrease in net revenues.

General and administrative expenses decreased $1.4 million, or 35.9%, to $2.5 million, from $3.9 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes of $0.9 million and a $0.5 million reduction in consultant bonus awards, both resulting from the decrease in sales during the nine months ended November 30, 2022.

Operating income of the UBAM segment decreased $13.0 million, or 61.9%, to $8.0 million during the nine months ended November 30, 2022, when compared to $21.0 million reported in the same period last year.

Operating income of the UBAM division as a percentage of net revenues for the nine months ended November 30, 2022 was 13.1%, compared to 19.3% for the nine months ended November 30, 2021.

This change primarily resulted from increased cost of goods sold, increased freight costs and increased operating and selling expenses as a percent of net revenues.

Publishing Operating Results for the Three and Nine Months Ended November 30, 2022

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

Three Months Ended

Six Months Ended

Nine Months Ended

Less discounts and allowances

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Operating income

Publishing Operating Results for the Three Months Ended August 31, 2022

Our Publishing division’s net revenues remained consistent at $3.5 million during the three-month period ended August 31, 2022, and 2021.

Gross margin remained consistent at $1.6 million during the three-month period ended August 31, 2022, and 2021.

Gross margin as a percentage of net revenues increased slightly to 46.8% during the three-month period ended August 31, 2022, from 46.4% 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, or 33.3%, to $0.8 million, from $0.6 million, during the three-month periods ended August 31, 2022 and 2021, respectively.

This change was due to an increase of $0.1 million in payroll expenses from our acquisition of Learning Wrap-Ups in December 2021 and a $0.1 million increase in other various expenses.

Operating income of the Publishing segment decreased $0.2 million, or 20.0%, to $0.8 million from $1.0 million for the three-month periods ended August 31, 2022 and 2021, respectively.

This change was driven by the increase in our operating expenses.

Publishing Operating Results for the Six Months Ended August 31, 2022

Our Publishing division’s net revenues decreased slightly by $0.1 million, or 1.5%, to $6.6 million during the six-month period ended August 31, 2022, from $6.7 million reported in the same period a year ago.

Gross margin increased $0.1 million, or 3.3%, to $3.1 million during the six-month period ended August 31, 2022, from $3.0 million reported in the same period a year ago, primarily due to a decrease in discounts resulting from a change in our customer mix.

Gross margin as a percentage of net revenues increased to 46.6%, during the six-month period ended August 31, 2022, from 45.4% reported in the same period a year ago.

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

Total operating expenses of the Publishing segment increased $0.3 million, or 25.0%, to $1.5 million during the six-month period ended August 31, 2022, from $1.2 million reported in the same period a year ago.

This change was due to an increase of $0.2 million in payroll expenses from our acquisition of Learning Wrap-Ups in December 2021 and a $0.1 million increase in other various expenses.

Operating income of the Publishing segment decreased $0.2 million, or 11.1%, to $1.6 million during the six-month period ended August 31, 2022 when compared to $1.8 million reported in the same period a year ago, due primarily to the increase in operating expenses.

Publishing Operating Results for the Three Months Ended November 30, 2022

Our Publishing division’s net revenues increased $1.1 million, or 29.7%, to $4.8 million during the three-month period ended November 30, 2022, from $3.7 million reported in the same period a year ago.

During fiscal 2023, we entered into a new distribution agreement with Usborne.

Under the terms in our new distribution agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne will use a different distributor to supply retail accounts with their products.

The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023.

The transition between distributors brought disruption concerns to many of our retail customers and resulted in additional sales orders before the November 15, 2022 transition date.

Usborne’s products sold within the Publishing Division accounted for 85.6% of all products sold during the three months ended November 30, 2022.

Gross margin increased $0.3 million, or 16.7%, to $2.1 million during the three-month period ended November 30, 2022, from $1.8 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 44.6% during the three-month period ended November 30, 2022, from 47.9% reported in the same quarter a year ago.

Gross margin as a percentage of net revenues changed primarily from an increase in cost of goods sold resulting from rising ocean freight costs on inbound inventory of $0.1 million, as well as changes in the mix of products sold between Kane Miller and Usborne.

Total operating expenses of the Publishing segment increased $0.3 million, or 50.0%, to $0.9 million, from $0.6 million, during the three-month periods ended November 30, 2022 and 2021, respectively.

This change was due to an increase of $0.1 million in wages for Learning Wrap-Ups not present in the prior year, a $0.1 million increase in freight expense due to higher shipping costs on increased sales and a $0.1 million increase in other various costs.

Operating income of the Publishing division remained consistent at $1.2 million for the three-month periods ended November 30, 2022 and 2021, respectively.

Publishing Operating Results for the Nine Months Ended November 30, 2022

Our Publishing division’s net revenues increased by $1.0 million, or 9.6%, to $11.4 million during the nine-month period ended November 30, 2022, from $10.4 million reported in the same period a year ago.

During fiscal 2023, we entered into a new distribution agreement with Usborne.

The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023.

The transition between distributors brought disruption concerns to many of our retail customers and resulted in additional sales orders before the November 15, 2022 transition date.

Usborne’s products sold within the Publishing Division accounted for 89.2% of all products sold during the nine months ended November 30, 2022.

Gross margin increased $0.4 million, or 8.3%, to $5.2 million during the nine-month period ended November 30, 2022, from $4.8 million reported in the same period a year ago, primarily from increased net revenues.

Gross margin as a percentage of net revenues decreased slightly to 45.7%, during the nine-month period ended November 30, 2022, from 46.3% reported in the same period a year ago primarily due to increased inbound transportation costs.

Total operating expenses of the Publishing segment increased $0.6 million, or 33.3%, to $2.4 million during the nine-month period ended November 30, 2022, from $1.8 million reported in the same period a year ago.

This change was due to an increase of $0.3 million in wages and $0.1 million in other various expenses related to Learning Wrap-Ups, which was acquired in December 2021.

Other increases include $0.1 million in outbound freight costs and $0.1 million in other various expenses related to the Publishing division.

Operating income of the Publishing segment decreased $0.2 million, or 6.7%, to $2.8 million during the nine-month period ended November 30, 2022 when compared to $3.0 million reported in the same period a year ago, due primarily to the increase in operating expenses.

Liquidity and Capital Resources

EDC has a history of profitability and positive cash flow.

EDC has a history of profitability and positive cash flows.

We typically fund our operations from the cash we generate.

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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 six months of fiscal year 2023, we experienced cash outflows from operations of $3,628,900.

These cash outflows resulted from:

During the first nine months of fiscal year 2023, we experienced cash inflows from operations of $703,700.

These cash inflows resulted from:

●net loss of $585,200

Adjusted for:

●depreciation expense of $1,207,500

●depreciation and amortization expense of $1,824,400

●share-based compensation expense, net of $640,100

●deferred income taxes of $558,400

●provision for doubtful accounts of $51,600

●provision for inventory allowance of $393,000

Positively impacted by:

●decrease in inventories, net of $8,950,500

●decrease in prepaid expenses and other assets of $214,200

●increase in deferred revenues of $728,300

●decrease in prepaid expenses and other assets of $295,600

Negatively impacted by:

●decrease in accounts payable of $8,483,300

●decrease in accrued salaries and commissions, and other liabilities of $2,263,200

●decrease in income taxes payable of $241,900

●increase in accounts receivable of $2,052,700

Cash used in investing activities was $254,000 for capital expenditures, consisting of $221,000 of software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders and $33,000 of other assets associated with the Company’s planned rebranding of its UBAM sales division.

Cash provided by financing activities was $4,354,200, which was comprised of net proceeds from term debt of $36,000,000 and cash received in treasury stock transactions of $63,400, offset by payments on term debt of $25,175,900, net payments on the line of credit of $5,662,600 and payments of $870,700 for dividends.

●decrease in income taxes payable of $1,040,600

●decrease in accrued salaries and commissions, and other liabilities of $524,800

Cash used in investing activities was $1,245,200 for capital expenditures, consisting of $658,200 associated with the purchase of SmartLab Toys, $484,900 of software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders, $99,000 of other assets associated with the Company’s rebrand of its UBAM sales division and $3,100 of other various changes.

Cash provided by financing activities was $835,200, which was comprised of net proceeds from term debt of $36,000,000 and cash received in treasury stock transactions of $63,400, offset by payments on term debt of $25,450,100, net payments on the line of credit of $8,729,000, payments of $870,700 for dividends declared in fiscal 2022 and payments of debt issue costs of $178,400.

During fiscal year 2023, we continue to expect the cash generated from our operations and cash available through our line of credit with our Lender will provide us the liquidity we need to support ongoing operations.

We expect to generate positive operational cash flow as we normalize inventory levels.

Cash generated from operations will be used to purchase inventory in order to expand our product offerings and to liquidate existing debt.

Cash generated from operations will be used to purchase inventory in order to expand our product offerings and to pay down existing debt.

Following a return to profitability, any excess cash is expected to be distributed to our shareholders.

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Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26%

Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was 4.03% at August 31, 2022)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 4.78% at August 31, 2022)

Revolving Loan allows for Letters of Credit up to $7,500,000

Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was 5.48% at November 30, 2022)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 6.23% at November 30, 2022)

Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at November 30, 2022)

The Loan Agreement also contains provisions that require the Company to maintain a minimum fixed charge ratio and limits any additional debt with other lenders.

Available credit under the current $15,000,000 revolving line of credit with the Company’s new Lender was approximately $2,939,100 at August 31, 2022.

Available credit under the current $15,000,000 revolving line of credit with the Company’s new Lender was approximately $6,005,500 at November 30, 2022.

The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:

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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 August 31, 2022 and February 28, 2022.

Management has estimated and included a reserve for sales returns of $0.2 million as of November 30, 2022 and February 28, 2022.

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 $0.2 million and $0.3 million at August 31, 2022 and February 28, 2022, respectively.

Management has estimated and included an allowance for doubtful accounts of $0.2 million and $0.3 million at November 30, 2022 and February 28, 2022, respectively.

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 additional exposure for storage damages and related issues, and therefore have higher obsolescence reserves.

Noncurrent inventory balances prior to valuation allowances were $3.8 million and $2.4 million at August 31, 2022 and February 28, 2022, respectively.

Noncurrent inventory valuation allowances were $0.5 million and $0.4 million at August 31, 2022 and February 28, 2022, respectively.

Noncurrent inventory balances prior to valuation allowances were $3.8 million and $2.4 million at November 30, 2022 and February 28, 2022, respectively.

Noncurrent inventory valuation allowances were $0.5 million and $0.4 million at November 30, 2022 and February 28, 2022, respectively.

Our principal supplier, based in England, generally requires a minimum reorder 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 7.9% of our active consultants have maintained consignment inventory at the end of the second quarter of fiscal year 2023.

Approximately 8.3% of our active consultants have maintained consignment inventory at the end of the third quarter of fiscal year 2023.

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 $1.3 million and $1.4 million at August 31, 2022 and February 28, 2022, respectively.

The total cost of inventory on consignment with consultants was $1.7 million and $1.4 million at November 30, 2022 and February 28, 2022, 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 at August 31, 2022 and February 28, 2022.

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $1.0 million at November 30, 2022 and $0.9 million at February 28, 2022.

Share-Based Compensation

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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 six months of fiscal year 2023, the Company recognized $0.5 million of compensation expense associated with the shares granted, which was offset by a $0.1 million reduction of compensation expense during the quarter associated with shares that were forfeited.

These forfeited shares are available for re-issue under the terms of the 2019 LTI Plan.

During the first nine months of fiscal year 2023, the Company recognized $0.7 million of compensation expense associated with the shares granted, which was offset by a $0.1 million reduction of compensation expense during the fiscal second quarter associated with shares that were forfeited.

These shares were re-issued under the terms of the 2019 LTI Plan during the fiscal third quarter.

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