EDUCATIONAL DEVELOPMENT CORP MANAGEMENT REPORT OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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Factors Affecting Forward-Looking Statements



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 our control. Our actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, our success in
recruiting and retaining new consultants, our ability to locate and procure
desired books, our ability to ship the volume of orders that are received
without creating backlogs, our ability to obtain adequate financing for working
capital and capital expenditures, economic and competitive conditions,
regulatory changes and other uncertainties, the COVID-19 pandemic, as well as
those factors discussed below and elsewhere in our Annual Report on Form 10-K
for the year ended February 28, 2022 and this Quarterly Report on Form 10-Q, all
of which are difficult to predict. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed may or may not occur. See
"Cautionary Remarks Regarding Forward-Looking Statements" in the front of this
Quarterly Report on Form 10-Q.



Overview



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"). 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. 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. All other supporting administrative activities are recognized
as other expenses outside of our two segments. Other expenses consist primarily
of the compensation of our office, warehouse and sales support staff as well as
the cost of operating and maintaining our corporate office and distribution
facility.



The following table presents our condensed reports of operational data:


                                                Three Months Ended                 Six Months Ended
                                                    August 31,                        August 31,
                                               2022             2021             2022             2021
Net revenues                               $ 19,418,300     $ 32,994,400     $ 42,579,200     $ 73,802,300
Cost of goods sold                            6,939,700       10,498,900       14,791,300       22,528,800
Gross margin                                 12,478,600       22,495,500    

27,787,900 51,273,500

Operating expenses
Operating and selling                         3,798,800        5,239,900        7,569,400       11,682,500
Sales commissions                             5,635,700       10,105,200       12,507,500       23,072,000
General and administrative                    4,017,600        4,793,900        8,401,900        9,932,800
Total operating expenses                     13,452,100       20,139,000       28,478,800       44,687,300

Interest expense                                528,100          213,700          916,200          381,500
Other income                                   (396,000 )       (515,300 )       (786,700 )     (1,114,000 )
Earnings (loss) before income taxes          (1,105,600 )      2,658,100         (820,400 )      7,318,700

Income taxes                                   (303,700 )        759,900         (234,300 )      1,982,400
Net earnings (loss)                        $   (801,900 )   $  1,898,200     $   (586,100 )   $  5,336,300



See the detailed discussion of revenue, gross margin, and general and administrative expenses by segment to be presented below. The following is an analysis of the significant changes in non-segment general and administrative expenses, other income and expenses and income taxes during the respective periods.



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Contents

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. 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. 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

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


                                                 Three Months Ended                  Six Months Ended
                                                     August 31,                         August 31,
                                               2022             2021              2022              2021
Gross sales                                $ 20,411,500     $  36,789,400     $  45,142,600     $  82,325,100
Less discounts and allowances                (6,033,700 )     (10,590,700 )     (12,653,200 )     (22,876,400 )
Transportation revenue                        1,554,400         3,319,400         3,459,600         7,686,300
Net revenues                                 15,932,200        29,518,100        35,949,000        67,135,000

Cost of goods sold                            5,085,500         8,636,600        11,247,500        18,886,500
Gross margin                                 10,846,700        20,881,500        24,701,500        48,248,500

Operating expenses
Operating and selling                         2,960,700         4,215,000         5,946,200         9,559,700
Sales commissions                             5,473,100         9,937,600        12,208,700        22,795,900
General and administrative                      715,000         1,149,800         1,517,400         2,452,500
Total operating expenses                      9,148,800        15,302,400        19,672,300        34,808,100

Operating income                           $  1,697,900     $   5,579,100     $   5,029,200     $  13,440,400

Average number of active consultants             26,800            46,100            29,500            50,200




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Contents

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. 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. 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.



UBAM operating expenses consists of operating and selling expenses, sales
commissions and general and administrative expenses. Operating and selling
expenses primarily consists of freight expenses and materials and supplies.
Sales commissions include amounts paid to consultants for new sales and
promotions. 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. 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. 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. 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.



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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.



Publication of operating results for the three and six months ended August 31, 2022



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



                                                Three Months Ended                 Six Months Ended
                                                    August 31,                        August 31,
                                               2022             2021             2022             2021
Gross sales                                $  7,358,000     $  7,397,700     $ 13,965,100     $ 14,253,600
Less discounts and allowances                (3,874,400 )     (3,922,800 )     (7,340,100 )     (7,591,200 )
Transportation revenue                            2,500            1,400            5,200            4,900
Net revenues                                  3,486,100        3,476,300        6,630,200        6,667,300

Cost of goods sold                            1,854,200        1,862,300        3,543,800        3,642,300
Gross margin                                  1,631,900        1,614,000        3,086,400        3,025,000

Total operating expenses                        816,000          631,200        1,520,800        1,180,700

Operating income                           $    815,900     $    982,800     $  1,565,600     $  1,844,300



Publication of operating results for the three months ended August 31, 2022

The net revenues of our Publishing division remained stable at $3.5 million
during the three-month period ended August 31, 2022and 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.



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Contents



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.


Publication of 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.



Cash 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, to pay for capital expenditures, to pay
dividends, and to acquire treasury stock. 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.



In the first six months of fiscal 2023, we recorded cash outflows related to $3,628,900. These disbursements result from:


?net loss of $586,100



Adjusted for:


? depreciation charge of $1,207,500

? stock-based compensation expense, net of $381,300


Offset by:


?deferred taxes on the income of $239,000

?provision for bad debts $51,600


Positively impacted by:


?decrease in inventories, net of $6,028,500

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

?increase in deferred revenue of $103,900


Negatively impacted by:


?decrease in accounts payable by $7,970,300

?decrease in salaries and commissions payable, and other liabilities of
$2,263,200

?reduction in income tax payable by $241,900

?increase in accounts receivable of $212,200

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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.



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



On August 9, 2022, the Company repaid in full all outstanding indebtedness and
terminated all commitments and obligations under its Amended and Restated Loan
Agreement dated February 15, 2021 (as amended), between the Company and MidFirst
Bank. The Company's payment to MidFirst Bank, including interest, was
approximately $45.0 million, which satisfied all of the Company's debt
obligations with MidFirst Bank. The Company did not incur any early termination
penalties as a result of the repayment of indebtedness or termination of the
Amended and Restated Loan Agreement, which provided Term Loan #1, Advancing Term
Loan #1, Advancing Term Loan #2 and the Revolving Loan.



On August 9, 2022the Company has signed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”). The Loan Agreement establishes a fixed rate term loan for a principal amount of
$15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $21,000,000 (the “Floating Rate Term Loan”; together with the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving promissory note in the principal amount of up to $15,000,000 (the “Revolving Loan”).

Features of the loan agreement include:


   (i)   Term Loans on 20-year amortization with 5-year maturity date of
         August 9, 2027
   (ii)  Revolving Loan maturity date of August 9, 2023

(iii) The fixed rate term loan bears interest at a fixed annual rate equal

at 4.26%

(iv) The variable rate term loan bears interest at an annual rate equal to

Forward SOFR rate + 1.75% (the effective rate was 4.03% at August 31, 2022)

(v) The revolving loan bears interest at an annual rate equal to the forward SOFR

         Rate + 2.50% (effective rate was 4.78% at August 31, 2022)
   (vi)  Revolving Loan allows for Letters of Credit up to $7,500,000




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.



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



Years ending February 28 (29),
2023                             $    900,000
2024                                1,800,000
2025                                1,800,000
2026                                1,800,000
2027                                1,800,000
Thereafter                         27,900,000
Total                            $ 36,000,000




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  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("GAAP"). 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 and in our audited
financial statements as of and for the year ended February 28, 2022 included in
our Form 10-K. However, we consider the following accounting policies to be more
significantly dependent on the use of estimates and assumptions.



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 stores 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 as of August 31, 2022 and February
28, 2022.


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



Inventory



Our inventory contains over 2,000 titles, each with different sell through rates
depending upon the nature and popularity of the title. We maintain very few
titles that are topical in nature. As such, the majority of the titles we sell
remain current in content for several years. Most of our products are printed in
China, Europe, Singapore, India, Malaysia and Dubai resulting in a six to
eight-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 minimum
order requirements of our suppliers. Noncurrent inventory was estimated by
management using an anticipated turnover ratio by title. Inventory in excess of
2½ years of anticipated sales is classified as noncurrent inventory. 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.



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. 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 reorder 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.



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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 7.9% of our active consultants have maintained consignment
inventory at the end of the second 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.



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.



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 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.



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