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 endedFebruary 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 owner and exclusive publisher ofKane 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 exclusiveUnited States Multi-Level Marketing ("MLM") distributor ofUsborne Publishing Limited ("Usborne") children's books. Significant portions of our inventory purchases are concentrated withUsborne . 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, at a minimum, to sell through their remainingUsborne 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 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 marketsKane 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. 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 shows our condensed statements of operations data:
Three Months Ended Nine Months Ended
November 30, November 30,
2022 2021 2022 2021
Net revenues $ 30,269,400 $ 45,112,300 $ 72,848,700 $ 118,914,600
Cost of goods sold 11,041,400 13,897,300 25,832,600 36,426,000
Gross margin 19,228,000 31,215,000
47,016,100 82,488,600
Operating expenses Operating and selling 5,397,300 7,354,500 12,966,700 19,037,000 Sales commissions 8,982,300 14,515,500 21,489,800 37,587,400 General and administrative 4,635,700 5,915,000 13,037,500 15,847,900 Total operating expenses 19,015,300 27,785,000 47,494,000 72,472,300 Interest expense 600,600 228,300 1,516,900 609,800 Other income (389,100 ) (400,900 ) (1,175,600 ) (1,514,800 ) Earnings (loss) before income taxes 1,200 3,602,600 (819,200 ) 10,921,300 Income taxes 300 956,000 (234,000 ) 2,938,400 Net earnings (loss)$ 900 $ 2,646,600 $ (585,200 ) $ 7,982,900
See the detailed discussion of revenues, gross margin and general and
administrative expenses by reportable segment below. 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.
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Non-Segment Operating Results for the Three Months Ended
Total operating expenses not associated with a reporting segment decreased$1.3 million , or 24.5{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$4.0 million for the three-month period endedNovember 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
three months ended
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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$0.0 million for the three months endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} for the quarter endedNovember 30, 2022 , from 26.5{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} for the quarter endedNovember 30, 2021 due primarily to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} due to the inclusion of state income and franchise taxes.
Non-Segment Operating Results for the Nine Months Ended
Total operating expenses not associated with a reporting segment decreased$2.7 million , or 19.3{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$11.3 million for the nine-month period endedNovember 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
months ended
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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to a tax benefit of$0.2 million for the nine months endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} for the nine months endedNovember 30, 2022 , from 26.9{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} for the nine months endedNovember 30, 2021 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} due to the inclusion of state income and franchise taxes.
UBAM Operating Results for the Three and Nine Months Ended
The following table summarizes the operating results of the UBAM segment:
Three Months Ended Nine Months Ended
November 30, November 30,
2022 2021 2022 2021
Gross sales $ 31,925,700 $ 50,232,200 $ 77,068,300 $ 132,557,400
Less discounts and allowances (8,664,100 ) (12,891,300 ) (21,317,300 ) (35,767,700 )
Transportation revenue 2,191,100 4,056,900 5,650,700 11,743,100
Net revenues 25,452,700 41,397,800 61,401,700 108,532,800
Cost of goods sold 8,372,000 11,961,700 19,619,400 30,848,200
Gross margin 17,080,700 29,436,100 41,782,300 77,684,600
Operating expenses
Operating and selling 4,318,700 6,069,000 10,264,900 15,628,600
Sales commissions 8,777,900 14,351,100 20,986,600 37,147,000
General and administrative 964,300 1,480,000 2,481,700 3,932,600
Total operating expenses 14,060,900 21,900,100 33,733,200 56,708,200
Operating income $ 3,019,800 $ 7,536,000 $ 8,049,100 $ 20,976,400
Average number of active consultants 27,100 41,500 28,700 47,300
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UBAM Operating Results for the Three Months Ended
UBAM net revenues decreased$15.9 million , or 38.4{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$25.5 million during the three months endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, 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 withUsborne Publishing Limited . 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 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$17.1 million during the three months endedNovember 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 endedNovember 30, 2022 decreased to 67.1{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, compared to 71.1{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} 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. 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 segment. Total operating expenses decreased$7.8 million , or 35.6{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$14.1 million during the three-month period endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$4.3 million during the three-month period endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$8.8 million during the three-month period endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$1.0 million during the three months endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} to$3.0 million during the three months endedNovember 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 endedNovember 30, 2022 decreased to 11.9{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, compared to 18.2{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} for the three months endedNovember 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
UBAM net revenues decreased$47.1 million , or 43.4{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$61.4 million during the nine-month period endedNovember 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 endedNovember 30, 2022 was 28,700, a decrease of 18,600, or 39.3{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, 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. 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. 16
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Gross margin decreased$35.9 million , or 46.2{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$41.8 million during the nine-month period endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} for the nine-month period endedNovember 30, 2022 , when compared to 71.6{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$33.7 million during the nine-month period endedNovember 30, 2022 , from$56.7 million for the same period a year ago. Operating and selling expenses decreased$5.3 million , or 34.0{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$10.3 million during the nine-month period endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$21.0 million during the nine-month period endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, 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 endedNovember 30, 2022 . Operating income of the UBAM segment decreased$13.0 million , or 61.9{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$8.0 million during the nine months endedNovember 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 endedNovember 30, 2022 was 13.1{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, compared to 19.3{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} for the nine months endedNovember 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
2022
The following table summarizes the operating results of the Publishing segment:
Three Months Ended Nine Months Ended
November 30, November 30,
2022 2021 2022 2021
Gross sales $ 10,125,200 $ 7,800,600 $ 24,090,400 $ 22,054,100
Less discounts and allowances (5,311,300 ) (4,087,300 ) (12,651,400 ) (11,678,500 )
Transportation revenue 2,800 1,200 8,000 6,200
Net revenues 4,816,700 3,714,500 11,447,000 10,381,800
Cost of goods sold 2,669,400 1,935,600 6,213,200 5,577,800
Gross margin 2,147,300 1,778,900 5,233,800 4,804,000
Total operating expenses 908,000 592,800 2,428,800 1,773,500
Operating income $ 1,239,300 $ 1,186,100 $ 2,805,000 $ 3,030,500
Publishing Operating Results for the Three Months Ended
Our Publishing division's net revenues increased$1.1 million , or 29.7{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$4.8 million during the three-month period endedNovember 30, 2022 , from$3.7 million reported in the same period a year ago. During fiscal 2023, we entered into a new distribution agreement withUsborne . Under the terms in our new distribution agreement, the Company no longer has the rights to distributeUsborne's products to retail customers afterNovember 15, 2022 , at which timeUsborne will use a different distributor to supply retail accounts with their products. TheNovember 15, 2022 transition date, atUsborne's request, was extended untilJanuary 31, 2023 . The transition between distributors brought disruption concerns to many of our retail customers and resulted in additional sales orders before theNovember 15, 2022 transition date.Usborne's products sold within the Publishing Division accounted for 85.6{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} of all products sold during the three months endedNovember 30, 2022 . 17
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Gross margin increased$0.3 million , or 16.7{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$2.1 million during the three-month period endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} during the three-month period endedNovember 30, 2022 , from 47.9{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} 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 betweenKane Miller andUsborne . Total operating expenses of the Publishing segment increased$0.3 million , or 50.0{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$0.9 million , from$0.6 million , during the three-month periods endedNovember 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
for the three-month periods ended
Publishing Operating Results for the Nine Months Ended
Our Publishing division's net revenues increased by$1.0 million , or 9.6{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$11.4 million during the nine-month period endedNovember 30, 2022 , from$10.4 million reported in the same period a year ago. During fiscal 2023, we entered into a new distribution agreement withUsborne . Under the terms in our new distribution agreement, the Company no longer has the rights to distributeUsborne's products to retail customers afterNovember 15, 2022 , at which timeUsborne will use a different distributor to supply retail accounts with their products. TheNovember 15, 2022 transition date, atUsborne's request, was extended untilJanuary 31, 2023 . The transition between distributors brought disruption concerns to many of our retail customers and resulted in additional sales orders before theNovember 15, 2022 transition date.Usborne's products sold within the Publishing Division accounted for 89.2{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} of all products sold during the nine months endedNovember 30, 2022 . Gross margin increased$0.4 million , or 8.3{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$5.2 million during the nine-month period endedNovember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, during the nine-month period endedNovember 30, 2022 , from 46.3{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$2.4 million during the nine-month period endedNovember 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 inDecember 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{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}, to$2.8 million during the nine-month period endedNovember 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 flows. 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.
During the first nine months of fiscal year 2023, we experienced cash inflows
from operations of
?net loss of$585,200 Adjusted for:
?depreciation and amortization expense of
?share-based compensation expense, net of
?deferred income taxes of
?provision for inventory allowance of
18
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?decrease in inventories, net of
?increase in deferred revenues of
?decrease in prepaid expenses and other assets of
Negatively impacted by:
?decrease in accounts payable of
?increase in accounts receivable of
?decrease in income taxes payable of
?decrease in accrued salaries and commissions, and other liabilities of
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 pay down existing debt. Following a return to profitability, any excess cash is expected to be distributed to our shareholders. OnAugust 9, 2022 , the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Amended and Restated Loan Agreement datedFebruary 15, 2021 (as amended), between the Company andMidFirst Bank . The Company's payment toMidFirst Bank , including interest, was approximately$45.0 million , which satisfied all of the Company's debt obligations withMidFirst 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
Agreement”) with
Agreement establishes a fixed rate term loan in the principal amount of
principal amount of
the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving
promissory note in the principal amount up to
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) Fixed Rate Term Loan bears
interest at a fixed rate per
annum equal to 4.26{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}
(iv) Floating Rate Term Loan bears
interest at a rate per annum
equal to Term SOFR Rate + 1.75{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf}
(effective rate was 5.48{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} at
November 30, 2022 )
(v) Revolving Loan bears interest at
a rate per annum equal to Term
SOFR Rate + 2.50{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} (effective
rate was 6.23{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} at November 30,
2022 )
(vi) 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 $6,005,500 at November 30, 2022 .
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The following table reflects aggregate future maturities of long-term debt
during the next five fiscal years and thereafter as follows:
Years endingFebruary 28 (29), 2023$ 450,000 2024 1,800,000 2025 1,800,000 2026 1,800,000 2027 1,800,000 Thereafter 27,900,000 Total$ 35,550,000 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 inthe 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 endedFebruary 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 ofNovember 30, 2022 andFebruary 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 atNovember 30, 2022 andFebruary 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 inChina ,Europe ,Singapore ,India ,Malaysia andDubai resulting in a six to eight-month lead-time to have a title printed and delivered to us. 20
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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 atNovember 30, 2022 andFebruary 28, 2022 , respectively. Noncurrent inventory valuation allowances were$0.5 million and$0.4 million atNovember 30, 2022 andFebruary 28, 2022 , respectively. Our principal supplier, based inEngland , 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. 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 8.3{e4f787673fbda589a16c4acddca5ba6fa1cbf0bc0eb53f36e5f8309f6ee846cf} 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$1.7 million and$1.4 million atNovember 30, 2022 andFebruary 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$1.0 million atNovember 30, 2022 and$0.9 million atFebruary 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 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. 21
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