EDUCATIONAL DEVELOPMENT CORPORATION 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, 2021 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 exclusiveUnited States trade co-publisher ofUsborne children's books and the owner of Kane Miller. We operate two separate segments, UBAM and Publishing, to sell ourUsborne andKane 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 shows our condensed statements of earnings data:
Three Months Ended Six Months Ended
August 31, August 31,
2021 2020 2021 2020
Net revenues $ 32,994,400 $ 59,250,100 $ 73,802,300 $ 97,541,800
Cost of goods sold 10,498,900 17,309,500 22,528,800 28,705,000
Gross margin 22,495,500 41,940,600 51,273,500 68,836,800
Operating expenses Operating and selling 5,239,900 10,531,900 11,682,500 16,872,100 Sales commissions 10,105,200 20,304,400 23,072,000 33,904,900 General and administrative 4,793,900 5,664,000 9,932,800 10,200,000 Total operating expenses 20,139,000 36,500,300
44,687,300 60,977,000
Interest expense 213,700 140,000 381,500 322,200 Other income (515,300 ) (499,200 ) (1,114,000 ) (905,800 ) Earnings before income taxes 2,658,100 5,799,500 7,318,700 8,443,400 Income taxes 759,900 1,544,500 1,982,400 2,257,300 Net earnings$ 1,898,200 $ 4,255,000 $ 5,336,300 $ 6,186,100
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$0.8 million , or 16.0%, to$4.2 million for the three-month period endedAugust 31, 2021 , when compared to$5.0 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a$0.6 million decrease in warehouse labor and a$0.4 million decrease in freight handling expenses, both resulting from a decrease in gross sales, offset by a$0.2 million increase in other various expenses. Interest expense increased$0.1 million , or 100.0%, to$0.2 million for the three months endedAugust 31, 2021 , when compared to$0.1 million for the same quarterly period a year ago associated with the increase in our line of credit and the addition of the Advancing Term Loan in the current fiscal year. Income taxes decreased$0.7 million , or 46.7%, to$0.8 million for the three months endedAugust 31, 2021 , from$1.5 million for the same quarterly period a year ago. Our effective tax rate increased to 28.6% for the quarter endedAugust 31, 2021 , from 26.6% for the quarter endedAugust 31, 2020 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.
Non-Segment Operating Results for the Six Months Ended
Total operating expenses remained consistent at$8.7 million for the six-month periods endedAugust 31, 2021 andAugust 31, 2020 . Warehouse labor decreased$0.2 million and freight handling decreased$0.4 million for the six months endedAugust 31, 2021 , both associated with reduced sales. These changes were offset by increased warehouse rental of$0.2 million and property insurance of$0.1 million associated with increased inventory levels along with a$0.3 million increase in other various expenses. Interest expense increased$0.1 million , or 33.3%, to$0.4 million for the six months endedAugust 31, 2021 , when compared to$0.3 million for the same period a year ago as a result of the increase in our line of credit and the addition of the Advancing Term Loan in the current fiscal year. Income taxes decreased$0.3 million , or 13.0%, to$2.0 million for the six months endedAugust 31, 2021 , from$2.3 million for the same period a year ago. Our effective tax rate increased to 27.1% for the six months endedAugust 31, 2021 , from 26.7% for the six months endedAugust 31, 2020 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.
UBAM Operating Results for the Three and Six Months Ended
The following table summarizes the operating results of the UBAM segment:
Three Months Ended Six Months Ended
August 31, August 31,
2021 2020 2021 2020
Gross sales $ 36,789,400 $ 68,868,300 $ 82,325,100 $ 112,814,400
Less discounts and allowances (10,590,700 ) (18,828,400 ) (22,876,400 ) (30,135,100 )
Transportation revenue 3,319,400 6,871,700 7,686,300 11,158,500
Net revenues 29,518,100 56,911,600 67,135,000 93,837,800
Cost of goods sold 8,636,600 16,129,700 18,886,500 26,818,300
Gross margin 20,881,500 40,781,900 48,248,500 67,019,500
Operating expenses
Operating and selling 4,215,000 9,137,600 9,559,700 14,563,900
Sales commissions 9,937,600 20,249,400 22,795,900 33,809,800
General and administrative 1,149,800 1,732,300 2,452,500 3,156,100
Total operating expenses 15,302,400 31,119,300 34,808,100 51,529,800
Operating income$ 5,579,100 $ 9,662,600
Average number of active consultants 46,100 45,400 50,200 39,300
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UBAM Operating Results for the Three Months Ended
UBAM net revenues decreased$27.4 million , or 48.2%, to$29.5 million during the three months endedAugust 31, 2021 , when compared to$56.9 million during the same period a year ago. The average number of active consultants in the second quarter of fiscal 2022 was 46,100, an increase of 700, or 1.5%, from 45,400 selling in the second quarter of fiscal 2021. The Company reports the average number of active consultants each quarter as a key indicator for this division. During the quarter endedAugust 31, 2020 our sales per average number of active consultants increased significantly to due to the increase in demand for our products resulting from the impacts of the COVID-19 pandemic. During last summer, school closings and public interaction restrictions increased the need for educational materials in the home and our consultants were positioned to fill this increased demand. During the quarter endedAugust 31, 2021 , our sales per average number of active consultants remained consistent with years prior to the COVID-19 pandemic. Gross margin decreased$19.9 million , or 48.8%, to$20.9 million during the three months endedAugust 31, 2021 , when compared to$40.8 million during the same period a year ago, primarily associated with the decrease in net revenues. Gross margin as a percentage of net revenues decreased 1.0%, to 70.7% for the three-month period endedAugust 31, 2021 , when compared to 71.7% the same period a year ago. The decrease in gross margin as a percentage of net revenues resulted from a change in order mix partially offset by reduced cost of goods sold. During the quarter endedAugust 31, 2021 sales through book fairs, booths and home parties increased over the second quarter last year when these sales types were challenged. These sales types have higher sales discounts and pay less sales commissions to our consultants, resulting in similar operating income. Reduced cost of goods sold resulted from larger volume discounts and vendor rebates associated with increased purchasing volumes over pre-COVID-19 levels. UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses. 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$15.8 million , or 50.8%, to$15.3 million during the three-month period endedAugust 31, 2021 , when compared to$31.1 million reported in the same quarter a year ago. Operating and selling expenses decreased$4.9 million , or 53.8%, to$4.2 million during the three-month period endedAugust 31, 2021 , when compared to$9.1 million reported in the same quarter a year ago, primarily due to a decrease in net revenues and a decrease in postage and freight peak charges we experienced in the second quarter last year. Sales commissions decreased$10.3 million , or 51.0%, to$9.9 million during the three-month period endedAugust 31, 2021 , when compared to$20.2 million reported in the same quarter a year ago, due primarily to the decrease in net revenues. General and administrative expenses decreased$0.6 million , or 35.3%, to$1.1 million during the three months endedAugust 31, 2021 , when compared to$1.7 million during the same period a year ago, due primarily to reduced bank fees from less credit card transactions during the quarter endedAugust 31, 2021 . Operating income of the UBAM segment decreased$4.1 million , or 42.3%, to$5.6 million during the three months endedAugust 31, 2021 , when compared to$9.7 million reported in the same quarter a year ago, primarily due to the change in net revenues. Operating income of the UBAM division as a percentage of net revenues for the three months endedAugust 31, 2021 increased to 18.9%, compared to 17.0% for the three months endedAugust 31, 2020 , primarily from reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes and reduced outbound shipping peak charges experienced in the second quarter last year.
UBAM Operating Results for the Six Months Ended
UBAM net revenues decreased$26.7 million , or 28.5%, to$67.1 million during the six-month period endedAugust 31, 2021 , compared to$93.8 million from the same period a year ago. The average number of active consultants in the six-month period endedAugust 31, 2021 was 50,200, an increase of 10,900, or 27.7%, from 39,300 selling in same period a year ago. During the six months endedAugust 31, 2020 our sales per average number of active consultants increased significantly due to the increase in demand for our products resulting from the impacts of the COVID-19 pandemic. School closings and quarantine restrictions increased the need for educational materials in the home and our consultants were positioned to fill this increased demand. During the six months endedAugust 31, 2021 , our sales per average number of active consultants remained consistent with years prior to the COVID-19 pandemic. 16
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Gross margin decreased$18.8 million , or 28.1%, to$48.2 million during the six-month period endedAugust 31, 2021 , when compared to$67.0 million during the same period a year ago, due primarily to a decrease in net revenues. Gross margin as a percentage of net revenues increased to 71.9% for the six-month period endedAugust 31, 2021 , when compared to 71.4% for the same period a year ago. During the six months endedAugust 31, 2021 , sales through book fairs, booths and home increased over the first six months of fiscal year 2021 when these sales types were challenged. These sales types have higher sales discounts and pay less sales commissions to our consultants, resulting in similar operating income. The decrease in gross margin percentage associated with the mix from these sales types was offset by reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes over pre-COVID-19 levels. Total operating expenses decreased$16.7 million , or 32.4%, to$34.8 million during the six-month period endedAugust 31, 2021 , from$51.5 million for the same period a year ago. Operating and selling expenses decreased$5.0 million , or 34.2%, to$9.6 million during the six-month period endedAugust 31, 2021 , when compared to$14.6 million reported in the same period a year ago, primarily due to a decrease in shipping costs associated with the decrease in volume of orders shipped. Sales commissions decreased$11.0 million , or 32.5%, to$22.8 million during the six-month period endedAugust 31, 2021 , when compared to$33.8 million reported in the same period a year ago, primarily due to the decrease in net revenues along with a lower percentage of internet-based sales, which offer fewer discounts and higher sales commissions to consultants. General and administrative expenses decreased$0.7 million , or 21.9%, to$2.5 million , from$3.2 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes. Operating income of the UBAM segment decreased$2.1 million , or 13.5%, to$13.4 million during the six months endedAugust 31, 2021 , when compared to$15.5 million reported in the same period last year. Operating income of the UBAM division as a percentage of net revenues for the six months endedAugust 31, 2021 was 20.0%, compared to 16.5% for the six months endedAugust 31, 2020 , a change of 3.5%. Operating income as a percentage of net revenues increased from the prior year primarily from reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes and reduced outbound shipping peak charges experienced during the first six months of the prior fiscal year.
Publishing Operating Results for the Three and Six Months Ended
The following table summarizes the operating results of the Publishing segment:
Three Months Ended Six Months Ended
August 31, August 31,
2021 2020 2021 2020
Gross sales $ 7,397,700 $ 4,814,500 $ 14,253,600 $ 7,765,300
Less discounts and allowances (3,922,800 ) (2,535,000 ) (7,591,200 ) (4,124,200 )
Transportation revenue 1,400 59,000 4,900 62,900
Net revenues 3,476,300 2,338,500 6,667,300 3,704,000
Cost of goods sold 1,862,300 1,179,800 3,642,300 1,886,700 Gross margin 1,614,000 1,158,700
3,025,000 1,817,300
Total operating expenses 631,200 419,900
1,180,700 731,900
Operating income$ 982,800 $ 738,800 $ 1,844,300 $ 1,085,400
Publishing Operating Results for the Three Months Ended
Our Publishing division's net revenues increased$1.2 million , or 52.2%, to$3.5 million during the three-month period endedAugust 31, 2021 , from$2.3 million reported in the same period a year ago. Many Publishing customers began to reopen in the latter half of fiscal year 2021 after closing in the first quarter of fiscal year 2021 due to the COVID-19 pandemic. Gross margin increased$0.4 million , or 33.3%, to$1.6 million during the three-month period endedAugust 31, 2021 , from$1.2 million reported in the same quarter a year ago, primarily due to the increase in net revenues. Gross margin as a percentage of net revenues decreased to 46.4% during the three-month period endedAugust 31, 2021 , from 49.5% reported in the same quarter a year ago. Gross margin as a percentage of net revenues fluctuates primarily from the different discount levels offered to customers as well as changes in the mix of products sold betweenKane Miller andUsborne . 17
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Total operating expenses of the Publishing segment increased$0.2 million , or 50.0%, to$0.6 million , from$0.4 million , during the three-month periods endedAugust 31, 2021 and 2020, primarily as a result of increased freight expenses from an increase in sales. Operating income of the Publishing segment increased$0.3 million , or 42.9%, to$1.0 million from$0.7 million for the three-month periods endedAugust 31, 2021 and 2020, primarily driven by the increase in net revenues.
Publishing Operating Results for the Six Months Ended
Our Publishing division's net revenues increased$3.0 million , or 81.1%, to$6.7 million during the six-month period endedAugust 31, 2021 , from$3.7 million reported in the same period a year ago. The increase in sales resulted from temporary store closures impacted by the COVID-19 pandemic in fiscal year 2021. Many Publishing customers temporarily closed during the first quarter of fiscal year 2021, following the guidance from their local authorities to slow the spread of the pandemic, and began reopening at varying times in the latter half of fiscal year 2021. Gross margin increased$1.2 million , or 66.7%, to$3.0 million during the six-month period endedAugust 31, 2021 , from$1.8 million reported in the same period a year ago, primarily due to the increase in net revenues. Gross margin as a percentage of net revenues decreased to 45.4%, during the six-month period endedAugust 31, 2021 , from 49.1% reported in the same period a year ago. The decrease in gross margin percentage results primarily from a change in our customer mix. Customers receive varying discounts due to sales volumes and contract terms. Total operating expenses of the Publishing segment increased$0.5 million , or 71.4%, to$1.2 million during the six-month period endedAugust 31, 2021 , from$0.7 million reported in the same period a year ago, resulting from a$0.3 million increase in postage and freight from an increase in sales volumes and a$0.2 million increase in sales commissions from an increase in sales volumes. Operating income of the Publishing segment increased$0.7 million , or 63.6%, to$1.8 million during the six-month period endedAugust 31, 2021 when compared to$1.1 million reported in the same period a year ago, due primarily to the increase in net revenues. 18
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Liquidity and Capital Resources
EDC has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate. We also use available cash to pay down outstanding bank loan balances, for capital expenditures, to pay dividends, and to acquire treasury stock. We 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 2022, we experienced cash outflows
from operations of
?net earnings of$5,336,300 Adjusted for:
?depreciation expense of
?share-based compensation expense of
?provision for inventory valuation allowance of
?provision for doubtful accounts of
Offset by:
?deferred income taxes of
Negatively impacted by:
?increase in inventories, net of
?decrease in accrued salaries and commissions, and other liabilities of
?decrease in deferred revenues of
?increase in accounts receivable of
?increase in prepaid expenses and other assets of
?decrease in accounts payable of
?decrease in income taxes payable of
Cash used in investing activities was$3,210,200 for capital expenditures, which were comprised of$2,849,700 in equipment purchased to increase our daily shipping capacity,$280,500 in software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders and$80,000 in building and building improvements. Cash provided by financing activities was$14,741,300 , which was comprised of proceeds from term debt of$5,244,700 , net borrowings under the line of credit of$11,408,500 and net cash received in treasury stock transactions of$92,400 , offset by payments of$1,698,500 for dividends and payments on term debt of$305,800 . During fiscal year 2022, we continue to expect the cash generated from our operations and cash available through our line of credit with our Bank will provide us the liquidity we need to support ongoing operations. Cash generated from operations will be used to increase inventory by expanding our product offerings, to liquidate existing debt, and any excess cash is expected to be distributed to our shareholders. OnFebruary 15, 2021 , the Company executed the Amended and Restated Loan Agreement withMidFirst Bank which replaced the prior loan agreement and includes multiple loans. Term Loan #1 Tranche A ("Term Loan #1"), originally totaling$13.4 million , was part of the prior loan agreement. Term Loan #1 had a fixed interest rate of 4.23%, with principal and interest payable monthly and a stated maturity date ofDecember 1, 2025 . Term Loan #1 is secured by the primary office, warehouse and land. Term Loan #1 was amended onApril 1, 2021 by executing the First Amendment to the Loan Agreement which reduced the fixed interest rate to 3.12% and removed the prepayment premium from the Loan Agreement. The outstanding borrowings on Term Loan #1 were$10.7 million and$11.0 million as ofAugust 31, 2021 andFebruary 28, 2021 , respectively. In addition, the Amended and Restated Loan Agreement provides a$6.0 million Advancing Term Loan to be used to finance planned equipment purchases. The Advancing Term Loan required interest-only payments throughJuly 15, 2021 , at which time it was converted to a 60-month amortizing term loan maturingJuly 15, 2026 . The Advancing Term Loan accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company's Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75%. Our borrowings outstanding under the Advancing Term Loan atAugust 31, 2021 were$5.2 million . 19
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The Amended and Restated Loan Agreement also provides a$20.0 million revolving loan ("line of credit") throughAugust 15, 2022 with interest payable monthly at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company's Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75%. OnJuly 16, 2021 , the Company executed the Second Amendment to the Loan Agreement which increased the Maximum Revolving Principal Amount from$15.0 million to$20.0 million . OnAugust 31, 2021 , the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate. Our borrowings outstanding on our line of credit atAugust 31, 2021 andFebruary 28, 2021 were$16.7 million and$5.2 million , respectively. Available credit under the revolving line of credit was approximately$3.3 million and$9.6 million atAugust 31, 2021 andFebruary 28, 2021 , respectively. The Amended and Restated Loan Agreement also contains a provision for our use of the Bank's letters of credit. The Bank agrees to issue or obtain issuance of commercial or stand-by letters of credit provided that the sum of the line of credit plus the letters of credit issued would not exceed the borrowing base in effect at the time. As ofAugust 31, 2021 , we had no letters of credit outstanding. The agreement contains provisions that require us to maintain specified financial ratios, place limitations on additional debt with other banks, limit the amounts of dividends declared and limits the number of shares that can be repurchased using funding from the line of credit.
The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:
Years endingFebruary 28 (29), 2022$ 816,900 2023 1,658,800 2024 1,678,300 2025 1,697,700 2026 9,546,400 Thereafter 525,500 Total$ 15,923,600 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. 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 ofAugust 31, 2021 andFebruary 28, 2021 . 20
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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 (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$0.4 million atAugust 31, 2021 , and$0.3 million atFebruary 28, 2021 . Included within this allowance is$0.1 million of reserve for vendor discounts to sell remaining inventory as ofAugust 31, 2021 andFebruary 28, 2021 . 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 four- to six-month lead-time to have a title printed and delivered to us. Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to minimum order requirements of our suppliers. Noncurrent inventory was estimated by management using the current year turnover ratio by title. Inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory. These inventory quantities have exposure of becoming out of date, and therefore have higher obsolescence reserves. Noncurrent inventory balances prior to valuation allowances were$1.1 million and$0.9 million atAugust 31, 2021 andFebruary 28, 2021 , respectively. Noncurrent inventory valuation allowances were$0.3 million and$0.2 million atAugust 31, 2021 andFebruary 28, 2021 , respectively. Our principal supplier, based inEngland , generally requires a minimum re-order of 6,500 or more of a title in order to get a solo print run. Smaller orders would require a shared print run with the supplier's other customers, which can result in lengthy delays to receive the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series. We then place the initial order or re-order based upon this analysis. These factors and historical analysis have led our management to determine that 2½ years represents a reasonable estimate of the normal operating cycle for our products. 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 4.8% of our active consultants maintained consignment inventory at the end of the second quarter of fiscal 2022. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with consultants was$1.2 million and$1.1 million atAugust 31, 2021 andFebruary 28, 2021 , respectively. Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company. Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management's identification of slow-moving inventory. Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of$0.8 million and$0.7 million atAugust 31, 2021 andFebruary 28, 2021 , respectively. 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. 21
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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 2022, the Company recognized
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