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What changed in EDUCATIONAL DEVELOPMENT CORP's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of EDUCATIONAL DEVELOPMENT CORP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+139 added−127 removedSource: 10-K (2023-05-17) vs 10-K (2022-05-05)

Top changes in EDUCATIONAL DEVELOPMENT CORP's 2023 10-K

139 paragraphs added · 127 removed · 91 edited across 4 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeMost of our books were originally published in other countries, in their native languages, and we translate them to common American English and have exclusive rights to publish the titles in the United States. We also have a broad line of ‘internet-linked’ books which allow readers to expand their educational experience by referring them to relevant non-Company websites.
Biggest changeOur books also include science and math titles, as well as chapter books and novels. Many of our Kane Miller books were originally published in other countries, in their native languages, and we translate them to common American English and have exclusive rights to publish the titles in the United States.
We are a corporation incorporated under the laws of the State of Delaware on August 23, 1965. Our fiscal year ends on February 28 (29). Our Company motto is “The future of our world depends on the education of our children. EDC delivers educational excellence one book at a time. We provide economic opportunity while fostering strong family values.
We are a corporation incorporated under the laws of the State of Delaware on August 23, 1965. Our fiscal year ends on February 28 (29). Our Company mission statement reflects “The future of our world depends on the education of our children. EDC delivers educational excellence one book at a time. We provide economic opportunity while fostering strong family values.
Employees As of April 25, 2022, 166 full-time employees worked at our Tulsa, OK, San Diego, CA and Layton, UT facilities. Of these employees, approximately 61% work in our distribution warehouse in Tulsa, OK.
Employees As of April 26, 2023, 138 full-time employees worked at our Tulsa, OK, San Diego, CA, Layton, UT and Seattle, WA facilities. Of these employees, approximately 56% work in our distribution warehouse in Tulsa, OK.
Our UBAM division competes in recruiting and retaining sales consultants, which continuously receive opportunities to work for other direct selling companies, as well as new non-traditional employment opportunities in the gig-marketplace that provide part-time supplemental income. We also compete with Scholastic Corporation in the school and library book fair market.
Our PaperPie division competes in recruiting and retaining brand partners, which continuously receive opportunities to work for other direct selling companies, as well as new non-traditional employment opportunities, especially in the gig marketplace that provide part-time supplemental income.
We touch the lives of children for a lifetime.” (b) Financial Information about Our Segments While selling children’s books and related products (collectively referred to as “books”) is our only line of business, we sell through two business segments, which we sometimes refer to as “divisions”: ● Home Business Division (“Usborne Books & More” or “UBAM”) – This division sells our books through independent consultants directly to our customers.
We touch the lives of children for a lifetime.” 4 Table of Contents (b) Financial Information about Our Segments We sell children’s books, educational toys and games and other related products (collectively referred to as “products” or “books”) through two business segments, which we refer to as “divisions” or “sales channels”: ● Direct Sales Division (“PaperPie”) – This division sells our books and products through independent brand partners direct to the customer.
Our Publishing division faces competition from large U.S. and international publishing companies that sell online and through the same retail publishing stores as well as for space in retail toy, gift and novelty stores that offer a variety of non-book products.
We also compete with other publishers in the school and library book fair market, of which Scholastic Corporation is the largest. 5 Table of Contents Our Publishing division faces competition from U.S. and international publishing companies that sell online and through the same retail bookstores, toy stores, and gift and novelty stores that offer a variety of non-book products.
Competition While we have the exclusive U.S. rights to sell Usborne and Kane Miller books, we face competition from the internet and other book publishers who are also selling directly to our customers.
Competition While we have the exclusive rights to sell Kane Miller books, Learning Wrap-Ups, SmartLab Toys and are the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne books, we face competition from other publishers selling on the internet and directly to our customer base.
This division had approximately 36,100 active consultants as of February 28, 2022. Our Publishing division markets through commissioned trade representatives who call on retail book, toy and specialty stores along with other retail outlets. Publishing also conducts in-house marketing by telephone to these customers and potential customers. This division markets to approximately 4,000 book, toy and specialty stores.
This division had approximately 24,600 active Brand Partners as of February 28, 2023. ● Publishing Division (“EDC Publishing” or “Publishing”) – This is our trade division which markets through commissioned trade representatives who call on retail book, toy and specialty stores along with other retail outlets.
Many of our books are interactive in nature, including our touchy-feely board books, activity books and flashcards, adventure and search books, art books, sticker books and foreign language books.
Many of our products are interactive in nature, including our touchy-feely board books, activity books and flashcards, adventure and search books, art books, sticker books, foreign language books, learning manipulatives and toys. We also have a broad line of ‘internet-linked’ books which allow readers to expand their educational experience by referring them to relevant non-Company websites.
Our consultants sell books by hosting home parties, through social media collaboration platforms on the internet, by hosting book fairs with school and public libraries and through other events. ● Publishing Division (“EDC Publishing” or “Publishing”) – This division sells our books to bookstores (including major national chains), toy stores, specialty stores, museums and other retail outlets throughout the country.
Our Brand Partners sell our products in various ways, including hosting home parties, through social media collaboration platforms on the internet, hosting book fairs with school and public libraries and through other events.
Item 1. BUSINESS ( a) General Description of Business We are the exclusive United States (“U.S.”) trade co-publisher of educational children’s books produced in the United Kingdom by Usborne Publishing Limited (“Usborne”) and we also exclusively publish books through our ownership of Kane Miller Book Publisher (“Kane Miller”); both award-winning publishers of international children’s books.
Item 1. BUSINESS ( a) General Description of Business We are the owner and exclusive publisher of Kane Miller children’s books; Learning Wrap-Ups, maker of educational manipulatives; and SmartLab Toys, maker of STEAM-based toys and games. We are also the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books.
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Percent Net Revenues by Division FY 2022 FY 2021 UBAM 91 % 96 % Publishing 9 % 4 % Total net revenues 100 % 100 % 4 Table of Contents (c) Narrative Description of Business Products As the exclusive United States trade co-publisher of Usborne books and sole publisher of Kane Miller books, we offer over 2,000 different children’s books.
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This division also has in-house representatives marketing by telephone and email to these customers and potential customers. This division markets to approximately 4,000 retail outlets. In addition to exhibiting at national trade and regional bookselling shows, our products are featured in agency showrooms in AmericasMart Atlanta, Dallas Market Center, and Minneapolis Mart.
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Our books include science and math titles, as well as chapter books and novels. We continually introduce new titles across all lines of our products. UBAM markets our books through commissioned consultants using a combination of direct sales, home parties, book fairs and internet based social media platforms (“online parties”).
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Under the contracted terms in our new distribution agreement, the Company no longer had the rights to distribute Usborne’s products to retail customers effective November 15, 2022, at which date Usborne planned to engage a different distributor to supply their products to retail accounts.
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Approximately 2% of our Publishing division's net revenues are to national book chain stores. Seasonality Sales for both divisions are greatest during the fall due to the holiday season.
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The November 15, 2022 transition date, at Usborne’s request, was extended until their new supplier can start distribution during 2023.
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These reports will be provided electronically, free of charge, upon request. 5 Table of Contents COVID-19 Update The Company has taken numerous steps, and will continue to take further actions, in its approach to minimize the impact of the COVID-19 pandemic.
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Percent of Net Revenues by Division FY 2023 FY 2022 PaperPie 85 % 91 % Publishing 15 % 9 % Total net revenues 100 % 100 % (c) Narrative Description of Business Products EDC’s current catalog contains approximately 2,000 titles, with new additions added four times per year across all lines of our products.
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Effective May 1, 2021, we lessened our safety and health practices in the office and warehouse based on the recommendations from the local Tulsa Health Department. We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business.
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Additionally, throughout the year, a similar number of titles that do not have sufficient sales are identified as “out of print” and these titles are no longer re-printed or included in future catalogs.
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While the Company did not experience a decrease in net revenues during fiscal year 2021, and while fiscal year 2022 results continued to show growth over pre-pandemic levels, the long-term severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted.
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The Company sells through the remaining quantities of these out of print titles through their normal sales channels at normal pricing and has not historically participated in the publishing industry’s “remainder” market.
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See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact COVID-19 had during the current fiscal year.
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Certain Kane Miller agreements include North American rights and these titles are also sold into Canada. Our SmartLab Toys and Learning Wrap-Ups imprints are owned product lines that are sold domestically and internationally, including the sale of foreign distribution rights to specific customers. Seasonality Sales for both divisions are greatest during the fall due to the holiday season.
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These reports will be provided electronically, free of charge, upon request. Employee Retention Credit In response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which, among other things, included a provision related to the Employee Retention Credit. The Company applied the provisions of the CARES Act as applicable.
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In fiscal 2024, the Company applied for employee retention credits for Q1, Q2 and Q3 wages paid in calendar year 2021. In connection with the CARES Act, the Company adopted a policy to recognize the employee retention credit when realized under Accounting Standards Codification (“ASC”) 450-30, Gain Contingencies .
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Accordingly, the total requested credits of $3.6 million are not recorded in the Company’s financial statements until the credits are received, as the Company is not certain the credits will be issued.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeIn addition to these owned properties, we also lease additional warehouse space in Tulsa, Oklahoma as needed for overflow inventory, a small office in San Diego, California that is used by our Kane Miller employees, and a warehouse and office space in Layton, Utah resulting from the acquisition of Learning Wrap-Ups.
Biggest changeIn addition to these owned properties, we also lease additional warehouse space in Tulsa, Oklahoma as needed for overflow inventory, a small office in San Diego, California that is used by our Kane Miller employees, a warehouse and office space in Layton, Utah resulting from the acquisition of Learning Wrap-Ups, and office space located in Seattle, Washington resulting from the acquisition of SmartLab Toys.
We also own a facility located at 10302 East 55th Place, Tulsa, Oklahoma that contains approximately 105,000 square feet of usable space including 8,000 square feet of office and 97,000 square feet of warehouse space. We use approximately 76,000 square feet of warehouse space for overflow inventory.
We also own a facility located at 10302 East 55th Place, Tulsa, Oklahoma that contains approximately 105,000 square feet of usable space including 8,000 square feet of office and 97,000 square feet of warehouse space. We use approximately 84,000 square feet of warehouse space for overflow inventory.
The remaining 8,000 square feet of office space and 21,000 square feet of warehouse are leased to third-party tenants with multi-year lease agreements.
The remaining 21,000 square feet are leased to a third-party tenant with a multi-year lease agreement.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeItem 5. MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The common stock of EDC is traded on NASDAQ (symbol “EDUC”). The number of shareholders of record of EDC's common stock as of April 28, 2022 was 457.
Biggest changeItem 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The common stock of EDC is traded on NASDAQ (symbol “EDUC”). The number of shareholders of record of EDC's common stock as of May 2, 2023, was 457.
Issuer Purchases of Equity Securities Period Total # of Shares Purchased Average Price Paid Per Share Total # of Shares Purchased as Part of Publicly Announced Plan (1) Maximum # of Shares that may be Repurchased Under the Plan (1) December 1-31, 2021 - $ - - 514,594 January 1-31, 2022 - - - 514,594 February 1-28, 2022 - - - 514,594 Total - $ - - (1) On February 4, 2019, the Board of Directors approved a new stock repurchase plan, replacing the former 2008 stock repurchase plan.
Issuer Purchases of Equity Securities Period Total # of Shares Purchased Average Price Paid Per Share Total # of Shares Purchased as Part of Publicly Announced Plan (1) Maximum # of Shares that may be Repurchased Under the Plan (1) December 1-31, 2022 - $ - - 514,594 January 1-31, 2023 - - - 514,594 February 1-28, 2023 - - - 514,594 Total - $ - - (1) On February 4, 2019, the Board of Directors approved a new stock repurchase plan, replacing the former 2008 stock repurchase plan.
The maximum number of shares which may be purchased under the new plan is 800,000. This plan has no expiration date.
The maximum number of shares which may be purchased under the new plan is 800,000. This plan has no expiration date. Item 6. [RESERVED]
For information regarding our compensation plans see Note 10 of the notes to the financial statements and our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 6, 2022, as outlined in Part III, Item 12 in this Annual Report.
For information regarding our compensation plans see Note 11 of the notes to the financial statements and our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on June 29, 2023, as outlined in Part III, Item 12 in this Annual Report.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThese cash flows resulted from: ● net earnings of $8,306,800 Adjusted for: ● depreciation expense of $2,126,700 ● share-based compensation expense of $1,046,500 ● provision for inventory valuation allowance of $235,700 ● provision for doubtful accounts of $115,800 Offset by: ● deferred income taxes of $208,600 Positively impacted by: ● increase in income taxes payable of $111,700 Negatively impacted by: ● increase in inventories, net of $21,396,900 ● decrease in accounts payable of $6,201,300 ● decrease in accrued salaries, commissions, and other liabilities of $2,868,300 ● decrease in deferred revenue of $1,794,300 ● increase in accounts receivable of $407,900 ● increase in prepaid expenses and other assets of $209,200 During the year our inventories increased significantly as we replenished quantities at volumes based on fiscal year 2021 sales.
Biggest changeThese cash flows resulted from: ● net loss of $2,504,900 Adjusted for: ● depreciation and amortization expense of $2,478,700 ● share-based compensation expense, net of $907,800 ● provision for inventory allowance of $715,900 Offset by: ● deferred income taxes of $678,100 Positively impacted by: ● decrease in inventories, net of $9,086,900 ● decrease in accounts receivable of $732,100 Negatively impacted by: ● decrease in accounts payable of $8,547,900 ● decrease in accrued salaries, commissions, and other liabilities of $1,578,000 ● decrease in income taxes payable of $241,900 ● increase in prepaid expenses and other assets of $233,200 ● decrease in deferred revenues of $78,900 Cash used in investing activities was $1,755,800 for capital expenditures, consisting of $852,500 of software upgrades to our proprietary systems that our Brand Partners use to monitor their business and place customer orders, $766,400 associated with the purchase of SmartLab Toys, $132,000 of other assets associated with the Company’s rebrand of the PaperPie sales division and $4,900 of other various changes.
Most of our products are printed in China, Europe, Singapore, India, Malaysia and Dubai typically resulting in a four to six-month lead-time to have a title printed and delivered to us. Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory.
Most of our products are printed in China, Europe, Singapore, India, Malaysia and Dubai typically resulting in a four 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.
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.
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 has been established. The fair value of these awards is determined based on the closing price of the shares on the grant date.
The customer base of UBAM consists of individual purchasers, as well as schools and public libraries. Revenues are primarily generated through book showings in individual homes, on social media collaboration platforms, through book fairs with school and public libraries and other events.
The customer base of PaperPie consists of individual purchasers, as well as schools and public libraries. Revenues are primarily generated through book showings in individual homes, on social media collaboration platforms, through book fairs with school and public libraries and other in-person events.
An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends. Management has estimated and included an allowance for doubtful accounts of $0.3 million for the fiscal years ended February 28, 2022 and February 28, 2021.
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 for the fiscal years ended February 28, 2023 and February 28, 2022, respectively.
Inventory Our inventory contains over 2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future.
Inventory Our inventory contains approximately 2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line is saleable as the products are not topical in nature and remain current in content today as well as in the future.
New Accounting Pronouncements See the New Accounting Pronouncements section of Note 1 to our financial statements, included in Part IV, Item 15 of this report, for further details of recent accounting pronouncements.
New Accounting Pronouncements See the New Accounting Pronouncements section of Note 1 to our financial statements, included in Part IV, Item 15 of this report, for further details of recent accounting pronouncements. 16 Table of Contents
Publishing Division Net Revenues by Market Type FY 2022 FY 2021 National chain bookstores 2 % 5 % All other 98 % 95 % Total net revenues 100 % 100 % Publishing uses a variety of methods to attract potential new customers and maintain current customers.
Publishing Division Net Revenues by Market Type FY 2023 FY 2022 National chain bookstores 2 % 2 % All other 98 % 98 % Total net revenues 100 % 100 % Publishing uses a variety of methods to attract potential new customers and maintain current customers.
Internet orders are processed through a standard online “shopping cart checkout” and the consultant receives sales credit and commission on the transaction. All internet orders are shipped directly to the end customer. The hostess earns discounted books based on the total sales from the attendees at the online party.
Internet orders are processed through a standard online “shopping cart checkout” and the Brand Partner receives sales credit and commission on the transaction. All internet orders are shipped directly to the end customer. The hostess earns discounted products based on the total sales from the attendees at the online party.
Historically, we have experienced an increase in inventory during the Summer in anticipation for the Fall increase in sales. In addition, new titles are typically released twice a year, in the Spring and Fall, which increases our inventory the months preceding these scheduled releases.
Seasonality The Company experiences increased sales in the Fall season. Historically, we have experienced an increase in inventory during the Summer in anticipation for the Fall increase in sales. In addition, new titles are typically released twice a year, in the Spring and Fall, which increases our inventory in the months preceding these scheduled releases.
All other supporting administrative activities are recognized as other expenses outside of our two segments.
All other supporting administrative activities are recognized as other expenses outside of our two divisions.
Sales commissions decreased $25.9 million, to $43.8 million during the fiscal year ended February 28, 2022, when compared to $69.7 million reported in the same period a year ago primarily due to the decrease in net revenues.
Sales commissions decreased $18.7 million, to $25.1 million during the fiscal year ended February 28, 2023, when compared to $43.8 million reported in the same period a year ago primarily due to the decrease in net revenues.
General and administrative expenses decreased $1.9 million, to $4.8 million during the fiscal year ended February 28, 2022, when compared with $6.7 million reported for fiscal year ended February 28, 2021.
General and administrative expenses decreased $1.7 million, to $3.1 million during the fiscal year ended February 28, 2023, when compared with $4.8 million reported for fiscal year ended February 28, 2022.
Consultants contact hosts or hostesses (collectively “hostess”) who then provide a list of contacts to invite to an online party. During the online party, the consultant answers attendee’s questions and provides product recommendations. These attendees then select desired products and place orders via the consultant’s customized website.
Brand Partners contact hosts or hostesses (collectively “hostess”) who then provide a list of contacts to invite to an online party. During the online party, the Brand Partner answers attendees’ questions and provides product recommendations. These attendees then select desired products and place orders via the Brand Partner’s customized website.
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.
We continue to expect the cash generated from our operations, specifically from the reduction of excess inventory, and cash available through our line of credit with our Lender will provide us the liquidity we need to support ongoing operations.
The effective tax rate decreased by 0.6%, to 26.1% for fiscal year ended February 28, 2022, as compared to 26.7% for fiscal year ended February 28, 2021 primarily due to sales mix fluctuations between states.
The effective tax rate increased by 0.8%, to 26.9% for fiscal year ended February 28, 2023, as compared to 26.1% for fiscal year ended February 28, 2022, primarily due to sales mix fluctuations between states.
In addition, Consultants receive a monthly sales bonus once their sales reach an established monthly goal and other awards (called “Home Office Challenges”) for meeting other individual sales and recruiting goals for the month. Consultants who recruit a specified number of other consultants into their downline “central group” become “Team Leaders”.
In addition, Brand Partners receive a monthly sales bonus once their total sales reach an established monthly goal and other awards (called “Level Perks”) for meeting other individual sales and recruiting goals for the month. Brand Partners who recruit a specified number of other Brand Partners into their downline become “Team Leaders”.
Under the new 2019 plan, the Company is authorized to purchase up to 800,000 shares of common stock, which represented approximately 9% of the outstanding shares as of February 28, 2022, of which 514,594 remains available to purchase as of February 28, 2022.
Under the new 2019 plan, the Company is authorized to purchase up to 800,000 shares of Company common stock, which represented approximately 9% of the outstanding shares as of February 28, 2023, of which 514,594 remains available to purchase as of February 28, 2023. Management has no plans to repurchase any outstanding shares until the Company returns to profitability.
Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to the minimum order requirements of our suppliers. Noncurrent inventory was estimated by management using the current year turnover ratio by title and anticipated sales of specific titles.
Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to the minimum order requirements of our suppliers. Noncurrent inventory is estimated by management using an anticipated turnover ratio by title, based primarily on historical trends.
Consultants receive “weekly commissions” from each sale they make; the commission rate they receive on each sale is determined by the marketing program under which the sale is made.
Brand Partners receive “weekly commissions” from each sale they make; the commission rate they receive on each sale is determined by the order type under which the sale is made.
Total UBAM operating expenses decreased $40.2 million, or 37.4%, to $67.4 million during the fiscal year ended February 28, 2022, when compared with $107.6 million reported for fiscal year ended February 28, 2021.
Total PaperPie operating expenses decreased $26.7 million, or 39.6%, to $40.7 million during the fiscal year ended February 28, 2023, when compared with $67.4 million reported for fiscal year ended February 28, 2022.
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.
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.
Other expenses are primarily compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate offices and distribution facilities. 7 Table of Contents UBAM Division Our UBAM division uses a multi-level direct selling platform to market books through independent sales representatives (“consultants”) located throughout the United States.
Other expenses consist primarily of the compensation for our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate offices and distribution facility. 7 Table of Contents PaperPie Division Our PaperPie division uses a multi-level direct selling organizational structure to market our products using independent sales representatives (“Brand Partners”) located throughout the United States.
This decrease was due to $1.5 million of decreased credit card transaction fees associated with decreased sales volumes and a $0.4 million decrease in promotions and marketing expenses associated with decreased consultant counts. 11 Table of Contents Operating income of our UBAM division decreased $8.4 million, or 25.6%, to $24.4 million for fiscal year ended February 28, 2022, as compared to $32.8 million reported for fiscal year ended February 28, 2021.
This decrease was due to $1.0 million of decreased credit card transaction fees associated with decreased sales volumes, a $0.4 million decrease in promotions and marketing expenses associated with decreased Brand Partner counts, and a $0.3 million decrease in payroll and various other expenses. 11 Table of Contents Operating income of our PaperPie division decreased $15.2 million, or 62.3%, to $9.2 million for fiscal year ended February 28, 2023, as compared to $24.4 million reported for fiscal year ended February 28, 2022.
Income taxes decreased $1.7 million, to $2.9 million for fiscal year ended February 28, 2022, from $4.6 million for the same period a year ago. This decrease was primarily related to a decrease in taxable income for the current fiscal year compared to the prior fiscal year.
Income taxes decreased $3.8 million, to a tax benefit of $0.9 million for fiscal year ended February 28, 2023, from a tax expense of $2.9 million for the same period a year ago. This decrease was primarily related to a decrease in taxable income for the current fiscal year compared to the prior fiscal year.
Operating income of the UBAM division as a percentage of net revenues for the year ended February 28, 2022 was 18.9%, compared to 16.7% for the year ended February 28, 2021, a change of 2.2%.
Operating income for the PaperPie division as a percentage of net revenues for the year ended February 28, 2023, was 12.3%, compared to 18.9% for the year ended February 28, 2022, a change of 6.6%.
An important factor in the continued growth of the UBAM division is the addition of new sales consultants and the retention of existing consultants. Current active consultants (defined as those with sales during the past six months) often recruit new sales consultants.
An important factor in the continued growth of the PaperPie division is the addition of new brand partners and the retention of existing Brand Partners. Current active Brand Partners (defined as those with sales during the past six months) are primarily responsible for recruiting new brand partners.
Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily received from the retail customers of our Publishing division. Those damages occur in the stores, not in shipping to the stores, and we typically do not offer credit for damaged returns.
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 a product damaged in transit. Damaged returns are primarily received from the retail customers of our Publishing division.
Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes. 10 Table of Contents UBAM Operating Results The following table summarizes the operating results of the UBAM segment for the twelve months ended February 28: Twelve Months Ended February 28, 2022 2021 Gross sales $ 159,303,800 $ 237,317,700 Less discounts and allowances (44,187,200 ) (65,099,100 ) Transportation revenue 13,861,900 23,790,700 Net revenues 128,978,500 196,009,300 Cost of goods sold 37,150,600 55,603,000 Gross margin 91,827,900 140,406,300 Operating expenses Operating and selling 18,800,300 31,182,700 Sales commissions 43,801,300 69,707,200 General and administrative 4,788,800 6,695,800 Total operating expenses 67,390,400 107,585,700 Operating income $ 24,437,500 $ 32,820,600 Average number of active consultants 44,900 48,700 UBAM net revenues decreased $67.0 million, or 34.2%, to $129.0 million for fiscal year ended February 28, 2022, when compared with net revenues of $196.0 million reported for fiscal year ended February 28, 2021.
Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes. 10 Table of Contents PaperPie Operating Results The following table summarizes the operating results of the PaperPie segment for the twelve months ended February 28: Twelve Months Ended February 28, 2023 2022 Gross sales $ 94,795,700 $ 159,303,800 Less discounts and allowances (27,271,100 ) (44,187,200 ) Transportation revenue 7,022,100 13,861,900 Net revenues 74,546,700 128,978,500 Cost of goods sold 24,639,000 37,150,600 Gross margin 49,907,700 91,827,900 Operating expenses Operating and selling 12,501,100 18,800,300 Sales commissions 25,095,100 43,801,300 General and administrative 3,140,900 4,788,800 Total operating expenses 40,737,100 67,390,400 Operating income $ 9,170,600 $ 24,437,500 Average number of active Brand Partners 28,000 44,900 PaperPie net revenues decreased $54.5 million, or 42.2%, to $74.5 million for fiscal year ended February 28, 2023, when compared with net revenues of $129.0 million reported for fiscal year ended February 28, 2022.
Consultants FY 2022 FY 2021 New Consultants Added During Fiscal Year 26,100 56,100 Active Consultants at End of Fiscal Year 36,100 57,600 Our UBAM division’s multi-level marketing platform presently has eight levels of sales representatives: ● Consultants ● Team Leaders ● Advanced Leaders ● Senior Leaders ● Executive Leaders ● Senior Executive Leaders ● Directors ● Senior Directors Upon signing up, sales representatives begin as “Consultants”.
Brand Partners FY 2023 FY 2022 New Brand Partners Added During Fiscal Year 16,500 26,100 Active Brand Partners at End of Fiscal Year 24,600 36,100 Our PaperPie division’s multi-level marketing organizational structure presently has eight levels of sales representatives, collectively known as Brand Partners: ● Brand Partners ● Team Leaders ● Advanced Leaders ● Senior Leaders ● Executive Leaders ● Senior Executive Leaders ● Directors ● Senior Directors Upon signing up, sales representatives begin as “Brand Partners”.
As of the end of fiscal year 2022, our revolving bank credit facility loan balance was $17.7 million with $2.3 million in available capacity. 12 Table of Contents During fiscal year 2022, we experienced negative cash flows from operations of $21,143,300.
As of the end of fiscal year 2023, our revolving bank credit facility loan balance was $10.6 million with $4.4 million in available capacity. 12 Table of Contents During fiscal year 2023, we experienced positive cash flows from operations of $58,500.
Management has estimated and included a reserve for sales returns of $0.2 million for the fiscal years ended February 28, 2022 and February 28, 2021. 15 Table of Contents Allowance for Doubtful Accounts We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns, when applicable (collectively “allowance for doubtful accounts”).
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”).
The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment. During fiscal years 2022 and 2021, the Company recognized $1.0 million and $0.9 million, respectively, of compensation expense associated with the shares granted.
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.
Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory. Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.9 million and $0.7 million at February 28, 2022 and February 28, 2021, respectively.
Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.9 million at February 28, 2023 and February 28, 2022.
Off Balance Sheet Arrangements As of February 28, 2022, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Seasonality The Company experiences increased sales in the Fall season.
Contractual Obligations We are a smaller reporting company and are not required to provide this information. Off-Balance Sheet Arrangements As of February 28, 2023, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Publishing Operating Results The following table summarizes the operating results of the Publishing segment for the twelve months ended February 28: Twelve Months Ended February 28, 2022 2021 Gross sales $ 28,163,000 $ 18,271,900 Less discounts and allowances (14,922,100 ) (9,715,600 ) Transportation revenue 9,400 69,500 Net revenues 13,250,300 8,625,800 Cost of goods sold 7,146,900 4,434,000 Gross margin 6,103,400 4,191,800 Total operating expenses 2,463,600 1,620,200 Operating income $ 3,639,800 $ 2,571,600 Our Publishing division’s net revenues increased $4.7 million, or 54.7%, to $13.3 million for fiscal year ended February 28, 2022, when compared with net revenues of $8.6 million reported for fiscal year ended February 28, 2021.
Publishing Operating Results The following table summarizes the operating results of the Publishing segment for the twelve months ended February 28: Twelve Months Ended February 28, 2023 2022 Gross sales $ 27,896,200 $ 28,163,000 Less discounts and allowances (14,624,400 ) (14,922,100 ) Transportation revenue 10,500 9,400 Net revenues 13,282,300 13,250,300 Cost of goods sold 7,120,200 7,146,900 Gross margin 6,162,100 6,103,400 Total operating expenses 2,975,300 2,463,600 Operating income $ 3,186,800 $ 3,639,800 Our Publishing division’s net revenues remained consistent at $13.3 million for fiscal years ended February 28, 2023 and 2022.
UBAM makes it easy to recruit by providing sign-up kits for which new consultants can earn rewards including discounted books and cash based on exceeding certain sales criteria. In addition, our UBAM division provides our consultants with an extensive operational handbook, valuable training and an individual website they can customize and use to operate their business.
PaperPie makes it easy to recruit by providing joining incentives to new brand partners including discounted products and cash bonus awards based on exceeding certain sales criteria. In addition, our PaperPie division provides our Brand Partners with an extensive operational handbook, valuable training, and an individual website they can customize and use to generate sales.
The average number of active consultants in fiscal year 2022 was 44,900, a decrease of 3,800, or 7.8%, from 48,700 in fiscal year 2021. The Company reports the average number of active consultants as a key indicator for this division.
The average number of active Brand Partners in fiscal year 2023 was 28,000, a decrease of 16,900, or 37.6%, from 44,900 in fiscal year 2022. The Company reports the average number of active Brand Partners as a key indicator for this division.
We utilized a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures, when necessary.
Available cash has historically been used to pay down outstanding bank loan balances, for capital expenditures, to pay dividends and to acquire treasury stock. We utilize a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures, when necessary.
The use of social media and party plan platforms, such as those available on Facebook, continue to be popular sales tools. These platforms allow consultants to “present” and customers to “attend” online purchasing events from any geographical location. 8 Table of Contents Customer’s internet orders are primarily received via the consultant’s customized website, which is hosted by the Company.
These platforms allow Brand Partners to “present” and customers to “attend” online purchasing events from any geographical location. 8 Table of Contents Customers’ internet orders are primarily received via the Brand Partner’s customized website, which is hosted by the Company.
Our employees attend many of the national trade shows held by the book selling industry each year, allowing us to contact potential buyers who may be unfamiliar with our books. We actively target the national book chains through joint promotional efforts and institutional advertising in trade publications.
Our employees attend many of the national trade shows held by the book and toy selling industry each year, allowing us to contact potential buyers who may be unfamiliar with our products. Our marketing strategy targets toy and specialty stores, in addition to bookstores and museum gift shops, through print media advertising in trade publications.
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.
We believe allowing our Brand Partners 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 8.5% of our active Brand Partners have maintained consignment inventory at the end of fiscal year 2023.
Inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory. Noncurrent inventory balances prior to valuation allowances were $2.4 million and $0.9 million at February 28, 2022 and February 28, 2021, respectively. Noncurrent inventory valuation allowances were $0.4 million and $0.2 million at February 28, 2022 and February 28, 2021, respectively.
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 $5.1 million and $2.4 million at February 28, 2023 and February 28, 2022, respectively.
The following is a discussion of significant changes in the non-segment related operating expenses, other income and expenses and income taxes during the respective periods. Non-Segment Operating Results Total operating expenses not associated with a reporting segment were $17.8 million for fiscal year ended February 28, 2022, compared to $19.4 million for the same period a year ago.
Non-Segment Operating Results Total operating expenses not associated with a reporting segment were $14.9 million for fiscal year ended February 28, 2023, compared to $17.8 million for the same period a year ago.
The total cost of inventory on consignment with consultants was $1.4 million and $1.1 million at February 28, 2022 and February 28, 2021, respectively. Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company.
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 Brand Partners was $1.5 million and $1.4 million at February 28, 2023 and February 28, 2022, respectively.
See “ Cautionary Remarks Regarding Forward Looking Statements ” in the front of this Annual Report on Form 10-K. Management Summary We are the exclusive United States trade co-publisher of Usborne children’s books and the owner of Kane Miller. We operate two separate segments; UBAM and Publishing, to sell our Usborne and Kane Miller children’s books.
See “ Cautionary Remarks Regarding Forward Looking Statements ” in the front of this Annual Report on Form 10-K. Management Summary We are the owner and exclusive publisher of Kane Miller children’s books; Learning Wrap-Ups, maker of educational manipulatives; and SmartLab Toys, maker of STEAM-based toys and games.
However, Publishing sales significantly increased this fiscal year due to the addition of new customers and stores opening back up to pre-pandemic levels. 9 Table of Contents Result of Operations The following table shows our statements of earnings data: Twelve Months Ended February 28, 2022 2021 Net revenues $ 142,228,800 $ 204,635,100 Cost of goods sold 44,297,500 60,037,000 Gross margin 97,931,300 144,598,100 Operating expenses Operating and selling 23,010,400 36,123,700 Sales commissions 44,377,500 69,977,200 General and administrative 20,302,200 22,541,500 Total operating expenses 87,690,100 128,642,400 Other (income) expense Interest expense 916,400 561,000 Other income (1,911,100 ) (1,836,100 ) Earnings before income taxes 11,235,900 17,230,800 Income taxes 2,929,100 4,606,800 Net earnings $ 8,306,800 $ 12,624,000 See the detailed discussion of net revenues, gross margin and operating expenses by reportable segment below.
See Publishing Operating Results for discussion of our updated distribution agreement with Usborne. 9 Table of Contents Result of Operations The following table shows our statements of operations data: Twelve Months Ended February 28, 2023 2022 Net revenues $ 87,829,000 $ 142,228,800 Cost of goods sold 31,759,200 44,297,500 Gross margin 56,069,800 97,931,300 Operating expenses Operating and selling 15,780,600 23,010,400 Sales commissions 25,676,100 44,377,500 General and administrative 17,195,100 20,302,200 Total operating expenses 58,651,800 87,690,100 Other (income) expense Interest expense 2,172,300 916,400 Other income (1,327,400 ) (1,911,100 ) Earnings (loss) before income taxes (3,426,900 ) 11,235,900 Income taxes (922,000 ) 2,929,100 Net earnings (loss) $ (2,504,900 ) $ 8,306,800 See the detailed discussion of net revenues, gross margin and operating expenses by reportable segment below.
The Company uses available cash or working capital borrowings to fund these increases in inventory. 14 Table of Contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
We do not expect inventory to increase in fiscal year 2024 as we continue to sell down excess inventory. 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.
Operating income as a percentage of net revenues changed from the prior year primarily due to $1.3 million of reduced freight handling costs primarily from reduced peak surcharges in the current fiscal year due to lower shipping volumes, a $0.4 million decrease in accrual expenses for the Company’s annual incentive trip and other consultant rewards resulting from less award earners, offset by a $0.6 million increase in cost of goods sold resulting from fewer rebates and discounts associated with purchase volumes as well as increased ocean freight costs on inbound inventory and $0.3 million in other various cost changes.
Operating income as a percentage of net revenues changed from the prior year primarily due to the decrease in net revenues caused by higher discounts and lower transportation revenue, the increase in cost of goods sold resulting from higher inbound freight costs along with fewer rebates and discounts associated with purchase volumes and the increase in accrued expenses for the Company’s Brand Partners related to the annual incentive trip and convention.
These two segments each have their own customer base. The Publishing segment markets its products on a wholesale basis to various retail accounts. The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, social media platform events (called “online parties”) and book fairs.
These two divisions each have their own customer base. The PaperPie division markets our complete line of products through a network of independent brand partners using a combination of home shows, internet party events and book fairs. The Publishing division markets Kane Miller, Learning Wrap-Ups and SmartLab Toys on a wholesale basis to various retail accounts.
In April 2008, our Board of Directors amended our 1998 stock repurchase plan, establishing that we may purchase up to an additional 1,000,000 shares as market conditions warrant. In February 2019, our Board of Directors approved a new stock repurchase plan to replace the amended 2008 plan.
In February 2019, our Board of Directors approved a new stock repurchase plan to replace the amended 2008 plan.
Upon reaching this Team Leader level, consultants become eligible to receive “monthly override payments” which are calculated on sales made from their downline central group of recruits. Team Leaders that recruit and promote other Team Leaders, and meet other established criteria, are eligible to become “Advanced Leaders”.
These downline recruits are known as their "Central Group". Upon reaching this Team Leader level, Brand Partners become eligible to receive “monthly override payments” which are calculated on sales made by their Central Group and downlines up to two levels below.
Once Advanced Leaders promote a second level consultant, add additional recruits and meet other established criteria, they become “Senior Leaders”, “Executive Leaders”, “Senior Executive Leaders”, “Directors” or “Senior Directors”. One-time bonus payments are made to consultants at each promotion level. Executive Leaders and higher receive an additional monthly override payment based upon the sales of their downline groups.
One-time cash bonus payments are made to Advance Leaders and higher at each promotion level. Executive Leaders and higher receive an additional monthly override payment based upon the sales of their executive group. Directors and higher receive an additional bonus payment if they promote a Team Leader from their Central Group.
Directors and higher receive an additional bonus payment if they promote an Advanced Leader to a Senior Leader from their central group. The maximum override payment a leader can receive is calculated on three levels below their downline central group. During fiscal year 2022, internet sales continued to be the largest sales channel within our UBAM division.
The maximum override payment a leader can receive is calculated on their Central Group and three levels below. During fiscal year 2023, internet sales continued to be the largest sales channel within our PaperPie division. The use of social media and party plan platforms, such as those available on Facebook, continue to be popular sales tools.
Gross margin increased $1.9 million, to $6.1 million for fiscal year ended February 28, 2022, from $4.2 million reported for fiscal year ended February 28, 2021. The increase in gross margin primarily resulted from the increase in net revenues.
Gross margin remained consistent, increasing $0.1 million, to $6.2 million for fiscal year ended February 28, 2023, from $6.1 million reported for fiscal year ended February 28, 2022.
Cash provided by financing activities was $23,633,200 which was comprised of proceeds from term debt of $15,244,700, increase in borrowings on the line of credit of $12,478,200 and net cash received in treasury stock transactions of $617,100, offset by payments of $3,429,100 for dividends and payments on term debt of $1,277,700.
Cash provided by financing activities was $2,025,200, 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 $25,900,100, net payments on the line of credit of $7,089,000, payments of $870,700 for dividends declared in fiscal 2022 and paid in fiscal 2023 and payments of debt issuance costs of $178,400.
Interest expense increased $0.3 million, to $0.9 million for fiscal year ended February 28, 2022, compared to $0.6 million reported for fiscal year ended February 28, 2021 due primarily to the increase in our line of credit and the addition of the advancing term loans in the current fiscal year.
Interest expense increased $1.3 million, to $2.2 million for fiscal year ended February 28, 2023, compared to $0.9 million reported for fiscal year ended February 28, 2022, due to increased borrowings with our lenders primarily associated with inventory and increases in floating interest rates.
The hostess earns discounted books based on the total sales at the party, including internet orders for those customers who can only attend via online access. Home party orders are typically shipped to the hostess who then distributes the books to the end customer. Customer specials are also available when customers, or their party, order above a specified amount.
These orders are typically shipped to the hostess who then distributes the products to the end customer. Customer specials are also available when customers, or their party, order above a specified amount. As with online parties, home shows often provide an excellent opportunity for recruiting new brand partners.
Operating income for the segment increased $1.0 million, or 38.5%, to $3.6 million for fiscal year ended February 28, 2022, from $2.6 million reported during the same period last year. The increase in operating income resulted primarily from increased gross margin from increased sales partially offset by increased inside sales commissions due to the addition of new retail customers.
Learning Wrap-Ups was acquired in the fourth quarter of fiscal year 2022. Operating income for the segment decreased $0.4 million, or 11.1%, to $3.2 million for fiscal year ended February 28, 2023, from $3.6 million reported during the same period last year.
During fiscal year 2022 our active consultant count has declined due to consultants returning to full-time work, as well as families experiencing children returning to the classroom, therefore requiring less learning-from-home materials than they had in the prior year.
Our Brand Partner numbers have declined due to Brand Partners 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 Brand Partner recruiting negatively impacted by the recent change in our distribution agreement with Usborne Publishing Limited.
To reach these markets, the Publishing division utilizes a combination of commissioned sales representatives located throughout the country and a commissioned in-house sales group located at our headquarters. The table below shows the percentage of net revenues from our Publishing division based on market type.
The table below shows the percentage of net revenues from our Publishing division based on market type.
An additional fundraising program, Cards for a Cause , offers our consultants the opportunity to help members of the community by sharing proceeds from the sale of specific items. Organizations sell variety boxes of greeting-type cards and donate a portion of the proceeds to help support their related causes.
Reach for the Stars is a pledge-based reading incentive program that provides cash and products to the sponsoring organization and products for the participating children. An additional fundraising program, Cards for a Cause , offers our Brand Partners the opportunity to help members of the community by sharing proceeds from the sale of specific items.
Publishing Division Our Publishing division operates in a market that is highly competitive, with a large number of retail companies engaged in the selling of books. The Publishing division’s customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums.
The Publishing division’s customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To reach these markets, the Publishing division utilizes a combination of commissioned sales representatives and an in-house sales group located at our headquarters.
Parents turn in their orders at a designated time. The book fair program generates discounted books for the sponsoring organization. UBAM also has various fundraiser programs. Reach for the Stars is a pledge-based reading incentive program that provides cash and books to the sponsoring organization and books for the participating children.
The Brand Partner provides promotional materials to introduce our products to parents, who then turn in their orders at a designated time. The book fair program generates discounted products for the sponsoring organization. PaperPie also generates revenues through various fundraiser programs directed toward schools and community organizations.
Operating and selling expenses decreased $12.4 million, to $18.8 million for fiscal year ended February 28, 2022, from $31.2 million reported in the same period a year ago due to a $11.4 million decrease in shipping costs associated with the decrease in volume of orders shipped and a $1.0 million decrease in accruals for the Company’s annual incentive trip and other consultant rewards associated with the decrease in UBAM sales.
Operating and selling expenses decreased $6.3 million, to $12.5 million for fiscal year ended February 28, 2023, from $18.8 million reported in the same period a year ago.
Gross margin as a percentage of net revenues decreased 2.5%, to 46.1% for fiscal year 2022, compared to 48.6% reported the same period a year ago.
Gross margin as a percentage of net revenues increased 0.3%, to 46.4% for fiscal year 2023, compared to 46.1% reported the same period a year ago due to a change in customer mix. Customers receive varying discounts due to higher sales volumes and contract terms.
Cash generated from operations will be used to pay down our line of credit, expand our product offerings, to liquidate existing debt, and any excess cash is expected to be distributed to our shareholders. On February 15, 2021, the Company executed the Amended and Restated Loan Agreement with MidFirst Bank which replaced the prior loan agreement and includes multiple loans.
Cash generated from operations will be used to purchase inventory in order to expand our product offerings and to pay down existing debt. 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.
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.
During fiscal years 2023 and 2022, the Company recognized $0.9 million and $1.0 million, respectively, of compensation expense associated with the shares granted. 15 Table of Contents Revenue Recognition Sales associated with product orders are recognized and recorded when products are shipped. Products are shipped FOB-Shipping Point. PaperPie’s sales are generally paid at the time the product is ordered.
Gross margin as a percentage of net revenues decreased 0.4% to 71.2% for fiscal year 2022 when compared to 71.6% for fiscal year 2021. The decrease in gross margin as a percentage of net revenues was due to the change in mix of order types received.
PaperPie gross margin decreased $41.9 million, or 45.6%, to $49.9 million for fiscal year ended February 28, 2023, from $91.8 million reported for fiscal year ended February 28, 2022. Gross margin as a percentage of net revenues decreased 4.3% to 66.9% for fiscal year 2023 when compared to 71.2% for fiscal year 2022.
Operating expenses decreased $1.6 million primarily related to a decrease in warehouse labor of $1.6 million driven by efficiencies gained from the addition of two new pick-pack-ship lines in fiscal year 2022 and lower sales, plus a $1.0 million decrease in freight-handling costs from the decrease in number of outbound shipments, offset by a $0.5 million increase in depreciation expense related to the addition of the new pick-pack-ship lines and a $0.5 million increase in warehouse rent for the increase in inventory.
These expense reductions were offset by a $0.3 million increase in depreciation expense primarily related to the addition of the new pick-pack-ship lines placed into service in fiscal year 2022, a $0.3 million increase in property taxes and insurance costs, and a $0.1 million increase in expenses related to the purchase of SmartLab Toys and the addition of the Seattle, WA office location.
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.
The decrease in operating income resulted primarily from the increase in operating expenses attributable to a full year impact of Learning Wrap-Ups office staff and related expenses. Liquidity and Capital Resources EDC has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate.
Additionally, home shows often provide an excellent opportunity for recruiting new consultants. UBAM net revenues also includes sales to schools and libraries through educational consultants. The school and library program includes book fairs which are held with an organization as the sponsor. The consultant provides promotional materials to introduce our books to parents.
PaperPie net revenues also includes sales to schools and libraries through PaperPie Learning, a separate program for Brand Partners which requires them to pass certain qualifications and complete training requirements. The PaperPie Learning program includes book fairs which are held with an organization as the sponsor.
The decrease in gross margin percentage resulted primarily from the increase in cost of goods sold resulting from fewer rebates and discounts associated with purchase volumes as well as increased ocean freight costs on inbound inventory and a change in our customer mix. Customers receive varying discounts due to higher sales volumes and contract terms.
The decrease in gross margin as a percentage of net revenues is attributed to higher discounts being offered to induce sales and a change in the mix of order types received impacting margins by approximately $1.0 million, rising ocean freight costs on inbound inventory totaling approximately $1.2 million, which increased cost of goods sold, and reduced purchasing volume discounts/rebates totaling approximately $1.0 million.
Removed
Home parties occur when consultants contact hostesses to hold book shows in their homes. The consultant assists the hostess in setting up the details for the show, makes a presentation at the show and takes orders for the books.
Added
We are also the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books. Significant portions of our inventory purchases are concentrated with Usborne.
Removed
Our products are then featured in promotions, such as catalogs, offered by the vendor. We may also seek to acquire, for a fee, an end cap position (our products are placed on the end of a shelf) in a bookstore, which we and the publishing industry consider an advantageous location in the bookstore.
Added
Our distribution agreement with Usborne includes annual minimum purchase volumes along with specific payment terms, which, if not met or if payments are not received timely, may result in termination of the agreement. During fiscal 2023, the Company did not meet the minimum purchase volumes and certain payments were not received timely.
Removed
Publishing’s in-house sales group targets the smaller independent book and gift store customers. This market has seen continued growth over the past several years as our sales to large bookstore chains have fluctuated based primarily on the number of promotions that we are able to run in the national chain stores.
Added
No notification of termination has been received and Usborne continues to accept and fulfill purchase orders from the Company. Should termination of the agreement occur, the Company will be allowed, at a minimum, to sell through their remaining Usborne inventory over the twelve months following the termination date. We sell our products through two separate divisions, PaperPie and Publishing.
Removed
Our semi-annual, full-color, 200-page catalogs, are mailed to over 4,000 customers and potential customers. We also offer two display racks to assist stores in displaying our products. Our Publishing division activities and sales were significantly impacted during fiscal year 2021 due to the COVID-19 pandemic.

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