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 29, 2020 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 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, internet party plan events and book fairs. 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 November 30, Nine Months Ended November 30,
2020 2019 2020 2019
Net revenues $ 66,750,300 $ 40,824,600 $ 164,292,100 $ 92,850,000
Cost of goods sold 19,597,800 13,279,900 48,302,800 30,382,500
Gross margin 47,152,500 27,544,700 115,989,300 62,467,500
Operating expenses
Operating and selling 11,616,200 6,513,500 28,488,300 15,089,900
Sales commissions 22,960,300 13,008,600 56,865,200 28,804,700
General and administrative 7,082,200 4,373,500 17,282,200 12,029,300
Total operating expenses 41,658,700 23,895,600
102,635,700 55,923,900
Interest expense 119,300 216,500 441,500 691,000
Other income (399,800 ) (403,100 ) (1,305,600 ) (1,196,300 )
Earnings before income taxes 5,774,300 3,835,700 14,217,700 7,048,900
Income taxes 1,504,700 1,099,900 3,762,000 1,941,900
Net earnings $ 4,269,600 $ 2,735,800 $ 10,455,700 $ 5,107,000
See the detailed discussion of revenues, costs of goods sold, gross margin and
operating expenses by reportable segment below. The following is a discussion of
significant changes in the non-segment related operating expenses, interest
expense 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 increased$2.4 million , or 64.9%, to$6.1 million for the three-month period endedNovember 30, 2020 , compared to$3.7 million for the same quarterly period a year ago. Operating expenses increased primarily as a result of a$1.0 million increase in labor in our warehouse, a$0.6 million increase in freight handling costs associated with increased order volumes and a$0.2 million increase in incentive payroll expenses associated with the Company's improved financial performance. Interest expense decreased$0.1 million , or 50.0%, to$0.1 million for the three months endedNovember 30, 2020 , when compared to$0.2 million for the same quarterly period a year ago as a result of the payoff of two long-term notes during the second quarter of fiscal year 2021. Income taxes increased$0.4 million , or 36.4%, to$1.5 million for the three months endedNovember 30, 2020 , from$1.1 million for the same quarterly period a year ago. Our effective tax rate decreased 2.6%, to 26.1% for the quarter endedNovember 30, 2020 , from 28.7% for the quarter endedNovember 30, 2019 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 Nine Months Ended
Total operating expenses not associated with a reporting segment increased$4.7 million , or 46.5%, to$14.8 million for the nine-month period endedNovember 30, 2020 , compared to$10.1 million for the same period a year ago. Operating expenses increased primarily as a result of a$2.4 million increase in labor in our warehouse, a$1.6 million increase in freight handling costs, both associated with the increase in order volumes, and a$0.3 million increase in incentive payroll expenses associated with the Company's improved financial performance. Interest expense decreased$0.3 million , or 42.9%, to$0.4 million for the nine months endedNovember 30, 2020 , when compared to$0.7 million for the same period a year ago as a result of the payoff of two long-term debt agreements during the second quarter of fiscal year 2021. Income taxes increased$1.9 million , or 100.0%, to$3.8 million for the nine months endedNovember 30, 2020 , from$1.9 million for the same period a year ago. Our effective tax rate decreased by 1.0%, to 26.5% for the nine months endedNovember 30, 2020 , from 27.5% for the nine months endedNovember 30, 2019 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 Nine Months Ended
The following table summarizes the operating results of the UBAM segment:
Three Months Ended November 30, Nine Months Ended November 30,
2020 2019 2020 2019
Gross sales $ 77,674,100 $ 47,974,800 $ 190,488,500 $ 106,219,100
Less discounts and allowances (21,244,700 ) (13,469,600 ) (51,379,800 ) (29,298,200 )
Transportation revenue 7,740,300 3,595,200 18,898,800 8,162,800
Net revenues 64,169,700 38,100,400 158,007,500 85,083,700
Cost of goods sold 18,230,200 11,830,100 45,048,500 26,317,100
Gross margin 45,939,500 26,270,300 112,959,000 58,766,600
Operating expenses
Operating and selling 10,055,900 5,599,200 24,619,800 12,690,500
Sales commissions 22,865,000 12,912,200 56,674,800 28,511,700
General and administrative 2,197,000 1,257,700 5,353,100 3,205,900
Total operating expenses 35,117,900 19,769,100
86,647,700 44,408,100
Operating income $ 10,821,600 $ 6,501,200 $ 26,311,300 $ 14,358,500
Average number of active consultants 57,200 33,600 45,200 32,900
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UBAM Operating Results for the Three Months Ended
UBAM net revenues increased$26.1 million , or 68.5%, to$64.2 million during the three months endedNovember 30, 2020 , compared to$38.1 million during the same period a year ago. The average number of active consultants in the third quarter of fiscal 2021 was 57,200, an increase of 23,600, or 70.2%, from 33,600 average active consultants selling in the third quarter of fiscal 2020. The Company reports the average number of active consultants each quarter as a key indicator for this division. UBAM's increase in active consultants resulted from several factors, including: an increase in families looking for non-traditional income streams to supplement or replace income lost from the COVID-19 pandemic; a change in new consultant kits which offered lower introductory prices; the restructure of our UBAM consultant success program, which was introduced during the first quarter of fiscal 2021; and technology improvements that have enhanced the customer experience and streamlined the proprietary systems that our consultants use to run their business. Our increase in active consultants and our ability to receive orders online and deliver directly to our customers' homes resulted in our increased revenues during the quarter. Gross margin increased$19.6 million , or 74.5%, to$45.9 million during the three months endedNovember 30, 2020 , compared to$26.3 million during the same period a year ago. Gross margin as a percentage of net revenues increased 2.6% to 71.6% for the three-month period endedNovember 30, 2020 when compared to 69.0% the same period a year ago. The increase in gross margin as a percentage of net revenues was due to the change in mix of order types received during the quarter. During the quarter our web sales, which have the lowest discounts and pay the highest commissions, increased significantly while book fairs, school and library sales and other in-person sales types declined year over year, due to the quarantining effects of the COVID-19 pandemic. The increase in web sales and decrease in in-person sales also resulted in overall higher sales commissions as a percentage of net revenues during the quarter. The overall net profit impact of the order type mix change after selling expenses, commissions and direct operating expenses was minimal. 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 increased$15.3 million , or 77.3%, to$35.1 million during the three-month period endedNovember 30, 2020 , when compared to$19.8 million reported in the same quarter a year ago. Operating and selling expenses increased$4.5 million , to$10.1 million , during the three-month period endedNovember 30, 2020 , when compared to$5.6 million reported in the same quarter a year ago, primarily due to an increase in postage and freight costs of$3.9 million and an increase in accruals for trips and other consultant rewards of$0.5 million , both associated with increased UBAM sales. Sales commissions increased$10.0 million , to$22.9 million , during the three-month period endedNovember 30, 2020 , when compared to$12.9 million reported in the same quarter a year ago, due primarily to the increase in sales volume and the increase in internet-based sales, which offer fewer discounts and higher sales commissions to consultants. General and administrative expenses increased$0.9 million to$2.2 million during the three months endedNovember 30, 2020 , compared to$1.3 million during the same period last year. This increase was primarily due to$0.6 million of increased credit card transaction fees associated with increased sales volumes and a$0.2 million increase in promotions and marketing expenses associated with increased consultant counts. Operating income of the UBAM segment increased$4.3 million , or 66.2%, to$10.8 million during the three months endedNovember 30, 2020 , when compared to$6.5 million reported in the same quarter a year ago, primarily due to the growth in net revenues. Operating income of the UBAM division as a percentage of net revenues for the three months endedNovember 30, 2020 remained consistent at 16.9%, compared to 17.1% for the three months endedNovember 30, 2019 .
UBAM Operating Results for the Nine Months Ended
UBAM net revenues increased$72.9 million , or 85.7%, to$158.0 million during the nine-month period endedNovember 30, 2020 , compared to$85.1 million from the same period a year ago. The increase in net revenues resulted from the increase in the average number of active consultants of 12,300, or 37.4%, to 45,200 during the first nine months of fiscal year 2021, and the overall increase in consultants to 60,500 by the end ofNovember 2020 , from an average number of active consultants of 32,900 in the first nine months of fiscal year 2020. UBAM's increase in active consultants resulted from several factors including: an increase in families looking for non-traditional income streams to supplement or replace income lost from the COVID-19 pandemic; a change in new consultant kits which offered lower introductory prices; the restructure of our UBAM consultant success program, which was introduced during the first quarter of fiscal 2021; and technology improvements that have enhanced the customer experience and streamlined the proprietary systems that our consultants use to run their business. Along with the significant increases in active consultants during the first nine months of fiscal year 2021, we experienced a significant increase in demand for educational materials in homes. Our increase in active consultants and our ability to receive orders online and deliver directly to our customers' homes resulted in our increased revenues. 17
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Gross margin increased$54.2 million , or 92.2%, to$113.0 million during the nine-month period endedNovember 30, 2020 , when compared to$58.8 million during the same period a year ago, due primarily to an increase in net revenues. Gross margin as a percentage of net revenues increased to 71.5% for the nine-month period endedNovember 30, 2020 , when compared to 69.1% for the same period a year ago. During the first nine months of fiscal year 2021 our web sales, which have the lowest discounts and pay the highest commissions, increased significantly while book fairs, school and library sales and other in-person sales types declined year over year, due to the quarantining effects of the COVID-19 pandemic. While the increase in web sales and decrease in in-person sales resulted in overall higher gross margin percentages during the first nine months of fiscal year 2021, these higher gross margins were offset by higher sales commissions and increased direct operating expenses of the division. The overall net profit impact of the order type mix change after selling expenses, commissions and direct operating expenses was minimal. Total operating expenses increased$42.2 million , or 95.0%, to$86.6 million during the nine-month period endedNovember 30, 2020 , from$44.4 million for the same period a year ago. Operating and selling expenses increased$11.9 million , to$24.6 million during the nine-month period endedNovember 30, 2020 , when compared to$12.7 million reported in the same period a year ago, primarily due to increased postage and freight costs of$11.4 million associated with the increase in volume of orders shipped. Sales commissions increased$28.2 million to$56.7 million during the nine-month period endedNovember 30, 2020 , when compared to$28.5 million reported in the same period a year ago, due primarily to the increase in internet-based sales, which offer fewer discounts and higher sales commissions to consultants. General and administrative expenses increased$2.2 million to$5.4 million , from$3.2 million recognized during the same period last year, due primarily to$1.6 million of increased credit card transaction fees associated with increased sales volumes and a$0.6 million increase in promotions and marketing expenses associated with increased consultant counts. Operating income of the UBAM segment increased$11.9 million , or 82.6%, to$26.3 million during the nine months endedNovember 30, 2020 , when compared to$14.4 million reported in the same period last year. Operating income of the UBAM division as a percentage of net revenues for the nine months endedNovember 30, 2020 was 16.7%, compared to 16.9% for the nine months endedNovember 30, 2019 , a change of 0.2%, or$0.4 million . Operating income as a percentage of net revenues changed from the prior year primarily due to increased postage and freight expenses as a percentage of net revenues totaling approximately$0.9 million , partially offset by the positive impact of the change to a "virtual" convention totaling approximately$0.5 million .
Publishing Operating Results for the Three and Nine Months Ended
The following table summarizes the operating results of the Publishing segment:
Three Months Ended November 30, Nine Months Ended November 30,
2020 2019 2020 2019
Gross sales $ 5,463,400 $ 5,645,100 $ 13,228,700 $ 16,416,200
Less discounts and allowances (2,886,400 ) (2,936,900 ) (7,010,600 ) (8,680,700 )
Transportation revenue 3,600 16,000 66,500 30,800
Net revenues 2,580,600 2,724,200 6,284,600 7,766,300
Cost of goods sold 1,367,600 1,449,800 3,254,300 4,065,400
Gross margin 1,213,000 1,274,400 3,030,300 3,700,900
Total operating expenses 440,000 441,500 1,171,900 1,447,600
Operating income $ 773,000 $ 832,900 $ 1,858,400 $ 2,253,300 Publishing Operating Results for the Three Months Ended
Our Publishing division's net revenues decreased$0.1 million , or 3.7%, to$2.6 million during the three-month period endedNovember 30, 2020 , from$2.7 million reported in the same period a year ago. Many Publishing customers began to re-open prior to the start of the third quarter of fiscal year 2021. The slight decrease in sales was primarily due to stores that were unable to remain open for the full third quarter of fiscal 2021 due to the COVID-19 pandemic. Gross margin decreased$0.1 million , or 7.7%, to$1.2 million during the three-month period endedNovember 30, 2020 , from$1.3 million reported in the same quarter a year ago, primarily due to the decrease in net revenues. Gross margin as a percentage of net revenues remained consistent, increasing 0.2%, to 47.0% during the three-month period endedNovember 30, 2020 , from 46.8% 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. 18
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Total operating expenses of the Publishing segment remained consistent at
Operating income of the Publishing segment remained consistent at
Publishing Operating Results for the Nine Months Ended
Our Publishing division's net revenues decreased$1.5 million , or 19.2%, to$6.3 million during the nine-month period endedNovember 30, 2020 , from$7.8 million reported in the same period a year ago. The decrease in sales resulted from temporary store closures impacted by the COVID-19 pandemic. Many Publishing customers temporarily closed during our fiscal year 2021 first quarter, following the guidance from their local authorities to prevent the spread of the pandemic, and have begun reopening at varying times over the past six months. Gross margin decreased$0.7 million , or 18.9%, to$3.0 million during the nine-month period endedNovember 30, 2020 , from$3.7 million reported in the same period a year ago, primarily due to the decrease in net revenues. Gross margin as a percentage of net revenues increased 0.5%, to 48.2%, during the nine-month period endedNovember 30, 2020 , from 47.7% reported in the same period a year ago. The increase 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 decreased$0.2 million to$1.2 million during the nine-month period endedNovember 30, 2020 , from$1.4 million reported in the same period a year ago, resulting from a$0.1 million decrease in postage and freight from the decrease in sales volumes and a$0.1 million decrease in sales commissions due to decreased net revenues. Operating income of the Publishing segment decreased$0.4 million , or 17.4%, to$1.9 million during the nine-month period endedNovember 30, 2020 when compared to$2.3 million reported in the same period a year ago, due primarily to the decrease in net revenues.
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 nine months of fiscal 2021, we generated positive cash flows
from our operations of
? net earnings of$10,455,700 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
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? increase in accounts payable of
? increase in accrued salaries and commissions, and other liabilities of
? increase in deferred revenues of
? increase in income tax payable of
Negatively impacted by:
? increase in inventories, net of
? increase in accounts receivable of
? increase in prepaid expenses and other assets of
Cash used in investing activities was$2,040,000 for capital expenditures, which were comprised of$1,488,300 in equipment purchased to increase our daily shipping capacity,$359,500 in software upgrades that our UBAM consultants use to monitor their business and place customer orders and$192,200 in building and building improvements.
Cash used in financing activities was
During fiscal year 2021, we continue to expect our cash from operations, along with our line of credit and any additional equipment financing needed from our Bank, will provide us the ability to meet our liquidity requirements. Cash generated from operations will be used to replace inventory, to liquidate existing debt and any excess cash is expected to be distributed to our shareholders or used to purchase available shares on the market. We have a Loan Agreement with the Bank, Term Loan #1 Tranche A totaling$11.1 million as ofNovember 30, 2020 , with a maturity date ofDecember 1, 2025 . Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. The Loan Agreement also includes a$10.0 million line of credit throughAugust 15, 2021 . The line of credit accrues interest monthly, at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company's Adjusted Funded Debt to EBITDA Ratio. The Loan Agreement maintains a minimum rate on borrowings of 2.75%, should the calculated rate of the LIBOR Index plus the tiered pricing rate fall below this level. We had no borrowings on our line of credit atNovember 30, 2020 andFebruary 29, 2020 . Available credit under the revolving loan was$10.0 million atNovember 30, 2020 . During the second quarter of fiscal year 2021, we paid off Loan Agreement Term Loan #1 Tranche B totaling$4.2 million , which previously had a maturity date ofDecember 1, 2025 . In addition, we also paid off Term Loan #2 totaling$2.9 million , which previously had a maturity date ofJune 28, 2021 . The purpose of paying off these loans early was to utilize our existing cash flows from operations to increase future profits by reducing interest expense, as well as, free up future cash flows to be used to either pay dividends or purchase additional shares. OnAugust 15, 2019 , the Company executed the Tenth Amendment Loan Agreement which extended the termination date of the line of credit toAugust 15, 2020 , amended the definition of LIBOR Margin, reduced the frequency of reports to the Lender, amended the Adjusted Funded Debt to EBITDA Ratio and amended the Compliance and Borrowing Base Certificates reporting requirements. OnAugust 15, 2020 , the Company executed the Eleventh Amendment Loan Agreement which extended the termination date of the line of credit toAugust 15, 2021 , reduced the maximum revolving principal amount from$15.0 million to$10.0 million , and amended the definition of the LIBOR Margin and Prime Margin, establishing a floor on the borrowing rates of 2.75%. The Loan Agreement also contains a provision for our use of the Bank's letters of credit. The Bank agrees to issue, or obtain issuance of, commercial or stand-by letters of credit provided that the sum of the line of credit plus the letters of credit issued would not exceed the borrowing base in effect at the time. As ofNovember 30, 2020 , we had no letters of credit outstanding. The agreement contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amounts of dividends declared, investments, capital expenditures, leasing transactions, and establish a dollar limit on the amount of shares that can be repurchased. 20
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The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:
Year endingFebruary 28 (29), 2021$ 128,800 2022 533,400 2023 556,800 2024 581,100 2025 605,400 Thereafter 8,709,300 Total$ 11,114,800
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 . 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 ofNovember 30, 2020 andFebruary 29, 2020 .
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$0.3 million atNovember 30, 2020 , and$0.2 million atFebruary 29, 2020 . Included within this allowance is$0.1 million of reserve for vendor discounts to sell remaining inventory as ofNovember 30, 2020 andFebruary 29, 2020 . 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. 21
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Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to minimum order requirements of our suppliers. Noncurrent inventory was estimated by management using the current year turnover ratio by title. Inventory in excess of 2 ½ 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$1.0 million and$1.2 million atNovember 30, 2020 andFebruary 29, 2020 , respectively. Noncurrent inventory valuation allowances were$0.2 million atNovember 30, 2020 andFebruary 29, 2020 . 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 4.2% of our active consultants maintained consignment inventory at the end of the third quarter of fiscal 2021. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with consultants was$1.3 million atNovember 30, 2020 and$1.5 million atFebruary 29, 2020 . During the current fiscal year, the Company increased its reserve for consignment inventory by approximately$0.2 million based on the estimated impact of the COVID-19 pandemic. Because our consultants are currently limited in their ability to sell consignment inventory at schools, book fairs or fall festivals, we expect an increase in write-offs associated with consultants that become inactive. 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$0.7 million and$0.5 million as ofNovember 30, 2020 andFebruary 29, 2020 , 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 2 ½ years represents a reasonable estimate of the normal operating cycle for our products. Stock-Based Compensation We account for stock-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 made, but before the vesting period is completed, will be reinvested in Company shares at the opening trading price on the dividend payment date. Shares purchased with cash dividends will also retain the same restrictions until the completion of the original vesting period associated with the awarded shares. The restricted share awards granted under the 2019 Long-Term Incentive Plan ("2019 LTI Plan") contain both service and performance conditions. The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment. During the first nine months of fiscal 2021, the Company recognized$0.7 million of compensation expense associated with the shares granted under the 2019 LTI Plan. 22
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