ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Factors Affecting Forward Looking Statements
MD&A contains statements that are forward-looking and include numerous risks which you should carefully consider. Additional risks and uncertainties can also materially and adversely affect our business. You should read the following discussion in connection with our condensed financial statements, including the notes to those statements, included in this document. Our fiscal years end on February 28(29).
Overview
We operate two separate divisions, EDC Publishing and Usborne Books & More (“UBAM”), to sell the Usborne and Kane Miller lines of children’s books. These two divisions each have their own customer base. EDC Publishing markets its products on a wholesale basis to various retail accounts. UBAM markets its products to individual consumers as well as school and public libraries.
The following table shows statements of earnings data as a percentage of net revenues.
Earnings as a Percent of Net Revenues
|
|
|
|
|
|
Three Months Ended November 30,
|
|
|
Nine Months Ended November 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
27.1
|
%
|
|
|
30.2
|
%
|
|
|
28.4
|
%
|
|
|
33.3
|
%
|
Gross margin
|
|
|
72.9
|
%
|
|
|
69.8
|
%
|
|
|
71.6
|
%
|
|
|
66.7
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and selling
|
|
|
32.5
|
%
|
|
|
28.2
|
%
|
|
|
33.0
|
%
|
|
|
27.9
|
%
|
Sales commissions
|
|
|
31.0
|
%
|
|
|
30.9
|
%
|
|
|
31.2
|
%
|
|
|
27.7
|
%
|
General and administrative
|
|
|
3.5
|
%
|
|
|
2.3
|
%
|
|
|
3.6
|
%
|
|
|
3.3
|
%
|
Total operating expenses
|
|
|
67.0
|
%
|
|
|
61.4
|
%
|
|
|
67.8
|
%
|
|
|
58.9
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-0.9
|
%
|
|
|
0.0
|
%
|
|
|
-0.9
|
%
|
|
|
0.0
|
%
|
Other income
|
|
|
1.7
|
%
|
|
|
0.0
|
%
|
|
|
1.6
|
%
|
|
|
-0.1
|
%
|
Earnings before income taxes
|
|
|
6.7
|
%
|
|
|
8.4
|
%
|
|
|
4.5
|
%
|
|
|
7.7
|
%
|
Income taxes
|
|
|
2.5
|
%
|
|
|
3.2
|
%
|
|
|
1.7
|
%
|
|
|
2.9
|
%
|
Net earnings
|
|
|
4.2
|
%
|
|
|
5.2
|
%
|
|
|
2.8
|
%
|
|
|
4.8
|
%
|
Operating Results for the Three Months Ended November 30, 2016
We earned income before income taxes of $2,040,100 for the three months ended November 30, 2016, compared with $2,033,100 for the three months ended November 30, 2015.
Revenues
|
|
For the Three Months Ended November 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Gross sales
|
|
$
|
34,397,300
|
|
|
$
|
28,931,400
|
|
|
$
|
5,465,900
|
|
|
|
18.9
|
|
Less discounts and allowances
|
|
|
(6,948,000
|
)
|
|
|
(6,751,600
|
)
|
|
|
(196,400
|
)
|
|
|
2.9
|
|
Transportation revenue
|
|
|
3,248,300
|
|
|
|
2,244,400
|
|
|
|
1,003,900
|
|
|
|
44.7
|
|
Net revenues
|
|
$
|
30,697,600
|
|
|
$
|
24,424,200
|
|
|
$
|
6,273,400
|
|
|
|
25.7
|
|
UBAM’s gross sales increased $4,506,900 during the three-month period ending November 30, 2016, when compared with the same quarterly period a year ago. The sales increase resulted from increases of:
·
|
26% in internet and home party sales, and
|
·
|
23% in fundraiser sales
|
Offset by a decrease of:
·
|
42% in school and library sales
|
Over the past year, the number of active sales consultants increased 63% to approximately 28,100 as of November 30, 2016, compared with 17,200 active consultants as of November 30, 2015.
The increase in internet and home party sales is attributed to a 31% increase in the total number of orders, offset by a 4% decrease in average order size. This increase in the total number of orders is a result of the increase in the number of sales consultants and their use of social media to conduct online events such as virtual home parties.
The increase in fundraiser sales is attributed to a 90% increase in the total number of orders, offset by a 35% decrease in the average order size.
The decrease in school and library sales is attributed to a 49% decrease in the average order size, offset by a 13% increase in the total number of orders.
EDC Publishing’s gross sales increased $959,000 during the three-month period ending November 30, 2016, when compared with the same quarterly period a year ago. Much of this increase is due to timing because the significant increase in UBAM sales had affected our ability to ship EDC Publishing sales in the same timeframe we had historically shipped orders. During the third quarter we were able to ship a significant amount of our backlog of EDC Publishing orders from the first two quarters of fiscal 2017. The increase in shipments during the third quarter affected our sales with an 83% increase in sales to major national accounts and a 2% increase in sales to smaller retail stores. We expect EDC Publishing sales for the year to continue to improve as our shipping timeframes return to historical levels as a result of significant capital improvements implemented during fiscal year 2017.
UBAM’s discounts and allowances were $3,528,100 and $3,855,300 for the quarterly periods ended November 30, 2016 and 2015, respectively. UBAM is a multi-level selling organization that markets its products through independent sales consultants. Sales are made to individual purchasers, and to school and public libraries. Gross sales in UBAM are based on the retail sales prices of the products. As a part of UBAM’s varied marketing programs, discounts relevant to the particular program are offered. The discounts and allowances in UBAM will vary from year-to-year depending on the marketing programs in place during any given period
.
The UBAM’s discounts and allowances were 12.6% and 16.5% of UBAM’s gross sales for the quarterly periods ended November 30, 2016 and 2015, respectively.
EDC Publishing’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in UBAM due to the different customer markets that each division targets. EDC Publishing’s discounts and allowances were $3,419,900 and $2,896,300 for the quarterly periods ended November 30, 2016 and 2015, respectively. EDC Publishing sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To be competitive with other wholesale book distributors, EDC Publishing sells at discounts between 48% and 55% of the retail sales prices of the products, based upon the quantity of books ordered and the dollar amount of the order. EDC Publishing’s discounts and allowances were 52.7% and 52.4% of EDC Publishing’s gross sales for the quarterly periods ended November 30, 2016 and 2015, respectively.
Transportation revenue increased to $3,248,300 from $2,244,400 when comparing the quarterly period ended November 30, 2016, to the same period in 2015. Transportation revenues primarily relate to UBAM and are based on a percentage of the total order, with a per-order minimum charge.
Expenses
|
|
For the Three Months Ended November 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Cost of sales
|
|
$
|
8,328,100
|
|
|
$
|
7,386,200
|
|
|
$
|
941,900
|
|
|
|
12.8
|
|
Operating and selling
|
|
|
9,965,900
|
|
|
|
6,888,000
|
|
|
|
3,077,900
|
|
|
|
44.7
|
|
Sales commissions
|
|
|
9,521,000
|
|
|
|
7,549,400
|
|
|
|
1,971,600
|
|
|
|
26.1
|
|
General and administrative
|
|
|
1,080,300
|
|
|
|
564,800
|
|
|
|
515,500
|
|
|
|
91.3
|
|
Total
|
|
$
|
28,895,300
|
|
|
$
|
22,388,400
|
|
|
$
|
6,506,900
|
|
|
|
29.1
|
|
Cost of sales increased 12.8% for the three months ended November 30, 2016, when compared with the three months ended November 30, 2015. Cost of sales as a percentage of gross sales were 24.2% and 25.9%, for each of the three-month periods ended November 30, 2016 and 2015, respectively. Cost of sales is the inventory cost of the product sold, which includes the cost of the product itself and inbound freight charges. Purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network are included in operating and selling expenses, not in cost of sales. These costs totaled $1,675,300 in the quarter ended November 30, 2016, and $950,500 in the quarter ended November 30, 2015.
In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of EDC Publishing, UBAM and the order entry and customer service functions
.
Operating and selling expenses as a percentage of gross sales were 29.0% for the quarter ended November 30, 2016, and 23.8% for the quarter ended November 30, 2015. This increase is primarily due to a 76% increase in purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network, along with a 40% increase in shipping and handling costs.
Sales commissions in EDC Publishing decreased 10.5% to $95,700 for the three months ended November 30, 2016, when compared with the same quarterly period a year ago. EDC Publishing sales commissions are paid on net sales and were 3.1% of net sales for the quarter ended November 30, 2016, and 4.0% for the quarter ended November 30, 2015. Sales commissions in EDC Publishing fluctuate depending upon the amount of sales made to our house accounts, which are EDC Publishing’s largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.
Sales commissions in UBAM increased 26.6% to $9,425,300 for the three months ended November 30, 2016, when compared with the same quarterly period a year ago, primarily due to the increase in net sales for the same period. UBAM sales commissions were 28.9% of gross sales for the three months ended November 30, 2016, and 31.8% of gross sales for the three months ended November 30, 2015. The fluctuation in the percentages of commission expense to gross sales is the result of the type of sale. Internet and home parties, book fairs, and school and library sales have different commission rates. Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants’ monthly sales and downline sales.
Our effective tax rate was 37.5% for the quarter ended November 30, 2016, and 38.1% for the quarter ended November 30, 2015. These rates are higher than the federal statutory rate due to the inclusion of state income and franchise taxes.
Operating Results for the Nine Months Ended November 30, 2016
We earned income before income taxes of $3,565,400 for the nine months ended November 30, 2016, compared with $3,603,800 for the nine months ended November 30, 2015.
Revenues
|
|
For the Nine Months Ended November 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Gross sales
|
|
$
|
91,657,200
|
|
|
$
|
59,920,100
|
|
|
$
|
31,737,100
|
|
|
|
53.0
|
|
Less discounts and allowances
|
|
|
(20,581,900
|
)
|
|
|
(16,953,700
|
)
|
|
|
(3,628,200
|
)
|
|
|
21.4
|
|
Transportation revenue
|
|
|
8,299,500
|
|
|
|
3,702,400
|
|
|
|
4,597,100
|
|
|
|
124.2
|
|
Net revenues
|
|
$
|
79,374,800
|
|
|
$
|
46,668,800
|
|
|
$
|
32,706,000
|
|
|
|
70.1
|
|
UBAM’s gross sales increased $35,146,600 during the nine-month period ending November 30, 2016, when compared with the same nine-month period a year ago. The sales increase resulted from increases of:
·
|
206% in fundraiser sales,
|
·
|
132% in internet and home party sales, and
|
·
|
17% in school and library sales
|
Over the past year, the number of active sales consultants increased 63% to approximately 28,100 as of November 30, 2016, compared with 17,200 active consultants as of November 30, 2015.
The increase in fundraiser sales is attributed to a 161% increase in the total number of orders and a 17% increase in the average order size.
The increase in internet and home party sales is attributed to a 136% increase in the total number of orders, offset by a 2% decrease in average order size. This increase in the total number of orders is a result of the increase in the number of sales consultants and their use of social media to conduct online events such as virtual home parties.
The increase in school and library sales is attributed to a 50% increase in the total number of orders, offset by a 22% decrease in average order size.
EDC Publishing’s gross sales decreased $3,409,500 during the nine-month period ending November 30, 2016, when compared with the same nine-month period a year ago. The significant increase in UBAM sales has affected our ability to ship all EDC Publishing sales in the same timeframe we have historically shipped orders. The decrease in shipments affected our sales with a 40% decrease in sales to major national accounts and a 13% decrease in sales to smaller retail stores. EDC Publishing’s sales began to improve during the third quarter and we expect this improvement to continue for the rest of the fiscal year as our shipping timeframes continue to return to historical levels as a result of significant capital improvements implemented late in the first quarter of fiscal year 2017 and improvements in operational flow.
UBAM’s discounts and allowances were $12,414,500 and $7,061,700 for the nine-month periods ended November 30, 2016 and 2015, respectively. UBAM is a multi-level selling organization that markets its products through independent sales consultants. Sales are made to individual purchasers, and to school and public libraries. Gross sales in UBAM are based on the retail sales prices of the products. As a part of UBAM’s varied marketing programs, discounts relevant to the particular program are offered. The discounts and allowances in UBAM will vary from year-to-year depending on the marketing programs in place during any given period
.
The UBAM’s discounts and allowances were 16.3% and 17.2% of UBAM’s gross sales for the nine-month periods ended November 30, 2016 and 2015, respectively.
EDC Publishing’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in UBAM due to the different customer markets that each division targets. EDC Publishing’s discounts and allowances were $8,167,400 and $9,892,000 for the nine-month periods ended November 30, 2016 and 2015, respectively. EDC Publishing sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To be competitive with other wholesale book distributors, EDC Publishing sells at discounts between 48% and 55% of the retail sales prices of the products, based upon the quantity of books ordered and the dollar amount of the order. EDC Publishing’s discounts and allowances were 53.1% and 52.6% of EDC Publishing’s gross sales for the nine-month periods ended November 30, 2016 and 2015, respectively.
Transportation revenue increased to $8,299,500 from $3,702,400 when comparing the nine-month period ended November 30, 2016, to the same period in 2015. Transportation revenues primarily relate to UBAM and are based on a percentage of the total order, with a per-order minimum charge.
Expenses
|
|
For the Nine Months Ended November 30,
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Cost of sales
|
|
$
|
22,500,300
|
|
|
$
|
15,537,400
|
|
|
$
|
6,962,900
|
|
|
|
44.8
|
|
Operating and selling
|
|
|
26,186,500
|
|
|
|
13,006,700
|
|
|
|
13,006,700
|
|
|
|
101.3
|
|
Sales commissions
|
|
|
24,802,200
|
|
|
|
12,924,800
|
|
|
|
11,877,400
|
|
|
|
91.9
|
|
General and administrative
|
|
|
2,842,000
|
|
|
|
1,561,700
|
|
|
|
1,280,300
|
|
|
|
82.0
|
|
Total
|
|
$
|
76,331,000
|
|
|
$
|
43,030,600
|
|
|
$
|
33,300,400
|
|
|
|
77.4
|
|
Cost of sales increased 44.8% for the nine months ended November 30, 2016, when compared with the nine months ended November 30, 2015. Cost of sales as a percentage of gross sales were 24.6% and 25.9%, for each of the nine-month periods ended November 30, 2016 and 2015, respectively. Cost of sales is the inventory cost of the product sold, which includes the cost of the product itself and inbound freight charges. Purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network are included in operating and selling expenses, not in cost of sales. These costs totaled $4,490,700 in the nine months ended November 30, 2016, and $1,697,500 in the nine months ended November 30, 2015.
In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of EDC Publishing, UBAM and the order entry and customer service functions
.
Operating and selling expenses as a percentage of gross sales were 28.6% for the nine months ended November 30, 2016, and 21.7% for the nine months ended November 30, 2015. This increase is primarily due to a 165% increase in purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network, along with a 107% increase in shipping and handling costs.
Sales commissions in EDC Publishing decreased 19.2% to $241,100 for the nine months ended November 30, 2016, when compared with the same nine-month period a year ago. Publishing Division sales commissions are paid on net sales and were 3.3% of net sales for the nine months ended November 30, 2016, and 3.3% for the nine months ended November 30, 2015. Sales commissions in EDC Publishing fluctuate depending upon the amount of sales made to our house accounts, which are EDC Publishing’s largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.
Sales commissions in UBAM increased 94.5% to $24,561,100 for the nine months ended November 30, 2016, when compared with the same nine-month period a year ago, primarily due to the increase in net sales for the same period. UBAM sales commissions were 30.3% of gross sales for the nine months ended November 30, 2016, and 30.7% of gross sales for the nine months ended November 30, 2015. The fluctuation in the percentages of commission expense to gross sales is the result of the type of sale. Internet and home parties, book fairs, and school and library sales have different commission rates. Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants’ monthly sales and downline sales.
Our effective tax rate was 37.9% for the nine months ended November 30, 2016, and 38.2% for the nine months ended November 30, 2015. These rates are higher than the federal statutory rate due to the inclusion of state income and franchise taxes.
Liquidity and Capital Resources
Our primary source of cash is typically operating cash flow. However, during this period of increased sales, our primary uses of cash are to build inventory to meet the demand, to pay dividends and for capital expenditures. We utilize bank credit facilities to meet our short-term cash needs when necessary.
For the nine-month period ended November 30, 2016 of fiscal year 2017, we experienced cash outflow from our operations of $169,400. Cash outflow resulted from the following:
•
|
an increase in inventories of $16,775,100,
|
•
|
an increase in accounts receivable of $1,994,200,
|
•
|
an increase in prepaid expenses and other assets of $1,661,300,
|
•
|
a decrease in the provision for inventory valuation allowance of $37,300, and
|
•
|
an increase in deferred income taxes of $35,400.
|
Offset by:
•
|
an increase in accounts payable, accrued salaries and commissions, and other current liabilities of $9,572,400,
|
•
|
an increase in deferred revenue of $6,632,500,
|
•
|
net earnings of $2,212,900,
|
•
|
depreciation expense of $780,400,
|
•
|
an increase in net income tax payable of $576,800,
|
•
|
the provision for doubtful accounts and sales returns of $558,900
|
The significant increase in accounts payable, accrued salaries and commissions, and other current liabilities is primarily a result of the current payments owed to our suppliers for our increased inventory stock required to sustain our sales increase.
The increase in deferred revenue is primarily a result of orders received for UBAM, but not shipped by the end of third quarter fiscal year 2017. The increase in prepaid expenses and other assets resulted primarily from the prepaid commissions related to these orders.
Cash used in investing activities was $2,123,600 for capital expenditures, which included:
•
|
Warehouse picking and inventory management systems of $762,000,
|
•
|
Additional investment in accounting and UBAM software systems of $514,400,
|
•
|
Warehouse equipment of $438,600,
|
•
|
Additional warehouse rack system of $303,900,
|
•
|
Other improvements to new facility and old warehouse, including furniture, of $55,300, and
|
•
|
Office equipment of $49,400.
|
Cash provided by financing activities was $2,089,000 for capital expenditures and operating activities, which included:
•
|
proceeds from long-term debt of $4,000,000, and
|
•
|
the sale of treasury stock of $170,700.
|
Offset by:
•
|
dividend payments of $1,099,500,
|
•
|
long-term debt payments of $530,200, and
|
•
|
net payments under our line of credit of $451,800, and
|
•
|
the acquisition of treasury stock of $200.
|
During fiscal year 2017, we will continue to work closely with the bank to ensure overall positive cash flow and the ability to meet our liquidity requirements for the foreseeable future. Cash generated from operations is used to liquidate any existing debt, pay capital distributions through dividends or repurchase shares outstanding.
Our Board of Directors has adopted a stock repurchase plan in which we may purchase up to a total of 3,000,000 shares as market conditions warrant. When stock becomes available at an attractive price, we will utilize free cash flow to repurchase shares. Management believes this enhances the value to the remaining stockholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity. We repurchased 23 shares during the nine-month period ended November 30, 2016. The maximum number of shares that can be repurchased in the future is 303,129.
We have a Loan Agreement with MidFirst Bank (“the Bank”) including Term Loan #1 comprised of Tranche A of $13.4 million and Tranche B of $5.0 million both with the maturity date of December 1, 2025. The Loan Agreement also provided a $7.0 million revolving loan (“line of credit’) through June 15, 2017. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. For Tranche B, interest is payable monthly at the bank adjusted LIBOR Index plus 2.75% (3.783% at November 30, 2016). Term Loan #1 is secured by the primary office, warehouse and land.
We also have Term Loan #2 with the Bank in the amount of $4.0 million with the maturity date of June 28, 2021, and interest payable monthly at the bank adjusted LIBOR Index plus 2.75%. Term Loan #2 is secured by a warehouse, land, and inventory.
The line of credit interest is payable monthly at a tiered rate based on our funded debt to EBITDA ratio (“ratio”), whereby pricing tier one is effective for a ratio greater than 4.00 and has a bank adjusted LIBOR Index plus 3.25% and pricing tier two applies for a ratio less than or equal to 4.00, with a bank adjusted LIBOR Index plus 2.75%. EBITDA is defined as earnings before interest expense, income tax expense (benefit) and depreciation and amortization expenses.
We had $2,880,000 in borrowings outstanding on our revolving credit agreement at November 30, 2016 and $3,331,800 in borrowings at February 29, 2016. Available credit under the revolving credit agreement was $4,120,000 at November 30, 2016. Subsequent to November 30, 2016, we utilized the remaining availability on our revolving credit agreement.
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 no letters of credit will have an expiry date later than June 15, 2017, and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time. 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 amount of compensation, salaries, investments, capital expenditures and leasing transactions. For the nine months ended November 30, 2016, we had no letters of credit outstanding.
At November 30, 2016, we were in violation of the debt to worth ratio covenant for which we have not yet received a waiver from the Bank. Accordingly, the related long-term debt has been classified as current. The debt to worth ratio requires the following: (1) For quarters ending August 31, 2016 and November 30, 2016: 3.50:1.00. (2) For quarters ending February 28, 2017, May 31, 2017, August 31, 2017, and November 30, 2017: 3.25:1:00. (3) Quarters thereafter: 3.00:1.00.
We expect to receive a debt waiver from the Bank to waive the debt covenant violation. As such, the following table reflects aggregate future maturities of long-term debt during the next five years and thereafter, subsequent to November 30, 2016, as follows:
Quarter ending November 30,
|
|
|
|
2017
|
|
$
|
898,500
|
|
2018
|
|
|
942,900
|
|
2019
|
|
|
980,000
|
|
2020
|
|
|
1,016,500
|
|
2021
|
|
|
1,058,600
|
|
Thereafter
|
|
|
16,876,100
|
|
|
|
$
|
21,772,600
|
|
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the 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 are recognized and recorded when products are shipped. Products are shipped FOB shipping point. UBAM’s sales are paid at the time the product is ordered. These sales accounted for 90.9% of net revenues for the nine-month period ended November 30, 2016, and 80.9% for the nine-month period ended November 30, 2015. Sales which have been paid but not shipped are classified as deferred revenue on the balance sheet.
Estimated allowances for sales returns are recorded as sales are recognized and recorded. 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 from retail stores. These returns relate to damage that occurs in the stores, not in shipping to the stores. It is industry practice to accept returns from wholesale customers. Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped. Management has estimated and included a reserve for sales returns of $100,000 as of November 30, 2016, and February 29, 2016.
Allowance for Doubtful Accounts
We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected. Management has estimated and included an allowance for doubtful accounts of $279,900 at November 30, 2016, and $401,900 at February 29, 2016.
Inventory
Management continually estimates and calculates the amount of non-current inventory. Non-current inventory arises due to the purchase of book inventory in quantities in excess of what will be sold within the normal operating cycle. Non-current inventory was estimated by management using the current year turnover ratio by title. Then all inventory in excess of 2 ½ years of anticipated sales is classified as non-current inventory. Non-current inventory balances, before valuation allowance, were $517,400 at November 30, 2016, and $469,000 at February 29, 2016.
Inventories are presented net of a valuation allowance. Management has estimated and included a valuation allowance for both current and non-current inventory. This allowance is based on management’s identification of slow moving inventory on hand. Management has estimated a valuation allowance for both current and non-current inventory of $285,000 and $325,000 as of November 30, 2016, and February 29, 2016, respectively.
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 date of grant and recognized as compensation expense over the vesting period.