Company Quick10K Filing
Quick10K
Educational Development
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$8.34 8 $68
10-Q 2019-05-31 Quarter: 2019-05-31
10-K 2019-02-28 Annual: 2019-02-28
10-Q 2018-11-30 Quarter: 2018-11-30
10-Q 2018-08-31 Quarter: 2018-08-31
10-Q 2018-05-31 Quarter: 2018-05-31
10-K 2018-02-28 Annual: 2018-02-28
10-Q 2017-11-30 Quarter: 2017-11-30
10-Q 2017-08-31 Quarter: 2017-08-31
10-Q 2017-05-31 Quarter: 2017-05-31
10-K 2017-02-28 Annual: 2017-02-28
10-Q 2016-11-30 Quarter: 2016-11-30
10-Q 2016-08-31 Quarter: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-K 2016-02-29 Annual: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-Q 2015-08-31 Quarter: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
10-K 2015-02-28 Annual: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-Q 2014-08-31 Quarter: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-K 2014-02-28 Annual: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
8-K 2019-07-23 Shareholder Vote
8-K 2019-07-11 Earnings, Regulation FD, Other Events, Exhibits
8-K 2019-05-28 Earnings, Regulation FD, Other Events, Exhibits
8-K 2019-02-07 Enter Agreement, Exhibits
8-K 2019-02-04 Other Events, Exhibits
8-K 2019-01-10 Earnings, Other Events, Exhibits
8-K 2018-10-11 Other Events, Exhibits
8-K 2018-09-06 Other Events, Exhibits
8-K 2018-08-29 Regulation FD, Exhibits
8-K 2018-08-22 Regulation FD, Other Events, Exhibits
8-K 2018-08-15 Amend Bylaw, Exhibits
8-K 2018-08-02 Officers
8-K 2018-07-24 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2018-07-13 Earnings, Regulation FD, Exhibits
8-K 2018-06-29 Other Events, Exhibits
8-K 2018-06-21 Enter Agreement, Exhibits
8-K 2018-05-24 Exhibits
8-K 2018-02-22 Enter Agreement, Exhibits
8-K 2018-02-08
8-K 2018-01-11 Earnings, Exhibits
AGN Allergan 45,980
UMBF UMB Financial 3,450
ISCA International Speedway 1,880
SG Sirius International Insurance Group 1,580
VRTU Virtusa 1,580
CYTK Cytokinetics 499
AWX Avalon Holdings 10
LHO Lasalle Hotel Properties 0
VLDI Validian 0
USCI United States Commodity Index Funds Trust 0
EDUC 2019-05-31
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
Note 2 - Inventories
Note 3 - Leases
Note 4 - Debt
Note 5 - Earnings per Share
Note 6 - Stock-Based Compensation
Note 7 - Shipping and Handling Costs
Note 8 - Business Segments
Note 9 - Fair Value Measurements
Note 10 - Deferred Revenues
Note 11 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_149913.htm
EX-31.2 ex_149914.htm
EX-32.1 ex_149915.htm

Educational Development Earnings 2019-05-31

EDUC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 edc20190531_10q.htm FORM 10-Q edc20190531_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 


 

FORM 10-Q 

 


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 31, 2019

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ____________.

 

Commission file number: 000-04957

 

EDUCATIONAL DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

73-0750007

(State or other jurisdiction of 

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

5402 South 122nd East Avenue, Tulsa, Oklahoma

 

74146

(Address of principal executive office)

 

(Zip Code)

  

Registrant’s telephone number, including area code (918) 622-4522

 

Securities registered pursuant to Section 12(b) of the Act: 

 

Common Stock, $.20 par value

EDUC

NASDAQ

(Title of class)

(Trading symbol)

(Name of each exchange on which registered)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒        No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒       No ☐         

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

 

Large accelerated filer ☐

Accelerated filer ☐

 

 

 

 

Non-accelerated filer ☐

Smaller reporting company ☒

 

 

 

 

 

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐       No ☒

 

As of July 11, 2019, there were 8,434,999 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding. 

 

 

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

3

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

23

Item 4.

Mine Safety Disclosures

23

Item 5.

Other Information

23

Item 6.

Exhibits

23

Signatures

24

 

 

CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS

 

The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended February 28, 2019 and in this quarterly report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report on Form 10-Q and speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.          FINANCIAL STATEMENTS

 

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED BALANCE SHEETS (UNAUDITED)

 

   

May 31,

   

February 28,

 

ASSETS

 

2019

   

2019

 

CURRENT ASSETS

               

Cash and cash equivalents

  $ 1,402,400     $ 3,199,300  

Accounts receivable, less allowance for doubtful accounts of

$368,800 (May 31) and $268,600 (February 28)

    3,075,600       3,258,800  

Inventories - Net

    33,507,900       33,445,600  

Prepaid expenses and other assets

    1,089,900       1,603,500  

Total current assets

    39,075,800       41,507,200  
                 

INVENTORIES - Net

    556,000       575,000  
                 

PROPERTY, PLANT AND EQUIPMENT - Net

    26,927,700       27,164,600  
                 

OTHER ASSETS

    72,500       19,500  
                 

TOTAL ASSETS

  $ 66,632,000     $ 69,266,300  
                 
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

CURRENT LIABILITIES

               

Accounts payable

  $ 12,043,700     $ 14,228,600  

Deferred revenues

    388,900       965,600  

Current maturities of long-term debt

    944,900       945,900  

Accrued salaries and commissions

    1,926,700       2,039,000  

Income taxes payable

    1,191,500       756,400  

Dividends payable

    408,900       410,100  

Other current liabilities

    3,292,700       4,177,900  

Total current liabilities

    20,197,300       23,523,500  
                 

LONG-TERM DEBT - Net of current maturities

    18,593,900       18,830,700  

DEFERRED INCOME TAXES - Net

    820,800       872,600  

OTHER LONG-TERM LIABILITIES

    148,600       109,000  

Total liabilities

    39,760,600       43,335,800  
                 

SHAREHOLDERS' EQUITY

               

Common stock, $0.20 par value; Authorized 16,000,000 shares;

Issued 12,092,080 (May 31 and February 28) shares;

Outstanding 8,177,294 (May 31) and 8,195,082 (February 28) shares

    2,418,400       2,418,400  

Capital in excess of par value

    9,209,500       8,975,100  

Retained earnings

    26,709,600       25,754,900  
      38,337,500       37,148,400  

Less treasury stock, at cost

    (11,466,100 )     (11,217,900 )

Total shareholders' equity

    26,871,400       25,930,500  

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 66,632,000     $ 69,266,300  

 

See notes to financial statements.

 

 

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)

 

   

Three Months Ended May 31,

 
   

2019

   

2018

 

GROSS SALES:

  $ 36,473,700     $ 39,074,800  

Less discounts and allowances

    (11,331,400 )     (11,901,400 )

Transportation revenue

    2,445,100       2,848,900  

NET REVENUES

    27,587,400       30,022,300  

COST OF GOODS SOLD

    9,056,200       9,669,700  

Gross margin

    18,531,200       20,352,600  
                 

OPERATING EXPENSE:

               

Operating and selling

    4,383,900       4,752,200  

Sales commissions

    8,533,000       9,373,100  

General and administrative

    3,938,200       3,892,500  

Total operating expenses

    16,855,100       18,017,800  
                 
                 

INTEREST EXPENSE

    232,000       213,400  

OTHER INCOME

    (402,400 )     (374,400 )
                 

EARNINGS BEFORE INCOME TAXES

    1,846,500       2,495,800  
                 

INCOME TAXES

    482,900       679,200  

NET EARNINGS

  $ 1,363,600     $ 1,816,600  
                 

BASIC AND DILUTED EARNINGS PER SHARE

               

Basic

  $ 0.17     $ 0.22  

Diluted

  $ 0.17     $ 0.22  
                 

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING

               

Basic

    8,184,272       8,177,190  

Diluted

    8,191,062       8,185,008  
Dividends declared per share   $ 0.05     $ 0.05  

 

See notes to financial statements.

 

 

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 31, 2019

 

   

Common Stock

(par value $0.20 per share)

                   

Treasury Stock

         
   

Number of

           

Capital in

                                 
   

Shares

           

Excess of

   

Retained

   

Number of

           

Shareholders'

 
   

Issued

   

Amount

   

Par Value

   

Earnings

   

Shares

   

Amount

   

Equity

 
                                                         

BALANCE - February 28, 2019

    12,092,080     $ 2,418,400     $ 8,975,100     $ 25,754,900       3,896,998     $ (11,217,900 )   $ 25,930,500  
                                                         

Purchases of treasury stock

    -       -       -       -       36,959       (302,500 )     (302,500 )

Sales of treasury stock

    -       -       68,100       -       (19,171 )     54,300       122,400  

Dividends declared ($0.05/share)

    -       -       -       (408,900 )     -       -       (408,900 )

Share-based compensation expense (see Note 6)

    -       -       166,300       -       -       -       166,300  

Net earnings

    -       -       -       1,363,600       -       -       1,363,600  

BALANCE - May 31, 2019

    12,092,080     $ 2,418,400     $ 9,209,500     $ 26,709,600       3,914,786     $ (11,466,100 )   $ 26,871,400  

 

 

FOR THE THREE MONTHS ENDED MAY 31, 2018

 

   

 

Common Stock

(par value $0.20 per share)

                   

Treasury Stock

         
   

Number of

           

Capital in

                                 
   

Shares

           

Excess of

   

Retained

   

Number of

           

Shareholders'

 
   

Issued

   

Amount

   

Par Value

   

Earnings

   

Shares

   

Amount

   

Equity

 
                                                         

BALANCE - February 28, 2018

    12,092,080     $ 2,418,400     $ 8,573,300     $ 20,714,500       3,912,468     $ (11,304,100

)

  $ 20,402,100  
                                                         

Purchases of treasury stock

    -       -       -       -       2,846       (29,600

)

    (29,600

)

Sales of treasury stock

    -       -       -       -       (3,302

)

    25,100       25,100  

Dividends declared ($0.05/share)

    -       -       -       (409,000

)

    -       -       (409,000

)

Net earnings

    -       -       -       1,816,600       -       -       1,816,600  

BALANCE - May 31, 2018

    12,092,080     $ 2,418,400     $ 8,573,300     $ 22,122,100       3,912,012     $ (11,308,600

)

  $ 21,805,200  

 

See notes to financial statements.

 

 

 

 

 

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MAY 31,

 

   

2019

   

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net earnings

  $ 1,363,600     $ 1,816,600  

Adjustments to reconcile net earnings to net cash

provided by (used in) operating activities:

               

Depreciation

    366,200       352,800  

Deferred income taxes, net

    (51,800 )     188,100  

Provision for doubtful accounts

    103,500       85,000  

Provision for inventory valuation allowance

    117,300       92,100  

Share-based compensation expense

    166,300       -  

Changes in assets and liabilities:

               

Accounts receivable

    79,700       56,400  

Inventories

    (160,600 )     (1,243,600 )

Prepaid expenses and other assets

    460,600       299,800  

Accounts payable

    (2,184,900 )     1,366,700  

Accrued salaries and commissions, and other liabilities

    (957,900 )     (482,200 )

Deferred revenues

    (576,700 )     (250,600 )

Income taxes payable

    435,100       486,400  

Total adjustments

    (2,203,200 )     950,900  

Net cash provided by (used in) operating activities

    (839,600 )     2,767,500  

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of property, plant and equipment

    (129,300 )     (804,100 )

Net cash used in investing activities

    (129,300 )     (804,100 )

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Payments on long-term debt

    (237,800 )     (251,300 )

Cash received from sale of treasury stock

    122,400       25,100  

Cash used to purchase treasury stock

    (302,500 )     (29,600 )

Dividends paid

    (410,100 )     -  

Net cash used in financing activities

    (828,000 )     (255,800 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    (1,796,900 )     1,707,600  

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

    3,199,300       2,723,300  

CASH AND CASH EQUIVALENTS - END OF PERIOD

  $ 1,402,400     $ 4,430,900  
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

               

Cash paid for interest

  $ 232,000     $ 229,300  

Cash paid for income taxes (net of refunds)

  $ 100,200     $ (6,100 )
                 

NON-CASH TRANSACTIONS

               

Accrued capital expenditures

  $ -     $ 33,300  

 

See notes to financial statements.

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying Unaudited Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim condensed financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Unaudited Condensed Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended February 28, 2019 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year due to the seasonality of our product sales.

 

On July 24, 2018, our Board of Directors authorized a two-for-one stock split in the form of a stock dividend. The stock dividend was distributed on August 22, 2018 to shareholders of record as of August 14, 2018. All share-based data, including the number of shares outstanding and per share amounts, have been retroactively adjusted to reflect the stock split for all periods presented.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of the Unaudited Condensed Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.

 

Significant Accounting Policies

 

Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented below, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 28, 2019 included in our Form 10-K.

 

New Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued accounting standards updates (“ASU”) and concluded that the following recently issued accounting standards apply to us:

 

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases, with the exception of short-term leases. The new accounting model for lessors remains largely unchanged, although some changes have been made to align it with the new lessee model and the new revenue recognition guidance. This update also requires companies to include additional disclosures regarding their lessee and lessor agreements. We adopted this standard on March 1, 2019, and it did not have a material impact on our condensed financial position, results of operations or cash flows. Adoption of this ASU resulted in an increase in our assets and liabilities by approximately $52,900 due to the recognition of right of use assets and lease liabilities. See Note 3 – Leases for our lease disclosures.

 

In June 2016, FASB issued ASU No. 2016-13 “Financial Instruments—Credit Losses”, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.   The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU No. 2016-13 in the first quarter of fiscal 2020. The adoption of this ASU did not have a material impact on the Company’s condensed financial position, results of operations or cash flows. 

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820).  The new guidance modifies disclosure requirements related to fair value measurement.  The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  Implementation on a prospective or retrospective basis varies by specific disclosure requirement.  The Company adopted ASU No. 2018-13 in the first quarter of fiscal 2020. The adoption of this ASU did not have a material impact on the Company’s condensed financial position, results of operations or cash flows.

 

 

Note 2 – INVENTORIES

 

Inventories consist of the following:

 

   

2019

 
   

May 31,

   

February 28,

 

Current:

               

Book inventory

  $ 33,646,400     $ 33,494,200  

Inventory valuation allowance

    (138,500 )     (48,600 )

Inventories net - current

  $ 33,507,900     $ 33,445,600  
                 

Noncurrent:

               

Book inventory

  $ 892,000     $ 904,400  

Inventory valuation allowance

    (336,000 )     (329,400 )

Inventories net - noncurrent

  $ 556,000     $ 575,000  

 

Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2.5 years of anticipated sales, are included in non-current inventory.

 

Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing, Ltd. (“Usborne”). Purchases from this company were approximately $5.9 million and $7.6 million for the three months ended May 31, 2019 and 2018, respectively. Total inventory purchases from all suppliers were $9.2 million and $11.0 million for the three months ended May 31, 2019 and 2018, respectively.

 

 

Note 3 – LEASES

 

As of March 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) using the modified retrospective method of adoption. We elected to use the transition option that allows us to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment (if any) to the opening balance of retained earnings in the year of adoption. Comparable periods continue to be presented under the guidance of the previous standard, ASC 840. ASC 842 requires lessees to recognize a lease liability and right-of-use asset on the balance sheet for operating leases. For lessors, the new accounting model remains largely the same, although some changes have been made to align it with the new lessee model and the new revenue recognition guidance, ASC 606, Revenue from Contracts with Customers. Our adoption of ASC 842 did not result in any adjustments to retained earnings.

 

We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under ASC 842.  Our lessee arrangement includes a rental agreement where we have exclusive use of dedicated office space in San Diego, California, and qualifies as an operating lease. Our lessor arrangements include two rental agreements for warehouse and office space in Tulsa, Oklahoma, and both qualify as operating leases under ASC 842.

 

In accordance with ASC 842, we have made an accounting policy election to not apply the new standard to lessee arrangements with a term of one year or less and no purchase option that is reasonably certain of exercise. We will continue to account for these short-term arrangements by recognizing payments and expenses as incurred, without recording a lease liability and right-of-use asset.

 

We have also made an accounting policy election for both our lessee and lessor arrangements to combine lease and non-lease components. This election is applied to all of our lease arrangements as our non-lease components are not material and do not result in significant timing differences in the recognition of rental expenses or income.

 

 

In addition, the Company elected the package of practical expedients upon adoption which permits the Company to not reassess under the new standard the Company’s prior conclusions about lease identification, lease classification and initial direct costs.

 

Operating Leases – Lessee

 

We recognize a lease liability, reported in other liabilities, for each lease based on the present value of remaining minimum fixed rental payments (which includes payments under any renewal option that we are reasonably certain to exercise), using a discount rate that approximates the rate of interest we would have to pay to borrow on a collateralized basis over a similar term. We also recognize a right-of-use asset, reported in other assets on the condensed balance sheets, for each lease, valued at the lease liability, adjusted for prepaid or accrued rent balances existing at the time of initial recognition. The lease liability and right-of-use asset are reduced over the term of the lease as payments are made and the assets are used.

 

Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on our condensed statements of earnings. Variable and short-term rental payments are recognized as costs and expenses as they are incurred. Future minimum rental payments under operating leases with initial terms greater than one year as of May 31, 2019, are as follows:

 

Year ending February 28 (29),

       

2020

  $ 9,600  

2021

    13,200  

2022

    13,700  

2023

    14,200  

2024

    8,400  

Total future minimum rental payments

    59,100  

Present value discount

    (6,200 )

Total operating lease liability

  $ 52,900  

 

The following table provides further information about our operating leases as of and for the three months ended May 31, 2019:

 

Current lease liability

  $ 13,300  

Long-term lease liability

  $ 39,600  

Right-of-use asset

  $ 52,900  
         

Fixed lease cost

  $ 3,100  

Operating cash flows – operating lease

  $ 3,100  

Remaining lease term (months)

    52  

Discount rate

    4.60

%

 

Rent expense was $2,700 for first quarter of fiscal 2019 and was recognized in accordance with ASC 840.

 

Operating Leases – Lessor

 

We recognize fixed rental income on a straight-line basis over the life of the lease as revenue on our condensed statements of earnings. Variable rental payments are recognized as revenue in the period in which the changes in facts and circumstances on which the variable lease payments are based occur.

 

Future minimum payments receivable under operating leases with terms greater than one year as of May 31, 2019 are estimated as follows:

 

Year ending February 28 (29),

       

2020

  $ 1,041,600  

2021

    1,414,300  

2022

    1,441,900  

2023

    1,470,000  

2024

    1,471,700  

Thereafter

    10,806,600  

Total

  $ 17,646,100  

 

 

The cost of the leased space was approximately $10,359,900 as of May 31, 2019 and February 28, 2019.  The accumulated depreciation associated with the leased assets was $1,323,500 and $1,233,400 as of May 31, 2019 and February 28, 2019, respectively.  Both the leased assets and accumulated depreciation are included in property, plant and equipment-net on the condensed balance sheets.

 

 

Note 4 – DEBT

 

Debt consists of the following:

 

   

2019

 
   

May 31,

   

February 28,

 
                 

Line of credit

  $ -     $ -  
                 
                 

Long-term debt

  $ 19,538,800     $ 19,776,600  

Less current maturities

    (944,900 )     (945,900 )

Long-term debt, net of current maturities

  $ 18,593,900     $ 18,830,700  

 

We have a Loan Agreement dated as of March 10, 2016 (as amended the “Loan Agreement”) with MidFirst Bank (“the Bank”) which includes multiple loans. Term Loan #1 is comprised of Tranche A totaling $13.4 million and Tranche B totaling $5.0 million, both with the maturity date of December 1, 2025. 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 a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.95% at May 31, 2019). 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 a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.95% at May 31, 2019).   Term Loan #2 is secured by our secondary warehouse and land. The Loan Agreement also provided a $15.0 million revolving loan (“line of credit”) through August 15, 2019 with interest payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.95% at May 31, 2019).

 

Tranche B of Term Loan #1, Term Loan #2 and the line of credit accrue interest at a tiered rate based on our Adjusted Funded Debt to EBITDA Ratio, which is payable monthly. The variable interest pricing tier is as follows:

 

Pricing Tier

 

Adjusted Funded Debt to EBITDA Ratio

 

LIBOR Margin (bps)

I

 

>2.00

 

325.00

II

 

>1.50 but <2.00

 

300.00

III

 

>1.00 but <1.50

 

275.00

IV

 

<1.00

 

250.00

 

Adjusted Funded Debt is defined as all long-term and short-term bank debt less the outstanding balances of Tranche A and Tranche B Term Loans.  EBITDA is defined in the Loan Agreement as earnings before interest expense, income tax expense (benefit) and depreciation and amortization expenses, reduced by rental income.  The $15.0 million line of credit is limited to advance rates on eligible receivables and eligible inventory levels.

 

We had no borrowings outstanding on our revolving credit agreement at May 31, 2019 and February 28, 2019. Available credit under the revolving credit agreement was $12,567,900 and $12,439,300 at May 31, 2019 and February 28, 2019, respectively.

 

On June 15, 2018, the Company executed the Eighth Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modifies the Loan Agreement, extending the termination date until August 15, 2019, reduces the interest rate pricing grid for all floating rate borrowings covered by the Loan Agreement, establishes a new $3,000,000 advancing term loan to be used for capital expansions to increase daily shipping capacity, releases the personal Guaranty of Randall W. White and Carol White, along with other covenant restrictions being lessened. The amendment also includes an adjustment to the Adjusted Funded Debt to EBITDA ratio for covenant compliance.

 

 

On February 7, 2019, the Company executed the Ninth Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modifies the Loan Agreement, removing the covenant prohibiting the Company from repurchasing its shares, subject to certain conditions.

 

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 August 15, 2019, 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. For the quarter ended May 31, 2019, we had no letters of credit outstanding.

 

The Loan Agreement also contains provisions that require us to maintain specified financial ratios; restricts transactions with related parties; prohibits mergers or consolidation; disallows additional debt; and limits the amount of investments, capital expenditures and leasing transactions we can make on a quarterly basis. Additionally, the Loan Agreement places limitations on the amount of dividends that may be distributed and the total value of stock that can be repurchased. 

 

The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:

 

Year ending February 28 (29),

       

2020

  $ 705,900  

2021

    988,400  

2022

    1,038,000  

2023

    1,087,500  

2024

    1,139,400  

Thereafter

    14,579,600  
Total   $ 19,538,800  

 

 

Note 5 – EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS, we have utilized the treasury stock method. See Note 1 for additional information regarding the stock split that occurred in fiscal 2019.

 

The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below.

 

   

Three Months Ended May 31,

 
   

2019

   

2018

 

Earnings per share:

               

Net earnings applicable to common shareholders

  $ 1,363,600     $ 1,816,600  

Shares:

               

Weighted average shares outstanding-basic

    8,184,272       8,177,190  

Assumed exercise of options

    6,790       7,818  
                 

Weighted average shares outstanding-diluted

    8,191,062       8,185,008  
                 

Diluted earnings per share:

               

Basic

  $ 0.17     $ 0.22  

Diluted

  $ 0.17     $ 0.22  

 

 

 

Note 6 – 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.

 

The Company has outstanding stock options under the 2002 Employee Incentive Stock Option Plan totaling 10,000 shares. No options have been exercised in the three months ended May 31, 2019. All options outstanding at May 31, 2019 expire in December 2019.

 

In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan establishes up to 600,000 shares of restricted stock which can be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 and 2021. Restricted shares granted under the 2019 LTI Plan “cliff vest” after five years.

 

The restricted share awards granted under the 2019 LTI Plan contain both service and performance conditions. The Company recognizes share 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 employee 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.  

 

For certain awards that provide discretion to adjust the allocation of the restricted shares, the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the Company and the employee has not yet been established.  For awards in which the service-inception date precedes the grant date, compensation cost is accrued beginning on the service-inception date.  The Company estimates the award's fair value on each subsequent reporting date, until the grant date, based on the closing market price of the Company’s common stock.  On the grant date, the award's fair value is fixed, subject to the remaining performance conditions, and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date.

 

During fiscal year 2019, the Company granted approximately 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share.  During fiscal year 2019, the Company recognized $401,800 of compensation expense associated with the shares granted. During the first fiscal quarter of 2020, the Company recognized $166,300 of compensation expense associated with the shares granted in fiscal year 2019. The remaining compensation expense for these awards, totaling approximately $2,494,200, will be recognized ratably over the remaining vesting period of approximately 45 months. 

 

A summary of compensation expense recognized in connection with restricted share awards follows:

 

   

Three Months Ended May 31,

 
   

2019

   

2018

 
                 

Share-based compensation expense

  $ 166,300     $ -  

 

 

Note 7 – SHIPPING AND HANDLING COSTS

 

We classify shipping and handling costs as operating and selling expenses in the statements of earnings. Shipping and handling costs include postage, freight, handling costs, as well as, shipping materials and supplies. These costs were $4,212,200 and $4,399,000 for the three months ended May 31, 2019 and 2018, respectively.

 

 

Note 8 – BUSINESS SEGMENTS

 

We have two reportable segments: Publishing and Usborne Books & More (“UBAM”). These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, through commissioned sales representatives, trade and specialty wholesalers and our internal tele-sales group. Our UBAM segment markets its products through a network of independent sales consultants using a combination of internet sales, direct sales, home shows and book fairs.

 

The accounting policies of the segments are the same as those of the rest of the Company. We evaluate segment performance based on earnings before income taxes of the segments, which is defined as segment net revenues reduced by cost of sales and direct expenses. Corporate expenses, depreciation, interest expense and income taxes are not allocated to the segments but are listed in the “Other” row below. Corporate expenses include the executive department, accounting department, information services department, general office management, warehouse operations and building facilities management. Our assets and liabilities are not allocated on a segment basis.

 

Information by reporting segment for the three-month periods ended May 31, 2019 and 2018, follows:

 

NET REVENUES  
       
   

Three Months Ended May 31,

 
   

2019

   

2018

 

Publishing

  $ 2,339,300     $ 2,306,200  

UBAM

    25,248,100       27,716,100  

Total

  $ 27,587,400     $ 30,022,300  

 

EARNINGS (LOSS) BEFORE INCOME TAXES  
       
   

Three Months Ended May 31,

 
   

2019

   

2018

 

Publishing

  $ 635,700     $ 506,300  

UBAM

    4,369,000       5,099,000  

Other

    (3,158,200 )     (3,109,500 )

Total

  $ 1,846,500     $ 2,495,800  

 

 

Note 9 – FAIR VALUE MEASUREMENTS

 

The valuation hierarchy included in U.S. GAAP considers the transparency of inputs used to value assets and liabilities as of the measurement date. A financial instrument’s classification within the valuation hierarchy is based on the lowest level of input that is significant to its fair value measurement. The three levels of the valuation hierarchy and the classification of our financial assets and liabilities within the hierarchy are as follows:

 

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 - Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly. If an asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability.

 

Level 3 - Unobservable inputs for the asset or liability.

 

We do not report any assets or liabilities at fair value in the financial statements. However, the estimated fair value of our term notes payable is estimated by management to approximate $19,234,600 and $19,123,700 at May 31, 2019 and February 28, 2019, respectively. Management’s estimates are based on the obligations’ characteristics, including floating interest rate, maturity, and collateral. Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.

 

 

Note 10 – DEFERRED REVENUES

 

The Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to the end of our first fiscal quarter that were not shipped as of May 31, 2019 are recorded as deferred revenues on the condensed balance sheet. We received approximately $388,900 at May 31, 2019 in payments for sales orders which were, or will be, shipped out subsequent to the quarter end. Orders that were included in deferred revenues predominantly shipped within the first few days of the next fiscal quarter.

 

 

Note 11 – SUBSEQUENT EVENTS

 

On July 11, 2019, our Board of Directors declared a distribution of $0.05 per share of common stock. This cash distribution will be paid on or about September 10, 2019 to shareholders of record on August 20, 2019.

 

 

 

Item 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 shipment delays, our ability to obtain adequate financing for working capital and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 28, 2019 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 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. These two segments each have their own customer base. The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, internet party events and book fairs. The Publishing segment markets its products on a wholesale basis to various retail accounts. All other supporting administrative activities are recognized as other expenses outside of our two segments. Other expenses are primarily 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 May 31,

 
   

2019

   

2018

 

Net revenues

  $ 27,587,400     $ 30,022,300  

Cost of goods sold

    9,056,200       9,669,700  

Gross margin

    18,531,200       20,352,600  
                 

Operating expenses

               

Operating and selling

    4,383,900       4,752,200  

Sales commissions

    8,533,000       9,373,100  

General and administrative

    3,938,200       3,892,500  

Total operating expenses

    16,855,100       18,017,800  
                 

Other (income) expense

               

Interest expense

    232,000       213,400  

Other income

    (402,400 )     (374,400 )

Earnings before income taxes

    1,846,500       2,495,800  
                 

Income taxes

    482,900       679,200  

Net earnings

  $ 1,363,600     $ 1,816,600  

 

See the detailed discussion of revenues, costs of services, gross margin, general and administrative expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods.

 

 

Non-Segment Operating Results for the Three Months Ended May 31, 2019

 

Total operating expenses not associated with a reporting segment remained consistent at $3.3 million for the three-month period ending May 31, 2019, compared to the same quarterly period a year ago.

 

Interest expense remained consistent at $0.2 million for the three months ended May 31, 2019 compared to the same quarterly period a year ago.

 

Income taxes decreased $0.2 million to $0.5 million for the three months ended May 31, 2019, from $0.7 million for the same quarterly period a year ago. Our effective tax rate was 26.2% for the quarter ended May 31, 2019, and 27.2% for the quarter ended May 31, 2018. 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 Months Ended May 31, 2019

 

The following table summarizes the operating results of the UBAM segment:

 

   

Three Months Ended May 31,

 
   

2019

   

2018

 

Gross sales

  $ 31,428,800     $ 34,158,600  

Less discounts and allowances

    (8,619,900 )     (9,283,800 )

Transportation revenue

    2,439,200       2,841,300  

Net revenues

    25,248,100       27,716,100  
                 

Cost of goods sold

    7,798,800       8,424,500  

Gross margin

    17,449,300       19,291,600  
                 

Operating expenses

               

Operating and selling

    3,643,000       3,949,300  

Sales commissions

    8,440,300       9,286,800  

General and administrative

    997,000       956,500  

Total operating expenses

    13,080,300       14,192,600  
                 

Operating income

  $ 4,369,000     $ 5,099,000  
                 

Average number of active consultants

    31,600       35,100  

 

UBAM first quarter net revenues decreased $2.5 million, or 9.0%, from $27.7 million reported in the first quarter of fiscal 2019, to $25.2 million reported in the first quarter of fiscal 2020. UBAM net revenues decreased primarily due to the reduced number of average active sales consultants selling our product between the common quarters. The average number of active consultants in the first quarter of fiscal 2020 was 31,600, a reduction of 3,500, or 10.0%, from 35,100 average active consultants selling in the first quarter of fiscal 2019.  During February 2018, UBAM offered a recruiting special that added 8,800 new active consultants.  This resulted in a large increase in the average active consultants selling during the first quarter of fiscal 2019.  Since that period, our average active consultant count has remained consistent between approximately 30,000 and 33,000.  We continue to face obstacles growing our number of active consultants due to challenging market conditions including: record low unemployment, increased recruiting competition from other non-traditional employment options outside of the direct selling industry and the normal turnover of consultants associated with the direct sales industry.

 

Gross margin decreased $1.8 million, or 9.3%, during the three-month period ending May 31, 2019, when compared to the same quarter a year ago, due primarily to a decrease in net revenues. Gross margin, as a percentage of net revenues, decreased to 69.1% for the three-month period ending May 31, 2019 when compared to 69.6% the same period a year ago. The decrease in gross margin as a percentage of net revenues was due to the change in mix of order types received during the quarter.

 

 

UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses. Operating and selling expenses primarily consists of freight expenses and materials and supplies. Sales commissions include amounts paid to consultants for new sales and promotions. These operating expenses are directly tied to the sales volumes of the UBAM segment. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the UBAM segment. Total operating expenses decreased $1.1 million, or 7.7%, to $13.1 million during the three-month period ending May 31, 2019, when compared to $14.2 million reported in the same quarter a year ago. The decrease in operating expenses was primarily due to a decrease in freight costs and sales commissions associated with the decrease in net revenues. General and administrative expenses remained consistent at $1.0 million reported during the three months ended May 31, 2019 and 2018.

 

Operating income of the UBAM segment decreased $0.7 million, or 13.7%, to $4.4 million during the three-month period ending May 31, 2019 as compared to $5.1 million from the same period a year ago. The decrease in operating income was primarily due to a decrease in UBAM net revenues.

 

Publishing Operating Results for the Three Months Ended May 31, 2019

 

The following table summarizes the operating results of the Publishing segment:

 

   

Three Months Ended May 31,

 
   

2019

   

2018

 

Gross sales

  $ 5,044,900     $ 4,916,200  

Less discounts and allowances

    (2,711,500 )     (2,617,600 )

Transportation revenue

    5,900       7,600  

Net revenues

    2,339,300       2,306,200  
                 

Cost of goods sold

    1,257,400       1,245,200  

Gross margin

    1,081,900       1,061,000  
                 

Total operating expenses

    446,200       554,700  
                 

Operating income

  $ 635,700     $ 506,300  

 

Our Publishing division’s net revenues remained consistent at $2.3 million for the three-month periods ending May 31, 2019 and 2018.

 

Gross margin remained consistent at $1.1 million during the three-month periods ending May 31, 2019 and 2018. Gross margin, as a percentage of net revenues, increased to 46.2% during the three-month period ending May 31, 2019, from 46.0% reported in the same quarter a year ago. The increase in gross margin resulted from a change in customer mix, as certain sales agreements with specific customers have higher gross margin due to lower discounts, and a change in product mix, as different products have higher gross margin due to lower product costs.

 

Total operating expenses of the Publishing segment decreased $0.2 million, to $0.4 million during the three-month period ending May 31, 2019 as compared to $0.6 million from the same period a year ago.  This decrease primarily resulted from less promotions and marketing expenses incurred during the first quarter of fiscal 2020, when compared to the same period last year.

 

Operating income of the Publishing segment increased $0.1 million, or 20.0%, to $0.6 million during the three-month period ending May 31, 2019 when compared to $0.5 million reported in the same period a year ago. The increase in operating income was primarily due to a decrease in operating 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. 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 three months of fiscal 2020, we experienced cash outflow from our operations of $839,600. Cash flows resulted from the following items:

 

net earnings of $1,363,600,

a decrease in prepaid expenses and other assets of $460,600,

an increase in net income taxes payable of $435,100,

depreciation expense of $366,200,

share-based compensation expense of $166,300,

an increase in the provision for inventory valuation allowance of $117,300,

an increase in the provision for doubtful accounts of $103,500, and

a decrease in accounts receivable of $79,700.

 

Offset by:

 

a decrease in accounts payable of $2,184,900,

a decrease in accrued salaries and commissions, and other liabilities of $957,900,

a decrease in deferred revenues of $576,700, 

an increase in inventories of $160,600, and

a decrease in deferred income tax liability of $51,800.

 

Cash used in investing activities was $129,300 for capital expenditures, which was primarily comprised of improvements to upgrade our e-commerce and consultant facing websites used in our UBAM division.

 

Cash used in financing activities was $828,000, which was comprised of payments on long-term debt of $237,800, dividends paid of $410,100, $302,500 used to purchase treasury stock, offset by sales of treasury stock generating $122,400.

 

During fiscal year 2020, we continue to expect our cash from operations, along with our line of credit with 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 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.   Tranche A has a fixed interest rate of 4.23% and interest is payable monthly.   The Loan Agreement also includes Term Loan #2 in the amount of $4.0 million, which is secured by a warehouse and land with the maturity date of June 28, 2021, and a $15.0 million revolving loan (“line of credit”) through August 15, 2019.

 

 

 

On June 15, 2018, the Company executed the Eighth Amendment Loan Agreement with the Bank which extended the termination date until August 15, 2019, reduced the interest rate pricing grid for all floating rate borrowings covered by the Loan Agreement, established a new $3 million advancing term loan to be used for capital expansions to increase daily shipping capacity, released the personal guaranty of Randall W. White and Carol White, along with other covenant restrictions being lessened. The amendment also included an adjustment to the Adjusted Funded Debt to EBITDA ratio for covenant compliance.

 

On February 7, 2019, the Company executed the Ninth Amendment Loan Agreement which removed the covenant prohibiting the Company from repurchasing its shares and identified certain limitations on the amount of funds that the Company could use to repurchase shares.

 

We had no borrowings on our revolving credit agreement at May 31, 2019 and February 28, 2019. Available credit under the revolving credit agreement was $12.6 million at May 31, 2019.

 

Tranche B of Term Loan #1, Term Loan #2 and the line of credit accrue interest monthly, at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.95% at May 31, 2019).

 

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 of May 31, 2019, 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.

 

The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:

 

Year ending February 28 (29),

       

2020

  $ 705,900  

2021

    988,400  

2022

    1,038,000  

2023

    1,087,500  

2024

    1,139,400  

Thereafter

    14,579,600  

Total

  $ 19,538,800  

 

 

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 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 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 of May 31, 2019 and February 28, 2019. 

 

Allowance for Doubtful Accounts

 

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns (collectively “allowance for doubtful accounts”).  An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends.  Management has estimated and included an allowance for doubtful accounts of $0.4 million at May 31, 2019, and $0.3 million at February 28, 2019. Included within this allowance is $0.1 million of reserve for vendor discounts to sell remaining inventory as of May 31, 2019 and February 28, 2019.

 

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.  Most of our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in a four to six-month lead-time to have a title printed and delivered to us.

 

Certain inventory is maintained in a noncurrent classification.  Management continually estimates and calculates the amount of noncurrent inventory.  Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to minimum order requirements of our suppliers.  Noncurrent inventory was estimated by management using the current year turnover ratio by title.  All inventory in excess of 2 ½ years of anticipated sales is classified as noncurrent inventory. Noncurrent inventory balances prior to valuation allowances were $0.9 million at May 31, 2019 and February 28, 2019, respectively.

 

 

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; and having consignment inventory leads to additional sales opportunities.  Approximately 11% of our active consultants maintained consignment inventory at the end of the first fiscal quarter 2020.  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 $1.5 million at May 31, 2019 and February 28, 2019.

 

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 $0.5 million and $0.4 million as of May 31, 2019 and February 28, 2019, respectively.

 

Our principal supplier, based in England, 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.

 

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.    

 

For certain awards that provide discretion to adjust the allocation of the restricted shares, the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the Company and the employees has not yet been established.  For awards in which the service-inception date precedes the grant date, compensation cost is accrued beginning on the service-inception date.  The Company estimates the award's fair value on each subsequent reporting date, until the grant date, based on the closing market price of the Company’s common stock.  On the grant date, the award's fair value is fixed, subject to the remaining performance conditions, and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date. During the first fiscal quarter of 2020, the Company recognized $0.2 million of compensation expense associated with the shares granted.

 

 

 

Item 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4.          CONTROLS AND PROCEDURES

 

An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of May 31, 2019. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer).

 

Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective pursuant to Exchange Act Rule 13a-15(e).

 

In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended May 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1.          LEGAL PROCEEDINGS

 

Not applicable.

 

Item 1A.          RISK FACTORS

 

Not required by smaller reporting company.

 

Item 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

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)

 
                                 

March 1 - 31, 2019

    19,333     $ 7.86       19,333       772,301  

April 1 - 30, 2019

    15,067       8.44       15,067       757,234  

May 1 - 31, 2019

    2,559       9.03       2,559       754,675  

Total

    36,959     $ 8.18       36,959          

 

(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 can be purchased under the new plan is 800,000. This plan has no expiration date.

 

Item 3.          DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

Item 4.          MINE SAFETY DISCLOSURES

 

None.

 

Item 5.          OTHER INFORMATION

 

None.

 

Item 6.          EXHIBITS

 

31.1

 

Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

 

 

 

31.2

 

Certification of Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

EDUCATIONAL DEVELOPMENT CORPORATION

(Registrant)

 

Date: July 15, 2019                                                 By     /s/ Randall W. White                                                 

Chairman of the Board, President

and Chief Executive Officer

(Principal Executive Officer)

 

 


 

 

 

 

 

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

31.1

 

Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

 

 

 

31.2

 

Certification of Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

 

 

 

32.1

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

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