UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 20202021
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 | 74146 |
(Address of principal executive offices) | (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 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. | |
| |
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 (§ 229.405 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, or a smaller reporting company. See 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 October 7, 2020,1, 2021, there were 8,355,9728,656,136 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.
TABLE OF CONTENTS
Page | ||
PARTI.FINANCIALINFORMATION | ||
Item 1. | 3 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3. | 23 | |
Item 4. | 23 | |
PARTII.OTHERINFORMATION | ||
Item 1. | 24 | |
Item 1A. | 24 | |
Item 2. | 24 | |
Item 3. | 24 | |
Item 4. | 24 | |
Item 5. | 24 | |
Item 6. |
| |
| ||
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 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 29, 202028, 2021 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
EDUCATIONALDEVELOPMENTCORPORATION |
CONDENSEDBALANCESHEETS(UNAUDITED) |
August 31, | February 29, | |||||||
ASSETS | 2020 | 2020 | ||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 22,636,300 | $ | 2,999,400 | ||||
Accounts receivable, less allowance for doubtful accounts of $319,900 (August 31) and $237,400 (February 29) | 3,267,800 | 2,967,200 | ||||||
Inventories - net | 30,563,400 | 30,087,300 | ||||||
Income taxes receivable | - | 221,700 | ||||||
Prepaid expenses and other assets | 1,305,400 | 950,600 | ||||||
Total current assets | 57,772,900 | 37,226,200 | ||||||
INVENTORIES - net | 452,000 | 1,016,700 | ||||||
PROPERTY, PLANT AND EQUIPMENT - net | 26,249,600 | 26,377,700 | ||||||
OTHER ASSETS | 111,100 | 82,200 | ||||||
TOTAL ASSETS | $ | 84,585,600 | $ | 64,702,800 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 24,710,700 | $ | 9,661,100 | ||||
Deferred revenues | 1,228,400 | 385,300 | ||||||
Current maturities of long-term debt | 522,000 | 1,027,400 | ||||||
Accrued salaries and commissions | 4,417,000 | 1,657,200 | ||||||
Income taxes payable | 1,911,500 | - | ||||||
Dividends payable | 501,300 | 417,400 | ||||||
Other current liabilities | 4,648,500 | 3,238,200 | ||||||
Total current liabilities | 37,939,400 | 16,386,600 | ||||||
LONG-TERM DEBT - net of current maturities | 10,721,600 | 17,784,300 | ||||||
DEFERRED INCOME TAXES - net | 808,200 | 993,300 | ||||||
OTHER LONG-TERM LIABILITIES | 140,200 | 145,800 | ||||||
Total liabilities | 49,609,400 | 35,310,000 | ||||||
SHAREHOLDERS' EQUITY | ||||||||
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,410,080 (August 31) and 12,410,080 (February 29) shares; Outstanding 8,354,691 (August 31) and 8,348,651 (February 29) shares | 2,482,000 | 2,482,000 | ||||||
Capital in excess of par value | 10,245,600 | 9,843,900 | ||||||
Retained earnings | 34,915,800 | 29,732,200 | ||||||
| 47,643,400 | 42,058,100 | |||||||
Less treasury stock, at cost | (12,667,200 | ) | (12,665,300 | ) | ||||
Total shareholders' equity | 34,976,200 | 29,392,800 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 84,585,600 | $ | 64,702,800 | ||||
August 31, | February 28, | |||||||
ASSETS | 2021 | 2021 | ||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 921,200 | $ | 1,812,200 | ||||
Accounts receivable, less allowance for doubtful accounts of $388,100 (August 31) and $331,900 (February 28) | 3,894,400 | 3,346,700 | ||||||
Inventories - net | 64,707,400 | 51,762,400 | ||||||
Prepaid expenses and other assets | 1,407,500 | 1,219,300 | ||||||
Total current assets | 70,930,500 | 58,140,600 | ||||||
INVENTORIES - net | 843,400 | 685,300 | ||||||
PROPERTY, PLANT AND EQUIPMENT - net | 31,186,400 | 29,951,000 | ||||||
OTHER ASSETS | 43,600 | 73,600 | ||||||
TOTAL ASSETS | $ | 103,003,900 | $ | 88,850,500 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 18,519,000 | $ | 19,674,300 | ||||
Line of credit | 16,653,800 | 5,245,300 | ||||||
Deferred revenues | 751,400 | 1,914,100 | ||||||
Current maturities of long-term debt | 1,645,200 | 533,500 | ||||||
Accrued salaries and commissions | 1,896,400 | 3,488,000 | ||||||
Dividends payable | 865,000 | 835,100 | ||||||
Income taxes payable | 126,100 | 130,200 | ||||||
Other current liabilities | 3,629,800 | 6,094,800 | ||||||
Total current liabilities | 44,086,700 | 37,915,300 | ||||||
LONG-TERM DEBT - net of current maturities | 14,278,400 | 10,451,200 | ||||||
DEFERRED INCOME TAXES - net | 41,400 | 89,900 | ||||||
OTHER LONG-TERM LIABILITIES | 114,000 | 134,300 | ||||||
Total liabilities | 58,520,500 | 48,590,700 | ||||||
SHAREHOLDERS' EQUITY | ||||||||
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 (August 31) and 12,410,080 (February 28) shares; Outstanding 8,650,229 (August 31) and 8,346,600 (February 28) shares | 2,540,400 | 2,482,000 | ||||||
Capital in excess of par value | 11,377,900 | 10,863,900 | ||||||
Retained earnings | 43,290,900 | 39,683,000 | ||||||
| 57,209,200 | 53,028,900 | |||||||
Less treasury stock, at cost | (12,725,800 | ) | (12,769,100 | ) | ||||
Total shareholders' equity | 44,483,400 | 40,259,800 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 103,003,900 | $ | 88,850,500 | ||||
See notes to condensed financial statements.statements (unaudited).
EDUCATIONALDEVELOPMENTCORPORATION |
CONDENSEDSTATEMENTSOFEARNINGS(UNAUDITED) |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
GROSS SALES | $ | 73,682,800 | $ | 32,541,700 | $ | 120,579,700 | $ | 69,015,400 | ||||||||
Less discounts and allowances | (21,363,400 | ) | (10,241,000 | ) | (34,259,300 | ) | (21,572,400 | ) | ||||||||
Transportation revenue | 6,930,700 | 2,137,300 | 11,221,400 | 4,582,400 | ||||||||||||
NET REVENUES | 59,250,100 | 24,438,000 | 97,541,800 | 52,025,400 | ||||||||||||
COST OF GOODS SOLD | 17,309,500 | 8,046,400 | 28,705,000 | 17,102,600 | ||||||||||||
Gross margin | 41,940,600 | 16,391,600 | 68,836,800 | 34,922,800 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Operating and selling | 10,531,900 | 4,192,500 | 16,872,100 | 8,576,400 | ||||||||||||
Sales commissions | 20,304,400 | 7,263,100 | 33,904,900 | 15,796,100 | ||||||||||||
General and administrative | 5,664,000 | 3,717,600 | 10,200,000 | 7,655,800 | ||||||||||||
Total operating expenses | 36,500,300 | 15,173,200 | 60,977,000 | 32,028,300 | ||||||||||||
INTEREST EXPENSE | 140,000 | 242,500 | 322,200 | 474,500 | ||||||||||||
OTHER INCOME | (499,200 | ) | (390,800 | ) | (905,800 | ) | (793,200 | ) | ||||||||
EARNINGS BEFORE INCOME TAXES | 5,799,500 | 1,366,700 | 8,443,400 | 3,213,200 | ||||||||||||
INCOME TAXES | 1,544,500 | 359,100 | 2,257,300 | 842,000 | ||||||||||||
NET EARNINGS | $ | 4,255,000 | $ | 1,007,600 | $ | 6,186,100 | $ | 2,371,200 | ||||||||
BASIC AND DILUTED EARNINGS PER SHARE | ||||||||||||||||
Basic | $ | 0.51 | $ | 0.12 | $ | 0.74 | $ | 0.29 | ||||||||
Diluted | $ | 0.51 | $ | 0.12 | $ | 0.74 | $ | 0.29 | ||||||||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING | ||||||||||||||||
Basic | 8,354,214 | 8,312,648 | 8,353,319 | 8,248,460 | ||||||||||||
Diluted | 8,354,214 | 8,318,790 | 8,353,319 | 8,254,926 | ||||||||||||
Dividends per share | $ | 0.06 | $ | 0.05 | $ | 0.12 | $ | 0.10 | ||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
GROSS SALES | $ | 44,187,100 | $ | 73,682,800 | $ | 96,578,700 | $ | 120,579,700 | ||||||||
Less discounts and allowances | (14,513,500 | ) | (21,363,400 | ) | (30,467,600 | ) | (34,259,300 | ) | ||||||||
Transportation revenue | 3,320,800 | 6,930,700 | 7,691,200 | 11,221,400 | ||||||||||||
NET REVENUES | 32,994,400 | 59,250,100 | 73,802,300 | 97,541,800 | ||||||||||||
COST OF GOODS SOLD | 10,498,900 | 17,309,500 | 22,528,800 | 28,705,000 | ||||||||||||
Gross margin | 22,495,500 | 41,940,600 | 51,273,500 | 68,836,800 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Operating and selling | 5,239,900 | 10,531,900 | 11,682,500 | 16,872,100 | ||||||||||||
Sales commissions | 10,105,200 | 20,304,400 | 23,072,000 | 33,904,900 | ||||||||||||
General and administrative | 4,793,900 | 5,664,000 | 9,932,800 | 10,200,000 | ||||||||||||
Total operating expenses | 20,139,000 | 36,500,300 | 44,687,300 | 60,977,000 | ||||||||||||
INTEREST EXPENSE | 213,700 | 140,000 | 381,500 | 322,200 | ||||||||||||
OTHER INCOME | (515,300 | ) | (499,200 | ) | (1,114,000 | ) | (905,800 | ) | ||||||||
EARNINGS BEFORE INCOME TAXES | 2,658,100 | 5,799,500 | 7,318,700 | 8,443,400 | ||||||||||||
INCOME TAXES | 759,900 | 1,544,500 | 1,982,400 | 2,257,300 | ||||||||||||
NET EARNINGS | $ | 1,898,200 | $ | 4,255,000 | $ | 5,336,300 | $ | 6,186,100 | ||||||||
BASIC AND DILUTED EARNINGS PER SHARE | ||||||||||||||||
Basic | $ | 0.24 | $ | 0.51 | $ | 0.66 | $ | 0.74 | ||||||||
Diluted | $ | 0.23 | $ | 0.51 | $ | 0.63 | $ | 0.74 | ||||||||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING | ||||||||||||||||
Basic | 8,028,594 | 8,354,214 | 8,028,929 | 8,353,319 | ||||||||||||
Diluted | 8,435,348 | 8,354,214 | 8,458,664 | 8,353,319 | ||||||||||||
Dividends per share | $ | 0.10 | $ | 0.06 | $ | 0.20 | $ | 0.12 | ||||||||
See notes to condensed financial statements.statements (unaudited).
EDUCATIONALDEVELOPMENTCORPORATION |
CONDENSEDSTATEMENTSOFCHANGESIN |
FORTHESIXMONTHSENDEDAUGUST 31, 2021 |
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of Shares Issued | Amount | Capital in Excess of Par Value | Retained Earnings | Number of Shares | Amount | Shareholders' Equity | ||||||||||||||||||||||
BALANCE – February 28, 2021 | 12,410,080 | $ | 2,482,000 | $ | 10,863,900 | $ | 39,683,000 | 4,063,480 | $ | (12,769,100 | ) | $ | 40,259,800 | |||||||||||||||
Sales of treasury stock | - | - | 26,600 | - | (1,714 | ) | 5,400 | 32,000 | ||||||||||||||||||||
Dividends declared ($0.10/share) | - | - | - | (834,800 | ) | - | - | (834,800 | ) | |||||||||||||||||||
Stock-based compensation (see note 6) | - | - | 261,600 | - | - | - | 261,600 | |||||||||||||||||||||
Net earnings | - | - | - | 3,438,100 | - | - | 3,438,100 | |||||||||||||||||||||
BALANCE - May 31, 2021 | 12,410,080 | $ | 2,482,000 | $ | 11,152,100 | $ | 42,286,300 | 4,061,766 | $ | (12,763,700 | ) | $ | 43,156,700 | |||||||||||||||
Sales of treasury stock | - | - | 46,100 | - | (4,915 | ) | 14,300 | 60,400 | ||||||||||||||||||||
Issuance of restricted share awards for vesting | 292,000 | 58,400 | (82,000 | ) | - | (5,000 | ) | 23,600 | - | |||||||||||||||||||
Dividends declared ($0.10/share) | - | - | - | (893,600 | ) | - | - | (893,600 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 261,700 | - | - | - | 261,700 | |||||||||||||||||||||
Net earnings | - | - | - | 1,898,200 | - | - | 1,898,200 | |||||||||||||||||||||
BALANCE - August 31, 2021 | 12,702,080 | $ | 2,540,400 | $ | 11,377,900 | $ | 43,290,900 | 4,051,851 | $ | (12,725,800 | ) | $ | 44,483,400 | |||||||||||||||
FORTHESIXMONTHSENDED AUGUST 31, 2020 |
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of Shares Issued | Amount | Capital in Excess of Par Value | Retained Earnings | Number of Shares | Amount | Shareholders' Equity | ||||||||||||||||||||||
BALANCE - February 29, 2020 | 12,410,080 | $ | 2,482,000 | $ | 9,843,900 | $ | 29,732,200 | 4,061,429 | $ | (12,665,300 | ) | $ | 29,392,800 | |||||||||||||||
Purchases of treasury stock | - | - | - | - | 17,565 | (75,500 | ) | (75,500 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | 5,000 | - | (21,167 | ) | 66,000 | 71,000 | ||||||||||||||||||||
Dividends declared ($0.06/share) | - | - | - | (502,200 | ) | - | - | (502,200 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 169,000 | - | - | - | 169,000 | |||||||||||||||||||||
Net earnings | - | - | - | 1,931,100 | - | - | 1,931,100 | |||||||||||||||||||||
BALANCE - May 31, 2020 | 12,410,080 | 2,482,000 | 10,017,900 | 31,161,100 | 4,057,827 | (12,674,800 | ) | 30,986,200 | ||||||||||||||||||||
Sales of treasury stock | - | - | 11,500 | - | (2,438 | ) | 7,600 | 19,100 | ||||||||||||||||||||
Dividends declared ($0.06/share) | - | - | - | (500,300 | ) | - | - | (500,300 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 216,200 | - | - | - | 216,200 | |||||||||||||||||||||
Net earnings | - | - | - | 4,255,000 | - | - | 4,255,000 | |||||||||||||||||||||
BALANCE - August 31, 2020 | 12,410,080 | $ | 2,482,000 | $ | 10,245,600 | $ | 34,915,800 | 4,055,389 | $ | (12,667,200 | ) | $ | 34,976,200 | |||||||||||||||
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of Shares Issued | Amount | Capital in Excess of Par Value | Retained Earnings | Number of Shares | Amount | Shareholders' Equity | ||||||||||||||||||||||
BALANCE – February 29, 2020 | 12,410,080 | $ | 2,482,000 | $ | 9,843,900 | $ | 29,732,200 | 4,061,429 | $ | (12,665,300 | ) | $ | 29,392,800 | |||||||||||||||
Purchases of treasury stock | - | - | - | - | 17,565 | (75,500 | ) | (75,500 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | 5,000 | - | (21,167 | ) | 66,000 | 71,000 | ||||||||||||||||||||
Dividends declared ($0.06/share) | - | - | - | (502,200 | ) | - | - | (502,200 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 169,000 | - | - | - | 169,000 | |||||||||||||||||||||
Net earnings | - | - | - | 1,931,100 | - | - | 1,931,100 | |||||||||||||||||||||
BALANCE - May 31, 2020 | 12,410,080 | $ | 2,482,000 | $ | 10,017,900 | $ | 31,161,100 | 4,057,827 | $ | (12,674,800 | ) | $ | 30,986,200 | |||||||||||||||
Sales of treasury stock | - | - | 11,500 | - | (2,438 | ) | 7,600 | 19,100 | ||||||||||||||||||||
Dividends declared ($0.06/share) | - | - | - | (500,300 | ) | - | - | (500,300 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 216,200 | - | - | - | 216,200 | |||||||||||||||||||||
Net earnings | - | - | - | 4,255,000 | - | - | 4,255,000 | |||||||||||||||||||||
BALANCE - August 31, 2020 | 12,410,080 | $ | 2,482,000 | $ | 10,245,600 | $ | 34,915,800 | 4,055,389 | $ | (12,667,200 | ) | $ | 34,976,200 | |||||||||||||||
|
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of Shares Issued | Amount | Capital in Excess of Par Value | Retained Earnings | Number of Shares | Amount | Shareholders' 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 | ||||||||||||||||||||
Purchases of treasury stock | - | - | - | - | 60,357 | (417,100 | ) | (417,100 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | 54,000 | - | (22,961 | ) | 54,600 | 108,600 | ||||||||||||||||||||
Dividends declared ($0.05/share) | - | - | - | (422,300 | ) | - | - | (422,300 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 166,200 | - | - | - | 166,200 | |||||||||||||||||||||
Issuance of restricted share awards for vesting | 308,000 | 61,600 | (61,600 | ) | - | - | - | - | ||||||||||||||||||||
Net earnings | - | - | - | 1,007,600 | - | - | 1,007,600 | |||||||||||||||||||||
BALANCE - August 31, 2019 | 12,400,080 | $ | 2,480,000 | $ | 9,368,100 | $ | 27,294,900 | 3,952,182 | $ | (11,828,600 | ) | $ | 27,314,400 | |||||||||||||||
See notes to condensed financial statements.statements (unaudited).
EDUCATIONALDEVELOPMENTCORPORATION |
|
|
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net earnings | $ | 6,186,100 | $ | 2,371,200 | ||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 821,100 | 684,800 | ||||||
Deferred income taxes | (185,100 | ) | 127,600 | |||||
Provision for doubtful accounts | 91,800 | 63,200 | ||||||
Provision for inventory valuation allowance | 106,400 | 129,900 | ||||||
Share-based compensation expense | 385,200 | 332,500 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (392,400 | ) | (303,100 | ) | ||||
Inventories, net | (17,700 | ) | (2,387,600 | ) | ||||
Prepaid expenses and other assets | (383,800 | ) | 544,600 | |||||
Accounts payable | 14,797,500 | (1,047,900 | ) | |||||
Accrued salaries and commissions, and other liabilities | 4,164,500 | (1,889,700 | ) | |||||
Deferred revenues | 843,100 | (213,700 | ) | |||||
Income taxes | 2,133,200 | 314,000 | ||||||
Total adjustments | 22,363,800 | (3,645,400 | ) | |||||
Net cash provided by (used in) operating activities | 28,549,900 | (1,274,200 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property, plant and equipment | (440,900 | ) | (234,700 | ) | ||||
Net cash used in investing activities | (440,900 | ) | (234,700 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments of term debt | (9,015,500 | ) | (472,100 | ) | ||||
Proceeds from term debt | 1,447,400 | - | ||||||
| Net borrowings under line of credit | - | 1,056,100 | ||||||
Cash received from sale of treasury stock | 90,100 | 231,000 |
| |||||
Cash used to purchase treasury stock | (75,500 | ) | (719,600 | ) | ||||
Dividends paid | (918,600 | ) | (819,000 | ) | ||||
Net cash used in financing activities | (8,472,100 | ) | (723,600 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 19,636,900 | (2,232,500 | ) | |||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 2,999,400 | 3,199,300 | ||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 22,636,300 | $ | 966,800 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
Cash paid for interest | $ | 343,900 | $ | 465,900 | ||||
Cash paid for income taxes | $ | 309,200 | $ | 448,600 | ||||
NONCASH INVESTING TRANSACTIONS | ||||||||
Accrued capital expenditures | $ | 252,000 | $ | - | ||||
Six Months Ended August 31, | ||||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net earnings | $ | 5,336,300 | $ | 6,186,100 | ||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 924,200 | 821,100 | ||||||
Deferred income taxes | (48,500 | ) | (185,100 | ) | ||||
Provision for doubtful accounts | 61,600 | 91,800 | ||||||
Provision for inventory valuation allowance | 120,000 | 106,400 | ||||||
Share-based compensation expense | 523,300 | 385,200 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (609,300 | ) | (392,400 | ) | ||||
Inventories, net | (13,223,100 | ) | (17,700 | ) | ||||
Prepaid expenses and other assets | (158,200 | ) | (383,800 | ) | ||||
Accounts payable | (104,700 | ) | 14,797,500 | |||||
Accrued salaries and commissions and other liabilities | (4,076,900 | ) | 4,164,500 | |||||
Deferred revenues | (1,162,700 | ) | 843,100 | |||||
Income taxes payable | (4,100 | ) | 2,133,200 | |||||
Total adjustments | (17,758,400 | ) | 22,363,800 | |||||
Net cash provided by (used in) operating activities | (12,422,100 | ) | 28,549,900 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property, plant and equipment | (3,210,200 | ) | (440,900 | ) | ||||
Net cash used in investing activities | (3,210,200 | ) | (440,900 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments on term debt | (305,800 | ) | (9,015,500 | ) | ||||
Proceeds from term debt | 5,244,700 | 1,447,400 | ||||||
Sales of treasury stock | 92,400 | 90,100 | ||||||
Purchases of treasury stock | 0 | (75,500 | ) | |||||
Net borrowings under line of credit | 11,408,500 | 0 | ||||||
Dividends paid | (1,698,500 | ) | (918,600 | ) | ||||
Net cash provided by (used in) financing activities | 14,741,300 | (8,472,100 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (891,000 | ) | 19,636,900 | |||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 1,812,200 | 2,999,400 | ||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 921,200 | $ | 22,636,300 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
Cash paid for interest | $ | 378,000 | $ | 343,900 | ||||
Cash paid for income taxes | $ | 2,035,000 | $ | 309,200 | ||||
NON-CASH TRANSACTIONS | ||||||||
Accrued capital expenditures | $ | 10,600 | $ | 252,000 | ||||
See notes to condensed financial statements.statements (unaudited).
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 29, 202028, 2021 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.
COVID-19 Update
In December 2019, a novel strain of coronavirus, known as COVID-19, was reported in Wuhan, China and has since extensively impacted the global health and economic environment. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and President Trump declared the COVID-19 outbreak in the United States as a national emergency. The Company has taken numerous steps, and will continue to take further actions, in its approach to minimize the impact of the COVID-19 pandemic. To ensure the well-being ofEffective May 1, 2021, we lessened our employees, the Company offered employees in our office the ability to work from home on a temporary basis; we instructed employees in our warehouse and office to take their temperature at the start of every shift; we requested employees forgo any in-person meetings and instead opt to utilize virtual meeting spaces; and we published and continually updated our employees on the most recent developments related to COVID-19 and best practices for safety and health practices in the office and warehouse and at home.based on the recommendations from the local Tulsa Health Department. We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business. On April 16, 2020, the Company entered into a loan with MidFirst Bank as the lender in an aggregate principal amount of $1.4 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This loan program provided paycheck protection for our employees from the economic impact to our business due to COVID-19, which was seen most by the decline in our Publishing division’s sales due to the closure of many retail outlets across the country, and in our UBAM division’s School and Library and Book Fair sales due to the closure of many schools nation-wide. The Company determined the PPP loan was no longer needed and therefore repaid the loan in full on May 12, 2020. While the Company did not experience a decrease in net revenues in the first six months ofduring fiscal year 2021, compared withand the same period inyear-to-date result of fiscal year 2020,2022 are more normalized, the long-term severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact COVID-19 had during the current fiscal period.
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 herein, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 29, 202028, 2021 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 December 2019, the FASB published ASU 2019-12: Income Taxes (Topic 740), which simplifies the accounting for income taxes. Topic 740 addresses a number of topics including but not limited to the removal of certain exceptions currently included in the standard related to intra-period allocation when there are losses, in addition to calculation of income taxes when current year-to-date losses exceed anticipated loss for the year. The amendment also simplifies accounting for certain franchise taxes and disclosure of the effect of enacted change in tax laws or rates. Topic 740 is effective for public entities forwas adopted by the Company at the beginning of fiscal years,year 2022 and interim periods within those fiscal years, beginning after December 15, 2020. Thedid not have a material impact of the adoption of the standard has not yet been determinedon our financial statements and is being evaluated.disclosures.
In March 2020, the FASB issued ASU 2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as London Interbank Offered Rate (LIBOR). This ASU includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This ASU is effective March 12, 2020 through December 31, 2022. The Company’s debt agreements include the use of alternate rates when LIBOR is not available. We do not expect the change from LIBOR to an alternate rate will have a material impact to our financial statements and, to the extent we enter into modifications of agreements that are impacted by the LIBOR phase-out, we will apply such guidance to those contract modifications.
Note 2 – INVENTORIES
Inventories consist of the following:
2020 | ||||||||
August 31, | February 29, | |||||||
Current: | ||||||||
Book inventory | $ | 31,067,700 | $ | 30,346,900 | ||||
Inventory valuation allowance | (504,300 | ) | (259,600 | ) | ||||
Inventories net – current | $ | 30,563,400 | $ | 30,087,300 | ||||
Noncurrent: | ||||||||
Book inventory | $ | 578,600 | $ | 1,226,500 | ||||
Inventory valuation allowance | (126,600 | ) | (209,800 | ) | ||||
Inventories net – noncurrent | $ | 452,000 | $ | 1,016,700 | ||||
August 31, 2021 | February 28, 2021 | |||||||
Current: | ||||||||
Book inventory | $ | 65,274,800 | $ | 52,276,200 | ||||
Inventory valuation allowance | (567,400 | ) | (513,800 | ) | ||||
Inventories net – current | $ | 64,707,400 | $ | 51,762,400 | ||||
Noncurrent: | ||||||||
Book inventory | $ | 1,124,400 | $ | 894,300 | ||||
Inventory valuation allowance | (281,000 | ) | (209,000 | ) | ||||
Inventories net – noncurrent | $ | 843,400 | $ | 685,300 | ||||
Book inventory includes inventory in transit which totaled $2,796,900 and $6,467,400 at August 31, 2021 and February 28, 2021, respectively.
Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2 ½2½ years of anticipated sales, are included in noncurrent inventory.
Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing, Ltd. (“Usborne”). Purchases received from this company were approximately $7.3 million$12,127,000 and $6.0 million$7,357,600 for the three months ended August 31, 20202021 and 2019,2020, respectively. Total inventory purchases received from all suppliers were $12.4 million$18,779,100 and $8.0 million$12,370,600 for the three months ended August 31, 20202021 and 2019,2020, respectively.
Purchases received from Usborne were approximately $11.3 million$24,415,300 and $11.9 million$11,332,000 for the six months ended August 31, 20202021 and 2019,2020, respectively. Total inventory purchases received from all suppliers were $18.2 million$36,564,300 and $17.2 million$18,217,200 for the six months ended August 31, 2021 and 2020, and 2019, respectively.
Note 3 – LEASES
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. OurOne lessee arrangement includes a rental agreement where we have the exclusive use of dedicated office space in San Diego, California, and qualifies as an operating lease. Our other lessee arrangement is short-term and offers flexible storage space on a month to month basis. Our lessee arrangements are not material to our condensed financial statements or notes to the condensed financial statements. Our lessor arrangements include three3 rental agreements for warehouse and office space in Tulsa, Oklahoma, and each qualifies as an operating lease 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.
Operating Leases – Lessee
We recognize a lease liability, reported in other liabilities on the condensed balance sheets, 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.
2020 | ||||||||
August 31, | February 29, | |||||||
Operating lease assets: | ||||||||
Right-of-use asset | $ | 39,800 | $ | 45,200 | ||||
Operating lease liabilities: | ||||||||
Current lease liability | $ | 13,600 | $ | 13,500 | ||||
Long-term lease liability | $ | 26,200 | $ | 31,700 | ||||
Remaining lease term (months) | 37 | 43 | ||||||
Discount rate | 4.60 | % | 4.60 | % | ||||
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.
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Fixed lease cost | $ | 3,300 | $ | 3,100 | $ | 6,500 | $ | 6,200 | ||||||||
Future minimum rental payments under operating leases with initial terms greater than one year as of August 31, 2020, are as follows:
Year ending February 28 (29), | ||||
2021 | $ | 6,700 | ||
2022 | 13,700 | |||
2023 | 14,200 | |||
2024 | 8,400 | |||
Total future minimum rental payments | 43,000 | |||
Present value discount | (3,200 | ) | ||
Total operating lease liability | $ | 39,800 |
The following table provides further information about our operating leases reported in our condensed financial statements:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Operating cash flows – operating lease | $ | 3,300 | $ | 3,100 | $ | 6,500 | $ | 6,200 | ||||||||
Operating Leases – Lessor
We recognize fixed rental income on a straight-line basis over the life of the lease as revenueother income on our condensed statements of earnings. Variable rental payments are recognized as revenueother income in the period in which the changes in facts and circumstances on which the variable lease payments are based occur.
On April 4, 2020, we executed an amendment to one of our existing leases that abated rental payments for the months of May, June and July 2020. The amendment also extended the term of the lease for three additional months. This amendment represents a lease modification and, as such, we have adjusted our fixed rental income on a straight-line basis over the remaining term starting May 1, 2020.
Future minimum payments receivable under operating leases with terms greater than one year are estimated as follows:
Year ending February 28 (29), | ||||
2021 | $ | 766,800 | ||
2022 | 1,556,100 | |||
2023 | 1,587,400 | |||
2024 | 1,592,500 | |||
2025 | 1,562,000 | |||
Thereafter | 9,694,300 | |||
Total | $ | 16,759,100 |
Years ending February 28 (29), | ||||
2022 | $ | 775,200 | ||
2023 | 1,573,200 | |||
2024 | 1,577,900 | |||
2025 | 1,547,100 | |||
2026 | 1,524,300 | |||
Thereafter | 8,091,000 | |||
Total | $ | 15,088,700 |
The cost of the leased space was approximately $10,806,300$10,828,600 and $10,789,500$10,826,400 as of August 31, 20202021 and February 29, 2020,28, 2021, respectively. The accumulated depreciation associated with the leased assets was $2,020,000$2,407,600 and $1,828,900$2,216,700 as of August 31, 20202021 and February 29, 2020,28, 2021, 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:
2020 | ||||||||
August 31, | February 29, | |||||||
Line of credit | $ | - | $ | - | ||||
Long-term debt | $ | 11,243,600 | $ | 18,811,700 | ||||
Less current maturities | (522,000 | ) | (1,027,400 | ) | ||||
Long-term debt, net of current maturities | $ | 10,721,600 | $ | 17,784,300 | ||||
August 31, 2021 | February 28, 2021 | |||||||
Line of credit | $ | 16,653,800 | $ | 5,245,300 | ||||
Advancing term loan | $ | 5,244,700 | $ | 0 | ||||
Long-term debt | 10,678,900 | 10,984,700 | ||||||
Less current maturities | (1,645,200 | ) | (533,500 | ) | ||||
Long-term debt, net of current maturities | $ | 14,278,400 | $ | 10,451,200 | ||||
We have aThe Company executed an Amended and Restated Loan Agreement dated as of March 10, 2016on February 15, 2021 (as amended the “Loan Agreement”) with MidFirst Bank (“the Bank”), which replaced the prior loan agreement and includes multiple loans. Term Loan #1 Tranche A (“Term Loan #1”), originally totaling $11.2$13.4 million, aswas part of August 31, 2020,the prior loan agreement. Term Loan #1 had a fixed interest rate of 4.23% with theprincipal and interest payable monthly and a stated maturity date of December 1, 2025. Tranche A has aOn April 1, 2021, the Company executed the First Amendment to the Loan Agreement which reduced the fixed interest rate of 4.23%on Term Loan #1 to 3.12% and interest is payable monthly.removed the prepayment premium from the Loan Agreement. Term Loan #1 is secured by the primary office, warehouse and land. The outstanding borrowings on Term Loan #1 were $10,678,900 and $10,984,700 as of August 31, 2021 and February 28, 2021, respectively.
The Loan Agreement also provides a $10.0$20.0 million revolving loan (“line of credit”) through August 15, 2021, which is limited to advance rates on eligible receivables and eligible inventory levels. Interest is2022 with interest payable monthly at the greater of 2.75% or the bank adjustedBank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, (2.75%with a minimum rate of 2.75% (the effective rate was 2.75% at August 31, 2020)2021).
On August 15, 2020,July 16, 2021, the Company executed the EleventhSecond Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modifies the Loan Agreement extendingwhich increased the termination date of the line of credit to August 15, 2021, reducing the maximum revolving principal amountMaximum Revolving Principal Amount from $15.0 million to $10.0 million,$20.0 million. On August 31, 2021, the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate. Our borrowings outstanding on our line of credit as of August 31, 2021 and amendingFebruary 28, 2021, were $16,653,800 and $5,245,300, respectively. Available credit under the definitionrevolving line of the LIBORcredit was approximately $3,346,200 and Prime rate, establishing that the rate charged, including the LIBOR Margin or Prime Margin, shall never be less than 2.75%.$9,570,200 at August 31, 2021 and February 28, 2021, respectively.
Adjusted Funded Debt is defined as all long-term and short-term bank debt less the outstanding balancesbalance of Tranche A.Term Loan #1. EBITDA is defined in the Loan Agreement as earnings beforenet income plus interest expense, income tax expense (benefit) and depreciation and amortization expenses,expenses. The Adjusted Funded Debt to EBITDA ratio includes Adjusted Funded Debt to trailing twelve months EBITDA, reduced by specific rental income.income received from a non-related third party, see Note 3. The $20.0 million line of credit is limited to advance rates on eligible receivables and eligible inventory levels.
The Advancing Term Loan and the line of credit accrue interest at a tiered rate based on our Adjusted Funded Debt to EBITDA ratio. The variable interest pricing tier is as follows:
PricingTier | AdjustedFundedDebttoEBITDARatio |
| LIBORMargin(bps) | ||
I | >2.00 | 300.00 | |||
II | >1.50 but <2.00 | 275.00 | |||
III | >1.00 but <1.50 | 250.00 | |||
IV | <1.00 | 225.00 |
We had no borrowings outstanding on our line of credit at August 31, 2020 and February 29, 2020. Available credit under the revolving line of credit was approximately $8.4 million and $11.0 million at August 31, 2020 and February 29, 2020, respectively.
The Loan Agreement 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, 2021,2022, 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. As of August 31, 2020,2021, we had no letters of credit outstanding.
On April 16, 2020,The Loan Agreement also contains provisions that require the Company entered into a loanto maintain specified financial ratios and limits any additional debt with other lenders. Additionally, the BankLoan Agreement places limitations on the amount of approximately $1.4 million pursuant todividends that may be distributed and the PPP undertotal value of stock that can be repurchased using advances from the CARES Act. The PPP Loan had a fixed interest rateline of 1.00%, with principal and interest payments starting December 1, 2020 and a scheduled maturity date of May 1, 2022. The Company determined the PPP loan was no longer needed and repaid the loan in full, including interest accrued to date, on May 12, 2020.credit.
On June 3, 2020, the Company paid off the remaining balance of the $4.0 million Term Loan #2 which originated on June 28, 2016. The final payment, including accrued interest, totaled $2.9 million. There were no additional fees or penalties resulting from the payoff of Term Loan #2.
On August 4, 2020, the Company paid off the remaining balance of the $5.0 million Term Loan #1 Tranche B which originated on March 10, 2016. The final payment, including accrued interest, totaled $4.2 million. There were no additional fees or penalties resulting from the payoff of Term Loan #1 Tranche B.
The following table reflects aggregate future scheduled maturities of long-term debt during the next five fiscal years and thereafter as follows:
Year ending February 28 (29), | ||||
2021 | $ | 256,200 | ||
2022 | 533,400 | |||
2023 | 556,700 | |||
2024 | 581,000 | |||
2025 | 605,300 | |||
Thereafter | 8,711,000 | |||
Total | $ | 11,243,600 |
Years ending February 28 (29), | ||||
2022 | $ | 816,900 | ||
2023 | 1,658,800 | |||
2024 | 1,678,300 | |||
2025 | 1,697,700 | |||
2026 | 9,546,400 | |||
Thereafter | 525,500 | |||
Total | $ | 15,923,600 |
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.period excluding nonvested restricted stock awards. Diluted EPS is based onincludes the combined weighted average numberdilutive effect of common shares outstandingissued unvested restricted stock awards and dilutiveadditional potential common shares issuable which include, where appropriate, the assumed exercise ofunder stock warrants, restricted stock and stock options. In computing diluted EPS, we haveWe utilized the treasury stock method. method in computing the potential common shares issuable under stock warrants, restricted stock, stock options and preferred shares.
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 August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Earnings: | ||||||||||||||||
Net earnings applicable to common shareholders | $ | 4,255,000 | $ | 1,007,600 | $ | 6,186,100 | $ | 2,371,200 | ||||||||
Weighted average shares: | ||||||||||||||||
Weighted average shares outstanding-basic | 8,354,214 | 8,312,648 | 8,353,319 | 8,248,460 | ||||||||||||
Assumed exercise of options | - | 6,142 | - | 6,466 | ||||||||||||
Weighted average shares outstanding-diluted | 8,354,214 | 8,318,790 | 8,353,319 | 8,254,926 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.51 | $ | 0.12 | $ | 0.74 | $ | 0.29 | ||||||||
Diluted | $ | 0.51 | $ | 0.12 | $ | 0.74 | $ | 0.29 | ||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Earnings: | ||||||||||||||||
Net earnings applicable to common shareholders | $ | 1,898,200 | $ | 4,255,000 | $ | 5,336,300 | $ | 6,186,100 | ||||||||
Weighted average shares: | ||||||||||||||||
Weighted average shares outstanding-basic | 8,028,594 | 8,354,214 | 8,028,929 | 8,353,319 | ||||||||||||
Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards | 406,754 | 0 | 429,735 | 0 | ||||||||||||
Weighted average shares outstanding-diluted | 8,435,348 | 8,354,214 | 8,458,664 | 8,353,319 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.24 | $ | 0.51 | $ | 0.66 | $ | 0.74 | ||||||||
Diluted | $ | 0.23 | $ | 0.51 | $ | 0.63 | $ | 0.74 | ||||||||
Note 6 – STOCK-BASEDSHARE-BASED COMPENSATION
We account for stock-basedshare-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 probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and share awards are updated and compensation expense is adjusted based on updated information.
In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan establishesestablished up to 600,000 shares of restricted stock which canavailable to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 or 2021. The Company exceeded all defined metrics during these fiscal years and 600,000 shares were granted to members of management according to the Plan. The granted shares under the 2019 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.
In July 2021, our shareholders approved the Company’s 2022 Long-Term Incentive Plan (“2022 LTI Plan”). The 2022 LTI Plan establishes up to 300,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2022 and 2023. The number of restricted shares to be distributed depends on attaining the performance metrics defined by the 20192022 LTI Plan and may result in the distribution of a number of shares that is less than, but not greater than, the number of restricted shares outlined in the terms of the 20192022 LTI Plan. Restricted shares granted under the 20192022 LTI Plan “cliff vest” after five years.years from the fiscal year that the defined metrics were exceeded.
During fiscal year 2019, the Company granted 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share. In the third quarter of fiscal year 2021, 5,000 of these restricted shares were forfeited. These shares were made available to be reissued to remaining participants upon forfeiture. The remaining compensation expense for thesethe outstanding awards, totaling approximately $1,662,800,$980,200, will be recognized ratably over the remaining vesting period of approximately 3018 months.
During the first quarter of fiscal year 2021, the Company granted approximately 151,000297,000 restricted shares under the 2019 LTI Plan, including the 5,000 aforementioned shares that were previously forfeited and held in Treasury, with an average grant-date fair value of $6.30 per share. The remaining compensation expense of thethese awards, totaling approximately $898,600,$1,374,800, will be recognized ratably over the remaining vesting period of approximately 5442 months.
As of August 31, 2020, 141,000 restricted2021, no shares were available for issuance as future awardshave been granted under the 20192022 LTI Plan.
A summary of compensation expense recognized in connection with restricted share awards follows:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Share-based compensation expense | $ | 216,200 | $ | 166,200 | $ | 385,200 | $ | 332,500 | ||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Share-based compensation expense | $ | 261,700 | $ | 216,200 | $ | 523,300 | $ | 385,200 | ||||||||
The following tablestable summarizes stock award activity during the first six months of fiscal year 20212022 under the 2019 LTI Plan:
|
| Shares |
|
| Weighted Average Fair Value (per share) |
| ||
|
|
|
|
|
|
|
|
|
Outstanding at February 29, 2020 |
|
| 308,000 |
|
| $ | 9.94 |
|
Granted |
|
| 151,000 |
|
|
| 6.30 |
|
Vested |
|
| - |
|
|
| - |
|
Forfeited |
|
| - |
|
|
| - |
|
Outstanding at August 31, 2020 |
|
| 459,000 |
|
| $ | 8.74 |
|
Shares | Weighted Average Fair Value (per share) | |||||||
Outstanding at February 28, 2021 | 600,000 | $ | 8.14 | |||||
Granted | - | - | ||||||
Vested | 0 | 0 | ||||||
Forfeited | - | - | ||||||
Outstanding at August 31, 2021 | 600,000 | $ | 8.14 | |||||
As of August 31, 2020,2021, total unrecognized stock-basedshare-based compensation expense related to unvested granted or issued restricted shares was $2,561,400,$2,355,000, which we expect to recognize over a weighted-average period of approximately 38.432.0 months.
Note 7 – SHIPPING AND HANDLING COSTS
We classify shipping and handling costs as operating and selling expenses in the condensed statements of earnings. Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies. These costs were $9,984,600$5,036,000 and $3,837,600$9,984,600 for the three months ended August 31, 20202021 and 2019,2020, respectively. These costs were $16,299,900$11,392,400 and $8,049,800$16,299,900 for the six months ended August 31, 2021 and 2020, and 2019, respectively.
Note 8 – BUSINESS SEGMENTS
We have two2 reportable segments: Publishing and Usborne Books & More (“UBAM”). and Publishing. 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. Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, trade and specialty wholesalers, through commissioned sales representatives and our internal tele-sales group.
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 and six-month periods ended August 31, 20202021 and 2019,2020, are as follows:
NET REVENUES | ||||||||||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Publishing | $ | 2,338,500 | $ | 2,702,800 | $ | 3,704,000 | $ | 5,042,100 | ||||||||
UBAM | 56,911,600 | 21,735,200 | 93,837,800 | 46,983,300 | ||||||||||||
Total | $ | 59,250,100 | $ | 24,438,000 | $ | 97,541,800 | $ | 52,025,400 | ||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES | ||||||||||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Publishing | $ | 738,800 | $ | 784,700 | $ | 1,085,400 | $ | 1,420,400 | ||||||||
UBAM | 9,662,600 | 3,488,300 | 15,489,700 | 7,857,300 | ||||||||||||
Other | (4,601,900 | ) | (2,906,300 | ) | (8,131,700 | ) | (6,064,500 | ) | ||||||||
Total | $ | 5,799,500 | $ | 1,366,700 | $ | 8,443,400 | $ | 3,213,200 | ||||||||
NET REVENUES | ||||||||||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
UBAM | $ | 29,518,100 | $ | 56,911,600 | $ | 67,135,000 | $ | 93,837,800 | ||||||||
Publishing | 3,476,300 | 2,338,500 | 6,667,300 | 3,704,000 | ||||||||||||
Total | $ | 32,994,400 | $ | 59,250,100 | $ | 73,802,300 | $ | 97,541,800 | ||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES | ||||||||||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
UBAM | $ | 5,579,100 | $ | 9,662,600 | $ | 13,440,400 | $ | 15,489,700 | ||||||||
Publishing | 982,800 | 738,800 | 1,844,300 | 1,085,400 | ||||||||||||
Other | (3,903,800 | ) | (4,601,900 | ) | (7,966,000 | ) | (8,131,700 | ) | ||||||||
Total | $ | 2,658,100 | $ | 5,799,500 | $ | 7,318,700 | $ | 8,443,400 | ||||||||
Note 9 – FAIR VALUE MEASUREMENTS
The valuation hierarchy included in 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 $11,710,500$15,654,000 and $19,155,500$11,078,800 at August 31, 20202021 and February 29, 2020,28, 2021, 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 the period that were not shipped as of August 31, 20202021 or February 29, 202028, 2021 are recorded as deferred revenues on the condensed balance sheets. We received approximately $1,228,400$751,400 and $385,300 at$1,914,100, as of August 31, 20202021 and February 29, 202028, 2021, respectively, in payments for sales orders which were or will be, shipped out subsequent to the end of the period. Orders that were included in deferred revenues predominantly shipped within the first few days of the next fiscal period.
Note 11 – SUBSEQUENT EVENTS
On October 6, 2020, our2021, the Board of Directors declaredapproved a distribution of $0.10 per share of common stock. This cash distributiondividend that will be paid on or about December 8, 2020 to shareholders of record on Thursday, November 19, 2020.18, 2021.
Item 2.MANAGEMENT’MANAGEMENT’SS 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 backlogs, our ability to obtain adequate financing for working capital and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, the COVID-19 pandemic, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 29, 202028, 2021 and this Quarterly Report on Form 10-Q, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur. See “Cautionary“Cautionary Remarks Regarding Forward-Looking Statements”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;segments, UBAM and Publishing, to sell our Usborne and Kane Miller children’s books. These two segments each have their own customer base. The Publishing segment markets its products on a wholesale basis to various retail accounts. The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, internet party plan events and book fairs. The Publishing segment markets its products on a wholesale basis to various retail accounts. All other supporting administrative activities are recognized as other expenses outside of our two segments. Other expenses consist primarily of the compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate office and distribution facility.
The following table shows our condensed statements of earnings data:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net revenues | $ | 59,250,100 | $ | 24,438,000 | $ | 97,541,800 | $ | 52,025,400 | ||||||||
Cost of goods sold | 17,309,500 | 8,046,400 | 28,705,000 | 17,102,600 | ||||||||||||
Gross margin | 41,940,600 | 16,391,600 | 68,836,800 | 34,922,800 | ||||||||||||
Operating expenses | ||||||||||||||||
Operating and selling | 10,531,900 | 4,192,500 | 16,872,100 | 8,576,400 | ||||||||||||
Sales commissions | 20,304,400 | 7,263,100 | 33,904,900 | 15,796,100 | ||||||||||||
General and administrative | 5,664,000 | 3,717,600 | 10,200,000 | 7,655,800 | ||||||||||||
Total operating expenses | 36,500,300 | 15,173,200 | 60,977,000 | 32,028,300 | ||||||||||||
Interest expense | 140,000 | 242,500 | 322,200 | 474,500 | ||||||||||||
Other income | (499,200 | ) | (390,800 | ) | (905,800 | ) | (793,200 | ) | ||||||||
Earnings before income taxes | 5,799,500 | 1,366,700 | 8,443,400 | 3,213,200 | ||||||||||||
Income taxes | 1,544,500 | 359,100 | 2,257,300 | 842,000 | ||||||||||||
Net earnings | $ | 4,255,000 | $ | 1,007,600 | $ | 6,186,100 | $ | 2,371,200 | ||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Net revenues | $ | 32,994,400 | $ | 59,250,100 | $ | 73,802,300 | $ | 97,541,800 | ||||||||
Cost of goods sold | 10,498,900 | 17,309,500 | 22,528,800 | 28,705,000 | ||||||||||||
Gross margin | 22,495,500 | 41,940,600 | 51,273,500 | 68,836,800 | ||||||||||||
Operating expenses | ||||||||||||||||
Operating and selling | 5,239,900 | 10,531,900 | 11,682,500 | 16,872,100 | ||||||||||||
Sales commissions | 10,105,200 | 20,304,400 | 23,072,000 | 33,904,900 | ||||||||||||
General and administrative | 4,793,900 | 5,664,000 | 9,932,800 | 10,200,000 | ||||||||||||
Total operating expenses | 20,139,000 | 36,500,300 | 44,687,300 | 60,977,000 | ||||||||||||
Interest expense | 213,700 | 140,000 | 381,500 | 322,200 | ||||||||||||
Other income | (515,300 | ) | (499,200 | ) | (1,114,000 | ) | (905,800 | ) | ||||||||
Earnings before income taxes | 2,658,100 | 5,799,500 | 7,318,700 | 8,443,400 | ||||||||||||
Income taxes | 759,900 | 1,544,500 | 1,982,400 | 2,257,300 | ||||||||||||
Net earnings | $ | 1,898,200 | $ | 4,255,000 | $ | 5,336,300 | $ | 6,186,100 | ||||||||
See the detailed discussion of revenues, costs of services, gross margin and general and administrative expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods.
Non-Segment Operating Results for the Three Months Ended August 31, 20202021
Total operating expenses not associated with a reporting segment increased $1.9decreased $0.8 million, or 61.3%16.0%, to $5.0$4.2 million for the three-month period ended August 31, 2020,2021, when compared to $3.1$5.0 million for the same quarterly period a year ago. Operating expenses increaseddecreased primarily as a result of $0.9a $0.6 million decrease in warehouse labor and a $0.4 million decrease in freight handling expenses, both resulting from a decrease in gross sales, offset by a $0.2 million increase in labor in our warehouse for the addition of a second full shift and a $0.7 million increase in freight handling costs due to the increase in order volumes.other various expenses.
Interest expense decreasedincreased $0.1 million, or 50.0%100.0%, to $0.1$0.2 million for the three months ended August 31, 2020,2021, when compared to $0.2$0.1 million for the same quarterly period a year ago as a resultassociated with the increase in our line of credit and the addition of the payoff of two long-term notes duringAdvancing Term Loan in the second quarter ofcurrent fiscal year 2021.year.
Income taxes increased $1.1decreased $0.7 million, or 275.0%46.7%, to $1.5$0.8 million for the three months ended August 31, 2020,2021, from $0.4$1.5 million for the same quarterly period a year ago. Our effective tax rate remained consistent, increasing 0.3%,increased to 28.6% for the quarter ended August 31, 2021, from 26.6% for the quarter ended August 31, 2020 from 26.3% for the quarter ended August 31, 2019.due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.
Non-Segment Operating Results for the Six Months Ended August 31, 20202021
Total operating expenses not associated with a reporting segment increased $2.3 million, or 35.9%, toremained consistent at $8.7 million for the six-month periodperiods ended August 31, 2020, compared to $6.4 million for the same period a year ago. Operating expenses increased primarily as a result of $1.1 million increase in2021 and August 31, 2020. Warehouse labor in our warehouse for the addition of a full second shift and a $0.9 million increase in freight handling costs due to the increase in order volumes.
Interest expense decreased $0.2 million or 40%, to $0.3and freight handling decreased $0.4 million for the six months ended August 31, 2020,2021, both associated with reduced sales. These changes were offset by increased warehouse rental of $0.2 million and property insurance of $0.1 million associated with increased inventory levels along with a $0.3 million increase in other various expenses.
Interest expense increased $0.1 million, or 33.3%, to $0.4 million for the six months ended August 31, 2021, when compared to $0.5$0.3 million for the same period a year ago as a result of the payoffincrease in our line of two long-term debt agreements duringcredit and the second quarteraddition of the Advancing Term Loan in the current fiscal year 2021.year.
Income taxes increased $1.5decreased $0.3 million, or 187.5%13.0%, to $2.3$2.0 million for the six months ended August 31, 2020,2021, from $0.8$2.3 million for the same period a year ago. Our effective tax rate remained consistent, increasing by 0.5%,increased to 27.1% for the six months ended August 31, 2021, from 26.7% for the six months ended August 31, 2020 from 26.2% for the six months ended August 31, 2019.due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.
UBAM Operating Results for the Three and Six Months Ended August 31, 2020 and 20192021
The following table summarizes the operating results of the UBAM segment:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Gross sales | $ | 68,868,300 | $ | 26,815,500 | $ | 112,814,400 | $ | 58,244,300 | ||||||||
Less discounts and allowances | (18,828,400 | ) | (7,208,700 | ) | (30,135,100 | ) | (15,828,600 | ) | ||||||||
Transportation revenue | 6,871,700 | 2,128,400 | 11,158,500 | 4,567,600 | ||||||||||||
Net revenues | 56,911,600 | 21,735,200 | 93,837,800 | 46,983,300 | ||||||||||||
Cost of goods sold | 16,129,700 | 6,688,200 | 26,818,300 | 14,487,000 | ||||||||||||
Gross margin | 40,781,900 | 15,047,000 | 67,019,500 | 32,496,300 | ||||||||||||
Operating expenses | ||||||||||||||||
Operating and selling | 9,137,600 | 3,448,300 | 14,563,900 | 7,091,300 | ||||||||||||
Sales commissions | 20,249,400 | 7,159,200 | 33,809,800 | 15,599,500 | ||||||||||||
General and administrative | 1,732,300 | 951,200 | 3,156,100 | 1,948,200 | ||||||||||||
Total operating expenses | 31,119,300 | 11,558,700 | 51,529,800 | 24,639,000 | ||||||||||||
Operating income | $ | 9,662,600 | $ | 3,488,300 | $ | 15,489,700 | $ | 7,857,300 | ||||||||
Average number of active consultants | 45,400 | 33,600 | 39,300 | 32,600 | ||||||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Gross sales | $ | 36,789,400 | $ | 68,868,300 | $ | 82,325,100 | $ | 112,814,400 | ||||||||
Less discounts and allowances | (10,590,700 | ) | (18,828,400 | ) | (22,876,400 | ) | (30,135,100 | ) | ||||||||
Transportation revenue | 3,319,400 | 6,871,700 | 7,686,300 | 11,158,500 | ||||||||||||
Net revenues | 29,518,100 | 56,911,600 | 67,135,000 | 93,837,800 | ||||||||||||
Cost of goods sold | 8,636,600 | 16,129,700 | 18,886,500 | 26,818,300 | ||||||||||||
Gross margin | 20,881,500 | 40,781,900 | 48,248,500 | 67,019,500 | ||||||||||||
Operating expenses | ||||||||||||||||
Operating and selling | 4,215,000 | 9,137,600 | 9,559,700 | 14,563,900 | ||||||||||||
Sales commissions | 9,937,600 | 20,249,400 | 22,795,900 | 33,809,800 | ||||||||||||
General and administrative | 1,149,800 | 1,732,300 | 2,452,500 | 3,156,100 | ||||||||||||
Total operating expenses | 15,302,400 | 31,119,300 | 34,808,100 | 51,529,800 | ||||||||||||
Operating income | $ | 5,579,100 | $ | 9,662,600 | $ | 13,440,400 | $ | 15,489,700 | ||||||||
Average number of active consultants | 46,100 | 45,400 | 50,200 | 39,300 | ||||||||||||
UBAM Operating Results for the Three Months Ended August 31, 20202021
UBAM net revenues increased $35.2decreased $27.4 million, or 162.2%48.2%, to $56.9$29.5 million during the three months ended August 31, 2020,2021, when compared to $21.7$56.9 million during the same period a year ago. The average number of active consultants in the second quarter of fiscal 20212022 was 45,400,46,100, an increase of 11,800,700, or 35.1%1.5%, from 33,600 average active consultants45,400 selling in the second quarter of fiscal 2020.2021. The Company reports the average number of active consultants each quarter as a key indicator for this division. Furthermore, duringDuring the second quarter ended August 31, 2020 our sales per average number of fiscal 2021 this division experienced significant growth in active consultants beginningincreased significantly to due to the increase in June with 36,900demand for our products resulting from the impacts of the COVID-19 pandemic. During last summer, school closings and public interaction restrictions increased the need for educational materials in the home and our consultants were positioned to fill this increased demand. During the quarter ended August 31, 2021, our sales per average number of active consultants and ending in Augustremained consistent with over 50,300 active consultants. UBAM's increase in active consultants resulted from several factors including: an increase in families looking for non-traditional income streamsyears prior to supplement or replace income lost from the COVID-19 pandemic, a change in new consultant kits which offered lower introductory prices, the restructure of our UBAM consultant success program, which was introduced during the first quarter of fiscal 2021, and technology improvements that have enhanced the customer experience and streamlined the proprietary systems that our consultants use to run their business. The Company announced monthly sales and active consultant numbers during the quarter, and shortly after quarter end to keep investors informed of the significant changes in volumes. Our increase in active consultants and our ability to receive orders online and deliver directly to our customers’ homes resulted in our increased revenues during the quarter.pandemic.
Gross margin increased $25.8decreased $19.9 million, or 172.0%48.8%, to $40.8$20.9 million during the three months ended August 31, 2020,2021, when compared to $15.0$40.8 million during the same period a year ago.ago, primarily associated with the decrease in net revenues. Gross margin as a percentage of net revenues increased 2.5%decreased 1.0%, to 71.7%70.7% for the three-month period ended August 31, 20202021, when compared to 69.2%71.7% the same period a year ago. The increasedecrease in gross margin as a percentage of net revenues was due to theresulted from a change in order mix partially offset by reduced cost of order types received during the quarter.goods sold. During the quarter webended August 31, 2021 sales whichthrough book fairs, booths and home parties increased over the second quarter last year when these sales types were challenged. These sales types have the lowesthigher sales discounts and pay the highest commissions, increased significantly while book fairs, school and library sales and other in-person sales types declined year over year, due to the quarantining effects of the COVID-19 pandemic. The increase in web sales and decrease in in-person sales also resulted in overall higherless sales commissions as a percentageto our consultants, resulting in similar operating income. Reduced cost of net revenue during the quarter. The overall net profit impact of the order type mix change after selling expenses, commissionsgoods sold resulted from larger volume discounts and direct operating expenses was considered by management to be minimal.vendor rebates associated with increased purchasing volumes over pre-COVID-19 levels.
UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses. Operating and selling expenses primarily consists of freight expenses and materials and supplies. Sales commissions include amounts paid to consultants for new sales and promotions. These operating expenses are directly tied to the sales volumes of the UBAM segment. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the UBAM segment. Total operating expenses increased $19.5decreased $15.8 million, or 168.1%50.8%, to $31.1$15.3 million during the three-month period ended August 31, 2020,2021, when compared to $11.6$31.1 million reported in the same quarter a year ago. Operating and selling expenses increased $5.7decreased $4.9 million, or 53.8%, to $9.1$4.2 million during the three-month period ended August 31, 2020,2021, when compared to $3.4$9.1 million reported in the same quarter a year ago, primarily due to an increasea decrease in net revenues and a decrease in postage and freight costs of $5.5 million and an increasepeak charges we experienced in accruals for trips and other consultant rewards of $0.2 million, both associated with increased UBAM sales.the second quarter last year. Sales commissions increased $13.0decreased $10.3 million, or 51.0%, to $20.2$9.9 million during the three-month period ended August 31, 2020,2021, when compared to $7.2$20.2 million reported in the same quarter a year ago, due primarily to the increasedecrease in sales volume and the increase in internet-based sales, which offer fewer discounts and higher sales commissions to consultants.net revenues. General and administrative expenses increased $0.7decreased $0.6 million, or 35.3%, to $1.7$1.1 million during the three months ended August 31, 2020,2021, when compared to $1.0$1.7 million during the same period last year. This increase wasa year ago, due primarily due to $0.6 million of increasedreduced bank fees from less credit card transaction fees associated with increased sales volumes. transactions during the quarter ended August 31, 2021.
Operating income of the UBAM segment increased $6.2decreased $4.1 million, or 177.1%42.3%, to $9.7$5.6 million during the three months ended August 31, 2020,2021, when compared to $3.5$9.7 million reported in the same quarter a year ago, primarily due to the growthchange in net revenues. Operating income of the UBAM division as a percentage of net revenues for the three months ended August 31, 2020 was 17.0%2021 increased to 18.9%, compared to 16.0%17.0% for the three months ended August 31, 2019, a change2020, primarily from reduced cost of 1.0%, or approximately $0.6 million. Operating income as a percentage of net revenues changedgoods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes and reduced outbound shipping peak charges experienced in the prior year primarily due to the positive impact of the change of our annual UBAM convention to “virtual” from an in-person event totaling approximately $0.5 million.second quarter last year.
UBAM Operating Results for the Six Months Ended August 31, 20202021
UBAM net revenues increased $46.8decreased $26.7 million, or 99.6%28.5%, to $93.8$67.1 million during the six-month period ended August 31, 2020,2021, compared to $47.0$93.8 million from the same period a year ago. The increase in net revenues resulted from the increase in the average number of active consultants in the six-month period ended August 31, 2021 was 50,200, an increase of 6,700,10,900, or 20.6%27.7%, tofrom 39,300 duringselling in same period a year ago. During the first six months of fiscal year 2021, and the overall increase in consultants to 50,300 by the end ofended August 31, 2020 from anour sales per average number of active consultants of 32,600 inincreased significantly due to the first six months of fiscal year 2020. UBAM's increase in active consultants resulted from several factors including: an increase in families looking for non-traditional income streams to supplement or replace income lost from the COVID-19 pandemic, a change in new consultant kits which offered lower introductory prices, the restructure of our UBAM consultant success program, which was introduced during the first quarter of fiscal 2021, and technology improvements that have enhanced the customer experience and streamlined the proprietary systems that our consultants use to run their business. The Company began announcing monthly sales and active consultant numbers starting in May of fiscal year 2021 to keep investors informed of the significant changes in net revenues and active consultant volumes. Along with the significant increases in active consultants during the first six months of fiscal year 2021, we experienced a significant increase in demand for our products resulting from the impacts of the COVID-19 pandemic. School closings and quarantine restrictions increased the need for educational materials in homes. Our increase inthe home and our consultants were positioned to fill this increased demand. During the six months ended August 31, 2021, our sales per average number of active consultants and our abilityremained consistent with years prior to receive orders online and deliver directly to our customers’ homes resulted in our increased revenues.the COVID-19 pandemic.
Gross margin increased $34.5decreased $18.8 million, or 106.2%28.1%, to $67.0$48.2 million during the six-month period ended August 31, 2020,2021, when compared to $32.5$67.0 million during the same period a year ago, due primarily to an increasea decrease in net revenues. Gross margin as a percentage of net revenues increased to 71.4%71.9% for the six-month period ended August 31, 2020,2021, when compared to 69.2%71.4% for the same period a year ago. During the first six months webended August 31, 2021 , sales which have the lowest discounts and pay the highest commissions, increased significantly whilethrough book fairs, schoolbooths and library sales and other in-person sales types declined yearhome increased over year, due to the quarantining effects of the COVID-19 pandemic. While the increase in web sales and decrease in in-person sales resulted in overall higher gross margin percentages during the first six months of fiscal year 2021 when these sales types were challenged. These sales types have higher sales discounts and pay less sales commissions to our consultants, resulting in similar operating income. The decrease in gross margins weremargin percentage associated with the mix from these sales types was offset by higher sales commissionsreduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased direct operating expenses of the division. The overall net profit impact of the order type mix change after selling expenses, commissions and direct operating expenses was minimal.purchasing volumes over pre-COVID-19 levels.
Total operating expenses increased $26.9decreased $16.7 million, or 109.3%32.4%, to $51.5$34.8 million during the six-month period ended August 31, 2020,2021, from $24.6$51.5 million for the same period a year ago. Operating and selling expenses increased $7.5decreased $5.0 million, or 34.2%, to $14.6$9.6 million during the six-month period ended August 31, 2020,2021, when compared to $7.1$14.6 million reported in the same period a year ago, primarily due to increased postage and freighta decrease in shipping costs of $7.4 million associated with the increasedecrease in volume of orders shipped. Sales commissions increased $18.2decreased $11.0 million, or 32.5%, to $33.8$22.8 million during the six-month period ended August 31, 2020,2021, when compared to $15.6$33.8 million reported in the same period a year ago, primarily due primarily to the increasedecrease in net revenues along with a lower percentage of internet-based sales, which offer fewer discounts and higher sales commissions to consultants. General and administrative expenses increased $1.3decreased $0.7 million, or 21.9%, to $3.2$2.5 million, from $1.9$3.2 million recognized during the same period last year, due primarily to $1.1 million of increaseddecreased credit card transaction fees associated with increaseddecreased sales volumes.
Operating income of the UBAM segment increased $7.6decreased $2.1 million, or 96.2%13.5%, to $15.5$13.4 million during the six months ended August 31, 2020,2021, when compared to $7.9$15.5 million reported in the same period last year. Operating income of the UBAM division as a percentage of net revenues for the six months ended August 31, 20202021 was 16.5%20.0%, compared to 16.7%16.5% for the six months ended August 31, 2019,2020, a change of 0.2%, or $0.2 million.3.5%. Operating income as a percentage of net revenues changedincreased from the prior year primarily due tofrom reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased postagepurchasing volumes and freight expenses as a percentage of net revenues totaling approximately $0.8 million, partially offset byreduced outbound shipping peak charges experienced during the positive impactfirst six months of the change to a “virtual” convention totaling approximately $0.5 million.prior fiscal year.
Publishing Operating Results for the Three and Six Months Ended August 31, 2020 and 20192021
The following table summarizes the operating results of the Publishing segment:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Gross sales | $ | 4,814,500 | $ | 5,726,200 | $ | 7,765,300 | $ | 10,771,100 | ||||||||
Less discounts and allowances | (2,535,000 | ) | (3,032,300 | ) | (4,124,200 | ) | (5,743,800 | ) | ||||||||
Transportation revenue | 59,000 | 8,900 | 62,900 | 14,800 | ||||||||||||
Net revenues | 2,338,500 | 2,702,800 | 3,704,000 | 5,042,100 | ||||||||||||
Cost of goods sold | 1,179,800 | 1,358,200 | 1,886,700 | 2,615,600 | ||||||||||||
Gross margin | 1,158,700 | 1,344,600 | 1,817,300 | 2,426,500 | ||||||||||||
Total operating expenses | 419,900 | 559,900 | 731,900 | 1,006,100 | ||||||||||||
Operating income | $ | 738,800 | $ | 784,700 | $ | 1,085,400 | $ | 1,420,400 | ||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Gross sales | $ | 7,397,700 | $ | 4,814,500 | $ | 14,253,600 | $ | 7,765,300 | ||||||||
Less discounts and allowances | (3,922,800 | ) | (2,535,000 | ) | (7,591,200 | ) | (4,124,200 | ) | ||||||||
Transportation revenue | 1,400 | 59,000 | 4,900 | 62,900 | ||||||||||||
Net revenues | 3,476,300 | 2,338,500 | 6,667,300 | 3,704,000 | ||||||||||||
Cost of goods sold | 1,862,300 | 1,179,800 | 3,642,300 | 1,886,700 | ||||||||||||
Gross margin | 1,614,000 | 1,158,700 | 3,025,000 | 1,817,300 | ||||||||||||
Total operating expenses | 631,200 | 419,900 | 1,180,700 | 731,900 | ||||||||||||
Operating income | $ | 982,800 | $ | 738,800 | $ | 1,844,300 | $ | 1,085,400 | ||||||||
Publishing Operating Results for the Three Months Ended August 31, 20202021
Our Publishing division’s net revenues decreased $0.4increased $1.2 million, or 14.8%52.2%, to $2.3$3.5 million during the three-month period ended August 31, 2020,2021, from $2.7$2.3 million reported in the same period a year ago. The decreaseMany Publishing customers began to reopen in sales resulted from temporary store closures impacted bythe latter half of fiscal year 2021 after closing in the first quarter of fiscal year 2021 due to the COVID-19 pandemic. Many Publishing customers temporarily closed during our fiscal year 2021 first quarter, following the guidance from their local authorities to prevent the spread of the pandemic, and have begun reopening at varying times over the past few months.
Gross margin decreased $0.1increased $0.4 million, or 7.7%33.3%, to $1.2$1.6 million during the three-month period ended August 31, 2020,2021, from $1.3$1.2 million reported in the same quarter a year ago, primarily due to the decreaseincrease in net revenues. Gross margin as a percentage of net revenues remained consistent, decreasing 0.2%,decreased to 49.5%46.4% during the three-month period ended August 31, 2020,2021, from 49.7%49.5% reported in the same quarter a year ago. Gross margin as a percentage of net revenues fluctuates primarily from the different discount levels offered to customers.customers as well as changes in the mix of products sold between Kane Miller and Usborne.
Total operating expenses of the Publishing segment decreasedincreased $0.2 million, or 33.3%50.0%, to $0.6 million, from $0.4 million, during the three-month periodperiods ended August 31, 2021 and 2020, primarily as a result of increased freight expenses from $0.6 million reportedan increase in the same quarter a year ago, primarily from $0.1 million in reduced exhibits and trade show expenses. Many trade shows and exhibits were cancelled during the second quarter of fiscal 2021 in response to the spread of the COVID-19 pandemic.sales.
Operating income of the Publishing segment decreased $0.1increased $0.3 million, or 12.5%42.9%, to $1.0 million from $0.7 million duringfor the three-month periodperiods ended August 31, 2021 and 2020, when compared to $0.8 million reported inprimarily driven by the same period a year ago, due primarily to the decreaseincrease in net revenues.
Publishing Operating Results for the Six Months Ended August 31, 20202021
Our Publishing division’s net revenues decreased $1.3increased $3.0 million, or 26.0%81.1%, to $3.7$6.7 million during the six-month period ended August 31, 2020,2021, from $5.0$3.7 million reported in the same period a year ago. The decreaseincrease in sales resulted from temporary store closures impacted by the COVID-19 pandemic.pandemic in fiscal year 2021. Many Publishing customers temporarily closed during ourthe first quarter of fiscal year 2021, first quarter, following the guidance from their local authorities to preventslow the spread of the pandemic, and have begunbegan reopening at varying times overin the past few months.latter half of fiscal year 2021.
Gross margin decreased $0.6increased $1.2 million, or 25.0%66.7%, to $1.8$3.0 million during the six-month period ended August 31, 2020,2021, from $2.4$1.8 million reported in the same period a year ago, primarily due to the decreaseincrease in net revenues. Gross margin as a percentage of net revenues increased 1.0%,decreased to 49.1%45.4%, during the six-month period ended August 31, 2020,2021, from 48.1%49.1% reported in the same period a year ago. The increasedecrease in gross margin percentage results primarily from a change in our customer mix. Customers receive varying discounts due to sales volumes and contract terms.
Total operating expenses of the Publishing segment decreased $0.3increased $0.5 million, or 71.4%, to $0.7$1.2 million during the six-month period ended August 31, 2020,2021, from $1.0$0.7 million reported in the same period a year ago, resulting from a $0.1$0.3 million decreaseincrease in postage and freight from a decrease in sales volumes, a $0.1 million decrease in sales commissions from a decreasean increase in sales volumes and a $0.1$0.2 million decreaseincrease in exhibits and trade show expenses.sales commissions from an increase in sales volumes.
Operating income of the Publishing segment decreased $0.3increased $0.7 million, or 21.4%63.6%, to $1.1$1.8 million during the six-month period ended August 31, 20202021 when compared to $1.4$1.1 million reported in the same period a year ago, due primarily to the decreaseincrease in net revenues.
Liquidity and Capital Resources
EDC has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate. We also use available cash to pay down outstanding bank loan balances, for capital expenditures, to pay dividends, and to acquire treasury stock. We have utilized a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures, when necessary.
During the first six months of fiscal 2021,year 2022, we generated positiveexperienced cash flowsoutflows from our operations of $28,549,900.$12,422,100. These cash flowsoutflows resulted from:
●net earnings of $6,186,100$5,336,300
Adjusted for:
●depreciation expense of $821,100$924,200
●share-based compensation expense of $385,200$523,300
●provision for inventory valuation allowance of $106,400$120,000
●provision for doubtful accounts of $91,800$61,600
Offset by:
●deferred income taxes of $185,100$48,500
Negatively impacted by:
Positively impacted by:
●increase in accounts payableinventories, net of $14,797,500$13,223,100
● increasedecrease in accrued salaries and commissions, and other liabilities of $4,164,500$4,076,900
● increase in income tax payable of $2,133,200
● increasedecrease in deferred revenues of $843,100$1,162,700
Negatively impacted by:
●increase in accounts receivable of $392,400$609,300
●increase in prepaid expenses and other assets of $383,800$158,200
● increasedecrease in inventories, netaccounts payable of $17,700$104,700
●decrease in income taxes payable of $4,100
Cash used in investing activities was $440,900$3,210,200 for capital expenditures, which were primarily comprised of $2,849,700 in equipment purchased to increase our daily shipping capacity, $280,500 in software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders and equipment purchased to increase our daily shipping capacity.$80,000 in building and building improvements.
Cash used inprovided by financing activities was $8,472,100,$14,741,300, which was comprised of net cash used to pay downproceeds from term debt of $7,568,100, payments$5,244,700, net borrowings under the line of $918,600 for dividends, offset by $14,600credit of $11,408,500 and net cash received in treasury stock transactions.transactions of $92,400, offset by payments of $1,698,500 for dividends and payments on term debt of $305,800.
During fiscal year 2021,2022, we continue to expect the cash generated from our operations and cash from operations, along withavailable through our line of credit and any additional equipment financing needed fromwith our Bank will provide us the abilityliquidity we need to meet our liquidity requirements.support ongoing operations. Cash generated from operations will be used to replaceincrease inventory by expanding our product offerings, to liquidate existing debt, and any excess cash is expected to be distributed to our shareholders or used to purchase available shares onshareholders.
On February 15, 2021, the market.
We have aCompany executed the Amended and Restated Loan Agreement with MidFirst Bank which replaced the Bank,prior loan agreement and includes multiple loans. Term Loan #1 Tranche A (“Term Loan #1”), originally totaling $11.2$13.4 million, aswas part of August 31, 2020,the prior loan agreement. Term Loan #1 had a fixed interest rate of 4.23%, with principal and interest payable monthly and a stated maturity date of December 1, 2025. Tranche A has aTerm Loan #1 is secured by the primary office, warehouse and land. Term Loan #1 was amended on April 1, 2021 by executing the First Amendment to the Loan Agreement which reduced the fixed interest rate to 3.12% and removed the prepayment premium from the Loan Agreement. The outstanding borrowings on Term Loan #1 were $10.7 million and $11.0 million as of 4.23%August 31, 2021 and interest is payable monthly. TheFebruary 28, 2021, respectively.
In addition, the Amended and Restated Loan Agreement also includesprovides a $10.0$6.0 million line of creditAdvancing Term Loan to be used to finance planned equipment purchases. The Advancing Term Loan required interest-only payments through AugustJuly 15, 2021.2021, at which time it was converted to a 60-month amortizing term loan maturing July 15, 2026. The line of creditAdvancing Term Loan accrues interest monthly, at the bank adjustedBank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio. The Loan Agreement maintainsRatio, with a minimum rate onof 2.75%. Our borrowings outstanding under the Advancing Term Loan at August 31, 2021 were $5.2 million.
The Amended and Restated Loan Agreement also provides a $20.0 million revolving loan (“line of credit”) through August 15, 2022 with interest payable monthly at the calculated rate of theBank-adjusted LIBOR Index plus thea tiered pricing rate fall below this level.
We had nobased on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75%. On July 16, 2021, the Company executed the Second Amendment to the Loan Agreement which increased the Maximum Revolving Principal Amount from $15.0 million to $20.0 million. On August 31, 2021, the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate. Our borrowings outstanding on our line of credit at August 31, 20202021 and February 29, 2020.28, 2021 were $16.7 million and $5.2 million, respectively. Available credit under the revolving loanline of credit was $8.4approximately $3.3 million and $9.6 million at August 31, 2020.2021 and February 28, 2021, respectively.
During the second quarter of fiscal year 2021, we paid off Loan Agreement Term Loan #1 Tranche B totaling $4.2 million, which previously had a maturity date of December 1, 2025. In addition, we also paid off Term Loan #2 totaling $2.9 million, which previously had a maturity date of June 28, 2021. The purpose of paying off these loans early was to utilize our existing cash flows from operations to increase future profits by reducing interest expense, as well as, free up future cash flows to be used to either pay dividends or purchase additional shares.
On August 15, 2019, the Company executed the Tenth Amendment Loan Agreement which extended the termination date of the line of credit to August 15, 2020, amended the definition of LIBOR Margin, reduced the frequency of reports to the Lender, amended the Adjusted Funded Debt to EBITDA RatioAmended and amended the Compliance and Borrowing Base Certificates reporting requirements.
On August 15, 2020, the Company executed the Eleventh Amendment Loan Agreement which extended the termination date of the line of credit to August 15, 2021, reduced the maximum revolving principal amount from $15.0 million to $10.0 million, and amended the definition of the LIBOR Margin and Prime Margin, establishing a floor on the borrowing rates of 2.75%.
TheRestated 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 August 31, 2020,2021, 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, disallowplace limitations on additional debt andwith other banks, limit the amounts of dividends declared investments, capital expenditures, leasing transactions, and establish a dollar limit onlimits the amountnumber of shares that can be repurchased.repurchased using funding from the line of credit.
The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:
Year ending February 28 (29), |
|
|
|
|
2020 |
| $ | 256,200 |
|
2021 |
|
| 533,400 |
|
2022 |
|
| 556,700 |
|
2023 |
|
| 581,000 |
|
2024 |
|
| 605,300 |
|
Thereafter |
|
| 8,711,000 |
|
Total |
| $ | 11,243,600 |
|
Years ending February 28 (29), | ||||
2022 | $ | 816,900 | ||
2023 | 1,658,800 | |||
2024 | 1,678,300 | |||
2025 | 1,697,700 | |||
2026 | 9,546,400 | |||
Thereafter | 525,500 | |||
Total | $ | 15,923,600 |
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.States(“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.
Revenue Recognition
Sales associated with product orders are recognized and recorded when products are shipped. Products are shipped FOB shipping point. UBAM’s sales are generally paid at the time the product is ordered. Sales which have been paid for but not shipped are classified as deferred revenue on the balance sheet. Sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted. Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.
Estimated allowances for sales returns are recorded as sales are recognized. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily received from the retail stores of our Publishing Division.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 August 31, 20202021 and February 29, 2020.28, 2021.
Allowance for Doubtful Accounts
We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns (collectively “allowance for doubtful accounts”). An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends. Management has estimated and included an allowance for doubtful accounts of $0.3$0.4 million at August 31, 2020,2021, and $0.2$0.3 million at February 29, 2020.28, 2021. Included within this allowance is $0.1 million of reserve for vendor discounts to sell remaining inventory as of August 31, 20202021 and February 29, 2020.28, 2021.
Inventory
Our inventory contains over 2,000 titles, each with different sell through rates depending upon the nature and popularity of the title. We maintain very few titles that are topical in nature. As such, the majority of the titles we sell remain current in content for several years. Most of our products are printed in China, Europe, 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. Inventory in excess of 2 ½2½ years of anticipated sales is classified as noncurrent inventory. These inventory quantities have exposure of becoming out of date, and therefore have higher obsolescence reserves. During the first six months of fiscal 2021, our sales have increased significantly, which significantly reduced the amount of inventory items with sale-through rates in excess of 2 ½ years. As such, we have reduced the reserve needed for noncurrent inventory obsolescence. Noncurrent inventory balances prior to valuation allowances were $0.6$1.1 million and $1.2$0.9 million at August 31, 20202021 and February 29, 2020,28, 2021, respectively. Noncurrent inventory valuation allowances were $0.1$0.3 million and $0.2 million at August 31, 20202021 and February 29, 2020,28, 2021, 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; in summary, having consignment inventory leads to additional sales opportunities. Approximately 5.0% of our active consultants maintained consignment inventory at the end of the second quarter of fiscal 2021. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with consultants was $1.3 million at August 31, 2020 and $1.5 million at February 29, 2020. During the quarter, the Company increased its reserve for consignment inventory by approximately $0.2 million based on the estimated impact of the COVID-19 pandemic. Because our consultants are currently limited in their ability to sell consignment inventory at schools, book fairs or fall festivals, we expect more consultants to become inactive in the future, and an increase in the consignment reserve was needed.
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 $0.6 million and $0.5 million as of August 31, 2020 and February 29, 2020, 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 ½2½ years represents a reasonable estimate of the normal operating cycle for our products.
Stock-BasedConsultants that meet certain eligibility requirements may request and receive inventory on consignment. We believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events; in summary, having consignment inventory leads to additional sales opportunities. Approximately 4.8% of our active consultants maintained consignment inventory at the end of the second quarter of fiscal 2022. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with consultants was $1.2 million and $1.1 million at August 31, 2021 and February 28, 2021, respectively.
Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company. Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory. Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.8 million and $0.7 million at August 31, 2021 and February 28, 2021, respectively.
Share-Based Compensation
We account for stock-basedshare-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant. For awards subject to service conditions, compensation expense is recognized over the vesting period on a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche. Forfeitures are recognized when they occur. Any cash dividends declared after the restricted stock award is made,issued, but before the vesting period is completed, will be reinvested in Company shares at the opening trading price on the dividend payment date. Shares purchased with cash dividends will also retain the same restrictions until the completion of the original vesting period associated with the awarded shares.
The restricted share awards granted under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) and 2022 Long-Term Incentive Plan (“2022 LTI Plan”) contain both service and performance conditions. The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.
During the first six months of fiscal 2021,year 2022, the Company recognized $0.4$0.5 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
AnEvaluation of Disclosure Controls and Procedures
We performed an evaluation was performed of the effectiveness of the design and operation of our disclosure“disclosure controls and procedures pursuant to Exchange Actprocedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of August 31, 2020.the end of the period covered by this report. 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 designed and were effective pursuant to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act Rule 13a-15(e).is accumulated and communicated to them, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported in accordance with the time periods specified in SEC rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events.
In addition,Changes in Internal Control over Financial Reporting
During the second quarter of the fiscal year covered by this report on Form 10-Q, there have been no changechanges in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended August 31, 2020 that hashave materially affected or isare 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) | ||||||||||||
June 1 - 30, | - | $ | - | - | 514,594 | |||||||||||
July 1 - 31, | - | - | - | 514,594 | ||||||||||||
August 1 - 31, | - | - | - | 514,594 | ||||||||||||
Total | - | $ | - | - | ||||||||||||
(1) | On February 4, 2019 the Board of Directors approved a new stock repurchase plan, replacing the former 2008 stock repurchase plan. The maximum number of shares which can be purchased under the new plan is 800,000. Amounts in the table reflect the remaining number of shares available to be repurchased. This plan has no expiration date. |
Item 3.DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4.MINE SAFETY DISCLOSURES
None.
Item 5.OTHER INFORMATION
Item 5. OTHER INFORMATIONNone.
None.
Item 6.EXHIBITS
| Restated Certificate of Incorporation dated April 26, 1968 and Certificate of Amendment thereto dated June 21, 1968 are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10-K (File No. 0-04957). | |
*3.2 | Certificate of Amendment of Restated Certificate of Incorporation dated August 27, 1977 is incorporated herein by reference to Exhibit 20.1 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957). | |
*3.3 | By-Laws, as amended, are incorporated herein by reference to Exhibit 20.2. to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957). | |
*3.4 | Certificate of Amendment of Restated Certificate of Incorporation dated November 17, 1986 is incorporated herein by reference to Exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-04957). | |
3.5 | ||
3.6 | ||
3.7 | ||
**10.1 | ||
| **10.2 | Third Amendment to the Amended and Restated Loan Agreement, dated August 31, 2021 by and between the Company and MidFirst Bank, Tulsa, OK. | |
**31.1 | ||
**31.2 | ||
**32.1 | ||
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Paper Filed
**Filed Herewith
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: October 13, 2020 By /s/ Randall W. White
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
EDUCATIONAL DEVELOPMENT CORPORATION (Registrant) | ||
Date: October 7, 2021 | By | /s/ Craig M. White �� |
President and Chief Executive Officer (Principal Executive Officer) | ||