Educational Development (EDUC) 10-K/A 2019 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)

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

For the fiscal year ended February 28, 2019

OR

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

For the transition period from               to             .

Commission file number: 000-04957

EDUCATIONAL DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	73-0750007
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5402 South 122nd East Avenue, Tulsa, Oklahoma	74146
(Address of principal executive 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)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐          No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐          No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒          No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 Yes ☒          No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

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 ☒

The aggregate market value of the outstanding shares of common stock held by non-affiliates of the registrant at the price at which the common stock was last sold on August 31, 2018 on the NASDAQ Stock Market, LLC was $73,291,100.

As of May 22, 2019, 8,175,836 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

PART II
Item 8.	Financial Statements and Supplementary Data	5
PART IV
Item 15.	Exhibits and Financial Statement Schedules	5

EXPLANATORY NOTE

This Amendment No. 1 to the Annual Report on Form 10-K of Educational Development Corporation (the “Company”) amends the Company’s Annual Report on Form 10-K for the year ended February 28, 2019, which was filed with the Securities and Exchange Commission on May 29, 2019 (the “Original Report”).  The sole purpose of this Amendment No. 1 is to amend and restate the Report of Independent Registered Public Accounting Firm (the “Auditor’s Report”) included in the Original Report to correct typographical errors in reference to the two-year period covered by the Auditor’s Report.  This Amendment No. 1 does not in any way change the conclusions expressed by HoganTaylor LLP in the Original Report, or any other disclosure included in Part II, Item 8 or Part IV, Item 15 of the Original Report.

In accordance with applicable Securities and Exchange Commission rules and as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Item 15 of this Amendment No. 1 reflects a new consent of HoganTaylor LLP (Exhibit 23.1) and currently dated certifications from the Company’s Chief Executive Officer (Exhibits 31.1 and 32.1) and Chief Financial Officer (Exhibits 31.2 and 32.1).

Except as described above, this Amendment No. 1 does not amend, update or change any other disclosures in the Original Report, including any of the financial information disclosed in Part II, Item 8 or Part IV, Item 15 of the Original Report, and does not purport to reflect any information or events subsequent to the filing thereof.

This Amendment No. 1 speaks as of the original filing date of the Original Report, and the Company has not undertaken herein to amend, supplement or update any information contained in the Original Report to give effect to any subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Report.

PART II

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 begins at page 7.

PART IV

Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  The following documents are filed as part of this report:

1.  Financial Statements          

	Page
Report of Independent Registered Public Accounting Firm	7
Balance Sheets as of February 28, 2019 and 2018	8
Statements of Earnings for the Years ended February 28, 2019 and 2018	9
Statements of Shareholders' Equity for the Years ended February 28, 2019 and 2018	10
Statements of Cash Flows for the Years ended February 28, 2019 and 2018	11
Notes to Financial Statements	12-25

Schedules have been omitted as such information is either not required or is included in the financial statements.

2.  Exhibits

*23.1	Consent of Independent Registered Public Accounting Firm.
*31.1	Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2	Certification of the Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1	Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed Herewith

5

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EDUCATIONAL DEVELOPMENT CORPORATION

Date:	June 12, 2019	By	/s/ Dan E. O’Keefe
			Dan E. O’Keefe
			Chief Financial Officer and Corporate Secretary
			(Principal Financial and Accounting Officer)

6

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Educational Development Corporation

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Educational Development Corporation (the Company) as of February 28, 2019 and 2018, and the related statements of earnings, shareholders' equity and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ HOGANTAYLOR LLP

We have served as the Company's auditor since 2005.

Tulsa, Oklahoma

May 29, 2019

7

EDUCATIONAL DEVELOPMENT CORPORATION

BALANCE SHEETS

AS OF FEBRUARY 28,

	2019			2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3,199,300		$	2,723,300
Accounts receivable, less allowance for doubtful accounts of $268,600 (2019) and $297,100 (2018)		3,258,800			2,913,700
Inventories - Net		33,445,600			26,618,600
Prepaid expenses and other assets		1,603,500			1,259,000
Total current assets		41,507,200			33,514,600
INVENTORIES - Net		575,000			435,900
PROPERTY, PLANT AND EQUIPMENT - Net		27,164,600			27,860,500
OTHER ASSETS		19,500			26,900
TOTAL ASSETS	$	69,266,300		$	61,837,900
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	14,228,600		$	12,469,000
Deferred revenues		965,600			693,000
Current maturities of long-term debt		945,900			881,200
Accrued salaries and commissions		2,039,000			2,007,900
Income taxes payable		756,400			1,798,800
Dividends payable		410,100			-
Other current liabilities		4,177,900			3,517,900
Total current liabilities		23,523,500			21,367,800
LONG-TERM DEBT - Net of current maturities		18,830,700			19,825,100
DEFERRED INCOME TAXES - Net		872,600			136,900
OTHER LONG-TERM LIABILITIES		109,000			106,000
Total liabilities		43,335,800			41,435,800
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,092,080 shares; Outstanding 8,195,082 (2019) and 8,179,612 (2018) shares		2,418,400			2,418,400
Capital in excess of par value		8,975,100			8,573,300
Retained earnings		25,754,900			20,714,500
		37,148,400			31,706,200
Less treasury stock, at cost		(11,217,900	)		(11,304,100	)
Total shareholders' equity		25,930,500			20,402,100
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	69,266,300		$	61,837,900

See notes to financial statements.

8

EDUCATIONAL DEVELOPMENT CORPORATION

STATEMENTS OF EARNINGS

FOR THE YEARS ENDED FEBRUARY 28,

	2019			2018
GROSS SALES	$	157,870,100		$	139,040,400
Less discounts and allowances		(49,754,000	)		(38,103,500	)
Transportation revenue		10,695,200			11,047,700
NET REVENUES		118,811,300			111,984,600
COST OF GOODS SOLD		39,063,600			35,824,300
Gross margin		79,747,700			76,160,300
OPERATING EXPENSES:
Operating and selling		18,550,600			17,694,700
Sales commissions		36,480,400			35,359,000
General and administrative		16,164,300			15,736,300
Total operating expenses		71,195,300			68,790,000
INTEREST EXPENSE		931,300			1,119,500
OTHER INCOME		(1,559,700	)		(1,581,900	)
EARNINGS BEFORE INCOME TAXES		9,180,800			7,832,700
INCOME TAXES		2,502,400			2,618,000
NET EARNINGS	$	6,678,400		$	5,214,700
BASIC AND DILUTED EARNINGS PER SHARE:
Basic	$	0.82		$	0.64
Diluted	$	0.81		$	0.64
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING:
Basic		8,189,149			8,175,996
Diluted		8,196,628			8,181,322
Dividends declared per share	$	0.20		$	-

See notes to financial statements.

9

EDUCATIONAL DEVELOPMENT CORPORATION

STATEMENTS OF SHAREHOLDERS’ EQUITY

AS OF FEBRUARY 28,

	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, 2017		12,082,080	$	2,416,400	$	8,549,000	$	15,499,800			3,901,932		$	(11,247,800	)	$	15,217,400
Exercise of stock options		10,000		2,000		24,300		-			-			-			26,300
Purchases of treasury stock		-		-		-		-			20,138			(98,400	)		(98,400	)
Sales of treasury stock		-		-		-		-			(9,602	)		42,100			42,100
Net earnings		-		-		-		5,214,700			-			-			5,214,700
BALANCE - February 28, 2018		12,092,080	$	2,418,400	$	8,573,300	$	20,714,500			3,912,468		$	(11,304,100	)	$	20,402,100
Purchases of treasury stock		-		-		-		-			25,171			(256,500	)		(256,500	)
Sales of treasury stock		-		-		-		-			(40,641	)		342,700			342,700
Dividends paid ($0.15/share)		-		-		-		(1,227,900	)		-			-			(1,227,900	)
Dividends declared ($0.05/share)		-		-		-		(410,100	)		-			-			(410,100	)
Share-based compensation expense (see Note 9 to the financial statements)		-		-		401,800		-			-			-			401,800
Net earnings		-		-		-		6,678,400			-			-			6,678,400
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

See notes to financial statements.

10

EDUCATIONAL DEVELOPMENT CORPORATION

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED FEBRUARY 28,

	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	6,678,400		$	5,214,700
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		1,455,800			1,251,000
Deferred income taxes, net		735,700			264,900
Provision for doubtful accounts		74,100			510,900
Provision for inventory valuation allowance		140,700			311,800
Share-based compensation expense		401,800			-
Changes in assets and liabilities:
Accounts receivable		(419,100	)		(407,700	)
Inventories, net		(7,106,800	)		7,079,000
Prepaid expenses and other assets		(337,100	)		(412,300	)
Accounts payable		2,399,100			(5,096,300	)
Accrued salaries and commissions, and other liabilities		694,000			177,400
Deferred revenues		272,600			59,900
Income taxes payable		(1,042,400	)		279,400
Total adjustments		(2,731,600	)		4,018,000
Net cash provided by operating activities		3,946,800			9,232,700
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(1,399,400	)		(1,437,700	)
Net cash used in investing activities		(1,399,400	)		(1,437,700	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt		(929,700	)		(1,877,000	)
Proceeds from long-term debt		-			1,019,000
Cash received from sale of treasury stock		342,700			42,100
Cash used to purchase treasury stock		(256,500	)		(98,400	)
Cash proceeds from issuance of stock options		-			26,300
Net payments on line of credit		-			(4,882,900	)
Dividends paid		(1,227,900	)		-
Net cash used in financing activities		(2,071,400	)		(5,770,900	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		476,000			2,024,100
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		2,723,300			699,200
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	3,199,300		$	2,723,300
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest	$	926,900		$	1,116,500
Cash paid for income taxes	$	2,874,300		$	2,073,600
NON-CASH TRANSACTIONS:
Accrued capital expenditures	$	-		$	639,500

See notes to financial statements.

11

EDUCATIONAL DEVELOPMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED FEBRUARY 28, 2019 AND 2018

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business—Educational Development Corporation (“we,” “our,” “us,” or “the Company”) distributes books and publications through our Usborne Books & More (“UBAM”) and EDC Publishing (“Publishing”) divisions to individual consumers, book, toy and gift stores, libraries and home educators located throughout the United States (“U.S.”).  We are the exclusive U.S. trade co-publisher of books and related items, published by Usborne Publishing Limited (“Usborne”), an England-based publishing company, our largest supplier.  We also publish books and related items through our ownership of Kane Miller Book Publisher (“Kane Miller”).

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

Estimates—Our financial statements were prepared in conformity with generally accepted accounting principles in the United States of America, which requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements.  Actual results could differ from these estimates.

Reclassifications—Certain reclassifications have been made to the fiscal 2018 balance sheet, statement of earnings, statement of cash flows and footnotes to conform to the classifications used in fiscal 2019.  These reclassifications had no effect on net earnings.

Business Concentration—A significant portion of our inventory purchases are concentrated with Usborne.  Purchases from them were approximately $29.8 million and $15.1 million for the years ended February 28, 2019 and 2018, respectively.  Total inventory purchases for those same periods were approximately $42.8 million and $24.5 million, respectively.  As of February 28, 2019, our outstanding accounts payable due to Usborne was $5.6 million.

A significant portion of our UBAM division sales are facilitated through the use of social media collaboration platforms that allow our consultants to interact in real-time, or near real-time, with customers.  Consultants use these platforms to invite potential customers to “online parties,”  provide book recommendations, answer questions and provide links to other supporting online materials. When a customer is ready to purchase books from the online party, they are redirected from the social media platform to the consultant’s e-commerce site where the order can be placed.   

Cash and Cash Equivalents—Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000. We have never experienced any losses related to these balances.  The majority of payments due from banks for third party credit card transactions process within two business days.  These amounts due are classified as cash and cash equivalents.  Cash and cash equivalents also include demand and time deposits, money market funds and other marketable securities with maturities of three months or less when acquired.

Accounts Receivable—Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within thirty days from the invoice date.  Extended payment terms are offered at certain times of the year for orders that meet minimum quantities or amounts.  Accounts receivable are stated at the amount management expects to collect from outstanding balances.  Delinquency fees are not assessed.  Payments of accounts receivable are allocated to the specific invoices identified on the customers’ remittance advice.  Accounts receivable are carried at original invoice amount less an estimated reserve made for returns and discounts based on quarterly review of historical rates of returns and expected discounts to be taken.  The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected.

Management periodically reviews accounts receivable balances and, based on an assessment of historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends, estimates the portion of the balance that will not be collected.  Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation account based on its assessment of the current status of the individual accounts. Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.  Recoveries of accounts receivable previously written off are recorded as income when received.

12

Management has estimated an allowance for doubtful accounts of $268,600 and $297,100 as of February 28, 2019 and 2018, respectively. Included within this allowance is $93,900 of reserve for vendor discounts to sell remaining inventory as of February 28, 2019 and 2018.

Inventories—Inventories are stated at the lower of cost or net realizable value.  Cost is determined using the average costing method.  We present a portion of our inventory as a noncurrent asset.  Occasionally we purchase book inventory in quantities in excess of what will be sold within the normal operating cycle due to the minimum order requirements of our primary supplier.  These excess quantities are included in noncurrent inventory.  We estimate noncurrent inventory using the current year turnover ratio by title.  All inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory.

Consultants that meet certain eligibility requirements may request and receive inventory on consignment.  Consignment inventory is stated at the lower of cost or net realizable value, 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, excluding the estimated reserve, with consultants was $1,545,000 and $1,549,300 at February 28, 2019 and 2018, respectively.  The Company has reserved for consignment inventory not expected to be sold or returned of $48,600 and $460,000 as of February 28, 2019 and 2018, respectively.  

Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and consultant consignment inventory that is not expected to be sold or returned.  Management estimates the allowance for both current and noncurrent inventory.  The allowance is based on management’s identification of slow-moving inventory and estimated consignment inventory that will not be sold or returned.

Property, Plant and Equipment—Property, plant and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives, as follows:

Building	30 years
Building improvements	10 – 15 years
Machinery and equipment	3 – 15 years
Furniture and fixtures	3 years

Capitalized projects that are not placed in service are recorded as in progress and are not depreciated until the related assets are placed in service.

Impairments of Long-Lived Assets—We review the value of long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable based on estimated future cash flows.  Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, historical and future cash flows and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates and can be impacted by other uncertainties. No impairment was noted during fiscal year 2019 or 2018.

Income Taxes—We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax basis of assets and liabilities using the current tax laws and rates. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts that are “more likely than not” to be realized.

Revenue Recognition—Sales are generally 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, which reduce net sales and costs of goods sold, 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 from retail stores. These returns result from damage that occurs in the stores, not in shipping to the stores. It is industry practice to accept non-damaged returns from retail customers. Management has estimated sales returns of approximately $204,000 and $217,000 as of February 28, 2019 and 2018, respectively, which is included in other current liabilities on the Company’s balance sheet. In addition, Management has recorded an asset for the expected value of non-damaged inventories to be returned. The estimated value of returned products of $102,000 and $117,000 is included in other current assets on the Company’s balance sheet as of February 28, 2019 and 2018, respectively.

13

Advertising Costs—Advertising costs are expensed as incurred.  Advertising expenses, included in general and administrative expenses in the statements of earnings, were $629,900 and $546,600 for the years ended February 28, 2019 and 2018, respectively.

Shipping and Handling Costs—We classify shipping and handling costs as operating and selling expenses in the statements of earnings.  Shipping and handling costs were $17,263,000 and $15,990,800 for the years ended February 28, 2019 and 2018, respectively.

Interest Expense—Interest related to our outstanding debt is recognized as incurred.  Interest expense, classified separately in the statements of earnings, were $931,300 and $1,119,500 for the years ended February 28, 2019 and 2018, respectively.

Earnings per Share—Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period.  Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options.  In computing Diluted EPS, we have utilized the treasury stock method.

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

	Year Ended February 28,
	2019		2018
Earnings per share:
Net earnings applicable to common shareholders	$	6,678,400	$	5,214,700
Shares:
Weighted average shares outstanding-basic		8,189,149		8,175,996
Assumed exercise of options		7,479		5,326
Weighted average shares outstanding-diluted		8,196,628		8,181,322
Diluted earnings per share:
Basic	$	0.82	$	0.64
Diluted	$	0.81	$	0.64

Stock-Based Compensation—We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant.  For awards subject to service conditions, compensation expense is recognized over the vesting period on a straight-line basis.  Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche.  Forfeitures are recognized when they occur.

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 pronouncements and concluded that the following recently issued accounting standard updates (“ASU”) apply to us.

In May 2014, FASB issued ASU No. 2014-09, and amended with ASU No. 2015-14 “Revenue from Contracts with Customers,” (“Topic 606”) which provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and will also result in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The amendments in this series of updates shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company adopted Topic 606, Revenue from Contracts with Customers, with a date of initial application of March 1, 2018, using the full retrospective method applied to all contracts. Results for all reporting periods are presented under Topic 606. As a result of adopting this new accounting guidance, the Company has changed the method of accounting for its hostess awards program from reporting the net cost of these awards in operating and selling expenses to allocating a portion of the transaction price to the material right and reporting these in gross sales and discounts with the associated costs in cost of goods sold. The new reporting of these awards increases gross sales and increases discounts and allowances for a similar amount, having an immaterial effect on net revenues and no effect on net earnings or retained earnings, but lowering the Company’s gross margin percentage. The Company has also removed the allowance for sales returns from the net accounts receivable amount reported on the balance sheet. The allowance for sales returns has been adjusted to reflect a refund liability and a return asset. The cumulative impact of adoption of the new revenue recognition standard had no impact on our financial position, results of operations and cash flows (See Note 11 to the financial statements).

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In February 2016, FASB issued ASU No. 2016-02, “Leases,” which is intended to establish a comprehensive new lease accounting model. The new standard clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset. The new standard is effective for interim and annual periods beginning after December 15, 2018, which means the first quarter of our fiscal year 2020. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. We have reviewed the ASU and evaluated the potential impact on our financial statements. As the accounting applied by a lessor is largely unchanged from that applied under the current standard, the Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations and cash flows.

In June 2016, FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses,” which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.   The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means the first quarter of our fiscal year 2021.  We expect the implementation of this ASU will not have a significant impact on our financial position, results of operations and cash flows.

In August 2016, FASB issued ASU No. 2016-15 “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.” The guidance's objective is to reduce diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flow. The new standards required date of adoption is effective for fiscal years beginning after December 15, 2017. This standard was adopted as of March 1, 2018. Adoption of this new standard did not have a material impact on our financial position, results of operations and cash flows.

In May 2017, FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This update amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. This ASU is effective for annual periods beginning after December 15, 2017. The new standard is required to be applied prospectively. The guidance was effective March 1, 2018, and the adoption of this ASU did not have a material impact on our financial position, results of operations and cash flows.

2.       INVENTORIES

Inventories consist of the following:

	February 28,
	2019			2018
Current:
Book inventory	$	33,494,200		$	27,078,600
Inventory valuation allowance		(48,600	)		(460,000	)
Inventories net - current	$	33,445,600		$	26,618,600
Noncurrent:
Book inventory	$	904,400		$	707,700
Inventory valuation allowance		(329,400	)		(271,800	)
Inventories net - noncurrent	$	575,000		$	435,900

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3.        PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	February 28,
	2019			2018
Land	$	4,107,200		$	4,107,200
Building		20,321,800			20,321,800
Building improvements		1,777,100			1,758,800
Machinery and equipment		7,972,900			7,231,300
Furniture and fixtures		109,000			109,000
		34,288,000			33,528,100
Less accumulated depreciation		(7,123,400	)		(5,667,600	)
	$	27,164,600		$	27,860,500

During fiscal years 2018 and 2019, the Company purchased and installed new warehouse equipment and made software enhancements to increase its daily shipping capacity and reduce warehouse labor.

4.        OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

	February 28,
	2019		2018
Accrued royalties	$	869,200	$	791,800
Accrued UBAM incentives		832,100		633,800
Accrued freight		431,400		357,800
Sales tax payable		547,000		557,600
Allowance for expected inventory returns		204,000		217,000
Other		1,294,200		959,900
Total other current liabilities	$	4,177,900	$	3,517,900

5.        INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The tax effects of significant items comprising our net deferred tax assets and liabilities are as follows:

	February 28,
	2019			2018
Deferred tax assets:
Allowance for doubtful accounts	$	72,500		$	149,600
Inventory overhead capitalization		87,600			69,800
Inventory valuation allowance		13,100			47,200
Inventory valuation allowance – noncurrent		88,900			70,700
Allowance for sales returns		27,500			26,000
Capital loss carryforward		116,200			111,900
Accruals		252,900			141,700
Deferred tax assets		658,700			616,900
Less valuation allowance		(116,200	)		(111,900	)
Total deferred tax assets		542,500			505,000
Deferred tax liabilities:
Property, plant and equipment		(1,415,100	)		(641,900	)
Total deferred tax liabilities		(1,415,100	)		(641,900	)
Net deferred income tax liabilities	$	(872,600	)	$	(136,900	)

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On December 22, 2017, President Trump signed into law the Tax Act.  Among its provisions, the Tax Act reduces the statutory U.S. Corporate income tax rate from a maximum rate of 35% to 21% effective January 1, 2018. The Tax Act also provides for accelerated deductions of certain capital expenditures made after September 27, 2017 through bonus depreciation.  Upon the enactment of the Tax Act in fiscal 2018, we recorded a reduction in our deferred income tax liabilities of $43,200 for the effect of the aforementioned change in the U.S. statutory income tax rate.  The application of the Tax Act may change due to regulations subsequently issued by the U.S. Treasury Department.

Management has assessed the evidence to estimate whether sufficient future capital gains will be generated to utilize the existing capital loss carryforward. As no current expectation of capital gains exists, management has determined that a valuation allowance is necessary to reduce the carrying value of the capital loss carryforward deferred tax asset as it is “more likely than not” that such assets are unrealizable.

The amount of the deferred tax asset considered realizable, however, could be adjusted if future capital gains are generated during the carryforward period which ended February 28, 2019.  Management has determined that no valuation allowance is necessary to reduce the carrying value of other deferred tax assets as it is “more likely than not” that such assets are realizable.

The components of income tax expense are as follows:

	February 28,
	2019		2018
Current:
Federal	$	1,253,600	$	1,964,700
State		513,100		388,400
		1,766,700		2,353,100
Deferred:
Federal		674,500		239,800
State		61,200		25,100
		735,700		264,900
Total income tax expense	$	2,502,400	$	2,618,000

The following reconciles our expected income tax rate to the U.S. federal statutory income tax rate:

	February 28,
	2019			2018
U.S. federal statutory income tax rate		21.0	%		31.8	%
U.S. state and local income taxes–net of federal benefit		4.7	%		4.0	%
Other		1.6	%		(2.4	%)
Total income tax expense		27.3	%		33.4	%

Our U.S. federal statutory income tax rate declined from 34.0% to 21.0% as of January 1, 2018.  As our fiscal year ends February 28, our federal effective tax rate for fiscal 2018 was a blended rate of 31.8%.  We file our tax returns in the U.S. and certain state jurisdictions in which we have nexus. We are no longer subject to income tax examinations by tax authorities for fiscal years before 2017.

Based upon a review of our income tax filing positions, we believe that our positions would be sustained upon an audit and do not anticipate any adjustments that would result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded. We classify interest and penalties associated with income taxes as a component of income tax expense on the statements of earnings.

6.        EMPLOYEE BENEFIT PLAN

We have a profit-sharing plan that incorporates the provisions of Section 401(k) of the Internal Revenue Code.  The 401(k) plan covers substantially all employees meeting specific age and length of service requirements.  Matching contributions are discretionary and amounted to $133,300 and $89,400 during the fiscal years ended February 28, 2019 and 2018, respectively.  The 401(k) plan includes an option for employees to invest in our stock, which is purchased from our treasury stock shares.  Shares purchased for the 401(k) plan from treasury stock amounted to 40,641 net shares and 9,602 net shares during the fiscal years ended February 28, 2019 and 2018, respectively.

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7.        COMMITMENTS

In connection with the purchase our 400,000 square-foot facility on 40-acres, in 2015, we entered into a 15-year lease with the seller, a non-related third party, who leases 181,300 square feet, or 45.3% of the facility.  The lease is being accounted for as an operating lease.

The cost of the leased space upon acquisition, and as of February 28, 2019, was estimated at $10,159,000.  The accumulated depreciation associated with the leased assets was $1,139,700 and $789,100 for the fiscal years ended February 28, 2019 and 2018, respectively.  Both the leased assets and accumulated depreciation are included in property, plant and equipment-net in the balance sheets.

The lessee pays $112,200 per month, through the lease anniversary date of December 2019, with a 2.0% annual increase adjustment on each anniversary date thereafter.  The lease terms allow for one five-year extension, which is not a bargain renewal option, at the expiration of the 15-year term.  Revenues associated with the lease are being recorded on a straight-line basis over the initial lease term and are reported in other income on the statements of earnings.

The following table reflects future minimum rental income payments under the non-cancellable portion of this lease as of February 28, 2019:

Year Ending February 28 (29),
2020	$	1,351,300
2021		1,378,300
2022		1,405,900
2023		1,434,000
2024		1,462,700
Thereafter		10,806,600
Total	$	17,838,800

At February 28, 2019, we had outstanding purchase commitments for inventory totaling $13,324,800, which is due during fiscal year 2020.  Of these commitments, $8,825,600 were with Usborne, $4,489,400 with various Kane Miller publishers and the remaining $9,800 with other suppliers.

Rent expense for the year ended February 28, 2019 and 2018, was $18,800 and $17,200, respectively.  The current lease on the property extends through 2021.

8.        DEBT

Debt consists of the following:

	February 28,
	2019			2018
Line of credit	$	-		$	-
Long-term debt	$	19,776,600		$	20,706,300
Less current maturities		(945,900	)		(881,200	)
Long-term debt, net of current maturities	$	18,830,700		$	19,825,100

We have a Loan Agreement dated as of March 10, 2016 (as amended the “Loan Agreement”) with MidFirst Bank (“the Bank”) which includes multiple loans.  Term Loan #1 is comprised of Tranche A totaling $13.4 million and Tranche B totaling $5.0 million, both with the maturity date of December 1, 2025.  Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. Tranche B interest is payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.99% at February 28, 2019).  Term Loan #1 is secured by the primary office, warehouse and land.  The outstanding borrowings on Tranche A were $11,984,100 and $12,453,300 at February 28, 2019 and 2018, respectively.  The outstanding borrowings on Tranche B were $4,479,700 and $4,657,700 at February 28, 2019 and 2018, respectively.

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We also have Term Loan #2 with the Bank in the amount of $4.0 million with the maturity date of June 28, 2021, and interest payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.99% at February 28, 2019).   Term Loan #2 is secured by our secondary warehouse and land. The Loan Agreement also provided a $15.0 million revolving loan (“line of credit”) through August 15, 2019 with interest payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.99% at February 28, 2019).  The outstanding borrowings on Term Loan #2 were $3,312,800 and $3,595,100 at February 28, 2019 and 2018, respectively.  We had no borrowings outstanding on line of credit at February 28, 2019 and 2018.  Available credit under the revolving credit agreement was $12,439,300 at February 28, 2019 and $9,424,000 at February 28, 2018.

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

Pricing Tier	Adjusted Funded Debt to EBITDA Ratio	LIBOR Margin (bps)
I	>2.00	325.00
II	>1.50 but <2.00	300.00
III	>1.00 but <1.50	275.00
IV	<1.00	250.00

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

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

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

The Loan Agreement contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue or obtain issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than August 15, 2019, and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time. We had no letters of credit outstanding for the year ended February 28, 2019.

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

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

Year ending February 28 (29),
2020	$	945,900
2021		988,600
2022		1,038,100
2023		1,087,600
2024		1,139,500
Thereafter		14,576,900
	$	19,776,600

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9.        STOCK-BASED COMPENSATION

The Board of Directors adopted the 2002 Incentive Stock Option Plan (the “2002 Plan”) in June of 2002.  The 2002 Plan also authorized us to grant up to 2,000,000 stock options. Options granted under the 2002 Plan vest at date of grant and are exercisable up to ten years from the date of grant.  The exercise price on options granted is equal to the market price at the date of grant.  Options outstanding at February 28, 2019 expire in December 2019.

A summary of the status of our 2002 Plan as of February 28, 2019 and 2018, and changes during the years then ended is presented below:

	February 28,
	2019				2018
			Weighted				Weighted
			Average				Average
			Exercise				Exercise
	Shares		Price		Shares		Price
Outstanding at beginning of year		10,000	$	2.63		20,000	$	2.63
Exercised		-		-		10,000		2.63
Expired		-		-		-		-
Outstanding at end of year		10,000	$	2.63		10,000	$	2.63

At February 28, 2019, all options outstanding are exercisable with an aggregate intrinsic value of $54,300 and weighted-average remaining contractual terms of options outstanding of 0.8 years.

In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan establishes up to 600,000 shares of restricted stock which can be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 and 2021.  The first award of 200,000 shares of restricted stock will be made for exceeding the initial annual net revenues target of $100,000,000.  The second award of an additional 200,000 shares of restricted stock will begin to be awarded for exceeding annual net revenues of $112,500,000 up to the full award of shares for reaching the second targeted annual net revenues of $130,000,000.  The third award of 200,000 shares of restricted stock will begin to be awarded for exceeding annual net revenues of $146,250,000 up to the full award of shares for reaching the third targeted annual net revenues of $160,000,000.  Should the Company’s annual net revenues exceed $160,000,000 in any of the three years under the plan, the 2019 LTI Plan calls for the full award of the 600,000 shares of restricted stock to be issued.  Awards of restricted stock will be made based on interpolation for years that net revenues exceed an established net revenues target but do not fully reach the next net revenues target.  Net revenues under the 2019 LTI Plan is defined as gross sales, less discounts plus transportation revenue, similarly as presented on the Company’s Statement of Earnings.  Awards of shares will be delayed if the Company does not achieve a minimum pre-tax profit of 3.0% in any fiscal year.  Delayed awards will be made to participants upon the Company achieving the minimum profitability during the next completed fiscal year. Restricted shares granted under the 2019 LTI Plan “cliff vest” after five years of continued employment. 

The restricted share awards granted under the 2019 LTI Plan contain both service and performance conditions. The Company recognizes share compensation expense only for the portion of the restricted share awards that are considered probable of vesting.  Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employee have been established.  The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.  

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

20

During fiscal year 2019, the Company granted approximately 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share.  During fiscal year 2019, the Company recognized $401,800 of compensation expense associated with the shares granted. The remaining compensation expense for these awards, totaling approximately $2,660,500, will be recognized ratably over the remaining vesting period of approximately 48 months. 

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

	Year Ended February 28,
	2019		2018
Share-based compensation expense	$	401,800	$	-

10.        STOCK REPURCHASE PLAN

In April 2008, the Board of Directors authorized us to repurchase up to an additional 1,000,000 shares of our common stock under the plan initiated in 1998 (“amended 2008 plan”).  On February 4, 2019, the Board of Directors replaced the amended 2008 plan with a new plan which authorized us to repurchase up to 800,000 of outstanding common stock in the open market or in privately negotiated transactions, and to utilize any derivative or similar instrument to effect share repurchase transactions (including without limitation, accelerated share repurchase contracts, equity forward transactions, equity swap transactions, floor transactions or other similar transactions or any combination of the foregoing transactions). The Company received approval for the new plan from its primary lender, which removed certain restrictions on share repurchases outlined in the fourth amendment and added other restrictions outlined in the ninth amendment to the Company’s Loan Agreement (see Note 8 to the financial statements).  

During fiscal year 2019, and prior to February 4, 2019, we purchased 16,805 shares at an average price of $11.31 per share totaling approximately $190,100 under the amended 2008 stock repurchase plan. Between February 4 and February 28, 2019, we purchased 8,366 shares at an average price of $7.93 per share totaling approximately $66,400 under the new 2019 stock repurchase plan.

11.        REVENUE RECOGNITION

Revenue is derived from the sales of children’s books and related products which are generally capable of being distinct and accounted for as a single performance obligation to deliver tangible goods. Substantially all of our books are sold to end consumers and publishing retail outlets. Revenues are recognized at shipping point, which is the point in time the customer obtains control of the products and risk of loss and rewards of ownership have been transferred. Shipping and handling fees are recorded as operating and selling expenses when the product is shipped and revenue is recognized. The Company estimates product returns based on historical return rates. The majority of the Company's contracts have a single performance obligation and are short term in nature. Sales taxes, that are collected from customers and remitted to governmental authorities, are accounted for on a net basis and therefore are excluded from net sales. 

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On March 1, 2018, the Company adopted Topic 606, as prescribed by the FASB, using the full retrospective method. Results for all reporting periods are presented under Topic 606.

There was no change to net earnings or retained earnings due to the adoption of Topic 606, with the impact primarily related to the recording of our hostess awards program in gross sales and discounts and allowances, as opposed to recording the net costs in operating and selling expenses. 

Disaggregation of Revenue

Refer to Note 13 – Business Segments for revenue by segment. 

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Arrangements with Multiple Performance Obligations

Certain contracts associated with the hostess awards program include sales incentives, such as discounted or free products. These incentives provide a separate performance obligation in the contract and material right to the customer. The transaction price is allocated to the material right based on its relative standalone selling price and is recognized in revenue as the performance obligations are satisfied, which occurs at shipping point or at the expiration of the material right. As our sales incentives are delivered with the associated products ordered, there is no deferral required. Revenue allocated to the material right are recognized in gross sales, discounts and allowances and cost of goods sold in our statement of earnings.

Practical Expedients and Exemptions

The Company generally expenses sales commissions when incurred. These costs are recorded within operating expenses. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Impact on Financial Statements

As a result of applying Topic 606, the impact to the Company’s balance sheet as of February 28, 2018 was as follows: 

						Without
	As Reported		Adjustments			Adoption
ASSETS
Accounts receivable-Net	$	2,913,700	$	(99,900	)	$	2,813,800
Inventories-Net		26,618,600		(100	)		26,618,500
Prepaid expenses and other assets		1,259,000		(117,000	)		1,142,000
Total current assets		33,514,600		(217,000	)		33,297,600
TOTAL ASSETS		61,837,900		(217,000	)		61,620,900
LIABILITIES
Other current liabilities		3,517,900		(217,000	)		3,300,900
Total liabilities		41,435,800		(217,000	)		41,218,800

As a result of applying Topic 606, the impact to the Company’s statement of earnings for the year ended February 28, 2018 was as follows:

							Without
	As Reported			Adjustments			Adoption
GROSS SALES	$	139,040,400		$	(13,193,200	)	$	125,847,200
Less discounts and allowances		(38,103,500	)		13,174,700			(24,928,800	)
Transportation revenue		11,047,700			-			11,047,700
NET REVENUES		111,984,600			(18,500	)		111,966,100
COST OF GOODS SOLD		35,824,300			(4,893,000	)		30,931,300
Gross margin		76,160,300			4,874,500			81,034,800
OPERATING EXPENSE:
Operating and selling		17,694,700			4,876,500			22,571,200
Sales commissions		35,359,000			-			35,359,000
General and administrative		15,736,300			-			15,736,300
Total operating expenses		68,790,000			4,876,500			73,666,500
INTEREST EXPENSE		1,119,500			-			1,119,500
OTHER INCOME		(1,581,900	)		(2,000	)		(1,583,900	)
EARNINGS BEFORE INCOME TAXES		7,832,700			-			7,832,700
INCOME TAXES		2,618,000			-			2,618,000
NET EARNINGS	$	5,214,700		$	-		$	5,214,700

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As a result of applying Topic 606, the impact to the Company’s operating results by reporting segment for the year ended February 28, 2018 was as follows:

UBAM

							Without
	As Reported			Adjustments			Adoption
GROSS SALES	$	121,364,700		$	(13,193,900	)	$	108,170,800
Less discounts and allowances		(28,657,900	)		13,175,400			(15,482,500	)
Transportation revenue		11,010,300			-			11,010,300
NET REVENUES		103,717,100			(18,500	)		103,698,600
COST OF GOODS SOLD		31,132,800			(4,893,000	)		26,239,800
Gross margin		72,584,300			4,874,500			77,458,800
OPERATING EXPENSE:
Operating and selling		14,509,500			4,875,500			19,385,000
Sales commissions		35,043,200			-			35,043,200
General and administrative		3,602,000			-			3,602,000
Total operating expenses		53,154,700			4,875,500			58,030,200
OPERATING INCOME	$	19,429,600		$	(1,000	)	$	19,428,600

Publishing

							Without
	As Reported			Adjustments			Adoption
GROSS SALES	$	17,675,700		$	700		$	17,676,400
Less discounts and allowances		(9,445,600	)		(700	)		(9,446,300	)
Transportation revenue		37,400			-			37,400
NET REVENUES		8,267,500			-			8,267,500
COST OF GOODS SOLD		4,691,500			-			4,691,500
Gross margin		3,576,000			-			3,576,000
OPERATING EXPENSE:
Operating and selling		987,500			-			987,500
Sales commissions		315,700			-			315,700
General and administrative		509,600			-			509,600
Total operating expenses		1,812,800			-			1,812,800
OPERATING INCOME	$	1,763,200		$	-		$	1,763,200

12.        QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly results of operations for the years ended February 28, 2019 and 2018.

	Net Revenues		Gross Margin		Net Earnings		Basic Earnings Per Share		Diluted Earnings Per Share
2019
First quarter	$	30,022,300	$	20,352,600	$	1,816,600	$	0.22	$	0.22
Second quarter		24,681,000		16,218,300		1,490,700		0.18		0.18
Third quarter		40,482,600		27,341,000		2,815,600		0.34		0.34
Fourth quarter		23,625,400		15,835,800		555,500		0.08		0.07
Total year	$	118,811,300	$	79,747,700	$	6,678,400	$	0.82	$	0.81
2018
First quarter	$	26,941,200	$	18,342,400	$	1,225,300	$	0.15	$	0.15
Second quarter		24,186,900		16,536,600		1,036,900		0.13		0.13
Third quarter		38,909,900		26,698,200		2,128,400		0.26		0.26
Fourth quarter		21,946,600		14,583,100		824,100		0.10		0.10
Total year	$	111,984,600	$	76,160,300	$	5,214,700	$	0.64	$	0.64

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13.        BUSINESS SEGMENTS

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

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

Information by industry segment for the years ended February 28, 2019 and 2018 is set forth below:

NET REVENUES

	2019		2018
Publishing	$	10,430,000	$	8,267,500
UBAM		108,381,300		103,717,100
Total	$	118,811,300	$	111,984,600

EARNINGS (LOSS) BEFORE INCOME TAXES

	2019			2018
Publishing	$	2,885,800		$	1,763,200
UBAM		19,250,100			19,429,600
Other		(12,955,100	)		(13,360,100	)
Total	$	9,180,800		$	7,832,700

14.        FAIR VALUE MEASUREMENTS

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

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

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

Level 3 - Unobservable inputs for the asset or liability.

We do not report any assets or liabilities at fair value in the financial statements. However, the estimated fair value of our line of credit is estimated by management to approximate the carrying value of $0 at February 28, 2019 and 2018.  The estimated fair value of our term notes payable is estimated by management to approximate $19,123,700 and $19,454,500 at February 28, 2019 and 2018, 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.

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15.        DEFERRED REVENUES

The Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to our fiscal year end that were not shipped as of February 28, 2019 are recorded as deferred revenues on the balance sheet. We received approximately $965,600 and $693,000 at February 28, 2019 and 2018, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the year end. Orders that were included in deferred revenues predominantly shipped within the first few days of the next fiscal year.

16.     SUBSEQUENT EVENTS

On May 21, 2019, the Board of Directors of EDC approved a $0.05 dividend that will be paid to shareholders of record on Tuesday, June 4, 2019. 

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