UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2017
OR
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 Ave, 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) |
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 January 12, 2018,October 8, 2019, there were 4,088,9348,467,379 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.
Page | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. | 3 | |
Item 2. | 15 | |
Item 3. | 22 | |
Item 4. | 22 | |
PART II. OTHER INFORMATION | ||
Item 1. | 23 | |
Item 1A. | 23 | |
Item 2. | 23 | |
Item 3. | 23 | |
Item 4. | 23 | |
Item 5. | 23 | |
Item 6. | 23 | |
24 |
CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS
The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended February 28, 20172019 and in this Quarterly Report.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
EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||
CONDENSED BALANCE SHEETS (UNAUDITED) | ||||||||
ASSETS | November 30, 2017 | February 28, 2017 | ||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 6,141,300 | $ | 699,200 | ||||
Accounts receivable, less allowance for doubtful accounts and sales returns of $637,000 (November 30) and $675,000 (February 28) | 3,834,700 | 2,917,000 | ||||||
Inventories—Net | 24,455,900 | 34,253,100 | ||||||
Prepaid expenses and other assets | 999,900 | 695,200 | ||||||
Total current assets | 35,431,800 | 38,564,500 | ||||||
NONCURRENT INVENTORIES —Net | 196,300 | 192,100 | ||||||
PROPERTY, PLANT AND EQUIPMENT—Net | 27,453,100 | 27,034,300 | ||||||
OTHER ASSETS | 61,400 | 61,400 | ||||||
DEFERRED INCOME TAXES | - | 128,000 | ||||||
TOTAL ASSETS | $ | 63,142,600 | $ | 65,980,300 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 10,263,600 | $ | 17,565,300 | ||||
Line of credit | - | 4,882,900 | ||||||
Deferred revenue | 661,700 | 633,100 | ||||||
Current maturities of long-term debt | 1,239,500 | 898,500 | ||||||
Accrued salaries and commissions | 4,144,900 | 1,379,700 | ||||||
Income taxes payable | 1,989,000 | 1,519,400 | ||||||
Other current liabilities | 4,432,200 | 3,218,200 | ||||||
Total current liabilities | 22,730,900 | 30,097,100 | ||||||
LONG-TERM DEBT-Net of current maturities | 20,686,000 | 20,665,800 | ||||||
DEFERRED INCOME TAXES | 51,400 | - | ||||||
OTHER LONG-TERM LIABILITIES | 106,000 | - | ||||||
Total liabilities | 43,574,300 | 50,762,900 | ||||||
COMMITMENTS (Note 8) | ||||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Common stock, $0.20 par value; Authorized 8,000,000 shares; Issued 6,046,040 (November 30) and 6,041,040 (February 28) shares; | 1,209,200 | 1,208,200 | ||||||
Capital in excess of par value | 8,573,300 | 8,548,000 | ||||||
Retained earnings | 20,708,400 | 16,317,800 | ||||||
30,490,900 | 26,074,000 | |||||||
Less treasury stock, at cost | (10,922,600 | ) | (10,856,600 | ) | ||||
Total shareholders' equity | 19,568,300 | 15,217,400 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 63,142,600 | $ | 65,980,300 |
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED BALANCE SHEETS (UNAUDITED) |
August 31, | February 28, | |||||||
ASSETS | 2019 | 2019 | ||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 966,800 | $ | 3,199,300 | ||||
Accounts receivable, less allowance for doubtful accounts of $311,700 (August 31) and $268,600 (February 28) | 3,498,700 | 3,258,800 | ||||||
Inventories - Net | 35,619,700 | 33,445,600 | ||||||
Prepaid expenses and other assets | 1,008,400 | 1,603,500 | ||||||
Total current assets | 41,093,600 | 41,507,200 | ||||||
INVENTORIES - Net | 658,600 | 575,000 | ||||||
PROPERTY, PLANT AND EQUIPMENT - Net | 26,714,500 | 27,164,600 | ||||||
OTHER ASSETS | 70,000 | 19,500 | ||||||
TOTAL ASSETS | $ | 68,536,700 | $ | 69,266,300 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 13,180,700 | $ | 14,228,600 | ||||
Line of credit | 1,056,100 | - | ||||||
Deferred revenues | 751,900 | 965,600 | ||||||
Current maturities of long-term debt | 927,200 | 945,900 | ||||||
Accrued salaries and commissions | 1,751,500 | 2,039,000 | ||||||
Income taxes payable | 1,070,400 | 756,400 | ||||||
Dividends payable | 422,300 | 410,100 | ||||||
Other current liabilities | 2,538,600 | 4,177,900 | ||||||
Total current liabilities | 21,698,700 | 23,523,500 | ||||||
LONG-TERM DEBT - Net of current maturities | 18,377,300 | 18,830,700 | ||||||
DEFERRED INCOME TAXES - Net | 1,000,200 | 872,600 | ||||||
OTHER LONG-TERM LIABILITIES | 146,100 | 109,000 | ||||||
Total liabilities | 41,222,300 | 43,335,800 | ||||||
SHAREHOLDERS' EQUITY | ||||||||
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,400,080 (August 31) and 12,092,080 (February 28) shares; Outstanding 8,447,898 (August 31) and 8,195,082 (February 28) shares | 2,480,000 | 2,418,400 | ||||||
Capital in excess of par value | 9,368,100 | 8,975,100 | ||||||
Retained earnings | 27,294,900 | 25,754,900 | ||||||
39,143,000 | 37,148,400 | |||||||
Less treasury stock, at cost | (11,828,600 | ) | (11,217,900 | ) | ||||
Total shareholders' equity | 27,314,400 | 25,930,500 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 68,536,700 | $ | 69,266,300 |
See notes to condensed financial statements.
EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||||||||||
CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) | ||||||||||||||||
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
GROSS SALES | $ | 41,894,600 | $ | 34,397,300 | $ | 100,989,500 | $ | 91,657,200 | ||||||||
Less discounts and allowances | (6,762,300 | ) | (6,948,000 | ) | (19,929,300 | ) | (20,581,900 | ) | ||||||||
Transportation revenue | 3,775,700 | 3,248,300 | 8,959,900 | 8,299,500 | ||||||||||||
NET REVENUES | 38,908,000 | 30,697,600 | 90,020,100 | 79,374,800 | ||||||||||||
COST OF GOODS SOLD | 10,494,800 | 8,328,100 | 24,579,200 | 22,500,300 | ||||||||||||
Gross margin | 28,413,200 | 22,369,500 | 65,440,900 | 56,874,500 | ||||||||||||
OPERATING EXPENSES: | ||||||||||||||||
Operating and selling | 7,837,300 | 6,520,300 | 17,549,900 | 16,790,900 | ||||||||||||
Sales commissions | 12,510,400 | 9,521,000 | 28,759,300 | 24,802,200 | ||||||||||||
General and administrative | 4,735,200 | 4,525,900 | 12,359,600 | 12,237,600 | ||||||||||||
Total operating expenses | 25,082,900 | 20,567,200 | 58,668,800 | 53,830,700 | ||||||||||||
OTHER INCOME (EXPENSE): | ||||||||||||||||
Interest expense | (287,600 | ) | (265,000 | ) | (863,800 | ) | (730,000 | ) | ||||||||
Other income | 390,100 | 502,800 | 1,189,400 | 1,251,600 | ||||||||||||
Total other income | 102,500 | 237,800 | 325,600 | 521,600 | ||||||||||||
EARNINGS BEFORE INCOME TAXES | 3,432,800 | 2,040,100 | 7,097,700 | 3,565,400 | ||||||||||||
INCOME TAXES | 1,304,400 | 765,900 | 2,707,100 | 1,352,500 | ||||||||||||
NET EARNINGS | $ | 2,128,400 | $ | 1,274,200 | $ | 4,390,600 | $ | 2,212,900 | ||||||||
BASIC AND DILUTED EARNINGS PER SHARE: | ||||||||||||||||
Basic | $ | 0.52 | $ | 0.31 | $ | 1.07 | $ | 0.54 | ||||||||
Diluted | $ | 0.52 | $ | 0.31 | $ | 1.07 | $ | 0.54 | ||||||||
DIVIDENDS PER SHARE | $ | 0.00 | $ | 0.09 | $ | 0.00 | $ | 0.27 | ||||||||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: | ||||||||||||||||
Basic | 4,087,268 | 4,079,916 | 4,087,686 | 4,074,355 | ||||||||||||
Diluted | 4,090,011 | 4,084,863 | 4,090,053 | 4,079,833 |
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
GROSS SALES | $ | 32,541,700 | $ | 33,013,600 | $ | 69,015,400 | $ | 72,088,400 | ||||||||
Less discounts and allowances | (10,241,000 | ) | (10,444,700 | ) | (21,572,400 | ) | (22,346,100 | ) | ||||||||
Transportation revenue | 2,137,300 | 2,112,100 | 4,582,400 | 4,961,000 | ||||||||||||
NET REVENUES | 24,438,000 | 24,681,000 | 52,025,400 | 54,703,300 | ||||||||||||
COST OF GOODS SOLD | 8,046,400 | 8,462,700 | 17,102,600 | 18,132,400 | ||||||||||||
Gross margin | 16,391,600 | 16,218,300 | 34,922,800 | 36,570,900 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Operating and selling | 4,192,500 | 3,261,600 | 8,576,400 | 8,013,800 | ||||||||||||
Sales commissions | 7,263,100 | 7,313,000 | 15,796,100 | 16,686,100 | ||||||||||||
General and administrative | 3,717,600 | 3,738,400 | 7,655,800 | 7,630,900 | ||||||||||||
Total operating expenses | 15,173,200 | 14,313,000 | 32,028,300 | 32,330,800 | ||||||||||||
INTEREST EXPENSE | 242,500 | 270,000 | 474,500 | 483,400 | ||||||||||||
OTHER INCOME | (390,800 | ) | (400,300 | ) | (793,200 | ) | (774,700 | ) | ||||||||
EARNINGS BEFORE INCOME TAXES | 1,366,700 | 2,035,600 | 3,213,200 | 4,531,400 | ||||||||||||
INCOME TAXES | 359,100 | 544,900 | 842,000 | 1,224,100 | ||||||||||||
NET EARNINGS | $ | 1,007,600 | $ | 1,490,700 | $ | 2,371,200 | $ | 3,307,300 | ||||||||
BASIC AND DILUTED EARNINGS PER SHARE | ||||||||||||||||
Basic | $ | 0.12 | $ | 0.18 | $ | 0.29 | $ | 0.40 | ||||||||
Diluted | $ | 0.12 | $ | 0.18 | $ | 0.29 | $ | 0.40 | ||||||||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING | ||||||||||||||||
Basic | 8,312,648 | 8,185,419 | 8,248,460 | 8,181,305 | ||||||||||||
Diluted | 8,318,790 | 8,192,833 | 8,254,926 | 8,188,920 | ||||||||||||
Dividends per share | $ | 0.05 | $ | - | $ | 0.10 | $ | 0.05 |
See notes to condensed financial statements.
EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||||||||||||||||||||||
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) | ||||||||||||||||||||||||||||
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2017 | ||||||||||||||||||||||||||||
Common Stock (par value $0.20 per share) | ||||||||||||||||||||||||||||
Number of | Capital in | Treasury Stock | ||||||||||||||||||||||||||
Shares | Excess of | Retained | Number of | Shareholders’ | ||||||||||||||||||||||||
Issued | Amount | Par Value | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
BALANCE—March 1, 2017 | 6,041,040 | $ | 1,208,200 | $ | 8,548,000 | $ | 16,317,800 | 1,950,966 | $ | (10,856,600 | ) | $ | 15,217,400 | |||||||||||||||
Exercise of stock options | 5,000 | 1,000 | 25,300 | - | - | - | 26,300 | |||||||||||||||||||||
Purchases of treasury stock | - | - | - | - | 10,041 | (98,000 | ) | (98,000 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | - | - | (3,901 | ) | 32,000 | 32,000 | ||||||||||||||||||||
Net earnings | - | - | - | 4,390,600 | - | - | 4,390,600 | |||||||||||||||||||||
BALANCE— November 30, 2017 | 6,046,040 | $ | 1,209,200 | $ | 8,573,300 | $ | 20,708,400 | 1,957,106 | $ | (10,922,600 | ) | $ | 19,568,300 |
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) |
FOR THE SIX MONTHS ENDED AUGUST 31, 2019 |
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of | Capital in | |||||||||||||||||||||||||||
Shares | Excess of | Retained | Number of | Shareholders' | ||||||||||||||||||||||||
Issued | Amount | Par Value | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
BALANCE - February 28, 2019 | 12,092,080 | $ | 2,418,400 | $ | 8,975,100 | $ | 25,754,900 | 3,896,998 | $ | (11,217,900 | ) | $ | 25,930,500 | |||||||||||||||
Purchases of treasury stock | - | - | - | - | 36,959 | (302,500 | ) | (302,500 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | 68,100 | - | (19,171 | ) | 54,300 | 122,400 | ||||||||||||||||||||
Dividends declared ($0.05/share) | - | - | - | (408,900 | ) | - | - | (408,900 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 166,300 | - | - | - | 166,300 | |||||||||||||||||||||
Net earnings | - | - | - | 1,363,600 | - | - | 1,363,600 | |||||||||||||||||||||
BALANCE - May 31, 2019 | 12,092,080 | 2,418,400 | 9,209,500 | 26,709,600 | 3,914,786 | (11,466,100 | ) | 26,871,400 | ||||||||||||||||||||
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 |
FOR THE SIX MONTHS ENDED AUGUST 31, 2018 |
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of | Capital in | |||||||||||||||||||||||||||
Shares | Excess of | Retained | Number of | Shareholders' | ||||||||||||||||||||||||
Issued | Amount | Par Value | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
BALANCE - February 28, 2018 | 12,092,080 | $ | 2,418,400 | $ | 8,573,300 | $ | 20,714,500 | 3,912,468 | $ | (11,304,100 | ) | $ | 20,402,100 | |||||||||||||||
Purchases of treasury stock | - | - | - | - | 2,846 | (29,600 | ) | (29,600 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | - | - | (3,302 | ) | 25,100 | 25,100 | ||||||||||||||||||||
Dividends declared ($0.05/share) | - | - | - | (409,000 | ) | - | - | (409,000 | ) | |||||||||||||||||||
Net earnings | - | - | - | 1,816,600 | - | - | 1,816,600 | |||||||||||||||||||||
BALANCE - May 31, 2018 | 12,092,080 | 2,418,400 | 8,573,300 | 22,122,100 | 3,912,012 | (11,308,600 | ) | 21,805,200 | ||||||||||||||||||||
Exercise of options | - | - | - | - | (9,634 | ) | 77,200 | 77,200 | ||||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 70,000 | - | - | - | 70,000 | |||||||||||||||||||||
Net earnings | - | - | - | 1,490,700 | - | - | 1,490,700 | |||||||||||||||||||||
BALANCE - August 31, 2018 | 12,092,080 | $ | 2,418,400 | $ | 8,643,300 | $ | 23,612,800 | 3,902,378 | $ | (11,231,400 | ) | $ | 23,443,100 |
See notes to financial statements.
EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) | ||||||||
FOR THE NINE MONTHS ENDED NOVEMBER 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net earnings | $ | 4,390,600 | $ | 2,212,900 | ||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | ||||||||
Depreciation | 911,700 | 780,400 | ||||||
Deferred income taxes | 179,400 | (35,400 | ) | |||||
Provision for doubtful accounts | 438,000 | 558,900 | ||||||
Provision for inventory valuation allowance | 33,000 | (37,300 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (1,355,700 | ) | (1,994,200 | ) | ||||
Inventories, net | 9,760,000 | (16,775,100 | ) | |||||
Prepaid expenses and other assets | (304,700 | ) | (1,661,300 | ) | ||||
Accounts payable | (7,301,700 | ) | 6,889,100 | |||||
Deferred revenue | 28,600 | 6,632,500 | ||||||
Accrued salaries and commissions | 2,765,200 | 375,600 | ||||||
Other liabilities | 1,320,000 | 2,307,700 | ||||||
Income taxes payable | 469,600 | 576,800 | ||||||
Total adjustments | 6,943,400 | (2,382,300 | ) | |||||
Net cash provided by (used in) operating activities | 11,334,000 | (169,400 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (1,330,500 | ) | (2,123,600 | ) | ||||
Net cash used in investing activities | (1,330,500 | ) | (2,123,600 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Payments on long-term debt | (657,800 | ) | (530,200 | ) | ||||
Proceeds from long-term debt | 1,019,000 | 4,000,000 | ||||||
Cash received from sales of treasury stock | 32,000 | 170,700 | ||||||
Cash used to purchase treasury stock | (98,000 | ) | (200 | ) | ||||
Proceeds from the issuance of stock options | 26,300 | - | ||||||
Net payments under the line of credit | (4,882,900 | ) | (451,800 | ) | ||||
Dividends paid | - | (1,099,500 | ) | |||||
Net cash provided by (used in) financing activities | (4,561,400 | ) | 2,089,000 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 5,442,100 | (204,000 | ) | |||||
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD | 699,200 | 1,183,700 | ||||||
CASH AND CASH EQUIVALENTS—END OF PERIOD | $ | 6,141,300 | $ | 979,700 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 868,900 | $ | 730,000 | ||||
Cash paid for income taxes | $ | 2,058,100 | $ | 811,100 |
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) |
FOR THE SIX MONTHS ENDED AUGUST 31, |
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net earnings | $ | 2,371,200 | $ | 3,307,300 | ||||
Adjustments to reconcile net earnings to net cash used in operating activities: | ||||||||
Depreciation | 684,800 | 717,600 | ||||||
Deferred income taxes, net | 127,600 | 251,100 | ||||||
Provision for doubtful accounts | 63,200 | 17,200 | ||||||
Provision for inventory valuation allowance | 129,900 | 176,300 | ||||||
Share-based compensation expense | 332,500 | 70,000 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (303,100 | ) | (264,800 | ) | ||||
Inventories | (2,387,600 | ) | (7,216,400 | ) | ||||
Prepaid expenses and other assets | 544,600 | (35,800 | ) | |||||
Accounts payable | (1,047,900 | ) | 2,767,400 | |||||
Accrued salaries and commissions, and other liabilities | (1,889,700 | ) | (1,276,400 | ) | ||||
Deferred revenues | (213,700 | ) | (234,800 | ) | ||||
Income taxes payable | 314,000 | (632,400 | ) | |||||
Total adjustments | (3,645,400 | ) | (5,661,000 | ) | ||||
Net cash used in operating activities | (1,274,200 | ) | (2,353,700 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property, plant and equipment | (234,700 | ) | (1,331,800 | ) | ||||
Net cash used in investing activities | (234,700 | ) | (1,331,800 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments on long-term debt | (472,100 | ) | (467,200 | ) | ||||
Cash received from sale of treasury stock | 231,000 | 102,300 | ||||||
Cash used to purchase treasury stock | (719,600 | ) | (29,600 | ) | ||||
Net borrowings under line of credit | 1,056,100 | 2,598,700 | ||||||
Dividends paid | (819,000 | ) | (409,000 | ) | ||||
Net cash (used in) provided by financing activities | (723,600 | ) | 1,795,200 | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (2,232,500 | ) | (1,890,300 | ) | ||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 3,199,300 | 2,723,300 | ||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 966,800 | $ | 833,000 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
Cash paid for interest | $ | 465,900 | $ | 454,800 | ||||
Cash paid for income taxes | $ | 448,600 | $ | 1,596,100 | ||||
NON-CASH TRANSACTIONS | ||||||||
Accrued capital expenditures | $ | - | $ | - |
See notes to condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1
– BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of Presentation
The accompanying Unaudited Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim condensed financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Unaudited Condensed Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended February 28, 20172019 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year due to the seasonality of our product sales.
On July 24, 2018, our Board of Directors authorized a two-for-one stock split in the form of a stock dividend. The stock dividend was distributed on August 22, 2018 to shareholders of record as of August 14, 2018. All share-based data, including the number of shares outstanding and per share amounts, have been maderetroactively adjusted to reflect the fiscal 2017 condensed balance sheet and condensed statement of earnings to conform to the classifications used in fiscal 2018. These reclassifications had no effect on net earnings.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Unaudited Condensed Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies
Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented below, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 28, 2017,2019 included in our Form 10-K.
New Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued accounting standards updates (“ASU”) and concluded that the following recently issued accounting standards apply to us.
In May 2014,February 2016, FASB issued ASU No. 2014-09, and amended with ASU No. 2015-14 “Revenue from Contracts with Customers,” 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 result2016-02, Leases (Topic 842). In addition, in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which meansJuly 2018, the first quarter of our fiscal year 2019. We do not expect the adoption of this ASU will have a significant impact on the Company’s financial position, results of operations and cash flows.
In June 2016, FASB issued ASU No. 2016-13 "Financial“Financial Instruments—Credit Losses"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 meansyears. The Company adopted ASU No. 2016-13 in the first quarter of our fiscal year 2021. We expect the implementation2020. The adoption of this ASU willdid not have a significantmaterial impact on ourthe Company’s condensed financial statements.position, results of operations or cash flows.
In May 2017,August 2018, the FASB issued ASU 2017-09, “Compensation - Stock CompensationNo. 2018-13, Fair Value Measurement (Topic 718): Scope of Modification Accounting.” This update amends the scope of modification accounting surrounding share-based payment arrangements as issued820). The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. This ASU isare effective for annual periods beginning after December 15, 2017,fiscal years, and interim periods within those annual periods, which meansfiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. The Company adopted ASU No. 2018-13 in the first quarter of our fiscal year 2019. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not yet been issued. We do not expect the2020. The adoption of this ASU 2017-09 todid not have a material effectimpact on ourthe Company’s condensed financial position, results of operations andor cash flows.
Note 2
– INVENTORIESInventories consist of the following:
2017 | ||||||||
November 30, | February 28, | |||||||
Current: | ||||||||
Book inventory | $ | 24,480,900 | $ | 34,278,100 | ||||
Inventory valuation allowance | (25,000 | ) | (25,000 | ) | ||||
Inventories net–current | $ | 24,455,900 | $ | 34,253,100 | ||||
Noncurrent: | ||||||||
Book inventory | $ | 502,200 | $ | 467,100 | ||||
Inventory valuation allowance | (305,900 | ) | (275,000 | ) | ||||
Inventories net–noncurrent | $ | 196,300 | $ | 192,100 |
2019 | ||||||||
August 31, | February 28, | |||||||
Current: | ||||||||
Book inventory | $ | 35,819,300 | $ | 33,494,200 | ||||
Inventory valuation allowance | (199,600 | ) | (48,600 | ) | ||||
Inventories net - current | $ | 35,619,700 | $ | 33,445,600 | ||||
Noncurrent: | ||||||||
Book inventory | $ | 936,900 | $ | 904,400 | ||||
Inventory valuation allowance | (278,300 | ) | (329,400 | ) | ||||
Inventories net - noncurrent | $ | 658,600 | $ | 575,000 |
Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2.5 years of anticipated sales, are included in noncurrentnon-current inventory.
Significant portions of our inventory purchases are concentrated with an England-based publishing company.company, Usborne Publishing, Ltd. (“Usborne”). Purchases from this company were approximately $6.9$6.0 million and $10.9$7.9 million for the three months ended November 30, 2017August 31, 2019 and 2016,2018, respectively. Total inventory purchases from all suppliers were $10.9$8.0 million and $15.2$10.6 million for the three months ended November 30, 2017August 31, 2019 and 2016,2018, respectively.
Purchases from this companyUsborne were approximately $18.2$11.9 million and $29.9$15.5 million for the ninesix months ended November 30, 2017August 31, 2019 and 2016,2018, respectively. Total inventory purchases from all suppliers were $27.5$17.2 million and $43.7$21.6 million for the ninesix months ended November 30, 2017August 31, 2019 and 2016,2018, respectively.
Note 3 – PROPERTY, PLANT AND EQUIPMENT LEASES
As of March 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) using the modified retrospective method of adoption. We elected to use the transition option that allows us to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment (if any) to the opening balance of retained earnings in the year of adoption. Comparable periods continue to be presented under the guidance of the previous standard, ASC 840. ASC 842 requires lessees to recognize a lease liability and right-of-use asset on the balance sheet for operating leases. For lessors, the new accounting model remains largely the same, although some changes have been made to align it with the new lessee model and the new revenue recognition guidance, ASC 606, Revenue from Contracts with Customers. Our adoption of ASC 842 did not result in any adjustments to retained earnings.
We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under ASC 842. Our lessee arrangement includes a rental agreement where we have exclusive use of dedicated office space in San Diego, California, and qualifies as an operating lease. Our lessor arrangements include two rental agreements for warehouse and office space in Tulsa, Oklahoma, and both qualify as operating leases under ASC 842.
In accordance with ASC 842, we have made an accounting policy election to not apply the new standard to lessee arrangements with a term of one year or less and no purchase option that is reasonably certain of exercise. We will continue to account for these short-term arrangements by recognizing payments and expenses as incurred, without recording a lease liability and right-of-use asset.
We have also made an accounting policy election for both our lessee and lessor arrangements to combine lease and non-lease components. This election is applied to all of our lease arrangements as our non-lease components are not material and do not result in significant timing differences in the recognition of rental expenses or income.
In addition, the Company elected the package of practical expedients upon adoption which permits the Company to not reassess under the new standard the Company’s prior conclusions about lease identification, lease classification and initial direct costs.
Operating Leases – Lessee
We recognize a lease liability, reported in other liabilities 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.
Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on our condensed statements of earnings. Variable and short-term rental payments are recognized as costs and expenses as they are incurred. Future minimum rental payments under operating leases with initial terms greater than one year as of August 31, 2019, are as follows:
Year ending February 28 (29), | ||||
2020 | $ | 6,400 | ||
2021 | 13,200 | |||
2022 | 13,700 | |||
2023 | 14,200 | |||
2024 | 8,400 | |||
Total future minimum rental payments | 55,900 | |||
Present value discount | (5,500 | ) | ||
Total operating lease liability | $ | 50,400 |
The following table provides further information about our operating leases as of and for the six months ended August 31, 2019:
Current lease liability | $ | 13,400 | ||
Long-term lease liability | $ | 37,100 | ||
Right-of-use asset | $ | 50,400 | ||
Fixed lease cost | $ | 6,200 | ||
Operating cash flows – operating lease | $ | 6,200 | ||
Remaining lease term (months) | 49 | |||
Discount rate | 4.60 | % |
Operating lease expense was $9,100 for six months ended August 31, 2018 and was recognized in accordance with ASC 840.
Operating Leases – Lessor
We recognize fixed rental income on a straight-line basis over the life of the lease as revenue on our condensed statements of earnings. Variable rental payments are recognized as revenue in the period in which the changes in facts and circumstances on which the variable lease payments are based occur.
Future minimum payments receivable under operating leases with terms greater than one year are estimated as follows:
Year ending February 28 (29), | ||||
2020 | $ | 695,900 | ||
2021 | 1,414,300 | |||
2022 | 1,441,900 | |||
2023 | 1,470,000 | |||
2024 | 1,471,700 | |||
Thereafter | 10,806,500 | |||
Total | $ | 17,300,300 |
The cost of the leased space was approximately $10,359,900 as of August 31, 2019 and February 28, 2019. The accumulated depreciation associated with the leased assets was $1,413,800 and $1,233,400 as of August 31, 2019 and February 28, 2019, respectively. Both the leased assets and accumulated depreciation are included in property, plant and equipment consist ofequipment-net on the following:
2017 | ||||||||
November 30, | February 28, | |||||||
Land | $ | 4,107,200 | $ | 4,107,200 | ||||
Building | 20,321,800 | 20,321,800 | ||||||
Building improvements | 1,750,100 | 1,692,500 | ||||||
Machinery and equipment | 6,493,200 | 5,230,700 | ||||||
Furniture and fixtures | 109,000 | 101,600 | ||||||
32,781,300 | 31,453,800 | |||||||
Less accumulated depreciation | (5,328,200 | ) | (4,419,500 | ) | ||||
Net property, plant and equipment | $ | 27,453,100 | $ | 27,034,300 |
Note 4
– DEBTDebt consists of the following:
2017 | ||||||||
November 30, | February 28, | |||||||
Line of credit | $ | - | $ | 4,882,900 | ||||
Long-term debt (net of debt issue costs) | $ | 21,925,500 | $ | 21,564,300 | ||||
Less current maturities | (1,239,500 | ) | (898,500 | ) | ||||
LONG-TERM DEBT-net of current maturities | $ | 20,686,000 | $ | 20,665,800 |
2019 | ||||||||
August 31, | February 28, | |||||||
Line of credit | $ | 1,056,100 | $ | - | ||||
Long-term debt | $ | 19,304,500 | $ | 19,776,600 | ||||
Less current maturities | (927,200 | ) | (945,900 | ) | ||||
Long-term debt, net of current maturities | $ | 18,377,300 | $ | 18,830,700 |
We have a Loan Agreement dated as of March 10, 2016 (as amended the “Loan Agreement”) with MidFirst Bank (“the Bank”) which includes multiple loans. Term Loan #1 is comprised of Tranche A totaling $13.4$11.7 million and Tranche B totaling $5.0$4.4 million as of August 31, 2019, both with the maturity date of December 1, 2025. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. For Tranche B, interest is payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.41%(4.42% at November 30, 2017)August 31, 2019). Term Loan #1 is secured by the primary office, warehouse and land. The outstanding borrowings on Tranche A were $12,566,300 and $12,902,800 at November 30, 2017 and February 28, 2017, respectively. The outstanding borrowings on Tranche B were $4,717,900 and $4,813,800 at November 30, 2017 and February 28, 2017, respectively.
We also have Term Loan #2 with the Bank in the amounttotaling $3.2 million as of $4.0 millionAugust 31, 2019, 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 (4.41%(4.42% at November 30, 2017)August 31, 2019). Term Loan #2 is secured by our secondary warehouse and land. The Loan Agreement also provided a $15.0 million revolving loan (“line of credit”) through JuneAugust 15, 20182020 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 (4.41%(4.42% at November 30, 2017)August 31, 2019). The outstanding borrowings on
Tranche B of Term Loan #2 were $3,639,000 and $3,847,700 at November 30, 2017 and February 28, 2017, respectively. We had $0 and $4,882,900 in borrowings outstanding on line of credit at November 30, 2017 and February 28, 2017, respectively. Available credit under the revolving credit agreement was $9,105,500 at November 30, 2017 and $2,117,100 at February 28, 2017.
Pricing Tier | Adjusted Funded Debt to EBITDA Ratio | LIBOR Margin (bps) | ||
I | >2.00 | 300.00 | ||
II | > | 275.00 | ||
III | > | 250.00 | ||
IV | < | 225.00 |
Adjusted Funded Debt is defined as all long termlong-term and short-term bank debt less the outstanding balances of Tranche A and TranceTranche B Term Loans. EBITDA is defined in the Loan Agreement as earnings before interest expense, income tax expense (benefit) and depreciation and amortization expenses.expenses, reduced by rental income. The $15.0 million line of credit is limited to advance rates on eligible receivables and eligible inventory levels.
We had $1,056,100 and no borrowings outstanding on our revolving credit agreement at August 31, 2019 and February 28, 2019, respectively. Available credit under the revolving credit agreement was $11,709,600 and $12,439,300 at August 31, 2019 and February 28, 2019, respectively.
On June 15, 2018, the Company executed the Eighth Amendment Loan Agreement with the Bank related to our Loan Agreement. The Presidentamendment modified the Loan Agreement, extending the termination date until August 15, 2019, reduced the interest rate pricing grid for all floating rate borrowings covered by the Loan Agreement, established a new $3,000,000 advancing term loan to be used for capital expansions to increase daily shipping capacity, released the personal Guaranty of Randall W. White and Chief Executive OfficerCarol White, along with other covenant restrictions being lessened. The amendment also included an adjustment to the Adjusted Funded Debt to EBITDA ratio for covenant compliance.
On February 7, 2019, the Company executed the Ninth Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modified the Loan Agreement, removing the covenant prohibiting the Company from repurchasing its shares, subject to certain conditions.
On August 15, 2019, the Company executed the Tenth Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modified the Loan Agreement, extending the termination date of the line of credit to August 15, 2020, amends the definition of LIBOR Margin, reduces the frequency of reports to the Lender, amends the Adjusted Funded Debt to EBITDA Ratio and his wife have executed a Guaranty Agreement obligating them to repay $3,680,000 of any unpaid Term Loans, unpaid accrued interestamends the Compliance and any recourse amounts as defined in the Continuing Guaranty Agreement.
The Loan Agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue or obtain issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than JuneAugust 15, 2018,2020, and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time. For the quarter ended November 30, 2017,As of August 31, 2019, we had no letters of credit outstanding.
The Loan Agreement also contains provisions that require us to maintain specified financial ratios, restrictratios; restricts transactions with related parties, prohibitparties; prohibits mergers or consolidation, disallowconsolidation; disallows additional debt,debt; and limitlimits the amount of compensation, salaries, investments, capital expenditures and leasing transactions we can make on a quarterly basis. Additionally, the Loan Agreement suspendsplaces limitations on the amount of dividends that may be distributed and the total value of stock buybacks.
Year ending February 28 (29), | ||||
2020 | $ | 471,700 | ||
2021 | 988,500 | |||
2022 | 1,038,100 | |||
2023 | 1,087,500 | |||
2024 | 1,139,400 | |||
Thereafter | 14,579,300 | |||
Total | $ | 19,304,500 |
Note 5
– EARNINGS PER SHAREBasic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS, we have utilized the treasury stock method. See Note 1 for additional information regarding the stock split that occurred in fiscal 2019.
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below.
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net earnings | $ | 2,128,400 | $ | 1,274,200 | $ | 4,390,600 | $ | 2,212,900 | ||||||||
Shares: | ||||||||||||||||
Weighted average shares outstanding – basic | 4,087,268 | 4,079,916 | 4,087,686 | 4,074,355 | ||||||||||||
Assumed exercise of options | 2,743 | 4,947 | 2,367 | 5,478 | ||||||||||||
Weighted average shares outstanding – diluted | 4,090,011 | 4,084,863 | 4,090,053 | 4,079,833 | ||||||||||||
Basic Earnings Per Share | $ | 0.52 | $ | 0.31 | $ | 1.07 | $ | 0.54 | ||||||||
Diluted Earnings Per Share | $ | 0.52 | $ | 0.31 | $ | 1.07 | $ | 0.54 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Earnings per share: | ||||||||||||||||
Net earnings applicable to common shareholders | $ | 1,007,600 | $ | 1,490,700 | $ | 2,371,200 | $ | 3,307,300 | ||||||||
Shares: | ||||||||||||||||
Weighted average shares outstanding-basic | 8,312,648 | 8,185,419 | 8,248,460 | 8,181,305 | ||||||||||||
Assumed exercise of options | 6,142 | 7,414 | 6,466 | 7,615 | ||||||||||||
Weighted average shares outstanding-diluted | 8,318,790 | 8,192,833 | 8,254,926 | 8,188,920 | ||||||||||||
Diluted earnings per share: | ||||||||||||||||
Basic | $ | 0.12 | $ | 0.18 | $ | 0.29 | $ | 0.40 | ||||||||
Diluted | $ | 0.12 | $ | 0.18 | $ | 0.29 | $ | 0.40 |
Note 6
– STOCK-BASED COMPENSATIONWe 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 and recognized asgrant. For awards subject to service conditions, compensation expense is recognized over the vesting period.
The Company has outstanding stock options under the 2002 Employee Incentive Stock Option Plan totaling 10,000 shares. No options have been exercised in the three and six months ended August 31, 2019. All options outstanding at August 31, 2019 expire in December 2019.
In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan establishes up to 600,000 shares of restricted stock which can be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 and 2021. Restricted shares granted under the 2019 LTI Plan “cliff vest” after five years.
The restricted share awards granted under the 2019 LTI Plan contain both service and performance conditions. The Company recognizes share compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employee have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.
For certain awards that provide discretion to adjust the allocation of the restricted shares, the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the Company and the employee has not yet been established. For awards in which the service-inception date precedes the grant date, compensation cost is accrued beginning on the service-inception date. The Company estimates the award's fair value on each subsequent reporting date, until the grant date, based on the closing market price of the Company’s common stock. On the grant date, the award's fair value is fixed, subject to the remaining performance conditions, and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date.
During fiscal year 2019, the Company granted approximately 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share. During the second fiscal quarter ended November 30, 2017, a former employee exercised 5,000 vested stock options.of 2020, the Company recognized $166,200 of compensation expense associated with the shares granted in fiscal year 2019. The Company recognized compensation expense totaling $332,500 in the first six months of fiscal 2020. The remaining compensation expense for these awards, totaling approximately $2,327,900, will be recognized ratably over the remaining vesting period of approximately 42 months.
A summary of compensation expense recognized in connection with restricted share awards follows:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Share-based compensation expense | $ | 166,200 | $ | 70,000 | $ | 332,500 | $ | 70,000 |
Note 7 – SHIPPING AND HANDLING COSTS
We classify shipping and handling costs incurred are included inas operating and selling expenses in the statements of earnings. Shipping and handling costs include postage, freight, handling costs, as well as, shipping materials and supplies. These costs were $5,328,900$3,837,600 and $4,569,900$3,259,900 for the three months ended November 30, 2017August 31, 2019 and 2016,2018, respectively. These costs were $12,200,100$8,049,800 and $12,134,700$7,658,900 for the ninesix months ended November 30, 2017August 31, 2019 and 2016,2018, respectively.
Note 98
We have two 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. TheOur 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 anour internal tele-sales group. TheOur UBAM segment markets its products through a network of independent sales consultants using a combination of internet sales, direct sales, home shows, internet shows and book fairs.
The accounting policies of the segments are the same as those described inof the summaryrest of significant accounting policies disclosed in the Company’s most recent 10-K annual report for the fiscal year ended February 28, 2017.Company. We evaluate segment performance based on earnings before income taxes of the segments, which is defined as segment net salesrevenues 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 nine-monthsix-month periods ended November 30, 2017August 31, 2019 and 2016,2018, are as follows:
NET REVENUES | ||||||||||||||||
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Publishing | $ | 2,439,600 | $ | 3,075,000 | $ | 6,538,700 | $ | 7,244,600 | ||||||||
UBAM | 36,468,400 | 27,622,600 | 83,481,400 | 72,130,200 | ||||||||||||
Total | $ | 38,908,000 | $ | 30,697,600 | $ | 90,020,100 | $ | 79,374,800 |
EARNINGS BEFORE INCOME TAXES | ||||||||||||||||
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Publishing | $ | 556,800 | $ | 979,500 | $ | 1,514,200 | $ | 2,138,700 | ||||||||
UBAM | 6,915,400 | 4,719,800 | 15,865,200 | 11,286,200 | ||||||||||||
Other | (4,039,400 | ) | (3,659,200 | ) | (10,281,700 | ) | (9,859,500 | ) | ||||||||
Total | $ | 3,432,800 | $ | 2,040,100 | $ | 7,097,700 | $ | 3,565,400 |
NET REVENUES | ||||||||||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Publishing | $ | 2,702,800 | $ | 2,605,500 | $ | 5,042,100 | $ | 4,911,700 | ||||||||
UBAM | 21,735,200 | 22,075,500 | 46,983,300 | 49,791,600 | ||||||||||||
Total | $ | 24,438,000 | $ | 24,681,000 | $ | 52,025,400 | $ | 54,703,300 |
EARNINGS (LOSS) BEFORE INCOME TAXES | ||||||||||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Publishing | $ | 784,700 | $ | 636,700 | $ | 1,420,400 | $ | 1,143,000 | ||||||||
UBAM | 3,488,300 | 4,277,100 | 7,857,300 | 9,376,100 | ||||||||||||
Other | (2,906,300 | ) | (2,878,200 | ) | (6,064,500 | ) | (5,987,700 | ) | ||||||||
Total | $ | 1,366,700 | $ | 2,035,600 | $ | 3,213,200 | $ | 4,531,400 |
Note 109
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'sinstrument’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
Note 1110
The Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to the end of our fiscal quarter that were not shipped as of August 31, 2019 are recorded as deferred revenues on the third quarter, we hadcondensed balance sheet. We received approximately $661,700$751,900 at August 31, 2019 in payments for sales orders which were, or will be, shipped out subsequent to the quarter end. As of November 30, 2017, these prepaid sales orders areOrders that were included in deferred revenue onrevenues predominantly shipped within the condensed balance sheet.
Note 121
On October 8, 2019, our Board of Directors declared a distribution of $0.05 per share of common stock. This cash distribution will be paid on or about December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act5, 2019 to shareholders of 2017 (the “Act”). Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”) requires that the effects of changes in tax laws or tax rates be recognized in the financial statements in the period in which such changes were enacted. Among other things, changes in tax laws or tax rates can affect the amount of taxes payable for the current period, as well as the amount and timing of deferred tax liabilities and deferred tax assets. The Company is a fiscal year reporting company and as such would be required to account for the impact related to the Act in the financial statements included in the annual reportrecord on Form 10-K for February 28, 2018.
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, including among other things, the risk factors discussed in our Annual Report on Form 10-K for the year ended February 28, 2017.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 backlog,backlogs, our ability to obtain adequate financing for working capital and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 28, 20172019 and this Quarterly Report on Form 10-Q, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur. See “Cautionary Remarks Regarding Forward-Looking Statements” in the front of this Quarterly Report on Form 10-Q.
Overview
We are the exclusive United States trade co-publisher of Usborne children’s books and the owner of Kane Miller. We operate two separate segments:segments; UBAM and Publishing, to sell our Usborne and Kane Miller lines of 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 showsparty plan events and book fairs. All other supporting administrative activities are recognized as other expenses outside of our two segments. Other expenses areconsist primarily of the compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate office and distribution facility.
The following table shows our condensed statements of earnings data:
Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenues | $ | 38,908,000 | $ | 30,697,600 | $ | 90,020,100 | $ | 79,374,800 | ||||||||
Cost of goods sold | 10,494,800 | 8,328,100 | 24,579,200 | 22,500,300 | ||||||||||||
Gross margin | 28,413,200 | 22,369,500 | 65,440,900 | 56,874,500 | ||||||||||||
Operating expenses: | ||||||||||||||||
Operating and selling | 7,837,300 | 6,520,300 | 17,549,900 | 16,790,900 | ||||||||||||
Sales commissions | 12,510,400 | 9,521,000 | 28,759,300 | 24,802,200 | ||||||||||||
General and administrative | 4,735,200 | 4,525,900 | 12,359,600 | 12,237,600 | ||||||||||||
Total operating expenses | 25,082,900 | 20,567,200 | 58,668,800 | 53,830,700 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (287,600 | ) | (265,000 | ) | (863,800 | ) | (730,000 | ) | ||||||||
Other income | 390,100 | 502,800 | 1,189,400 | 1,251,600 | ||||||||||||
Earnings before income taxes | 3,432,800 | 2,040,100 | 7,097,700 | 3,565,400 | ||||||||||||
Income taxes | 1,304,400 | 765,900 | 2,707,100 | 1,352,500 | ||||||||||||
Net earnings | $ | 2,128,400 | $ | 1,274,200 | $ | 4,390,600 | $ | 2,212,900 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net revenues | $ | 24,438,000 | $ | 24,681,000 | $ | 52,025,400 | $ | 54,703,300 | ||||||||
Cost of goods sold | 8,046,400 | 8,462,700 | 17,102,600 | 18,132,400 | ||||||||||||
Gross margin | 16,391,600 | 16,218,300 | 34,922,800 | 36,570,900 | ||||||||||||
Operating expenses | ||||||||||||||||
Operating and selling | 4,192,500 | 3,261,600 | 8,576,400 | 8,013,800 | ||||||||||||
Sales commissions | 7,263,100 | 7,313,000 | 15,796,100 | 16,686,100 | ||||||||||||
General and administrative | 3,717,600 | 3,738,400 | 7,655,800 | 7,630,900 | ||||||||||||
Total operating expenses | 15,173,200 | 14,313,000 | 32,028,300 | 32,330,800 | ||||||||||||
Interest expense | 242,500 | 270,000 | 474,500 | 483,400 | ||||||||||||
Other income | (390,800 | ) | (400,300 | ) | (793,200 | ) | (774,700 | ) | ||||||||
Earnings before income taxes | 1,366,700 | 2,035,600 | 3,213,200 | 4,531,400 | ||||||||||||
Income taxes | 359,100 | 544,900 | 842,000 | 1,224,100 | ||||||||||||
Net earnings | $ | 1,007,600 | $ | 1,490,700 | $ | 2,371,200 | $ | 3,307,300 |
See the detailed discussion of revenues, costs of services, gross margin, general and administrative expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods.
Non-Segment Operating Results for the Three Months Ended November 30, 2017
Total operating expenses
not associated with a reporting segmentInterest expense decreased $0.1 million partially offset by other cost reductions.
Income taxes
Non-Segment Operating Results for the NineSix Months Ended November 30, 2017
Total operating expenses
not associated with a reporting segment increasedInterest expense
Income taxes
UBAM Operating Results for the Three and NineSix Months Ended November 30, 2017
The following table summarizes the operating results of the UBAM segment for the three and nine months ended November 30, 2017 and 2016:
For the Three Months Ended November 30, | For the Nine Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Gross sales | $ | 36,761,700 | $ | 27,907,200 | $ | 87,143,200 | $ | 76,263,200 | ||||||||
Less discounts and allowances | (4,059,000 | ) | (3,528,100 | ) | (12,595,300 | ) | (12,414,500 | ) | ||||||||
Transportation revenue | 3,765,700 | 3,243,500 | 8,933,500 | 8,281,500 | ||||||||||||
Net revenues | 36,468,400 | 27,622,600 | 83,481,400 | 72,130,200 | ||||||||||||
Cost of goods sold | 9,114,200 | 6,577,500 | 20,939,500 | 18,549,700 | ||||||||||||
Gross margin | 27,354,200 | 21,045,100 | 62,541,900 | 53,580,500 | ||||||||||||
Operating Expenses | ||||||||||||||||
Operating and selling | 6,860,200 | 5,613,300 | 14,752,100 | 14,311,500 | ||||||||||||
Sales commissions | 12,420,000 | 9,425,300 | 28,507,800 | 24,561,100 | ||||||||||||
General and administrative | 1,158,600 | 1,286,700 | 3,416,800 | 3,421,700 | ||||||||||||
Total operating expenses | 20,438,800 | 16,325,300 | 46,676,700 | 42,294,300 | ||||||||||||
Operating income | $ | 6,915,400 | $ | 4,719,800 | $ | 15,865,200 | $ | 11,286,200 | ||||||||
Average number of active consultants | 31,100 | 28,100 | 29,500 | 24,800 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Gross sales | $ | 26,815,500 | $ | 27,484,400 | $ | 58,244,300 | $ | 61,643,000 | ||||||||
Less discounts and allowances | (7,208,700 | ) | (7,511,300 | ) | (15,828,600 | ) | (16,795,100 | ) | ||||||||
Transportation revenue | 2,128,400 | 2,102,400 | 4,567,600 | 4,943,700 | ||||||||||||
Net revenues | 21,735,200 | 22,075,500 | 46,983,300 | 49,791,600 | ||||||||||||
Cost of goods sold | 6,688,200 | 7,031,400 | 14,487,000 | 15,455,900 | ||||||||||||
Gross margin | 15,047,000 | 15,044,100 | 32,496,300 | 34,335,700 | ||||||||||||
Operating expenses | ||||||||||||||||
Operating and selling | 3,448,300 | 2,517,000 | 7,091,300 | 6,466,300 | ||||||||||||
Sales commissions | 7,159,200 | 7,220,600 | 15,599,500 | 16,507,400 | ||||||||||||
General and administrative | 951,200 | 1,029,400 | 1,948,200 | 1,985,900 | ||||||||||||
Total operating expenses | 11,558,700 | 10,767,000 | 24,639,000 | 24,959,600 | ||||||||||||
Operating income | $ | 3,488,300 | $ | 4,277,100 | $ | 7,857,300 | $ | 9,376,100 | ||||||||
Average number of active consultants | 33,600 | 32,800 | 32,600 | 34,000 |
UBAM Operating Results for the Three Months Ended November 30, 2017
UBAM segment’s sales consist of home shows, internet shows and book fairs. Netnet revenues increased $8.9decreased $0.4 million, or 32.2%1.8%, to $36.5$21.7 million during the three months ended August 31, 2019, as compared to $22.1 million during the same period a year ago. The average number of active consultants in the second quarter of fiscal 2020 was 33,600, an increase of 800, or 2.4%, from 32,800 average active consultants selling in the second quarter of fiscal 2019. During our annual convention in late June this year, we announced a UBAM 30th Anniversary Recruiting Special which resulted in the signing of over 10,000 new active consultants during the five-week recruiting special. Although this recruiting special resulted in a large increase in the number of average active consultants selling during the second quarter of fiscal 2020, it can take several weeks for these new consultants to start experiencing success.
Gross margin remained consistent at $15.0 million during the three-month period ending November 30, 2017,August 31, 2019, when compared with net revenues of $27.6 million reportedto the same quarter a year ago. The increase inGross margin, as a percentage of net revenues, resulted primarily from an increase in the orders received during the period and an increase in our daily shipping volumes over the same period last year.
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 hostess awards associated with sales orders.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, travel and entertainment expenses, outside services, inventory reserves and other expenses directly associated with the UBAM segment. Total operatingOperating expenses increased $4.1$0.8 million, or 25.1%7.4%, to $20.4$11.6 million during the three-month period ending November 30, 2017,August 31, 2019, when compared withto $10.8 million reported in the same quarter last year. Operating expenses increased primarilya year ago. During the second quarter of fiscal 2019, the Company received a resort refund from increasedless consultants choosing to attend the annual incentive trip than had earned it. Without this refund, operating and selling costs and increased sales commissions, both tiedexpenses as a percentage of net revenues would have been more comparable to the growthUBAM divisions historical operating and selling expenses as a percentage of net revenues. In addition, the Company incurred an increase in freight and postage primarily from a pricing increase in fiscal 2020 totaling approximately $0.2 million for packages delivered through the United States Postal Service, a $0.1 million increase in freight and postage associated with the UBAM 30th Anniversary Recruiting Special and $0.1 million increase in other operating and selling costs. Sales commissions remained consistent at $7.2 million period over period and as a percentage of net revenues between the periods. General and administrative expenses remained consistent at $1.0 million during the period.
Operating income of the UBAM segment increased $2.2decreased $0.8 million, or 46.8%18.6%, to $6.9$3.5 million during the three-month period ending November 30, 2017, whenAugust 31, 2019 as compared to the same quarter a year ago, due to primarily to increased sales and gross margins, partially offset by increased operating and selling expenses and sales commissions.
UBAM Operating Results for the Six Months Ended August 31, 2019
UBAM net revenues decreased $2.8 million, or 5.6%, to $47.0 million during the six-month period ending August 31, 2019, as compared to $49.8 million from the same period a year ago. The decrease in net revenues primarily resulted from the increasea decrease in the number of active sales consultants during the period along with increase in the year over year shipments made during the third quarter.
Gross marginsmargin decreased $1.8 million, or 5.2%, to $32.5 million during the six-month period ending August 31, 2019, when compared to $34.3 million during the same period a year ago, due primarily to a decrease in net revenues during the first quarter of fiscal 2020 when compared to fiscal 2019. Gross margin, as a percentage of net revenues, increased $8.9 million to $62.5 million69.2% for the nine-monthsix-month period ending November 30, 2017 from $53.6 million reported duringAugust 31, 2019 when compared to 69.0% for the same period a year ago. The increase in gross margins primarily resulted from the increase in sales. Gross marginsmargin as a percentage of net revenues remained consistent at 74.9%was due to a change in the mix of order types between the periods.
Operating expenses decreased $0.4 million, or 1.6%, to $24.6 million during the six month period ending August 31, 2019, when compared to $25.0 million, for the nine-monthsix-month period ending November 30, 2017August 31, 2018. The decrease in operating expenses was primarily due to a $0.9 million decrease in sales commissions associated with the decrease in net revenues and a $0.1 million decrease in various general and administrative expenses, offset by a $0.6 million increase in operating and selling expenses. Operating and selling expenses increased primarily from a refund received related to the annual UBAM incentive trip received in the second quarter of fiscal 2019 and approximately $0.2 million increase in freight and postage costs during the first six months ended August 31, 2019 due to pricing increases on packages delivered through the United States Postal Service.
Operating income of the UBAM segment decreased $1.5 million, or 16.0%, to $7.9 million during the six-month period ending August 31, 2019, when compared to 74.3% reportedwith $9.4 million from the same period a year ago.
Publishing Operating Results for the Three and Six Months Ended August 31, 2019
The following table summarizes the operating results of the Publishing segment:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Gross sales | $ | 5,726,200 | $ | 5,529,200 | $ | 10,771,100 | $ | 10,445,400 | ||||||||
Less discounts and allowances | (3,032,300 | ) | (2,933,400 | ) | (5,743,800 | ) | (5,551,000 | ) | ||||||||
Transportation revenue | 8,900 | 9,700 | 14,800 | 17,300 | ||||||||||||
Net revenues | 2,702,800 | 2,605,500 | 5,042,100 | 4,911,700 | ||||||||||||
Cost of goods sold | 1,358,200 | 1,431,300 | 2,615,600 | 2,676,500 | ||||||||||||
Gross margin | 1,344,600 | 1,174,200 | 2,426,500 | 2,235,200 | ||||||||||||
Total operating expenses | 559,900 | 537,500 | 1,006,100 | 1,092,200 | ||||||||||||
Operating income | $ | 784,700 | $ | 636,700 | $ | 1,420,400 | $ | 1,143,000 |
Publishing Operating Results for the Three Months Ended August 31, 2019
Our Publishing division’s net revenues increased $0.1 million, or 3.8%, to $2.7 million during the three-month period ending August 31, 2019, from $2.6 million reported in the same period a year ago. This increase is due to an increase in sales commissions associatedto existing retail customers, specifically in the Toy and Gift store classifications.
Gross margin increased $0.1 million, or 8.3%, to $1.3 million during the three-month period ending August 31, 2019, from $1.2 million reported in the same quarter a year ago. This increase is primarily related to the growth in net revenues. Gross margin as a percentage of net revenues, increased 4.6%, to 49.7% during the three-month period ending August 31, 2019, from 45.1% reported in the same quarter a year ago. The increase in gross margin resulted from a change in customer mix, as certain sales agreements with UBAM’s revenue growth.
Operating income of the UBAMPublishing segment increased $4.6$0.2 million, or 40.7%33.3%, to $15.9$0.8 million during the nine-monththree-month period ending November 30, 2017August 31, 2019 when compared to $11.3$0.6 million reported duringin the same period a year ago. The increase in operating income was primarily due to increased gross margins on increased sales.
Publishing Operating Results for the Three and NineSix Months Ended November 30, 2017
For the Three Months Ended November 30, | For the Nine Months Ended November 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Gross sales | $ | 5,132,900 | $ | 6,490,100 | $ | 13,846,300 | $ | 15,394,000 | ||||||||
Less discounts and allowances | (2,703,300 | ) | (3,419,900 | ) | (7,334,000 | ) | (8,167,400 | ) | ||||||||
Transportation revenue | 10,000 | 4,800 | 26,400 | 18,000 | ||||||||||||
Net revenues | 2,439,600 | 3,075,000 | 6,538,700 | 7,244,600 | ||||||||||||
Cost of goods sold | 1,380,600 | 1,750,600 | 3,639,700 | 3,950,600 | ||||||||||||
Gross margin | 1,059,000 | 1,324,400 | 2,899,000 | 3,294,000 | ||||||||||||
Total operating expenses | 502,200 | 344,900 | 1,384,800 | 1,155,300 | ||||||||||||
Operating income | $ | 556,800 | $ | 979,500 | $ | 1,514,200 | $ | 2,138,700 |
Our Publishing segment’sdivision’s net revenues decreased $0.6increased $0.1 million, or 19.4%2.0%, to $2.4$5.0 million forduring the three months ended November 30, 2017six-month period ending August 31, 2019, from $3.1$4.9 million reported for the quarter ended November 30, 2016. Revenues declined from the same period last year due to smaller customer orders in the third period of fiscal 2018 when compared to last year, as well as fewer customers placing orders. During the third quarter of fiscal year 2017, we had significant delays in shipments which resulted in lost customers and customers reducing order sizes during the fall selling season of fiscal 2018, based on slower delivery expectations.
Gross margin increased $0.2 million, or 9.1%, to $2.4 million during the six-month period ending August 31, 2019, from $2.2 million reported in the same period a year ago. This increase is related to the growth in net revenues and a decrease in sales.cost of goods sold. Gross Marginsmargin as a percentage of revenue remained consistent betweennet revenues, increased 2.6%, to 48.1% during the periods.
Total operating expenses decreased $0.1 million, or 9.1%, to $1.0 million during the segment declined $0.6 million, to $1.5 million, for the nine months ended November 30, 2017six-month period ending August 31, 2019, from $2.1$1.1 million reported in the same period a year ago. This decrease primarily resulted from less promotions and marketing expenses incurred during the first six months of fiscal 2020, when compared to the same period last year.
Total operating income increased $0.3 million, or 27.3%, to $1.4 million during the six-month period ending August 31, 2019, from $1.1 million reported in the same period a year ago. The declineincrease in operating income resulted primarilywas due to increased sales from the decline in salescustomers with lower discounts and gross margins.
Liquidity and Capital Resources
EDC has a history of cash is typically operatingprofitability and positive cash flow. The majority ofWe typically fund our operations from the cash outflow over the past several years has been associated with increasing our inventorywe generate. We also use available cash to keep up with our increased demandpay down outstanding bank loan balances, for our products.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 nine-month period ended November 30, 2017,first six months of fiscal 2020, we experienced cash inflowoutflow from our operations of $11.3 million. Net earnings of $4.4 million were increased by$1,274,200. Cash flows resulted from the following items:
• | net earnings of $2,371,200 |
• | depreciation expense of $684,800, |
• | a decrease in prepaid expenses and other assets of $544,600, |
• | share-based compensation expense of $332,500, |
• | an increase in income tax payable of $314,000, |
• | an increase in provision for inventory valuation allowance of $129,900, |
• | an increase in deferred income taxes, net of $127,600, and |
• | an increase in the provision for doubtful accounts of $63,200, |
Offset by:
• | an increase in inventories, net of $2,387,600, |
• | a decrease in accrued salaries and commissions, and other liabilities of $1,889,700, |
• | a decrease in accounts payable of $1,047,900 |
• | an increase in accounts receivable of $303,100, and |
• | a decrease in deferred revenue of $213,700. |
Cash used in investing activities was $1.3 million$234,700 for capital expenditures, which was primarily comprised of improvements made to two ofupgrade our pick lines which were upgraded with new automated routing functionality to bypass zones that had no picks of approximately $1.0 millione-commerce and inventory management systems of $0.1 million and various other improvements to the warehouse, facility and equipment totaling $0.2 million.
Cash used in financing activities was $4.6 million,$723,600, which was primarily comprised of repayment$819,000 of dividends paid, $488,600 net cash used in treasury stock transactions, and payments on long-term debt of $472,100, partially offset by cash received from net borrowings under our line of credit of $4.9 million and payments on long-term debt of $0.7 million, offset by draws on the recently executed Advancing Term Loan of $1.0 million along with other minor equity changes.
During fiscal year 2018,2020, we continue to expect our cash from operations, andalong with our expanded line of credit with our Bank, will provide us the ability to meet our liquidity requirements. We have a history of profitability and positive cash flow. Consequently, cashCash generated from operations will be used to increasereplace inventory, in anticipation of continued sales growth and to liquidate existing debt.
We have a Loan Agreement with the Bank including Term Loan #1 comprised of Tranche A of $13.4totaling $11.7 million and Tranche B totaling $4.4 million as of $5.0 millionAugust 31, 2019, both with the maturity date of December 1, 2025. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly.
On June 15, 2018, and an $3.0 million advancing term loan which matures November 30, 2020.
On February 7, 2017, we signed a Fourth Amendment Loan Agreement with the Bank which modified certain debt covenant calculations and waived an existing default that occurred in the fourth quarter of fiscal year 2017.
On August 15, 2019, the Company executed the Tenth Amendment Loan Agreement to increase the maximum revolving principal amount from $7.0 million to $10.0 million andwhich extended the termination date of the Loan Agreementline of credit to JuneAugust 15, 2018. The Fifth Amendment also modified2020, amended the Loan Agreementdefinition of LIBOR Margin, reduced the frequency of reports to include an Advancing Term Loan of $3.0 million which the Company is usingLender, amended the Adjusted Funded Debt to coverEBITDA Ratio and amended the cost of the fiscal 2017 capital improvements to increase its daily shipping capacity. The Company expects the amount of the planned capital improvements will be less than the Advancing Term Loan availability. The Advancing Term loan accrued interest between June 15Compliance and December 1, 2017, at which time the balance was converted to a term loan and set to amortize over a thirty-six-month period
We had no$1.1 million in borrowings outstanding on our revolving credit agreement at November 30, 2017August 31, 2019 and $4.9 million inno borrowings at February 28, 2017.2019. Available credit under the revolving credit agreement was $9,105,500$11.7 million at November 30, 2017.
Tranche B of Term Loan #1, Term Loan #2 and the line of credit and the Advancing Term Loan accrue interest monthly, at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.41%(4.42% at November 30, 2017)August 31, 2019).
The Loan Agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue, or obtain issuance of commercial or stand-by letters of credit provided that the sum of the line of credit plus the letters of credit issued would not exceed the borrowing base in effect at the time. Additionally, the Loan Agreement suspends dividends. For the quarter ended November 30, 2017,As of August 31, 2019, we had no letters of credit outstanding. The agreement contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amountamounts of compensation, salaries,dividends declared, investments, capital expenditures, leasing transactions, and leasing transactions.
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) | ||||
2018 | 267,100 | |||
2019 | 1,278,600 | |||
2020 | 1,331,200 | |||
2021 | 1,324,300 | |||
2022 | 1,069,000 | |||
Thereafter | 16,672,100 | |||
Total Maturities | $ | 21,942,300 |
Year ending February 28 (29), | ||||
2020 | $ | 471,700 | ||
2021 | 988,500 | |||
2022 | 1,038,100 | |||
2023 | 1,087,500 | |||
2024 | 1,139,400 | |||
Thereafter | 14,579,300 | |||
Total | $ | 19,304,500 |
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.
Revenue Recognition
Sales associated with product orders are generally recognized and recorded when products are shipped. Products are shipped FOB shipping point. The UBAM segment’sUBAM’s sales are generally paid at the time the product is ordered. These sales accounted for 93.7% of net revenues for the three-month period ended November 30, 2017, and 90.0% for the three-month period ended November 30, 2016. Sales thatwhich 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 and recorded.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. These returns primarily result from damage that occursstores of our Publishing Division. Those damages occur in the stores, not in shipping to the stores.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 $100,000$0.2 million as of November 30, 2017,August 31, 2019 and $190,000 as of February 28, 2017.
Allowance for Doubtful Accounts
We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments.payments and a reserve for vendor share markdowns (collectively “allowance for doubtful accounts”). An estimate of uncollectableuncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer'scustomers’ financial conditionconditions and current economic trends. Consignment inventory related to inactive consultants is reclassified to accounts receivable and the associated reserve is included within our allowance. If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected. Management has estimated and included an allowance for doubtful accounts of $537,000$0.3 million at November 30, 2017,August 31, 2019, and $485,000 at February 28, 2017.2019. Included within this allowance is $264,000 and $217,000$0.1 million of reserve for vendor discounts to sell remaining inventory as of November 30, 2017August 31, 2019 and February 28, 2017, respectively, of reserve related to consignment inventory held by inactive consultants.
Inventory
Our inventory contains approximately 2,200over 2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future. Most of our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in a fivefour to eight-monthsix-month lead-time to have a title printed and delivered to us.
Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to minimum order requirements of our suppliers. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2 ½ years of anticipated sales is classified as noncurrent inventory. Noncurrent inventory balances prior to valuation allowances were $502,200 and $467,100$0.9 million at November 30, 2017August 31, 2019 and February 28, 2017,2019, respectively.
Consultants that meet certain eligibility requirements are allowed tomay request and receive inventory on consignment. We believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events; and having consignment inventory leads to additional sales opportunities. Approximately 12% and 11%9% of our active consultants maintained consignment inventory at November 30, 2017 and February 28, 2017, respectively.the end of the second fiscal quarter 2020. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total valuecost of inventory on consignment with active consultants was $1,533,100$1.6 million at August 31, 2019 and $1,140,700$1.5 million at November 30, 2017 and February 28, 2017, respectively. There is a seasonal increase in consignment inventory during the fall when UBAM consultants acquire inventory for sales events at annual state fair and other regional fall festival events. Inventory related to inactive consultants is reclassified to accounts receivables and amounted to $264,000 and $309,000 as of November 30, 2017 and February 28, 2017, respectively.
Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and active consultant consignmentreserves for consigned inventory that is not expected to be sold or returned.returned to the Company. Management estimates the inventory obsolescence allowance for both current inventory,and noncurrent inventory, and active consultant consignment inventory balances. The allowancewhich is based on management’s identification of slow moving inventory and estimated consignment inventory that will not be sold or returned.slow-moving inventory. Management has estimated a valuation allowance for these combined inventoriesboth current and noncurrent inventory, including the reserve for consigned inventory, of $330,900$0.5 million and $300,000$0.4 million as of November 30, 2017August 31, 2019 and February 28, 2017,2019, respectively.
Our principal supplier, based in England, generally requires a minimum reorderre-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.
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 and recognized asgrant. For awards subject to service conditions, compensation expense is recognized over the vesting period neton a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of estimated forfeitures.the award and are recognized ratably from the service inception date to the vesting date for each tranche. Forfeitures are recognized when they occur.
The restricted share awards granted under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) contain both service and performance conditions. The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.
For certain awards that provide discretion to adjust the allocation of the restricted shares, the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the Company and the employees has not yet been established. For awards in which the service-inception date precedes the grant date, compensation cost is accrued beginning on the service-inception date. The Company estimates the award's fair value on each subsequent reporting date, until the grant date, based on the closing market price of the Company’s common stock. On the grant date, the award's fair value is fixed, subject to the remaining performance conditions, and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date. During the first six months of fiscal 2020, the Company recognized $0.3 million of compensation expense associated with the shares granted.
Not applicable.
An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of November 30, 2017.August 31, 2019. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer).
Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective pursuant to Exchange Act Rule 13a-15(e).
In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended November 30, 2017August 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Not Applicable.
Not required by smaller reporting company.
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 (2)(3) | ||||||||||||
September 1 - 30, 2017 | 736 | $ | 10.19 | 0 | 297,368 | |||||||||||
October 1 - 31, 2017 | 0 | $ | N/A | 0 | 297,368 | |||||||||||
November 1 - 30, 2017 | 0 | N/A | 0 | 297,368 | ||||||||||||
Total | 736 | $ | 10.19 | 0 |
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, 2019 |
|
| 6,696 |
|
| $ | 6.83 |
|
|
| 6,696 |
|
|
| 747,979 |
|
July 1 - 31, 2019 |
|
| 43,607 |
|
|
| 6.94 |
|
|
| 43,607 |
|
|
| 704,372 |
|
August 1 - 31, 2019 |
|
| 10,054 |
|
|
| 6.81 |
|
|
| 10,054 |
|
|
| 694,318 |
|
Total |
|
| 60,357 |
|
| $ | 6.91 |
|
|
| 60,357 |
|
|
|
|
|
(1) |
On February 4, 2019 the Board of Directors |
Not Applicable.
None.
None.
10.01 | ||
31.1 |
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 15, 2019 By /s/ Randall W. White
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT INDEX
10.01 | ||
31.1 |