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, 2017August 31, 2022
OR
☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________..
Commission file number: 000-04957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 73-0750007 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5402 South 122nd East 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 be filed by Section 13 or 15(d)12(b) 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 ☐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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | |
Yes ☒ No ☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer | ||
Non-accelerated filer ☐ | Smaller reporting company ☒ | ||
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | |
Yes ☐ No ☒ |
As of January 12, 2018,October 2, 2022, there were 4,088,9348,685,289 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.
TABLE OF CONTENTS
Page | ||
PARTI.FINANCIALINFORMATION | ||
Item 1. | 3 | |
Item 2. | 14 | |
Item 3. | 22 | |
Item 4. | 22 | |
PARTII.OTHERINFORMATION | ||
Item 1. | 23 | |
Item 1A. | 23 | |
Item 2. | 23 | |
Item 3. | 23 | |
Item 4. | 23 | |
Item 5. | 23 | |
Item 6. | 24 | |
25 |
CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS
The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 7 – Management’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended February 28, 20172022 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
Item 1. FINANCIAL STATEMENTS
EDUCATIONALDEVELOPMENTCORPORATION |
CONDENSEDBALANCESHEETS(UNAUDITED) |
EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||||||||||
CONDENSED BALANCE SHEETS (UNAUDITED) | ||||||||||||||||
August 31, | February 28, | |||||||||||||||
ASSETS | November 30, 2017 | February 28, 2017 | 2022 | 2022 | ||||||||||||
CURRENT ASSETS: | ||||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 6,141,300 | $ | 699,200 | $ | 832,500 | $ | 361,200 | ||||||||
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 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $238,600 (August 31) and $336,700 (February 28) | 3,902,600 | 3,638,800 | ||||||||||||||
Inventories - net | 64,274,600 | 71,553,600 | ||||||||||||||
Prepaid expenses and other assets | 999,900 | 695,200 | 1,211,700 | 960,500 | ||||||||||||
Total current assets | 35,431,800 | 38,564,500 | 70,221,400 | 76,514,100 | ||||||||||||
NONCURRENT INVENTORIES —Net | 196,300 | 192,100 | ||||||||||||||
PROPERTY, PLANT AND EQUIPMENT—Net | 27,453,100 | 27,034,300 | ||||||||||||||
INVENTORIES - net | 3,305,800 | 2,055,300 | ||||||||||||||
PROPERTY, PLANT AND EQUIPMENT - net | 29,505,100 | 30,484,000 | ||||||||||||||
DEFERRED INCOME TAX ASSET | 18,600 | 118,700 | ||||||||||||||
OTHER ASSETS | 61,400 | 61,400 | 660,700 | 761,600 | ||||||||||||
DEFERRED INCOME TAXES | - | 128,000 | ||||||||||||||
TOTAL ASSETS | $ | 63,142,600 | $ | 65,980,300 | $ | 103,711,600 | $ | 109,933,700 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Accounts payable | $ | 10,263,600 | $ | 17,565,300 | $ | 4,441,500 | $ | 12,411,800 | ||||||||
Line of credit | - | 4,882,900 | 12,060,900 | 17,723,500 | ||||||||||||
Deferred revenue | 661,700 | 633,100 | ||||||||||||||
Deferred revenues | 785,500 | 681,600 | ||||||||||||||
Current maturities of long-term debt | 1,239,500 | 898,500 | 1,800,000 | 2,542,200 | ||||||||||||
Accrued salaries and commissions | 4,144,900 | 1,379,700 | 1,258,500 | 1,890,200 | ||||||||||||
Dividends payable | - | 870,700 | ||||||||||||||
Income taxes payable | 1,989,000 | 1,519,400 | - | 241,900 | ||||||||||||
Other current liabilities | 4,432,200 | 3,218,200 | 2,368,700 | 3,897,900 | ||||||||||||
Total current liabilities | 22,730,900 | 30,097,100 | 22,715,100 | 40,259,800 | ||||||||||||
LONG-TERM DEBT-Net of current maturities | 20,686,000 | 20,665,800 | ||||||||||||||
DEFERRED INCOME TAXES | 51,400 | - | ||||||||||||||
LONG-TERM DEBT - net | 33,975,800 | 22,409,500 | ||||||||||||||
OTHER LONG-TERM LIABILITIES | 106,000 | - | 396,600 | 498,900 | ||||||||||||
Total liabilities | 43,574,300 | 50,762,900 | 57,087,500 | 63,168,200 | ||||||||||||
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 | ||||||||||||||
SHAREHOLDERS' EQUITY | ||||||||||||||||
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 (August 31 and February 28) shares; Outstanding 8,685,289 (August 31) and 8,707,247 (February 28) shares | 2,540,400 | 2,540,400 | ||||||||||||||
Capital in excess of par value | 8,573,300 | 8,548,000 | 12,666,900 | 12,246,600 | ||||||||||||
Retained earnings | 20,708,400 | 16,317,800 | 43,939,000 | 44,525,100 | ||||||||||||
30,490,900 | 26,074,000 | 59,146,300 | 59,312,100 | |||||||||||||
Less treasury stock, at cost | (10,922,600 | ) | (10,856,600 | ) | (12,522,200 | ) | (12,546,600 | ) | ||||||||
Total shareholders' equity | 19,568,300 | 15,217,400 | 46,624,100 | 46,765,500 | ||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 63,142,600 | $ | 65,980,300 | ||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 103,711,600 | $ | 109,933,700 |
See notes to condensed financial statements.statements (unaudited).
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 |
EDUCATIONALDEVELOPMENTCORPORATION |
CONDENSEDSTATEMENTSOFOPERATIONS(UNAUDITED) |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
GROSS SALES | $ | 27,769,500 | $ | 44,187,100 | $ | 59,107,700 | $ | 96,578,700 | ||||||||
Less discounts and allowances | (9,908,100 | ) | (14,513,500 | ) | (19,993,300 | ) | (30,467,600 | ) | ||||||||
Transportation revenue | 1,556,900 | 3,320,800 | 3,464,800 | 7,691,200 | ||||||||||||
NET REVENUES | 19,418,300 | 32,994,400 | 42,579,200 | 73,802,300 | ||||||||||||
COST OF GOODS SOLD | 6,939,700 | 10,498,900 | 14,791,300 | 22,528,800 | ||||||||||||
Gross margin | 12,478,600 | 22,495,500 | 27,787,900 | 51,273,500 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Operating and selling | 3,798,800 | 5,239,900 | 7,569,400 | 11,682,500 | ||||||||||||
Sales commissions | 5,635,700 | 10,105,200 | 12,507,500 | 23,072,000 | ||||||||||||
General and administrative | 4,017,600 | 4,793,900 | 8,401,900 | 9,932,800 | ||||||||||||
Total operating expenses | 13,452,100 | 20,139,000 | 28,478,800 | 44,687,300 | ||||||||||||
INTEREST EXPENSE | 528,100 | 213,700 | 916,200 | 381,500 | ||||||||||||
OTHER INCOME | (396,000 | ) | (515,300 | ) | (786,700 | ) | (1,114,000 | ) | ||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES | (1,105,600 | ) | 2,658,100 | (820,400 | ) | 7,318,700 | ||||||||||
INCOME TAXES | (303,700 | ) | 759,900 | (234,300 | ) | 1,982,400 | ||||||||||
NET EARNINGS (LOSS) | $ | (801,900 | ) | $ | 1,898,200 | $ | (586,100 | ) | $ | 5,336,300 | ||||||
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE | ||||||||||||||||
Basic | $ | (0.10 | ) | $ | 0.24 | $ | (0.07 | ) | $ | 0.66 | ||||||
Diluted | $ | (0.10 | ) | $ | 0.23 | $ | (0.07 | ) | $ | 0.63 | ||||||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING | ||||||||||||||||
Basic | 8,081,807 | 8,028,594 | 8,084,117 | 8,028,929 | ||||||||||||
Diluted | 8,081,807 | 8,435,348 | 8,084,117 | 8,458,664 | ||||||||||||
Dividends per share | $ | - | $ | 0.10 | $ | - | $ | 0.20 |
See notes to condensed financial statements.
statements (unaudited).
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 |
EDUCATIONALDEVELOPMENTCORPORATION |
CONDENSEDSTATEMENTSOFCHANGESINSHAREHOLDERS’ EQUITY(UNAUDITED) |
FORTHESIX MONTHSENDEDAUGUST 31, 2022 |
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of Shares Issued | Amount | Capital in Excess of Par Value | Retained Earnings | Number of Shares | Amount | Shareholders' Equity | ||||||||||||||||||||||
BALANCE – February 28, 2022 | 12,702,080 | $ | 2,540,400 | $ | 12,246,600 | $ | 44,525,100 | 3,994,833 | $ | (12,546,600 | ) | $ | 46,765,500 | |||||||||||||||
Sales of treasury stock | - | - | 39,000 | - | (7,771 | ) | 24,400 | 63,400 | ||||||||||||||||||||
Forfeiture of restricted shares | - | - | - | - | 16,180 | - | - | |||||||||||||||||||||
Share-based compensation expense - net | - | - | 261,600 | - | - | - | 261,600 | |||||||||||||||||||||
Net earnings | - | - | - | 215,800 | - | - | 215,800 | |||||||||||||||||||||
BALANCE - May 31, 2022 | 12,702,080 | $ | 2,540,400 | $ | 12,547,200 | $ | 44,740,900 | 4,003,242 | $ | (12,522,200 | ) | $ | 47,306,300 | |||||||||||||||
Forfeiture of restricted shares | - | - | - | - | 13,549 | - | - | |||||||||||||||||||||
Share-based compensation expense - net | - | - | 119,700 | - | - | - | 119,700 | |||||||||||||||||||||
Net loss | - | - | - | (801,900 | ) | - | - | (801,900 | ) | |||||||||||||||||||
BALANCE - August 31, 2022 | 12,702,080 | $ | 2,540,400 | $ | 12,666,900 | $ | 43,939,000 | 4,016,791 | $ | (12,522,200 | ) | $ | 46,624,100 |
FORTHESIXMONTHSENDEDAUGUST 31, 2021 |
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of Shares Issued | Amount | Capital in Excess of Par Value | Retained Earnings | Number of Shares | Amount | Shareholders' Equity | ||||||||||||||||||||||
BALANCE – February 28, 2021 | 12,410,080 | $ | 2,482,000 | $ | 10,863,900 | $ | 39,683,000 | 4,063,480 | $ | (12,769,100 | ) | $ | 40,259,800 | |||||||||||||||
Sales of treasury stock | - | - | 26,600 | - | (1,714 | ) | 5,400 | 32,000 | ||||||||||||||||||||
Dividends declared ($0.10/share) | - | - | - | (834,800 | ) | - | - | (834,800 | ) | |||||||||||||||||||
Share-based compensation expense - net | - | - | 261,600 | - | - | - | 261,600 | |||||||||||||||||||||
Net earnings | - | - | - | 3,438,100 | - | - | 3,438,100 | |||||||||||||||||||||
BALANCE - May 31, 2021 | 12,410,080 | $ | 2,482,000 | $ | 11,152,100 | $ | 42,286,300 | 4,061,766 | $ | (12,763,700 | ) | $ | 43,156,700 | |||||||||||||||
Sales of treasury stock | - | - | 46,100 | - | (4,915 | ) | 14,300 | 60,400 | ||||||||||||||||||||
Issuance of restricted share awards for vesting | 292,000 | 58,400 | (82,000 | ) | - | (5,000 | ) | 23,600 | - | |||||||||||||||||||
Dividends declared ($0.10/share) | - | - | - | (893,600 | ) | - | - | (893,600 | ) | |||||||||||||||||||
Share-based compensation expense - net | - | - | 261,700 | - | - | - | 261,700 | |||||||||||||||||||||
Net earnings | - | - | - | 1,898,200 | - | - | 1,898,200 | |||||||||||||||||||||
BALANCE - August 31, 2021 | 12,702,080 | $ | 2,540,400 | $ | 11,377,900 | $ | 43,290,900 | 4,051,851 | $ | (12,725,800 | ) | $ | 44,483,400 |
See notes to condensed financial statements (unaudited).
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 |
EDUCATIONALDEVELOPMENTCORPORATION |
CONDENSEDSTATEMENTSOFCASHFLOWS(UNAUDITED) |
Six Months Ended August 31, | ||||||||
2022 | 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net earnings (loss) | $ | (586,100 | ) | $ | 5,336,300 | |||
Adjustments to reconcile net earnings (loss) to net cash used in operating activities: | ||||||||
Depreciation | 1,207,500 | 924,200 | ||||||
Deferred income taxes | (239,000 | ) | (48,500 | ) | ||||
Provision for doubtful accounts | (51,600 | ) | 61,600 | |||||
Provision for inventory valuation allowance | - | 120,000 | ||||||
Share-based compensation expense - net | 381,300 | 523,300 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (212,200 | ) | (609,300 | ) | ||||
Inventories - net | 6,028,500 | (13,223,100 | ) | |||||
Prepaid expenses and other assets | 214,200 | (158,200 | ) | |||||
Accounts payable | (7,970,300 | ) | (104,700 | ) | ||||
Accrued salaries and commissions and other liabilities | (2,263,200 | ) | (4,073,000 | ) | ||||
Deferred revenues | 103,900 | (1,166,600 | ) | |||||
Income taxes payable | (241,900 | ) | (4,100 | ) | ||||
Total adjustments | (3,042,800 | ) | (17,758,400 | ) | ||||
Net cash used in operating activities | (3,628,900 | ) | (12,422,100 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of property, plant and equipment | (221,000 | ) | (3,210,200 | ) | ||||
Purchases of other assets | (33,000 | ) | - | |||||
Net cash used in investing activities | (254,000 | ) | (3,210,200 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments on term debt | (25,175,900 | ) | (305,800 | ) | ||||
Proceeds from term debt | 36,000,000 | 5,244,700 | ||||||
Sales of treasury stock | 63,400 | 92,400 | ||||||
Net borrowings (payments) on line of credit | (5,662,600 | ) | 11,408,500 | |||||
Dividends paid | (870,700 | ) | (1,698,500 | ) | ||||
Net cash provided by financing activities | 4,354,200 | 14,741,300 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 471,300 | (891,000 | ) | |||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 361,200 | 1,812,200 | ||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 832,500 | $ | 921,200 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION | ||||||||
Cash paid for interest | $ | 838,600 | $ | 378,000 | ||||
Cash paid for income taxes (net of refunds) | $ | 95,800 | $ | 2,035,000 | ||||
NON-CASH TRANSACTIONS | ||||||||
Accrued capital expenditures | $ | - | $ | 10,600 |
See notes to condensed financial statements.statements (unaudited).
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, 20172022 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.
Reclassifications
Certain reclassifications have been made to the fiscal 2017 condensed balance sheet andyear 2022 condensed statement of earningscash flows and footnotes to conform to the classifications used in fiscal 2018.year 2023. These reclassifications had no effect on net earnings.
COVID-19 Update
The Company has taken numerous steps, and will continue to take further actions, in its approach to minimize the impact of the COVID-19 pandemic. We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business. The long-term severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact COVID-19 had during the current fiscal period.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Unaudited Condensed Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies
Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented herein and unless other disclosed, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 28, 2017,2022 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 applystandard applies to us.us:
In May 2014,March 2020, the FASB issued ASU No. 2014-09, and amended2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are discontinued, such as London Interbank Offered Rate (“LIBOR”). This ASU No. 2015-14 “Revenue from Contracts with Customers,” which providesincludes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a single revenue recognition model whichprevious accounting determination at the modification date. This ASU is intended to improve comparability over a rangeeffective March 12, 2020 through December 31, 2022. With the execution of industries, companies and geographical boundaries and will also result in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which means 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.
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 |
August 31, 2022 | February 28, 2022 | |||||||
Current: | ||||||||
Book inventory | $ | 64,709,700 | $ | 72,064,400 | ||||
Inventory valuation allowance | (435,100 | ) | (510,800 | ) | ||||
Inventories net – current | $ | 64,274,600 | $ | 71,553,600 | ||||
Noncurrent: | ||||||||
Book inventory | $ | 3,764,700 | $ | 2,437,600 | ||||
Inventory valuation allowance | (458,900 | ) | (382,300 | ) | ||||
Inventories net – noncurrent | $ | 3,305,800 | $ | 2,055,300 |
Inventory in transit totaled $442,800 and $2,732,400 at August 31, 2022 and February 28, 2022, respectively.
Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2.52½ years of anticipated sales, are included in noncurrent inventory.
Significant portions of our inventory purchases are concentrated with an England-based publishing company.company, Usborne Publishing Limited (“Usborne”). Our distribution agreement includes annual minimum purchase volumes along with specific payment terms, which if not met or payments are not received timely may result in termination of the agreement. Should termination of the agreement occur, the Company will be allowed to sell through their remaining Usborne inventory over the twelve months following the termination date. Purchases received from this companyUsborne were approximately $6.9 million$1,206,200 and $10.9 million$12,127,000 for the three months ended November 30, 2017August 31, 2022 and 2016,2021, respectively. Total inventory purchases received from all suppliers were $10.9 million$3,163,100 and $15.2 million$18,779,100 for the three months ended November 30, 2017August 31, 2022 and 2016,2021, respectively.
Purchases received from this companyUsborne were approximately $18.2 million$4,783,500 and $29.9 million$24,415,300 for the ninesix months ended November 30, 2017August 31, 2022 and 2016,2021, respectively. Total inventory purchases received from all suppliers were $27.5 million$9,141,700 and $43.7 million$36,564,300 for the ninesix months ended November 30, 2017August 31, 2022 and 2016,2021, respectively.
Note 3 – PROPERTY, PLANT AND EQUIPMENT LEASES
We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under Accounting Standards Codification (“ASC”) 842 - Leases. Our lessee arrangements include two rental agreements where we have the exclusive use of dedicated office space in San Diego, California, as well as warehouse and office space in Layton, Utah, and both qualify as an operating lease. Our lessor arrangements include three rental agreements for warehouse and office space in Tulsa, Oklahoma, and each qualify as an operating lease under ASC 842.
Operating Leases – Lessor
We recognize fixed rental income on a straight-line basis over the life of the following:lease as other income on our condensed statements of operations.
Future minimum payments receivable under operating leases with terms greater than one year are estimated as follows:
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 |
Years ending February 28 (29), | ||||
2023 | $ | 775,900 | ||
2024 | 1,568,900 | |||
2025 | 1,547,100 | |||
2026 | 1,524,300 | |||
2027 | 1,554,800 | |||
Thereafter | 6,536,200 | |||
Total | $ | 13,507,200 |
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 |
The cost of the Bank in the amount of $4.0 million with the maturity date of June 28, 2021, and interest payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.41% at November 30, 2017). 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 June 15, 2018 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% at November 30, 2017). The outstanding borrowings on Term Loan #2 were $3,639,000 and $3,847,700 at November 30, 2017leased space was $10,834,300 for both August 31, 2022 and February 28, 2017,2022, respectively. We had $0The accumulated depreciation associated with the leased assets was $2,796,700 and $4,882,900 in borrowings outstanding on line$2,603,300 as of credit at November 30, 2017August 31, 2022 and February 28, 2017,2022, respectively. Available creditBoth the leased assets and accumulated depreciation are included in property, plant and equipment - net on the condensed balance sheets.
Note 4 – DEBT
Debt consists of the following:
August 31, 2022 | February 28, 2022 | |||||||
Line of credit | $ | 12,060,900 | $ | 17,723,500 | ||||
Floating rate term loan(s) (1) | $ | 21,000,000 | $ | 14,651,000 | ||||
Fixed rate term loan | 15,000,000 | 10,349,100 | ||||||
Total long-term debt | 36,000,000 | 25,000,100 | ||||||
Less current maturities | (1,800,000 | ) | (2,542,200 | ) | ||||
Less debt issue cost | (224,200 | ) | (48,400 | ) | ||||
Long-term debt, net | $ | 33,975,800 | $ | 22,409,500 | ||||
(1) The February 28, 2022 floating rate term loans balance of $14,651,000 was comprised of the MidFirst Bank advancing term loans #1 and #2. |
On August 9, 2022, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under the revolving credit agreement was $9,105,500 at November 30, 2017its Amended and $2,117,100 at February 28, 2017.
On August 9, 2022, the Company executed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”). The Loan Agreement establishes a fixed rate term loan in the principal amount of $15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $21,000,000 (the “Floating Rate Term Loan”; together with the Fixed Rate Term Loan, all accrue interest atcollectively, the “Term Loans”), and a tiered rate based on our Adjusted Funded Debtrevolving promissory note in the principal amount up to EBITDA ratio which is payable monthly. The current pricing tier is as follows:$15,000,000 (the “Revolving Loan” or “Line of Credit”).
Features of Tranche A and Trance B Term Loans. EBITDA is defined in the Loan Agreement as earnings before interest expense, income tax expense (benefit) and depreciation and amortization expenses. The $15.0 million line of credit is limited to advance rates on eligible receivables and eligible inventory levels.include:
(i) | Term Loans on 20-year amortization with 5-year maturity date of August 9, 2027 | |
(ii) | Revolving Loan maturity date of August 9, 2023 | |
(iii) | Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26% | |
(iv) | Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was 4.03% at August 31, 2022) | |
(v) | Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 4.78% at August 31, 2022) | |
(vi) | Revolving Loan allows for Letters of Credit up to $7,500,000 (none were outstanding at August 31, 2022) |
The Loan Agreement also contains provisions that require usthe Company to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallowa minimum fixed charge ratio and limits any additional debt and limitwith other lenders. Available credit under the amountcurrent $15,000,000 revolving line of compensation, salaries, investments, capital expenditures, leasing transactions we can make on a quarterly basis. Additionally,credit with the Loan Agreement suspends dividends and stock buybacks.
The following table reflects aggregate future scheduled maturities of long-term debt during the next five fiscal years and thereafter as follows:
Years ending February 28 (29), | ||||
2023 | $ | 900,000 | ||
2024 | 1,800,000 | |||
2025 | 1,800,000 | |||
2026 | 1,800,000 | |||
2027 | 1,800,000 | |||
Thereafter | 27,900,000 | |||
Total | $ | 36,000,000 |
Note 5
– EARNINGS PER SHAREBasic earnings (loss) per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period.period excluding nonvested restricted stock awards. Diluted EPS is based onincludes the combined weighted average numberdilutive effect of common shares outstandingissued unvested restricted stock awards and dilutiveadditional potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS we haveunder stock warrants, restricted stock and stock options, if applicable. We utilized the treasury stock method. method in computing the potential common shares issuable under stock warrants, restricted stock and stock options.
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below.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, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Earnings (loss): | ||||||||||||||||
Net earnings (loss) applicable to common shareholders | $ | (801,900 | ) | $ | 1,898,200 | $ | (586,100 | ) | $ | 5,336,300 | ||||||
Weighted average shares: | ||||||||||||||||
Weighted average shares outstanding-basic | 8,081,807 | 8,028,594 | 8,084,117 | 8,028,929 | ||||||||||||
Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards | - | 406,754 | - | 429,735 | ||||||||||||
Weighted average shares outstanding-diluted | 8,081,807 | 8,435,348 | 8,084,117 | 8,458,664 | ||||||||||||
Earnings (loss) per share: | ||||||||||||||||
Basic | $ | (0.10 | ) | $ | 0.24 | $ | (0.07 | ) | $ | 0.66 | ||||||
Diluted | $ | (0.10 | ) | $ | 0.23 | $ | (0.07 | ) | $ | 0.63 |
As shown in the future is 296,632. Additionally, at an exercise pricetable below, the following shares have not been included in the calculation of $5.25diluted earnings (loss) per share as they would be anti-dilutive to the Company purchased into treasury shares 3,544 shares at $9.85 during the nine months ended November 30, 2017.calculation above.
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Weighted average shares: | ||||||||||||||||
Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards | 264,653 | - | 331,956 | - |
Note 6 – STOCK-BASEDSHARE-BASED COMPENSATION
We account for stock-basedshare-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant and recognized asgrant. For awards subject to service conditions, compensation expense is recognized over the vesting period.period on a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche. Forfeitures are recognized when they occur. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and share awards are updated and compensation expense is adjusted based on updated information.
In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan established up to 600,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 or 2021. The Company exceeded all defined metrics during these fiscal years and 600,000 shares were granted to members of management according to the Plan. The granted shares under the 2019 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.
In July 2021, our shareholders approved the Company’s 2022 Long-Term Incentive Plan (“2022 LTI Plan”). The 2022 LTI Plan established up to 300,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2022 or 2023. The number of restricted shares to be distributed depends on attaining the performance metrics defined by the 2022 LTI Plan and may result in the distribution of a number of shares that is less than, but not greater than, the number of restricted shares outlined in the terms of the 2022 LTI Plan. Restricted shares granted under the 2022 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.
During fiscal year 2019, the quarter ended NovemberCompany granted 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share. In fiscal year 2021, 5,000 of these restricted shares were forfeited. These shares were made available to be reissued to remaining participants upon forfeiture. During fiscal year 2023, 10,000 of these restricted shares were forfeited, along with 969 additional shares purchased with dividends received from the original issue date. The fiscal year 2023 forfeitures are available for reissue to remaining participants under the 2019 LTI Plan. The remaining compensation expense for the outstanding awards, totaling approximately $315,300 as of August 31, 2022, will be recognized ratably over the remaining vesting period of approximately 6 months.
During fiscal year 2021, the Company granted 297,000 restricted shares under the 2019 LTI Plan, including the 5,000 aforementioned shares that were previously forfeited and held in Treasury, with an average grant-date fair value of $6.30 per share. During fiscal year 2023, 18,000 of these restricted shares were forfeited, along with 760 additional shares purchased with dividends received from the original issue date. These shares are available for reissue to remaining participants under the 2019 LTI Plan. The remaining compensation expense of these awards, totaling approximately $922,600 as of August 31, 2022, will be recognized ratably over the remaining vesting period of approximately 30 2017,months. Total shares available for reissue to remaining participants under the 2019 LTI Plan was 28,000 at August 31, 2022.
As of August 31, 2022, no shares have been granted under the 2022 LTI Plan.
A summary of compensation expense recognized in connection with restricted share awards follows:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Share-based compensation expense | $ | 261,600 | $ | 261,700 | $ | 523,200 | $ | 523,300 | ||||||||
Less reduction of expense for forfeitures | (141,900 | ) | - | (141,900 | ) | - | ||||||||||
Share-based compensation expense - net | 119,700 | 261,700 | 381,300 | 523,300 |
The following table summarizes stock award activity during the first six months of fiscal year 2023 under the 2019 LTI Plan:
Shares | Weighted Average Fair Value (per share) | |||||||
Outstanding at February 28, 2022 | 600,000 | $ | 8.14 | |||||
Granted | - | - | ||||||
Vested | - | - | ||||||
Forfeited | (28,000 | ) | 7.60 | |||||
Outstanding at August 31, 2022 | 572,000 | $ | 8.17 |
As of August 31, 2022, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $1,237,900, which we expect to recognize over a former employee exercised 5,000 vested stock options.weighted-average period of 23.9 months.
Note 7
– SHIPPING AND HANDLING COSTSWe classify shipping and handling costs incurred are included inas operating and selling expenses in the condensed statements of operations. Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies. These costs were $5,328,900$3,123,700 and $4,569,900$5,036,000 for the three months ended November 30, 2017August 31, 2022 and 2016,2021, respectively. These costs were $12,200,100$6,686,300 and $12,134,700$11,392,400 for the ninesix months ended November 30, 2017August 31, 2022 and 2016,2021, respectively.
Note 9
We have two reportable segments: 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 UBAM segment markets its products through a network of independent sales consultants using a combination of internet sales, direct sales, home shows and book fairs. Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores, museums, trade and museums,specialty wholesalers, through commissioned sales representatives trade and specialty wholesalers and anour internal tele-sales group. The UBAM segment markets its products through a network of independent sales consultants using a combination of 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 (loss) 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, 2022 and 2016,2021, are as follows:
NET REVENUES | ||||||||||||||||
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
UBAM | $ | 15,932,200 | $ | 29,518,100 | $ | 35,949,000 | $ | 67,135,000 | ||||||||
Publishing | 3,486,100 | 3,476,300 | 6,630,200 | 6,667,300 | ||||||||||||
Total | $ | 19,418,300 | $ | 32,994,400 | $ | 42,579,200 | $ | 73,802,300 |
NET REVENUES | ||||||||||||||||||||||||||||||||
EARNINGS (LOSS) BEFORE INCOME TAXES | EARNINGS (LOSS) BEFORE INCOME TAXES | |||||||||||||||||||||||||||||||
Three Months Ended November 30, | Nine Months Ended November 30, | Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
UBAM | $ | 1,697,900 | $ | 5,579,100 | $ | 5,029,200 | $ | 13,440,400 | ||||||||||||||||||||||||
Publishing | $ | 2,439,600 | $ | 3,075,000 | $ | 6,538,700 | $ | 7,244,600 | 815,900 | 982,800 | 1,565,600 | 1,844,300 | ||||||||||||||||||||
UBAM | 36,468,400 | 27,622,600 | 83,481,400 | 72,130,200 | ||||||||||||||||||||||||||||
Other | (3,619,400 | ) | (3,903,800 | ) | (7,415,200 | ) | (7,966,000 | ) | ||||||||||||||||||||||||
Total | $ | 38,908,000 | $ | 30,697,600 | $ | 90,020,100 | $ | 79,374,800 | $ | (1,105,600 | ) | $ | 2,658,100 | $ | (820,400 | ) | $ | 7,318,700 |
Note 9 – FINANCIAL INSTRUMENTS
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 |
The following methods and assumptions are used in estimating the fair-value disclosures for financial instruments:
- | The carrying amounts reported in the condensed balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. |
- | The estimated fair value of our term notes payable is estimated by management to approximate $35,475,900 and $24,521,600 as of August 31, 2022 and February 28, 2022, respectively. The term notes payable reflected on the Company’s condensed balance sheets were $36,000,000 and $25,000,100 as of August 31, 2022 and February 28, 2022, respectively. Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and collateral. |
Note 11
The Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to the end of the third quarter, we hadperiod that were not shipped as of August 31, 2022 or February 28, 2022 are recorded as deferred revenues on the condensed balance sheets. We received approximately $661,700$785,500 and $681,600, as of August 31, 2022 and February 28, 2022, respectively, in payments for sales orders which werewill be shipped out subsequent to the quarter end. Asend of November 30, 2017, these prepaid sales orders are included in deferred revenue on the condensed balance sheet.period.
Note 12
None.
Item 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting Forward-Looking Statements
The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control, 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, the COVID-19 pandemic, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 28, 20172022 and this Quarterly Report on Form 10-Q, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur. See “Cautionary“Cautionary Remarks Regarding Forward-Looking Statements”Statements” in the front of this Quarterly Report on Form 10-Q.
Overview
We are the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books and the owner and exclusive publisher of Kane Miller Book Publisher (“Kane Miller”). Significant portions of our inventory purchases are concentrated with Usborne. Our distribution agreement includes annual minimum purchase volumes along with specific payment terms, which if not met or payments are not received timely may result in termination of the agreement. Should termination of the agreement occur, the Company will be allowed to sell through their remaining Usborne inventory over the twelve months following the termination date. 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. The Publishing segment markets its products on a wholesale basis to various retail accounts. All other supporting administrative activities are recognized as other expenses outside of our two segments. Other expenses 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 earningsoperations data:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net revenues | $ | 19,418,300 | $ | 32,994,400 | $ | 42,579,200 | $ | 73,802,300 | ||||||||
Cost of goods sold | 6,939,700 | 10,498,900 | 14,791,300 | 22,528,800 | ||||||||||||
Gross margin | 12,478,600 | 22,495,500 | 27,787,900 | 51,273,500 | ||||||||||||
Operating expenses | ||||||||||||||||
Operating and selling | 3,798,800 | 5,239,900 | 7,569,400 | 11,682,500 | ||||||||||||
Sales commissions | 5,635,700 | 10,105,200 | 12,507,500 | 23,072,000 | ||||||||||||
General and administrative | 4,017,600 | 4,793,900 | 8,401,900 | 9,932,800 | ||||||||||||
Total operating expenses | 13,452,100 | 20,139,000 | 28,478,800 | 44,687,300 | ||||||||||||
Interest expense | 528,100 | 213,700 | 916,200 | 381,500 | ||||||||||||
Other income | (396,000 | ) | (515,300 | ) | (786,700 | ) | (1,114,000 | ) | ||||||||
Earnings (loss) before income taxes | (1,105,600 | ) | 2,658,100 | (820,400 | ) | 7,318,700 | ||||||||||
Income taxes | (303,700 | ) | 759,900 | (234,300 | ) | 1,982,400 | ||||||||||
Net earnings (loss) | $ | (801,900 | ) | $ | 1,898,200 | $ | (586,100 | ) | $ | 5,336,300 |
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 |
See the detailed discussion of revenues, costs of services, gross margin and general and administrative expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods.
Non-Segment Operating Results for the Three Months Ended November 30, 2017August 31, 2022
Total operating expenses
not associated with a reporting segmentInterest expense
Income taxes decreased $1.1 million, or 137.5%, to a tax benefit of $0.3 million for the three months ended November 30, 2017, which was consistent with the interestAugust 31, 2022, from an expense reported for the same quarter last year.
Non-Segment Operating Results for the NineSix Months Ended November 30, 2017August 31, 2022
Total operating expenses
not associated with a reporting segmentInterest expense increased operating profits of approximately $0.4$0.5 million, partially offset by reduced other expenses totaling $0.2 million.
Income taxes decreased $2.2 million, or 110.0%, to a tax rate was 38.1%benefit of $0.2 million for the ninesix months ended November 30, 2017, and 37.9%August 31, 2022, from a tax expense of $2.0 million for the same period a year ago. Theseago, primarily resulting from operating losses for the six months ended August 31, 2022. Our effective tax rate increased to 28.6% for the six months ended August 31, 2022, from 27.1% for the six months ended August 31, 2021 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.
UBAM Operating Results for the Three and NineSix Months Ended November 30, 2017August 31, 2022
The following table summarizes the operating results of the UBAM segment for the three and nine months ended November 30, 2017 and 2016:segment:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Gross sales | $ | 20,411,500 | $ | 36,789,400 | $ | 45,142,600 | $ | 82,325,100 | ||||||||
Less discounts and allowances | (6,033,700 | ) | (10,590,700 | ) | (12,653,200 | ) | (22,876,400 | ) | ||||||||
Transportation revenue | 1,554,400 | 3,319,400 | 3,459,600 | 7,686,300 | ||||||||||||
Net revenues | 15,932,200 | 29,518,100 | 35,949,000 | 67,135,000 | ||||||||||||
Cost of goods sold | 5,085,500 | 8,636,600 | 11,247,500 | 18,886,500 | ||||||||||||
Gross margin | 10,846,700 | 20,881,500 | 24,701,500 | 48,248,500 | ||||||||||||
Operating expenses | ||||||||||||||||
Operating and selling | 2,960,700 | 4,215,000 | 5,946,200 | 9,559,700 | ||||||||||||
Sales commissions | 5,473,100 | 9,937,600 | 12,208,700 | 22,795,900 | ||||||||||||
General and administrative | 715,000 | 1,149,800 | 1,517,400 | 2,452,500 | ||||||||||||
Total operating expenses | 9,148,800 | 15,302,400 | 19,672,300 | 34,808,100 | ||||||||||||
Operating income | $ | 1,697,900 | $ | 5,579,100 | $ | 5,029,200 | $ | 13,440,400 | ||||||||
Average number of active consultants | 26,800 | 46,100 | 29,500 | 50,200 |
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 |
UBAM Operating Results for the Three Months Ended November 30, 2017August 31, 2022
UBAM segment’s sales consist of home shows, internet shows and book fairs. Netnet revenues increased $8.9decreased $13.6 million, or 32.2%46.1%, to $36.5$15.9 million during the three-month period ending November 30, 2017,three months ended August 31, 2022, when compared with net revenues of $27.6to $29.5 million reported the same quarter a year ago. The increase in 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.
Gross margin decreased $10.1 million, or 48.3%, to $10.8 million during the three months ended August 31, 2022, when compared to $20.9 million during the same period last year due to recent facility changes. During the first and second quarters of this fiscal year, we modified our distribution center setup and added new automation that increased our daily shipping capacity. With this increased capacity, our shipments were able to keep pace with our incoming orders during the quarter ended November 30, 2017. During the third quarter last year, our shipments did not keep pace with incoming orders and we ended the quarter with a large backlog of orders totaling approximately $9.6 million, which was recognized as deferred revenue at quarter end.
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 operating expenses increased $4.1decreased $6.2 million, or 25.1%40.5%, to $20.4$9.1 million during the three-month period ending November 30, 2017,ended August 31, 2022, when compared withto $15.3 million reported in the same quarter last year.a year ago. Operating expenses increased primarily from increased operating and selling costs and increased sales commissions, both tied to the growth in revenues during the period.
Operating income of the UBAM segment decreased $3.9 million, or 69.6% to $1.7 million during the three months ended August 31, 2022, when compared to $5.6 million reported in the same quarter a year ago. Operating income of the UBAM division as a percentage of net revenues for the three months ended August 31, 2022 decreased to 10.7%, compared to 18.9% for the three months ended August 31, 2021. This change primarily resulted from increased salescost of goods sold, increased freight costs and gross margins, partially offset byother increased operating and selling expenses and sales commissions.expenses.
UBAM Operating Results for the NineSix Months Ended November 30, 2017August 31, 2022
UBAM net revenues increased $11.4decreased $31.2 million, or 15.8%46.5%, to $83.5$35.9 million during the nine-monthsix-month period ending November 30, 2017, whenended August 31, 2022, compared with net revenues of $72.1to $67.1 million reported duringfrom the same period a year ago. The increase in net revenues primarily resulted from the increase 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 margin decreased $23.5 million, or 48.8%, to $24.7 million during the first nine months of fiscal 2018. Our consultant growth is driven by existing active consultants recruiting and retaining new consultants.
Total UBAM operating expenses increased $4.4decreased $15.1 million, or 10.4%43.4%, to $46.7$19.7 million during the nine-monthsix-month period ending November 30, 2017,ended August 31, 2022, from $34.8 million for the same period a year ago. Operating and selling expenses decreased $3.7 million, or 38.5%, to $5.9 million during the six-month period ended August 31, 2022, when compared to $9.6 million reported in the same period a year ago, primarily due to a decrease in shipping costs associated with $42.3the decrease in volume of orders shipped totaling approximately $5.5 million. This expense reduction was partially offset by increased freight costs of approximately $1.2 million due to increased freight rates and fuel surcharges, as well as $0.4 million in increased consultant incentive trip expenses and increases in convention expense of $0.2 million. The June 2022 annual UBAM convention was the first hybrid “in-person & virtual” convention. While our in-person convention attendance numbers were promising, net profits were down from the prior two years, when our convention costs were minimal given we were 100% virtual. Sales commissions decreased $10.6 million, or 46.5%, to $12.2 million during the six-month period ended August 31, 2022, when compared to $22.8 million reported in the same period a year ago, primarily due to the decrease in net revenues. General and administrative expenses decreased $1.0 million, or 40.0%, to $1.5 million, from $2.5 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes of $0.6 million and a $0.3 million reduction in consultant bonus awards, both resulting from the decrease in sales during the six months ended August 31, 2022.
Operating income of the UBAM segment decreased $8.4 million, or 62.7%, to $5.0 million during the six months ended August 31, 2022, when compared to $13.4 million reported in the same period last year. Operating income of the UBAM division as a percentage of net revenues for the six months ended August 31, 2022 was 14.0%, compared to 20.0% for the six months ended August 31, 2021. This change primarily resulted from increased cost of goods sold, increased freight costs and other increased operating and selling expenses.
Publishing Operating Results for the Three and Six Months Ended August 31, 2022
The following table summarizes the operating results of the Publishing segment:
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Gross sales | $ | 7,358,000 | $ | 7,397,700 | $ | 13,965,100 | $ | 14,253,600 | ||||||||
Less discounts and allowances | (3,874,400 | ) | (3,922,800 | ) | (7,340,100 | ) | (7,591,200 | ) | ||||||||
Transportation revenue | 2,500 | 1,400 | 5,200 | 4,900 | ||||||||||||
Net revenues | 3,486,100 | 3,476,300 | 6,630,200 | 6,667,300 | ||||||||||||
Cost of goods sold | 1,854,200 | 1,862,300 | 3,543,800 | 3,642,300 | ||||||||||||
Gross margin | 1,631,900 | 1,614,000 | 3,086,400 | 3,025,000 | ||||||||||||
Total operating expenses | 816,000 | 631,200 | 1,520,800 | 1,180,700 | ||||||||||||
Operating income | $ | 815,900 | $ | 982,800 | $ | 1,565,600 | $ | 1,844,300 |
Publishing Operating Results for the Three Months Ended August 31, 2022
Our Publishing division’s net revenues remained consistent at $3.5 million during the three-month period ended August 31, 2022, and 2021.
Gross margin remained consistent at $1.6 million during the three-month period ended August 31, 2022, and 2021. Gross margin as a percentage of net revenues increased slightly to 46.8% during the three-month period ended August 31, 2022, from 46.4% reported in the same quarter a year ago. Gross margin as a percentage of net revenues fluctuates primarily from the different discount levels offered to customers as well as changes in the mix of products sold between Kane Miller and Usborne.
Total operating expenses of the Publishing segment increased $0.2 million, or 33.3%, to $0.8 million, from $0.6 million, during the three-month periods ended August 31, 2022 and 2021, respectively. This change was due to an increase of $0.1 million in payroll expenses from our acquisition of Learning Wrap-Ups in December 2021 and a $0.1 million increase in other various expenses.
Operating income of the Publishing segment decreased $0.2 million, or 20.0%, to $0.8 million from $1.0 million for the three-month periods ended August 31, 2022 and 2021, respectively. This change was driven by the increase in our operating expenses.
Publishing Operating Results for the Six Months Ended August 31, 2022
Our Publishing division’s net revenues decreased slightly by $0.1 million, or 1.5%, to $6.6 million during the six-month period ended August 31, 2022, from $6.7 million reported in the same period a year ago.
Gross margin increased $0.1 million, or 3.3%, to $3.1 million during the six-month period ended August 31, 2022, from $3.0 million reported in the same period a year ago, primarily due to a decrease in discounts resulting from a change in our customer mix. Gross margin as a percentage of net revenues increased to 46.6%, during the six-month period ended August 31, 2022, from 45.4% reported in the same period a year ago. Customers receive varying discounts due to sales volumes and contract terms.
Total operating expenses of the Publishing segment increased $0.3 million, or 25.0%, to $1.5 million during the six-month period ended August 31, 2022, from $1.2 million reported in the same period a year ago. This change was due to an increase of $0.2 million in payroll expenses from our acquisition of Learning Wrap-Ups in December 2021 and a $0.1 million increase in other various expenses.
Operating income of the Publishing segment decreased $0.2 million, or 11.1%, to $1.6 million during the six-month period ended August 31, 2022 when compared to $1.8 million reported in the same period a year ago, due primarily to the increase in operating and selling expenses and increased sales commissions associated with UBAM’s revenue growth.
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 |
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, to pay 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 year 2023, we experienced cash inflowoutflows from our operations of $11.3 million. Net earnings$3,628,900. These cash outflows resulted from:
●net loss of $4.4 million were increased by the following items:$586,100
Adjusted for:
●depreciation expense of $0.9 million,$1,207,500
●share-based compensation expense, net of $381,300
Offset by:
●deferred income taxes of $0.2 million,$239,000
●provision for doubtful accounts of $0.4 million,$51,600
Positively impacted by:
●decrease in accounts payableinventories, net of $7.3 million,$6,028,500
●decrease in prepaid expenses and other assets of $0.3 million.$214,200
●increase in inventory was primarily the resultdeferred revenues of management efforts to reduce inventory volumes that were purchased in recent quarters. These inventory purchases were made based on sales forecast assumptions that were greater than our actual sales results.$103,900
Negatively impacted by:
●decrease in accounts payable from the end of the fiscal year 2017 was primarily a result$7,970,300
●decrease in accrued salaries and commissions, and other liabilities of payments owed to our suppliers for increased inventory purchases made over the last six months$2,263,200
●decrease in income taxes payable of fiscal year 2017.$241,900
●increase in accounts receivable of $212,200
Cash used in investing activities was $1.3 million$254,000 for capital expenditures, which was primarily comprisedconsisting of improvements made$221,000 of software upgrades to twoour proprietary systems that our UBAM consultants use to monitor their business and place customer orders and $33,000 of our pick lines which were upgradedother assets associated with new automated routing functionality to bypass zones that had no picksthe Company’s planned rebranding of approximately $1.0 million and inventory management systems of $0.1 million and various other improvements to the warehouse, facility and equipment totaling $0.2 million.its UBAM sales division.
Cash used inprovided by financing activities was $4.6 million,$4,354,200, which was primarily comprised of repaymentnet proceeds from term debt of borrowings under our$36,000,000 and cash received in treasury stock transactions of $63,400, offset by payments on term debt of $25,175,900, net payments on the line of credit of $4.9 million$5,662,600 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.$870,700 for dividends.
During fiscal year 2018,2023, we continue to expect ourthe cash generated from our operations and cash available through our expanded line of credit with our BankLender will provide us the abilityliquidity we need to meet our liquidity requirements.support ongoing operations. We have a history of profitability andexpect to generate positive operational cash flow. Consequently, cashflow as we normalize inventory levels. Cash generated from operations will be used to increasepurchase inventory in anticipation of continued sales growthorder to expand our product offerings and to liquidate existing debt. Following a return to profitability, any excess cash is expected to be distributed to our shareholders.
On August 9, 2022, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Amended and Restated Loan Agreement withdated February 15, 2021 (as amended), between the Company and MidFirst Bank. The Company’s payment to MidFirst Bank, including interest, was approximately $45.0 million, which satisfied all of the Company’s debt obligations with MidFirst Bank. The Company did not incur any early termination penalties as a result of the repayment of indebtedness or termination of the Amended and Restated Loan Agreement, which provided Term Loan #1, comprisedAdvancing Term Loan #1, Advancing Term Loan #2 and the Revolving Loan.
On August 9, 2022, the Company executed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Tranche A of $13.4 million and Tranche B of $5.0 million both withOklahoma” or the maturity date of December 1, 2025. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly.
Features of the Loan Agreement to June 15, 2018. The Fifth Amendment also modified the Loan Agreement to include an Advancing Term Loan of $3.0 million which the Company is using to cover 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 15 and December 1, 2017, at which time the balance was converted to a term loan and set to amortize over a thirty-six-month periodinclude:
(i) | Term Loans on 20-year amortization with 5-year maturity date of August 9, 2027 | |
(ii) | Revolving Loan maturity date of August 9, 2023 | |
(iii) | Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26% | |
(iv) | Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was 4.03% at August 31, 2022) | |
(v) | Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 4.78% at August 31, 2022) | |
(vi) | Revolving Loan allows for Letters of Credit up to $7,500,000 |
The Loan Agreement also contains provisions that require the Company to maintain a provision for our use ofminimum fixed charge ratio and limits any additional debt with other lenders. Available credit under 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 thecurrent $15,000,000 revolving line of credit pluswith the letters of credit issued would not exceed the borrowing base in effectCompany’s new Lender was approximately $2,939,100 at the time. Additionally, the Loan Agreement suspends dividends. For the quarter ended November 30, 2017, 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 amount of compensation, salaries, investments, capital expenditures and leasing transactions.August 31, 2022.
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 |
Years ending February 28 (29), | ||||
2023 | $ | 900,000 | ||
2024 | 1,800,000 | |||
2025 | 1,800,000 | |||
2026 | 1,800,000 | |||
2027 | 1,800,000 | |||
Thereafter | 27,900,000 | |||
Total | $ | 36,000,000 |
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.States(“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report.report and in our audited financial statements as of and for the year ended February 28, 2022 included in our Form 10-K. 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, 2022 and $190,000 as of February 28, 2017.2022.
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, when applicable (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$0.2 million and $0.3 million at November 30, 2017, and $485,000 at February 28, 2017. Included within this allowance is $264,000 and $217,000 as of November 30, 2017August 31, 2022 and February 28, 2017, respectively, of reserve related to consignment inventory held by inactive consultants.2022, respectively.
Inventory
Our inventory contains approximately 2,200over 2,000 titles, each with different sell through rates of sale, depending upon the nature and popularity of the title. Almost all of our product line is saleable as the booksWe maintain very few titles that are not topical in nature andnature. As such, the majority of the titles we sell remain current in content today as well as in the future.for several years. Most of our products are printed in China, Europe, China, Singapore, India, Malaysia and Dubai resulting in a fivesix to eight-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 yearan anticipated turnover ratio by title. All inventoryInventory in excess of 2 ½2½ years of anticipated sales is classified as noncurrent inventory. These inventory quantities have additional exposure for storage damages and related issues, and therefore have higher obsolescence reserves. Noncurrent inventory balances prior to valuation allowances were $502,200$3.8 million and $467,100$2.4 million at November 30, 2017August 31, 2022 and February 28, 2017,2022, respectively.
Our principal supplier, based in England, generally requires a minimum reorder 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-orderreorder based upon this analysis.
Consultants that meet certain eligibility requirements may request and receive inventory on consignment. We believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events; in summary, having consignment inventory leads to additional sales opportunities. Approximately 7.9% of our active consultants have maintained consignment inventory at the end of the second quarter of fiscal year 2023. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with consultants was $1.3 million and $1.4 million at August 31, 2022 and February 28, 2022, respectively.
Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company. Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory. Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.9 million at August 31, 2022 and February 28, 2022.
Share-Based Compensation
We account for stock-basedshare-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant 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. Any cash dividends declared after the restricted stock award is issued, but before the vesting period is completed, will be reinvested in Company shares at the opening trading price on the dividend payment date. Shares purchased with cash dividends will also retain the same restrictions until the completion of the original vesting period associated with the awarded shares.
The restricted share awards under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) and 2022 Long-Term Incentive Plan (“2022 LTI Plan”) contain both service and performance conditions. The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.
During the first six months of fiscal year 2023, the Company recognized $0.5 million of compensation expense associated with the shares granted, which was offset by a $0.1 million reduction of compensation expense during the quarter associated with shares that were forfeited. These forfeited shares are available for re-issue under the terms of the 2019 LTI Plan.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We performed an evaluation was performed of the effectiveness of the design and operation of our disclosure“disclosure controls and procedures pursuant to Exchange Actprocedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of November 30, 2017.the end of the period covered by this report. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer).
Based on that evaluation, these officers concluded that our disclosure controls and procedures were designed and were effective pursuant to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act Rule 13a-15(e).is accumulated and communicated to them, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported in accordance with the time periods specified in SEC rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events.
Changes in Internal Control over Financial Reporting
During the second quarter of the fiscal year covered by this report on Form 10-Q, there have been no changechanges in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended November 30, 2017 that hashave materially affected or isare reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 1A. RISK FACTORS
Not required by smaller reporting company.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Period | Total # of Shares Purchased | Average Price Paid per Share | Total # of Shares Purchased as Part of Publicly Announced Plan (1) | Maximum # of Shares that May be Repurchased under the Plan (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 | ||||||||||||
June 1 - 30, 2022 | - | $ | - | - | 514,594 | |||||||||||
July 1 - 31, 2022 | - | - | - | 514,594 | ||||||||||||
August 1 - 31, 2022 | - | - | - | 514,594 | ||||||||||||
Total | - | $ | - | - |
(1) | On February 4, 2019 the Board of Directors |
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
None.
Item 5. 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
3.1* | Restated Certificate of Incorporation dated April 26, 1968 and Certificate of Amendment thereto dated June 21, 1968 are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10-K (File No. 0-04957). | |
3.2* | Certificate of Amendment of Restated Certificate of Incorporation dated August 27, 1977 is incorporated herein by reference to Exhibit 20.1 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957). | |
3.3* | By-Laws, as amended, are incorporated herein by reference to Exhibit 20.2. to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957). | |
3.4* | Certificate of Amendment of Restated Certificate of Incorporation dated November 17, 1986 is incorporated herein by reference to Exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-04957). | |
3.5 | ||
3.6 | ||
3.7 | ||
10.1 | ||
10.2 | ||
10.3 | ||
31.1** |
32.1** | ||
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Paper Filed
** Filed Herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
EDUCATIONAL DEVELOPMENT CORPORATION (Registrant) | |||
Date: October 6, 2022 | By | /s/ Craig M. White | |
President and Chief Executive Officer (Principal Executive Officer) | |||