UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2018
OR
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ___________ to ____________.
Commission file number: 000-04957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 73-0750007 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5402 South 122nd East Avenue, Tulsa, Oklahoma | 74146 | |
(Address of principal executive office) | (Zip Code) |
Registrant’s telephone number, including area code (918) 622-4522
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.20 par value | EDUC | NASDAQ |
(Title of class) | (Trading symbol) | (Name of each exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company ☒ | |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 9, 2018,11, 2019, there were 4,093,4818,434,999 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.
TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. 3 Item 2. 15 Item 3. 22 Item 4. 22 PART II. OTHER INFORMATION Item 1. 23 Item 1A. 23 Item 2. 23 Item 3. 23 Item 4. 23 Item 5. 23 Item 6. 23 24 CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended February 28, 2121222222222222222320182019 and in this quarterly report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report on Form 10-Q and speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
PART I. FINANCIAL INFORMATION
| EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||
| ASSETS | May 31, 2018 | February 28, 2018 | ||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 4,430,900 | $ | 2,723,300 | ||||
| Accounts receivable, less allowance for doubtful accounts $347,200 (May 31) and $297,100 (February 28) | 2,772,300 | 2,913,700 | ||||||
| Inventories—Net | 27,715,700 | 26,618,600 | ||||||
| Prepaid expenses and other assets | 959,200 | 1,259,000 | ||||||
| Total current assets | 35,878,100 | 33,514,600 | ||||||
| INVENTORIES—Net | 490,300 | 435,900 | ||||||
| PROPERTY, PLANT AND EQUIPMENT—Net | 27,705,600 | 27,860,500 | ||||||
| OTHER ASSETS | 26,900 | 26,900 | ||||||
| TOTAL ASSETS | $ | 64,100,900 | $ | 61,837,900 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 13,229,500 | $ | 12,469,000 | ||||
| Deferred revenues | 442,400 | 693,000 | ||||||
| Current maturities of long-term debt | 891,100 | 881,200 | ||||||
| Accrued salaries and commissions | 1,910,800 | 2,007,900 | ||||||
| Income taxes payable | 2,285,200 | 1,798,800 | ||||||
| Dividends payable | 409,000 | - | ||||||
| Other current liabilities | 3,132,800 | 3,517,900 | ||||||
| Total current liabilities | 22,300,800 | 21,367,800 | ||||||
| LONG-TERM DEBT—Net of current maturities | 19,563,900 | 19,825,100 | ||||||
| DEFERRED INCOME TAXES—Net | 325,000 | 136,900 | ||||||
| OTHER LONG-TERM LIABILITIES | 106,000 | 106,000 | ||||||
| Total liabilities | 42,295,700 | 41,435,800 | ||||||
| COMMITMENTS (Note 7) | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
Common stock, $0.20 par value; Authorized 8,000,000 shares; Issued 6,046,040 (May 31 and February 28) shares; Outstanding 4,090,034 (May 31) and 4,089,806 (February 28) shares | 1,209,200 | 1,209,200 | ||||||
| Capital in excess of par value | 8,573,300 | 8,573,300 | ||||||
| Retained earnings | 22,940,100 | 21,532,500 | ||||||
| 32,722,600 | 31,315,000 | |||||||
| Less treasury stock, at cost | (10,917,400 | ) | (10,912,900 | ) | ||||
| Total shareholders’ equity | 21,805,200 | 20,402,100 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 64,100,900 | $ | 61,837,900 | ||||
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED BALANCE SHEETS (UNAUDITED) |
May 31, | February 28, | |||||||
ASSETS | 2019 | 2019 | ||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,402,400 | $ | 3,199,300 | ||||
Accounts receivable, less allowance for doubtful accounts of $368,800 (May 31) and $268,600 (February 28) | 3,075,600 | 3,258,800 | ||||||
Inventories - Net | 33,507,900 | 33,445,600 | ||||||
Prepaid expenses and other assets | 1,089,900 | 1,603,500 | ||||||
Total current assets | 39,075,800 | 41,507,200 | ||||||
INVENTORIES - Net | 556,000 | 575,000 | ||||||
PROPERTY, PLANT AND EQUIPMENT - Net | 26,927,700 | 27,164,600 | ||||||
OTHER ASSETS | 72,500 | 19,500 | ||||||
TOTAL ASSETS | $ | 66,632,000 | $ | 69,266,300 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 12,043,700 | $ | 14,228,600 | ||||
Deferred revenues | 388,900 | 965,600 | ||||||
Current maturities of long-term debt | 944,900 | 945,900 | ||||||
Accrued salaries and commissions | 1,926,700 | 2,039,000 | ||||||
Income taxes payable | 1,191,500 | 756,400 | ||||||
Dividends payable | 408,900 | 410,100 | ||||||
Other current liabilities | 3,292,700 | 4,177,900 | ||||||
Total current liabilities | 20,197,300 | 23,523,500 | ||||||
LONG-TERM DEBT - Net of current maturities | 18,593,900 | 18,830,700 | ||||||
DEFERRED INCOME TAXES - Net | 820,800 | 872,600 | ||||||
OTHER LONG-TERM LIABILITIES | 148,600 | 109,000 | ||||||
Total liabilities | 39,760,600 | 43,335,800 | ||||||
SHAREHOLDERS' EQUITY | ||||||||
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,092,080 (May 31 and February 28) shares; Outstanding 8,177,294 (May 31) and 8,195,082 (February 28) shares | 2,418,400 | 2,418,400 | ||||||
Capital in excess of par value | 9,209,500 | 8,975,100 | ||||||
Retained earnings | 26,709,600 | 25,754,900 | ||||||
| 38,337,500 | 37,148,400 | |||||||
Less treasury stock, at cost | (11,466,100 | ) | (11,217,900 | ) | ||||
Total shareholders' equity | 26,871,400 | 25,930,500 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 66,632,000 | $ | 69,266,300 | ||||
See notes to financial statements.
| EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||
| Three Months Ended May 31, | ||||||||
| 2018 | 2017 | |||||||
| GROSS SALES | $ | 39,074,800 | $ | 34,511,100 | ||||
| Less discounts and allowances | (11,901,400 | ) | (10,270,500 | ) | ||||
| Transportation revenue | 2,848,900 | 2,700,600 | ||||||
| NET REVENUES | 30,022,300 | 26,941,200 | ||||||
| COST OF GOODS SOLD | 9,669,700 | 8,598,800 | ||||||
| Gross margin | 20,352,600 | 18,342,400 | ||||||
| OPERATING EXPENSES: | ||||||||
| Operating and selling | 4,752,200 | 4,226,800 | ||||||
| Sales commissions | 9,373,100 | 8,509,200 | ||||||
| General and administrative | 3,892,500 | 3,713,900 | ||||||
| Total operating expenses | 18,017,800 | 16,449,900 | ||||||
| INTEREST EXPENSE | 213,400 | 281,500 | ||||||
| OTHER INCOME | (374,400 | ) | (371,200 | ) | ||||
| EARNINGS BEFORE INCOME TAXES | 2,495,800 | 1,982,200 | ||||||
| INCOME TAXES | 679,200 | 756,900 | ||||||
| NET EARNINGS | $ | 1,816,600 | $ | 1,225,300 | ||||
| BASIC AND DILUTED EARNINGS PER SHARE: | ||||||||
| Basic | $ | 0.44 | $ | 0.30 | ||||
| Diluted | $ | 0.44 | $ | 0.30 | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: | ||||||||
| Basic | 4,088,595 | 4,090,143 | ||||||
| Diluted | 4,092,504 | 4,093,878 | ||||||
| Dividends declared per share | $ | 0.10 | $ | 0.00 | ||||
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) |
Three Months Ended May 31, | ||||||||
2019 | 2018 | |||||||
GROSS SALES: | $ | 36,473,700 | $ | 39,074,800 | ||||
Less discounts and allowances | (11,331,400 | ) | (11,901,400 | ) | ||||
Transportation revenue | 2,445,100 | 2,848,900 | ||||||
NET REVENUES | 27,587,400 | 30,022,300 | ||||||
COST OF GOODS SOLD | 9,056,200 | 9,669,700 | ||||||
Gross margin | 18,531,200 | 20,352,600 | ||||||
OPERATING EXPENSE: | ||||||||
Operating and selling | 4,383,900 | 4,752,200 | ||||||
Sales commissions | 8,533,000 | 9,373,100 | ||||||
General and administrative | 3,938,200 | 3,892,500 | ||||||
Total operating expenses | 16,855,100 | 18,017,800 | ||||||
INTEREST EXPENSE | 232,000 | 213,400 | ||||||
OTHER INCOME | (402,400 | ) | (374,400 | ) | ||||
EARNINGS BEFORE INCOME TAXES | 1,846,500 | 2,495,800 | ||||||
INCOME TAXES | 482,900 | 679,200 | ||||||
NET EARNINGS | $ | 1,363,600 | $ | 1,816,600 | ||||
BASIC AND DILUTED EARNINGS PER SHARE | ||||||||
Basic | $ | 0.17 | $ | 0.22 | ||||
Diluted | $ | 0.17 | $ | 0.22 | ||||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING | ||||||||
Basic | 8,184,272 | 8,177,190 | ||||||
Diluted | 8,191,062 | 8,185,008 | ||||||
| Dividends declared per share | $ | 0.05 | $ | 0.05 | ||||
See notes to financial statements.
| EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||||||||||||||||||||||
| FOR THE THREE MONTHS ENDED MAY 31, 2018 | ||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
| Number of | Capital in | |||||||||||||||||||||||||||
| Shares | Excess of | Retained | Number of | Shareholders’ | ||||||||||||||||||||||||
| Issued | Amount | Par Value | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
| BALANCE—February 28, 2018 | 6,046,040 | $ | 1,209,200 | $ | 8,573,300 | $ | 21,532,500 | 1,956,234 | $ | (10,912,900 | ) | $ | 20,402,100 | |||||||||||||||
| Purchases of treasury stock | - | - | - | - | 1,423 | (29,600 | ) | (29,600 | ) | |||||||||||||||||||
| Sales of treasury stock | - | - | - | - | (1,651 | ) | 25,100 | 25,100 | ||||||||||||||||||||
| Dividends declared ($0.10/share) | - | - | - | (409,000 | ) | - | - | (409,000 | ) | |||||||||||||||||||
| Net earnings | - | - | - | 1,816,600 | - | - | 1,816,600 | |||||||||||||||||||||
| BALANCE— May 31, 2018 | 6,046,040 | $ | 1,209,200 | $ | 8,573,300 | $ | 22,940,100 | 1,956,006 | $ | (10,917,400 | ) | $ | 21,805,200 | |||||||||||||||
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) |
FOR THE THREE MONTHS ENDED MAY 31, 2019 |
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of | Capital in | |||||||||||||||||||||||||||
Shares | Excess of | Retained | Number of | Shareholders' | ||||||||||||||||||||||||
Issued | Amount | Par Value | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
BALANCE - February 28, 2019 | 12,092,080 | $ | 2,418,400 | $ | 8,975,100 | $ | 25,754,900 | 3,896,998 | $ | (11,217,900 | ) | $ | 25,930,500 | |||||||||||||||
Purchases of treasury stock | - | - | - | - | 36,959 | (302,500 | ) | (302,500 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | 68,100 | - | (19,171 | ) | 54,300 | 122,400 | ||||||||||||||||||||
Dividends declared ($0.05/share) | - | - | - | (408,900 | ) | - | - | (408,900 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 6) | - | - | 166,300 | - | - | - | 166,300 | |||||||||||||||||||||
Net earnings | - | - | - | 1,363,600 | - | - | 1,363,600 | |||||||||||||||||||||
BALANCE - May 31, 2019 | 12,092,080 | $ | 2,418,400 | $ | 9,209,500 | $ | 26,709,600 | 3,914,786 | $ | (11,466,100 | ) | $ | 26,871,400 | |||||||||||||||
FOR THE THREE MONTHS ENDED MAY 31, 2018 |
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of | Capital in | |||||||||||||||||||||||||||
Shares | Excess of | Retained | Number of | Shareholders' | ||||||||||||||||||||||||
Issued | Amount | Par Value | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
BALANCE - February 28, 2018 | 12,092,080 | $ | 2,418,400 | $ | 8,573,300 | $ | 20,714,500 | 3,912,468 | $ | (11,304,100 | ) | $ | 20,402,100 | |||||||||||||||
Purchases of treasury stock | - | - | - | - | 2,846 | (29,600 | ) | (29,600 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | - | - | (3,302 | ) | 25,100 | 25,100 | ||||||||||||||||||||
Dividends declared ($0.05/share) | - | - | - | (409,000 | ) | - | - | (409,000 | ) | |||||||||||||||||||
Net earnings | - | - | - | 1,816,600 | - | - | 1,816,600 | |||||||||||||||||||||
BALANCE - May 31, 2018 | 12,092,080 | $ | 2,418,400 | $ | 8,573,300 | $ | 22,122,100 | 3,912,012 | $ | (11,308,600 | ) | $ | 21,805,200 | |||||||||||||||
See notes to financial statements.
| EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||
| FOR THE THREE MONTHS ENDED MAY 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net earnings | $ | 1,816,600 | $ | 1,225,300 | ||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | 352,800 | 293,300 | ||||||
| Deferred income taxes, net | 188,100 | 54,500 | ||||||
| Provision for doubtful accounts | 85,000 | 90,300 | ||||||
| Provision for inventory valuation allowance | 92,100 | 205,600 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 56,400 | (395,000 | ) | |||||
| Inventories, net | (1,243,600 | ) | 4,389,100 | |||||
| Prepaid expenses and other assets | 299,800 | (3,400 | ) | |||||
| Accounts payable | 1,366,700 | (7,133,900 | ) | |||||
Accrued salaries and commissions, and other liabilities | (482,200 | ) | 355,200 | |||||
| Deferred revenues | (250,600 | ) | (86,100 | ) | ||||
| Income tax payable | 486,400 | 663,100 | ||||||
| Total adjustments | 950,900 | (1,567,300 | ) | |||||
| Net cash provided by (used in) operating activities | 2,767,500 | (342,000 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property, plant and equipment | (804,100 | ) | (236,800 | ) | ||||
| Net cash used in investing activities | (804,100 | ) | (236,800 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on long-term debt | (251,300 | ) | (219,000 | ) | ||||
| Cash received from sale of treasury stock | 25,100 | 9,000 | ||||||
| Cash used to purchase treasury stock | (29,600 | ) | - | |||||
| Net borrowings under line of credit | - | 677,400 | ||||||
| Net cash provided by (used in) financing activities | (255,800 | ) | 467,400 | |||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,707,600 | (111,400 | ) | |||||
| CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD | 2,723,300 | 699,200 | ||||||
| CASH AND CASH EQUIVALENTS—END OF PERIOD | $ | 4,430,900 | $ | 587,800 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | ||||||||
| Cash paid for interest | $ | 229,300 | $ | 275,200 | ||||
| Cash paid for income taxes (net of refunds) | $ | (6,100 | ) | $ | - | |||
| NON-CASH TRANSACTIONS: | ||||||||
| Accrued capital expenditures | $ | 33,300 | $ | - | ||||
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) |
FOR THE THREE MONTHS ENDED MAY 31, |
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net earnings | $ | 1,363,600 | $ | 1,816,600 | ||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 366,200 | 352,800 | ||||||
Deferred income taxes, net | (51,800 | ) | 188,100 | |||||
Provision for doubtful accounts | 103,500 | 85,000 | ||||||
Provision for inventory valuation allowance | 117,300 | 92,100 | ||||||
Share-based compensation expense | 166,300 | - | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 79,700 | 56,400 | ||||||
Inventories | (160,600 | ) | (1,243,600 | ) | ||||
Prepaid expenses and other assets | 460,600 | 299,800 | ||||||
Accounts payable | (2,184,900 | ) | 1,366,700 | |||||
Accrued salaries and commissions, and other liabilities | (957,900 | ) | (482,200 | ) | ||||
Deferred revenues | (576,700 | ) | (250,600 | ) | ||||
Income taxes payable | 435,100 | 486,400 | ||||||
Total adjustments | (2,203,200 | ) | 950,900 | |||||
Net cash provided by (used in) operating activities | (839,600 | ) | 2,767,500 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (129,300 | ) | (804,100 | ) | ||||
Net cash used in investing activities | (129,300 | ) | (804,100 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Payments on long-term debt | (237,800 | ) | (251,300 | ) | ||||
Cash received from sale of treasury stock | 122,400 | 25,100 | ||||||
Cash used to purchase treasury stock | (302,500 | ) | (29,600 | ) | ||||
Dividends paid | (410,100 | ) | - | |||||
Net cash used in financing activities | (828,000 | ) | (255,800 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,796,900 | ) | 1,707,600 | |||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 3,199,300 | 2,723,300 | ||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 1,402,400 | $ | 4,430,900 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | ||||||||
Cash paid for interest | $ | 232,000 | $ | 229,300 | ||||
Cash paid for income taxes (net of refunds) | $ | 100,200 | $ | (6,100 | ) | |||
NON-CASH TRANSACTIONS | ||||||||
Accrued capital expenditures | $ | - | $ | 33,300 | ||||
See notes to financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note 1
– BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING 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, 20182019 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year due to the seasonality of our product sales.
On July 24, 2018, our Board of Directors authorized a two-for-one stock split in the form of a stock dividend. The stock dividend was distributed on August 22, 2018 to shareholders of record as of August 14, 2018. All share-based data, including the number of shares outstanding and per share amounts, have been maderetroactively adjusted to reflect the fiscal 2018 condensed balance sheets, condensed statement of earnings and consolidated statement of cash flows to conform to the classifications used in fiscal 2019. These reclassifications had no effect on net earnings.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Unaudited Condensed Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies
Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented below, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 28, 20182019 included in our Form 10-K.
New Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued accounting standards updates (“ASU”) and concluded that the following recently issued accounting standards apply to us.
In February 2016, FASB issued ASU No. 2016-02, “Leases,” which is intended to establish a comprehensive new lease accounting model. The new standard clarifies the definition of a lease,Leases (Topic 842). This ASU requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leasesa right of use asset and lease liability on the balance sheet as a lease liabilityfor all leases, with a corresponding right-of-use asset.the exception of short-term leases. The new accounting model for lessors remains largely unchanged, although some changes have been made to align it with the new lessee model and the new revenue recognition guidance. This update also requires companies to include additional disclosures regarding their lessee and lessor agreements. We adopted this standard is effective for interimon March 1, 2019, and annual periods beginning after December 15, 2018, which means the first quarter of our fiscal year 2020. The new standard requiresit did not have a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. We are currently reviewing the ASU and evaluating the potentialmaterial impact on our condensed financial statements.
In June 2016, FASB issued ASU No. 2016-13 “Financial Instruments—Credit Losses”, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which meansyears. The Company adopted ASU No. 2016-13 in the first quarter of our fiscal year 2020. We anticipate this ASU having minimal impact on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. The Company adopted ASU No. 2018-13 in the first quarter of fiscal 2020. The adoption of this ASU did not have a material impact on the Company’s condensed financial position, results of operations or cash flows.
Note 2
– INVENTORIESInventories consist of the following:
| 2018 | ||||||||
| May 31, | February 28, | |||||||
| Current: | ||||||||
| Book inventory | $ | 28,177,200 | $ | 27,078,600 | ||||
| Inventory valuation allowance | (461,500 | ) | (460,000 | ) | ||||
| Inventories net–current | $ | 27,715,700 | $ | 26,618,600 | ||||
| Noncurrent: | ||||||||
| Book inventory | $ | 838,800 | $ | 707,700 | ||||
| Inventory valuation allowance | (348,500 | ) | (271,800 | ) | ||||
| Inventories net–noncurrent | $ | 490,300 | $ | 435,900 | ||||
2019 | ||||||||
May 31, | February 28, | |||||||
Current: | ||||||||
Book inventory | $ | 33,646,400 | $ | 33,494,200 | ||||
Inventory valuation allowance | (138,500 | ) | (48,600 | ) | ||||
Inventories net - current | $ | 33,507,900 | $ | 33,445,600 | ||||
Noncurrent: | ||||||||
Book inventory | $ | 892,000 | $ | 904,400 | ||||
Inventory valuation allowance | (336,000 | ) | (329,400 | ) | ||||
Inventories net - noncurrent | $ | 556,000 | $ | 575,000 | ||||
Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2.5 years of anticipated sales, are included in non-current inventory.
Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing, Ltd. (“Usborne”). Purchases from this company were approximately $7.6$5.9 million and $1.9$7.6 million for the three months ended May 31, 20182019 and 2017,2018, respectively. Total inventory purchases from all suppliers were $11.0$9.2 million and $5.4$11.0 million for the three months ended May 31, 2019 and 2018, respectively.
Note 3 – LEASES
As of March 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) using the modified retrospective method of adoption. We elected to use the transition option that allows us to initially apply the new lease standard at the adoption date and 2017, respectively.
We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under ASC 842. Our lessee arrangement includes a rental agreement where we have exclusive use of dedicated office space in San Diego, California, and qualifies as an operating lease. Our lessor arrangements include two rental agreements for warehouse and office space in Tulsa, Oklahoma, and both qualify as operating leases under ASC 842.
In accordance with ASC 842, we have made an accounting policy election to not apply the new standard to lessee arrangements with a term of one year or less and no purchase option that is reasonably certain of exercise. We will continue to account for these short-term arrangements by recognizing payments and expenses as incurred, without recording a lease liability and right-of-use asset.
We have also made an accounting policy election for both our lessee and lessor arrangements to combine lease and non-lease components. This election is applied to all of our lease arrangements as our non-lease components are not material and do not result in significant timing differences in the recognition of rental expenses or income.
In addition, the Company elected the package of practical expedients upon adoption which permits the Company to not reassess under the new standard the Company’s prior conclusions about lease identification, lease classification and initial direct costs.
Operating Leases – Lessee
We recognize a lease liability, reported in other liabilities, for each lease based on the present value of remaining minimum fixed rental payments (which includes payments under any renewal option that we are reasonably certain to exercise), using a discount rate that approximates the rate of interest we would have to pay to borrow on a collateralized basis over a similar term. We also recognize a right-of-use asset, reported in other assets on the condensed balance sheets, for each lease, valued at the lease liability, adjusted for prepaid or accrued rent balances existing at the time of initial recognition. The lease liability and right-of-use asset are reduced over the term of the lease as payments are made and the assets are used.
Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on our condensed statements of earnings. Variable and short-term rental payments are recognized as costs and expenses as they are incurred. Future minimum rental payments under operating leases with initial terms greater than one year as of May 31, 2019, are as follows:
Year ending February 28 (29), | ||||
2020 | $ | 9,600 | ||
2021 | 13,200 | |||
2022 | 13,700 | |||
2023 | 14,200 | |||
2024 | 8,400 | |||
Total future minimum rental payments | 59,100 | |||
Present value discount | (6,200 | ) | ||
Total operating lease liability | $ | 52,900 |
The following table provides further information about our operating leases as of and for the three months ended May 31, 2019:
Current lease liability | $ | 13,300 | ||
Long-term lease liability | $ | 39,600 | ||
Right-of-use asset | $ | 52,900 | ||
Fixed lease cost | $ | 3,100 | ||
Operating cash flows – operating lease | $ | 3,100 | ||
Remaining lease term (months) | 52 | |||
Discount rate | 4.60 | % |
Rent expense was $2,700 for first quarter of fiscal 2019 and was recognized in accordance with ASC 840.
Operating Leases – Lessor
We recognize fixed rental income on a straight-line basis over the life of the lease as revenue on our condensed statements of earnings. Variable rental payments are recognized as revenue in the period in which the changes in facts and circumstances on which the variable lease payments are based occur.
Future minimum payments receivable under operating leases with terms greater than one year as of May 31, 2019 are estimated as follows:
Year ending February 28 (29), | ||||
2020 | $ | 1,041,600 | ||
2021 | 1,414,300 | |||
2022 | 1,441,900 | |||
2023 | 1,470,000 | |||
2024 | 1,471,700 | |||
Thereafter | 10,806,600 | |||
Total | $ | 17,646,100 |
The cost of the leased space was approximately $10,359,900 as of May 31, 2019 and February 28, 2019. The accumulated depreciation associated with the leased assets was $1,323,500 and $1,233,400 as of May 31, 2019 and February 28, 2019, respectively. Both the leased assets and accumulated depreciation are included in property, plant and equipment-net on the condensed balance sheets.
Note 34 – DEBT
Debt consists of the following:
| 2018 | ||||||||
| May 31, | February 28, | |||||||
| Line of credit | $ | - | $ | - | ||||
| Long-term debt | $ | 20,455,000 | $ | 20,706,300 | ||||
| Less current maturities | (891,100 | ) | (881,200 | ) | ||||
| Long-term debt, net of current maturities | $ | 19,563,900 | $ | 19,825,100 | ||||
2019 | ||||||||
May 31, | February 28, | |||||||
Line of credit | $ | - | $ | - | ||||
Long-term debt | $ | 19,538,800 | $ | 19,776,600 | ||||
Less current maturities | (944,900 | ) | (945,900 | ) | ||||
Long-term debt, net of current maturities | $ | 18,593,900 | $ | 18,830,700 | ||||
We have a Loan Agreement dated as of March 10, 2016 (as amended the “Loan Agreement”) with MidFirst Bank (“the Bank”) which includes multiple loans. Term Loan #1 is comprised of Tranche A totaling $13.4 million and Tranche B totaling $5.0 million, both with the maturity date of December 1, 2025. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. For Tranche B, interest is payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (5.03%(4.95% at May 31, 2018)2019). Term Loan #1 is secured by the primary office, warehouse and land.
We also have Term Loan #2 with the Bank in the amount of $4.0 million with the maturity date of June 28, 2021, and interest payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (5.03%(4.95% at May 31, 2018)2019). Term Loan #2 is secured by our secondary warehouse and land. The Loan Agreement also provided a $15.0 million revolving loan (“line of credit”) through JuneAugust 15, 20182019 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 (5.03%(4.95% at May 31, 2018)2019).
Tranche B of Term Loan #1, unpaid accrued interest thereon,Term Loan #2 and any recourse amounts as defined in the Continuing Guaranty Agreement (See Note 12).
Pricing Tier | Adjusted Funded Debt to EBITDA Ratio | LIBOR Margin (bps) | ||
I | > | 325.00 | ||
II | > | 300.00 | ||
III | > | 275.00 | ||
IV | < | 250.00 |
Adjusted Funded Debt is defined as all long-term and short-term bank debt less the outstanding balances of Tranche A and Tranche B Term Loans. EBITDA is defined in the Loan Agreement as earnings before interest expense, income tax expense (benefit) and depreciation and amortization expenses.
We had no borrowings outstanding on our revolving credit agreement at May 31, 20182019 and February 28, 2018.2019. Available credit under the revolving credit agreement was $10,448,800$12,567,900 and $9,424,000$12,439,300 at May 31, 20182019 and at February 28, 2019, respectively.
On June 15, 2018, respectively.the Company executed the Eighth Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modifies the Loan Agreement, extending the termination date until August 15, 2019, reduces the interest rate pricing grid for all floating rate borrowings covered by the Loan Agreement, establishes a new $3,000,000 advancing term loan to be used for capital expansions to increase daily shipping capacity, releases the personal Guaranty of Randall W. White and Carol White, along with other covenant restrictions being lessened. The amendment also includes an adjustment to the Adjusted Funded Debt to EBITDA ratio for covenant compliance.
On February 7, 2019, the Company executed the Ninth Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modifies the Loan Agreement, removing the covenant prohibiting the Company from repurchasing its shares, subject to certain conditions.
The Loan Agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue or obtain issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than JuneAugust 15, 2018 (see Note 12),2019, and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time. For the quarter ended May 31, 2018,2019, we had no letters of credit outstanding.
The Loan Agreement also contains provisions that require us to maintain specified financial ratios, restrictratios; restricts transactions with related parties, prohibitparties; prohibits mergers or consolidation, disallowconsolidation; disallows additional debt,debt; and limitlimits the amount of compensation, salaries, investments, capital expenditures and leasing transactions we can make on a quarterly basis. Additionally, the Loan Agreement places limitations on the amount of dividends that may be distributed and certainthe total value of stock buyback transactions.
The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:
| Year ending February 28 (29), | ||||
| 2019 | $ | 735,800 | ||
| 2020 | 926,300 | |||
| 2021 | 968,100 | |||
| 2022 | 1,016,800 | |||
| 2023 | 1,065,300 | |||
| Thereafter | 15,742,700 | |||
| $ | 20,455,000 | |||
Year ending February 28 (29), | ||||
2020 | $ | 705,900 | ||
2021 | 988,400 | |||
2022 | 1,038,000 | |||
2023 | 1,087,500 | |||
2024 | 1,139,400 | |||
Thereafter | 14,579,600 | |||
| Total | $ | 19,538,800 |
Note 45
Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS, we have utilized the treasury stock method.
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below.
Three Months Ended May 31, | ||||||||
2019 | 2018 | |||||||
Earnings per share: | ||||||||
Net earnings applicable to common shareholders | $ | 1,363,600 | $ | 1,816,600 | ||||
Shares: | ||||||||
Weighted average shares outstanding-basic | 8,184,272 | 8,177,190 | ||||||
Assumed exercise of options | 6,790 | 7,818 | ||||||
Weighted average shares outstanding-diluted | 8,191,062 | 8,185,008 | ||||||
Diluted earnings per share: | ||||||||
Basic | $ | 0.17 | $ | 0.22 | ||||
Diluted | $ | 0.17 | $ | 0.22 | ||||
| Three Months Ended May 31, | ||||||||
| 2018 | 2017 | |||||||
| Earnings Per Share: | ||||||||
Net earnings applicable to common shareholders | $ | 1,816,600 | $ | 1,225,300 | ||||
| Shares: | ||||||||
Weighted average shares outstanding–basic | 4,088,595 | 4,090,143 | ||||||
| Assumed exercise of options | 3,909 | 3,735 | ||||||
Weighted average shares outstanding–diluted | 4,092,504 | 4,093,878 | ||||||
| Diluted Earnings Per Share: | ||||||||
| Basic | $ | 0.44 | $ | 0.30 | ||||
| Diluted | $ | 0.44 | $ | 0.30 | ||||
Note 56
We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant and recognized asgrant. For awards subject to service conditions, compensation expense is recognized over the vesting period.period on a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche. Forfeitures are recognized when they occur.
The Company has outstanding stock options under the 2002 Employee Incentive Stock Option Plan totaling 10,000 shares. No such transactions occurredoptions have been exercised in the three months ended May 31, 2018 and 2017.2019. All options outstanding at May 31, 20182019 expire in December 2019.
The restricted share awards granted under the 2019 LTI Plan contain both service and performance conditions. The Company recognizes share compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employee have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.
For certain awards that provide discretion to adjust the allocation of the restricted shares, the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the Company and the employee has not yet been established. For awards in which the service-inception date precedes the grant date, compensation cost is accrued beginning on the service-inception date. The Company estimates the award's fair value on each subsequent reporting date, until the grant date, based on the closing market price of the Company’s common stock. On the grant date, the award's fair value is fixed, subject to the remaining performance conditions, and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date.
During fiscal year 2019, the Company granted approximately 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share. During fiscal year 2019, the Company recognized $401,800 of compensation expense associated with the shares granted. During the first fiscal quarter of 2020, the Company recognized $166,300 of compensation expense associated with the shares granted in fiscal year 2019. The remaining compensation expense for these awards, totaling approximately $2,494,200, will be recognized ratably over the remaining vesting period of approximately 45 months.
A summary of compensation expense recognized in connection with restricted share awards follows:
Three Months Ended May 31, | ||||||||
2019 | 2018 | |||||||
Share-based compensation expense | $ | 166,300 | $ | - | ||||
Note 67
We classify shipping and handling costs as operating and selling expenses in the statements of earnings. Shipping and handling costs include postage, freight, handling costs, as well as, shipping materials and supplies. These costs were
$4,212,200 and $4,399,000Note 8
– BUSINESS SEGMENTSWe have two reportable segments: Publishing and Usborne Books & More (“UBAM”) and Publishing.. These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, through commissioned sales representatives, trade and specialty wholesalers and anour internal tele-sales group. Our UBAM segment markets its products through a network of independent sales consultants using a combination of internet sales, direct sales, home shows and book fairs and internet sales.
The accounting policies of the segments are the same as those of the rest of the Company. We evaluate segment performance based on earnings before income taxes of the segments, which is defined as segment net 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-month periodperiods ended May 31, 2019 and 2018, and 2017, follows:
| NET REVENUES | ||||||||
| 2018 | 2017 | |||||||
| Publishing | $ | 2,306,200 | $ | 2,122,100 | ||||
| UBAM | 27,716,100 | 24,819,100 | ||||||
| Total | $ | 30,022,300 | $ | 26,941,200 | ||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | ||||||||
| 2018 | 2017 | |||||||
| Publishing | $ | 506,300 | $ | 569,100 | ||||
| UBAM | 5,099,000 | 4,379,500 | ||||||
| Other | (3,109,500 | ) | (2,966,400 | ) | ||||
| Total | $ | 2,495,800 | $ | 1,982,200 | ||||
| NET REVENUES | ||||||||
Three Months Ended May 31, | ||||||||
2019 | 2018 | |||||||
Publishing | $ | 2,339,300 | $ | 2,306,200 | ||||
UBAM | 25,248,100 | 27,716,100 | ||||||
Total | $ | 27,587,400 | $ | 30,022,300 | ||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | ||||||||
Three Months Ended May 31, | ||||||||
2019 | 2018 | |||||||
Publishing | $ | 635,700 | $ | 506,300 | ||||
UBAM | 4,369,000 | 5,099,000 | ||||||
Other | (3,158,200 | ) | (3,109,500 | ) | ||||
Total | $ | 1,846,500 | $ | 2,495,800 | ||||
Note 9
– FAIR VALUE MEASUREMENTSThe valuation hierarchy included in U.S. GAAP considers the transparency of inputs used to value assets and liabilities as of the measurement date. A financial instrument’s classification within the valuation hierarchy is based on the lowest level of input that is significant to its fair value measurement. The three levels of the valuation hierarchy and the classification of our financial assets and liabilities within the hierarchy are as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly. If an asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs for the asset or liability.
We do not report any assets or liabilities at fair value in the financial statements. However, the estimated fair value of our line of credit is estimated by management to approximate the carrying value of
Note 10
– DEFERRED REVENUESThe Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to the end of our first fiscal quarter we hadthat were not shipped as of May 31, 2019 are recorded as deferred revenues on the condensed balance sheet. We received approximately $442,400$388,900 at May 31, 2019 in payments for sales orders which were, or will be, shipped out subsequent to the quarter end. As of May 31, 2018, these prepaid sales orders areOrders that were included in deferred revenues onpredominantly shipped within the condensed balance sheet.
| As Reported | Adjustments | Without Adoption | ||||||||||
| ASSETS | ||||||||||||
| Accounts receivable—Net | $ | 2,913,700 | $ | (99,900 | ) | $ | 2,813,800 | |||||
| Inventories—Net | 26,618,600 | (100 | ) | 26,618,500 | ||||||||
| Prepaid expenses and other assets | 1,259,000 | (117,000 | ) | 1,142,000 | ||||||||
| Total current assets | 33,514,600 | (217,000 | ) | 33,297,600 | ||||||||
| TOTAL ASSETS | 61,837,900 | (217,000 | ) | 61,620,900 | ||||||||
| LIABILITIES | ||||||||||||
| Other current liabilities | 3,517,900 | (217,000 | ) | 3,300,900 | ||||||||
| Total liabilities | 41,435,800 | (217,000 | ) | 41,218,800 | ||||||||
| As Reported | Adjustments | Without Adoption | ||||||||||
| GROSS SALES | $ | 34,511,100 | $ | (3,337,200 | ) | $ | 31,173,900 | |||||
| Less discounts and allowances | (10,270,500 | ) | 3,326,800 | (6,943,700 | ) | |||||||
| Transportation revenue | 2,700,600 | - | 2,700,600 | |||||||||
| NET REVENUES | 26,941,200 | (10,400 | ) | 26,930,800 | ||||||||
| COST OF GOODS SOLD | 8,598,800 | (1,174,000 | ) | 7,424,800 | ||||||||
| Gross margin | 18,342,400 | 1,163,600 | 19,506,000 | |||||||||
| OPERATING EXPENSES: | ||||||||||||
| Operating and selling | 4,226,800 | 1,165,600 | 5,392,400 | |||||||||
| Sales commissions | 8,509,200 | - | 8,509,200 | |||||||||
| General and administrative | 3,713,900 | - | 3,713,900 | |||||||||
| Total operating expenses | 16,449,900 | 1,165,600 | 17,615,500 | |||||||||
| INTEREST EXPENSE | 281,500 | - | 281,500 | |||||||||
| OTHER INCOME | (371,200 | ) | (2,000 | ) | (373,200 | ) | ||||||
| EARNINGS BEFORE INCOME TAXES | 1,982,200 | - | 1,982,200 | |||||||||
| INCOME TAXES | 756,900 | - | 756,900 | |||||||||
| NET EARNINGS | $ | 1,225,300 | $ | - | $ | 1,225,300 | ||||||
| As Reported | Adjustments | Without Adoption | ||||||||||
| GROSS SALES | $ | 29,986,300 | $ | (3,337,900 | ) | $ | 26,648,400 | |||||
| Less discounts and allowances | (7,860,700 | ) | 3,327,500 | (4,533,200 | ) | |||||||
| Transportation revenue | 2,693,500 | - | 2,693,500 | |||||||||
| NET REVENUES | 24,819,100 | (10,400 | ) | 24,808,700 | ||||||||
| COST OF GOODS SOLD | 7,473,700 | (1,174,000 | ) | 6,299,700 | ||||||||
| Gross margin | 17,345,400 | 1,163,600 | 18,509,000 | |||||||||
| OPERATING EXPENSES: | ||||||||||||
| Operating and selling | 3,165,200 | 1,164,900 | 4,330,100 | |||||||||
| Sales commissions | 8,423,700 | 8,423,700 | ||||||||||
| General and administrative | 1,377,000 | 1,377,000 | ||||||||||
| Total operating expenses | 12,965,900 | 1,164,900 | 14,130,800 | |||||||||
| OPERATING INCOME | $ | 4,379,500 | $ | (1,300 | ) | $ | 4,378,200 | |||||
| As Reported | Adjustments | Without Adoption | ||||||||||
| GROSS SALES | $ | 4,524,800 | $ | 700 | $ | 4,525,500 | ||||||
| Less discounts and allowances | (2,409,800 | ) | (700 | ) | (2,410,500 | ) | ||||||
| Transportation revenue | 7,100 | - | 7,100 | |||||||||
| NET REVENUES | 2,122,100 | - | 2,122,100 | |||||||||
| COST OF GOODS SOLD | 1,125,100 | - | 1,125,100 | |||||||||
| Gross margin | 997,000 | - | 997,000 | |||||||||
| OPERATING EXPENSES: | ||||||||||||
| Operating and selling | 244,900 | - | 244,900 | |||||||||
| Sales commissions | 83,500 | - | 83,500 | |||||||||
| General and administrative | 99,500 | - | 99,500 | |||||||||
| Total operating expenses | 427,900 | - | 427,900 | |||||||||
| OPERATING INCOME | $ | 569,100 | $ | - | $ | 569,100 | ||||||
Note 1211
On June 15, 2018, the Company executed the Eighth Amendment Loan Agreement with the Bank relatedJuly 11, 2019, our Board of Directors declared a distribution of $0.05 per share of common stock. This cash distribution will be paid on or about September 10, 2019 to our Loan Agreement dated asshareholders of March 10, 2016, as amended. The Amendment modifies the Loan Agreement, extending the termination date untilrecord on August 15, 2019, reduces the interest rate pricing grid for all floating rate borrowings covered by the Loan Agreement, establishes a new $3,000,000 advancing term loan to be used for capital expansions to increase daily shipping capacity, releases the Guaranty Agreement of Randall W. White and Carol White, along with other covenant restrictions being lessened. The amendment also includes an adjustment to the Adjusted Funded Debt to EBITDA ratio for covenant compliance.
Factors Affecting Forward-Looking Statements
The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, number of our success in recruiting and retaining new consultants, our ability to locate and procure desired books, our ability to ship the volume of orders that are received without creating backlogs,shipment delays, our ability to obtain adequate financing for working capital and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 28, 20182019 and this Quarterly Report on Form 10-Q, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur. See “Cautionary Remarks Regarding Forward-Looking Statements” in the front of this Quarterly Report on Form 10-Q.
Overview
We are the exclusive United States trade co-publisher of Usborne children’s books and the owner of Kane Miller. We operate two separate segments: UBAM and Publishing, to sell our Usborne and Kane Miller children’s books. These two segments each have their own customer base. The Publishing segment markets its products on a wholesale basis to various retail accounts. The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, internet party plan events and book fairs. The Publishing segment markets its products on a wholesale basis to various retail accounts. All other supporting administrative activities are recognized as other expenses outside of our two segments. Other expenses are primarily compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate office and distribution facility.
The following table shows our condensed statements of earnings data:
For the Three Months Ended May 31, | ||||||||
| 2018 | 2017 | |||||||
| Net revenues | $ | 30,022,300 | $ | 26,941,200 | ||||
| Cost of goods sold | 9,669,700 | 8,598,800 | ||||||
| Gross margin | 20,352,600 | 18,342,400 | ||||||
| Operating expenses: | ||||||||
| Operating and selling | 4,752,200 | 4,226,800 | ||||||
| Sales commissions | 9,373,100 | 8,509,200 | ||||||
| General and administrative | 3,892,500 | 3,713,900 | ||||||
| Total operating expenses | 18,017,800 | 16,449,900 | ||||||
| Other (income) expense | ||||||||
| Interest expense | 213,400 | 281,500 | ||||||
| Other income | (374,400 | ) | (371,200 | ) | ||||
| Earnings before income taxes | 2,495,800 | 1,982,200 | ||||||
| Income taxes | 679,200 | 756,900 | ||||||
| Net earnings | $ | 1,816,600 | $ | 1,225,300 | ||||
Three Months Ended May 31, | ||||||||
2019 | 2018 | |||||||
Net revenues | $ | 27,587,400 | $ | 30,022,300 | ||||
Cost of goods sold | 9,056,200 | 9,669,700 | ||||||
Gross margin | 18,531,200 | 20,352,600 | ||||||
Operating expenses | ||||||||
Operating and selling | 4,383,900 | 4,752,200 | ||||||
Sales commissions | 8,533,000 | 9,373,100 | ||||||
General and administrative | 3,938,200 | 3,892,500 | ||||||
Total operating expenses | 16,855,100 | 18,017,800 | ||||||
Other (income) expense | ||||||||
Interest expense | 232,000 | 213,400 | ||||||
Other income | (402,400 | ) | (374,400 | ) | ||||
Earnings before income taxes | 1,846,500 | 2,495,800 | ||||||
Income taxes | 482,900 | 679,200 | ||||||
Net earnings | $ | 1,363,600 | $ | 1,816,600 | ||||
See the detailed discussion of revenues, costs of services, gross margin, general and administrative expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods.
Non-Segment Operating Results for the Three Months Ended May 31, 2019
Total operating expenses
not associated with a reporting segment remained consistentInterest expense
Income taxes decreased primarily as a result of $0 in borrowings against the line of credit in the first quarter of fiscal 2019 as compared$0.2 million to $5.6$0.5 million in the first quarter of fiscal 2018.
UBAM Operating Results for the Three Months Ended May 31, 2018
The following table summarizes the operating results of the UBAM segment forsegment:
Three Months Ended May 31, | ||||||||
2019 | 2018 | |||||||
Gross sales | $ | 31,428,800 | $ | 34,158,600 | ||||
Less discounts and allowances | (8,619,900 | ) | (9,283,800 | ) | ||||
Transportation revenue | 2,439,200 | 2,841,300 | ||||||
Net revenues | 25,248,100 | 27,716,100 | ||||||
Cost of goods sold | 7,798,800 | 8,424,500 | ||||||
Gross margin | 17,449,300 | 19,291,600 | ||||||
Operating expenses | ||||||||
Operating and selling | 3,643,000 | 3,949,300 | ||||||
Sales commissions | 8,440,300 | 9,286,800 | ||||||
General and administrative | 997,000 | 956,500 | ||||||
Total operating expenses | 13,080,300 | 14,192,600 | ||||||
Operating income | $ | 4,369,000 | $ | 5,099,000 | ||||
Average number of active consultants | 31,600 | 35,100 | ||||||
UBAM first quarter net revenues decreased $2.5 million, or 9.0%, from $27.7 million reported in the three months ended May 31,first quarter of fiscal 2019, to $25.2 million reported in the first quarter of fiscal 2020. UBAM net revenues decreased primarily due to the reduced number of average active sales consultants selling our product between the common quarters. The average number of active consultants in the first quarter of fiscal 2020 was 31,600, a reduction of 3,500, or 10.0%, from 35,100 average active consultants selling in the first quarter of fiscal 2019. During February 2018, UBAM offered a recruiting special that added 8,800 new active consultants. This resulted in a large increase in the average active consultants selling during the first quarter of fiscal 2019. Since that period, our average active consultant count has remained consistent between approximately 30,000 and 2017:
For the Three Months Ended May 31, | ||||||||
| 2018 | 2017 | |||||||
| Gross sales | $ | 34,158,600 | $ | 29,986,300 | ||||
| Less discounts and allowances | (9,283,800 | ) | (7,860,700 | ) | ||||
| Transportation revenue | 2,841,300 | 2,693,500 | ||||||
| Net revenues | 27,716,100 | 24,819,100 | ||||||
| Cost of goods sold | 8,424,500 | 7,473,700 | ||||||
| Gross margin | 19,291,600 | 17,345,400 | ||||||
| Operating expenses | ||||||||
| Operating and selling | 3,949,300 | 3,165,200 | ||||||
| Sales commissions | 9,286,800 | 8,423,700 | ||||||
| General and administrative | 956,500 | 1,377,000 | ||||||
| Total operating expenses | 14,192,600 | 12,965,900 | ||||||
| Operating income | $ | 5,099,000 | $ | 4,379,500 | ||||
| Average number of active consultants | 35,100 | 25,600 | ||||||
Gross margin decreased $1.8 million, or 11.7%9.3%, during the three-month period ending May 31, 2018, when compared with the same quarter a year ago. The sales increase primarily resulted from an increase in the number of active consultants. The average number of active sales consultants increased 9,500, or 37.1% from 25,600 in the first quarter of fiscal year 2018 to 35,100 in the first quarter of fiscal 2019. Our consultant growth is driven by existing active consultants recruiting and retaining new consultants.
UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses. Operating and selling expenses primarily consists of freight expenses and materials and supplies. Sales commissions include amounts paid to consultants for new sales and promotions. These operating expenses are directly tied to the sales volumes of the UBAM segment. General and administrative expenses include payroll, travel and entertainment expenses, outside services, inventory reserves and other expenses directly associated with the UBAM segment. OperatingTotal operating expenses increased 1,226,700,decreased $1.1 million, or 9.5%7.7%, to $13.1 million during the three-month period ending May 31, 2018,2019, when compared withto $14.2 million reported in the same quarter a year ago,ago. The decrease in operating expenses was primarily due primarily to a decrease in freight costs and sales commissions associated with the growthdecrease in sales.
Operating income of the UBAM segment increased $719,500,decreased $0.7 million, or 16.4%13.7%, to $4.4 million during the three-month period ending May 31, 2018, when2019 as compared to $5.1 million from the same quarterperiod a year ago,ago. The decrease in operating income was primarily due primarily to growtha decrease in sales.
Publishing Operating Results for the Three Months Ended May 31, 2018
The following table summarizes the operating results of the Publishing segment for the three months ended May 31, 2018 and 2017:
For the Three Months Ended May 31, | ||||||||
| 2018 | 2017 | |||||||
| Gross sales | $ | 4,916,200 | $ | 4,524,800 | ||||
| Less discounts and allowances | (2,617,600 | ) | (2,409,800 | ) | ||||
| Transportation revenue | 7,600 | 7,100 | ||||||
| Net revenues | 2,306,200 | 2,122,100 | ||||||
| Cost of goods sold | 1,245,200 | 1,125,100 | ||||||
| Gross margin | 1,061,000 | 997,000 | ||||||
| Total operating expenses | 554,700 | 427,900 | ||||||
| Operating income | $ | 506,300 | $ | 569,100 | ||||
Three Months Ended May 31, | ||||||||
2019 | 2018 | |||||||
Gross sales | $ | 5,044,900 | $ | 4,916,200 | ||||
Less discounts and allowances | (2,711,500 | ) | (2,617,600 | ) | ||||
Transportation revenue | 5,900 | 7,600 | ||||||
Net revenues | 2,339,300 | 2,306,200 | ||||||
Cost of goods sold | 1,257,400 | 1,245,200 | ||||||
Gross margin | 1,081,900 | 1,061,000 | ||||||
Total operating expenses | 446,200 | 554,700 | ||||||
Operating income | $ | 635,700 | $ | 506,300 | ||||
Our Publishing division’s net revenues increased $184,100, or 8.7%, to $2,306,200remained consistent at $2.3 million for the three months endedthree-month periods ending May 31, 2018,2019 and 2018.
Gross margin remained consistent at $1.1 million during the three-month periods ending May 31, 2019 and 2018. Gross margin, as a percentage of net revenues, increased to 46.2% during the three-month period ending May 31, 2019, from 46.0% reported in the same quarter a year ago. The increase in gross margin resulted from a change in customer mix, as certain sales agreements with specific customers have higher gross margin due to lower discounts, and a change in product mix, as different products have higher gross margin due to lower product costs.
Total operating expenses of the Publishing segment decreased $0.2 million, to $0.4 million during the three-month period ending May 31, 2019 as compared to $0.6 million from the same period a year ago. This decrease primarily resulted from less promotions and marketing expenses incurred during the first quarter of fiscal 2020, when compared to net revenues of $2,122,100 reported for the three months ended May 31, 2017. This increase is primarily related to an increase in orders from our smaller customers.
Operating income of the Publishing segment remained consistent betweenincreased $0.1 million, or 20.0%, to $0.6 million during the two periods.three-month period ending May 31, 2019 when compared to $0.5 million reported in the same period a year ago. The increase in operating income was primarily due to a decrease in operating expenses.
EDC has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate. We also use available cash primarily to pay down outstanding bank loan balances, for capital expenditures, to pay dividends, and to acquire treasury stock. We have utilized a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures, when necessary. Our revolving bank credit facility loan balance was $0 with $10,448,800 in available capacity at May 31, 2018.
During the first quarterthree months of fiscal 2019,2020, we experienced cash inflowoutflow from our operations of $2,767,500.$839,600. Cash flows resulted from the following items:
• | net earnings of $1,363,600, |
• | a decrease in prepaid expenses and other assets of $460,600, |
• | an increase in net income taxes payable of $435,100, |
• | depreciation expense of $366,200, |
• | share-based compensation expense of $166,300, |
• | an increase in the provision for inventory valuation allowance of $117,300, |
• | an increase in the provision for doubtful accounts of $103,500, and |
• | a decrease in accounts receivable of $79,700. |
Offset by:
• | a decrease in accounts payable of $2,184,900, |
• | a decrease in accrued salaries and commissions, and other liabilities of $957,900, |
• | a decrease in deferred revenues of $576,700, |
• | an increase in inventories of $160,600, and |
| • | a decrease in deferred income tax liability of $51,800. |
Cash used in investing activities was $804,100$129,300 for capital expenditures, which was primarily comprised of improvements to upgrade our warehouse pickinge-commerce and inventory management systems and various other improvements to the warehouse and facility.
Cash used in financing activities was $255,800,$828,000, which was primarily comprised of payments on long-term debt of $251,300 and $4,500 net cash$237,800, dividends paid of $410,100, $302,500 used into purchase treasury stock, transactions.
During fiscal year 2019,2020, we continue to expect our cash from operations, along with our expanded line of credit with our Bank, will provide us the ability to meet our liquidity requirements. Cash generated from operations will be used to increasereplace inventory, in anticipation of continued sales growth, to liquidate existing debt and any excess cash is expected to be distributed to our shareholders.
We have a Loan Agreement with the Bank including Term Loan #1 comprised of Tranche A of $13.4 million and Tranche B of $5.0 million both with the maturity date of December 1, 2025. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. The Loan Agreement also includes Term Loan #2 in the amount of $4.0 million, which is secured by a warehouse and land with the maturity date of June 28, 2021, and a $15.0 million revolving loan (“line of credit”) through August 15, 2019.
On June 15, 2018.
On February 7, 2019, the Company executed the Ninth Amendment Loan Agreement which removed the covenant prohibiting the Company from repurchasing its shares and identified certain limitations on the amount of funds that the Company could use to repurchase shares.
We had no borrowings outstanding on our revolving credit agreement at May 31, 20182019 and $5.6 million in borrowings at May 31, 2017.February 28, 2019. Available credit under the revolving credit agreement was $10,448,800$12.6 million at May 31, 2018.
Tranche B of Term Loan #1, Term Loan #2 and the line of credit accrue interest monthly, at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (5.03%(4.95% at May 31, 2018)2019).
The Loan Agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue, or obtain issuance of commercial or stand-by letters of credit provided that the sum of the line of credit plus the letters of credit issued would not exceed the borrowing base in effect at the time. For the three months endedAs of May 31, 2018,2019, we had no letters of credit outstanding. The agreement contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amounts of dividends declared, compensation, salaries, investments, capital expenditures, leasing transactions, and leasing transactions.
The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:
Year ending February 28 (29), | ||||
2020 | $ | 705,900 | ||
2021 | 988,400 | |||
2022 | 1,038,000 | |||
2023 | 1,087,500 | |||
2024 | 1,139,400 | |||
Thereafter | 14,579,600 | |||
Total | $ | 19,538,800 |
| Year Ending February 28 (29) | ||||
| 2019 | $ | 735,800 | ||
| 2020 | 926,300 | |||
| 2021 | 968,100 | |||
| 2022 | 1,016,800 | |||
| 2023 | 1,065,300 | |||
| Thereafter | 15,742,700 | |||
| Total Maturities | $ | 20,455,000 | ||
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. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.
Revenue Recognition
Sales associated with product orders are generally recognized and recorded when products are shipped. Products are shipped FOB shipping point. The UBAM segment’sUBAM’s sales are typicallygenerally paid at the time the product is ordered. These sales accounted for 92.3% of net revenues for the three-month period ended May 31, 2018, and 92.1% for the three-month period ended May 31, 2017. 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 recognizedrecorded when the product is shipped.
Estimated allowances for sales returns which reduce net sales and costs of goods sold, are recorded as sales are recognized 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 approximately $217,000$0.2 million as of May 31, 2018,2019 and February 28, 2018, which is included in other current liabilities on the Company’s balance sheet as of May 31, 2018 and 2017, respectively. In addition, Management has recorded an asset for the expected value of non-damaged inventories to be returned. The estimated value of returned products of $100,000 is included in other current assets on the Company’s balance sheet as of May 31, 2018 and 2017, respectively.
Allowance for Doubtful Accounts
We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments.payments and a reserve for vendor share markdowns (collectively “allowance for doubtful accounts”). An estimate of uncollectableuncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer'scustomers’ financial conditionconditions and current economic trends. Management has estimated and included an allowance for doubtful accounts of $347,200$0.4 million at May 31, 2018,2019, and $297,100$0.3 million at February 28, 2018.
Inventory
Our inventory contains over 2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future. Most of our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in a threefour to six-month lead-time to have a title printed and delivered to us.
Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to minimum order requirements of our suppliers. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2 ½ years of anticipated sales is classified as noncurrent inventory. Noncurrent inventory balances prior to valuation allowances were $838,800 and $707,700$0.9 million at May 31, 20182019 and February 28, 2018,2019, respectively.
Consultants that meet certain eligibility requirements are allowed tomay request and receive inventory on consignment. We believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events; and having consignment inventory leads to additional sales opportunities. Approximately 11% of our active consultants maintained consignment inventory at May 31, 2018 and February 28, 2018.the end of the first fiscal quarter 2020. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total valuecost of inventory on consignment with active consultants was $1,372,900 and $1,270,700$1.5 million at May 31, 20182019 and February 28, 2018, respectively. Inventory related to inactive consultants amounted to $288,500 and $278,500 as of May 31, 2018 and February 28, 2018, respectively.
Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and active and inactive consultant consignmentreserves for consigned inventory that is not expected to be sold or returned.returned to the Company. Management estimates the inventory obsolescence allowance for both current 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, as well as consignmentincluding the reserve for consigned inventory, held by activeof $0.5 million and inactive consultants of $810,000 and $731,800$0.4 million as of May 31, 20182019 and February 28, 2018,2019, respectively.
Our principal supplier, Usborne,based in England, generally requires a minimum reorderre-order of 6,500 or more of a title in order to get a solo print run. Smaller orders would require a shared print run with the supplier’s other customers, which can result in lengthy delays to receive the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series. We then place ourthe initial order or re-ordersre-order based upon this analysis.
Stock-Based Compensation
We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant and recognized asgrant. For awards subject to service conditions, compensation expense is recognized over the vesting period neton a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of estimated forfeitures.
The restricted share awards granted under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) contain both service and performance conditions. The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.
For certain awards that provide discretion to adjust the allocation of the restricted shares, the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the Company and the employees has not yet been established. For awards in which the service-inception date precedes the grant date, compensation cost is accrued beginning on the service-inception date. The Company estimates the award's fair value on each subsequent reporting date, until the grant date, based on the closing market price of the Company’s common stock. On the grant date, the award's fair value is fixed, subject to the remaining performance conditions, and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date. During the first fiscal quarter of 2020, the Company recognized $0.2 million of compensation expense associated with the shares granted.
Not applicable.
An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of May 31, 2018.2019. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer).
Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective pursuant to Exchange Act Rule 13a-15(e).
In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended May 31, 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Not applicable.
Not required by smaller reporting company.
| Period | Total # of Shares Purchased | Average Price Paid per Share | Total # of Shares Purchased as Part of Publicly Announced Plan (1) | Maximum # of Shares that May be Repurchased under the Plan | ||||||||||||
| March 1 - 31, 2018 | 1,410 | $ | 20.85 | 0 | 295,194 | |||||||||||
| April 1 - 30, 2018 | 0 | N/A | 0 | 295,194 | ||||||||||||
| May 1 - 31, 2018 | 13 | $ | 25.15 | 0 | 295,181 | |||||||||||
| Total | 1,423 | $ | 20.89 | 0 | ||||||||||||
Period | Total # of Shares Purchased | Average Price Paid per Share | Total # of Shares Purchased as Part of Publicly Announced Plan (1) | Maximum # of Shares that May be Repurchased under the Plan (1) | ||||||||||||
March 1 - 31, 2019 | 19,333 | $ | 7.86 | 19,333 | 772,301 | |||||||||||
April 1 - 30, 2019 | 15,067 | 8.44 | 15,067 | 757,234 | ||||||||||||
May 1 - 31, 2019 | 2,559 | 9.03 | 2,559 | 754,675 | ||||||||||||
Total | 36,959 | $ | 8.18 | 36,959 | ||||||||||||
(1) | On February 4, 2019 the Board of Directors |
Not applicable.
None.
None.
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:
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Exhibit No. | Description | |
31.1 |