UNITEDSTATES

SECURITIESANDEXCHANGECOMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

☒ QUARTERLYREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

For the quarterly period ended ~~August~~May 31, ~~2018~~2019

☐ TRANSITIONREPORTUNDERSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

For the transition period from ___________ to ____________.

Commission file number: 000-04957

EDUCATIONALDEVELOPMENTCORPORATION

(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~~~~122~~^nd~~East~~~~Avenue,~~~~Tulsa,~~~~Oklahoma~~~~74146~~

~~(Address of principal executive offices) (Zip~~

5402 South 122^nd 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 (§ ~~229.405~~232.405 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 ~~October 10, 2018,~~July 11, 2019, there were ~~8,195,598~~8,434,999 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.

Table of Contents

TABLEOFCONTENTS

		Page
PART I.FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1815
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2622
Item 4.	Controls and Procedures	2622

PART II.OTHER INFORMATION
Item 1.	Legal Proceedings	2723
Item 1A.	Risk Factors	2723
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2723
Item 3.	Defaults Upon Senior Securities	2723
Item 4.	Mine Safety Disclosures	2723
Item 5.	Other Information	2723
Item 6.	Exhibits	2723
Signatures		2824

CAUTIONARYREMARKSREGARDINGFORWARD-LOOKINGSTATEMENTS

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 “Item7–Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations” in our Annual Report on Form 10-K for the year ended February 28, ~~2018~~2019 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.

Table of Contents

PARTI.FINANCIALINFORMATION

Item1. FINANCIALSTATEMENTS

EDUCATIONALDEVELOPMENTCORPORATION

CONDENSEDBALANCESHEETS(UNAUDITED)

	August 31,			February 28,			May 31,			February 28,
ASSETS	2018			2018			2019			2019
CURRENT ASSETS
Cash and cash equivalents	$	833,000		$	2,723,300		$	1,402,400		$	3,199,300
Accounts receivable, less allowance for doubtful accounts $254,800 (August 31) and $297,100 (February 28)		3,161,300			2,913,700
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		33,515,300			26,618,600			33,507,900			33,445,600
Prepaid expenses and other assets		1,294,800			1,259,000			1,089,900			1,603,500
Total current assets		38,804,400			33,514,600			39,075,800			41,507,200

INVENTORIES - Net		579,300			435,900			556,000			575,000

PROPERTY, PLANT AND EQUIPMENT - Net		27,835,200			27,860,500			26,927,700			27,164,600

OTHER ASSETS		26,900			26,900			72,500			19,500

TOTAL ASSETS	$	67,245,800		$	61,837,900		$	66,632,000		$	69,266,300


LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	14,596,900		$	12,469,000		$	12,043,700		$	14,228,600
Line of credit		2,598,700			-
Deferred revenues		458,200			693,000			388,900			965,600
Current maturities of long-term debt		895,500			881,200			944,900			945,900
Accrued salaries and commissions		1,877,300			2,007,900			1,926,700			2,039,000
Income taxes payable		1,166,400			1,798,800			1,191,500			756,400
Dividends payable								408,900			410,100
Other current liabilities		2,369,100			3,517,900			3,292,700			4,177,900
Total current liabilities		23,962,100			21,367,800			20,197,300			23,523,500

LONG-TERM DEBT - Net of current maturities		19,343,600			19,825,100			18,593,900			18,830,700
DEFERRED INCOME TAXES - Net		388,000			136,900			820,800			872,600
OTHER LONG-TERM LIABILITIES		109,000			106,000			148,600			109,000
Total liabilities		43,802,700			41,435,800			39,760,600			43,335,800

COMMITMENTS (Note 7)

SHAREHOLDERS' EQUITY
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,092,080 (August 31 and February 28) shares; Outstanding 8,189,702 (August 31) and 8,179,612 (February 28) shares		2,418,400			2,418,400
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		8,643,300			8,573,300			9,209,500			8,975,100
Retained earnings		23,612,800			20,714,500			26,709,600			25,754,900
		34,674,500			31,706,200			38,337,500			37,148,400
Less treasury stock, at cost		(11,231,400	)		(11,304,100	)		(11,466,100	)		(11,217,900	)
Total shareholders' equity		23,443,100			20,402,100			26,871,400			25,930,500
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	67,245,800		$	61,837,900		$	66,632,000		$	69,266,300

See notes to financial statements.

Table of Contents

EDUCATIONALDEVELOPMENTCORPORATION

CONDENSEDSTATEMENTSOFEARNINGS(UNAUDITED)

	Three Months Ended August 31,						Six Months Ended August 31,						Three Months Ended May 31,
	2018			2017			2018			2017			2019			2018
GROSS SALES	$	33,013,600		$	30,500,600		$	72,088,400		$	65,011,700
GROSS SALES:													$	36,473,700		$	39,074,800
Less discounts and allowances		(10,444,700	)		(8,797,300	)		(22,346,100	)		(19,067,800	)		(11,331,400	)		(11,901,400	)
Transportation revenue		2,112,100			2,483,600			4,961,000			5,184,200			2,445,100			2,848,900
NET REVENUES		24,681,000			24,186,900			54,703,300			51,128,100			27,587,400			30,022,300
COST OF GOODS SOLD		8,462,700			7,650,300			18,132,400			16,249,100			9,056,200			9,669,700
Gross margin		16,218,300			16,536,600			36,570,900			34,879,000			18,531,200			20,352,600

OPERATING EXPENSE:
Operating and selling		3,261,600			3,336,300			8,013,800			7,563,100			4,383,900			4,752,200
Sales commissions		7,313,000			7,739,700			16,686,100			16,248,900			8,533,000			9,373,100
General and administrative		3,738,400			3,910,500			7,630,900			7,624,400			3,938,200			3,892,500
Total operating expenses		14,313,000			14,986,500			32,330,800			31,436,400			16,855,100			18,017,800


INTEREST EXPENSE		270,000			294,700			483,400			576,200			232,000			213,400
OTHER INCOME		(400,300	)		(427,300	)		(774,700	)		(798,500	)		(402,400	)		(374,400	)

EARNINGS BEFORE INCOME TAXES		2,035,600			1,682,700			4,531,400			3,664,900			1,846,500			2,495,800

INCOME TAXES		544,900			645,800			1,224,100			1,402,700			482,900			679,200
NET EARNINGS	$	1,490,700		$	1,036,900		$	3,307,300		$	2,262,200		$	1,363,600		$	1,816,600

BASIC AND DILUTED EARNINGS PER SHARE
Basic	$	0.18		$	0.13		$	0.40		$	0.28		$	0.17		$	0.22
Diluted	$	0.18		$	0.13		$	0.40		$	0.28		$	0.17		$	0.22

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING
Basic		8,185,419			8,171,296			8,181,305			8,175,791			8,184,272			8,177,190
Diluted		8,192,833			8,181,258			8,188,920			8,184,507			8,191,062			8,185,008
Dividends per share	$	-		$	-		$	0.05		$	-
Dividends declared per share													$	0.05		$	0.05

See notes to financial statements.

Table of Contents

EDUCATIONALDEVELOPMENTCORPORATION

CONDENSEDSTATEMENTOFCHANGESIN~~SHA~~~~REHOLDERS’~~ SHAREHOLDERS’ EQUITY(UNAUDITED)

FOR THE THREE MONTHS ENDED ~~THE~~MAY 3~~SIX~~1, ~~MONTHS~~~~ENDED~~~~AUGUST~~~~31,~~~~2018~~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, 2018
12,092,080 $ 2,418,400 $ 8,573,300 $ 20,714,500 3,912,468 $ (11,304,100
)
$ 20,402,100
Purchase of treasury stock
- - - - 2,846 (29,600
)
(29,600
)
Sales of treasury stock
- - - - (12,936
)
102,300 102,300
Dividends paid ($0.05/share)
- - - (409,000
)
- - (409,000
)
Share-based compensation expense (see Note 5)
- - 70,000 - - - 70,000
Net earnings
- - - 3,307,300 - - 3,307,300
BALANCE - August 31, 2018
12,092,080 $ 2,418,400 $ 8,643,300 $ 23,612,800 3,902,378 $ (11,231,400
)
$ 23,443,100

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.

5
Table of Contents

EDUCATIONALDEVELOPMENTCORPORATION
CONDENSEDSTATEMENTSOFCASHFLOWS(UNAUDITED)
FOR THE THREE MONTHS ENDED ~~THE~~MAY 3~~SIX~~1~~MONTHS~~~~ENDED~~~~AUGUST~~~~31,~~,

2018

2017

2019

2018

CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings
$ 3,307,300 $ 2,262,200 $ 1,363,600 $ 1,816,600
Adjustments to reconcile net earnings to net cash
used in operating activities:

Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:

Depreciation
717,600 585,500 366,200 352,800
Deferred income taxes, net
251,100 206,200 (51,800 ) 188,100
Provision for doubtful accounts
17,200 (114,000
)
103,500 85,000
Provision for inventory valuation allowance
176,300 198,700 117,300 92,100
Share-based compensation expense
70,000 - 166,300 -
Changes in assets and liabilities:

Accounts receivable
(264,800
)
33,200 79,700 56,400
Inventories, net
(7,216,400
)
4,812,800
Inventories
(160,600 ) (1,243,600 )
Prepaid expenses and other assets
(35,800
)
(318,800
)
460,600 299,800
Accounts payable
2,767,400 (8,800,400
)
(2,184,900 ) 1,366,700
Accrued salaries and commissions, and other liabilities
(1,276,400
)
267,200 (957,900 ) (482,200 )
Deferred revenues
(234,800
)
14,000 (576,700 ) (250,600 )
Income tax payable
(632,400
)
(103,500
)
Income taxes payable
435,100 486,400
Total adjustments
(5,661,000
)
(3,219,100
)
(2,203,200 ) 950,900
Net cash used in operating activities
(2,353,700
)
(956,900
)
Net cash provided by (used in) operating activities
(839,600 ) 2,767,500
CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property, plant and equipment
(1,331,800
)
(1,227,500
)
(129,300 ) (804,100 )
Net cash used in investing activities
(1,331,800
)
(1,227,500
)
(129,300 ) (804,100 )
CASH FLOWS FROM FINANCING ACTIVITIES:

Payments on long-term debt
(467,200
)
(430,500
)
(237,800 ) (251,300 )
Proceeds from long-term debt
- 1,019,100
Cash received from sale of treasury stock
102,300 18,600 122,400 25,100
Cash used to purchase treasury stock
(29,600
)
(55,600
)
(302,500 ) (29,600 )
Net borrowings under line of credit
2,598,700 1,366,000
Dividends paid
(409,000
)
- (410,100 ) -
Net cash provided by financing activities
1,795,200 1,917,600
NET DECREASE IN CASH AND CASH EQUIVALENTS
(1,890,300
)
(266,800
)
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
2,723,300 699,200 3,199,300 2,723,300
CASH AND CASH EQUIVALENTS - END OF PERIOD
$ 833,000 $ 432,400 $ 1,402,400 $ 4,430,900

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:

Cash paid for interest
$ 454,800 $ 558,900 $ 232,000 $ 229,300
Cash paid for income taxes
$ 1,596,100 $ 1,162,300
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.

6
Table of Contents

NOTESTOCONDENSEDFINANCIALSTATEMENTS(UNAUDITED)

Note1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BasisofPresentation

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, ~~2018~~2019 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 retroactively adjusted to reflect the stock split for all periods presented.

~~Reclassifications~~
~~Certain reclassifications have been made to~~Use of Estimates in the ~~fiscal 2018 condensed balance sheets, condensed statement~~Preparation 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~~ofFinancialStatements

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.

SignificantAccountingPolicies

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, ~~2018~~2019 included in our Form 10-K.

NewAccountingPronouncements

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued accounting standards updates (“ASU”) and concluded that the following recently issued accounting standards apply to ~~us.~~
In May 2014, FASB issued ASU No. 2014-09, and amended with ASU No. 2015-14 “Revenue from Contracts with Customers,” (Topic 606) which provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and will also result in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The amendments in this series of updates shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company adopted Topic 606, Revenue from Contracts with Customers, with a date of initial application of March 1, 2018, using the full retrospective method applied to all contracts. Results for all reporting periods are presented under Topic 606. As a result of adopting this new accounting guidance, the Company has changed the method of accounting for its hostess awards program from reporting the net cost of these awards in operating and selling expenses to allocating a portion of the transaction price to the material right and reporting these in gross sales and discounts with the associated costs in cost of goods sold. The new reporting of these awards increases gross sales and increases discounts and allowances for a similar amount, having an immaterial effect on net revenues and no effect on net earnings or retained earnings, but lowering the Company’s gross margin percentage. The Company has also removed the allowance for sales returns from the net accounts receivable amount reported on the balance sheet. The allowance for sales returns has been adjusted to reflect a refund liability and a return asset. The cumulative impact of adoption of the new revenue recognition standard had no impact on net earnings and retained earnings (See Note 11).
7
~~Table of Contents~~
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 ~~leases~~a right of use asset and lease liability on the balance sheet ~~as a lease liability~~for 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 interim~~on March 1, 2019, and ~~annual periods beginning after December 15, 2018, which means the first quarter of our fiscal year 2020. The new standard requires~~it 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.~~position, results of operations or cash flows. Adoption of this ASU resulted in an increase in our assets and liabilities by approximately $52,900 due to the recognition of right of use assets and lease liabilities. See Note 3 – Leases for our lease disclosures.

In June 2016, FASB issued ASU No. 2016-13 “Financial Instruments—Credit Losses”, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.   The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal ~~years, which means~~years. The Company adopted ASU No. 2016-13 in the first quarter of ~~our~~ fiscal ~~year~~ 2020. ~~We anticipate this ASU to have minimal impact on our financial statements.~~
~~In August 2016, FASB issued ASU No. 2016-15 “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.”~~ The guidance’s objective is to reduce diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standards required date of adoption is effective for fiscal years beginning after December 15, 2017. This standard was adopted as of March 1, 2018. Adoption of this new standard did not have a material impact on our financial statements.
In May 2017, FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This update amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The new standard is required to be applied prospectively. The guidance was effective March 1, 2018, and the adoption of this ASU did not have a material impact on ~~our~~the Company’s condensed financial ~~statements.~~position, results of operations or cash flows.
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.
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Note2 – INVENTORIES

Inventories consist of the following:

2018

2019

August 31,

February 28,

May 31,

February 28,

Current:

Book inventory
$ 33,818,600 $ 27,078,600 $ 33,646,400 $ 33,494,200
Inventory valuation allowance
(303,300
)
(460,000
)
(138,500 ) (48,600 )
Inventories net – current
$ 33,515,300 $ 26,618,600
Inventories net - current
$ 33,507,900 $ 33,445,600

Noncurrent:

Book inventory
$ 943,700 $ 707,700 $ 892,000 $ 904,400
Inventory valuation allowance
(364,400
)
(271,800
)
(336,000 ) (329,400 )
Inventories net – noncurrent
$ 579,300 $ 435,900
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 ~~$7.9~~$5.9 million and ~~$9.4~~$7.6 million for the three months ended ~~August~~May 31, ~~2018~~2019 and ~~2017,~~2018, respectively. Total inventory purchases from all suppliers were ~~$10.6~~$9.2 million and ~~$11.3~~$11.0 million for the three months ended ~~August~~May 31, ~~2018~~2019 and ~~2017,~~2018, respectively.

~~Purchases~~
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 recognize a cumulative-effect adjustment (if any) to the opening balance of retained earnings in the year of adoption. Comparable periods continue to be presented under the guidance of the previous standard, ASC 840. ASC 842 requires lessees to recognize a lease liability and right-of-use asset on the balance sheet for operating leases. For lessors, the new accounting model remains largely the same, although some changes have been made to align it with the new lessee model and the new revenue recognition guidance, ASC 606, Revenue from ~~Usborne were approximately $15.5 million~~Contracts with Customers. Our adoption of ASC 842 did not result in any adjustments to retained earnings.
We have both lessee and ~~$11.3 million~~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 ~~six months ended August 31, 2018~~new standard to lessee arrangements with a term of one year or less and ~~2017, respectively. Total inventory purchases from~~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 ~~suppliers were $21.6 million~~of our lease arrangements as our non-lease components are not material and ~~$16.6 million for~~do not result in significant timing differences in the ~~six months ended August 31, 2018 and 2017, respectively.~~recognition of rental expenses or income.

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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
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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.

Note3 4 – DEBT

Debt consists of the following:

2018

2019

August 31,

February 28,

May 31,

February 28,

Line of credit
$ 2,598,700 $ - $ - $ -

Long-term debt
$ 20,239,100 $ 20,706,300 $ 19,538,800 $ 19,776,600
Less current maturities
(895,500
)
(881,200
)
(944,900 ) (945,900 )
Long-term debt, net of current maturities
$ 19,343,600 $ 19,825,100 $ 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 ~~(4.58%~~(4.95% at ~~August~~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 ~~(4.58%~~(4.95% at ~~August~~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 August 15, 2019 with interest payable monthly at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio ~~(4.58%~~(4.95% at ~~August~~May 31, ~~2018)~~2019).

~~The~~ Tranche B of Term Loan #1, Term Loan #2 and the line of credit ~~and the Term Loan #2~~ accrue interest at a tiered rate based on our Adjusted Funded Debt to EBITDA Ratio, which is payable monthly. The variable interest pricing tier is as follows:

PricingTier
Adjusted Funded Debt to EBITDA Ratio
~~Adjusted~~~~Funded~~~~Debt~~to~~EBITDA~~~~Ratio~~
LIBORMargin(bps)
I
>2.00
325.00
II
>1.50 but <2.00
300.00
III
>1.00 but <1.50
275.00
IV
<1.00
250.00

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

We had ~~$2,598,700 and~~ no borrowings outstanding on our revolving credit agreement at ~~August~~May 31, ~~2018~~2019 and February 28, ~~2018, respectively.~~2019. Available credit under the revolving credit agreement was ~~$8,867,700~~$12,567,900 and ~~$9,424,000~~$12,439,300 at ~~August~~May 31, ~~2018~~2019 and at February 28, ~~2018,~~2019, respectively.

On June 15, 2018, the Company executed the Eighth Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modifies the Loan Agreement, ~~dated as of March 10, 2016. This Amendment established~~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. We had no borrowings outstanding on~~capacity, releases the ~~advancing term loan at August 31, 2018.~~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.
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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 August 15, 2019, and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time. For the quarter ended ~~August~~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, restrict~~ratios; restricts transactions with related ~~parties,~~parties; prohibits mergers or ~~consolidation, disallow~~consolidation; disallows additional ~~debt,~~debt; and ~~limit~~limits 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 ~~certain~~the total value of stock ~~buyback transactions.~~
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that can be repurchased.

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

Year ending February 28 (29),

2019
$ 434,200
Year ending February 28 (29),

2020
925,900 $ 705,900
2021
967,700 988,400
2022
1,016,300 1,038,000
2023
1,064,900 1,087,500
2024
1,139,400
Thereafter
15,830,100 14,579,600
Total
$ 20,239,100 $ 19,538,800

Note4 5 – EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS, we have utilized the treasury stock method. See Note 1 for additional information regarding the stock split that occurred in fiscal 2019.

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

Three Months Ended August 31,

Six Months Ended August 31,

Three Months Ended May 31,

2018

2017

2018

2017

2019

2018

Earnings per share:

Net earnings applicable to common shareholders
$ 1,490,700 $ 1,036,900 $ 3,307,300 $ 2,262,200 $ 1,363,600 $ 1,816,600
Shares:

Weighted average shares outstanding-basic
8,185,419 8,171,296 8,181,305 8,175,791 8,184,272 8,177,190
Assumed exercise of options
7,414 9,962 7,615 8,716 6,790 7,818

Weighted average shares outstanding-diluted
8,192,833 8,181,258 8,188,920 8,184,507 8,191,062 8,185,008

Diluted earnings per share:

Basic
$ 0.18 $ 0.13 $ 0.40 $ 0.28 $ 0.17 $ 0.22
Diluted
$ 0.18 $ 0.13 $ 0.40 $ 0.28 $ 0.17 $ 0.22
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Note5 6 – STOCK-BASED COMPENSATION

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

The Company has outstanding stock options under the 2002 Employee Incentive Stock Option Plan totaling 10,000 shares. No options have been exercised in the three ~~and six~~ months ended ~~August~~May 31, ~~2018.~~2019. All options outstanding at ~~August~~May 31, ~~2018~~2019 expire in December 2019.

In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan establishes up to 600,000 shares of restricted stock which can be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 and 2021. Restricted shares granted under the 2019 LTI Plan “cliff vest” after five years.

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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 ~~employees~~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 ~~employees~~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.

~~On July 24, 2018,~~During fiscal year 2019, the Company granted approximately ~~239,000~~308,000 restricted shares under the 2019 LTI Plan with aan average grant-date fair value of ~~$9.57~~$9.94 per share. ~~In addition,~~During fiscal year 2019, the Company ~~authorized approximately 80,000 restricted~~recognized $401,800 of compensation expense associated with the shares ~~under~~granted. During the ~~2019 LTI Plan in which the service-inception date was established resulting in the fair value~~first fiscal quarter of these awards being measured at $12.00 per share, the closing price of the Company's stock at August 31, 2018. The grant date for these awards will be established when a mutual understanding of the key terms and conditions is reached between2020, the Company ~~and~~recognized $166,300 of compensation expense associated with the ~~employees.~~shares granted in fiscal year 2019. The remaining compensation expense ~~of the above~~for these awards, totaling approximately $2,494,200, will be recognized ratably ~~from~~over the ~~service inception date to the~~remaining vesting ~~date for this tranche which is~~period of approximately 5445 months. The number of restricted shares to be distributed depends on attaining the performance metrics defined by the 2019 LTI Plan and may result in the distribution of a number of shares that is greater or less than the number of restricted shares granted, as outlined in the terms of the 2019 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,

2018

2017

2018

2017

Compensation Expense
$ 70,000 $ - $ 70,000 $ -

Three Months Ended May 31,

2019

2018

Share-based compensation expense
$ 166,300 $ -

Note6 7 – SHIPPING AND HANDLING COSTS

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 ~~$3,259,900~~$4,212,200 and ~~$3,121,500~~$4,399,000 for the three months ended ~~August~~May 31, ~~2018~~2019 and ~~2017, respectively. These costs were $7,658,900 and $6,871,200 for the six months ended August 31,~~ 2018, ~~and 2017,~~ respectively.

~~Note~~7 ~~– COMMITMENTS~~
In connection with the 2015 purchase of our 400,000 square-foot facility on 40-acres, we entered in to a 15-year lease with the seller, a non-related third party, who leases 181,300 square feet, or 45.3% of the facility. The lease is being accounted for as an operating lease.
~~The cost of the leased space upon acquisition was estimated at $10,159,000, which was also the carrying cost as of August 31, 2018.~~
The lessee pays $110,100 per month, through the lease anniversary date of December 2018, with a 2.0% annual increase adjustment on each anniversary date thereafter. The lease terms allow for one five-year extension, which is not a bargain renewal option, at the expiration of the 15-year term. Revenue associated with the lease is being recorded on a straight-line basis and is reported in other income on the statements of earnings.
At August 31, 2018, we had outstanding purchase commitments for inventory totaling approximately $13,627,000 which will be due during fiscal year 2019. Of these commitments, $8,344,000 were with Usborne, $4,861,200 with various Kane Miller publishers and the remaining $421,800 with other suppliers.
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Note8 – BUSINESS SEGMENTS

We have two reportable segments: Publishing and Usborne Books & More (“UBAM”) ~~and Publishing.~~. These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. 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.~~fairs.

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

Information by reporting segment for the ~~three and six-month~~three-month periods ended ~~August~~May 31, ~~2018~~2019 and ~~2017,~~2018, follows:

NET REVENUES
NET REVENUES
NET REVENUES

Three Months Ended August 31,

Six Months Ended August 31,

Three Months Ended May 31,

2018

2017

2018

2017

2019

2018

Publishing
$ 2,605,500 $ 1,977,000 $ 4,911,700 $ 4,099,100 $ 2,339,300 $ 2,306,200
UBAM
22,075,500 22,209,900 49,791,600 47,029,000 25,248,100 27,716,100
Total
$ 24,681,000 $ 24,186,900 $ 54,703,300 $ 51,128,100 $ 27,587,400 $ 30,022,300

EARNINGS (LOSS) BEFORE INCOME TAXES
EARNINGS (LOSS) BEFORE INCOME TAXES
EARNINGS (LOSS) BEFORE INCOME TAXES

Three Months Ended August 31,

Six Months Ended August 31,

Three Months Ended May 31,

2018

2017

2018

2017

2019

2018

Publishing
$ 636,700 $ 388,300 $ 1,143,000 $ 957,400 $ 635,700 $ 506,300
UBAM
4,277,100 4,570,300 9,376,100 8,949,800 4,369,000 5,099,000
Other
(2,878,200
)
(3,275,900
)
(5,987,700
)
(6,242,300
)
(3,158,200 ) (3,109,500 )
Total
$ 2,035,600 $ 1,682,700 $ 4,531,400 $ 3,664,900 $ 1,846,500 $ 2,495,800

Note9 – FAIR VALUE MEASUREMENTS

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

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

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

Level 3 - Unobservable inputs for the asset or liability.

We do not report any assets or liabilities at fair value in the financial statements. However, the estimated fair value of our ~~line of credit is estimated by management to approximate the carrying value of $2,598,700 and $0 at August 31, 2018 and February 28, 2018, respectively. The estimated fair value of our~~ term notes payable is estimated by management to approximate ~~$19,492,300~~$19,234,600 and ~~$19,454,500~~$19,123,700 at ~~August~~May 31, ~~2018~~2019 and February 28, ~~2018,~~2019, respectively. Management’s estimates are based on the obligations’ characteristics, including floating interest rate, maturity, and collateral. Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.

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Note10 – DEFERRED REVENUES

AsThe Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to the end of our ~~second~~first fiscal quarter ~~we had~~that were not shipped as of May 31, 2019 are recorded as deferred revenues on the condensed balance sheet. We received approximately ~~$458,200~~$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 August 31, 2018, these prepaid sales orders are~~Orders that were included in deferred revenues onpredominantly shipped within the ~~condensed balance sheet.~~first few days of the next fiscal quarter.

Note11 ~~– REVENUE RECOGNITION~~
Revenue is derived from the sales of children’s books and related products which are generally capable of being distinct and accounted for as single performance obligation to deliver tangible goods. Substantially all of our books are sold to end consumers and publishing retail outlets. Accordingly, revenues are recognized at shipping point, which is the point in time the customer obtains control of the products. Shipping and handling fees are recorded as operating and selling expenses when the product is shipped and revenue is recognized. The Company estimates product returns based on historical return rates. The majority of the Company's contracts have a single performance obligation and are short term in nature. Sales taxes, that are collected from customers and remitted to governmental authorities, are accounted for on a net basis and therefore are excluded from net sales.
~~Adoption~~of~~ASC~~~~Topic~~~~606,~~~~“Revenue~~~~from~~~~Contracts~~~~with~~~~Customers”~~
~~On March 1, 2018, the Company adopted Topic 606, as prescribed by the FASB, using the full retrospective method. Results for all reporting periods are presented under Topic 606.~~
There was no change to net earnings or retained earnings due to the adoption of Topic 606, with the impact primarily related to the recording of our hostess award program in gross sales and discounts and allowances, as opposed to recording the net costs in operating and selling expenses.
~~Disaggregation~~of~~Revenue~~
~~Please refer to Note 8 – Business Segments for revenue by segment.~~
~~Arrangements~~~~with~~~~Multiple~~~~Performance~~~~Obligations~~
Certain contracts associated with the hostess awards program include sales incentives, such as discounted or free products. These incentives provide a separate performance obligation in the contract and material right to the customer. The transaction price is allocated to the material right based on its relative standalone selling price and is recognized in revenue as the performance obligations are satisfied, which occurs at shipping point or at the expiration of the material right. As our sales incentives are delivered with the associated products ordered, there is no deferral required. Revenue allocated to the material right are recognized in gross sales, discounts and allowances and cost of goods sold in our condensed statement of earnings.
~~Practical~~~~Expedients~~~~and~~~~Exemptions~~
The Company generally expenses sales commissions when incurred. These costs are recorded within operating expenses. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
~~Impact~~on~~Financial~~~~Statements~~
~~As a result of applying Topic 606, the impact to the Company’s condensed consolidated balance sheet as of February 28, 2018 was as follows:~~

Without

As Reported

Adjustments

Adoption

ASSETS

Accounts receivable-Net
$ 2,913,700 $ (99,900
)
$ 2,813,800
Inventories-Net
26,618,600 (100
)
26,618,500
Prepaid expenses and other assets
1,259,000 (117,000
)
1,142,000
Total current assets
33,514,600 (217,000
)
33,297,600

TOTAL ASSETS
61,837,900 (217,000
)
61,620,900

LIABILITIES

Other current liabilities
3,517,900 (217,000
)
3,300,900
Total liabilities
41,435,800 (217,000
)
41,218,800
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~~Table of Contents~~
~~As a result of applying Topic 606, the impact to the Company’s condensed statement of earnings for the three months ended August 31, 2017 was as follows:~~

Without

As Reported

Adjustments

Adoption

GROSS SALES
$ 30,500,600 $ (2,579,600
)
$ 27,921,000
Less discounts and allowances
(8,797,300
)
2,574,000 (6,223,300
)
Transportation revenue
2,483,600 - 2,483,600
NET REVENUES
24,186,900 (5,600
)
24,181,300
COST OF GOODS SOLD
7,650,300 (990,700
)
6,659,600
Gross margin
16,536,600 985,100 17,521,700

OPERATING EXPENSE:

Operating and selling
3,336,300 983,900 4,320,200
Sales commissions
7,739,700 - 7,739,700
General and administrative
3,910,500 - 3,910,500
Total operating expenses
14,986,500 983,900 15,970,400

INTEREST EXPENSE
294,700 - 294,700
OTHER INCOME
(427,300
)
1,200 (426,100
)

EARNINGS BEFORE INCOME TAXES
1,682,700 - 1,682,700

INCOME TAXES
645,800 - 645,800
NET EARNINGS
$ 1,036,900 $ - $ 1,036,900
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~~As a result of applying Topic 606, the impact to the Company’s operating results by reporting segment for the three months ended August 31, 2017 was as follows:~~
~~UBAM~~

Without

As Reported

Adjustments

Adoption

GROSS SALES
$ 26,312,700 $ (2,579,600
)
$ 23,733,100
Less discounts and allowances
(6,577,100
)
2,574,000 (4,003,100
)
Transportation revenue
2,474,300 - 2,474,300
NET REVENUES
22,209,900 (5,600
)
22,204,300
COST OF GOODS SOLD
6,516,300 (990,700
)
5,525,600
Gross margin
15,693,600 985,100 16,678,700

OPERATING EXPENSE:

Operating and selling
2,578,000 983,800 3,561,800
Sales commissions
7,664,100 - 7,664,100
General and administrative
881,200 - 881,200
Total operating expenses
11,123,300 983,800 12,107,100
OPERATING INCOME
$ 4,570,300 $ 1,300 $ 4,571,600
~~Publishing~~

Without

As Reported

Adjustments

Adoption

GROSS SALES
$ 4,187,900 $ - $ 4,187,900
Less discounts and allowances
(2,220,200
)
- (2,220,200
)
Transportation revenue
9,300 - 9,300
NET REVENUES
1,977,000 - 1,977,000
COST OF GOODS SOLD
1,134,000 - 1,134,000
Gross margin
843,000 - 843,000

OPERATING EXPENSE:

Operating and selling
294,100 - 294,100
Sales commissions
75,600 - 75,600
General and administrative
85,000 - 85,000
Total operating expenses
454,700 - 454,700
OPERATING INCOME
$ 388,300 $ - $ 388,300
15
~~Table of Contents~~
~~As a result of applying Topic 606, the impact to the Company’s condensed statement of earnings for the six months ended August 31, 2017 was as follows:~~

Without

As Reported

Adjustments

Adoption

GROSS SALES
$ 65,011,700 $ (5,916,800
)
$ 59,094,900
Less discounts and allowances
(19,067,800
)
5,900,800 (13,167,000
)
Transportation revenue
5,184,200 - 5,184,200
NET REVENUES
51,128,100 (16,000
)
51,112,100
COST OF GOODS SOLD
16,249,100 (2,164,700
)
14,084,400
Gross margin
34,879,000 2,148,700 37,027,700

OPERATING EXPENSE:

Operating and selling
7,563,100 2,149,500 9,712,600
Sales commissions
16,248,900 - 16,248,900
General and administrative
7,624,400 - 7,624,400
Total operating expenses
31,436,400 2,149,500 33,585,900

INTEREST EXPENSE
576,200 - 576,200
OTHER INCOME
(798,500
)
(800
)
(799,300
)

EARNINGS BEFORE INCOME TAXES
3,664,900 - 3,664,900

INCOME TAXES
1,402,700 - 1,402,700
NET EARNINGS
$ 2,262,200 $ - $ 2,262,200
~~As a result of applying Topic 606, the impact to the Company’s operating results by reporting segment for the six months ended August 31, 2017 was as follows:~~
~~UBAM~~

Without

As Reported

Adjustments

Adoption

GROSS SALES
$ 56,299,000 $ (5,917,500
)
$ 50,381,500
Less discounts and allowances
(14,437,800
)
5,901,500 (8,536,300
)
Transportation revenue
5,167,800 - 5,167,800
NET REVENUES
47,029,000 (16,000
)
47,013,000
COST OF GOODS SOLD
13,990,000 (2,164,700
)
11,825,300
Gross margin
33,039,000 2,148,700 35,187,700

OPERATING EXPENSE:

Operating and selling
5,743,200 2,148,700 7,891,900
Sales commissions
16,087,800 - 16,087,800
General and administrative
2,258,200 - 2,258,200
Total operating expenses
24,089,200 2,148,700 26,237,900
OPERATING INCOME
$ 8,949,800 $ - $ 8,949,800
16
~~Table of Contents~~
~~Publishing~~

Without

As Reported

Adjustments

Adoption

GROSS SALES
$ 8,712,700 $ 700 $ 8,713,400
Less discounts and allowances
(4,630,000
)
(700
)
(4,630,700
)
Transportation revenue
16,400 - 16,400
NET REVENUES
4,099,100 - 4,099,100
COST OF GOODS SOLD
2,259,100 - 2,259,100
Gross margin
1,840,000 - 1,840,000

OPERATING EXPENSE:

Operating and selling
539,000 - 539,000
Sales commissions
161,100 - 161,100
General and administrative
182,500 - 182,500
Total operating expenses
882,600 - 882,600
OPERATING INCOME
$ 957,400 $ - $ 957,400
~~Note~~12 – SUBSEQUENT EVENTS

~~In September 2018,~~On July 11, 2019, our ~~board~~Board of ~~directors~~Directors declared a distribution of $0.05 per share of common stock. This cash distribution ~~was~~will be paid on or about September ~~26, 2018~~10, 2019 to shareholders of record on ~~September 17, 2018. The total cash distributions paid under this declaration was approximately $409,100.~~August 20, 2019.

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Item2.          MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS

FactorsAffectingForward-LookingStatements

The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, our success in recruiting and retaining new consultants, our ability to locate and procure desired books, our ability to ship the volume of orders that are received without creating 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, 2019 ~~following~~~~discussion~~~~contains~~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~~statements~~~~that~~~~reflect~~~~our~~~~future~~~~plans,~~~~estimates,~~~~beliefs~~~~and~~~~expected~~~~performance.~~~~The~~~~forward-looking~~~~statements~~~~are~~~~dependent~~~~upon~~events~~risks~~~~and~~~~uncertainties~~~~that~~ discussed maybe~~outside~~~~our~~~~control.~~~~Our~~~~actual~~~~results~~~~could~~~~differ~~~~materially~~~~from~~~~those~~~~discussed~~ or may not occur. See “Cautionary Remarks Regarding Forward-Looking Statements” in~~these~~~~forward-looking~~~~statements.~~~~Factors~~~~that~~~~could~~~~cause~~or~~contribute~~to~~such~~~~differences~~~~include,~~~~but~~~~are~~~~not~~~~limited~~~~to,~~~~number~~ the front 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,~~~~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~~ this Quarterly ReportonForm~~10-K~~~~for~~~~the~~~~year~~~~ended~~~~February~~~~28,~~~~2018~~~~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:

Three Months Ended August 31,

Six Months Ended August 31,

Three Months Ended May 31,

2018

2017

2018

2017

2019

2018

Net revenues
$ 24,681,000 $ 24,186,900 $ 54,703,300 $ 51,128,100 $ 27,587,400 $ 30,022,300
Cost of goods sold
8,462,700 7,650,300 18,132,400 16,249,100 9,056,200 9,669,700
Gross margin
16,218,300 16,536,600 36,570,900 34,879,000 18,531,200 20,352,600

Operating expense:

Operating expenses

Operating and selling
3,261,600 3,336,300 8,013,800 7,563,100 4,383,900 4,752,200
Sales commissions
7,313,000 7,739,700 16,686,100 16,248,900 8,533,000 9,373,100
General and administrative
3,738,400 3,910,500 7,630,900 7,624,400 3,938,200 3,892,500
Total operating expenses
14,313,000 14,986,500 32,330,800 31,436,400 16,855,100 18,017,800

Other (income) expense

Interest expense
270,000 294,700 483,400 576,200 232,000 213,400
Other income
(400,300
)
(427,300
)
(774,700
)
(798,500
)
(402,400 ) (374,400 )
Earnings before income taxes
2,035,600 1,682,700 4,531,400 3,664,900 1,846,500 2,495,800

Income taxes
544,900 645,800 1,224,100 1,402,700 482,900 679,200
Net earnings
$ 1,490,700 $ 1,036,900 $ 3,307,300 $ 2,262,200 $ 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.

1815
Table of Contents

Non-Segment Operating Results for the Three Months Ended May 3~~Operating~~1, 201~~Results~~~~for~~~~the~~~~Three~~~~Months~~~~Ended~~~~August~~~~31,~~~~2018~~9

Total operating expenses not associated with a reporting segment ~~decreased $0.4 million, or 11.8%, to $3.0~~remained consistent at $3.3 million for the three-month period ending ~~August~~May 31, ~~2018,~~2019, compared to ~~$3.4 million for~~ the same quarterly period a year ago. Our operating expenses decreased from reduced payroll in our warehouse of approximately $0.2 million due to efficiencies from automation introduced during the last year offset by approximately $0.1 million of compensation associated with the new 2019 LTI Plan. Other operating expenses declined $0.3 million primarily due to $0.1 million of reduced property tax expense due to a state exemption received on our new facility, among other lesser changes.

Interest expense remained consistent at ~~$0.3~~$0.2 million for the three months ended ~~August~~May 31, ~~2018, when~~2019 compared to the same quarterly period a year ago. Interest expense decreased $0.1 million due to reduced borrowings on the line of credit of $2.6 million in the second quarter of fiscal 2019 as compared to $6.2 million in the second quarter of fiscal 2018. These reduced expenses were offset by increased interest expenses of $0.1 million on the Company’s other borrowings due to increases in the LIBOR based floating interest rates during the past year.

Income taxes decreased ~~$0.1~~$0.2 million to $0.5 million for the three months ended ~~August~~May 31, ~~2018,~~2019, from ~~$0.6~~$0.7 million for the same quarterly period a year ago. Our effective tax rate was ~~26.8%~~26.2% for the quarter ended ~~August~~May 31, ~~2018,~~2019, and ~~38.4%~~27.2% for the quarter ended ~~August~~May 31, ~~2017. The decrease in the tax rate resulted from our reduced federal tax rate included with the passage of the Tax Cuts and Jobs Act of 2017 (“Tax Act”).~~2018. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

~~Non-Segment~~UBAM OperatingResults~~for~~~~the~~~~Six~~~~Months~~~~Ended~~~~August~~~~31,~~~~2018~~
~~Total~~~~operating~~~~expenses~~ ~~not associated with a reporting segment decreased $0.2 million, or 3.1%, to $6.3 million~~ for the six-month period ending August 31, 2018, compared to $6.5 million for the same period a year ago. Payroll increased $0.1 million associated with the Company’s 2019 LTI Plan offset by reduced payroll in our warehouse of $0.2 million due to increase automation and $0.1 million in reduced property taxes due to a state exemption received on our new facility.
~~Interest~~~~expense~~ decreased $0.1 million to $0.5 million for the six months ended August 31, 2018, from $0.6 million for the same period a year ago. Interest expense decreased primarily as a result of reduced borrowings against the line of credit in the first six months of fiscal 2019 as compared to the same period a year ago.
~~Income taxes~~ decreased $0.2 million to $1.2 million for the six months ended August 31, 2018, from $1.4 million for the same period a year ago. Our effective tax rate was 27.0% for the six months ended August 31, 2018, and 38.3% for the six months ended August 31, 2017. The decrease in the tax rate resulted from our reduced federal tax rate included with the passage of the Tax Act. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

Three Months Ended ~~UBAM~~May 3~~Operating~~1, 201~~Results~~~~for~~~~the~~~~Three~~~~and~~~~Six~~~~Months~~~~Ended~~~~August~~~~31,~~~~2018~~9

The following table summarizes the operating results of the UBAM segment:

Three Months Ended August 31,

Six Months Ended August 31,

2018

2017

2018

2017

Gross sales
$ 27,484,400 $ 26,312,700 $ 61,643,000 $ 56,299,000
Less discounts and allowances
(7,511,300
)
(6,577,100
)
(16,795,100
)
(14,437,800
)
Transportation revenue
2,102,400 2,474,300 4,943,700 5,167,800
Net revenue
22,075,500 22,209,900 49,791,600 47,029,000

Cost of goods sold
7,031,400 6,516,300 15,455,900 13,990,000
Gross margin
15,044,100 15,693,600 34,335,700 33,039,000

Operating expense:

Operating and selling
2,517,000 2,578,000 6,466,300 5,743,200
Sales commissions
7,220,600 7,664,100 16,507,400 16,087,800
General and administrative
1,029,400 881,200 1,985,900 2,258,200
Total operating expenses
10,767,000 11,123,300 24,959,600 24,089,200

Operating income
$ 4,277,100 $ 4,570,300 $ 9,376,100 $ 8,949,800

Average number of active consultants
32,800 29,700 34,000 28,600

~~Table of Contents~~

~~UBAM~~~~Operating~~~~Results~~~~for~~~~the~~~~Three~~~~Months~~~~Ended~~~~August~~~~31,~~~~2018~~

	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 ~~gross sales increased $1.2~~first quarter net revenues decreased $2.5 million, or ~~4.6%~~9.0%, ~~to $27.5~~from $27.7 million during the three months ended August 31, 2018, as compared to $26.3 million during the same period a year ago. The increase in gross sales resulted from an increase in orders due primarily to an increasereported in the 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 ~~active consultants.~~product between the common quarters. The average number of active ~~sales~~ consultants ~~increased 3,100, or 10.4%, to 32,800~~ in the ~~second~~first quarter of fiscal ~~2019~~2020 was 31,600, a reduction of 3,500, or 10.0%, from ~~29,700~~35,100 average active consultants selling in the ~~second~~first quarter of fiscal ~~year 2018. Our consultant growth is driven by our existing~~2019. During February 2018, UBAM offered a recruiting special that added 8,800 new active ~~consultants recruiting new consultants and retaining existing~~ consultants.

The increase in gross sales was offset by an increase in discounts and allowances of $0.9 million, or 13.6%, to $7.5 million in the three months ended August 31, 2018, as compared to $6.6 million during the same period a year ago. Discounts and allowances increased as a result of increased gross sales and a change in the mix of order types between the periods. Discounts and allowances vary depending on the type of order, or order mix. Order types with higher discounts, such as book fairs, typically result in lower sales commissions for the consultant. As such, the order mix for the three-month period ending August 31, 2018 had higher discounts and allowances but lower sales commissions than the same period a year ago.

Transportation revenue decreased $0.4 million, or 16.0%, to $2.1 million during the three months ended August 31, 2018, as compared to $2.5 million for the same period last year. The decrease in transportation revenue is also directly related to the change in mix of order types. Orders with higher discounts, such as book fairs, offer free shipping which This resulted in a ~~decrease~~large increase in ~~shipping revenue~~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 33,000. We continue to face obstacles growing our number of active consultants due to challenging market conditions including: record low unemployment, increased recruiting competition from other non-traditional employment options outside of the ~~periods.~~direct selling industry and the normal turnover of consultants associated with the direct sales industry.

Gross margin decreased ~~$0.7~~$1.8 million, or ~~4.5%~~9.3%, during the three-month period ending ~~August~~May 31, ~~2018,~~2019, when compared to the same quarter a year ago, due primarily to ~~an increase in discounts and allowances and~~a decrease in ~~transportation revenue.~~net revenues. Gross margin, as a percentage of net revenues, decreased ~~2.6%~~ to ~~68.1%~~69.1% for the three-month period ending ~~August~~May 31, ~~2018~~2019 when compared to ~~70.7%~~69.6% the same period a year ago. The decrease in gross margin as a percentage of net revenues was due to the change in mix of order types received during the quarter. ~~This change in mix also resulted in less sales commissions during the quarter.~~

Table of Contents

UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses. Operating and selling expenses primarily consists of freight expenses and materials and supplies. Sales commissions include amounts paid to consultants for new sales and promotions. These operating expenses are directly tied to the sales volumes of the UBAM segment. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the UBAM segment. ~~Operating~~Total operating expenses decreased ~~$0.3~~$1.1 million, or ~~2.7%~~7.7%, to ~~$10.8~~$13.1 million during the three-month period ending ~~August~~May 31, ~~2018,~~2019, when compared to ~~$11.1~~$14.2 million reported in the same quarter a year ago. The decrease in operating expenses was primarily due to a decrease in freight costs and sales commissions partially offset by an increase in general and administrative expenses. The sales commissions decreased due to a change in the mix of order types between the periods. Our order types have different discounts and allowances, freight charges and sales commission percentages associated with ~~them.~~the decrease in net revenues. General and administrative expenses ~~increased $0.1 million, or 11.1%, to~~remained consistent at $1.0 million reported during the three months ended ~~August~~May 31, ~~2018, from $0.9 million reported in the same period last year. General~~2019 and ~~operating expenses increased as a result of an increase in monthly sales awards earned by consultants.~~ 2018.

Operating income of the UBAM segment decreased ~~$0.3~~$0.7 million, or ~~6.5%~~13.7%, to ~~$4.3~~$4.4 million during the three-month period ending ~~August~~May 31, ~~2018~~2019 as compared to ~~$4.6~~$5.1 million from the same period a year ago. The decrease in operating income was primarily due to a decrease in ~~margins due to a change in mix of order types and an increase in general and administrative expenses.~~

~~UBAM~~~~Operating~~~~Results~~~~for~~~~the~~~~Six~~~~Months~~~~Ended~~~~August~~~~31,~~~~2018~~

UBAM gross sales increased $5.3 million, or 9.4%, to $61.6 million during the six-month period ending August 31, 2018, as compared to $56.3 million from the same period a year ago. The gross sales increase resulted from an increase in the number of active consultants. The average number of active sales consultants increased 5,400, or 18.9% to 34,000 in the fiscal year 2019 from 28,600 in the fiscal year 2018. Our consultant growth is driven by existing active consultants recruiting and retaining new consultants.

The increase in gross sales was partially offset by an increase in discounts and allowances of $2.4 million, or 16.7%, to $16.8 million in the six months ended August 31, 2018, as compared to $14.4 million during the same period a year ago. Discounts and allowances increased as a result of increased gross sales and a change in the mix of order types between the periods.

Transportation revenue decreased $0.3 million, or 5.8%, to $4.9 million during the six months ended August 31, 2018, as compared to $5.2 million for the same period last year. The decrease in transportation revenue is also directly related to the change in mix of order types. Orders with higher discounts, such as book fairs, offer free shipping which resulted in a decrease in shipping revenue between the periods.

~~Table of Contents~~

Gross margin increased $1.3 million, or 3.9%, to $34.3 million during the six-month period ending August 31, 2018, when compared to $33.0 million during the same period a year ago, due primarily to an increase in sales. Gross margin, as a percentage of net revenues, decreased to 69.0% for the six-month period ending August 31, 2018 when compared to 70.3% the same period a year ago. The decrease in gross margin as a percentage of net revenues was due to a change in the mix of order types between the periods.

UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses. Operating expenses increased $0.9 million, or 3.7%, to $25.0 million during the six-month period ending August 31, 2018, when compared to $24.1 million reported the same period a year ago. The increase in operating expenses was due to an increase in operating and selling expenses of $0.8 million primarily related to an increase in postage and freight related to higher sales. Sales commissions increased $0.4, or 2.5%, to $16.5 million reported during the six months ended August 31, 2018, from $16.1 million reported in the same period last year. Sales commissions increased primarily due to an increase to gross sales. Offsetting these increases was a decrease in general and administrative expenses of $0.3 million, or 13.0%, to $2.0 million reported during the six months ended August 31, 2018, from $2.3 million reported in the same period last year. General and operating expenses decreased primarily as a result of a reduction in merchant services fees associated with our online payment processing among other changes.

Operating income of the UBAM segment increased $0.5 million, or 5.6%, to $9.4 million during the six-month period ending August 31, 2018, when compared with $8.9 million from the same period a year ago. The increase in operating income was primarily due to increased gross sales.revenues.

Publishing Operating Results for the Three Months Ended May 3~~Operating~~1, 201~~Results~~~~for~~~~the~~~~Three~~~~and~~~~Six~~~~Months~~~~Ended~~~~August~~~~31,~~~~2018~~9

The following table summarizes the operating results of the Publishing segment:

Three Months Ended August 31,

Six Months Ended August 31,

2018

2017

2018

2017

Gross sales
$ 5,529,200 $ 4,187,900 $ 10,445,400 $ 8,712,700
Less discounts and allowances
(2,933,400
)
(2,220,200
)
(5,551,000
)
(4,630,000
)
Transportation revenue
9,700 9,300 17,300 16,400
Net revenue
2,605,500 1,977,000 4,911,700 4,099,100

Cost of goods sold
1,431,300 1,134,000 2,676,500 2,259,100
Gross margin
1,174,200 843,000 2,235,200 1,840,000

Total operating expenses
537,500 454,700 1,092,200 882,600

Operating income
$ 636,700 $ 388,300 $ 1,143,000 $ 957,400

~~Publishing~~~~Operating~~~~Results~~~~for~~~~the~~~~Three~~~~Months~~~~Ended~~~~August~~~~31,~~~~2018~~

	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 $0.6~~remained consistent at $2.3 million ~~or 30.0%, to $2.6~~for the three-month periods ending May 31, 2019 and 2018.

Gross margin remained consistent at $1.1 million during the three-month ~~period~~periods ending ~~August~~May 31, 2018, from $2.0 million reported in the same period a year ago. This increase is primarily related to an increase in orders from our largest customers which had reduced sales in the same period last year.

Gross margin increased $0.4 million, or 50.0%, to $1.2 million during the three-month period ending August 31, 2018, from $0.8 million reported in the same quarter a year ago. This increase is primarily related to the growth in gross sales.2019 and 2018. Gross margin, as a percentage of net revenues, increased ~~2.5%,~~ to ~~45.1%~~46.2% during the three-month period ending ~~August~~May 31, ~~2018,~~2019, from ~~42.6%~~46.0% reported in the same quarter a year ~~ago, due to~~ago. The increase in gross margin resulted from a change in customer mix, ~~between the two quarters.~~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 ~~remained consistent at $0.5~~decreased $0.2 million, to $0.4 million during the three-month period ending ~~August~~May 31, ~~2018~~2019 as compared to $0.6 million from the same period a year ago. This decrease primarily resulted from less promotions and ~~2017, respectively.~~marketing expenses incurred during the first quarter of fiscal 2020, when compared to the same period last year.

Operating income of the Publishing segment increased ~~$0.2~~$0.1 million, or ~~50.0%~~20.0%, to $0.6 million during the three-month period ending ~~August~~May 31, ~~2018~~2019 when compared to ~~$0.4~~$0.5 million reported in the same period a year ago. The increase in operating income was primarily due to ~~increased gross sales.~~a decrease in operating expenses.

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Table of Contents

~~Publishing~~~~Operating~~~~Results~~~~for~~~~the~~~~Six~~~~Months~~~~Ended~~~~August~~~~31,~~~~2018~~

Our Publishing division’s net revenues increased $0.8 million, or 19.5%, to $4.9 million during the six-month period ending August 31, 2018, from $4.1 million reported in the same period a year ago. This increase is primarily related to an increase in orders from our largest customers which had reduced sales in the same period last year.

Gross margin increased $0.4 million, or 22.2%, to $2.2 million during the six-month period ending August 31, 2018, from $1.8 million reported in the same period a year ago. This increase is primarily related to the growth in gross sales. Gross margin as a percentage of net revenues, increased 0.6%, to 45.5% during the six-month period ending August 31, 2018, from 44.9% reported in the same period a year ago, due to a change in customer mix between the periods.

Total operating expenses increased $0.2 million, or 22.2%, to $1.1 million during the six-month period ending August 31, 2018, from $0.9 million reported in the same period a year ago. This increase is primarily related to an increase in freight costsLiquidity and ~~sales commissions associated with the growth in sales.~~

Total operating income increased $0.1 million, or 10.0%, to $1.1 million during the six-month period ending August 31, 2018, from $1.0 million reported in the same period a year ago. The increase in operating income was primarily due to increased gross sales.

~~Liquidity~~~~and~~CapitalResources

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 $2,598,700 with $8,867,700 in available capacity at August 31, 2018.~~

During the first ~~six~~three months of fiscal ~~2019,~~2020, we experienced cash outflow from our operations of ~~$2,353,700.~~$839,600. Cash flows resulted from the following items:

~~net earnings of $3,307,300,~~

~~depreciation expense of $717,600,~~

~~share-based compensation expense of $70,000,~~

~~an increase in deferred income tax liability, net of $251,100,~~

•	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 ~~$176,300,~~$117,300,
•	an increase in the provision for doubtful accounts of ~~$17,200,~~$103,500, and
•	a decrease in accounts receivable of $79,700.

~~an increase in accounts payable of $2,767,400,~~

Offset by:

~~an increase in accounts receivable of $264,800,~~

~~an increase in inventories, net of $7,216,400,~~

~~an increase in prepaid expenses and other assets of $35,800,~~

~~a decrease in accrued salaries and commissions, and other liabilities of $1,276,400,~~

~~a decrease in deferred revenue of $234,800, and~~

~~a decrease in income tax payable of $632,400,~~

~~Table of Contents~~

•	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 ~~$1,331,800~~$129,300 for capital expenditures, which was primarily comprised of improvements to upgrade our ~~warehouse picking~~e-commerce and ~~inventory management systems and various other improvements to the warehouse and facility.~~consultant facing websites used in our UBAM division.

Cash ~~provided by~~used in financing activities was ~~$1,795,200,~~$828,000, which was ~~primarily~~ comprised of ~~cash received from net borrowings under our line of credit of $2,598,700, $72,700 net cash received from treasury stock transactions, offset by~~ payments on long-term debt of ~~$467,200 and~~$237,800, dividends paid of ~~$409,000.~~$410,100, $302,500 used to purchase treasury stock, offset by sales of treasury stock generating $122,400.

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 ~~increase~~replace inventory, ~~in anticipation of continued sales growth,~~ to liquidate existing debt and any excess cash is expected to be distributed to our ~~shareholders.~~shareholders or used to purchase available shares on the market.

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.

~~Effective March 10, 2016, we signed a First Amendment Loan Agreement with the Bank which provided an increase to $6.0 million from our original $4.0 million line~~

Table of ~~credit through~~Contents

On June 15, 2016. Effective June 15, 2016, we signed a Second Amendment Loan Agreement with the Bank which provided a further increase to $7.0 million from our previous $6.0 million line of credit and extended it through June 15, 2017. Effective June 28, 2016, we signed a Third Amendment Loan Agreement with the Bank which included Term Loan #2 in the amount of $4.0 million. Effective February 7, 2017, we signed a Fourth Amendment Loan Agreement with the Bank which modified certain debt covenant calculations and waived an existing default that occurred in the fourth quarter of fiscal year 2017.

~~Effective, June 15, 2017,~~2018, the Company executed the Fifth Amendment Loan Agreement with the Bank which modified the Loan Agreement to increase the maximum revolving principal amount from $7.0 million to $10.0 million and extended the termination date 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 used to cover the cost of the fiscal 2018 capital improvements to increase our daily shipping capacity. The Advancing Term loan accrued interest between June 15, 2017 and December 1, 2017, at which time the balance was converted to a term loan and set to amortize over a thirty-six-month period. The Advancing Term Loan was repaid early, without penalty, in February 2018.

Effective September 1, 2017, we signed a Sixth Amendment Loan Agreement with the Bank which further increased the maximum revolving principal amount from $10.0 million to $15.0 million, subject to certain collateral restrictions.

Effective February 15, 2018, we signed a Seventh Amendment Loan Agreement with the Bank which modified the limitation on dividends as well as modified and removed other financial covenant calculations.

~~Effective June 15, 2018, we signed an~~ Eighth Amendment Loan Agreement with the Bank which extended the termination date until August 15, 2019, reduced the interest rate pricing grid for all floating rate borrowings covered by the Loan Agreement, established a new ~~$3.0~~$3 million advancing term loan to be used for capital expansions to increase daily shipping capacity, released the personal ~~Guaranty~~guaranty of Randall W. White and Carol White, along with other covenant restrictions being lessened. The amendment also included an adjustment to the Adjusted Funded Debt to EBITDA ~~Ratio~~ratio for covenant compliance.

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 ~~$2.6 million in~~no borrowings on our revolving credit agreement at ~~August~~May 31, ~~2018~~2019 and ~~no borrowings at~~ February 28, ~~2018.~~2019. Available credit under the revolving credit agreement was ~~$8,867,700~~$12.6 million at ~~August~~May 31, ~~2018.~~2019.

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 ~~(4.58%~~(4.95% at ~~August~~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 ended August~~As of May 31, ~~2018,~~2019, we had no ~~outstanding~~ letters of ~~credit.~~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.~~

~~Table~~establish a dollar limit on the amount of ~~Contents~~

shares that can be repurchased.

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

	Year ending February 28 (29),

2019	$	434,200
Year ending February 28 (29),
2020		925,900	$	705,900
2021		967,700		988,400
2022		1,016,300		1,038,000
2023		1,064,900		1,087,500
2024				1,139,400
Thereafter		15,830,100		14,579,600
Total	$	20,239,100	$	19,538,800

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CriticalAccountingPolicies

Ourdiscussionandanalysisofourfinancialconditionandresultsofoperationsarebaseduponourfinancialstatements,whichhavebeenpreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStates.Thepreparationofthesefinancialstatementsrequiresustomakeestimatesandjudgmentsthataffectthereportedamountsofassets,liabilities,revenuesandexpenses,andrelateddisclosuresofcontingentassetsandliabilities.Onanon-goingbasis,weevaluateourestimates,includingthoserelatedtoourvaluationofinventory,allowanceforuncollectibleaccountsreceivable,allowanceforsalesreturns,long-livedassetsanddeferredincometaxes.Webaseourestimatesonhistoricalexperienceandonvariousotherassumptionsthatarebelievedtobereasonableunderthecircumstances,theresultsofwhichformthebasisformakingjudgmentsaboutthecarryingvaluesofassetsandliabilitiesthatarenotreadilyapparentfromothersources.

Actualresultsmaymateriallydifferfromtheseestimatesunderdifferentassumptionsorconditions.Historically,however,actualresultshavenotdifferedmateriallyfromthosedeterminedusingrequiredestimates.Oursignificantaccountingpoliciesaredescribedinthenotesaccompanyingthefinancialstatementsincludedelsewhereinthisreport.However,weconsiderthefollowingaccountingpoliciestobemoresignificantlydependentontheuseofestimatesandassumptions.

RevenueRecognition

Sales associated with product orders are ~~generally~~ recognized and recorded when products are shipped. Products are shipped FOB shipping point. ~~The UBAM segment’s~~UBAM’s sales are ~~typically~~generally paid at the time the product is ordered. ~~UBAM sales accounted for 91.0% of net revenues for the six-month period ended August 31, 2018, and 92.0% for the six-month period ended August 31, 2017.~~ Sales ~~that~~which have been paid for but not shipped are classified as deferred revenue on the balance sheet. Sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted. Transportation revenue represents the amount billed to the customer for shipping the product and is ~~recognized~~recorded when the product is shipped.

Estimated allowances for sales returns ~~which reduce net sales and costs of goods sold,~~ are recorded as sales are ~~recognized 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 occurs~~stores 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 ~~August~~May 31, ~~2018,~~2019 and February 28, 2018, which is included in other current liabilities on the Company’s balance sheet. In addition, Management has recorded an asset for the expected value of non-damaged inventories to be returned. The estimated value of returned products of $117,000 is included in other current assets on the Company’s balance sheet as of August 31, 2018 and February 28, 2018.2019.

AllowanceforDoubtfulAccounts

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 ~~uncollectable~~uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, ~~the customer's~~customers’ financial ~~condition~~conditions and current economic trends. Management has estimated and included an allowance for doubtful accounts of ~~$254,800~~$0.4 million at ~~August~~May 31, ~~2018,~~2019, and ~~$297,100~~$0.3 million at February 28, ~~2018.~~2019. Included within this allowance is $0.1 million of reserve for vendor discounts to sell remaining inventory as of May 31, 2019 and February 28, 2019.

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 ~~three~~four to six-month lead-time to have a title printed and delivered to us.

~~Table of Contents~~

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 ~~$943,700 and $707,700~~$0.9 million at ~~August~~May 31, ~~2018~~2019 and February 28, ~~2018,~~2019, respectively.

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Consultants that meet certain eligibility requirements ~~are allowed to~~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; and having consignment inventory leads to additional sales opportunities. Approximately 11% of our active consultants maintained consignment inventory at ~~August 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 ~~value~~cost of inventory on consignment with ~~active~~ consultants was ~~$1,319,600 and $1,270,700~~$1.5 million at ~~August~~May 31, ~~2018~~2019 and February 28, ~~2018, respectively. Inventory related to inactive consultants amounted to $182,000 and $278,500 as of August 31, 2018 and February 28, 2018, respectively.~~2019.

Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and ~~active and inactive consultant consignment~~reserves 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 consignment~~including the reserve for consigned inventory, ~~held by active~~of $0.5 million and ~~inactive consultants of $667,700 and $731,800~~$0.4 million as of ~~August~~May 31, ~~2018~~2019 and February 28, ~~2018,~~2019, respectively.

Our principal supplier, ~~Usborne,~~based in England, generally requires a minimum ~~reorder~~re-order of 6,500 or more of a title in order to get a solo print run. Smaller orders would require a shared print run with the supplier’s other customers, which can result in lengthy delays to receive the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series. We then place ~~our~~the initial order or ~~re-orders~~re-order based upon this analysis.

These factors and historical analysis have led our management to determine that 2 ½ years represents a reasonable estimate of the normal operating cycle for our products.

Stock-BasedCompensation

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

The restricted share awards granted under the 2019 Long-Term Incentive Plan (“2019 LTI ~~Plan~~Plan”) contain both service and performance conditions. The Company recognizes ~~share~~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.

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Item3. QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISK

Not applicable.

Item4. CONTROLSANDPROCEDURES

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 ~~August~~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 ~~August~~May 31, ~~2018~~2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PARTII.OTHERINFORMATION

Item1. LEGALPROCEEDINGS

Not applicable.

Item1A. RISKFACTORS

Not required by smaller reporting company.

Item2. UNREGISTEREDSALESOFEQUITYSECURITIESANDUSEOFPROCEEDS

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)

June 1 - 30, 2018
0 N/A 0 590,362
July 1 - 31, 2018
0 N/A 0 590,362
August 1 - 31, 2018
0 N/A 0 590,362
Total
0 N/A 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)		~~In April 2008,~~	On February 4, 2019 the Board of Directors ~~authorized us to purchase up to 1,000,000 additional~~approved a new stock repurchase plan, replacing the former 2008 stock repurchase plan. The maximum number of shares ~~of our common stock~~which can be purchased under athe new plan ~~initiated in 1998.~~is 800,000. This plan has no expiration date.
~~(2)~~		On August 22, 2018 the Company issued a two-for-one stock split in the form of a stock dividend. The maximum number of shares that may be repurchased under the plan have been updated to reflect the stock split.

~~We announced no sales or repurchases of our common stock during the three months ended August 31, 2018.~~

Item3. DEFAULTSUPONSENIORSECURITIES

Not applicable.

Item4. MINESAFETYDISCLOSURES

None.

Item5. OTHERINFORMATION

None.

Item6. EXHIBITS

31.1		Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

31.2		Certification of Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

EDUCATIONALDEVELOPMENTCORPORATION

(Registrant)

Date: ~~October~~July 1~~15,~~5~~2018~~, 2019 By /s/RandallW.White

Chairman of the Board, President

and Chief Executive Officer

(Principal Executive Officer)

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EXHIBITINDEX

Exhibit No.		Description

31.1		Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

31.2		Certification of Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	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
Purchase of treasury stock		-		-		-		-			2,846			(29,600	)		(29,600	)
Sales of treasury stock		-		-		-		-			(12,936	)		102,300			102,300
Dividends paid ($0.05/share)		-		-		-		(409,000	)		-			-			(409,000	)
Share-based compensation expense (see Note 5)		-		-		70,000		-			-			-			70,000
Net earnings		-		-		-		3,307,300			-			-			3,307,300
BALANCE - August 31, 2018		12,092,080	$	2,418,400	$	8,643,300	$	23,612,800			3,902,378		$	(11,231,400	)	$	23,443,100

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

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	%

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

PricingTier	Adjusted Funded Debt to EBITDA Ratio	~~Adjusted~~~~Funded~~~~Debt~~to~~EBITDA~~~~Ratio~~		LIBORMargin(bps)
I	>2.00		325.00
II	>1.50 but <2.00		300.00
III	>1.00 but <1.50		275.00
IV	<1.00		250.00

NET REVENUES	NET REVENUES									NET REVENUES

		Three Months Ended August 31,				Six Months Ended August 31,					Three Months Ended May 31,
		2018		2017		2018		2017			2019		2018
Publishing		$	2,605,500	$	1,977,000	$	4,911,700	$	4,099,100		$	2,339,300	$	2,306,200
UBAM			22,075,500		22,209,900		49,791,600		47,029,000			25,248,100		27,716,100
Total		$	24,681,000	$	24,186,900	$	54,703,300	$	51,128,100		$	27,587,400	$	30,022,300

EARNINGS (LOSS) BEFORE INCOME TAXES	EARNINGS (LOSS) BEFORE INCOME TAXES													EARNINGS (LOSS) BEFORE INCOME TAXES

		Three Months Ended August 31,						Six Months Ended August 31,							Three Months Ended May 31,
		2018			2017			2018			2017				2019			2018
Publishing		$	636,700		$	388,300		$	1,143,000		$	957,400			$	635,700		$	506,300
UBAM			4,277,100			4,570,300			9,376,100			8,949,800				4,369,000			5,099,000
Other			(2,878,200	)		(3,275,900	)		(5,987,700	)		(6,242,300	)			(3,158,200	)		(3,109,500	)
Total		$	2,035,600		$	1,682,700		$	4,531,400		$	3,664,900			$	1,846,500		$	2,495,800

						Without
	As Reported		Adjustments			Adoption
ASSETS
Accounts receivable-Net	$	2,913,700	$	(99,900	)	$	2,813,800
Inventories-Net		26,618,600		(100	)		26,618,500
Prepaid expenses and other assets		1,259,000		(117,000	)		1,142,000
Total current assets		33,514,600		(217,000	)		33,297,600

TOTAL ASSETS		61,837,900		(217,000	)		61,620,900

LIABILITIES
Other current liabilities		3,517,900		(217,000	)		3,300,900
Total liabilities		41,435,800		(217,000	)		41,218,800

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)

June 1 - 30, 2018		0		N/A		0		590,362
July 1 - 31, 2018		0		N/A		0		590,362
August 1 - 31, 2018		0		N/A		0		590,362
Total		0		N/A		0