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EDUC Educational Development

Filed: 7 Oct 21, 9:01am


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended August 31, 2021

 

OR

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ____________.

 

Commission file number: 000-04957

 

EDUCATIONAL DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

73-0750007

(State or other jurisdiction of 

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

5402 South 122nd East Ave, Tulsa, Oklahoma

74146

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code (918) 622-4522

 

Securities registered pursuant to Section 12(b) of the Act: 

 

Common Stock, $.20 par value

EDUC

NASDAQ

(Title of class)

(Trading symbol)

(Name of each exchange on which registered)

 

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

 

Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒   No ☐

 

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

 

 

Large accelerated filer ☐

Accelerated filer ☒

   
 

Non-accelerated filer ☐

Smaller reporting company ☒

   
  

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

 

Yes ☐   No ☒

 

As of October 1, 2021, there were 8,656,136 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding. 

 

 

 

 

TABLE OF CONTENTS

 

  

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

3

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

   

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Mine Safety Disclosures

24

Item 5.

Other Information

24

Item 6.

Exhibits

25

Signatures

26

 

 

CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS

 

The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended February 28, 2021 and in this quarterly report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report on Form 10-Q and speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.          FINANCIAL STATEMENTS

 

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED BALANCE SHEETS (UNAUDITED)

 

  

August 31,

  

February 28,

 

ASSETS

 

2021

  

2021

 

CURRENT ASSETS

        

Cash and cash equivalents

 $921,200  $1,812,200 

Accounts receivable, less allowance for doubtful accounts of

$388,100 (August 31) and $331,900 (February 28)

  3,894,400   3,346,700 

Inventories - net

  64,707,400   51,762,400 

Prepaid expenses and other assets

  1,407,500   1,219,300 

Total current assets

  70,930,500   58,140,600 
         

INVENTORIES - net

  843,400   685,300 

PROPERTY, PLANT AND EQUIPMENT - net

  31,186,400   29,951,000 

OTHER ASSETS

  43,600   73,600 

TOTAL ASSETS

 $103,003,900  $88,850,500 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

CURRENT LIABILITIES

        

Accounts payable

 $18,519,000  $19,674,300 

Line of credit

  16,653,800   5,245,300 

Deferred revenues

  751,400   1,914,100 

Current maturities of long-term debt

  1,645,200   533,500 

Accrued salaries and commissions

  1,896,400   3,488,000 

Dividends payable

  865,000   835,100 

Income taxes payable

  126,100   130,200 

Other current liabilities

  3,629,800   6,094,800 

Total current liabilities

  44,086,700   37,915,300 
         

LONG-TERM DEBT - net of current maturities

  14,278,400   10,451,200 

DEFERRED INCOME TAXES - net

  41,400   89,900 

OTHER LONG-TERM LIABILITIES

  114,000   134,300 

Total liabilities

  58,520,500   48,590,700 
         

SHAREHOLDERS' EQUITY

        

Common stock, $0.20 par value; Authorized 16,000,000 shares;

Issued 12,702,080 (August 31) and 12,410,080 (February 28) shares;

Outstanding 8,650,229 (August 31) and 8,346,600 (February 28) shares

  2,540,400   2,482,000 

Capital in excess of par value

  11,377,900   10,863,900 

Retained earnings

  43,290,900   39,683,000 
   57,209,200   53,028,900 

Less treasury stock, at cost

  (12,725,800

)

  (12,769,100

)

Total shareholders' equity

  44,483,400   40,259,800 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 $103,003,900  $88,850,500 

 

See notes to condensed financial statements (unaudited).

 

 

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)

 

  

Three Months Ended

August 31,

  

Six Months Ended

August 31, 

 
  

2021

  

   2020

  

2021

  

2020

 

GROSS SALES

 $44,187,100  $73,682,800  $96,578,700  $120,579,700 

Less discounts and allowances

  (14,513,500

)

  (21,363,400

)

  (30,467,600

)

  (34,259,300

)

Transportation revenue

  3,320,800   6,930,700   7,691,200   11,221,400 

NET REVENUES

  32,994,400   59,250,100   73,802,300   97,541,800 

COST OF GOODS SOLD

  10,498,900   17,309,500   22,528,800   28,705,000 

Gross margin

  22,495,500   41,940,600   51,273,500   68,836,800 
                 

OPERATING EXPENSES

                

Operating and selling

  5,239,900   10,531,900   11,682,500   16,872,100 

Sales commissions

  10,105,200   20,304,400   23,072,000   33,904,900 

General and administrative

  4,793,900   5,664,000   9,932,800   10,200,000 

Total operating expenses

  20,139,000   36,500,300   44,687,300   60,977,000 
                 
                 

INTEREST EXPENSE

  213,700   140,000   381,500   322,200 

OTHER INCOME

  (515,300

)

  (499,200

)

  (1,114,000

)

  (905,800

)

                 

EARNINGS BEFORE INCOME TAXES

  2,658,100   5,799,500   7,318,700   8,443,400 
                 

INCOME TAXES

  759,900   1,544,500   1,982,400   2,257,300 

NET EARNINGS

 $1,898,200  $4,255,000  $5,336,300  $6,186,100 
                 

BASIC AND DILUTED EARNINGS PER SHARE

                

Basic

 $0.24  $0.51  $0.66  $0.74 

Diluted

 $0.23  $0.51  $0.63  $0.74 
                 

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING

                

Basic

  8,028,594   8,354,214   8,028,929   8,353,319 

Diluted

  8,435,348   8,354,214   8,458,664   8,353,319 

Dividends per share

 $0.10  $0.06  $0.20  $0.12 

See notes to condensed financial statements (unaudited).

 

 

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED AUGUST 31, 2021

 

  

Common Stock

(par value $0.20 per share)

          

Treasury Stock

     
  

Number of

Shares

Issued

  

Amount

  

Capital in

Excess of

Par Value

  

Retained

Earnings

  

Number

of

Shares

  

Amount

  

Shareholders'

Equity

 
                             

BALANCE – February 28, 2021

  12,410,080  $2,482,000  $10,863,900  $39,683,000   4,063,480  $(12,769,100

)

 $40,259,800 

Sales of treasury stock

  -   -   26,600   -   (1,714

)

  5,400   32,000 

Dividends declared ($0.10/share)

  -   -   -   (834,800

)

  -   -   (834,800

)

Stock-based compensation (see note 6)

  -   -   261,600   -   -   -   261,600 

Net earnings

  -   -   -   3,438,100   -   -   3,438,100 

BALANCE - May 31, 2021

  12,410,080  $2,482,000  $11,152,100  $42,286,300   4,061,766  $(12,763,700

)

 $43,156,700 

Sales of treasury stock

  -   -   46,100   -   (4,915

)

  14,300   60,400 

Issuance of restricted share awards for vesting

  292,000   58,400   (82,000

)

  -   (5,000

)

  23,600   - 

Dividends declared ($0.10/share)

  -   -   -   (893,600

)

  -   -   (893,600

)

Share-based compensation expense (see Note 6)

  -   -   261,700   -   -   -   261,700 

Net earnings

  -   -   -   1,898,200   -   -   1,898,200 

BALANCE - August 31, 2021

  12,702,080  $2,540,400  $11,377,900  $43,290,900   4,051,851  $(12,725,800

)

 $44,483,400 

 

 

FOR THE SIX MONTHS ENDED AUGUST 31, 2020

 

  

Common Stock

(par value $0.20 per share)

          

Treasury Stock

     
  

Number of

Shares

Issued

  

Amount

  

Capital in

Excess of

Par Value

  

Retained

Earnings

  

Number

of

Shares

  

Amount

  

Shareholders'

Equity

 
                             

BALANCE – February 29, 2020

  12,410,080  $2,482,000  $9,843,900  $29,732,200   4,061,429  $(12,665,300

)

 $29,392,800 

Purchases of treasury stock

  -   -   -   -   17,565   (75,500

)

  (75,500

)

Sales of treasury stock

  -   -   5,000   -   (21,167

)

  66,000   71,000 

Dividends declared ($0.06/share)

  -   -   -   (502,200

)

  -   -   (502,200

)

Share-based compensation expense (see Note 6)

  -   -   169,000   -   -   -   169,000 

Net earnings

  -   -   -   1,931,100   -   -   1,931,100 

BALANCE - May 31, 2020

  12,410,080  $2,482,000  $10,017,900  $31,161,100   4,057,827  $(12,674,800

)

 $30,986,200 

Sales of treasury stock

  -   -   11,500   -   (2,438

)

  7,600   19,100 

Dividends declared ($0.06/share)

  -   -   -   (500,300

)

  -   -   (500,300

)

Share-based compensation expense (see Note 6)

  -   -   216,200   -   -   -   216,200 

Net earnings

  -   -   -   4,255,000   -   -   4,255,000 

BALANCE - August 31, 2020

  12,410,080  $2,482,000  $10,245,600  $34,915,800   4,055,389  $(12,667,200

)

 $34,976,200 

 

See notes to condensed financial statements (unaudited).

 

 

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

  

Six Months Ended

August 31,

 
  

2021

  

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

        

Net earnings

 $5,336,300  $6,186,100 

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

        

Depreciation

  924,200   821,100 

Deferred income taxes

  (48,500

)

  (185,100

)

Provision for doubtful accounts

  61,600   91,800 

Provision for inventory valuation allowance

  120,000   106,400 

Share-based compensation expense

  523,300   385,200 

Changes in assets and liabilities:

        

Accounts receivable

  (609,300

)

  (392,400

)

Inventories, net

  (13,223,100

)

  (17,700

)

Prepaid expenses and other assets

  (158,200

)

  (383,800

)

Accounts payable

  (104,700

)

  14,797,500 

Accrued salaries and commissions and other liabilities

  (4,076,900

)

  4,164,500 

Deferred revenues

  (1,162,700

)

  843,100 

Income taxes payable

  (4,100

)

  2,133,200 

Total adjustments

  (17,758,400

)

  22,363,800 

Net cash provided by (used in) operating activities

  (12,422,100

)

  28,549,900 

CASH FLOWS FROM INVESTING ACTIVITIES

        

Purchases of property, plant and equipment

  (3,210,200

)

  (440,900

)

Net cash used in investing activities

  (3,210,200

)

  (440,900

)

CASH FLOWS FROM FINANCING ACTIVITIES

        

Payments on term debt

  (305,800

)

  (9,015,500

)

Proceeds from term debt

  5,244,700   1,447,400 

Sales of treasury stock

  92,400   90,100 

Purchases of treasury stock

  0   (75,500

)

Net borrowings under line of credit

  11,408,500   0 

Dividends paid

  (1,698,500

)

  (918,600

)

Net cash provided by (used in) financing activities

  14,741,300   (8,472,100

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  (891,000

)

  19,636,900 

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

  1,812,200   2,999,400 

CASH AND CASH EQUIVALENTS - END OF PERIOD

 $921,200  $22,636,300 
         

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION

        

Cash paid for interest

 $378,000  $343,900 

Cash paid for income taxes

 $2,035,000  $309,200 
         

NON-CASH TRANSACTIONS

        

    Accrued capital expenditures

 $10,600  $252,000 

 

See notes to condensed financial statements (unaudited).

 

 

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying Unaudited Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim condensed financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Unaudited Condensed Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended February 28, 2021 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.

 

COVID-19 Update

 

The Company has taken numerous steps, and will continue to take further actions, in its approach to minimize the impact of the COVID-19 pandemic. Effective May 1, 2021, we lessened our safety and health practices in the office and warehouse based on the recommendations from the local Tulsa Health Department. We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business. While the Company did not experience a decrease in net revenues during fiscal year 2021, and the year-to-date result of fiscal 2022 are more normalized, the long-term severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact COVID-19 had during the current fiscal period.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of the Unaudited Condensed Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.

 

Significant Accounting Policies

 

Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented herein, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 28, 2021 included in our Form 10-K.

 

New Accounting Pronouncements

 

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued accounting standards updates (“ASU”) and concluded that the following recently issued accounting standards apply to us:

 

In December 2019, the FASB published ASU 2019-12: Income Taxes (Topic 740), which simplifies the accounting for income taxes. Topic 740 addresses a number of topics including but not limited to the removal of certain exceptions currently included in the standard related to intra-period allocation when there are losses, in addition to calculation of income taxes when current year-to-date losses exceed anticipated loss for the year. The amendment also simplifies accounting for certain franchise taxes and disclosure of the effect of enacted change in tax laws or rates. Topic 740 was adopted by the Company at the beginning of fiscal year 2022 and did not have a material impact on our financial statements and disclosures.

 

In March 2020, the FASB issued ASU 2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as London Interbank Offered Rate (LIBOR). This ASU includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This ASU is effective March 12, 2020 through December 31, 2022. The Company’s debt agreements include the use of alternate rates when LIBOR is not available. We do not expect the change from LIBOR to an alternate rate will have a material impact to our financial statements and, to the extent we enter into modifications of agreements that are impacted by the LIBOR phase-out, we will apply such guidance to those contract modifications.

 

 

Note 2 – INVENTORIES

 

Inventories consist of the following:

 

  

August 31, 2021

  

February 28, 2021

 

Current:

        

Book inventory

 $65,274,800  $52,276,200 

Inventory valuation allowance

  (567,400

)

  (513,800

)

Inventories net – current

 $64,707,400  $51,762,400 
         

Noncurrent:

        

Book inventory

 $1,124,400  $894,300 

Inventory valuation allowance

  (281,000

)

  (209,000

)

Inventories net – noncurrent

 $843,400  $685,300 

 

Book inventory includes inventory in transit which totaled $2,796,900 and $6,467,400 at August 31, 2021 and February 28, 2021, respectively.

 

Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2½ years of anticipated sales, are included in noncurrent inventory.

 

Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing, Ltd. (“Usborne”). Purchases received from this company were $12,127,000 and $7,357,600 for the three months ended August 31, 2021 and 2020, respectively. Total inventory purchases received from all suppliers were $18,779,100 and $12,370,600 for the three months ended August 31, 2021 and 2020, respectively.

 

Purchases received from Usborne were $24,415,300 and $11,332,000 for the six months ended August 31, 2021 and 2020, respectively. Total inventory purchases received from all suppliers were $36,564,300 and $18,217,200 for the six months ended August 31, 2021 and 2020, respectively.

 

Note 3 – LEASES

 

We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under ASC 842. One lessee arrangement includes a rental agreement where we have the exclusive use of dedicated office space in San Diego, California, and qualifies as an operating lease. Our other lessee arrangement is short-term and offers flexible storage space on a month to month basis. Our lessee arrangements are not material to our condensed financial statements or notes to the condensed financial statements. Our lessor arrangements include 3 rental agreements for warehouse and office space in Tulsa, Oklahoma, and each qualifies as an operating lease under ASC 842.

 

Operating Leases Lessor

 

We recognize fixed rental income on a straight-line basis over the life of the lease as other income on our condensed statements of earnings. Variable rental payments are recognized as other income in the period in which the changes in facts and circumstances on which the variable lease payments are based occur.

 

On April 4, 2020, we executed an amendment to one of our existing leases that abated rental payments for the months of May, June and July 2020. The amendment also extended the term of the lease for three additional months. This amendment represents a lease modification and, as such, we have adjusted our fixed rental income on a straight-line basis over the remaining term starting May 1, 2020.

 

 

Future minimum payments receivable under operating leases with terms greater than one year are estimated as follows:

 

Years ending February 28 (29),

    

2022

 

$

775,200

 

2023

  

1,573,200

 

2024

  

1,577,900

 

2025

  

1,547,100

 

2026

  

1,524,300

 

Thereafter

  

8,091,000

 

Total

 

$

15,088,700

 

 

The cost of the leased space was $10,828,600 and $10,826,400 as of August 31, 2021 and February 28, 2021, respectively. The accumulated depreciation associated with the leased assets was $2,407,600 and $2,216,700 as of August 31, 2021 and February 28, 2021, respectively. Both the leased assets and accumulated depreciation are included in property, plant and equipment-net on the condensed balance sheets.

 

Note 4 – DEBT

 

Debt consists of the following:

 

  

August 31, 2021

  

February 28, 2021

 
         

Line of credit

 $16,653,800  $5,245,300 
         
         

Advancing term loan

 $5,244,700  $0 

Long-term debt

  10,678,900   10,984,700 

Less current maturities

  (1,645,200

)

  (533,500

)

Long-term debt, net of current maturities

 $14,278,400  $10,451,200 

 

The Company executed an Amended and Restated Loan Agreement on February 15, 2021 (as amended the “Loan Agreement”) with MidFirst Bank (“the Bank”), which replaced the prior loan agreement and includes multiple loans. Term Loan #1 Tranche A (“Term Loan #1”), originally totaling $13.4 million, was part of the prior loan agreement. Term Loan #1 had a fixed interest rate of 4.23% with principal and interest payable monthly and a stated maturity date of December 1, 2025. On April 1, 2021, the Company executed the First Amendment to the Loan Agreement which reduced the fixed interest rate on Term Loan #1 to 3.12% and removed the prepayment premium from the Loan Agreement. Term Loan #1 is secured by the primary office, warehouse and land. The outstanding borrowings on Term Loan #1 were $10,678,900 and $10,984,700 as of August 31, 2021 and February 28, 2021, respectively.

 

The Loan Agreement also provides a $20.0 million revolving loan (“line of credit”) through August 15, 2022 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, with a minimum rate of 2.75% (the effective rate was 2.75% at August 31, 2021). On July 16, 2021, the Company executed the Second Amendment to the Loan Agreement which increased the Maximum Revolving Principal Amount from $15.0 million to $20.0 million. On August 31, 2021, the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate. Our borrowings outstanding on our line of credit as of August 31, 2021 and February 28, 2021, were $16,653,800 and $5,245,300, respectively. Available credit under the revolving line of credit was approximately $3,346,200 and $9,570,200 at August 31, 2021 and February 28, 2021, respectively. 

 

In addition, the Loan Agreement provides a $6.0 million Advancing Term Loan to be used to finance planned equipment purchases. The Advancing Term Loan required interest-only payments through July 15, 2021, at which time it was converted to a 60-month amortizing term loan maturing July 15, 2026. The Advancing Term Loan accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75% (the effective rate was 2.75% at August 31, 2021). Our borrowings outstanding under the Advancing Term Loan at August 31, 2021 were $5,244,700 and we had no borrowings at February 28, 2021.

 

Adjusted Funded Debt is defined as all long-term and short-term bank debt less the outstanding balance of Term Loan #1. EBITDA is defined in the Loan Agreement as net income plus interest expense, income tax expense (benefit) and depreciation and amortization expenses. The Adjusted Funded Debt to EBITDA ratio includes Adjusted Funded Debt to trailing twelve months EBITDA, reduced by specific rental income received from a non-related third party, see Note 3. The $20.0 million line of credit is limited to advance rates on eligible receivables and eligible inventory levels.

 

 

The Advancing Term Loan and the line of credit accrue interest at a tiered rate based on our Adjusted Funded Debt to EBITDA ratio. The variable interest pricing tier is as follows:

 

Pricing Tier

 

Adjusted Funded Debt to EBITDA Ratio

 

LIBOR Margin (bps)

I

 

>2.00

 

300.00

II

 

>1.50 but <2.00

 

275.00

III

 

>1.00 but <1.50

 

250.00

IV

 

<1.00

 

225.00

 

The Loan Agreement contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue or obtain issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than August 15, 2022, 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. As of August 31, 2021, we had no letters of credit outstanding.

 

The Loan Agreement also contains provisions that require the Company to maintain specified financial ratios and limits any additional debt with other lenders. Additionally, the Loan Agreement places limitations on the amount of dividends that may be distributed and the total value of stock that can be repurchased using advances from the line of credit.

 

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

 

Years ending February 28 (29),

    

2022

 

$

816,900

 

2023

  

1,658,800

 

2024

  

1,678,300

 

2025

  

1,697,700

 

2026

  

9,546,400

 

Thereafter

  

525,500

 

Total

 

$

15,923,600

 

 

Note 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 excluding nonvested restricted stock awards. Diluted EPS includes the dilutive effect of issued unvested restricted stock awards and additional potential common shares issuable under stock warrants, restricted stock and stock options. We utilized the treasury stock method in computing the potential common shares issuable under stock warrants, restricted stock, stock options and preferred shares.

 

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,

 
  

2021

  

2020

  

2021

  

2020

 

Earnings:

                

Net earnings applicable to common shareholders

 $1,898,200  $4,255,000  $5,336,300  $6,186,100 
                 

Weighted average shares:

                

Weighted average shares outstanding-basic

  8,028,594   8,354,214   8,028,929   8,353,319 

Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards

  406,754   0   429,735   0 

Weighted average shares outstanding-diluted

  8,435,348   8,354,214   8,458,664   8,353,319 
                 

Earnings per share:

                

Basic

 $0.24  $0.51  $0.66  $0.74 

Diluted

 $0.23  $0.51  $0.63  $0.74 

 

 

Note 6 – SHARE-BASED COMPENSATION

 

We account for share-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 probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and share awards are updated and compensation expense is adjusted based on updated information.

 

In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan established up to 600,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 or 2021. The Company exceeded all defined metrics during these fiscal years and 600,000 shares were granted to members of management according to the Plan. The granted shares under the 2019 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.

 

In July 2021, our shareholders approved the Company’s 2022 Long-Term Incentive Plan (“2022 LTI Plan”). The 2022 LTI Plan establishes up to 300,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2022 and 2023. The number of restricted shares to be distributed depends on attaining the performance metrics defined by the 2022 LTI Plan and may result in the distribution of a number of shares that is less than, but not greater than, the number of restricted shares outlined in the terms of the 2022 LTI Plan. Restricted shares granted under the 2022 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.

 

During fiscal year 2019, the Company granted 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share. In the third quarter of fiscal year 2021, 5,000 of these restricted shares were forfeited. These shares were made available to be reissued to remaining participants upon forfeiture. The remaining compensation expense for the outstanding awards, totaling approximately $980,200, will be recognized ratably over the remaining vesting period of approximately 18 months.

 

During fiscal year 2021, the Company granted 297,000 restricted shares under the 2019 LTI Plan, including the 5,000 aforementioned shares that were previously forfeited and held in Treasury, with an average grant-date fair value of $6.30 per share. The remaining compensation expense of these awards, totaling approximately $1,374,800, will be recognized ratably over the remaining vesting period of approximately 42 months.

 

As of August 31, 2021, no shares have been granted under the 2022 LTI Plan.

 

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

 

  

Three Months Ended August 31,

  

Six Months Ended August 31,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Share-based compensation expense

 $261,700  $216,200  $523,300  $385,200 

 

The following table summarizes stock award activity during the first six months of fiscal year 2022 under the 2019 LTI Plan:

 

  

Shares

  

Weighted Average Fair Value (per share)

 
         

Outstanding at February 28, 2021

  600,000  $8.14 

Granted

  -   - 

Vested

  0   0 

Forfeited

  -   - 

Outstanding at August 31, 2021

  600,000  $8.14 

 

As of August 31, 2021, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $2,355,000, which we expect to recognize over a weighted-average period of 32.0 months.

 

 

Note 7 – SHIPPING AND HANDLING COSTS

 

We classify shipping and handling costs as operating and selling expenses in the condensed statements of earnings. Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies. These costs were $5,036,000 and $9,984,600 for the three months ended August 31, 2021 and 2020, respectively. These costs were $11,392,400 and $16,299,900 for the six months ended August 31, 2021 and 2020, respectively.

 

Note 8 – BUSINESS SEGMENTS

 

We have 2 reportable segments: Usborne Books & More (“UBAM”) and Publishing. These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. 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. Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, trade and specialty wholesalers, through commissioned sales representatives and our internal tele-sales group.

 

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

 

Information by reporting segment for the three and six-month periods ended August 31, 2021 and 2020, are as follows:

 

NET REVENUES

                 
  

Three Months Ended

August 31,

  

Six Months Ended

August 31,

 
  

2021

  

2020

  

2021

  

2020

 

UBAM

 $29,518,100  $56,911,600  $67,135,000  $93,837,800 

Publishing

  3,476,300   2,338,500   6,667,300   3,704,000 

Total

 $32,994,400  $59,250,100  $73,802,300  $97,541,800 

 

EARNINGS (LOSS) BEFORE INCOME TAXES

 
                 
  

Three Months Ended

August 31,

  

Six Months Ended

August 31,

 
  

2021

  

2020

  

2021

  

2020

 

UBAM

 $5,579,100  $9,662,600  $13,440,400  $15,489,700 

Publishing

  982,800   738,800   1,844,300   1,085,400 

Other

  (3,903,800

)

  (4,601,900

)

  (7,966,000

)

  (8,131,700

)

Total

 $2,658,100  $5,799,500  $7,318,700  $8,443,400 

 

Note 9 – FAIR VALUE MEASUREMENTS

 

The valuation hierarchy included in 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 term notes payable is estimated by management to approximate $15,654,000 and $11,078,800 at August 31, 2021 and February 28, 2021, 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.

 

Note 10 – DEFERRED REVENUES

 

The Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to the end of the period that were not shipped as of August 31, 2021 or February 28, 2021 are recorded as deferred revenues on the condensed balance sheets. We received approximately $751,400 and $1,914,100, as of August 31, 2021 and February 28, 2021, respectively, in payments for sales orders which were shipped out subsequent to the end of the period. Orders that were included in deferred revenues predominantly shipped within the first few days of the next fiscal period.

 

Note 11 – SUBSEQUENT EVENTS

 

On October 6, 2021, the Board of Directors approved a $0.10 dividend that will be paid to shareholders of record on Thursday, November 18, 2021.

 

 

 

Item 2.          MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Factors Affecting Forward-Looking Statements

 

The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. 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 backlogs, our ability to obtain adequate financing for working capital and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, the COVID-19 pandemic, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 28, 2021 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 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 consist primarily of the compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate office and distribution facility.

 

The following table shows our condensed statements of earnings data:

 

  

Three Months Ended

August 31,

  

Six Months Ended

August 31,

 
  

2021

  

2020

  

2021

  

2020

 

Net revenues

 $32,994,400  $59,250,100  $73,802,300  $97,541,800 

Cost of goods sold

  10,498,900   17,309,500   22,528,800   28,705,000 

Gross margin

  22,495,500   41,940,600   51,273,500   68,836,800 
                 

Operating expenses

                

Operating and selling

  5,239,900   10,531,900   11,682,500   16,872,100 

Sales commissions

  10,105,200   20,304,400   23,072,000   33,904,900 

General and administrative

  4,793,900   5,664,000   9,932,800   10,200,000 

Total operating expenses

  20,139,000   36,500,300   44,687,300   60,977,000 
                 

Interest expense

  213,700   140,000   381,500   322,200 

Other income

  (515,300

)

  (499,200

)

  (1,114,000

)

  (905,800

)

Earnings before income taxes

  2,658,100   5,799,500   7,318,700   8,443,400 
                 

Income taxes

  759,900   1,544,500   1,982,400   2,257,300 

Net earnings

 $1,898,200  $4,255,000  $5,336,300  $6,186,100 

 

See the detailed discussion of revenues, gross margin and general and administrative expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods.

 

 

Non-Segment Operating Results for the Three Months Ended August 31, 2021

 

Total operating expenses not associated with a reporting segment decreased $0.8 million, or 16.0%, to $4.2 million for the three-month period ended August 31, 2021, when compared to $5.0 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a $0.6 million decrease in warehouse labor and a $0.4 million decrease in freight handling expenses, both resulting from a decrease in gross sales, offset by a $0.2 million increase in other various expenses.

 

Interest expense increased $0.1 million, or 100.0%, to $0.2 million for the three months ended August 31, 2021, when compared to $0.1 million for the same quarterly period a year ago associated with the increase in our line of credit and the addition of the Advancing Term Loan in the current fiscal year.

 

Income taxes decreased $0.7 million, or 46.7%, to $0.8 million for the three months ended August 31, 2021, from $1.5 million for the same quarterly period a year ago. Our effective tax rate increased to 28.6% for the quarter ended August 31, 2021, from 26.6% for the quarter ended August 31, 2020 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

 

Non-Segment Operating Results for the Six Months Ended August 31, 2021

 

Total operating expenses remained consistent at $8.7 million for the six-month periods ended August 31, 2021 and August 31, 2020. Warehouse labor decreased $0.2 million and freight handling decreased $0.4 million for the six months ended August 31, 2021, both associated with reduced sales. These changes were offset by increased warehouse rental of $0.2 million and property insurance of $0.1 million associated with increased inventory levels along with a $0.3 million increase in other various expenses.

 

Interest expense increased $0.1 million, or 33.3%, to $0.4 million for the six months ended August 31, 2021, when compared to $0.3 million for the same period a year ago as a result of the increase in our line of credit and the addition of the Advancing Term Loan in the current fiscal year.

 

Income taxes decreased $0.3 million, or 13.0%, to $2.0 million for the six months ended August 31, 2021, from $2.3 million for the same period a year ago. Our effective tax rate increased to 27.1% for the six months ended August 31, 2021, from 26.7% for the six months ended August 31, 2020 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

 

UBAM Operating Results for the Three and Six Months Ended August 31, 2021

 

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

 

  

Three Months Ended

August 31,

  

Six Months Ended

August 31,

 
  

2021

  

2020

  

2021

  

2020

 

Gross sales

 $36,789,400  $68,868,300  $82,325,100  $112,814,400 

Less discounts and allowances

  (10,590,700

)

  (18,828,400

)

  (22,876,400

)

  (30,135,100

)

Transportation revenue

  3,319,400   6,871,700   7,686,300   11,158,500 

Net revenues

  29,518,100   56,911,600   67,135,000   93,837,800 
                 

Cost of goods sold

  8,636,600   16,129,700   18,886,500   26,818,300 

Gross margin

  20,881,500   40,781,900   48,248,500   67,019,500 
                 

Operating expenses

                

Operating and selling

  4,215,000   9,137,600   9,559,700   14,563,900 

Sales commissions

  9,937,600   20,249,400   22,795,900   33,809,800 

General and administrative

  1,149,800   1,732,300   2,452,500   3,156,100 

Total operating expenses

  15,302,400   31,119,300   34,808,100   51,529,800 
                 

Operating income

 $5,579,100  $9,662,600  $13,440,400  $15,489,700 
                 

Average number of active consultants

  46,100   45,400   50,200   39,300 

 

 

UBAM Operating Results for the Three Months Ended August 31, 2021

 

UBAM net revenues decreased $27.4 million, or 48.2%, to $29.5 million during the three months ended August 31, 2021, when compared to $56.9 million during the same period a year ago. The average number of active consultants in the second quarter of fiscal 2022 was 46,100, an increase of 700, or 1.5%, from 45,400 selling in the second quarter of fiscal 2021. The Company reports the average number of active consultants each quarter as a key indicator for this division. During the quarter ended August 31, 2020 our sales per average number of active consultants increased significantly to due to the increase in demand for our products resulting from the impacts of the COVID-19 pandemic. During last summer, school closings and public interaction restrictions increased the need for educational materials in the home and our consultants were positioned to fill this increased demand. During the quarter ended August 31, 2021, our sales per average number of active consultants remained consistent with years prior to the COVID-19 pandemic.

 

Gross margin decreased $19.9 million, or 48.8%, to $20.9 million during the three months ended August 31, 2021, when compared to $40.8 million during the same period a year ago, primarily associated with the decrease in net revenues. Gross margin as a percentage of net revenues decreased 1.0%, to 70.7% for the three-month period ended August 31, 2021, when compared to 71.7% the same period a year ago. The decrease in gross margin as a percentage of net revenues resulted from a change in order mix partially offset by reduced cost of goods sold. During the quarter ended August 31, 2021 sales through book fairs, booths and home parties increased over the second quarter last year when these sales types were challenged. These sales types have higher sales discounts and pay less sales commissions to our consultants, resulting in similar operating income. Reduced cost of goods sold resulted from larger volume discounts and vendor rebates associated with increased purchasing volumes over pre-COVID-19 levels.

 

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. Total operating expenses decreased $15.8 million, or 50.8%, to $15.3 million during the three-month period ended August 31, 2021, when compared to $31.1 million reported in the same quarter a year ago. Operating and selling expenses decreased $4.9 million, or 53.8%, to $4.2 million during the three-month period ended August 31, 2021, when compared to $9.1 million reported in the same quarter a year ago, primarily due to a decrease in net revenues and a decrease in postage and freight peak charges we experienced in the second quarter last year. Sales commissions decreased $10.3 million, or 51.0%, to $9.9 million during the three-month period ended August 31, 2021, when compared to $20.2 million reported in the same quarter a year ago, due primarily to the decrease in net revenues. General and administrative expenses decreased $0.6 million, or 35.3%, to $1.1 million during the three months ended August 31, 2021, when compared to $1.7 million during the same period a year ago, due primarily to reduced bank fees from less credit card transactions during the quarter ended August 31, 2021.

 

Operating income of the UBAM segment decreased $4.1 million, or 42.3%, to $5.6 million during the three months ended August 31, 2021, when compared to $9.7 million reported in the same quarter a year ago, primarily due to the change in net revenues. Operating income of the UBAM division as a percentage of net revenues for the three months ended August 31, 2021 increased to 18.9%, compared to 17.0% for the three months ended August 31, 2020, primarily from reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes and reduced outbound shipping peak charges experienced in the second quarter last year.

 

UBAM Operating Results for the Six Months Ended August 31, 2021

 

UBAM net revenues decreased $26.7 million, or 28.5%, to $67.1 million during the six-month period ended August 31, 2021, compared to $93.8 million from the same period a year ago. The average number of active consultants in the six-month period ended August 31, 2021 was 50,200, an increase of 10,900, or 27.7%, from 39,300 selling in same period a year ago. During the six months ended August 31, 2020 our sales per average number of active consultants increased significantly due to the increase in demand for our products resulting from the impacts of the COVID-19 pandemic. School closings and quarantine restrictions increased the need for educational materials in the home and our consultants were positioned to fill this increased demand. During the six months ended August 31, 2021, our sales per average number of active consultants remained consistent with years prior to the COVID-19 pandemic.

 

 

Gross margin decreased $18.8 million, or 28.1%, to $48.2 million during the six-month period ended August 31, 2021, when compared to $67.0 million during the same period a year ago, due primarily to a decrease in net revenues. Gross margin as a percentage of net revenues increased to 71.9% for the six-month period ended August 31, 2021, when compared to 71.4% for the same period a year ago. During the six months ended August 31, 2021 , sales through book fairs, booths and home increased over the first six months of fiscal year 2021 when these sales types were challenged. These sales types have higher sales discounts and pay less sales commissions to our consultants, resulting in similar operating income. The decrease in gross margin percentage associated with the mix from these sales types was offset by reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes over pre-COVID-19 levels.

 

Total operating expenses decreased $16.7 million, or 32.4%, to $34.8 million during the six-month period ended August 31, 2021, from $51.5 million for the same period a year ago. Operating and selling expenses decreased $5.0 million, or 34.2%, to $9.6 million during the six-month period ended August 31, 2021, when compared to $14.6 million reported in the same period a year ago, primarily due to a decrease in shipping costs associated with the decrease in volume of orders shipped. Sales commissions decreased $11.0 million, or 32.5%, to $22.8 million during the six-month period ended August 31, 2021, when compared to $33.8 million reported in the same period a year ago, primarily due to the decrease in net revenues along with a lower percentage of internet-based sales, which offer fewer discounts and higher sales commissions to consultants. General and administrative expenses decreased $0.7 million, or 21.9%, to $2.5 million, from $3.2 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes.

 

Operating income of the UBAM segment decreased $2.1 million, or 13.5%, to $13.4 million during the six months ended August 31, 2021, when compared to $15.5 million reported in the same period last year. Operating income of the UBAM division as a percentage of net revenues for the six months ended August 31, 2021 was 20.0%, compared to 16.5% for the six months ended August 31, 2020, a change of 3.5%. Operating income as a percentage of net revenues increased from the prior year primarily from reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes and reduced outbound shipping peak charges experienced during the first six months of the prior fiscal year.

 

Publishing Operating Results for the Three and Six Months Ended August 31, 2021

 

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

 

  

Three Months Ended

August 31,

  

Six Months Ended

August 31,

 
  

2021

  

2020

  

2021

  

2020

 

Gross sales

 $7,397,700  $4,814,500  $14,253,600  $7,765,300 

Less discounts and allowances

  (3,922,800

)

  (2,535,000

)

  (7,591,200

)

  (4,124,200

)

Transportation revenue

  1,400   59,000   4,900   62,900 

Net revenues

  3,476,300   2,338,500   6,667,300   3,704,000 
                 

Cost of goods sold

  1,862,300   1,179,800   3,642,300   1,886,700 

Gross margin

  1,614,000   1,158,700   3,025,000   1,817,300 
                 

Total operating expenses

  631,200   419,900   1,180,700   731,900 
                 

Operating income

 $982,800  $738,800  $1,844,300  $1,085,400 

 

Publishing Operating Results for the Three Months Ended August 31, 2021

 

Our Publishing division’s net revenues increased $1.2 million, or 52.2%, to $3.5 million during the three-month period ended August 31, 2021, from $2.3 million reported in the same period a year ago. Many Publishing customers began to reopen in the latter half of fiscal year 2021 after closing in the first quarter of fiscal year 2021 due to the COVID-19 pandemic.

 

Gross margin increased $0.4 million, or 33.3%, to $1.6 million during the three-month period ended August 31, 2021, from $1.2 million reported in the same quarter a year ago, primarily due to the increase in net revenues. Gross margin as a percentage of net revenues decreased to 46.4% during the three-month period ended August 31, 2021, from 49.5% reported in the same quarter a year ago. Gross margin as a percentage of net revenues fluctuates primarily from the different discount levels offered to customers as well as changes in the mix of products sold between Kane Miller and Usborne.

 

 

Total operating expenses of the Publishing segment increased $0.2 million, or 50.0%, to $0.6 million, from $0.4 million, during the three-month periods ended August 31, 2021 and 2020, primarily as a result of increased freight expenses from an increase in sales.

 

Operating income of the Publishing segment increased $0.3 million, or 42.9%, to $1.0 million from $0.7 million for the three-month periods ended August 31, 2021 and 2020, primarily driven by the increase in net revenues.

 

Publishing Operating Results for the Six Months Ended August 31, 2021

 

Our Publishing division’s net revenues increased $3.0 million, or 81.1%, to $6.7 million during the six-month period ended August 31, 2021, from $3.7 million reported in the same period a year ago. The increase in sales resulted from temporary store closures impacted by the COVID-19 pandemic in fiscal year 2021. Many Publishing customers temporarily closed during the first quarter of fiscal year 2021, following the guidance from their local authorities to slow the spread of the pandemic, and began reopening at varying times in the latter half of fiscal year 2021.

 

Gross margin increased $1.2 million, or 66.7%, to $3.0 million during the six-month period ended August 31, 2021, from $1.8 million reported in the same period a year ago, primarily due to the increase in net revenues. Gross margin as a percentage of net revenues decreased to 45.4%, during the six-month period ended August 31, 2021, from 49.1% reported in the same period a year ago.  The decrease in gross margin percentage results primarily from a change in our customer mix. Customers receive varying discounts due to sales volumes and contract terms.

 

Total operating expenses of the Publishing segment increased $0.5 million, or 71.4%, to $1.2 million during the six-month period ended August 31, 2021, from $0.7 million reported in the same period a year ago, resulting from a $0.3 million increase in postage and freight from an increase in sales volumes and a $0.2 million increase in sales commissions from an increase in sales volumes.

 

Operating income of the Publishing segment increased $0.7 million, or 63.6%, to $1.8 million during the six-month period ended August 31, 2021 when compared to $1.1 million reported in the same period a year ago, due primarily to the increase in net revenues.

 

 

 

Liquidity and Capital Resources

 

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 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. 

 

During the first six months of fiscal year 2022, we experienced cash outflows from operations of $12,422,100. These cash outflows resulted from:

 

●net earnings of $5,336,300

 

Adjusted for: 

 

●depreciation expense of $924,200

●share-based compensation expense of $523,300

●provision for inventory valuation allowance of $120,000

●provision for doubtful accounts of $61,600 

 

Offset by:

 

●deferred income taxes of $48,500

 

Negatively impacted by:

 

●increase in inventories, net of $13,223,100

●decrease in accrued salaries and commissions, and other liabilities of $4,076,900

●decrease in deferred revenues of $1,162,700

●increase in accounts receivable of $609,300

●increase in prepaid expenses and other assets of $158,200

●decrease in accounts payable of $104,700

●decrease in income taxes payable of $4,100

 

Cash used in investing activities was $3,210,200 for capital expenditures, which were comprised of $2,849,700 in equipment purchased to increase our daily shipping capacity, $280,500 in software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders and $80,000 in building and building improvements.

 

Cash provided by financing activities was $14,741,300, which was comprised of proceeds from term debt of $5,244,700, net borrowings under the line of credit of $11,408,500 and net cash received in treasury stock transactions of $92,400, offset by payments of $1,698,500 for dividends and payments on term debt of $305,800.

 

During fiscal year 2022, we continue to expect the cash generated from our operations and cash available through our line of credit with our Bank will provide us the liquidity we need to support ongoing operations. Cash generated from operations will be used to increase inventory by expanding our product offerings, to liquidate existing debt, and any excess cash is expected to be distributed to our shareholders.

 

On February 15, 2021, the Company executed the Amended and Restated Loan Agreement with MidFirst Bank which replaced the prior loan agreement and includes multiple loans. Term Loan #1 Tranche A (“Term Loan #1”), originally totaling $13.4 million, was part of the prior loan agreement. Term Loan #1 had a fixed interest rate of 4.23%, with principal and interest payable monthly and a stated maturity date of December 1, 2025. Term Loan #1 is secured by the primary office, warehouse and land. Term Loan #1 was amended on April 1, 2021 by executing the First Amendment to the Loan Agreement which reduced the fixed interest rate to 3.12% and removed the prepayment premium from the Loan Agreement. The outstanding borrowings on Term Loan #1 were $10.7 million and $11.0 million as of August 31, 2021 and February 28, 2021, respectively.

 

In addition, the Amended and Restated Loan Agreement provides a $6.0 million Advancing Term Loan to be used to finance planned equipment purchases. The Advancing Term Loan required interest-only payments through July 15, 2021, at which time it was converted to a 60-month amortizing term loan maturing July 15, 2026. The Advancing Term Loan accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 2.75%. Our borrowings outstanding under the Advancing Term Loan at August 31, 2021 were $5.2 million.

 

 

The Amended and Restated Loan Agreement also provides a $20.0 million revolving loan (“line of credit”) through August 15, 2022 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, with a minimum rate of 2.75%. On July 16, 2021, the Company executed the Second Amendment to the Loan Agreement which increased the Maximum Revolving Principal Amount from $15.0 million to $20.0 million. On August 31, 2021, the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate. Our borrowings outstanding on our line of credit at August 31, 2021 and February 28, 2021 were $16.7 million and $5.2 million, respectively. Available credit under the revolving line of credit was approximately $3.3 million and $9.6 million at August 31, 2021 and February 28, 2021, respectively.

 

The Amended and Restated 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. As of August 31, 2021, we had no letters of credit outstanding. The agreement contains provisions that require us to maintain specified financial ratios, place limitations on additional debt with other banks, limit the amounts of dividends declared and limits the number of shares that can be repurchased using funding from the line of credit.

 

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

 

Years ending February 28 (29),

    

2022

 

$

816,900

 

2023

  

1,658,800

 

2024

  

1,678,300

 

2025

  

1,697,700

 

2026

  

9,546,400

 

Thereafter

  

525,500

 

Total

 

$

15,923,600

 

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States(GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.

 

Revenue Recognition

 

Sales associated with product orders are recognized and recorded when products are shipped. Products are shipped FOB shipping point. UBAM’s sales are generally paid at the time the product is ordered. Sales which have been paid for but not shipped are classified as deferred revenue on the balance sheet. Sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted. Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.

 

Estimated allowances for sales returns are recorded as sales are recognized. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily received from the retail stores of our Publishing division. Those damages occur in the stores, not in shipping to the 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 $0.2 million as of August 31, 2021 and February 28, 2021. 

 

 

Allowance for Doubtful Accounts

 

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns (collectively “allowance for doubtful accounts”). An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends. Management has estimated and included an allowance for doubtful accounts of $0.4 million at August 31, 2021, and $0.3 million at February 28, 2021. Included within this allowance is $0.1 million of reserve for vendor discounts to sell remaining inventory as of August 31, 2021 and February 28, 2021. 

 

Inventory

 

Our inventory contains over 2,000 titles, each with different sell through rates depending upon the nature and popularity of the title. We maintain very few titles that are topical in nature. As such, the majority of the titles we sell remain current in content for several years. Most of our products are printed in China, Europe, Singapore, India, Malaysia and Dubai resulting in a four- to six-month lead-time to have a title printed and delivered to us.

 

Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to minimum order requirements of our suppliers. Noncurrent inventory was estimated by management using the current year turnover ratio by title. Inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory. These inventory quantities have exposure of becoming out of date, and therefore have higher obsolescence reserves. Noncurrent inventory balances prior to valuation allowances were $1.1 million and $0.9 million at August 31, 2021 and February 28, 2021, respectively. Noncurrent inventory valuation allowances were $0.3 million and $0.2 million at August 31, 2021 and February 28, 2021, respectively.

 

Our principal supplier, based in England, generally requires a minimum 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 the initial order or re-order based upon this analysis. These factors and historical analysis have led our management to determine that 2½ years represents a reasonable estimate of the normal operating cycle for our products.

 

Consultants that meet certain eligibility requirements may request and receive inventory on consignment. We believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events; in summary, having consignment inventory leads to additional sales opportunities. Approximately 4.8% of our active consultants maintained consignment inventory at the end of the second quarter of fiscal 2022. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with consultants was $1.2 million and $1.1 million at August 31, 2021 and February 28, 2021, respectively.

 

Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company. Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory. Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.8 million and $0.7 million at August 31, 2021 and February 28, 2021, respectively.

 

Share-Based Compensation

 

We account for share-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. Any cash dividends declared after the restricted stock award is issued, but before the vesting period is completed, will be reinvested in Company shares at the opening trading price on the dividend payment date. Shares purchased with cash dividends will also retain the same restrictions until the completion of the original vesting period associated with the awarded shares.

 

 

The restricted share awards under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) and 2022 Long-Term Incentive Plan (“2022 LTI Plan”) contain both service and performance conditions. The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.

 

During the first six months of fiscal year 2022, the Company recognized $0.5 million of compensation expense associated with the shares granted.

 

 

 

Item 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4.          CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We performed an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer).

 

Based on that evaluation, these officers concluded that our disclosure controls and procedures were designed and were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to them, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported in accordance with the time periods specified in SEC rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events.

 

Changes in Internal Control over Financial Reporting

 

During the second quarter of the fiscal year covered by this report on Form 10-Q, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1.          LEGAL PROCEEDINGS

 

Not applicable.

 

Item 1A.       RISK FACTORS

 

Not required by smaller reporting company.

 

Item 2.               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Period

 

Total # of Shares

Purchased

  

Average Price

Paid per Share

  

Total # of Shares

Purchased as

Part of Publicly Announced Plan (1)

  

Maximum # of Shares that may

be Repurchased under the Plan (1)

 
                 

June 1 - 30, 2021

  

-

  

$

-

   

-

   

514,594

 

July 1 - 31, 2021

  

-

   

-

   

-

   

514,594

 

August 1 - 31, 2021

  

-

   

-

   

-

   

514,594

 

Total

  

-

  

$

-

   

-

     

 

(1)

 

On February 4, 2019 the Board of Directors approved a new stock repurchase plan, replacing the former 2008 stock repurchase plan. The maximum number of shares which can be purchased under the new plan is 800,000. Amounts in the table reflect the remaining number of shares available to be repurchased. This plan has no expiration date.

 

Item 3.          DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

Item 4.          MINE SAFETY DISCLOSURES

 

None.

 

Item 5.          OTHER INFORMATION

 

None.

 

 

Item 6.          EXHIBITS

 

*3.1

 

Restated Certificate of Incorporation dated April 26, 1968 and Certificate of Amendment thereto dated June 21, 1968 are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10-K (File No. 0-04957).

   

*3.2

 

Certificate of Amendment of Restated Certificate of Incorporation dated August 27, 1977 is incorporated herein by reference to Exhibit 20.1 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957).

   

*3.3

 

By-Laws, as amended, are incorporated herein by reference to Exhibit 20.2. to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957).

   

*3.4

 

Certificate of Amendment of Restated Certificate of Incorporation dated November 17, 1986 is incorporated herein by reference to Exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-04957).

   

3.5

 

Certificate of Amendment of Restated Certificate of Incorporation dated March 22, 1996 is incorporated herein by reference to Exhibit 3.4 to Form 10-K for fiscal year ended February 28, 1997 (File No. 0-04957).

   

3.6

 

Certificate of Amendment of Restated Certificate of Incorporation dated July 15, 2002 is incorporated herein by reference to Exhibit 10.30 to Form 10-K dated February 28, 2003 (File No. 0-04957).

   

3.7

 

Certificate of Amendment of Restated Certificate of Incorporation dated August 15, 2018 is incorporated herein by reference to Exhibit 3.1 to Form 8-K dated August 21, 2018 (File No. 0-04957).

   

**10.1

 

Second Amendment to the Amended and Restated Loan Agreement, dated July 16, 2021 by and between the Company and MidFirst Bank, Tulsa, OK.

   
**10.2 Third Amendment to the Amended and Restated Loan Agreement, dated August 31, 2021 by and between the Company and MidFirst Bank, Tulsa, OK.
   

**31.1

 

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

   

**31.2

 

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

   

**32.1

 

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

   

101.INS

 

Inline XBRL Instance Document

   

101.SCH

 

Inline XBRL Taxonomy Extension Schema

   

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase

   

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase

   

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase

   

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase

   

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*Paper Filed

**Filed Herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
 

EDUCATIONAL DEVELOPMENT CORPORATION

(Registrant)

   
   

Date: October 7, 2021

By

/s/ Craig M. White                             

  

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

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