UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ___________ to ____________.
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
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(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. | |
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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). | |
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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 ☐ | |
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| Non-accelerated filer ☐ | Smaller reporting company |
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| 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 ☐ |
As of January 3, 2022, there were
TABLE OF CONTENTS
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Page |
PART I. FINANCIAL INFORMATION |
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Item 1. |
3 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
14 |
Item 3. |
22 |
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Item 4. |
22 |
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PART II. OTHER INFORMATION |
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Item 1. |
23 |
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Item 1A. |
23 |
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Item 2. |
23 |
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Item 3. |
23 |
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Item 4. |
23 |
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Item 5. |
23 |
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Item 6. |
24 |
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25 |
CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS
The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 7 – Management’s 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) |
November 30, |
February 28, |
|||||||
ASSETS |
2021 |
2021 |
||||||
CURRENT ASSETS |
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Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable, less allowance for doubtful accounts of $ |
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Inventories - net |
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Prepaid expenses and other assets |
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Total current assets |
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INVENTORIES - net |
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PROPERTY, PLANT AND EQUIPMENT - net |
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DEFERRED INCOME TAX ASSET |
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OTHER ASSETS |
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TOTAL ASSETS |
$ | $ | ||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
$ | $ | ||||||
Line of credit |
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Deferred revenues |
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Current maturities of long-term debt |
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Accrued salaries and commissions |
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Dividends payable |
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Income taxes payable |
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Other current liabilities |
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Total current liabilities |
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LONG-TERM DEBT - net |
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DEFERRED INCOME TAX LIABILITY |
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OTHER LONG-TERM LIABILITIES |
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Total liabilities |
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SHAREHOLDERS' EQUITY |
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Common stock, $ Issued Outstanding |
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Capital in excess of par value |
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Retained earnings |
||||||||
Less treasury stock, at cost |
( |
) |
( |
) |
||||
Total shareholders' equity |
||||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
$ | $ |
See notes to condensed financial statements (unaudited).
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) |
Three Months Ended November 30, |
Nine Months Ended November 30, |
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2021 |
2020 |
2021 |
2020 |
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GROSS SALES |
$ | $ | $ | $ | ||||||||||||
Less discounts and allowances |
( |
) |
( |
) |
( |
) |
( |
) |
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Transportation revenue |
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NET REVENUES |
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COST OF GOODS SOLD |
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Gross margin |
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OPERATING EXPENSES |
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Operating and selling |
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Sales commissions |
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General and administrative |
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Total operating expenses |
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INTEREST EXPENSE |
||||||||||||||||
OTHER INCOME |
( |
) |
( |
) |
( |
) |
( |
) |
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EARNINGS BEFORE INCOME TAXES |
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INCOME TAXES |
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NET EARNINGS |
$ | $ | $ | $ | ||||||||||||
BASIC AND DILUTED EARNINGS PER SHARE |
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Basic |
$ | $ | $ | $ | ||||||||||||
Diluted |
$ | $ | $ | $ | ||||||||||||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING |
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Basic |
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Diluted |
||||||||||||||||
Dividends per share |
$ | $ | $ | $ |
See notes to condensed financial statements (unaudited).
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) |
FOR THE NINE MONTHS ENDED NOVEMBER 30, 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 |
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BALANCE – February 28, 2021 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
Sales of treasury stock |
- | - | - | ( |
) |
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Dividends declared ($ |
- | - | - | ( |
) |
- | - | ( |
) |
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Stock-based compensation (see note 6) |
- | - | - | - | - | |||||||||||||||||||||||
Net earnings |
- | - | - | - | - | |||||||||||||||||||||||
BALANCE - May 31, 2021 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
Sales of treasury stock |
- | - | - | ( |
) |
|||||||||||||||||||||||
Issuance of restricted share awards for vesting |
( |
) |
- | ( |
) |
- | ||||||||||||||||||||||
Dividends declared ($ |
- | - | - | ( |
) |
- | - | ( |
) |
|||||||||||||||||||
Share-based compensation expense (see Note 6) |
- | - | - | - | - | |||||||||||||||||||||||
Net earnings |
- | - | - | - | - | |||||||||||||||||||||||
BALANCE - August 31, 2021 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
Sales of treasury stock |
- | - | - | ( |
) |
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Dividends declared ($ |
- | - | - | ( |
) |
- | - | ( |
) |
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Share-based compensation expense (see Note 6) |
- | - | - | - | - | |||||||||||||||||||||||
Net earnings |
- | - | - | - | - | |||||||||||||||||||||||
BALANCE - November 30, 2021 |
$ | $ | $ | $ | ( |
) |
$ |
FOR THE NINE MONTHS ENDED NOVEMBER 30, 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 |
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BALANCE – February 29, 2020 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
Purchases of treasury stock |
- | - | - | - | ( |
) |
( |
) |
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Sales of treasury stock |
- | - | - | ( |
) |
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Dividends declared ($ |
- | - | - | ( |
) |
- | - | ( |
) |
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Share-based compensation expense (see Note 6) |
- | - | - | - | - | |||||||||||||||||||||||
Net earnings |
- | - | - | - | - | |||||||||||||||||||||||
BALANCE - May 31, 2020 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
Sales of treasury stock |
- | - | - | ( |
) |
|||||||||||||||||||||||
Dividends declared ($ |
- | - | - | ( |
) |
- | - | ( |
) |
|||||||||||||||||||
Share-based compensation expense (see Note 6) |
- | - | - | - | - | |||||||||||||||||||||||
Net earnings |
- | - | - | - | - | |||||||||||||||||||||||
BALANCE - August 31, 2020 |
$ | $ | $ | $ | ( |
) |
$ | |||||||||||||||||||||
Sales of treasury stock |
- | - | - | ( |
) |
|||||||||||||||||||||||
Dividends declared ($ |
- | - | - | ( |
) |
- | - | ( |
) |
|||||||||||||||||||
Share-based compensation expense (see Note 6) |
- | - | - | - | - | |||||||||||||||||||||||
Net earnings |
- | - | - | - | - | |||||||||||||||||||||||
BALANCE - November 30, 2020 |
$ | $ | $ | $ | ( |
) |
$ |
See notes to condensed financial statements (unaudited).
EDUCATIONAL DEVELOPMENT CORPORATION |
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) |
Nine Months Ended November 30, |
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2021 |
2020 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net earnings |
$ | $ | ||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
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Depreciation |
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Deferred income taxes |
( |
) |
( |
) |
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Provision for doubtful accounts |
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Provision for inventory valuation allowance |
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Share-based compensation expense |
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Changes in assets and liabilities: |
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Accounts receivable |
( |
) |
( |
) |
||||
Inventories, net |
( |
) |
( |
) |
||||
Prepaid expenses and other assets |
( |
) |
( |
) |
||||
Accounts payable |
||||||||
Accrued salaries and commissions and other liabilities |
( |
) |
||||||
Deferred revenues |
( |
) |
||||||
Income taxes payable |
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Total adjustments |
( |
) |
||||||
Net cash provided by (used in) operating activities |
( |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property, plant and equipment |
( |
) |
( |
) |
||||
Net cash used in investing activities |
( |
) |
( |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Payments on term debt |
( |
) |
( |
) |
||||
Proceeds from term debt |
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Sales of treasury stock |
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Purchases of treasury stock |
( |
) |
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Net payments on line of credit |
( |
) |
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Dividends paid |
( |
) |
( |
) |
||||
Net cash provided by (used in) financing activities |
( |
) |
||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
( |
) |
||||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD |
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CASH AND CASH EQUIVALENTS - END OF PERIOD |
$ | $ | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION |
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Cash paid for interest |
$ | $ | ||||||
Cash paid for income taxes |
$ | $ |
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.
Reclassifications
Certain reclassifications have been made to the fiscal 2021 condensed balance sheet, condensed statement of cash flows and footnotes to conform to the classifications used in fiscal 2022. These reclassifications had no effect on net earnings.
COVID-19 Update
The Company has taken numerous steps, and will continue to take further actions, in its approach to minimize the impact of the COVID-19 pandemic. 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 results 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.
Note 2 – INVENTORIES
Inventories consist of the following:
November 30, 2021 |
February 28, 2021 |
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Current: |
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Book inventory |
$ | $ | ||||||
Inventory valuation allowance |
( |
) |
( |
) |
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Inventories net – current |
$ | $ | ||||||
Noncurrent: |
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Book inventory |
$ | $ | ||||||
Inventory valuation allowance |
( |
) |
( |
) |
||||
Inventories net – noncurrent |
$ | $ |
Book inventory includes inventory in transit which totaled $
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 $
Purchases received from Usborne were $
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
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), |
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2022 |
|
$ |
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2023 |
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2024 |
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2025 |
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2026 |
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Thereafter |
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Total |
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$ |
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|
The cost of the leased space was $
Note 4 – DEBT
Debt consists of the following:
November 30, 2021 |
February 28, 2021 |
|||||||
Line of credit |
$ | $ | ||||||
Advancing term loan #1 |
$ | $ | ||||||
Advancing term loan #2 |
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Term loan #1 |
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Total long-term debt |
||||||||
Less current maturities |
( |
) |
( |
) |
||||
Less debt issue cost |
( |
) |
||||||
Long-term debt, net |
$ | $ |
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 $
The Loan Agreement also provides a $
In addition, the Loan Agreement provides a $
On November 19, 2021, the Company executed the Fourth Amendment to the Loan Agreement which established Advancing Term Loan #2 in the principal amount of $
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
Pricing Tier |
|
Adjusted Funded Debt to EBITDA Ratio |
|
LIBOR Margin (bps) |
I |
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II |
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III |
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IV |
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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 November 30, 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), |
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|
|
2022 |
|
$ |
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|
2023 |
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2024 |
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2025 |
|
|
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2026 |
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Thereafter |
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Total |
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$ |
|
|
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 and stock options.
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below:
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
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Earnings: |
||||||||||||||||
Net earnings applicable to common shareholders |
$ | $ | $ | $ | ||||||||||||
Weighted average shares: |
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Weighted average shares outstanding-basic |
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Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards |
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Weighted average shares outstanding-diluted |
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Earnings per share: |
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Basic |
$ | $ | $ | $ | ||||||||||||
Diluted |
$ | $ | $ | $ |
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”).
During fiscal year 2019, the Company granted
During fiscal year 2021, the Company granted
As of November 30, 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 November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
Share-based compensation expense |
$ | $ | $ | $ |
The following table summarizes stock award activity during the first nine months of fiscal year 2022 under the 2019 LTI Plan:
Shares |
Weighted Average Fair Value (per share) |
|||||||
Outstanding at February 28, 2021 |
$ | |||||||
Granted |
- | - | ||||||
Vested |
||||||||
Forfeited |
- | - | ||||||
Outstanding at November 30, 2021 |
$ |
As of November 30, 2021, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $
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 $
Note 8 – BUSINESS SEGMENTS
We have
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 nine-month periods ended November 30, 2021 and 2020, are as follows:
NET REVENUES |
||||||||||||||||
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
UBAM |
$ | $ | $ | $ | ||||||||||||
Publishing |
||||||||||||||||
Total |
$ | $ | $ | $ |
EARNINGS (LOSS) BEFORE INCOME TAXES |
||||||||||||||||
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
UBAM |
$ | $ | $ | $ | ||||||||||||
Publishing |
||||||||||||||||
Other |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Total |
$ | $ | $ | $ |
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.
The Company did not have any financial assets and liabilities that were required to be measured at fair value. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate fair value due to their short maturities. The fair value of our term notes payable is estimated by management to approximate $
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 November 30, 2021 or February 28, 2021 are recorded as deferred revenues on the condensed balance sheets. We received approximately $
Note 11 – SUBSEQUENT EVENTS
On December 1, 2021 the Company acquired Learning Wrap-Ups, Inc, (Learning Wrap-Ups) for an initial purchase price of $800,000, which approximates the net assets acquired by the Company. Learning Wrap-Ups historical annual sales total approximately $
On
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting Forward-Looking Statements
The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. 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 November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
Net revenues |
$ | 45,112,300 | $ | 66,750,300 | $ | 118,914,600 | $ | 164,292,100 | ||||||||
Cost of goods sold |
13,897,300 | 19,597,800 | 36,426,000 | 48,302,800 | ||||||||||||
Gross margin |
31,215,000 | 47,152,500 | 82,488,600 | 115,989,300 | ||||||||||||
Operating expenses |
||||||||||||||||
Operating and selling |
7,354,500 | 11,616,200 | 19,037,000 | 28,488,300 | ||||||||||||
Sales commissions |
14,515,500 | 22,960,300 | 37,587,400 | 56,865,200 | ||||||||||||
General and administrative |
5,915,000 | 7,082,200 | 15,847,900 | 17,282,200 | ||||||||||||
Total operating expenses |
27,785,000 | 41,658,700 | 72,472,300 | 102,635,700 | ||||||||||||
Interest expense |
228,300 | 119,300 | 609,800 | 441,500 | ||||||||||||
Other income |
(400,900 |
) |
(399,800 |
) |
(1,514,800 |
) |
(1,305,600 |
) |
||||||||
Earnings before income taxes |
3,602,600 | 5,774,300 | 10,921,300 | 14,217,700 | ||||||||||||
Income taxes |
956,000 | 1,504,700 | 2,938,400 | 3,762,000 | ||||||||||||
Net earnings |
$ | 2,646,600 | $ | 4,269,600 | $ | 7,982,900 | $ | 10,455,700 |
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 November 30, 2021
Total operating expenses not associated with a reporting segment decreased $0.8 million, or 13.1%, to $5.3 million for the three-month period ended November 30, 2021, when compared to $6.1 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a $0.8 million decrease in warehouse labor and a $0.3 million decrease in freight handling expenses, both resulting from a decrease in gross sales, offset by a $0.2 million increase in depreciation expense and a $0.1 million increase in other various expenses.
Interest expense increased $0.1 million, or 100.0%, to $0.2 million for the three months ended November 30, 2021, when compared to $0.1 million for the same quarterly period a year ago associated with the borrowings against our line of credit and the addition of the advancing term loans in the current fiscal year, not utilized in the same quarterly period a year ago.
Income taxes decreased $0.5 million, or 33.3%, to $1.0 million for the three months ended November 30, 2021, from $1.5 million for the same quarterly period a year ago, resulting from a decrease in gross sales. Our effective tax rate increased to 26.5% for the quarter ended November 30, 2021, from 26.1% for the quarter ended November 30, 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 Nine Months Ended November 30, 2021
Total operating expenses decreased $0.8 million, or 5.4%, to $14.0 million for the nine months ended November 30, 2021, from $14.8 million for the same quarterly period a year ago. Warehouse labor decreased $1.0 million and freight handling decreased $0.8 million for the nine months ended November 30, 2021, both associated with reduced sales. These changes were offset by an increase in warehouse rental expenses of $0.3 million, an increase in depreciation expense of $0.3 million, an increase in property insurance of $0.1 million associated with increased inventory levels, along with a $0.1 million increase in other various expenses.
Interest expense increased $0.2 million, or 50.0%, to $0.6 million for the nine months ended November 30, 2021, when compared to $0.4 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 loans in the current fiscal year.
Income taxes decreased $0.9 million, or 23.7%, to $2.9 million for the nine months ended November 30, 2021, from $3.8 million for the same period a year ago, resulting from a decrease in gross sales. Our effective tax rate increased to 26.9% for the nine months ended November 30, 2021, from 26.5% for the nine months ended November 30, 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 Nine Months Ended November 30, 2021
The following table summarizes the operating results of the UBAM segment:
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
Gross sales |
$ | 50,232,200 | $ | 77,674,100 | $ | 132,557,400 | $ | 190,488,500 | ||||||||
Less discounts and allowances |
(12,891,300 |
) |
(21,244,700 |
) |
(35,767,700 |
) |
(51,379,800 |
) |
||||||||
Transportation revenue |
4,056,900 | 7,740,300 | 11,743,100 | 18,898,800 | ||||||||||||
Net revenues |
41,397,800 | 64,169,700 | 108,532,800 | 158,007,500 | ||||||||||||
Cost of goods sold |
11,961,700 | 18,230,200 | 30,848,200 | 45,048,500 | ||||||||||||
Gross margin |
29,436,100 | 45,939,500 | 77,684,600 | 112,959,000 | ||||||||||||
Operating expenses |
||||||||||||||||
Operating and selling |
6,069,000 | 10,055,900 | 15,628,600 | 24,619,800 | ||||||||||||
Sales commissions |
14,351,100 | 22,865,000 | 37,147,000 | 56,674,800 | ||||||||||||
General and administrative |
1,480,000 | 2,197,000 | 3,932,600 | 5,353,100 | ||||||||||||
Total operating expenses |
21,900,100 | 35,117,900 | 56,708,200 | 86,647,700 | ||||||||||||
Operating income |
$ | 7,536,000 | $ | 10,821,600 | $ | 20,976,400 | $ | 26,311,300 | ||||||||
Average number of active consultants |
41,500 | 57,200 | 47,300 | 45,200 |
UBAM Operating Results for the Three Months Ended November 30, 2021
UBAM net revenues decreased $22.8 million, or 35.5%, to $41.4 million during the three months ended November 30, 2021, when compared to $64.2 million during the same period a year ago. The average number of active consultants in the third quarter of fiscal 2022 was 41,500, a decrease of 15,700, or 27.4%, from 57,200 consultants selling in the third quarter of fiscal 2021. During the first and second quarter of fiscal 2021, our active consultants grew significantly due to pandemic-related events such as seeking replacement income from the loss of full-time employment, an increase in the need for work-from-home opportunities and an increased demand for educational products in the home. Our consultant numbers declined this year due to consultants returning to full-time employment, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials than they had in the prior year. While the decrease in sales and consultants has occurred in fiscal 2022, our UBAM division’s active consultants and sales continue to exceed pre-pandemic levels.
Gross margin decreased $16.5 million, or 35.9%, to $29.4 million during the three months ended November 30, 2021, when compared to $45.9 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 0.5%, to 71.1% for the three-month period ended November 30, 2021, when compared to 71.6% 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. Throughout the quarter ended November 30, 2021 sales through book fairs, booths and home parties increased over the third 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 $13.2 million, or 37.6%, to $21.9 million during the three-month period ended November 30, 2021, when compared to $35.1 million reported in the same quarter a year ago. Operating and selling expenses decreased $4.0 million, or 39.6%, to $6.1 million during the three-month period ended November 30, 2021, when compared to $10.1 million reported in the same quarter a year ago, primarily due to a $3.4 million decrease in postage and freight and a $0.6 million decrease in accruals for the Company’s annual incentive trip and other consultant rewards associated with the decrease in net sales. Sales commissions decreased $8.5 million, or 37.1%, to $14.4 million during the three-month period ended November 30, 2021, when compared to $22.9 million reported in the same quarter a year ago, due primarily to the decrease in net revenues. General and administrative expenses decreased $0.7 million, or 31.8%, to $1.5 million during the three months ended November 30, 2021, when compared to $2.2 million during the same period a year ago, due primarily to $0.6 million of reduced bank fees from less credit card transactions during the quarter ended November 30, 2021.
Operating income of the UBAM segment decreased $3.3 million, or 30.6% to $7.5 million during the three months ended November 30, 2021, when compared to $10.8 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 November 30, 2021 increased to 18.2%, compared to 16.9% for the three months ended November 30, 2020, a change of $0.6 million. This operating improvement resulted primarily from $0.2 million of reduced outbound shipping peak surcharges, a $0.2 million decrease in accruals for the Company’s annual incentive trip and other consultant rewards and a $0.2 million decrease in consultant promotion bonuses paid.
UBAM Operating Results for the Nine Months Ended November 30, 2021
UBAM net revenues decreased $49.5 million, or 31.3%, to $108.5 million during the nine-month period ended November 30, 2021, compared to $158.0 million from the same period a year ago. The average number of active consultants in the nine-month period ended November 30, 2021 was 47,300, an increase of 2,100, or 4.6%, from 45,200 selling in same period a year ago. During fiscal 2021, our active consultants grew from 29,600 at the beginning of the year to 57,600 at the end of the fiscal year. This active consultant growth resulted from pandemic-related events such as seeking replacement income from loss of full-time employment, an increase in the need for work-from-home opportunities and an increased demand for educational products in the home. During fiscal 2022 our active consultant count has declined due to consultants returning to full-time work, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials than they had in the prior year. While a decrease in sales and consultants has occurred in fiscal 2022, our UBAM division’s active consultants and sales continue to exceed pre-pandemic levels.
Gross margin decreased $35.3 million, or 31.2%, to $77.7 million during the nine-month period ended November 30, 2021, when compared to $113.0 million during the same period a year ago, due primarily to a decrease in net revenues. Gross margin as a percentage of net revenues remained consistent at 71.6% for the nine-month period ended November 30, 2021, when compared to 71.5% for the same period a year ago.
Total operating expenses decreased $29.9 million, or 34.5%, to $56.7 million during the nine-month period ended November 30, 2021, from $86.6 million for the same period a year ago. Operating and selling expenses decreased $9.0 million, or 36.6%, to $15.6 million during the nine-month period ended November 30, 2021, when compared to $24.6 million reported in the same period a year ago, primarily due to a $8.1 million decrease in shipping costs associated with the decrease in volume of orders shipped and a $0.9 million decrease in accruals for the Company’s annual incentive trip and other consultant rewards associated with the decrease in UBAM sales. Sales commissions decreased $19.6 million, or 34.6%, to $37.1 million during the nine-month period ended November 30, 2021, when compared to $56.7 million reported in the same period a year ago, primarily due to the decrease in net revenues. General and administrative expenses decreased $1.5 million, or 27.8%, to $3.9 million, from $5.4 million recognized during the same period last year, due primarily to a $1.2 million decrease in credit card transaction fees associated with decreased sales volumes and a $0.3 million decrease in other various expenses.
Operating income of the UBAM segment decreased $5.3 million, or 20.2%, to $21.0 million during the nine months ended November 30, 2021, when compared to $26.3 million reported in the same period last year. Operating income of the UBAM division as a percentage of net revenues for the nine months ended November 30, 2021 was 19.3%, compared to 16.7% for the nine months ended November 30, 2020, a change of 2.6%. Operating income as a percentage of net revenues increased from the prior year primarily due to $0.9 million of reduced cost of goods sold resulting from larger volume discounts and vendor rebates associated with increased purchasing volumes, $0.9 million of increased transportation revenue due to the increase of our minimum shipping charge implemented in the third quarter of fiscal 2021, $0.9 million of reduced freight handling costs primarily from reduced peak surcharges in the current fiscal year due to lower shipping volumes, $0.7 million improvement from the change in order type mix, a $0.5 million decrease in accrual expenses for the Company’s annual incentive trip and other consultant rewards resulting from less award earners and $0.2 million of other various cost reductions, offset by $1.2 million of reduced transportation revenue associated with free shipping days offered in the current fiscal year, not offered in the previous fiscal year.
Publishing Operating Results for the Three and Nine Months Ended November 30, 2021
The following table summarizes the operating results of the Publishing segment:
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
Gross sales |
$ | 7,800,600 | $ | 5,463,400 | $ | 22,054,100 | $ | 13,228,700 | ||||||||
Less discounts and allowances |
(4,087,300 |
) |
(2,886,400 |
) |
(11,678,500 |
) |
(7,010,600 |
) |
||||||||
Transportation revenue |
1,200 | 3,600 | 6,200 | 66,500 | ||||||||||||
Net revenues |
3,714,500 | 2,580,600 | 10,381,800 | 6,284,600 | ||||||||||||
Cost of goods sold |
1,935,600 | 1,367,600 | 5,577,800 | 3,254,300 | ||||||||||||
Gross margin |
1,778,900 | 1,213,000 | 4,804,000 | 3,030,300 | ||||||||||||
Total operating expenses |
592,800 | 440,000 | 1,773,500 | 1,171,900 | ||||||||||||
Operating income |
$ | 1,186,100 | $ | 773,000 | $ | 3,030,500 | $ | 1,858,400 |
Publishing Operating Results for the Three Months Ended November 30, 2021
Our Publishing division’s net revenues increased $1.1 million, or 42.3%, to $3.7 million during the three-month period ended November 30, 2021, from $2.6 million reported in the same period a year ago. Many Publishing customers closed their stores during the first and second quarters of fiscal 2021 due to the COVID-19 pandemic and did not reopen until the third or fourth quarter of fiscal 2021. As such, much of the sales increase resulted from the return of customer activity to pre-pandemic levels. In addition, sales in the current year third fiscal quarter were boosted by the addition of new customers added during the quarter.
Gross margin increased $0.6 million, or 50.0%, to $1.8 million during the three-month period ended November 30, 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 increased to 47.9% during the three-month period ended November 30, 2021, from 47.0% 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 November 30, 2021 and 2020, resulting from a $0.1 million increase in postage and freight from an increase in sales volumes and a $0.1 million increase in sales commissions from an increase in sales volumes.
Operating income of the Publishing segment increased $0.4 million, or 50.0%, to $1.2 million from $0.8 million for the three-month periods ended November 30, 2021 and 2020, primarily driven by the increase in gross margin.
Publishing Operating Results for the Nine Months Ended November 30, 2021
Our Publishing division’s net revenues increased $4.1 million, or 65.1%, to $10.4 million during the nine-month period ended November 30, 2021, from $6.3 million reported in the same period a year ago. The increase in sales primarily resulted from temporary store closures in fiscal year 2021 due to the COVID-19 pandemic. Many Publishing customers closed during the first and second quarters 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. In addition, Publishing’s sales during the first nine months increased beyond pre-pandemic levels from the addition of new customers, as well as increased sales volumes with existing customers due to increased demand for our products.
Gross margin increased $1.8 million, or 60.0%, to $4.8 million during the nine-month period ended November 30, 2021, from $3.0 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 46.3%, during the nine-month period ended November 30, 2021, from 48.2% reported in the same period a year ago. The decrease in gross margin percentage results primarily from a change in our customer mix, as customers receive varying discounts due to sales volumes and contract terms, as well as changes in the mix of products sold between Kane Miller and Usborne.
Total operating expenses of the Publishing segment increased $0.6 million, or 50.0%, to $1.8 million during the nine-month period ended November 30, 2021, from $1.2 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 $0.3 million increase in sales commissions from an increase in sales volumes.
Operating income of the Publishing segment increased $1.1 million, or 57.9%, to $3.0 million during the nine-month period ended November 30, 2021 when compared to $1.9 million reported in the same period a year ago, due primarily to the increase in gross margin.
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 nine months of fiscal year 2022, we experienced cash outflows from operations of $7,377,100. These cash outflows resulted from:
●net earnings of $7,982,900
Adjusted for:
●depreciation expense of $1,518,700
●share-based compensation expense of $784,900
●provision for inventory valuation allowance of $180,000
●provision for doubtful accounts of $91,800
Offset by:
●deferred income taxes of $226,700
Positively impacted by:
●increase in accounts payable of $4,451,400
●increase in income taxes payable of $453,900
Negatively impacted by:
●increase in inventories, net of $18,817,000
●increase in accounts receivable of $1,476,700
●decrease in deferred revenues of $1,320,200
●decrease in accrued salaries and commissions, and other liabilities of $841,100
●increase in prepaid expenses and other assets of $159,000
Cash used in investing activities was $3,387,100 for capital expenditures, which were comprised of $2,901,600 in equipment purchased to increase our daily shipping capacity, $392,800 in software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders and $92,700 in other building and equipment improvements.
Cash provided by financing activities was $9,858,700, which was comprised of proceeds from term debt of $15,244,700 and net cash received in treasury stock transactions of $154,400, offset by payments of $2,563,400 for dividends, repayment of borrowings on the line of credit of $2,225,900, and payments on term debt of $751,100.
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 $10.5 million and $11.0 million as of November 30, 2021 and February 28, 2021, respectively.
In addition, the Amended and Restated Loan Agreement provides a $6.0 million Advancing Term Loan #1 to be used to finance planned equipment purchases. The Advancing Term Loan #1 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 #1 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 3.00%. Our borrowings outstanding under the Advancing Term Loan #1 at November 30, 2021 were $5.0 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 3.00%. 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 November 30, 2021 and February 28, 2021 were $3.0 million and $5.2 million, respectively. Available credit under the revolving line of credit was approximately $17.0 million and $9.6 million at November 30, 2021 and February 28, 2021, respectively.
On November 19, 2021, the Company executed the Fourth Amendment to the Loan Agreement which established Advancing Term Loan #2 in the principal amount of $10.0 million, amended the definition of LIBO Rate and LIBOR Margin and added Benchmark Replacement Provisions. The Advancing Term Loan #2 is a 120-month amortizing loan maturing November 19, 2031 and 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 3.00%. Our borrowings outstanding under the Advancing Term Loan #2 at November 30, 2021 were $10.0 million.
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 November 30, 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 |
|
$ |
622,700 |
|
2023 |
|
|
2,541,800 |
|
2024 |
|
|
2,587,900 |
|
2025 |
|
|
2,634,700 |
|
2026 |
|
|
10,499,200 |
|
Thereafter |
|
|
6,641,600 |
|
Total |
|
$ |
25,527,900 |
|
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 November 30, 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 $0.3 million at November 30, 2021, and $0.3 million at 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 $2.2 million and $0.9 million at November 30, 2021 and February 28, 2021, respectively. Noncurrent inventory valuation allowances were $0.3 million and $0.2 million at November 30, 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 6.5% of our active consultants have maintained consignment inventory at the end of the third 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 $1.6 million and $1.1 million at November 30, 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 $0.9 million and $0.7 million at November 30, 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 nine months of fiscal year 2022, the Company recognized $0.8 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 third 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 |
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Total # of Shares Purchased |
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Average Price Paid per Share |
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Total # of Shares Purchased as Part of Publicly Announced Plan (1) |
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Maximum # of Shares that may be Repurchased under the Plan (1) |
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September 1 - 30, 2021 |
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- |
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$ |
- |
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- |
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514,594 |
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October 1 - 31, 2021 |
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- |
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- |
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- |
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514,594 |
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November 1 - 30, 2021 |
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- |
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- |
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- |
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514,594 |
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Total |
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- |
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$ |
- |
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- |
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(1) |
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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 |
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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). |
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*3.2 |
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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). |
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*3.3 |
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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). |
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*3.4 |
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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). |
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3.5 |
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3.6 |
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3.7 |
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10.1 | First Amendment to the Amended and Restated Loan Agreement, dated April 1, 2021 by and between the Company and MidFirst Bank, Tulsa, OK is incorporated herein by reference to Exhibit 10.11 to Form 10-K dated February 28, 2021 (File No. 0-04957). | |
10.2 |
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10.3 |
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10.4 |
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**31.1 |
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**31.2 |
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**32.1 |
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101.INS |
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Inline XBRL Instance Document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase |
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104 |
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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.
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EDUCATIONAL DEVELOPMENT CORPORATION (Registrant) |
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Date: January 6, 2022 |
By |
/s/ Craig M. White |
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President and Chief Executive Officer (Principal Executive Officer) |