What changed in this filing

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Item 1. Financial Statements

2021-07-08 compared with 2021-01-13 · 281 added, 136 removed, 222 unchanged (65% of the section changed)

2 unchanged sentences

CONDENSED BALANCE SHEETS (UNAUDITED)

November 30 ,

CURRENT ASSETS

1 unchanged sentence

Accounts receivable, less allowance for doubtful accounts of

$345,000 (November 30) and $237,400 (February 29)

$ 360,400 (May 31) and $ 331,900 (February 28)

Inventories - net

Income taxes receivable

Prepaid expenses and other assets

5 unchanged sentences

Accounts payable

Line of credit

Deferred revenues

2 unchanged sentences

Dividends payable

Income taxes payable

Other current liabilities

7 unchanged sentences

Authorized 16,000,000 shares;

Issued 12,410,080 (November 30) and 12,410,080 (February 29) shares;

Outstanding 8,355,972 (November 30) and 8,348,651 (February 29) shares

Issued 12,410,080 shares;

Outstanding 8,348,314 (May 31) and 8,346,600 (February 28) shares

Capital in excess of par value

3 unchanged sentences

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

See notes to financial statements.

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 ,

Three Months Ended May 31,

Less discounts and allowances

11 unchanged sentences

Dividends per share

See notes to financial statements.

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 , 2020

FOR THE THREE MONTHS ENDED MAY 31, 2021

(par value $0.20 per share)

2 unchanged sentences

BALANCE - February 28, 2021

Purchases of treasury stock

Sales of treasury stock

2 unchanged sentences

BALANCE - May 31, 2021

Sales of treasury stock

Dividends declared ($0.06/share)

Share-based compensation expense (see Note 6)

BALANCE – August 31, 2020

Sales of treasury stock

Dividends declared ($0.10/share)

Share-based compensation expense (see Note 6)

BALANCE - November 30, 2020

FOR THE NINE MONTHS ENDED NOVEMBER 30 , 2019

FOR THE THREE MONTHS ENDED MAY 31, 2020

(par value $0.20 per share)

7 unchanged sentences

BALANCE - May 31, 2020

Purchases of treasury stock

Sales of treasury stock

Dividends declared ($0.05/share)

Share-based compensation expense (see Note 6)

Issuance of restricted share awards for vesting

BALANCE - August 31, 2019

Purchases of treasury stock

Sales of treasury stock

Dividends declared ($0.05/share)

Share-based compensation expense (see Note 6)

BALANCE - November 30, 2019

See notes to financial statements.

See notes to condensed financial statements (unaudited).

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 30 ,

Three Months Ended May 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Adjustments to reconcile net earnings to net cash provided by operating activities:

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

Deferred income taxes

9 unchanged sentences

Deferred revenues

Income taxes payable

Total adjustments

Net cash provided by operating activities

Net cash provided by (used in) operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

6 unchanged sentences

Purchases of treasury stock

Net borrowings under line of credit

Dividends paid

Net cash used in financing activities

NET INCREASE IN CASH AND CASH EQUIVALENTS

Net cash provided by (used in) financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

3 unchanged sentences

Cash paid for income taxes

See notes to financial statements.

See notes to condensed financial statements (unaudited).

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

9 unchanged sentences

COVID-19 Update

In December 2019, a novel strain of coronavirus, known as COVID-19, was reported in Wuhan, China and has since extensively impacted the global health and economic environment.

In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and President Trump declared the COVID-19 outbreak in the United States as a national emergency.

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.

To ensure the well-being of our employees, the Company offered employees in our office the ability to work from home on a temporary basis;

we instructed employees in our warehouse and office to take their temperature at the start of every shift;

we requested employees forgo any in-person meetings and instead opt to utilize virtual meeting spaces;

and we published and continually updated our employees on the most recent developments related to COVID-19 and best practices for safety and health in the office, warehouse and at home.

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.

On April 16, 2020, the Company entered into a loan with MidFirst Bank as the lender in an aggregate principal amount of $1.4 million pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

This loan program provided paycheck protection for our employees from the economic impact to our business due to COVID-19, which was seen most by the decline in our Publishing division’s sales due to the temporary closure of many retail outlets across the country, and in our UBAM division’s School and Library and Book Fair sales due to the temporary closure of many schools nation-wide.

The Company determined the PPP loan was no longer needed and therefore repaid the loan in full on May 12, 2020.

While the Company did not experience a decrease in net revenues in the first nine months of fiscal year 2021 compared with the same period in fiscal year 2020, the severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted.

While the Company did not experience a decrease in net revenues during fiscal year 2021, the 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

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The amendment also simplifies accounting for certain franchise taxes and disclosure of the effect of enacted change in tax laws or rates.

Topic 740 is effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The impact of the adoption of the standard has not yet been determined and is being evaluated.

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:

8 unchanged sentences

Inventories consist of the following:

February 28, 2021

Book inventory

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Inventories net – noncurrent

Book inventory includes inventory in transit which totaled $ 4,114,600 and $ 6,467,400 at May 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.

Purchases received from this company were approximately $26.2 million and $4.2 million for the three months ended November 30, 2020 and 2019, respectively.

Total inventory purchases received from all suppliers were $35.0 million and $6.9 million for the three months ended November 30, 2020 and 2019, respectively.

Purchases received from Usborne were approximately $37.5 million and $16.1 million for the nine months ended November 30, 2020 and 2019, respectively.

Total inventory purchases received from all suppliers were $53.2 million and $24.1 million for the nine months ended November 30, 2020 and 2019, respectively.

Purchases received from this company were $ 12,288,300 and $ 3,974,400 for the three months ended May 31, 2021 and 2020, respectively.

Total inventory purchases received from all suppliers were $ 17,785,200 and $ 5,846,600 for the three months ended May 31, 2021 and 2020, respectively.

Note 3 – LEASES

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Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under ASC 842.

Our lessee arrangement includes a rental agreement where we have the exclusive use of dedicated office space in San Diego, California, and qualifies as an operating lease.

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 three rental agreements for warehouse and office space in Tulsa, Oklahoma, and each qualifies as an operating lease under ASC 842.

In accordance with ASC 842, we have made an accounting policy election to not apply the new standard to lessee arrangements with a term of one year or less and no purchase option that is reasonably certain of exercise.

We will continue to account for these short-term arrangements by recognizing payments and expenses as incurred, without recording a lease liability and right-of-use asset.

We have also made an accounting policy election for both our lessee and lessor arrangements to combine lease and non-lease components.

This election is applied to all of our lease arrangements as our non-lease components are not material and do not result in significant timing differences in the recognition of rental expenses or income.

Operating Leases – Lessee

We recognize a lease liability, reported in other liabilities on the condensed balance sheets, for each lease based on the present value of remaining minimum fixed rental payments (which includes payments under any renewal option that we are reasonably certain to exercise), using a discount rate that approximates the rate of interest we would have to pay to borrow on a collateralized basis over a similar term.

We also recognize a right-of-use asset, reported in other assets on the condensed balance sheets, for each lease, valued at the lease liability, adjusted for prepaid or accrued rent balances existing at the time of initial recognition.

The lease liability and right-of-use asset are reduced over the term of the lease as payments are made and the assets are used.

Operating lease assets:

Right-of-use asset

Operating lease liabilities:

Current lease liability

Long-term lease liability

Remaining lease term (months)

Discount rate

Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on our condensed statements of earnings.

Variable and short-term rental payments are recognized as costs and expenses as they are incurred.

Three Months Ended November 30,

Nine Months Ended November 30,

Fixed lease cost

Future minimum rental payments under operating leases with initial terms greater than one year as of November 30, 2020, are as follows:

Year ending February 28 (29),

Total future minimum rental payments

Present value discount

Total operating lease liability

The following table provides further information about our operating leases reported in our condensed financial statements:

Three Months Ended November 30,

Nine Months Ended November 30,

Operating cash flows – operating lease

Operating Leases – Lessor

We recognize fixed rental income on a straight-line basis over the life of the lease as revenue on our condensed statements of earnings.

Variable rental payments are recognized as revenue in the period in which the changes in facts and circumstances on which the variable lease payments are based occur.

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.

2 unchanged sentences

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

Year ending February 28 (29),

The cost of the leased space was approximately $10,846,200 and $10,789,500 as of November 30, 2020 and February 29, 2020, respectively.

The accumulated depreciation associated with the leased assets was $2,120,000 and $1,828,900 as of November 30, 2020 and February 29, 2020, respectively.

Years ending February 28 (29),

The cost of the leased space was approximately $ 10,826,400 as of May 31, 2021 and February 28, 2021, respectively.

The accumulated depreciation associated with the leased assets was $ 2,312,100 and $ 2,216,700 as of May 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.

1 unchanged sentence

Debt consists of the following:

February 28, 2021

Line of credit

Advancing term loan

Long-term debt

1 unchanged sentence

Long-term debt, net of current maturities

We have a Loan Agreement dated as of March 10, 2016 (as amended the “Loan Agreement”) with MidFirst Bank (“the Bank”) which includes Term Loan #1 Tranche A totaling $11.1 million as of November 30, 2020, with the maturity date of December 1, 2025.

Tranche A has a fixed interest rate of 4.23% and interest is payable monthly.

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 Loan Agreement also provides a $10.0 million revolving loan (“line of credit”) through August 15, 2021, which is limited to advance rates on eligible receivables and eligible inventory levels.

Interest is payable monthly at the greater of 2.75% or the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (2.75% at November 30, 2020).

On August 15, 2020, the Company executed the Eleventh Amendment Loan Agreement with the Bank related to our Loan Agreement.

The amendment modified the Loan Agreement, extended the termination date of the line of credit to August 15, 2021, reduced the maximum revolving principal amount from $15.0 million to $10.0 million, and amended the definition of the LIBOR and Prime rate, establishing that the rate charged, including the LIBOR Margin or Prime Margin, shall never be less than 2.75%.

Adjusted Funded Debt is defined as all long-term and short-term bank debt less the outstanding balances of Tranche A.

EBITDA is defined in the Loan Agreement as earnings before interest expense, income tax expense (benefit) and depreciation and amortization expenses, reduced by rental income.

The outstanding borrowings on Term Loan #1 were $ 10,842,300 and $ 10,984,700 as of May 31, 2021 and February 28, 2021, respectively.

The Loan Agreement also provides a $ 15.0 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 May 31, 2021).

Our borrowings outstanding on our line of credit at May 31, 2021 and February 28, 2021, were $ 8,732,500 and $ 5,245,300 , respectively.

Available credit under the revolving line of credit was approximately $ 6,267,500 and $ 9,570,200 at May 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 requires interest-only payments through July 15, 2021, at which time it will convert 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 May 31, 2021).

Our borrowings outstanding under the Advancing Term Loan at May 31, 2021 were $ 3,896,200 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 month EBITDA, reduced by specific rental income received from a non-related third party, see Note 3.

The $15.0 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:

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>1.00 but < 1.50

We had no borrowings outstanding on our line of credit at November 30, 2020 and February 29, 2020.

Available credit under the revolving line of credit was approximately $10.0 million and $11.0 million at November 30, 2020 and February 29, 2020, respectively.

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, 2020, we had no letters of credit outstanding.

On April 16, 2020, the Company entered into a loan with the Bank of approximately $1.4 million pursuant to the PPP under the CARES Act.

The PPP Loan had a fixed interest rate of 1.00%, with principal and interest payments starting December 1, 2020 and a scheduled maturity date of May 1, 2022.

Subsequent to receiving the loan, the Company determined the PPP loan was not needed and repaid the loan in full, including interest accrued to date, on May 12, 2020.

On June 3, 2020, the Company paid off the remaining balance of the $4.0 million Term Loan #2 which originated on June 28, 2016.

The final payment, including accrued interest, totaled $2.9 million.

There were no additional fees or penalties resulting from the payoff of Term Loan #2.

On August 4, 2020, the Company paid off the remaining balance of the $5.0 million Term Loan #1 Tranche B which originated on March 10, 2016.

The final payment, including accrued interest, totaled $4.2 million.

There were no additional fees or penalties resulting from the payoff of Term Loan #1 Tranche B.

As of May 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:

Year ending February 28 (29),

Years ending February 28 (29),

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.

Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options.

In computing diluted EPS, we have utilized the treasury stock method.

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 November 30,

Nine Months Ended November 30,

Three Months Ended May 31,

Net earnings applicable to common shareholders

1 unchanged sentence

Weighted average shares outstanding-basic

Assumed exercise of options

Issued unvested restricted stock and assumed shares issuable

under granted unvested restricted stock awards

Weighted average shares outstanding-diluted

Earnings per share:

Note 6 – STOCK-BASED COMPENSATION

We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant.

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.

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The remaining compensation expense of these awards, totaling approximately $ 1,473,000 , will be recognized ratably over the remaining vesting period of approximately 45 months.

As of November 30, 2020, there are no restricted shares available for issuance as future awards under the 2019 LTI Plan.

As of May 31, 2021, there are no restricted shares available for issuance as future awards under the 2019 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,

Three Months Ended May 31,

Share-based compensation expense

The following table summarizes stock award activity during fiscal year 2021 under the 2019 LTI Plan:

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

Weighted Average Fair Value (per share)

Outstanding at February 28, 2021

Outstanding at November 30, 2020

As of November 30, 2020, total unrecognized stock-based compensation expense related to unvested restricted shares was $3,139,800, which we expect to recognize over a weighted-average period of 39.8 months.

Outstanding at May 31, 2021

As of May 31, 2021, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $ 2,616,600 , which we expect to recognize over a weighted-average period of 34.5 months.

Note 7 – SHIPPING AND HANDLING COSTS

We classify shipping and handling costs as operating and selling expenses in the statements of earnings.

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 $10,610,900 and $6,037,600 for the three months ended November 30, 2020 and 2019, respectively.

These costs were $26,910,800 and $14,087,400 for the nine months ended November 30, 2020 and 2019, respectively.

These costs were $ 6,356,400 and $ 6,315,300 for the three months ended May 31, 2021 and 2020, respectively.

Note 8 – BUSINESS SEGMENTS

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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, through commissioned sales representatives, trade and specialty wholesalers and our internal tele-sales group.

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.

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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, 2020 and 2019, are as follows:

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

Three Months Ended

Nine Months Ended

EARNINGS (LOSS) BEFORE INCOME TAXES

Three Months Ended

Nine Months Ended

Note 9 – FAIR VALUE MEASUREMENTS

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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 $11,508,200 and $19,155,500 at November 30, 2020 and February 29, 2020, respectively.

However, the estimated fair value of our term notes payable is estimated by management to approximate $ 14,329,100 and $ 11,078,800 at May 31, 2021 and February 28, 2021, respectively.

Management’s estimates are based on the obligations’ characteristics, including floating interest rate, maturity, and collateral.

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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, 2020 or February 29, 2020 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $2,330,900 and $385,300 as of November 30, 2020 and February 29, 2020 in payments for sales orders which were shipped out subsequent to the end of the period.

Any payments received prior to the end of the period that were not shipped as of May 31, 2021 or February 28, 2021 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 1,627,000 and $ 1,914,100 as of May 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 January 7, 2021, our Board of Directors declared a distribution of $0.10 per share of common stock.

This cash distribution will be paid on or about March 11, 2021 to shareholders of record on February 23, 2021.

On July 7, 2021 , the Board of Directors approved a $ 0.10 dividend that will be paid to shareholders of record on Tuesday, August 24, 2021 .

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.

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 May 31,

Cost of goods sold

Operating expenses

Operating and selling

Sales commissions

General and administrative

Total operating expenses

Interest expense

Earnings before income taxes

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 May 31, 2021

Total operating expenses not associated with a reporting segment increased $0.7 million, or 18.4%, to $4.5 million for the three-month period ended May 31, 2021, when compared to $3.8 million for the same quarterly period a year ago.

Operating expenses increased primarily as a result of a $0.5 million increase in labor in our warehouse associated with increased gross sales, a $0.1 million increase in rent for additional warehouse space associated with our increased inventory and a $0.1 million increase in other expenses.

Interest expense remained consistent at $0.2 million for the three months ended May 31, 2021, when compared to $0.2 million for the same quarterly period a year ago.

Income taxes increased $0.5 million, or 71.4%, to $1.2 million for the three months ended May 31, 2021, from $0.7 million for the same quarterly period a year ago.

Our effective tax rate decreased 0.8%, to 26.2% for the quarter ended May 31, 2021, from 27.0% for the quarter ended May 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 Months Ended May 31, 2021

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

Three Months Ended May 31,

Less discounts and allowances

Transportation revenue

Cost of goods sold

Operating expenses

Operating and selling

Sales commissions

General and administrative

Total operating expenses

Operating income

Average number of active consultants

UBAM net revenues increased $0.7 million, or 1.9%, to $37.6 million during the three months ended May 31, 2021, when compared to $36.9 million during the same period a year ago.

The average number of active consultants in the first quarter of fiscal 2022 was 55,100, an increase of 22,000 or 66.5%, from 33,100 average active consultants selling in the first quarter of fiscal 2021.

The Company reports the average number of active consultants each quarter as a key indicator for this division.

UBAM's increase in active consultants resulted from several factors, including:

an increase in families looking for non-traditional income streams to supplement or replace income lost from the COVID-19 pandemic;

a change in new consultant kits which offered lower introductory prices;

the restructure of our UBAM consultant success program, which was introduced during the first quarter of fiscal 2021;

and technology improvements that have enhanced the customer experience and streamlined the proprietary systems that our consultants use to run their business.

Our increase in active consultants and our ability to receive orders online and deliver directly to our customers’ homes resulted in our increased revenues during the quarter.

Gross margin increased $1.2 million, or 4.6%, to $27.4 million during the three months ended May 31, 2021, when compared to $26.2 million during the same period a year ago, primarily associated with the growth in net revenues.

Gross margin as a percentage of net revenues increased 1.7%, to 72.8% for the three-month period ended May 31, 2021, when compared to 71.1% the same period a year ago.

The increase in gross margin as a percentage of net revenues resulted from increased volume rebates from our largest supplier and increased freight revenues due to rate change made in our fiscal 2021 fourth quarter that applies to a majority of shipments to our customers.

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 $0.9 million, or 4.4%, to $19.5 million during the three-month period ended May 31, 2021, when compared to $20.4 million reported in the same quarter a year ago.

Operating and selling expenses decreased $0.1 million, to $5.3 million during the three-month period ended May 31, 2021, when compared to $5.4 million reported in the same quarter a year ago, primarily due to a decrease in postage and freight expenses.

Sales commissions decreased $0.7 million, to $12.9 million during the three-month period ended May 31, 2021, when compared to $13.6 million reported in the same quarter a year ago, due primarily to the change in order type mix.

School and Library orders were stronger in the first quarter of fiscal 2022 as schools were primarily closed during the first quarter of last year.

School and Library orders have larger discounts and pay less commissions than web sale orders.

General and administrative expenses decreased $0.1 million, to $1.3 million during the three months ended May 31, 2021, when compared to $1.4 million during the same period a year ago.

Operating income of the UBAM segment increased $2.1 million, or 36.2%, to $7.9 million during the three months ended May 31, 2021, when compared to $5.8 million reported in the same quarter a year ago, primarily due to the change in gross margin and order type mix.

Operating income of the UBAM division as a percentage of net revenues for the three months ended May 31, 2021 increased to 20.9%, compared to 15.8% for the three months ended May 31, 2020.

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

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

Three Months May 31,

Less discounts and allowances

Transportation revenue

Cost of goods sold

Total operating expenses

Operating income

Our Publishing division’s net revenues increased $1.8 million, or 128.6%, to $3.2 million during the three-month period ended May 31, 2021, from $1.4 million reported in the same period a year ago.

Many Publishing customers began to re-open 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 $0.7 million, or 100.0%, to $1.4 million during the three-month period ended May 31, 2021, from $0.7 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 4.0%, to 44.2% during the three-month period ended May 31, 2021, from 48.2% 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 to $0.5 million, from $0.3 million, during the three-month periods ended May 31, 2021 and 2020, primarily as a result of increased freight expenses due to increased sales.

Operating income of the Publishing segment increased to $0.9 million from $0.3 million for the three-month periods ended May 31, 2021 and 2020, primarily driven by 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 three months of fiscal 2022, we generated negative cash flows from our operations of $4,876,400.

These cash flows resulted from:

●net earnings of $3,438,100

Adjusted for:

●depreciation expense of $432,000

●share-based compensation expense of $261,600

●deferred income taxes of $237,500

●provision for inventory valuation allowance of $60,000

●provision for doubtful accounts of $37,600

Positively impacted by:

●increase in income tax payable of $967,700

Negatively impacted by:

●increase in inventories, net of $4,928,000

●decrease in accrued salaries and commissions, and other liabilities of $3,617,900

●increase in accounts receivable of $665,100

●decrease in accounts payable of $577,400

●decrease in deferred revenues of $287,100

●increase in prepaid expenses and other assets of $235,400

Cash used in investing activities was $1,617,200 for capital expenditures, which were comprised of $1,417,200 in equipment purchased to increase our daily shipping capacity, $144,400 in software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders and $55,600 in building and building improvements.

Cash provided by financing activities was $6,438,000, which was comprised of proceeds from term debt of $3,896,200, net borrowings under the line of credit of $3,487,200 and net cash received in treasury stock transactions of $32,000, offset by payments of $835,100 for dividends and payments on term debt of $142,300.

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 $10.8 million and $11.0 million as of May 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 requires interest-only payments through July 15, 2021, at which time it will convert to a 60-month amortizing term loan maturing July 15, 2026.

Our borrowings outstanding under the Advancing Term Loan at May 31, 2021 were $3.9 million.

The Amended and Restated Loan Agreement also provides a $15.0 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%.

Our borrowings outstanding on our line of credit at May 31, 2021 and February 28, 2021 were $8.7 million and $5.2 million.

Available credit under the revolving line of credit was approximately $6.3 million and $9.6 million at May 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 May 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),

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 May 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 May 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 May 31, 2021 and February 28, 2021.

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 $1.0 million and $0.9 million at May 31, 2021 and February 28, 2021, respectively.

Noncurrent inventory valuation allowances were $0.2 million at May 31, 2021 and February 28, 2021.

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 4.2% of our active consultants maintained consignment inventory at the end of the first 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 $1.1 million for both May 31, 2021 and February 28, 2021.

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 $0.7 million for both May 31, 2021 and February 28, 2021.

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 granted under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) contain both service and performance conditions.

The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting.

Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established.

The fair value of these awards is determined based on the closing price of the shares on the grant date.

The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.

During the first three months of fiscal year 2022, the Company recognized $0.3 million of compensation expense associated with the shares granted.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements