# Educational Development Corp: Form 10-Q for the period ended Aug 31, 2019

- Company: [Educational Development Corp](/companies/educ.md) (CIK 31667)
- Form: 10-Q
- Filed: 2019-10-15
- Accepted by EDGAR: Oct 15, 2019, 13:03 ET
- Period: 2019-08-31
- Accession: 0001185185-19-001375
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/31667/000118518519001375/edc20190831_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/31667/000118518519001375/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-06-01 to 2019-08-31 | $24.4m | us-gaap:Revenues |
| Revenue | 6 months, 2019-03-01 to 2019-08-31 | $52.0m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2019-06-01 to 2019-08-31 | $8.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2019-03-01 to 2019-08-31 | $17.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-06-01 to 2019-08-31 | $16.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2019-03-01 to 2019-08-31 | $34.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-06-01 to 2019-08-31 | $4.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2019-03-01 to 2019-08-31 | $8.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2019-06-01 to 2019-08-31 | $242.5k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2019-03-01 to 2019-08-31 | $474.5k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-06-01 to 2019-08-31 | $359.1k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2019-03-01 to 2019-08-31 | $842.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-06-01 to 2019-08-31 | $1.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2019-03-01 to 2019-08-31 | $2.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-06-01 to 2019-08-31 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2019-03-01 to 2019-08-31 | $0.29 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-06-01 to 2019-08-31 | $0.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2019-03-01 to 2019-08-31 | $0.29 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-06-01 to 2019-08-31 | 8,318,790 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2019-03-01 to 2019-08-31 | 8,254,926 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2019-03-01 to 2019-08-31 | −$1.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2019-03-01 to 2019-08-31 | $234.7k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2019-03-01 to 2019-08-31 | $819.0k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2019-08-31 | $966.8k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-08-31 | $41.1m | us-gaap:AssetsCurrent |
| Total assets | at 2019-08-31 | $68.5m | us-gaap:Assets |
| Current liabilities | at 2019-08-31 | $21.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-08-31 | $41.2m | us-gaap:Liabilities |
| Long-term debt | at 2019-08-31 | $18.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2019-08-31 | $927.2k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2019-08-31 | $27.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 32,456 characters.

### 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, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 28, 2019 and this Quarterly Report on Form 10-Q, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur. See “Cautionary Remarks Regarding Forward-Looking Statements” in the front of this Quarterly Report on Form 10-Q.*

### Overview

We are the exclusive United States trade co-publisher of Usborne children’s books and the owner of Kane Miller. We operate two separate segments; UBAM and Publishing, to sell our Usborne and Kane Miller children’s books. These two segments each have their own customer base. The Publishing segment markets its products on a wholesale basis to various retail accounts. The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, internet party plan events and book fairs. All other supporting administrative activities are recognized as other expenses outside of our two segments. Other expenses consist primarily of the compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate office and distribution facility.

The following table shows our condensed statements of earnings data:

|  | Three Months Ended August 31, 2019 | 2018 | Six Months Ended August 31, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net revenues | $24,438,000 | $24,681,000 | $52,025,400 | $54,703,300 |
| Cost of goods sold | 8,046,400 | 8,462,700 | 17,102,600 | 18,132,400 |
| Gross margin | 16,391,600 | 16,218,300 | 34,922,800 | 36,570,900 |
| Operating expenses |  |  |  |  |
| Operating and selling | 4,192,500 | 3,261,600 | 8,576,400 | 8,013,800 |
| Sales commissions | 7,263,100 | 7,313,000 | 15,796,100 | 16,686,100 |
| General and administrative | 3,717,600 | 3,738,400 | 7,655,800 | 7,630,900 |
| Total operating expenses | 15,173,200 | 14,313,000 | 32,028,300 | 32,330,800 |
| Interest expense | 242,500 | 270,000 | 474,500 | 483,400 |
| Other income | (390,800) | (400,300) | (793,200) | (774,700) |
| Earnings before income taxes | 1,366,700 | 2,035,600 | 3,213,200 | 4,531,400 |
| Income taxes | 359,100 | 544,900 | 842,000 | 1,224,100 |
| Net earnings | $1,007,600 | $1,490,700 | $2,371,200 | $3,307,300 |

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

### Non-Segment Operating Results for the Three Months Ended August 31, 2019

*Total operating expenses* not associated with a reporting segment increased $0.1 million, or 3.3%, to $3.1 million for the three-month period ending August 31, 2019, compared to $3.0 million for the same quarterly period a year ago. Our operating expenses increased approximately $0.1 million due to the compensation expense associated with the Company’s 2019 LTI Plan.

*Interest expense* decreased $0.1 million to $0.2 million for the three months ended August 31, 2019, when compared to $0.3 million for the same quarterly period a year ago. Interest expense decreased $0.1 million due to borrowings on the line of credit of $1.1 million in the second quarter of fiscal 2020 as compared to $2.6 million in the second quarter of fiscal 2019.

*Income taxes* decreased $0.1 million to $0.4 million for the three months ended August 31, 2019, from $0.5 million for the same quarterly period a year ago. Our effective tax rate was 26.3% for the quarter ended August 31, 2019, and 26.8% for the quarter ended August 31, 2018. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

### Non-Segment Operating Results for the Six Months Ended August 31, 2019

*Total operating expenses* not associated with a reporting segment increased $0.1 million, or 1.6%, to $6.4 million for the six-month period ending August 31, 2019, compared to $6.3 million for the same period a year ago. The increase in operating expenses resulted primarily from $0.3 million of compensation expense associated with the Company’s 2019 LTI Plan offset by $0.2 million of other reduced expenses.

*Interest expense* remained consistent at $0.5 million for the six months ended August 31, 2019 and for the same period a year ago.

*Income taxes* decreased $0.4 million to $0.8 million for the six months ended August 31, 2019, from $1.2 million for the same period a year ago. Our effective tax rate was 26.2% for the six months ended August 31, 2019, and 27.0% for the six months ended August 31, 2018. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

### UBAM Operating Results for the Three and Six Months Ended August 31, 2019

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

|  | Three Months Ended August 31, 2019 | 2018 | Six Months Ended August 31, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Gross sales | $26,815,500 | $27,484,400 | $58,244,300 | $61,643,000 |
| Less discounts and allowances | (7,208,700) | (7,511,300) | (15,828,600) | (16,795,100) |
| Transportation revenue | 2,128,400 | 2,102,400 | 4,567,600 | 4,943,700 |
| Net revenues | 21,735,200 | 22,075,500 | 46,983,300 | 49,791,600 |
| Cost of goods sold | 6,688,200 | 7,031,400 | 14,487,000 | 15,455,900 |
| Gross margin | 15,047,000 | 15,044,100 | 32,496,300 | 34,335,700 |
| Operating expenses |  |  |  |  |
| Operating and selling | 3,448,300 | 2,517,000 | 7,091,300 | 6,466,300 |
| Sales commissions | 7,159,200 | 7,220,600 | 15,599,500 | 16,507,400 |
| General and administrative | 951,200 | 1,029,400 | 1,948,200 | 1,985,900 |
| Total operating expenses | 11,558,700 | 10,767,000 | 24,639,000 | 24,959,600 |
| Operating income | $3,488,300 | $4,277,100 | $7,857,300 | $9,376,100 |
| Average number of active consultants | 33,600 | 32,800 | 32,600 | 34,000 |

16

### UBAM Operating Results for the Three Months Ended August 31, 2019

UBAM net revenues decreased $0.4 million, or 1.8%, to $21.7 million during the three months ended August 31, 2019, as compared to $22.1 million during the same period a year ago. The average number of active consultants in the second quarter of fiscal 2020 was 33,600, an increase of 800, or 2.4%, from 32,800 average active consultants selling in the second quarter of fiscal 2019. During our annual convention in late June this year, we announced a UBAM 30th Anniversary Recruiting Special which resulted in the signing of over 10,000 new active consultants during the five-week recruiting special. Although this recruiting special resulted in a large increase in the number of average active consultants selling during the second quarter of fiscal 2020, it can take several weeks for these new consultants to start experiencing success.

Gross margin remained consistent at $15.0 million during the three-month period ending August 31, 2019, when compared to the same quarter a year ago. Gross margin, as a percentage of net revenues, increased 1.1% to 69.2% for the three-month period ending August 31, 2019 when compared to 68.1% the same period a year ago. The increase in gross margin as a percentage of net revenues was due to the change in mix of order types received during the quarter. This change in mix also resulted in higher sales commissions as a percent of net revenue during the quarter.

UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses. Operating and selling expenses primarily consists of freight expenses and materials and supplies. Sales commissions include amounts paid to consultants for new sales and promotions. These operating expenses are directly tied to the sales volumes of the UBAM segment. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the UBAM segment. Operating expenses increased $0.8 million, or 7.4%, to $11.6 million during the three-month period ending August 31, 2019, when compared to $10.8 million reported in the same quarter a year ago. During the second quarter of fiscal 2019, the Company received a resort refund from less consultants choosing to attend the annual incentive trip than had earned it. Without this refund, operating and selling expenses as a percentage of net revenues would have been more comparable to the UBAM divisions historical operating and selling expenses as a percentage of net revenues. In addition, the Company incurred an increase in freight and postage primarily from a pricing increase in fiscal 2020 totaling approximately $0.2 million for packages delivered through the United States Postal Service, a $0.1 million increase in freight and postage associated with the UBAM 30th Anniversary Recruiting Special and $0.1 million increase in other operating and selling costs. Sales commissions remained consistent at $7.2 million period over period and as a percentage of net revenues between the periods. General and administrative expenses remained consistent at $1.0 million during the three months ended August 31, 2019 and for the same period last year.

Operating income of the UBAM segment decreased $0.8 million, or 18.6%, to $3.5 million during the three-month period ending August 31, 2019 as compared to $4.3 million from the same period a year ago. The decrease in operating income was primarily due to the change in operating and selling expenses as described above.

### UBAM Operating Results for the Six Months Ended August 31, 2019

UBAM net revenues decreased $2.8 million, or 5.6%, to $47.0 million during the six-month period ending August 31, 2019, as compared to $49.8 million from the same period a year ago. The decrease in net revenues resulted from a decrease in the average number of active consultants of 1,400, or 4.1% to 32,600 during the first six months of fiscal year 2020 from 34,000 in the first six months of fiscal year 2019. During February 2018, the UBAM division offered a recruiting special that added 8,800 new active consultants during the month. This increase in selling consultants resulted in an increase in UBAM sales during the first three months of fiscal 2019 over the first quarter of fiscal 2020. During the second quarter of fiscal 2020, UBAM offered a 30th Anniversary Recruiting Special that added over 10,000 new recruits to the sales force over the five-week recruiting special and increased our consultant count to be more consistent with the prior year. Sales from these new recruits are expected to be more impactful during the last six months of the year.

Gross margin decreased $1.8 million, or 5.2%, to $32.5 million during the six-month period ending August 31, 2019, when compared to $34.3 million during the same period a year ago, due primarily to a decrease in net revenues during the first quarter of fiscal 2020 when compared to fiscal 2019. Gross margin, as a percentage of net revenues, increased to 69.2% for the six-month period ending August 31, 2019 when compared to 69.0% for the same period a year ago. The increase in gross margin as a percentage of net revenues was due to a change in the mix of order types between the periods.

Operating expenses decreased $0.4 million, or 1.6%, to $24.6 million during the six month period ending August 31, 2019, when compared to $25.0 million, for the six-month period ending August 31, 2018. The decrease in operating expenses was primarily due to a $0.9 million decrease in sales commissions associated with the decrease in net revenues and a $0.1 million decrease in various general and administrative expenses, offset by a $0.6 million increase in operating and selling expenses. Operating and selling expenses increased primarily from a refund received related to the annual UBAM incentive trip received in the second quarter of fiscal 2019 and approximately $0.2 million increase in freight and postage costs during the first six months ended August 31, 2019 due to pricing increases on packages delivered through the United States Postal Service.

Operating income of the UBAM segment decreased $1.5 million, or 16.0%, to $7.9 million during the six-month period ending August 31, 2019, when compared with $9.4 million from the same period a year ago. The decrease in operating income was primarily due to a decrease in net revenues and an increase in operating and selling expenses as described above.

### Publishing Operating Results for the Three and Six Months Ended August 31, 2019

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

|  | Three Months Ended August 31, 2019 | 2018 | Six Months Ended August 31, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Gross sales | $5,726,200 | $5,529,200 | $10,771,100 | $10,445,400 |
| Less discounts and allowances | (3,032,300) | (2,933,400) | (5,743,800) | (5,551,000) |
| Transportation revenue | 8,900 | 9,700 | 14,800 | 17,300 |
| Net revenues | 2,702,800 | 2,605,500 | 5,042,100 | 4,911,700 |
| Cost of goods sold | 1,358,200 | 1,431,300 | 2,615,600 | 2,676,500 |
| Gross margin | 1,344,600 | 1,174,200 | 2,426,500 | 2,235,200 |
| Total operating expenses | 559,900 | 537,500 | 1,006,100 | 1,092,200 |
| Operating income | $784,700 | $636,700 | $1,420,400 | $1,143,000 |

### Publishing Operating Results for the Three Months Ended August 31, 2019

Our Publishing division’s net revenues increased $0.1 million, or 3.8%, to $2.7 million during the three-month period ending August 31, 2019, from $2.6 million reported in the same period a year ago. This increase is due to an increase in sales to existing retail customers, specifically in the Toy and Gift store classifications.

Gross margin increased $0.1 million, or 8.3%, to $1.3 million during the three-month period ending August 31, 2019, from $1.2 million reported in the same quarter a year ago. This increase is primarily related to the growth in net revenues. Gross margin as a percentage of net revenues, increased 4.6%, to 49.7% during the three-month period ending August 31, 2019, from 45.1% reported in the same quarter a year ago. The increase in gross margin resulted from a change in customer mix, as certain sales agreements with specific customers have higher gross margin due to lower discounts, and a change in product mix, as different products have higher gross margin due to lower product costs.

Total operating expenses of the Publishing segment remained consistent at $0.6 million during the three-month period ending August 31, 2019, from $0.5 million reported in the same quarter a year ago.

Operating income of the Publishing segment increased $0.2 million, or 33.3%, to $0.8 million during the three-month period ending August 31, 2019 when compared to $0.6 million reported in the same period a year ago. The increase in operating income was primarily due to increased sales with customers that have lower discounts.

### Publishing Operating Results for the Six Months Ended August 31, 2019

Our Publishing division’s net revenues increased $0.1 million, or 2.0%, to $5.0 million during the six-month period ending August 31, 2019, from $4.9 million reported in the same period a year ago. This increase is due to an increase in sales to existing retail customers, specifically in the Toy and Gift store classifications.

Gross margin increased $0.2 million, or 9.1%, to $2.4 million during the six-month period ending August 31, 2019, from $2.2 million reported in the same period a year ago. This increase is related to the growth in net revenues and a decrease in cost of goods sold. Gross margin as a percentage of net revenues, increased 2.6%, to 48.1% during the six-month period ending August 31, 2019, from 45.5% reported in the same period a year ago. The increase in gross margin resulted from a change in customer mix, as certain sales agreements with specific customers have higher gross margin due to lower discounts, and a change in product mix, as different products have higher gross margin due to lower product costs.

Total operating expenses decreased $0.1 million, or 9.1%, to $1.0 million during the six-month period ending August 31, 2019, from $1.1 million reported in the same period a year ago. This decrease primarily resulted from less promotions and marketing expenses incurred during the first six months of fiscal 2020, when compared to the same period last year.

Total operating income increased $0.3 million, or 27.3%, to $1.4 million during the six-month period ending August 31, 2019, from $1.1 million reported in the same period a year ago. The increase in operating income was due to increased sales from customers with lower discounts and decreased operating expenses.

### Liquidity and Capital Resources

EDC has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate. We also use available cash to pay down outstanding bank loan balances, for capital expenditures, to pay dividends, and to acquire treasury stock. We have utilized a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures, when necessary.

During the first six months of fiscal 2020, we experienced cash outflow from our operations of $1,274,200. Cash flows resulted from the following items:

- net earnings of $2,371,200
- depreciation expense of $684,800,
- a decrease in prepaid expenses and other assets of $544,600,
- share-based compensation expense of $332,500,
- an increase in income tax payable of $314,000,
- an increase in provision for inventory valuation allowance of $129,900,
- an increase in deferred income taxes, net of $127,600, and
- an increase in the provision for doubtful accounts of $63,200,

Offset by:

- an increase in inventories, net of $2,387,600,
- a decrease in accrued salaries and commissions, and other liabilities of $1,889,700,
- a decrease in accounts payable of $1,047,900
- an increase in accounts receivable of $303,100, and
- a decrease in deferred revenue of $213,700.

Cash used in investing activities was $234,700 for capital expenditures, which was primarily comprised of improvements to upgrade our e-commerce and consultant facing websites used in our UBAM division.

Cash used in financing activities was $723,600, which was primarily comprised of $819,000 of dividends paid, $488,600 net cash used in treasury stock transactions, and payments on long-term debt of $472,100, partially offset by cash received from net borrowings under our line of credit of $1,056,100.

During fiscal year 2020, we continue to expect our cash from operations, along with our line of credit with our Bank, will provide us the ability to meet our liquidity requirements. Cash generated from operations will be used to replace inventory, to liquidate existing debt and any excess cash is expected to be distributed to our shareholders or used to purchase available shares on the market.

We have a Loan Agreement with the Bank including Term Loan #1 comprised of Tranche A totaling $11.7 million and Tranche B totaling $4.4 million as of August 31, 2019, both with the maturity date of December 1, 2025. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. The Loan Agreement also includes Term Loan #2 totaling $3.2 million as of August 31, 2019, which is secured by a warehouse and land with the maturity date of June 28, 2021, and a $15.0 million revolving loan (“line of credit”) through August 15, 2020.

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

On February 7, 2019, the Company executed the Ninth Amendment Loan Agreement which removed the covenant prohibiting the Company from repurchasing its shares and identified certain limitations on the amount of funds that the Company could use to repurchase shares.

On August 15, 2019, the Company executed the Tenth Amendment Loan Agreement which extended the termination date of the line of credit to August 15, 2020, amended the definition of LIBOR Margin, reduced the frequency of reports to the Lender, amended the Adjusted Funded Debt to EBITDA Ratio and amended the Compliance and Borrowing Base Certificates.

We had $1.1 million in borrowings on our revolving credit agreement at August 31, 2019 and no borrowings at February 28, 2019. Available credit under the revolving credit agreement was $11.7 million at August 31, 2019.

Tranche B of Term Loan #1, Term Loan #2 and the line of credit accrue interest monthly, at the bank adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.42% at August 31, 2019).

The Loan Agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue, or obtain issuance of commercial or stand-by letters of credit provided that the sum of the line of credit plus the letters of credit issued would not exceed the borrowing base in effect at the time. As of August 31, 2019, we had no letters of credit outstanding. The agreement contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amounts of dividends declared, investments, capital expenditures, leasing transactions, and establish a dollar limit on the amount of shares that can be repurchased.

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

| Year ending February 28 (29), |  |
| --- | ---: |
| 2020 | $471,700 |
| 2021 | 988,500 |
| 2022 | 1,038,100 |
| 2023 | 1,087,500 |
| 2024 | 1,139,400 |
| Thereafter | 14,579,300 |
| Total | $19,304,500 |

### Critical Accounting Policies

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

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

### Revenue Recognition

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

Estimated allowances for sales returns are recorded as sales are recognized. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily received from the retail stores of our Publishing Division. Those damages occur in the stores, not in shipping to the stores, and we typically do not offer credit for damaged returns. It is industry practice to accept non-damaged returns from retail customers. Management has estimated and included a reserve for sales returns of $0.2 million as of August 31, 2019 and February 28, 2019.

### 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 August 31, 2019, and February 28, 2019. Included within this allowance is $0.1 million of reserve for vendor discounts to sell remaining inventory as of August 31, 2019 and February 28, 2019.

### Inventory

Our inventory contains over 2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future. Most of our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in a 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. All inventory in excess of 2 ½ years of anticipated sales is classified as noncurrent inventory. Noncurrent inventory balances prior to valuation allowances were $0.9 million at August 31, 2019 and February 28, 2019, respectively.

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; and having consignment inventory leads to additional sales opportunities. Approximately 9% of our active consultants maintained consignment inventory at the end of the second fiscal quarter 2020. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with consultants was $1.6 million at August 31, 2019 and $1.5 million at February 28, 2019.

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 $0.5 million and $0.4 million as of August 31, 2019 and February 28, 2019, 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 2 ½ years represents a reasonable estimate of the normal operating cycle for our products.

### Stock-Based Compensation

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

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

For certain awards that provide discretion to adjust the allocation of the restricted shares, the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the Company and the employees has not yet been established. For awards in which the service-inception date precedes the grant date, compensation cost is accrued beginning on the service-inception date. The Company estimates the award's fair value on each subsequent reporting date, until the grant date, based on the closing market price of the Company’s common stock. On the grant date, the award's fair value is fixed, subject to the remaining performance conditions, and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date. During the first six months of fiscal 2020, the Company recognized $0.3 million of compensation expense associated with the shares granted.

## Controls and procedures

As filed, 915 characters.

An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of August 31, 2019. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer).

Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective pursuant to Exchange Act Rule 13a-15(e).

In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended August 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Oct 15, 2019.
Source: SEC EDGAR, the filing index for accession 0001185185-19-001375. Last ingested by Listed: Oct 24, 2026, 14:52 ET. No prices; not investment advice.