# Educational Development Corp: Form 10-Q for the period ended May 31, 2020

- Company: [Educational Development Corp](/companies/educ.md) (CIK 31667)
- Form: 10-Q
- Filed: 2020-07-13
- Accepted by EDGAR: Jul 13, 2020, 20:56 ET
- Period: 2020-05-31
- Accession: 0001185185-20-000992
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/31667/000118518520000992/edc20200531_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/31667/000118518520000992/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-05-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-03-01 to 2020-05-31 | $38.3m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2020-03-01 to 2020-05-31 | $11.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-03-01 to 2020-05-31 | $26.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-03-01 to 2020-05-31 | $6.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2020-03-01 to 2020-05-31 | $182.2k | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-03-01 to 2020-05-31 | $712.8k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-03-01 to 2020-05-31 | $1.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-03-01 to 2020-05-31 | $0.23 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-03-01 to 2020-05-31 | $0.23 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-03-01 to 2020-05-31 | 8,352,424 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-03-01 to 2020-05-31 | $12.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-03-01 to 2020-05-31 | $143.8k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2020-03-01 to 2020-05-31 | $417.4k | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2020-05-31 | $14.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-05-31 | $45.4m | us-gaap:AssetsCurrent |
| Total assets | at 2020-05-31 | $72.4m | us-gaap:Assets |
| Current liabilities | at 2020-05-31 | $22.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-05-31 | $41.4m | us-gaap:Liabilities |
| Long-term debt | at 2020-05-31 | $17.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-05-31 | $1.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-05-31 | $31.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 24,187 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, 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 29, 2020 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 May 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net revenues | $38,291,700 | $27,587,400 |
| Cost of goods sold | 11,395,500 | 9,056,200 |
| Gross margin | 26,896,200 | 18,531,200 |
| Operating expenses |  |  |
| Operating and selling | 6,340,200 | 4,383,900 |
| Sales commissions | 13,600,500 | 8,533,000 |
| General and administrative | 4,536,000 | 3,938,200 |
| Total operating expenses | 24,476,700 | 16,855,100 |
| Interest expense | 182,200 | 232,000 |
| Other income | (406,600) | (402,400) |
| Earnings before income taxes | 2,643,900 | 1,846,500 |
| Income taxes | 712,800 | 482,900 |
| Net earnings | $1,931,100 | $1,363,600 |

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

### Non-Segment Operating Results for the Three Months Ended May 31, 2020

*Total operating expenses* not associated with a reporting segment increased $0.5 million, or 15.2%, to $3.8 million for the three-month period ended May 31, 2020, compared to $3.3 million for the same quarterly period a year ago. Operating expenses increased due to an increase in freight handling costs of $0.3 million and $0.2 million in additional warehouse labor costs due to increased sales volumes in the first quarter of fiscal year 2021.

*Interest expense* remained consistent at $0.2 million for the three months ended May 31, 2020, when compared to $0.2 million for the same quarterly period a year ago.

*Income taxes* increased $0.2 million to $0.7 million for the three months ended May 31, 2020, from $0.5 million for the same quarterly period a year ago. Our effective tax rate increased 0.8%, to 27.0% for the quarter ended May 31, 2020, from 26.2% for the quarter ended May 31, 2019. Our effective tax rate increased due to a fluctuation in sales mix 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, 2020

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

|  | Three Months Ended May 31, 2020 | 2019 |
| --- | ---: | ---: |
| Gross sales | $43,946,100 | $31,428,800 |
| Less discounts and allowances | (11,306,700) | (8,619,900) |
| Transportation revenue | 4,286,800 | 2,439,200 |
| Net revenues | 36,926,200 | 25,248,100 |
| Cost of goods sold | 10,688,600 | 7,798,800 |
| Gross margin | 26,237,600 | 17,449,300 |
| Operating expenses |  |  |
| Operating and selling | 5,426,300 | 3,643,000 |
| Sales commissions | 13,560,400 | 8,440,300 |
| General and administrative | 1,423,800 | 997,000 |
| Total operating expenses | 20,410,500 | 13,080,300 |
| Operating income | $5,827,100 | $4,369,000 |
| Average number of active consultants | 33,100 | 31,600 |

### UBAM Operating Results for the Three Months Ended May 31, 2020

UBAM net revenues increased $11.7 million, or 46.4%, to $36.9 million during the three months ended May 31, 2020, as compared to $25.2 million during the same period a year ago. The average number of active consultants in the first quarter of fiscal 2021 was 33,100, an increase of 1,500, or 4.7%, from 31,600 average active consultants selling in the first quarter of fiscal 2020. In addition, due to the closure of many schools across the nation during the quarter from the COVID-19 pandemic, we experienced an increase demand for educational materials in homes. 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 $8.8 million, or 50.6%, to $26.2 million during the three months ended May 31, 2020, as compared to $17.4 million during the same period a year ago. Gross margin as a percentage of net revenues increased 2.0% to 71.1% for the three-month period ended May 31, 2020 when compared to 69.1% the same period a year ago. The increase in gross margin percentage was due to a change in the mix of order type, caused by an increase in internet-based sales and a decrease in sales through home parties, school and library and book fairs resulting primarily from the impact of the COVID-19 pandemic. Internet-based orders offer fewer discounts than other UBAM sales order types but have increased sales commission expenses.

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 increased $7.3 million to $20.4 million during the three-month period ended May 31, 2020, when compared to $13.1 million reported in the same quarter a year ago. Operating and selling expenses increased $1.8 million to $5.4 million during the three-month period ended May 31, 2020, when compared to $3.6 million reported in the same quarter a year ago, due primarily to an increase in postage and freight costs of $1.9 million associated with the increase in volume of orders shipped. Sales commissions increased $5.2 million to $13.6 million during the three-month period ended May 31, 2020, when compared to $8.4 million reported in the same quarter a year ago, due primarily to the increase in internet-based sales, which offer fewer discounts and higher sales commissions to consultants. General and administrative expenses increased $0.4 million to $1.4 million, from $1.0 million, during the three months ended May 31, 2020 when compared to the same period last year, due primarily to a $0.4 million increase in credit card transaction fees associated with increased sales volumes.

Operating income of the UBAM segment increased $1.4 million, or 31.8%, to $5.8 million during the three months ended May 31, 2020, when compared to $4.4 million reported in the same quarter a year ago for reasons described above.

### Publishing Operating Results for the Three Months Ended May 31, 2020

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

|  | Three Months Ended May 31, 2020 | 2019 |
| --- | ---: | ---: |
| Gross sales | $2,950,800 | $5,044,900 |
| Less discounts and allowances | (1,589,200) | (2,711,500) |
| Transportation revenue | 3,900 | 5,900 |
| Net revenues | 1,365,500 | 2,339,300 |
| Cost of goods sold | 706,900 | 1,257,400 |
| Gross margin | 658,600 | 1,081,900 |
| Total operating expenses | 312,000 | 446,200 |
| Operating income | $346,600 | $635,700 |

### Publishing Operating Results for the Three Months Ended May 31, 2020

Our Publishing division’s net revenues decreased $0.9 million, or 39.1%, to $1.4 million during the three-month period ended May 31, 2020, from $2.3 million reported in the same period a year ago. This decrease in sales resulted from temporary store closures impacted by the COVID-19 pandemic. Many of our publishing customers temporarily closed in March, following the guidance from their local authorities in an attempt to reduce the spread of the virus and began reopening in May.

Gross margin decreased $0.4 million, or 36.4%, to $0.7 million during the three-month period ended May 31, 2020, from $1.1 million reported in the same quarter a year ago, primarily due to the decrease in net revenues. Gross margin as a percentage of net revenues increased 2.0%, to 48.2%, during the three-month period ended May 31, 2020, from 46.2% reported in the same quarter a year ago. The increase in gross margin percentage results primarily from a change in our customer mix. Certain customers with larger volumes receive increased discounts.

Total operating expenses of the Publishing segment decreased $0.1 million to $0.3 million during the three-month period ended May 31, 2020, from $0.4 million reported in the same quarter a year ago, primarily from $0.1 million reduced exhibits and trade show expenses. Many trade shows and exhibits were cancelled during the first quarter of fiscal 2021 in response to the spread of the COVID-19 pandemic.

Operating income of the Publishing segment decreased $0.3 million, or 50.0%, to $0.3 million during the three-month period ended May 31, 2020 when compared to $0.6 million reported in the same period a year ago, due primarily to the decrease in net revenues.

### Liquidity and Capital Resources

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

During the first three months of fiscal 2021, we generated positive cash flows from our operations of $12,595,200. These cash flows resulted from:

- net earnings of $1,931,100

Adjusted for:

- depreciation expense of $409,900
- share-based compensation expense of $169,000
- deferred income taxes of $91,200
- provision for inventory valuation allowance of $80,000
- provision for doubtful accounts of $67,800

Positively impacted by:

- decrease in inventory, net of $3,080,800
- decrease in accounts receivable of $348,900
- decrease in prepaid expenses and other assets of $29,100
- increase in accrued salaries of $2,373,300
- increase in deferred revenues of $2,026,800
- increase in accounts payable of $1,385,200
- increase in income tax payable of $602,100

Cash used in investing activities was $143,800 for capital expenditures, which were primarily comprised of software upgrades that our UBAM consultants use to monitor their business and place customer orders.

Cash used in financing activities was $685,300, which was primarily comprised of $417,400 of dividends paid, net cash used for term debt of $263,400, and $4,500 net cash used in treasury stock transactions.

During fiscal year 2021, 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 $11.4 million and Tranche B totaling $4.2 million as of May 31, 2020, 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 $2.9 million as of May 31, 2020, which is secured by a warehouse and land with the maturity date of June 28, 2021, and a $15.0 million line of credit through August 15, 2020. Subsequent to quarter end, the Company paid off Term Loan #2.

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 reporting requirements.

We had no borrowings on our revolving credit agreement at May 31, 2020 and February 29, 2020. Available credit under the revolving credit agreement was $9.0 million at May 31, 2020.

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 (2.44% at May 31, 2020).

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 May 31, 2020, 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), |  |
| --- | ---: |
| 2021 | $837,000 |
| 2022 | 1,155,500 |
| 2023 | 1,195,500 |
| 2024 | 1,237,100 |
| 2025 | 1,278,600 |
| Thereafter | 12,844,600 |
| Total | $18,548,300 |

### 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 May 31, 2020 and February 29, 2020.

### 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 May 31, 2020, and $0.2 million at February 29, 2020. Included within this allowance is $0.1 million of reserve for vendor discounts to sell remaining inventory as of May 30, 2020 and February 29, 2020.

### 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 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 2 ½ years of anticipated sales is classified as noncurrent inventory. Noncurrent inventory balances prior to valuation allowances were $1.0 million and $1.2 million at May 31, 2020 and February 29, 2020, 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; in summary, having consignment inventory leads to additional sales opportunities. Approximately 7.4% of our active consultants maintained consignment inventory at the end of the first fiscal quarter 2021. 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 $1.3 million at May 31, 2020 and $1.5 million at February 29, 2020.

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 $0.6 million and $0.5 million as of May 31, 2020 and February 29, 2020, 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. Any cash dividends declared after the restricted stock award is made, 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 2021, the Company recognized $0.2 million of compensation expense associated with the shares granted.

## Controls and procedures

As filed, 909 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 May 31, 2020. 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 May 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Filed Jul 13, 2020.
Source: SEC EDGAR, the filing index for accession 0001185185-20-000992. Last ingested by Listed: Oct 24, 2026, 14:52 ET. No prices; not investment advice.