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
Overview
We are the exclusive
The following table shows our condensed statements of earnings data:
Three Months Ended May 31, 2021 2020 Net revenues$ 40,807,900 $ 38,291,700 Cost of goods sold 12,029,900 11,395,500 Gross margin 28,778,000 26,896,200 Operating expenses Operating and selling 6,442,600 6,340,200 Sales commissions 12,966,700 13,600,500 General and administrative 5,139,000 4,536,000 Total operating expenses 24,548,300 24,476,700 Interest expense 167,800 182,200 Other income (598,700 ) (406,600 )
Earnings before income taxes 4,660,600 2,643,900
Income taxes 1,222,500 712,800 Net earnings$ 3,438,100 $ 1,931,100
See the detailed discussion of revenues, gross margin and general and administrative expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods.
Non-Segment Operating Results for the Three Months Ended
Total operating expenses not associated with a reporting segment increased
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Interest expense remained consistent at
Income taxes increased
UBAM Operating Results for the Three Months Ended
The following table summarizes the operating results of the UBAM segment:
Three Months Ended May 31, 2021 2020 Gross sales$ 45,535,700 $ 43,946,100 Less discounts and allowances (12,285,700 ) (11,306,700 ) Transportation revenue 4,366,900 4,286,800 Net revenues 37,616,900 36,926,200 Cost of goods sold 10,249,900 10,688,600 Gross margin 27,367,000 26,237,600 Operating expenses Operating and selling 5,344,700 5,426,300 Sales commissions 12,858,300 13,560,400 General and administrative 1,302,800 1,423,800 Total operating expenses 19,505,800 20,410,500 Operating income$ 7,861,200 $ 5,827,100 Average number of active consultants 55,100 33,100
UBAM net revenues increased
Gross margin increased
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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
Operating income of the UBAM segment increased
Publishing Operating Results for the Three Months Ended
The following table summarizes the operating results of the Publishing segment:
Three Months May 31, 2021 2020 Gross sales$ 6,855,900 $ 2,950,800 Less discounts and allowances (3,668,400 ) (1,589,200 ) Transportation revenue 3,500 3,900 Net revenues 3,191,000 1,365,500 Cost of goods sold 1,780,000 706,900 Gross margin 1,411,000 658,600 Total operating expenses 549,400 312,000 Operating income$ 861,600 $ 346,600
Our Publishing division's net revenues increased
Gross margin increased
Total operating expenses of the Publishing segment increased
Operating income of the Publishing segment increased to
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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
?net earnings of$3,438,100 Adjusted for:
?depreciation expense of
?share-based compensation expense of
?deferred income taxes of
?provision for inventory valuation allowance of
?provision for doubtful accounts of
Positively impacted by:
?increase in income tax payable of
Negatively impacted by:
?increase in inventories, net of
?decrease in accrued salaries and commissions, and other liabilities of
?increase in accounts receivable of
?decrease in accounts payable of
?decrease in deferred revenues of
?increase in prepaid expenses and other assets of
Cash used in investing activities was
Cash provided by financing activities was
During fiscal year 2022, we continue to expect the cash generated from our operations and cash available through our line of credit with our Bank will provide us the liquidity we need to support ongoing operations. Cash generated from operations will be used to increase inventory by expanding our product offerings, to liquidate existing debt, and any excess cash is expected to be distributed to our shareholders.
On
In addition, the Amended and Restated Loan Agreement provides a
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The Amended and Restated Loan Agreement also provides a
The Amended and Restated Loan Agreement also contains a provision for our use of
the Bank's letters of credit. The Bank agrees to issue or obtain issuance of
commercial or stand-by letters of credit provided that the sum of the line of
credit plus the letters of credit issued would not exceed the borrowing base in
effect at the time. As of
The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:
Years endingFebruary 28 (29), 2022$ 838,600 2023 1,387,500 2024 1,407,100 2025 1,426,400 2026 9,289,300 Thereafter 389,600 Total$ 14,738,500 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
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
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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
Inventory
Our inventory contains over 2,000 titles, each with different sell through rates
depending upon the nature and popularity of the title. We maintain very few
titles that are topical in nature. As such, the majority of the titles we sell
remain current in content for several years. Most of our products are printed in
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
Our principal supplier, based in
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
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
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.
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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
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