See notes to financial statements.
See notes to financial statements.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2022 AND FEBRUARY 28, 2021
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business—Educational Development Corporation (“we,” “our,” “us,” or “the Company”) distributes books and publications through our Usborne Books & More (“UBAM”) and EDC Publishing (“Publishing”) divisions to individual consumers, book, toy and gift stores, libraries and home educators located throughout the United States (“U.S.”). We are the exclusive U.S. trade co-publisher of books and related items published by Usborne Publishing Limited (“Usborne”), an England-based publishing company, our largest supplier. We also publish books and related items through our ownership of Kane Miller Book Publisher (“Kane Miller”).
Estimates—Our financial statements were prepared in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Actual results could differ from these estimates.
Reclassifications—Certain reclassifications have been made to the fiscal year 2021 balance sheet, statement of cash flows and footnotes to conform to the classifications used in fiscal year 2022. These reclassifications had no effect on net earnings.
Business Concentration—A significant portion of our inventory purchases are concentrated with Usborne. Purchases from them were approximately $42,596,300 and $50,772,900 for the years ended February 28, 2022 and February 28, 2021, respectively. Total inventory purchases for those same periods were approximately $64,670,700 and $72,359,900, respectively. As of February 28, 2022 and February 28, 2021, our outstanding accounts payable due to Usborne was $8,783,900 and $14,561,000, respectively.
A significant portion of our UBAM division sales are facilitated through the use of social media collaboration platforms that allow our consultants to interact in real-time, or near real-time, with customers. Consultants use these platforms to invite potential customers to “online parties,” provide book recommendations, answer questions and provide links to other supporting online materials. When a customer is ready to purchase books from the online party, they are redirected from the social media platform to the consultant’s e-commerce site where the order can be placed.
Cash and Cash Equivalents—Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000. We have never experienced any losses related to these balances. The majority of payments due from banks for third party credit card transactions process within two business days. These amounts due are classified as cash and cash equivalents. Cash and cash equivalents also include demand and time deposits, money market funds and other marketable securities with maturities of three months or less when acquired.
Accounts Receivable—Accounts receivable are uncollateralized customer obligations due under normal trade terms, generally requiring payment within thirty days from the invoice date. Extended payment terms are offered at certain times of the year for orders that meet minimum quantities or amounts. During fiscal year 2021, extended payment terms were granted to customers that were negatively impacted by the COVID-19 pandemic. Delinquency fees are not assessed. Payments of accounts receivable are allocated to the specific invoices identified on the customers’ remittance advice. Accounts receivable are carried at original invoice amount less an estimated reserve made for returns and discounts based on quarterly review of historical rates of returns and expected discounts to be taken. The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected.
Management periodically reviews accounts receivable balances and, based on an assessment of historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends, estimates the portion of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation account based on its assessment of the current status of the individual accounts. Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Recoveries of accounts receivable previously written off are recorded as income when received.
Management has estimated an allowance for doubtful accounts of $336,700 and $331,900 as of February 28, 2022 and February 28, 2021, respectively.
Inventories—Inventories are stated at the lower of cost or net realizable value. Cost is determined using the average costing method. We present a portion of our inventory as a noncurrent asset. Occasionally we purchase book inventory in quantities in excess of what will be sold within the normal operating cycle due to the minimum order requirements of our primary supplier. These excess quantities are included in noncurrent inventory. We estimate noncurrent inventory using the current year turnover ratio by title and anticipated sales of specific titles. For inventory that has at least twelve months of sales history, inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory.
The Company assumes title and responsibility for inventory purchased according to the contract language with our suppliers and the individual shipment terms for the order. The majority of Usborne and Kane Miller orders pass title at FOB-Port of Shipment. The Company maintains insurance for the value of the inventory once the title has been passed until it is received at our warehouse (“inventory in transit”).
Consultants that meet certain eligibility requirements may request and receive inventory on consignment. Consignment inventory is stated at the lower of cost or net realizable value, 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, excluding the estimated reserve, with consultants was $1,399,200 and $1,114,100 at February 28, 2022 and February 28, 2021, respectively. The Company has reserved for consignment inventory not expected to be sold or returned of $505,100 and $478,600 as of February 28, 2022 and February 28, 2021, respectively.
Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and consultant consignment inventory that is not expected to be sold or returned. Management estimates the allowance for both current and noncurrent inventory. The allowance is based on management’s identification of slow-moving inventory and estimated consignment inventory that will not be sold or returned.
Property, Plant and Equipment—Property, plant and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful life, as follows:
Building
|
30 years |
Building improvements
|
5 – 15 years |
Machinery and equipment
|
3 – 15 years |
Capitalized software
|
4 years |
Furniture and fixtures
|
3 years |
Capitalized projects that are not placed in service are recorded as in progress and are not depreciated until the related assets are placed in service.
Impairment of Long-Lived Assets—We review the value of long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable based on estimated future cash flows. Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, historical and future cash flows and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of the carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates and can be impacted by other uncertainties. No impairment was noted during fiscal years 2022 or 2021.
Income Taxes—We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax basis of assets and liabilities using the current tax laws and rates. A valuation allowance is established when necessary to reduce net deferred tax assets to the amounts that are “more likely than not” to be realized.
Revenue Recognition—Revenue is derived from the sales of children’s books and related products which are generally capable of being distinct and accounted for as a single performance obligation to deliver tangible goods. Substantially all of our books are sold to end consumers through our UBAM division and retail outlets through our Publishing division. Refer to Note 13 – Business Segments for revenue by segment. Revenues of both divisions are recognized at shipping point, which is the point in time the customer obtains control of the products and risk of loss and rewards of ownership have been transferred. Products are shipped FOB-Shipping Point. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for as a pass-through liability, and therefore are excluded from net sales.
The majority of UBAM’s sales contracts have a single performance obligation and are short-term in nature. UBAM’s sales are generally collected at the time the product is ordered. Sales which have been paid for but not shipped are classified as deferred revenue on the balance sheets. Sales associated with consignment inventory are recognized when reported by the consignee and payment associated with the sale has been collected. Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.
Certain UBAM sales contracts associated with the hostess award programs include sales incentives, such as discounted products. These incentives provide a separate performance obligation in the contract and material right to the customer. The transaction price is allocated to the material right based on its relative standalone selling price and is recognized in revenue as the performance obligations are satisfied, which occurs at shipping point or at the expiration of the material right. As the products included as sales incentives are shipped with the associated products ordered, there is no deferral required. Revenues allocated to the material right are recognized in gross sales, discounts and allowances and cost of goods sold in our statements of earnings.
The majority of Publishing’s sales contracts have a single performance obligation and are short-term in nature. Publishing’s sales may be collected at the time the product is shipped or the customers may be given payment terms based primarily on their credit worthiness and payment history.
Estimated allowances for sales returns, which reduce net revenues and cost of goods sold, 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 from retail stores. These returns result from damage that occurs in the stores, not in shipping to the stores. It is industry practice to accept non-damaged returns from retail customers. Management has estimated sales returns of approximately $201,500 as of both February 28, 2022 and February 28, 2021, which is included in other current liabilities on the Company’s balance sheets. In addition, Management has recorded an asset for the expected value of non-damaged inventories to be returned. The estimated value of returned products of $100,800 is included in other current assets on the Company’s balance sheets as of both February 28, 2022 and February 28, 2021.
The Company generally expenses sales commissions in the same period that the revenue is recognized. These costs are recorded within operating expenses. The Company does not disclose the value of unsatisfied performance obligations for contracts with an unexpected length of one year or less.
Advertising Costs—Advertising costs are expensed as incurred. Advertising expenses, included in general and administrative expenses in the statements of earnings, were $765,100 and $1,181,300 for the years ended February 28, 2022 and February 28, 2021, respectively.
Shipping and Handling Costs—We classify shipping and handling costs as operating and selling expenses in the statements of earnings. Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies. These costs were $22,005,600 and $34,167,000 for the years ended February 28, 2022 and February 28, 2021, respectively.
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 and the assumed vesting of granted restricted share awards. In computing Diluted EPS, we have utilized the treasury stock method.
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below:
|
|
Year Ended February 28,
|
|
|
|
2022
|
|
|
2021
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Net earnings applicable to common shareholders
|
|
$ |
8,306,800 |
|
|
$ |
12,624,000 |
|
Shares:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic
|
|
|
8,039,843 |
|
|
|
8,352,474 |
|
Issuance of nonvested restricted shares
|
|
|
412,497 |
|
|
|
74,250 |
|
Weighted average shares outstanding-diluted
|
|
|
8,452,340 |
|
|
|
8,426,724 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.03 |
|
|
$ |
1.51 |
|
Diluted
|
|
$ |
0.98 |
|
|
$ |
1.50 |
|
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.
New Accounting Pronouncements—The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that the following recently issued accounting standard updates (“ASU”) apply to us:
In December 2019, the FASB published ASU 2019-12: Income Taxes (Topic 740), which simplifies the accounting for income taxes. Topic 740 addresses a number of topics including but not limited to the removal of certain exceptions currently included in the standard related to intra-period allocation when there are losses, in addition to calculation of income taxes when current year-to-date losses exceed anticipated loss for the year. The amendment also simplifies accounting for certain franchise taxes and disclosure of the effect of enacted change in tax laws or rates. Topic 740 was adopted by the Company at the beginning of fiscal year 2022 and did not have a material impact on our financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04: Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as London Interbank Offered Rate (LIBOR). This ASU includes practical expedients for contract modifications due to reference rate reform. Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date. This ASU is effective March 12, 2020 through December 31, 2022. The Company’s debt agreements include the use of alternate rates when LIBOR is not available. We do not expect the change from LIBOR to an alternate rate will have a material impact to our financial statements and, to the extent we enter into modifications of agreements that are impacted by the LIBOR phase-out, we apply such guidance to those contract modifications.
2. INVENTORIES
Inventories consist of the following:
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
Current:
|
|
|
|
|
|
|
|
|
Book inventory
|
|
$ |
72,064,400 |
|
|
$ |
52,276,200 |
|
Inventory valuation allowance
|
|
|
(510,800 |
)
|
|
|
(513,800 |
)
|
Inventories net - current
|
|
$ |
71,553,600 |
|
|
$ |
51,762,400 |
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Book inventory
|
|
$ |
2,437,600 |
|
|
$ |
894,300 |
|
Inventory valuation allowance
|
|
|
(382,300 |
)
|
|
|
(209,000 |
)
|
Inventories net - noncurrent
|
|
$ |
2,055,300 |
|
|
$ |
685,300 |
|
Inventory in transit totaled $2,732,400 and $6,467,400 at February 28, 2022 and February 28, 2021, respectively.
Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2 ½ years of anticipated sales, are included in noncurrent inventory.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
Land
|
|
$ |
4,107,200 |
|
|
$ |
4,107,200 |
|
Building
|
|
|
20,424,900 |
|
|
|
20,373,900 |
|
Building improvements
|
|
|
2,274,100 |
|
|
|
1,949,200 |
|
Machinery and equipment
|
|
|
14,223,500 |
|
|
|
8,289,400 |
|
Furniture and fixtures
|
|
|
110,800 |
|
|
|
110,800 |
|
Capitalized software
|
|
|
1,151,900 |
|
|
|
866,500 |
|
Property, plant and equipment - in progress
|
|
|
496,900 |
|
|
|
4,436,300 |
|
Total property, plant and equipment
|
|
|
42,789,300 |
|
|
|
40,133,300 |
|
Less accumulated depreciation
|
|
|
(12,305,300 |
)
|
|
|
(10,182,300 |
)
|
Property, plant and equipment-net
|
|
$ |
30,484,000 |
|
|
$ |
29,951,000 |
|
During fiscal year 2021, the Company placed into service UBAM platform upgrades that the consultants use to monitor their business and continued its development of a new platform for customers to place orders. In fiscal year 2022, the Company put into production two new pick-pack-ship lines to increase the Company’s daily shipping capacity.
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
Accrued royalties
|
|
$ |
873,800 |
|
|
$ |
1,423,400 |
|
Accrued UBAM incentives
|
|
|
1,610,800 |
|
|
|
1,695,000 |
|
Accrued freight
|
|
|
191,400 |
|
|
|
265,700 |
|
Sales tax payable
|
|
|
499,900 |
|
|
|
986,400 |
|
Allowance for expected inventory returns
|
|
|
201,500 |
|
|
|
201,500 |
|
Other
|
|
|
520,500 |
|
|
|
961,000 |
|
Total other current liabilities
|
|
$ |
3,897,900 |
|
|
$ |
5,533,000 |
|
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising our net deferred tax assets and liabilities are as follows:
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
90,900 |
|
|
$ |
89,600 |
|
Inventory overhead capitalization
|
|
|
203,500 |
|
|
|
127,700 |
|
Inventory valuation allowance
|
|
|
137,900 |
|
|
|
138,700 |
|
Inventory valuation allowance – noncurrent
|
|
|
103,200 |
|
|
|
56,400 |
|
Allowance for sales returns
|
|
|
27,200 |
|
|
|
27,200 |
|
Accruals
|
|
|
953,600 |
|
|
|
754,200 |
|
Total deferred tax assets
|
|
|
1,516,300 |
|
|
|
1,193,800 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(1,397,600 |
)
|
|
|
(1,283,700 |
)
|
Total deferred tax liabilities
|
|
|
(1,397,600 |
)
|
|
|
(1,283,700 |
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities)
|
|
$ |
118,700 |
|
|
$ |
(89,900 |
)
|
The components of income tax expense are as follows:
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
2,663,900 |
|
|
$ |
3,236,400 |
|
State
|
|
|
623,700 |
|
|
|
901,600 |
|
|
|
|
3,287,600 |
|
|
|
4,138,000 |
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(304,400 |
)
|
|
|
382,100 |
|
State
|
|
|
(54,100 |
)
|
|
|
86,700 |
|
|
|
|
(358,500 |
)
|
|
|
468,800 |
|
Total income tax expense
|
|
$ |
2,929,100 |
|
|
$ |
4,606,800 |
|
The following reconciles our expected income tax rate to the U.S. federal statutory income tax rate:
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
U.S. federal statutory income tax rate
|
|
|
21.0 |
%
|
|
|
21.0 |
%
|
U.S. state and local income taxes–net of federal benefit
|
|
|
5.5 |
%
|
|
|
5.5 |
%
|
Other
|
|
|
(0.4 |
)%
|
|
|
0.2 |
%
|
Total income tax expense
|
|
|
26.1 |
%
|
|
|
26.7 |
%
|
We file our tax returns in the U.S. and certain state jurisdictions in which we have nexus. We are no longer subject to income tax examinations by tax authorities for fiscal years before 2017.
Based upon a review of our income tax filing positions, we believe that our positions would be sustained upon an audit and do not anticipate any adjustments that would result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded. We classify interest and penalties associated with income taxes as a component of income tax expense on the statements of earnings.
6. EMPLOYEE BENEFIT PLAN
The Company has created the Educational Development Corporation Employee 401(k) Plan (“EDC 401(k) Plan”) as a benefit plan for employees offering retirement investment options as well as profit sharing with its employees, in the form of matching contributions. The EDC 401(k) Plan includes, as an investment option, the ability to purchase shares of the Company’s stock which the Plan Administrator acquires directly from the NASDAQ. This plan incorporates the provisions of Section 401(k) of the Internal Revenue Code that allow favorable tax treatments on investments. The EDC 401(k) Plan is available to all employees that meet specific age and length of service requirements. The Company’s matching contributions are discretionary and approved annually at a meeting of the EDC 401(k) Plan’s Trustees and Company’s management. Matching contributions made to the Plan by the Company totaled $161,300 and $126,800 during the years ended February 28, 2022 and February 28, 2021, respectively.
7. LEASES
We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under Accounting Standards Codification (“ASC”) 842 - Leases. Our lessee arrangement includes two rental agreements where we have the exclusive use of dedicated office space in San Diego, California, as well as warehouse and office space in Layton, Utah, and both qualify as an operating lease. Our lessor arrangements include three rental agreements for warehouse and office space in Tulsa, Oklahoma, and each qualify as an operating lease under ASC 842.
In accordance with ASC 842, we have made an accounting policy election to not apply the 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 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 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.
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
Operating lease assets:
|
|
|
|
|
|
|
|
|
Right-of-use assets
|
|
$ |
495,800 |
|
|
$ |
34,100 |
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities:
|
|
|
|
|
|
|
|
|
Current lease liabilities
|
|
$ |
111,000 |
|
|
$ |
13,700 |
|
Long-term lease liabilities
|
|
$ |
384,800 |
|
|
$ |
20,400 |
|
|
|
|
|
|
|
|
|
|
Remaining lease term (months)
|
|
|
57.0 |
|
|
|
31.0 |
|
Discount Rate
|
|
|
3.06 |
%
|
|
|
4.60 |
%
|
Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses in our statements of earnings. Variable and short-term rental payments are recognized as costs and expenses as they are incurred.
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
Fixed lease costs
|
|
$ |
35,300 |
|
|
$ |
13,200 |
|
Future minimum rental payments under operating leases with initial terms greater than one year as of February 28, 2022, are as follows:
Years ending February 28 (29),
|
|
|
|
|
2023
|
|
$ |
110,400 |
|
2024
|
|
|
111,600 |
|
2025
|
|
|
112,900 |
|
2026
|
|
|
114,300 |
|
2027
|
|
|
86,600 |
|
Total future minimum rental payments
|
|
|
535,800 |
|
Present value discount
|
|
|
(40,000 |
)
|
Total operating lease liability
|
|
$ |
495,800 |
|
The following table provides further information about our operating leases reported in our financial statements:
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows – operating leases
|
|
$ |
35,300 |
|
|
$ |
13,200 |
|
Operating Leases – Lessor
In connection with the 2015 purchase of our 400,000 square-foot facility on 40-acres, we entered into a 15-year lease with the seller, a non-related third party, who leases 181,300 square feet, or 45.3% of the facility. The lessee pays $119,100 per month, through the lease anniversary date of December 2022, with a 2.0% annual increase adjustment on each anniversary date thereafter. The lease terms allow for one five-year extension, which is not a bargain renewal option, at the expiration of the 15-year term. Revenues associated with the lease are being recorded on a straight-line basis over the initial lease term and are reported in other income in the statements of earnings. We recognize variable rental payments as revenue in the period in which the changes in facts and circumstances, on which the variable lease payments are based, occur.
On April 4, 2020, we executed an amendment to one of our existing leases that abated rental payments for the months of May, June and July 2020. The amendment also extended the term of the lease for three additional months. This amendment represents a lease modification and, as such, we have adjusted our fixed rental income on a straight-line basis over the remaining term starting May 1, 2020.
Future minimum payments receivable under operating leases with terms greater than one year are estimated as follows:
Years ending February 28 (29),
|
|
|
|
|
2023
|
|
$ |
1,573,200 |
|
2024
|
|
|
1,577,900 |
|
2025
|
|
|
1,547,100 |
|
2026
|
|
|
1,524,300 |
|
2027
|
|
|
1,554,800 |
|
Thereafter
|
|
|
6,536,200 |
|
Total
|
|
$ |
14,313,500 |
|
The cost of the leased space was approximately $10,834,300 and $10,826,400 as of February 28, 2022 and February 28, 2021, respectively. The accumulated depreciation associated with the leased assets was $2,603,300 and $2,216,700 as of February 28, 2022 and February 28, 2021, respectively. Both the leased assets and accumulated depreciation are included in property, plant and equipment-net on the balance sheets.
8. DEBT
Debt consists of the following:
|
|
February 28,
|
|
|
|
2022
|
|
|
2021
|
|
Line of credit
|
|
$ |
17,723,500 |
|
|
$ |
5,245,300 |
|
|
|
|
|
|
|
|
|
|
Advancing term loan #1
|
|
$ |
4,782,600 |
|
|
$ |
- |
|
Advancing term loan #2
|
|
|
9,868,400 |
|
|
|
- |
|
Term loan #1
|
|
|
10,349,100 |
|
|
|
10,984,700 |
|
Total long-term debt
|
|
|
25,000,100 |
|
|
|
10,984,700 |
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(2,542,200 |
)
|
|
|
(533,500 |
)
|
Less debt issue cost
|
|
|
(48,400 |
)
|
|
|
- |
|
Long-term debt, net
|
|
$ |
22,409,500 |
|
|
$ |
10,451,200 |
|
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 $20.0 million revolving loan (“line of credit”) through August 15, 2022 with interest payable monthly at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 3.00% (the effective rate was 3.40% at February 28, 2022). On July 16, 2021, the Company executed the Second Amendment to the Loan Agreement which increased the Maximum Revolving Principal Amount from $15.0 million to $20.0 million. On August 31, 2021, the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate. Available credit under the revolving line of credit was approximately $2,276,500 and $9,570,200 at February 28, 2022 and February 28, 2021, respectively.
In addition, the Loan Agreement provides a $6.0 million Advancing Term Loan #1 to be used to finance planned equipment purchases. The Advancing Term Loan #1 required interest-only payments through July 15, 2021, at which time it was converted to a 60-month amortizing term loan maturing July 15, 2026. The Advancing Term Loan #1 accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 3.00% (the effective rate was 3.40% at February 28, 2022).
On November 19, 2021, the Company executed the Fourth Amendment to the Loan Agreement which established Advancing Term Loan #2 in the principal amount of $10.0 million, amended the definition of LIBO Rate and LIBOR Margin and added Benchmark Replacement Provisions. The Advancing Term Loan #2 is a 120-month amortizing loan maturing November 19, 2031 and accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 3.00% (the effective rate was 3.40% at February 28, 2022).
Adjusted Funded Debt is defined as all long-term and short-term bank debt less the outstanding balance of Term Loan #1. EBITDA is defined in the Loan Agreement as net income plus interest expense, income tax expense (benefit) and depreciation and amortization expenses. The Adjusted Funded Debt to EBITDA ratio includes Adjusted Funded Debt to trailing twelve months EBITDA, reduced by specific rental income received from a third party, see Note 7. The $20.0 million line of credit is limited to advance rates on eligible receivables and eligible inventory levels.
The advancing term loans and the line of credit accrue interest at a tiered rate based on our Adjusted Funded Debt to EBITDA ratio. The variable interest pricing tiers are as follows:
Pricing Tier
|
Adjusted Funded Debt to EBITDA Ratio
|
LIBOR Margin (bps)
|
I
|
> 2.50 |
325.00 |
II
|
> 2.00 but < 2.50 |
300.00 |
III
|
> 1.50 but < 2.00 |
275.00 |
IV
|
< 1.50 |
250.00 |
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. We had no letters of credit outstanding as of February 28, 2022.
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 maturities of long-term debt during the next five fiscal years as follows:
Years ending February 28 (29),
|
|
2023
|
|
$ |
2,542,200 |
|
2024
|
|
|
2,591,800 |
|
2025
|
|
|
2,638,500 |
|
2026
|
|
|
10,489,800 |
|
2027
|
|
|
1,518,700 |
|
Thereafter
|
|
|
5,219,100 |
|
Total
|
|
$ |
25,000,100 |
|
9. COMMITMENTS AND CONTINGENCIES
As of February 28, 2022, the Company had outstanding purchase commitments for inventory totaling $11,407,500, which will be received and payments due during fiscal year 2023. Of these inventory commitments, $6,635,300 were with Usborne, $4,687,700 with various Kane Miller publishers and the remaining $84,500 with other suppliers.
10. SHARE-BASED COMPENSATION
We account for share-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant. For awards subject to service conditions, compensation expense is recognized over the vesting period on a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche. Forfeitures are recognized when they occur. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and share awards are updated and compensation expense is adjusted based on updated information.
In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan established up to 600,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 or 2021. The Company exceeded all defined metrics during these fiscal years and 600,000 shares were granted to members of management according to the Plan. The granted shares under the 2019 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.
In July 2021, our shareholders approved the Company’s 2022 Long-Term Incentive Plan (“2022 LTI Plan”). The 2022 LTI Plan establishes up to 300,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2022 and 2023. The number of restricted shares to be distributed depends on attaining the performance metrics defined by the 2022 LTI Plan and may result in the distribution of a number of shares that is less than, but not greater than, the number of restricted shares outlined in the terms of the 2022 LTI Plan. Restricted shares granted under the 2022 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.
During fiscal year 2019, the Company granted 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share. In the third quarter of fiscal year 2021, 5,000 of these restricted shares were forfeited. These shares were made available to be reissued to remaining participants upon forfeiture. The remaining compensation expense for the outstanding awards, totaling approximately $653,500, will be recognized ratably over the remaining vesting period of approximately 12 months as of February 28, 2022.
During fiscal year 2021, the Company granted 297,000 restricted shares under the 2019 LTI Plan, including the 5,000 aforementioned shares that were previously forfeited and held in Treasury, with an average grant-date fair value of $6.30 per share. The remaining compensation expense of these awards, totaling approximately $1,178,400, will be recognized ratably over the remaining vesting period of approximately 36 months as of February 28, 2022.
As of February 28, 2022, no shares have been granted under the 2022 LTI Plan.
A summary of compensation expense recognized in connection with restricted share awards as follows:
|
|
Year Ended February 28,
|
|
|
|
2022
|
|
|
2021
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
$ |
1,046,500 |
|
|
$ |
938,600 |
|
The following table summarizes stock award activity during fiscal year 2022 under the 2019 LTI Plan:
|
|
Shares
|
|
|
Weighted Average Fair Value (per share)
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2021
|
|
|
600,000 |
|
|
$ |
8.14 |
|
Granted
|
|
|
- |
|
|
|
- |
|
Vested
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
Outstanding at February 28, 2022
|
|
|
600,000 |
|
|
$ |
8.14 |
|
As of February 28, 2022, total unrecognized share-based compensation expense related to unvested restricted shares was $1,831,900, which we expect to recognize over a weighted-average period of 27.4 months.
11. STOCK REPURCHASE PLAN
In April 2008, the Board of Directors authorized us to repurchase up to an additional 1,000,000 shares of our common stock under the plan initiated in 1998 (“amended 2008 plan”). On February 4, 2019, the Board of Directors replaced the amended 2008 plan with a new plan which authorized us to repurchase up to 800,000 shares of outstanding common stock in the open market or in privately negotiated transactions, and to utilize any derivative or similar instrument to effect share repurchase transactions (including without limitation, accelerated share repurchase contracts, equity forward transactions, equity swap transactions, floor transactions or other similar transactions or any combination of the foregoing transactions). This plan has no expiration date.
During fiscal year 2022, there were no repurchases under the 2019 stock repurchase plan. During fiscal year 2021, we purchased 22,565 shares at an average price of $7.27 per share totaling approximately $163,800 under the 2019 stock repurchase plan. The maximum number of shares that may be repurchased in the future is 514,594.