EDUCATIONAL DEVELOPMENT CORP 10-K

Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) Rule 13a-15(a) as of February 28, 2022. 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 to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to them, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported in accordance with the time periods specified in SEC rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events. Changes in Internal Control over Financial Reporting During the fourth quarter of the fiscal year covered by this report on Form 10-K, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. Management ’ s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13(a) thru 15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the framework set forth in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation under the 2013 COSO Framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of February 28, 2022. Our internal control over financial reporting as of February 28, 2022 has been audited by HoganTaylor LLP, an independent registered public accounting firm, as stated in their report, which is included in this Form 10-K. 17 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Educational Development Corporation Opinion on the Internal Control Over Financial Reporting We have audited Educational Development Corporation's (the Company) internal control over financial reporting as of February 28, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets of the Company as of February 28, 2022 and 2021, the related statements of earnings, shareholders' equity and cash flows for the years then ended, and the related notes to the financial statements and our report dated May 5, 2022 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ HOGANTAYLOR LLP Tulsa, Oklahoma May 5, 2022 18 Table of Contents Item 9B. OTHER INFORMATION None Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None 19 Table of Contents PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE (a) Identification of Directors The information required by this Item 10 is furnished by incorporation by reference to the information under the caption "Election of Directors" in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 6, 2022. (b) Identification of Executive Officers The information required by this Item 10 is furnished by incorporation by reference to the information under the caption "Executive Officers of the Registrant" in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 6, 2022. (c) Compliance with Section 16 (a) of the Exchange Act The information required by this Item 10 is furnished by incorporation by reference to the information under the caption "Section 16 (a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 6, 2022. Item 11. EXECUTIVE COMPENSATION The information required by this Item 11 is furnished by incorporation by reference to the information under the caption "Executive Compensation" in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 6, 2022. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 is furnished by incorporation by reference to the information under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Compensation Plans" in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 6, 2022. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE None Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item 14 is furnished by incorporation by reference to the information under the caption "Independent Registered Public Accountants" in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 6, 2022. 20 Table of Contents PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: 1. Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 483 ) 25 Balance Sheets as of February 28, 2022 and February 28, 2021 26 Statements of Earnings for the Years ended February 28, 2022 and February 28, 2021 27 Statements of Shareholders' Equity for the Years ended February 28, 2022 and February 28, 2021 28 Statements of Cash Flows for the Years ended February 28, 2022 and February 28, 2021 29 Notes to Financial Statements 30-42 Schedules have been omitted as such information is either not required or is included in the financial statements. 2. Exhibits *3.1 Restated Certificate of Incorporation dated April 26, 1968 and Certificate of Amendment thereto dated June 21, 1968 are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10-K (File No. 0-04957). *3.2 Certificate of Amendment of Restated Certificate of Incorporation dated August 27, 1977 is incorporated herein by reference to Exhibit 20.1 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957). *3.3 By-Laws, as amended, are incorporated herein by reference to Exhibit 20.2. to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957). *3.4 Certificate of Amendment of Restated Certificate of Incorporation dated November 17, 1986 is incorporated herein by reference to Exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-04957). 3.5 Certificate of Amendment of Restated Certificate of Incorporation dated March 22, 1996 is incorporated herein by reference to Exhibit 3.4 to Form 10-K for fiscal year ended February 28, 1997 (File No. 0-04957). 3.6 Certificate of Amendment of Restated Certificate of Incorporation dated July 15, 2002 is incorporated herein by reference to Exhibit 10.30 to Form 10-K dated February 28, 2003 (File No. 0-04957). 3.7 Certificate of Amendment of Restated Certificate of Incorporation dated August 15, 2018 is incorporated herein by reference to Exhibit 3.1 to Form 8-K dated August 21, 2018 (File No. 0-04957). *4.1 Specimens of Common Stock Certificates are incorporated herein by reference to Exhibits 3.1 and 3.2 to Registration Statement on Form 10-K (File No. 0-04957) filed June 29, 1970. *10.1 Usborne Agreement-Contractual agreement by and between the Company and Usborne Publishing Limited dated November 25, 1988 is incorporated herein by reference to Exhibit 10.12 to Form 10-K dated February 28, 1989 (File No. 0-04957). *10.2 Party Plan-Contractual agreement by and between the Company and Usborne Publishing Limited dated March 14, 1989 is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 28, 1989 (File No. 0-04957). *10.3 Amendment dated January 1, 1992 to Usborne Agreement - Contractual agreement by and between the Company and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 29, 1992 (File No. 0-04957). 21 Table of Contents 10.4 Educational Development Corporation 2002 Incentive Stock Option Plan is incorporated herein by reference to Exhibit A to definitive proxy statement on Schedule 14A dated May 23, 2002 (File No. 0-04957). 10.5 Amendment dated November 12, 2002 to Usborne Agreement – Contractual agreement by and between us and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.32 to Form 10-K dated February 28, 2003 (File No. 0-04957). 10.6 Employment Agreement between Randall W. White and the Company dated February 28, 2004 incorporated herein by reference to Exhibit 10.8 to Form 10-K dated February 28, 2005 (File No. 0-04957). 10.7 Purchase and Sale Agreement dated December 1, 2015 by and between the Company and Hilti, Inc., Tulsa, OK incorporated herein by reference to Exhibit 10.8 to Form 10-K dated February 28, 2019 (File No. 0-04957). 10.8 Lease Agreement dated December 1, 2015 by and between the Company and Hilti, Inc., Tulsa, OK incorporated herein by reference to Exhibit 10.9 to Form 10-K dated February 28, 2019 (File No. 0-04957). 10.9 Amended and Restated Loan Agreement dated February 15, 2021 by and between the Company and MidFirst Bank, Tulsa, OK is incorporated herein by reference to Exhibit 10.10 to form 10-K dated February 28, 2021 (File No. 0-04957) 10.10 First Amendment to the Amended and Restated Loan Agreement, dated April 1, 2021 by and between the Company and MidFirst Bank, Tulsa, OK is incorporated herein by reference to Exhibit 10.11 to Form 10-K dated February 28, 2021 (File No. 0-04957). 10.11 Second Amendment to the Amended and Restated Loan Agreement, dated July 16, 2021 by and between the Company and MidFirst Bank, Tulsa, OK is incorporated herein by reference to Exhibit 10.1 to Form 10-Q dated August 31, 2021 (File No. 0-04957). 10.12 Third Amendment to the Amended and Restated Loan Agreement, dated August 31, 2021 by and between the Company and MidFirst Bank, Tulsa, OK is incorporated herein by reference to Exhibit 10.2 to Form 10-Q dated August 31, 2021 (File No. 0-04957). 10.13 Fourth Amendment to the Amended and Restated Loan Agreement, dated November 19, 2021 by and between the Company and MidFirst Bank, Tulsa, OK is incorporated herein by reference to Exhibit 10.01 to Form 8-K dated November 24, 2021 (File No. 0-04957). **10.14 Fifth Amendment to the Amended and Restated Loan Agreement, dated April 11, 2022 by and between the Company and MidFirst Bank, Tulsa, OK. **23.1 Consent of Independent Registered Public Accounting Firm. **31.1 Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **31.2 Certification of the Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. **32.1 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 22 Table of Contents 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase 101.LAB Inline XBRL Taxonomy Extension Label Linkbase 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) *Paper Filed **Filed Herewith Item 16. FORM 10-K SUMMARY Not applicable 23 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EDUCATIONAL DEVELOPMENT CORPORATION Date: May 5, 2022 By /s/ Craig M. White Craig M. White President and Chief Executive Officer (Principal Executive Officer) Date: May 5, 2022 By /s/ Dan E. O’Keefe Dan E. O’Keefe Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Date: May 5, 2022 /s/ Craig M. White Craig M. White, Director President and Chief Executive Officer (Principal Executive Officer) May 5, 2022 /s/ Randall W. White Randall W. White, Director Chairman of the Board May 5, 2022 /s/ John A. Clerico John A. Clerico, Director May 5, 2022 /s/ Dr. Kara Gae Neal Dr. Kara Gae Neal, Director May 5, 2022 /s/ Joshua J. Peters Joshua J. Peters, Director May 5, 2022 /s/ Dan E. O’Keefe Dan E. O’Keefe Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) 24 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Educational Development Corporation Opinion on the Financial Statements We have audited the accompanying balance sheets of Educational Development Corporation (the Company) as of February 28, 2022 and 2021, the related statements of earnings, shareholders' equity and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of February 28, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated May 5, 2022, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ HOGANTAYLOR LLP We have served as the Company's auditor since 2005. Tulsa, Oklahoma May 5, 2022 25 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION BALANCE SHEETS AS OF FEBRUARY 28, 2022 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 361,200 $ 1,812,200 Accounts receivable, less allowance for doubtful accounts of $ 336,700 (2022) and $ 331,900 (2021) 3,638,800 3,346,700 Inventories - net 71,553,600 51,762,400 Prepaid expenses and other assets 960,500 1,219,300 Total current assets 76,514,100 58,140,600 INVENTORIES - net 2,055,300 685,300 PROPERTY, PLANT AND EQUIPMENT - net 30,484,000 29,951,000 DEFERRED INCOME TAX ASSET 118,700 - OTHER ASSETS 761,600 73,600 TOTAL ASSETS $ 109,933,700 $ 88,850,500 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 12,411,800 $ 19,674,300 Line of credit 17,723,500 5,245,300 Deferred revenues 681,600 2,475,900 Current maturities of long-term debt 2,542,200 533,500 Accrued salaries and commissions 1,890,200 3,488,000 Dividends payable 870,700 835,100 Income taxes payable 241,900 130,200 Other current liabilities 3,897,900 5,533,000 Total current liabilities 40,259,800 37,915,300 LONG-TERM DEBT - net of current maturities and debt issuance costs 22,409,500 10,451,200 DEFERRED INCOME TAX LIABILITY - 89,900 OTHER LONG-TERM LIABILITIES 498,900 134,300 Total liabilities 63,168,200 48,590,700 COMMITMENTS AND CONTINGENCIES – See Note 9 SHAREHOLDERS' EQUITY: Common stock, $ 0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 shares; Outstanding 8,707,247 (2022) and 8,346,600 (2021) shares 2,540,400 2,482,000 Capital in excess of par value 12,246,600 10,863,900 Retained earnings 44,525,100 39,683,000 59,312,100 53,028,900 Less treasury stock, at cost ( 12,546,600 ) ( 12,769,100 ) Total shareholders' equity 46,765,500 40,259,800 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 109,933,700 $ 88,850,500 See notes to financial statements. 26 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF EARNINGS FOR THE YEARS ENDED FEBRUARY 28, 2022 2021 GROSS SALES $ 187,466,800 $ 255,589,600 Less discounts and allowances ( 59,109,300 ) ( 74,814,700 ) Transportation revenue 13,871,300 23,860,200 NET REVENUES 142,228,800 204,635,100 COST OF GOODS SOLD 44,297,500 60,037,000 Gross margin 97,931,300 144,598,100 OPERATING EXPENSES: Operating and selling 23,010,400 36,123,700 Sales commissions 44,377,500 69,977,200 General and administrative 20,302,200 22,541,500 Total operating expenses 87,690,100 128,642,400 INTEREST EXPENSE 916,400 561,000 OTHER INCOME ( 1,911,100 ) ( 1,836,100 ) EARNINGS BEFORE INCOME TAXES 11,235,900 17,230,800 INCOME TAXES 2,929,100 4,606,800 NET EARNINGS $ 8,306,800 $ 12,624,000 BASIC AND DILUTED EARNINGS PER SHARE: Basic $ 1.03 $ 1.51 Diluted $ 0.98 $ 1.50 WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: Basic 8,039,843 8,352,474 Diluted 8,452,340 8,426,724 Dividends per share $ 0.40 $ 0.32 See notes to financial statements. 27 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF SHAREHOLDERS ’ EQUITY AS OF FEBRUARY 28 (29), Common Stock (par value $0.20 per share) Treasury Stock Number of Shares Issued Amount Capital in Excess of Par Value Retained Earnings Number of Shares Amount Shareholders' Equity BALANCE - February 29, 2020 12,410,080 $ 2,482,000 $ 9,843,900 $ 29,732,200 4,061,429 $ ( 12,665,300 ) $ 29,392,800 Purchases of treasury stock - - - - 22,565 ( 163,800 ) ( 163,800 ) Sales of treasury stock - - 57,800 - ( 26,828 ) 83,600 141,400 Dividends declared ($ 0.32 /share) - - - ( 2,673,200 ) - - ( 2,673,200 ) Forfeiture of restricted share awards - - 23,600 - 6,314 ( 23,600 ) - Share-based compensation expense (see Note 10) - - 938,600 - - - 938,600 Net earnings - - - 12,624,000 - - 12,624,000 BALANCE - February 28, 2021 12,410,080 $ 2,482,000 $ 10,863,900 $ 39,683,000 4,063,480 $ ( 12,769,100 ) $ 40,259,800 Sales of treasury stock - - 418,200 - ( 63,647 ) 198,900 617,100 Issuance of restricted share awards for vesting 292,000 58,400 ( 82,000 ) - ( 5,000 ) 23,600 - Dividends declared ($ 0.40 /share) - - - ( 3,464,700 ) - - ( 3,464,700 ) Share-based compensation expense (see Note 10) - - 1,046,500 - - - 1,046,500 Net earnings - - - 8,306,800 - - 8,306,800 BALANCE - February 28, 2022 12,702,080 2,540,400 12,246,600 44,525,100 3,994,833 ( 12,546,600 ) 46,765,500 See notes to financial statements. 28 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 28, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 8,306,800 $ 12,624,000 Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities: Depreciation and amortization 2,126,700 1,633,200 Deferred income taxes ( 208,600 ) ( 903,400 ) Provision for doubtful accounts 115,800 139,800 Provision for inventory valuation allowance 235,700 198,600 Share-based compensation expense 1,046,500 938,600 Changes in assets and liabilities: Accounts receivable ( 407,900 ) ( 519,400 ) Inventories, net ( 21,396,900 ) ( 21,542,300 ) Prepaid expenses and other assets ( 209,200 ) ( 260,100 ) Accounts payable ( 6,201,300 ) 8,952,000 Accrued salaries and commissions, and other liabilities ( 2,868,300 ) 4,502,000 Deferred revenues ( 1,794,300 ) 1,702,800 Income taxes payable 111,700 351,900 Total adjustments ( 29,450,100 ) ( 4,806,300 ) Net cash provided by/(used in) operating activities ( 21,143,300 ) 7,817,700 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 3,717,200 ) ( 4,145,300 ) Purchases of other assets ( 223,700 ) - Net cash used in investing activities ( 3,940,900 ) ( 4,145,300 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on term debt ( 1,277,700 ) ( 9,274,400 ) Proceeds from term debt 15,244,700 1,447,400 Sales of treasury stock 617,100 141,400 Purchases of treasury stock - ( 163,800 ) Net borrowings under line of credit 12,478,200 5,245,300 Dividends paid ( 3,429,100 ) ( 2,255,500 ) Net cash provided by/(used in) financing activities 23,633,200 ( 4,859,600 ) NET DECREASE IN CASH AND CASH EQUIVALENTS ( 1,451,000 ) ( 1,187,200 ) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,812,200 2,999,400 CASH AND CASH EQUIVALENTS - END OF YEAR $ 361,200 $ 1,812,200 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid for interest $ 890,000 $ 582,000 Cash paid for income taxes $ 2,970,000 $ 4,806,900 NON-CASH TRANSACTIONS: Accrued capital expenditures $ - $ 1,061,200 See notes to financial statements. 29 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION 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. 30 Table of Contents 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. 31 Table of Contents 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 32 Table of Contents 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. 33 Table of Contents 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 ) 34 Table of Contents 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. 35 Table of Contents 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 36 Table of Contents 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. 37 Table of Contents 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 38 Table of Contents 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 39 Table of Contents 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 . 12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended February 28, 2022 and February 28, 2021: Net Revenues Gross Margin Net Earnings Basic Earnings Per Share Diluted Earnings Per Share 2022 First quarter $ 40,807,900 $ 28,778,000 $ 3,438,100 $ 0.43 $ 0.41 Second quarter 32,994,400 22,495,500 1,898,200 0.23 0.22 Third quarter 45,112,300 31,215,000 2,646,600 0.33 0.31 Fourth quarter 23,314,200 15,442,800 323,900 0.04 0.04 Total year $ 142,228,800 $ 97,931,300 $ 8,306,800 $ 1.03 $ 0.98 2021 First quarter $ 38,291,700 $ 26,896,200 $ 1,931,100 $ 0.23 $ 0.23 Second quarter 59,250,100 41,940,600 4,255,000 0.51 0.51 Third quarter 66,750,300 47,152,500 4,269,600 0.51 0.51 Fourth quarter 40,343,000 28,608,800 2,168,300 0.26 0.25 Total year $ 204,635,100 $ 144,598,100 $ 12,624,000 $ 1.51 $ 1.50 40 Table of Contents 13. BUSINESS SEGMENTS We have two reportable segments: Publishing and UBAM. These reportable segments offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, through commissioned sales representatives, trade and specialty wholesalers and our internal tele-sales group. Our UBAM segment markets its products through a network of independent sales consultants using a combination of internet sales, direct sales, home shows and book fairs. The accounting policies of the segments are the same as those of the rest of the Company. We evaluate segment performance based on earnings before income taxes of the segments, which is defined as segment net revenues reduced by cost of sales and direct expenses. Corporate expenses, depreciation, interest expense and income taxes are not allocated to the segments but are listed in the “Other” row below. Corporate expenses include the executive department, accounting department, information services department, general office management, warehouse operations and building facilities management. Our assets and liabilities are not allocated on a segment basis. Information by industry segment for the years ended February 28, 2022 and February 28, 2021 is set forth below: NET REVENUES 2022 2021 Publishing $ 13,250,300 $ 8,625,800 UBAM 128,978,500 196,009,300 Total $ 142,228,800 $ 204,635,100 EARNINGS (LOSS) BEFORE INCOME TAXES 2022 2021 Publishing $ 3,639,800 $ 2,571,600 UBAM 24,437,500 32,820,600 Other ( 16,841,400 ) ( 18,161,400 ) Total $ 11,235,900 $ 17,230,800 14. FINANCIAL INSTRUMENTS The following methods and assumptions are used in estimating the fair-value disclosures for financial instruments: - The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. - The estimated fair value of our term notes payable is estimated by management to approximate $ 24,521,600 and $ 11,078,800 as of February 28, 2022 and February 28, 2021, respectively. Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and collateral. 41 Table of Contents 15. DEFERRED REVENUES The Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to our fiscal year end that were not shipped as of February 28, 2022 and February 28, 2021 are recorded as deferred revenues on the balance sheets. We received approximately $ 681,600 and $ 2,475,900 as of February 28, 2022 and February 28, 2021, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the fiscal year end. 16. SUBSEQUENT EVENTS On April 11, 2022, the Company executed the Fifth Amendment to the Loan Agreement which temporarily increased the maximum revolving principal amount from $ 20.0 million to $ 25.0 million. The temporary increase period began on April 11, 2022 and ends on September 15, 2022, at which time the maximum revolving principal will automatically revert back to $20.0 million. It also extended the termination date on the revolving loan from August 15, 2022 to April 11, 2023. Furthermore, this amendment defines the Benchmark Replacement, as the use of LIBO Rates have been discontinued, and now uses SOFR (“Secured Overnight Financing Rate”) which is published by the Chicago Mercantile Exchange. SOFR Margin, based upon the Adjusted Funded Debt to EBITDA Ratio increased across all four pricing tiers by 5 basis points. Lastly, the Adjusted Funded Debt Test Default changed to 3.50:1.00 for calendar months ending before May 31, 2022, and 2.75:1.00 thereafter. 42