EDUCATIONAL DEVELOPMENT CORP 10-Q

Item 1. FINANCIAL STATEMENTS EDUCATIONAL DEVELOPMENT CORPORATION CONDENSED BALANCE SHEETS (UNAUDITED) August 31, February 28, ASSETS 2022 2022 CURRENT ASSETS Cash and cash equivalents $ 832,500 $ 361,200 Accounts receivable, less allowance for doubtful accounts of $ 238,600 (August 31) and $ 336,700 (February 28) 3,902,600 3,638,800 Inventories - net 64,274,600 71,553,600 Prepaid expenses and other assets 1,211,700 960,500 Total current assets 70,221,400 76,514,100 INVENTORIES - net 3,305,800 2,055,300 PROPERTY, PLANT AND EQUIPMENT - net 29,505,100 30,484,000 DEFERRED INCOME TAX ASSET 18,600 118,700 OTHER ASSETS 660,700 761,600 TOTAL ASSETS $ 103,711,600 $ 109,933,700 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 4,441,500 $ 12,411,800 Line of credit 12,060,900 17,723,500 Deferred revenues 785,500 681,600 Current maturities of long-term debt 1,800,000 2,542,200 Accrued salaries and commissions 1,258,500 1,890,200 Dividends payable - 870,700 Income taxes payable - 241,900 Other current liabilities 2,368,700 3,897,900 Total current liabilities 22,715,100 40,259,800 LONG-TERM DEBT - net 33,975,800 22,409,500 OTHER LONG-TERM LIABILITIES 396,600 498,900 Total liabilities 57,087,500 63,168,200 SHAREHOLDERS' EQUITY Common stock, $ 0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 (August 31 and February 28) shares; Outstanding 8,685,289 (August 31) and 8,707,247 (February 28) shares 2,540,400 2,540,400 Capital in excess of par value 12,666,900 12,246,600 Retained earnings 43,939,000 44,525,100 59,146,300 59,312,100 Less treasury stock, at cost ( 12,522,200 ) ( 12,546,600 ) Total shareholders' equity 46,624,100 46,765,500 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 103,711,600 $ 109,933,700 See notes to condensed financial statements (unaudited). 3 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 GROSS SALES $ 27,769,500 $ 44,187,100 $ 59,107,700 $ 96,578,700 Less discounts and allowances ( 9,908,100 ) ( 14,513,500 ) ( 19,993,300 ) ( 30,467,600 ) Transportation revenue 1,556,900 3,320,800 3,464,800 7,691,200 NET REVENUES 19,418,300 32,994,400 42,579,200 73,802,300 COST OF GOODS SOLD 6,939,700 10,498,900 14,791,300 22,528,800 Gross margin 12,478,600 22,495,500 27,787,900 51,273,500 OPERATING EXPENSES Operating and selling 3,798,800 5,239,900 7,569,400 11,682,500 Sales commissions 5,635,700 10,105,200 12,507,500 23,072,000 General and administrative 4,017,600 4,793,900 8,401,900 9,932,800 Total operating expenses 13,452,100 20,139,000 28,478,800 44,687,300 INTEREST EXPENSE 528,100 213,700 916,200 381,500 OTHER INCOME ( 396,000 ) ( 515,300 ) ( 786,700 ) ( 1,114,000 ) EARNINGS (LOSS) BEFORE INCOME TAXES ( 1,105,600 ) 2,658,100 ( 820,400 ) 7,318,700 INCOME TAXES ( 303,700 ) 759,900 ( 234,300 ) 1,982,400 NET EARNINGS (LOSS) $ ( 801,900 ) $ 1,898,200 $ ( 586,100 ) $ 5,336,300 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE Basic $ ( 0.10 ) $ 0.24 $ ( 0.07 ) $ 0.66 Diluted $ ( 0.10 ) $ 0.23 $ ( 0.07 ) $ 0.63 WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING Basic 8,081,807 8,028,594 8,084,117 8,028,929 Diluted 8,081,807 8,435,348 8,084,117 8,458,664 Dividends per share $ - $ 0.10 $ - $ 0.20 See notes to condensed financial statements (unaudited). 4 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED AUGUST 31, 2022 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 28, 2022 12,702,080 $ 2,540,400 $ 12,246,600 $ 44,525,100 3,994,833 $ ( 12,546,600 ) $ 46,765,500 Sales of treasury stock - - 39,000 - ( 7,771 ) 24,400 63,400 Forfeiture of restricted shares - - - - 16,180 - - Share-based compensation expense - net - - 261,600 - - - 261,600 Net earnings - - - 215,800 - - 215,800 BALANCE - May 31, 2022 12,702,080 $ 2,540,400 $ 12,547,200 $ 44,740,900 4,003,242 $ ( 12,522,200 ) $ 47,306,300 Forfeiture of restricted shares - - - - 13,549 - - Share-based compensation expense - net - - 119,700 - - - 119,700 Net loss - - - ( 801,900 ) - - ( 801,900 ) BALANCE - August 31, 2022 12,702,080 $ 2,540,400 $ 12,666,900 $ 43,939,000 4,016,791 $ ( 12,522,200 ) $ 46,624,100 FOR THE SIX MONTHS ENDED AUGUST 31, 2021 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 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 - - 26,600 - ( 1,714 ) 5,400 32,000 Dividends declared ($ 0.10 /share) - - - ( 834,800 ) - - ( 834,800 ) Share-based compensation expense - net - - 261,600 - - - 261,600 Net earnings - - - 3,438,100 - - 3,438,100 BALANCE - May 31, 2021 12,410,080 $ 2,482,000 $ 11,152,100 $ 42,286,300 4,061,766 $ ( 12,763,700 ) $ 43,156,700 Sales of treasury stock - - 46,100 - ( 4,915 ) 14,300 60,400 Issuance of restricted share awards for vesting 292,000 58,400 ( 82,000 ) - ( 5,000 ) 23,600 - Dividends declared ($ 0.10 /share) - - - ( 893,600 ) - - ( 893,600 ) Share-based compensation expense - net - - 261,700 - - - 261,700 Net earnings - - - 1,898,200 - - 1,898,200 BALANCE - August 31, 2021 12,702,080 $ 2,540,400 $ 11,377,900 $ 43,290,900 4,051,851 $ ( 12,725,800 ) $ 44,483,400 See notes to condensed financial statements (unaudited). 5 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended August 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ ( 586,100 ) $ 5,336,300 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation 1,207,500 924,200 Deferred income taxes ( 239,000 ) ( 48,500 ) Provision for doubtful accounts ( 51,600 ) 61,600 Provision for inventory valuation allowance - 120,000 Share-based compensation expense - net 381,300 523,300 Changes in assets and liabilities: Accounts receivable ( 212,200 ) ( 609,300 ) Inventories - net 6,028,500 ( 13,223,100 ) Prepaid expenses and other assets 214,200 ( 158,200 ) Accounts payable ( 7,970,300 ) ( 104,700 ) Accrued salaries and commissions and other liabilities ( 2,263,200 ) ( 4,073,000 ) Deferred revenues 103,900 ( 1,166,600 ) Income taxes payable ( 241,900 ) ( 4,100 ) Total adjustments ( 3,042,800 ) ( 17,758,400 ) Net cash used in operating activities ( 3,628,900 ) ( 12,422,100 ) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment ( 221,000 ) ( 3,210,200 ) Purchases of other assets ( 33,000 ) - Net cash used in investing activities ( 254,000 ) ( 3,210,200 ) CASH FLOWS FROM FINANCING ACTIVITIES Payments on term debt ( 25,175,900 ) ( 305,800 ) Proceeds from term debt 36,000,000 5,244,700 Sales of treasury stock 63,400 92,400 Net borrowings (payments) on line of credit ( 5,662,600 ) 11,408,500 Dividends paid ( 870,700 ) ( 1,698,500 ) Net cash provided by financing activities 4,354,200 14,741,300 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 471,300 ( 891,000 ) CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 361,200 1,812,200 CASH AND CASH EQUIVALENTS - END OF PERIOD $ 832,500 $ 921,200 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid for interest $ 838,600 $ 378,000 Cash paid for income taxes (net of refunds) $ 95,800 $ 2,035,000 NON-CASH TRANSACTIONS Accrued capital expenditures $ - $ 10,600 See notes to condensed financial statements (unaudited). 6 Table of Contents NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Note 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying Unaudited Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim condensed financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Unaudited Condensed Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended February 28, 2022 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year due to the seasonality of our product sales. Reclassifications Certain reclassifications have been made to the fiscal year 2022 condensed statement of cash flows and footnotes to conform to the classifications used in fiscal year 2023. These reclassifications had no effect on net earnings. COVID-19 Update The Company has taken numerous steps, and will continue to take further actions, in its approach to minimize the impact of the COVID-19 pandemic. We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business. The long-term severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact COVID-19 had during the current fiscal period. Use of Estimates in the Preparation of Financial Statements The preparation of the Unaudited Condensed Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Significant Accounting Policies Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented herein and unless other disclosed, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 28, 2022 included in our Form 10-K. 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 accounting standards updates (“ASU”) and concluded that the following recently issued accounting standard applies to us: 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 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. With the execution of the Company’s new Credit Agreement with BOKF, NA on August 9, 2022, the Company no longer has a loan agreement utilizing interest rates that reference LIBOR. The Company’s new Credit Agreement utilizes the Secured Overnight Financing Rate (“SOFR”) published by the Chicago Mercantile Exchange. 7 Table of Contents Note 2 – INVENTORIES Inventories consist of the following: August 31, 2022 February 28, 2022 Current: Book inventory $ 64,709,700 $ 72,064,400 Inventory valuation allowance ( 435,100 ) ( 510,800 ) Inventories net – current $ 64,274,600 $ 71,553,600 Noncurrent: Book inventory $ 3,764,700 $ 2,437,600 Inventory valuation allowance ( 458,900 ) ( 382,300 ) Inventories net – noncurrent $ 3,305,800 $ 2,055,300 Inventory in transit totaled $ 442,800 and $ 2,732,400 at August 31, 2022 and February 28, 2022, respectively. Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2½ years of anticipated sales, are included in noncurrent inventory. Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing Limited (“Usborne”). Our distribution agreement includes annual minimum purchase volumes along with specific payment terms, which if not met or payments are not received timely may result in termination of the agreement. Should termination of the agreement occur, the Company will be allowed to sell through their remaining Usborne inventory over the twelve months following the termination date. Purchases received from Usborne were $ 1,206,200 and $ 12,127,000 for the three months ended August 31, 2022 and 2021, respectively. Total inventory purchases received from all suppliers were $ 3,163,100 and $ 18,779,100 for the three months ended August 31, 2022 and 2021, respectively. Purchases received from Usborne were $ 4,783,500 and $ 24,415,300 for the six months ended August 31, 2022 and 2021, respectively. Total inventory purchases received from all suppliers were $ 9,141,700 and $ 36,564,300 for the six months ended August 31, 2022 and 2021, respectively. Note 3 – 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 arrangements include 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. Operating Leases – Lessor We recognize fixed rental income on a straight-line basis over the life of the lease as other income on our condensed statements of operations. Future minimum payments receivable under operating leases with terms greater than one year are estimated as follows: Years ending February 28 (29), 2023 $ 775,900 2024 1,568,900 2025 1,547,100 2026 1,524,300 2027 1,554,800 Thereafter 6,536,200 Total $ 13,507,200 8 Table of Contents The cost of the leased space was $ 10,834,300 for both August 31, 2022 and February 28, 2022, respectively. The accumulated depreciation associated with the leased assets was $ 2,796,700 and $ 2,603,300 as of August 31, 2022 and February 28, 2022, respectively. Both the leased assets and accumulated depreciation are included in property, plant and equipment - net on the condensed balance sheets. Note 4 – DEBT Debt consists of the following: August 31, 2022 February 28, 2022 Line of credit $ 12,060,900 $ 17,723,500 Floating rate term loan(s) (1) $ 21,000,000 $ 14,651,000 Fixed rate term loan 15,000,000 10,349,100 Total long-term debt 36,000,000 25,000,100 Less current maturities ( 1,800,000 ) ( 2,542,200 ) Less debt issue cost ( 224,200 ) ( 48,400 ) Long-term debt, net $ 33,975,800 $ 22,409,500 (1) The February 28, 2022 floating rate term loans balance of $14,651,000 was comprised of the MidFirst Bank advancing term loans #1 and #2. On August 9, 2022, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Amended and Restated Loan Agreement dated February 15, 2021 (as amended), between the Company and MidFirst Bank. The Company’s payment to MidFirst Bank, including interest, was $ 45,028,600 , which satisfied all of the Company’s debt obligations with MidFirst Bank. The Company did not incur any early termination penalties as a result of the repayment of indebtedness or termination of the Amended and Restated Loan Agreement, which provided Term Loan #1, Advancing Term Loan #1, Advancing Term Loan #2 and the Revolving Loan. In connection with the repayment of outstanding indebtedness, the Company was automatically and permanently released from all security interests, mortgages, liens and encumbrances under the Amended and Restated Loan Agreement with MidFirst Bank. The material terms of the Amended and Restated Loan Agreement with MidFirst Bank are described in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 5, 2022. On August 9, 2022, the Company executed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”). The Loan Agreement establishes a fixed rate term loan in the principal amount of $ 15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $ 21,000,000 (the “Floating Rate Term Loan”; together with the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving promissory note in the principal amount up to $ 15,000,000 (the “Revolving Loan” or “Line of Credit”). Features of the Loan Agreement include: (i) Term Loans on 20-year amortization with 5-year maturity date of August 9, 2027 (ii) Revolving Loan maturity date of August 9, 2023 (iii) Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26 % (iv) Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75 % (effective rate was 4.03 % at August 31, 2022) (v) Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50 % (effective rate was 4.78 % at August 31, 2022) (vi) Revolving Loan allows for Letters of Credit up to $ 7,500,000 (none were outstanding at August 31, 2022) The Loan Agreement also contains provisions that require the Company to maintain a minimum fixed charge ratio and limits any additional debt with other lenders. Available credit under the current $ 15,000,000 revolving line of credit with the Lender was approximately $ 2,939,100 at August 31, 2022. 9 Table of Contents The following table reflects aggregate future scheduled maturities of long-term debt during the next five fiscal years and thereafter as follows: Years ending February 28 (29), 2023 $ 900,000 2024 1,800,000 2025 1,800,000 2026 1,800,000 2027 1,800,000 Thereafter 27,900,000 Total $ 36,000,000 Note 5 – EARNINGS PER SHARE Basic earnings (loss) per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period excluding nonvested restricted stock awards. Diluted EPS includes the dilutive effect of issued unvested restricted stock awards and additional potential common shares issuable under stock warrants, restricted stock and stock options, if applicable. We utilized the treasury stock method in computing the potential common shares issuable under stock warrants, restricted stock and stock options. The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below: Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 Earnings (loss): Net earnings (loss) applicable to common shareholders $ ( 801,900 ) $ 1,898,200 $ ( 586,100 ) $ 5,336,300 Weighted average shares: Weighted average shares outstanding-basic 8,081,807 8,028,594 8,084,117 8,028,929 Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards - 406,754 - 429,735 Weighted average shares outstanding-diluted 8,081,807 8,435,348 8,084,117 8,458,664 Earnings (loss) per share: Basic $ ( 0.10 ) $ 0.24 $ ( 0.07 ) $ 0.66 Diluted $ ( 0.10 ) $ 0.23 $ ( 0.07 ) $ 0.63 As shown in the table below, the following shares have not been included in the calculation of diluted earnings (loss) per share as they would be anti-dilutive to the calculation above. Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 Weighted average shares: Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards 264,653 - 331,956 - 10 Table of Contents Note 6 – 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 established 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 or 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 fiscal year 2021, 5,000 of these restricted shares were forfeited. These shares were made available to be reissued to remaining participants upon forfeiture. During fiscal year 2023, 10,000 of these restricted shares were forfeited, along with 969 additional shares purchased with dividends received from the original issue date. The fiscal year 2023 forfeitures are available for reissue to remaining participants under the 2019 LTI Plan. The remaining compensation expense for the outstanding awards, totaling approximately $ 315,300 as of August 31, 2022, will be recognized ratably over the remaining vesting period of approximately 6 months. 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. During fiscal year 2023, 18,000 of these restricted shares were forfeited, along with 760 additional shares purchased with dividends received from the original issue date. These shares are available for reissue to remaining participants under the 2019 LTI Plan. The remaining compensation expense of these awards, totaling approximately $ 922,600 as of August 31, 2022, will be recognized ratably over the remaining vesting period of approximately 30 months. Total shares available for reissue to remaining participants under the 2019 LTI Plan was 28,000 at August 31, 2022. As of August 31, 2022, no shares have been granted under the 2022 LTI Plan. A summary of compensation expense recognized in connection with restricted share awards follows: Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 Share-based compensation expense $ 261,600 $ 261,700 $ 523,200 $ 523,300 Less reduction of expense for forfeitures ( 141,900 ) - ( 141,900 ) - Share-based compensation expense - net 119,700 261,700 381,300 523,300 The following table summarizes stock award activity during the first six months of fiscal year 2023 under the 2019 LTI Plan: Shares Weighted Average Fair Value (per share) Outstanding at February 28, 2022 600,000 $ 8.14 Granted - - Vested - - Forfeited ( 28,000 ) 7.60 Outstanding at August 31, 2022 572,000 $ 8.17 11 Table of Contents As of August 31, 2022, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $ 1,237,900 , which we expect to recognize over a weighted-average period of 23.9 months. Note 7 – SHIPPING AND HANDLING COSTS We classify shipping and handling costs as operating and selling expenses in the condensed statements of operations. Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies. These costs were $ 3,123,700 and $ 5,036,000 for the three months ended August 31, 2022 and 2021, respectively. These costs were $ 6,686,300 and $ 11,392,400 for the six months ended August 31, 2022 and 2021, respectively. Note 8 – BUSINESS SEGMENTS We have two reportable segments: Usborne Books & More (“UBAM”) and Publishing. These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. 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. Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores, museums, trade and specialty wholesalers, through commissioned sales representatives and our internal tele-sales group. The accounting policies of the segments are the same as those of the rest of the Company. We evaluate segment performance based on earnings (loss) 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 reporting segment for the three and six-month periods ended August 31, 2022 and 2021, are as follows: NET REVENUES Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 UBAM $ 15,932,200 $ 29,518,100 $ 35,949,000 $ 67,135,000 Publishing 3,486,100 3,476,300 6,630,200 6,667,300 Total $ 19,418,300 $ 32,994,400 $ 42,579,200 $ 73,802,300 EARNINGS (LOSS) BEFORE INCOME TAXES Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 UBAM $ 1,697,900 $ 5,579,100 $ 5,029,200 $ 13,440,400 Publishing 815,900 982,800 1,565,600 1,844,300 Other ( 3,619,400 ) ( 3,903,800 ) ( 7,415,200 ) ( 7,966,000 ) Total $ ( 1,105,600 ) $ 2,658,100 $ ( 820,400 ) $ 7,318,700 Note 9 – FINANCIAL INSTRUMENTS The following methods and assumptions are used in estimating the fair-value disclosures for financial instruments: - The carrying amounts reported in the condensed 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 $ 35,475,900 and $ 24,521,600 as of August 31, 2022 and February 28, 2022, respectively. The term notes payable reflected on the Company’s condensed balance sheets were $ 36,000,000 and $ 25,000,100 as of August 31, 2022 and February 28, 2022, respectively. Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and collateral. 12 Table of Contents Note 10 – DEFERRED REVENUES The Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to the end of the period that were not shipped as of August 31, 2022 or February 28, 2022 are recorded as deferred revenues on the condensed balance sheets. We received approximately $ 785,500 and $ 681,600 , as of August 31, 2022 and February 28, 2022, respectively, in payments for sales orders which will be shipped subsequent to the end of the period. Note 11 – SUBSEQUENT EVENTS None. 13 Table of Contents Item 2. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors Affecting Forward-Looking Statements The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, our success in recruiting and retaining new consultants, our ability to locate and procure desired books, our ability to ship the volume of orders that are received without creating backlogs, our ability to obtain adequate financing for working capital and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, the COVID-19 pandemic, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 28, 2022 and this Quarterly Report on Form 10-Q, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur. See “ Cautionary Remarks Regarding Forward-Looking Statements ” in the front of this Quarterly Report on Form 10-Q. Overview We are the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books and the owner and exclusive publisher of Kane Miller Book Publisher (“Kane Miller”). Significant portions of our inventory purchases are concentrated with Usborne. Our distribution agreement includes annual minimum purchase volumes along with specific payment terms, which if not met or payments are not received timely may result in termination of the agreement. Should termination of the agreement occur, the Company will be allowed to sell through their remaining Usborne inventory over the twelve months following the termination date. We operate two separate segments, UBAM and Publishing, to sell our Usborne and Kane Miller children’s books. These two segments each have their own customer base. The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, internet party plan events and book fairs. The Publishing segment markets its products on a wholesale basis to various retail accounts. All other supporting administrative activities are recognized as other expenses outside of our two segments. Other expenses consist primarily of the compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate office and distribution facility. The following table shows our condensed statements of operations data: Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 Net revenues $ 19,418,300 $ 32,994,400 $ 42,579,200 $ 73,802,300 Cost of goods sold 6,939,700 10,498,900 14,791,300 22,528,800 Gross margin 12,478,600 22,495,500 27,787,900 51,273,500 Operating expenses Operating and selling 3,798,800 5,239,900 7,569,400 11,682,500 Sales commissions 5,635,700 10,105,200 12,507,500 23,072,000 General and administrative 4,017,600 4,793,900 8,401,900 9,932,800 Total operating expenses 13,452,100 20,139,000 28,478,800 44,687,300 Interest expense 528,100 213,700 916,200 381,500 Other income (396,000 ) (515,300 ) (786,700 ) (1,114,000 ) Earnings (loss) before income taxes (1,105,600 ) 2,658,100 (820,400 ) 7,318,700 Income taxes (303,700 ) 759,900 (234,300 ) 1,982,400 Net earnings (loss) $ (801,900 ) $ 1,898,200 $ (586,100 ) $ 5,336,300 See the detailed discussion of revenues, gross margin and general and administrative expenses by reportable segment below. The following is a discussion of significant changes in the non-segment related general and administrative expenses, other income and expenses and income taxes during the respective periods. 14 Table of Contents Non-Segment Operating Results for the Three Months Ended August 31, 2022 Total operating expenses not associated with a reporting segment decreased $0.7 million, or 16.7%, to $3.5 million for the three-month period ended August 31, 2022, when compared to $4.2 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a $0.6 million decrease in labor, primarily within our warehouse operations, and a $0.2 million decrease in freight handling expenses, both resulting from a decrease in gross sales. These expense reductions were offset by a $0.1 million increase in depreciation expense primarily driven by last year’s addition of two new pick/pack/ship lines. Interest expense increased $0.3 million, or 150.0%, to $0.5 million for the three months ended August 31, 2022, when compared to $0.2 million for the same quarterly period a year ago, due to increased borrowings with our Lenders which resulted primarily from our increased inventory levels and recent increases in floating interest rates. Income taxes decreased $1.1 million, or 137.5%, to a tax benefit of $0.3 million for the three months ended August 31, 2022, from an expense of $0.8 million for the same quarterly period a year ago, primarily resulting from operating losses in the second quarter ended August 31, 2022. Our effective tax rate decreased to 27.5% for the quarter ended August 31, 2022, from 28.6% for the quarter ended August 31, 2021 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes. Non-Segment Operating Results for the Six Months Ended August 31, 2022 Total operating expenses not associated with a reporting segment decreased $1.4 million, or 16.1%, to $7.3 million for the six-month period ended August 31, 2022, when compared to $8.7 million for the same period a year ago. Labor expenses decreased $1.3 million, primarily within our warehouse operations, and freight handling costs decreased $0.5 million for the six months ended August 31, 2022, both associated with reduced sales. These expense reductions were offset by a $0.3 million increase in depreciation expense primarily driven by last year’s addition of two new pick/pack/ship lines and a $0.1 million increase in other various expenses. Interest expense increased $0.5 million, or 125.0%, to $0.9 million for the six months ended August 31, 2022, when compared to $0.4 million for the same period a year ago, due to increased borrowings with our Lenders which resulted primarily from our increased inventory levels. Income taxes decreased $2.2 million, or 110.0%, to a tax benefit of $0.2 million for the six months ended August 31, 2022, from a tax expense of $2.0 million for the same period a year ago, primarily resulting from operating losses for the six months ended August 31, 2022. Our effective tax rate increased to 28.6% for the six months ended August 31, 2022, from 27.1% for the six months ended August 31, 2021 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes. UBAM Operating Results for the Three and Six Months Ended August 31, 2022 The following table summarizes the operating results of the UBAM segment: Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 Gross sales $ 20,411,500 $ 36,789,400 $ 45,142,600 $ 82,325,100 Less discounts and allowances (6,033,700 ) (10,590,700 ) (12,653,200 ) (22,876,400 ) Transportation revenue 1,554,400 3,319,400 3,459,600 7,686,300 Net revenues 15,932,200 29,518,100 35,949,000 67,135,000 Cost of goods sold 5,085,500 8,636,600 11,247,500 18,886,500 Gross margin 10,846,700 20,881,500 24,701,500 48,248,500 Operating expenses Operating and selling 2,960,700 4,215,000 5,946,200 9,559,700 Sales commissions 5,473,100 9,937,600 12,208,700 22,795,900 General and administrative 715,000 1,149,800 1,517,400 2,452,500 Total operating expenses 9,148,800 15,302,400 19,672,300 34,808,100 Operating income $ 1,697,900 $ 5,579,100 $ 5,029,200 $ 13,440,400 Average number of active consultants 26,800 46,100 29,500 50,200 15 Table of Contents UBAM Operating Results for the Three Months Ended August 31, 2022 UBAM net revenues decreased $13.6 million, or 46.1%, to $15.9 million during the three months ended August 31, 2022, when compared to $29.5 million during the same period a year ago. The average number of active consultants in the second quarter of fiscal 2023 was 26,800, a decrease of 19,300, or 41.9%, from 46,100 average active consultants selling in the second quarter of fiscal 2022. Our consultant numbers declined during this period due to consultants returning to full-time employment, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials than they had in the prior year. We also saw new consultant recruiting negatively impacted by the recent change in our distribution agreement with Usborne Publishing Limited. The new agreement caused a temporary level of confusion with our consultants until we were able to effectively communicate the continuation of our relationship within the UBAM division. In addition, sales during the second quarter of fiscal 2023 were negatively impacted by recent record inflation, which resulted in high fuel cost and food price increases that has impacted the disposable income of our customers. We expect this impact on sales to continue as inflationary pressures persist. Historically, when we have experienced these difficult inflationary times, our UBAM active consultant numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living. Gross margin decreased $10.1 million, or 48.3%, to $10.8 million during the three months ended August 31, 2022, when compared to $20.9 million during the same period a year ago. Gross margin as a percentage of net revenues for the three months ended August 31, 2022 decreased to 68.1%, compared to 70.7% the same period a year ago. The decrease in gross margin as a percentage of net revenues is attributed to a change in order mix resulting in higher discounts totaling approximately $0.1 million, rising ocean freight costs on inbound inventory totaling approximately $0.2 million and reduced purchasing volume discounts/rebates totaling approximately $0.1 million. UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses. Operating and selling expenses primarily consists of freight expenses and materials and supplies. Sales commissions include amounts paid to consultants for new sales and promotions. These operating expenses are directly tied to the sales volumes of the UBAM segment. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the UBAM segment. Total operating expenses decreased $6.2 million, or 40.5%, to $9.1 million during the three-month period ended August 31, 2022, when compared to $15.3 million reported in the same quarter a year ago. Operating and selling expenses decreased $1.2 million, or 28.6%, to $3.0 million during the three-month period ended August 31, 2022, when compared to $4.2 million reported in the same quarter a year ago, primarily due to a decrease in outbound freight from fewer sales and shipments totaling approximately $2.0 million. This expense reduction was partially offset by increased freight costs of approximately $0.3 million due to increased freight rates and fuel surcharges, as well as $0.3 million in increased consultant incentive trip expenses and convention expense increases of $0.2 million. The June 2022 annual UBAM convention was the first hybrid “in-person & virtual” convention. While our in-person convention attendance numbers were promising, net profits were down from the prior two years, when our convention costs were minimal given we were 100% virtual. Sales commissions decreased $4.4 million, or 44.4%, to $5.5 million during the three-month period ended August 31, 2022, when compared to $9.9 million reported in the same quarter a year ago, due primarily to the decrease in net revenues. General and administrative expenses decreased $0.4 million, or 36.4%, to $0.7 million during the three months ended August 31, 2022, when compared to $1.1 million during the same period a year ago, due primarily to $0.2 million of reduced bank fees from fewer credit card transactions and a $0.2 million reduction in consultant bonus awards, both resulting from the decrease in sales during the quarter ended August 31, 2022. Operating income of the UBAM segment decreased $3.9 million, or 69.6% to $1.7 million during the three months ended August 31, 2022, when compared to $5.6 million reported in the same quarter a year ago. Operating income of the UBAM division as a percentage of net revenues for the three months ended August 31, 2022 decreased to 10.7%, compared to 18.9% for the three months ended August 31, 2021. This change primarily resulted from increased cost of goods sold, increased freight costs and other increased operating and selling expenses. UBAM Operating Results for the Six Months Ended August 31, 2022 UBAM net revenues decreased $31.2 million, or 46.5%, to $35.9 million during the six-month period ended August 31, 2022, compared to $67.1 million from the same period a year ago. The average number of active consultants in the six-month period ended August 31, 2022 was 29,500, a decrease of 20,700, or 41.2%, from 50,200 selling in same period a year ago. Our consultant numbers declined during this period due to consultants returning to full-time employment, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials than they had in the prior year. In addition, sales during the first six months of fiscal 2023 were negatively impacted by recent record inflation, which resulted in fuel cost and food price increases that has impacted the disposable income of our customers. We expect this impact on sales to continue as inflationary pressures persist. Historically, when we have experienced these difficult inflationary times, our UBAM active consultant numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living. 16 Table of Contents Gross margin decreased $23.5 million, or 48.8%, to $24.7 million during the six-month period ended August 31, 2022, when compared to $48.2 million during the same period a year ago, due primarily to a decrease in net revenues. Gross margin as a percentage of net revenues decreased to 68.7% for the six-month period ended August 31, 2022, when compared to 71.9% for the same period a year ago. During the six months ended August 31, 2022, sales through book fairs, booths and home parties increased compared to the six-month period ended August 31, 2021 when these traditional sales types were challenged by the effects of the pandemic. These sales types have higher sales discounts and pay less sales commissions to our consultants, resulting in similar operating income. Gross margin, as a percentage of net revenues was also impacted negatively by rising ocean freight costs on inbound inventory totaling approximately $0.3 million and reduced purchasing volume discounts/rebates totaling approximately $0.5 million. Total operating expenses decreased $15.1 million, or 43.4%, to $19.7 million during the six-month period ended August 31, 2022, from $34.8 million for the same period a year ago. Operating and selling expenses decreased $3.7 million, or 38.5%, to $5.9 million during the six-month period ended August 31, 2022, when compared to $9.6 million reported in the same period a year ago, primarily due to a decrease in shipping costs associated with the decrease in volume of orders shipped totaling approximately $5.5 million. This expense reduction was partially offset by increased freight costs of approximately $1.2 million due to increased freight rates and fuel surcharges, as well as $0.4 million in increased consultant incentive trip expenses and increases in convention expense of $0.2 million. The June 2022 annual UBAM convention was the first hybrid “in-person & virtual” convention. While our in-person convention attendance numbers were promising, net profits were down from the prior two years, when our convention costs were minimal given we were 100% virtual. Sales commissions decreased $10.6 million, or 46.5%, to $12.2 million during the six-month period ended August 31, 2022, when compared to $22.8 million reported in the same period a year ago, primarily due to the decrease in net revenues. General and administrative expenses decreased $1.0 million, or 40.0%, to $1.5 million, from $2.5 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes of $0.6 million and a $0.3 million reduction in consultant bonus awards, both resulting from the decrease in sales during the six months ended August 31, 2022. Operating income of the UBAM segment decreased $8.4 million, or 62.7%, to $5.0 million during the six months ended August 31, 2022, when compared to $13.4 million reported in the same period last year. Operating income of the UBAM division as a percentage of net revenues for the six months ended August 31, 2022 was 14.0%, compared to 20.0% for the six months ended August 31, 2021. This change primarily resulted from increased cost of goods sold, increased freight costs and other increased operating and selling expenses. Publishing Operating Results for the Three and Six Months Ended August 31, 2022 The following table summarizes the operating results of the Publishing segment: Three Months Ended August 31, Six Months Ended August 31, 2022 2021 2022 2021 Gross sales $ 7,358,000 $ 7,397,700 $ 13,965,100 $ 14,253,600 Less discounts and allowances (3,874,400 ) (3,922,800 ) (7,340,100 ) (7,591,200 ) Transportation revenue 2,500 1,400 5,200 4,900 Net revenues 3,486,100 3,476,300 6,630,200 6,667,300 Cost of goods sold 1,854,200 1,862,300 3,543,800 3,642,300 Gross margin 1,631,900 1,614,000 3,086,400 3,025,000 Total operating expenses 816,000 631,200 1,520,800 1,180,700 Operating income $ 815,900 $ 982,800 $ 1,565,600 $ 1,844,300 Publishing Operating Results for the Three Months Ended August 31, 2022 Our Publishing division’s net revenues remained consistent at $3.5 million during the three-month period ended August 31, 2022, and 2021. Gross margin remained consistent at $1.6 million during the three-month period ended August 31, 2022, and 2021. Gross margin as a percentage of net revenues increased slightly to 46.8% during the three-month period ended August 31, 2022, from 46.4% reported in the same quarter a year ago. Gross margin as a percentage of net revenues fluctuates primarily from the different discount levels offered to customers as well as changes in the mix of products sold between Kane Miller and Usborne. 17 Table of Contents Total operating expenses of the Publishing segment increased $0.2 million, or 33.3%, to $0.8 million, from $0.6 million, during the three-month periods ended August 31, 2022 and 2021, respectively. This change was due to an increase of $0.1 million in payroll expenses from our acquisition of Learning Wrap-Ups in December 2021 and a $0.1 million increase in other various expenses. Operating income of the Publishing segment decreased $0.2 million, or 20.0%, to $0.8 million from $1.0 million for the three-month periods ended August 31, 2022 and 2021, respectively. This change was driven by the increase in our operating expenses. Publishing Operating Results for the Six Months Ended August 31, 2022 Our Publishing division’s net revenues decreased slightly by $0.1 million, or 1.5%, to $6.6 million during the six-month period ended August 31, 2022, from $6.7 million reported in the same period a year ago. Gross margin increased $0.1 million, or 3.3%, to $3.1 million during the six-month period ended August 31, 2022, from $3.0 million reported in the same period a year ago, primarily due to a decrease in discounts resulting from a change in our customer mix. Gross margin as a percentage of net revenues increased to 46.6%, during the six-month period ended August 31, 2022, from 45.4% reported in the same period a year ago. Customers receive varying discounts due to sales volumes and contract terms. Total operating expenses of the Publishing segment increased $0.3 million, or 25.0%, to $1.5 million during the six-month period ended August 31, 2022, from $1.2 million reported in the same period a year ago. This change was due to an increase of $0.2 million in payroll expenses from our acquisition of Learning Wrap-Ups in December 2021 and a $0.1 million increase in other various expenses. Operating income of the Publishing segment decreased $0.2 million, or 11.1%, to $1.6 million during the six-month period ended August 31, 2022 when compared to $1.8 million reported in the same period a year ago, due primarily to the increase in operating expenses. Liquidity and Capital Resources EDC has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate. We also use available cash to pay down outstanding bank loan balances, to pay for capital expenditures, to pay dividends, and to acquire treasury stock. We have utilized a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures, when necessary. During the first six months of fiscal year 2023, we experienced cash outflows from operations of $3,628,900. These cash outflows resulted from: ●net loss of $586,100 Adjusted for: ●depreciation expense of $1,207,500 ●share-based compensation expense, net of $381,300 Offset by: ●deferred income taxes of $239,000 ●provision for doubtful accounts of $51,600 Positively impacted by: ●decrease in inventories, net of $6,028,500 ●decrease in prepaid expenses and other assets of $214,200 ●increase in deferred revenues of $103,900 Negatively impacted by: ●decrease in accounts payable of $7,970,300 ●decrease in accrued salaries and commissions, and other liabilities of $2,263,200 ●decrease in income taxes payable of $241,900 ●increase in accounts receivable of $212,200 18 Table of Contents Cash used in investing activities was $254,000 for capital expenditures, consisting of $221,000 of software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders and $33,000 of other assets associated with the Company’s planned rebranding of its UBAM sales division. Cash provided by financing activities was $4,354,200, which was comprised of net proceeds from term debt of $36,000,000 and cash received in treasury stock transactions of $63,400, offset by payments on term debt of $25,175,900, net payments on the line of credit of $5,662,600 and payments of $870,700 for dividends. During fiscal year 2023, we continue to expect the cash generated from our operations and cash available through our line of credit with our Lender will provide us the liquidity we need to support ongoing operations. We expect to generate positive operational cash flow as we normalize inventory levels. Cash generated from operations will be used to purchase inventory in order to expand our product offerings and to liquidate existing debt. Following a return to profitability, any excess cash is expected to be distributed to our shareholders. On August 9, 2022, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Amended and Restated Loan Agreement dated February 15, 2021 (as amended), between the Company and MidFirst Bank. The Company’s payment to MidFirst Bank, including interest, was approximately $45.0 million, which satisfied all of the Company’s debt obligations with MidFirst Bank. The Company did not incur any early termination penalties as a result of the repayment of indebtedness or termination of the Amended and Restated Loan Agreement, which provided Term Loan #1, Advancing Term Loan #1, Advancing Term Loan #2 and the Revolving Loan. On August 9, 2022, the Company executed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”). The Loan Agreement establishes a fixed rate term loan in the principal amount of $15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $21,000,000 (the “Floating Rate Term Loan”; together with the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving promissory note in the principal amount up to $15,000,000 (the “Revolving Loan”). Features of the Loan Agreement include: (i) Term Loans on 20-year amortization with 5-year maturity date of August 9, 2027 (ii) Revolving Loan maturity date of August 9, 2023 (iii) Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26% (iv) Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was 4.03% at August 31, 2022) (v) Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 4.78% at August 31, 2022) (vi) Revolving Loan allows for Letters of Credit up to $7,500,000 The Loan Agreement also contains provisions that require the Company to maintain a minimum fixed charge ratio and limits any additional debt with other lenders. Available credit under the current $15,000,000 revolving line of credit with the Company’s new Lender was approximately $2,939,100 at August 31, 2022. The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows: Years ending February 28 (29), 2023 $ 900,000 2024 1,800,000 2025 1,800,000 2026 1,800,000 2027 1,800,000 Thereafter 27,900,000 Total $ 36,000,000 19 Table of Contents Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States( “ GAAP ” ). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report and in our audited financial statements as of and for the year ended February 28, 2022 included in our Form 10-K. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions. Revenue Recognition Sales associated with product orders are recognized and recorded when products are shipped. Products are shipped FOB shipping point. UBAM’s sales are generally paid at the time the product is ordered. Sales which have been paid for but not shipped are classified as deferred revenue on the balance sheet. Sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted. Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped. Estimated allowances for sales returns are recorded as sales are recognized. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily received from the retail stores of our Publishing division. Those damages occur in the stores, not in shipping to the stores, and we typically do not offer credit for damaged returns. It is industry practice to accept non-damaged returns from retail customers. Management has estimated and included a reserve for sales returns of $0.2 million as of August 31, 2022 and February 28, 2022. Allowance for Doubtful Accounts We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns, when applicable (collectively “allowance for doubtful accounts”). An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends. Management has estimated and included an allowance for doubtful accounts of $0.2 million and $0.3 million at August 31, 2022 and February 28, 2022, respectively. Inventory Our inventory contains over 2,000 titles, each with different sell through rates depending upon the nature and popularity of the title. We maintain very few titles that are topical in nature. As such, the majority of the titles we sell remain current in content for several years. Most of our products are printed in China, Europe, Singapore, India, Malaysia and Dubai resulting in a six to eight-month lead-time to have a title printed and delivered to us. Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to minimum order requirements of our suppliers. Noncurrent inventory was estimated by management using an anticipated turnover ratio by title. Inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory. These inventory quantities have additional exposure for storage damages and related issues, and therefore have higher obsolescence reserves. Noncurrent inventory balances prior to valuation allowances were $3.8 million and $2.4 million at August 31, 2022 and February 28, 2022, respectively. Noncurrent inventory valuation allowances were $0.5 million and $0.4 million at August 31, 2022 and February 28, 2022, respectively. Our principal supplier, based in England, generally requires a minimum reorder of 6,500 or more of a title in order to get a solo print run. Smaller orders would require a shared print run with the supplier’s other customers, which can result in lengthy delays to receive the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series. We then place the initial order or reorder based upon this analysis. These factors and historical analysis have led our management to determine that 2½ years represents a reasonable estimate of the normal operating cycle for our products. 20 Table of Contents Consultants that meet certain eligibility requirements may request and receive inventory on consignment. We believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events; in summary, having consignment inventory leads to additional sales opportunities. Approximately 7.9% of our active consultants have maintained consignment inventory at the end of the second quarter of fiscal year 2023. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with consultants was $1.3 million and $1.4 million at August 31, 2022 and February 28, 2022, respectively. Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company. Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory. Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.9 million at August 31, 2022 and February 28, 2022. Share-Based Compensation We account for share-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant. For awards subject to service conditions, compensation expense is recognized over the vesting period on a straight-line basis. Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche. Forfeitures are recognized when they occur. Any cash dividends declared after the restricted stock award is issued, but before the vesting period is completed, will be reinvested in Company shares at the opening trading price on the dividend payment date. Shares purchased with cash dividends will also retain the same restrictions until the completion of the original vesting period associated with the awarded shares. The restricted share awards under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) and 2022 Long-Term Incentive Plan (“2022 LTI Plan”) contain both service and performance conditions. The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment. During the first six months of fiscal year 2023, the Company recognized $0.5 million of compensation expense associated with the shares granted, which was offset by a $0.1 million reduction of compensation expense during the quarter associated with shares that were forfeited. These forfeited shares are available for re-issue under the terms of the 2019 LTI Plan. 21 Table of Contents Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.