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, 2023. 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) through 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, 2023. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report. Item 9B. OTHER INFORMATION None Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None 17 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 June 29, 2023. (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 June 29, 2023. (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 June 29, 2023. 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 June 29, 2023. 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 June 29, 2023. 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 June 29, 2023. 18 Table of Contents PART IV Item 15. EXHIBITS, 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 ) 23 Balance Sheets as of February 28, 2023 and February 28, 2022 25 Statements of Operations for the Years ended February 28, 2023 and February 28, 2022 26 Statements of Shareholders' Equity for the Years ended February 28, 2023 and February 28, 2022 27 Statements of Cash Flows for the Years ended February 28, 2023 and February 28, 2022 28 Notes to Financial Statements 29-41 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). 19 Table of Contents *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). 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 is incorporated herein by reference to Exhibit 10.14 to form 10-K dated February 28, 2022 (File No. 0-04957). 10.15 Usborne Distribution Agreement dated May 16, 2022 by and between the Company and Usborne Publishing Limited, London, England is incorporated herein by reference to Exhibit 10.2 to form 10-Q dated May 31, 2022 (File No. 0-04957). 10.16 Credit Agreement dated August 9, 2022 by and between the Company and BOKF, NA, Tulsa, OK is incorporated herein by reference to Exhibit 10.01 to form 8-K dated August 11, 2022 (File No. 0-04957). 10.17 First Amendment to Credit Agreement, dated December 22, 2022 by and between the Company and BOKF, NA, Tulsa, OK. Is incorporated herein by reference to Exhibit 10.4 to Form 10-Q dated November 30, 2022 (File No. 0-04957). **10.18 Second Amendment to Credit Agreement, dated May 10, 2023 by and between the Company and BOKF, NA, Tulsa, OK. 20 Table of Contents **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. 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 21 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 17, 2023 By /s/ Craig M. White Craig M. White President and Chief Executive Officer (Principal Executive Officer) Date: May 17, 2023 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 17, 2023 /s/ Craig M. White Craig M. White, Director President and Chief Executive Officer (Principal Executive Officer) May 17, 2023 /s/ Randall W. White Randall W. White, Director Chairman of the Board May 17, 2023 /s/ John A. Clerico John A. Clerico, Director May 17, 2023 /s/ Dr. Kara Gae Neal Dr. Kara Gae Neal, Director May 17, 2023 /s/ Joshua J. Peters Joshua J. Peters, Director May 17, 2023 /s/ Bradley V. Stoots Bradley V. Stoots, Director May 17, 2023 /s/ Dan E. O’Keefe Dan E. O’Keefe Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) 22 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, 2023 and 2022, the related statements of operations, 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, 2023 and 2022, 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. 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 Public Company Accounting Oversight Board (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 auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Liquidity and Management's Plans While the Company received a waiver for the fixed charge ratio default that occurred on February 28, 2023, the borrowing and purchasing capacity was restricted and management's forecast indicated that the Company will not be in compliance in future periods as described in Note 9. These conditions, among others in the aggregate, raise substantial doubt over the Company's ability to meet its obligations over the next twelve months. Management has evaluated these conditions and concluded that its plans have alleviated the substantial doubt about the Company's ability to continue for at least the next twelve months. To assess their ability to meet obligations as they come due and assess future compliance with debt covenants for at least twelve months from the issuance date of the financial statements, the Company has forecasted future financial results which requires significant judgment and estimation. Additionally, there is significant judgment and increased level of audit effort involved in determining that it is probable that management's plans will be effectively implemented and alleviate substantial doubt about the Company's ability to continue beyond the next twelve months. 23 Table of Contents Our audit procedures we performed to address this critical audit matter included, among others: ● Reading and evaluating management's plans for dealing with the adverse effects of the conditions and events. ● Obtaining the Company's amended debt agreement and assessing whether the terms were appropriately considered on the Company's debt covenant compliance. ● Evaluating the reasonableness of management's significant assumptions and judgments used in the preparation of the forecast. ● Comparing the forecast to budgets provided to the board of directors, to historical results, to recent trends used in other audit areas and to subsequent actual results. ● Evaluating the adequacy of the disclosure included in the notes to the financial statements. /s/ HOGANTAYLOR LLP We have served as the Company's auditor since 2005. Tulsa, Oklahoma May 17, 2023 24 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION BALANCE SHEETS AS OF FEBRUARY 28, 2023 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 689,100 $ 361,200 Accounts receivable, less allowance for doubtful accounts of $ 211,700 (2023) and $ 336,700 (2022) 2,906,700 3,638,800 Inventories - net 59,086,500 71,553,600 Prepaid expenses and other assets 869,300 960,500 Total current assets 63,551,600 76,514,100 INVENTORIES - net 4,719,600 2,055,300 PROPERTY, PLANT AND EQUIPMENT - net 29,656,400 30,484,000 DEFERRED INCOME TAX ASSET 796,800 118,700 OTHER ASSETS 1,212,400 761,600 TOTAL ASSETS $ 99,936,800 $ 109,933,700 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,863,900 $ 12,411,800 Line of credit 10,634,500 17,723,500 Deferred revenues 602,700 681,600 Current maturities of long-term debt 34,894,900 2,542,200 Accrued salaries and commissions 828,200 1,890,200 Dividends payable - 870,700 Income taxes payable - 241,900 Other current liabilities 3,294,000 3,897,900 Total current liabilities 54,118,200 40,259,800 LONG-TERM DEBT - net - 22,409,500 OTHER LONG-TERM LIABILITIES 586,800 498,900 Total liabilities 54,705,000 63,168,200 COMMITMENTS AND CONTINGENCIES – See Note 10 SHAREHOLDERS' EQUITY: Common stock, $ 0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 shares; Outstanding 8,713,289 (2023) and 8,707,247 (2022) shares 2,540,400 2,540,400 Capital in excess of par value 13,193,400 12,246,600 Retained earnings 42,020,200 44,525,100 57,754,000 59,312,100 Less treasury stock, at cost ( 12,522,200 ) ( 12,546,600 ) Total shareholders' equity 45,231,800 46,765,500 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 99,936,800 $ 109,933,700 See notes to financial statements. 25 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED FEBRUARY 28, 2023 2022 GROSS SALES $ 122,691,900 $ 187,466,800 Less discounts and allowances ( 41,895,500 ) ( 59,109,300 ) Transportation revenue 7,032,600 13,871,300 NET REVENUES 87,829,000 142,228,800 COST OF GOODS SOLD 31,759,200 44,297,500 Gross margin 56,069,800 97,931,300 OPERATING EXPENSES: Operating and selling 15,780,600 23,010,400 Sales commissions 25,676,100 44,377,500 General and administrative 17,195,100 20,302,200 Total operating expenses 58,651,800 87,690,100 INTEREST EXPENSE 2,172,300 916,400 OTHER INCOME ( 1,327,400 ) ( 1,911,100 ) EARNINGS (LOSS) BEFORE INCOME TAXES ( 3,426,900 ) 11,235,900 INCOME TAX EXPENSE (BENEFIT) ( 922,000 ) 2,929,100 NET EARNINGS (LOSS) $ ( 2,504,900 ) $ 8,306,800 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Basic $ ( 0.31 ) $ 1.03 Diluted $ ( 0.31 ) $ 0.98 WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: Basic 8,157,704 8,039,843 Diluted 8,157,704 8,452,340 Dividends per share $ - $ 0.40 See notes to financial statements. 26 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF SHAREHOLDERS ’ EQUITY AS OF FEBRUARY 28, 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 - - 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 - net - - 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 Sales of treasury stock - - 39,000 - ( 7,771 ) 24,400 63,400 Forfeiture of restricted shares - - - - 29,729 - - Issuance of restricted share awards for vesting - - - - ( 28,000 ) - - Share-based compensation expense - net - - 907,800 - - - 907,800 Net loss - - - ( 2,504,900 ) - - ( 2,504,900 ) BALANCE – February 28, 2023 12,702,080 $ 2,540,400 $ 13,193,400 $ 42,020,200 3,988,791 $ ( 12,522,200 ) $ 45,231,800 See notes to financial statements. 27 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 28, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ ( 2,504,900 ) $ 8,306,800 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,478,700 2,126,700 Deferred income taxes ( 678,100 ) ( 208,600 ) Provision for doubtful accounts - 115,800 Provision for inventory valuation allowance 715,900 235,700 Share-based compensation expense - net 907,800 1,046,500 Changes in assets and liabilities: Accounts receivable 732,100 ( 407,900 ) Inventories - net 9,086,900 ( 21,396,900 ) Prepaid expenses and other assets ( 233,200 ) ( 209,200 ) Accounts payable ( 8,547,900 ) ( 6,201,300 ) Accrued salaries and commissions, and other liabilities ( 1,578,000 ) ( 2,868,300 ) Deferred revenues ( 78,900 ) ( 1,794,300 ) Income taxes payable/receivable ( 241,900 ) 111,700 Total adjustments 2,563,400 ( 29,450,100 ) Net cash provided by (used in) operating activities 58,500 ( 21,143,300 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 1,578,800 ) ( 3,717,200 ) Purchases of other assets ( 177,000 ) ( 223,700 ) Net cash used in investing activities ( 1,755,800 ) ( 3,940,900 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on term debt ( 25,900,100 ) ( 1,277,700 ) Payments on debt issuance costs ( 178,400 ) - Proceeds from term debt 36,000,000 15,244,700 Sales of treasury stock 63,400 617,100 Net borrowings (payments) under line of credit ( 7,089,000 ) 12,478,200 Dividends paid ( 870,700 ) ( 3,429,100 ) Net cash provided by financing activities 2,025,200 23,633,200 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 327,900 ( 1,451,000 ) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 361,200 1,812,200 CASH AND CASH EQUIVALENTS - END OF YEAR $ 689,100 $ 361,200 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: Cash paid for interest $ 1,986,000 $ 890,000 Cash paid for income taxes (net of refunds) $ ( 3,900 ) $ 2,970,000 See notes to financial statements. 28 Table of Contents EDUCATIONAL DEVELOPMENT CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 28, 2023 AND FEBRUARY 28, 2022 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business —Educational Development Corporation (“we,” “our,” “us,” or “the Company”) distributes books and educational products and publications through our PaperPie 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 owner and exclusive publisher of Kane Miller children’s books; Learning Wrap-Ups, maker of educational manipulatives; and SmartLab Toys, maker of STEAM-based toys and games. We are also the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books. 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. Liquidity - In accordance with ASU No. 2014-15, Disclosure of Uncertainties about an Entity ’ s Ability to Continue as a Going Concern (Subtopic 205-40) , the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. Determining the extent to which conditions or events raise substantial doubt about our ability to continue as a going concern and the extent to which mitigating plans sufficiently alleviate any such substantial doubt requires significant judgment and estimation by us. Our significant estimates related to this analysis may include identifying business factors such as changes in our brand partners, growth and profitability used in the forecasted financial results and liquidity. Further, we make assumptions about the probability that management's plans will be effectively implemented and alleviate substantial doubt and our ability to continue as a going concern. We believe that the estimated values used in our going concern analysis are based on reasonable assumptions. However, such assumptions are inherently uncertain and actual results could differ materially from those estimates. See Note 9 for more information about our going concern assessment. Sales Concentration —Significant portions of our sales are generated in our Direct Sales division, PaperPie. Of these sales, a substantial portion are facilitated through the use of social media collaboration platforms that allow our Brand Partners (formerly, consultants) to interact in real-time, or near real-time, with customers. Brand Partners use these platforms to invite potential customers to “online parties,” provide product recommendations, answer questions and provide links to other supporting online materials. When a customer is ready to purchase products from the online party, they are redirected from the social media platform to the Brand Partner’s company hosted 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. 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. 29 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 products 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. We estimate noncurrent inventory using an anticipated turnover ratio by title, based primarily on historical trends. These excess quantities of 2½ years of anticipated sales are 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 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”). Brand Partners 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 Brand Partners was $ 1,531,600 and $ 1,399,200 at February 28, 2023 and February 28, 2022, respectively. The Company has reserved for consignment inventory not expected to be sold or returned of $ 488,500 and $ 505,100 as of February 28, 2023 and February 28, 2022, respectively. Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and Brand Partner 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 Molds and tooling 3 – 5 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, including capitalized software. The development of customer and Brand Partner software applications are critical to our ongoing business operations and included in capitalized software. External and internal costs associated with the development of new software applications incurred during the application development stage are capitalized. Training and maintenance costs are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. 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 2023 or 2022. 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. In accordance with ASC 842, we have made an accounting policy election to not apply the standard to lessee arrangements with a term of one year or less and no purchase option that is reasonably certain of exercise. We will continue to account for these short-term arrangements by recognizing payments and expenses as incurred, without recording a lease liability and right-of-use asset. We have also made an accounting policy election for both our lessee and lessor arrangements to combine lease and non-lease components. This election is applied to all of our lease arrangements as our non-lease components are not material and do not result in significant timing differences in the recognition of rental expenses or income. Income Taxes —We account for income taxes under ASC 740 - Income Taxes, which requires an asset and liability approach. 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. 30 Table of Contents 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 products are sold to end consumers through our PaperPie division and retail outlets through our Publishing division. Refer to Note 14 – Business Segments for revenue by segment. Revenues of both divisions are recognized when the product is shipped, FOB-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. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for as a pass-through liability, and therefore are excluded from net sales. The majority of PaperPie’s sales contracts have a single performance obligation and are short-term in nature. PaperPie’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 PaperPie 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 operations. 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, 2023 and February 28, 2022, 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, 2023 and February 28, 2022. 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 operations, were $ 428,600 and $ 765,100 for the years ended February 28, 2023 and February 28, 2022, respectively. Shipping and Handling Costs —We classify shipping and handling costs as operating and selling expenses in the statements of operations. Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies. These costs were $ 13,588,400 and $ 22,005,600 for the years ended February 28, 2023 and February 28, 2022, respectively. 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. Earnings per Share —Basic earnings (loss) per share (“EPS”) is computed by dividing net earnings (loss) 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. 31 Table of Contents 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, 2023 2022 Earnings (loss) per share: Net earnings (loss) applicable to common shareholders $ ( 2,504,900 ) $ 8,306,800 Shares: Weighted average shares outstanding-basic 8,157,704 8,039,843 Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards - 412,497 Weighted average shares outstanding-diluted 8,157,704 8,452,340 Diluted earnings (loss) per share: Basic $ ( 0.31 ) $ 1.03 Diluted $ ( 0.31 ) $ 0.98 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. Year Ended February 28, 2023 2022 Weighted average shares: Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards 222,395 - 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 no new accounting standard updates (“ASU”) had or may have a material impact on the Company. 2. INVENTORIES Inventories consist of the following: February 28, 2023 2022 Current: Product inventory $ 59,577,400 $ 72,064,400 Inventory valuation allowance ( 490,900 ) ( 510,800 ) Inventories net - current $ 59,086,500 $ 71,553,600 Noncurrent: Product inventory $ 5,135,200 $ 2,437,600 Inventory valuation allowance ( 415,600 ) ( 382,300 ) Inventories net - noncurrent $ 4,719,600 $ 2,055,300 Inventory in transit totaled $ 850,100 and $ 2,732,400 at February 28, 2023 and February 28, 2022, respectively. Product 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. 32 Table of Contents 3. BUSINESS CONCENTRATION Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing Limited (“Usborne”). During fiscal 2023, we entered into a new distribution agreement (“Agreement”) with Usborne. The Agreement includes annual minimum purchase volumes along with specific payment terms and letter of credit requirements, which if not met may result in Usborne having the right to terminate the Agreement on less than 30 days’ written notice. Should termination of the Agreement occur, the Company will be allowed to sell its remaining Usborne inventory for an agreed upon period, but not less than twelve months following the termination date. As of February 28, 2023, the Company did not meet the minimum purchase requirements and did not supply the letter of credit required under the Agreement, which could allow Usborne to exercise their option to terminate the Agreement. Usborne has not notified the Company of termination of the Agreement. Usborne has refused to pay the $ 1.0 million volume rebate owed to the Company from purchases made during fiscal 2022. The Company is disputing the cancellation of the rebate but has not recognized any rebate in fiscal 2023 due to its uncertainty. Additionally, under the terms in the Agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne was to use a different distributor to supply retail accounts with its products. As a courtesy upon Usborne’s request, the November 15, 2022 transition was extended until their new supplier can start distribution in 2023. Gross sales attributed to Usborne’s products sold within the Publishing division accounted for 83.1 %, or $ 23,220,600 , during the fiscal year ended February 28, 2023, and 86.5 %, or $ 24,341,100 , during the fiscal year ended February 28, 2022. Purchases received from Usborne were approximately $ 11,448,500 and $ 42,596,300 for the years ended February 28, 2023 and February 28, 2022, respectively. Total inventory purchases for those same periods were approximately $ 20,377,600 and $ 64,670,700 , respectively. Included in our balance sheets, outstanding accounts payable due to Usborne as of February 28, 2023 and February 28, 2022 were $ 117,600 and $ 6,361,500 , respectively. Total Usborne inventory owned by the Company and included in our balance sheets were $ 35,363,500 and $ 44,170,000 as of February 28, 2023 and February 28, 2022, respectively. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: February 28, 2023 2022 Land $ 4,107,200 $ 4,107,200 Building 20,424,900 20,424,900 Building improvements 2,274,200 2,274,100 Machinery and equipment 14,234,900 14,223,500 Furniture and fixtures 121,700 110,800 Capitalized software 1,236,300 1,151,900 Molds and tooling 704,000 - Capitalized software - in progress 1,265,000 496,900 Total property, plant and equipment 44,368,200 42,789,300 Less accumulated depreciation ( 14,711,800 ) ( 12,305,300 ) Property, plant and equipment-net $ 29,656,400 $ 30,484,000 During fiscal year 2022, the Company added two new pick-pack-ship lines to increase the Company’s daily shipping capacity and acquired Learning Wrap-Ups. In fiscal year 2023, the Company purchased the SmartLab Toys product line and opened facilities in Seattle, Washington. The Company has continued its development of its new customer portal and e-commerce platform, both of which are expected to be released in fiscal year 2024. 5. OTHER CURRENT LIABILITIES Other current liabilities consist of the following: February 28, 2023 2022 Accrued royalties $ 504,400 $ 873,800 Accrued PaperPie incentives 1,189,900 1,610,800 Accrued freight 120,300 191,400 Sales tax payable 394,800 499,900 Allowance for expected inventory returns 201,500 201,500 Other 883,100 520,500 Total other current liabilities $ 3,294,000 $ 3,897,900 33 Table of Contents 6. 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, 2023 2022 Deferred tax assets: Allowance for doubtful accounts $ 57,200 $ 90,900 Inventory overhead capitalization 170,100 203,500 Inventory valuation allowance 132,500 137,900 Inventory valuation allowance – noncurrent 112,200 103,200 Allowance for sales returns 27,200 27,200 Research and development capitalization 291,600 - Net operating loss carryforward (1) 830,900 - Accruals 1,069,100 953,600 Total deferred tax assets 2,690,800 1,516,300 Deferred tax liabilities: Property, plant and equipment ( 1,894,000 ) ( 1,397,600 ) Total deferred tax liabilities ( 1,894,000 ) ( 1,397,600 ) Net deferred income tax assets $ 796,800 $ 118,700 (1) The Company’s net operating loss (“NOL”) carryforward was generated from losses incurred in fiscal 2023. The Company’s NOL can be carried forward indefinitely, but are limited to a 80% maximum offset of taxable income. Authoritative guidance requires a valuation allowance to be established when determining whether deferred tax assets are more likely-than-not to be realized. Based on the Company’s evaluation, we determined the net deferred tax assets do meet the requirements to be realized, and as such, no valuation allowance has been established. The components of income tax expense (benefit) are as follows: February 28, 2023 2022 Current: Federal (1) $ - $ 2,663,900 State (1) - 623,700 - 3,287,600 Deferred: Federal ( 719,700 ) ( 304,400 ) State ( 202,300 ) ( 54,100 ) ( 922,000 ) ( 358,500 ) Total income tax expense (benefit) $ ( 922,000 ) $ 2,929,100 (1) The Company incurred losses in fiscal 2023, resulting in a net operating loss carryforward and reclassification from current to deferred. 34 Table of Contents The following reconciles our expected income tax rate to the U.S. federal statutory income tax rate: February 28, 2023 2022 U.S. federal statutory income tax rate 21.0 % 21.0 % U.S. state and local income taxes–net of federal benefit 5.7 % 5.5 % Other 0.2 % ( 0.4 )% Total income tax expense 26.9 % 26.1 % 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 operations. 7. 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 $ 160,800 and $ 161,300 during the years ended February 28, 2023 and February 28, 2022, respectively. 8. LEASES We have both lessee and lessor arrangements. Our lessee arrangements include four rental agreements where we have the exclusive use of dedicated office space in San Diego, California, warehouse and office space in Layton, Utah, warehouse and office space in Seattle, Washington, and warehouse space locally in Tulsa, OK, all of which qualify as an operating lease. Our lessor arrangements includes one rental agreement for warehouse and office space in Tulsa, Oklahoma, and qualifies as an operating lease under ASC 842. 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 and 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, 2023 2022 Operating lease assets: Right-of-use assets $ 823,600 $ 495,800 Operating lease liabilities: Current lease liabilities $ 347,800 $ 111,000 Long-term lease liabilities $ 475,800 $ 384,800 Weighted-average remaining lease term (months) 36.3 57.0 Weighted-average discount rate 4.01 % 3.06 % 35 Table of Contents 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 operations. Variable and short-term rental payments are recognized as costs and expenses as they are incurred. February 28, 2023 2022 Fixed lease costs $ 154,400 $ 35,300 Future minimum rental payments under operating leases with initial terms greater than one year as of February 28, 2023, are as follows: Years ending February 28 (29), 2024 402,700 2025 270,500 2026 122,200 2027 72,800 Total future minimum rental payments 868,200 Less: imputed interest ( 44,600 ) Total operating lease liabilities $ 823,600 The following table provides further information about our operating leases reported in our financial statements: February 28, 2023 2022 Operating cash flows – operating leases $ 154,400 $ 35,300 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 $ 121,500 per month, through the lease anniversary date of December 2023, 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 operations. 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. Future minimum payments receivable under operating leases with terms greater than one year are estimated as follows: Years ending February 28 (29), 2024 1,568,900 2025 1,547,100 2026 1,524,300 2027 1,554,800 2028 1,585,900 Thereafter 4,950,300 Total $ 12,731,300 The cost of the leased space was approximately $ 10,637,900 and $ 10,834,300 as of February 28, 2023 and February 28, 2022, respectively. The accumulated depreciation associated with the leased assets was $ 2,853,200 and $ 2,603,300 as of February 28, 2023 and February 28, 2022, respectively. Both the leased assets and accumulated depreciation are included in property, plant and equipment-net on the balance sheets. 36 Table of Contents 9. DEBT Debt consists of the following: February 28, 2023 2022 Line of credit $ 10,634,500 $ 17,723,500 Floating rate term loan(s) (1) $ 20,475,000 $ 14,651,000 Fixed rate term loan 14,625,000 10,349,100 Total term debt 35,100,000 25,000,100 Less current portion ( 34,894,900 ) ( 2,542,200 ) Less debt issue cost ( 205,100 ) ( 48,400 ) Long-term debt, net $ - $ 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 6.28 % at February 28, 2023) (v) Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50 % (effective rate was 7.03 % at February 28, 2023) (vi) Revolving Loan allows for Letters of Credit up to $ 7,500,000 upon bank approval (none were outstanding at February 28, 2023) 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. The Company was in violation of the minimum fixed charge ratio covenant as of February 28, 2023, for which the Company obtained a written waiver of compliance from the Lender. Available credit under the current $ 15,000,000 revolving line of credit with the Company’s Lender was approximately $ 4,365,500 at February 28, 2023. On December 22, 2022, the Company executed the First Amendment to our Loan Agreement with the Lender. This amendment clarified the definition of the Fixed Charge Coverage Ratio to exclude dividends paid prior to November 30, 2022, and placed restrictions on acquisitions and cash dividends. 37 Table of Contents On May 10, 2023, the Company executed the Second Amendment to our Loan Agreement with the Lender. This amendment waived the fixed charge ratio default which occurred on February 28, 2023. The Second Amendment also added a cumulative maximum level of fiscal year to date inventory purchases through the expiration of the Revolving Loan Agreement, increased the borrowing rate on the Company’s Revolving Loan to Term SOFR Rate plus 3.5 %, requires certain swap agreements, reduced the revolving commitment from $15,000,000 to $ 14,000,000 , effective May 10, 2023, and further reduced the revolving commitment to $ 13,500,000 , effective July 15, 2023, among other items. The Company does not expect to meet the fixed charge ratio, outlined in the amended Loan Agreement, during fiscal year 2024. Under the terms of the amended Loan Agreement, not meeting this ratio could represent an Event of Default. Should an Event of Default occur, the Lender will have the right to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan. As an Event of Default is expected, and no waiver of the Event of Default is guaranteed to be received by the Lender, the long-term maturities of the Fixed Rate Term Loan and Float Rate Term Loan have been reclassified as current liabilities. While the Company received a waiver for the fixed charge ratio default that occurred on February 28, 2023, the borrowing and purchasing capacity was restricted and management's forecast indicated that the Company will be out of compliance in future periods. An Event of Default is expected associated with the amended Loan Agreement, there is no guaranty that the Event of Default will be waived by the Lender, and the bank may choose to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan. These conditions, among others in the aggregate, raise substantial doubt over the Company's ability to continue as a going concern. Management has plans to enter into a new financing agreement by August 9, 2023, with the Lender, that will allow it to operate without default and reclassify the non-current portions of the Fixed Rate Term Loan and Floating Rate Term Loan as long-term liabilities. In addition, management’s plans include reducing inventory and related borrowing costs, building the active PaperPie Brand Partners to pre-pandemic levels, as the distraction and costs associated with the rebrand that occurred in fiscal year 2023 are expected to have a lesser impact in the future, reducing expenses due to lower revenue volumes and receipt of the contingent Employee Retention Credit. Although there is no guarantee, we believe management's plans are probable of being achieved to alleviate the substantial doubt about our ability to continue as a going concern and we will have sufficient liquidity to meet our obligations as they become due over the next twelve months. The following table reflects aggregate current maturities of term debt, excluding the Revolving Loan, during the next fiscal years as follows: Year ending February 29, 2024 $ 35,100,000 Total $ 35,100,000 10. COMMITMENTS AND CONTINGENCIES As of February 28, 2023, the Company had outstanding purchase commitments for inventory totaling $ 4,868,600 , which will be received and payments due during fiscal year 2024. Of these inventory commitments, $ 2,309,000 were with Usborne, $ 2,103,300 with various Kane Miller publishers and the remaining $ 456,300 with other suppliers. As a response to the COVID-19 outbreak, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which contained a number of programs to assist workers, families and businesses. Part of the CARES Act provides an Employee Retention Credit (“ERC”) which is a refundable tax credit against certain employment taxes equal to 50% of qualified wages paid, up to $10,000 per employee annually, from March 12, 2020 through January 1, 2021. Additional relief provisions were passed by the United States government, which extended and expanded the qualified wage caps on these credits to 70% of qualified wages paid, up to $10,000 per employee per quarter, through September 30, 2021. At the time of the original filing of Form 941, we were unaware that we qualified for the ERC. Subsequent to the original filing, we became aware of our qualification based on a more than nominal impact to the business due to a government order/mandate. We recognized our qualification during the fourth quarter of fiscal 2023 based on a study provided by a third party amounting to $ 1,369,900 in the first quarter of 2021, $ 1,065,900 in the second quarter of 2021, and $ 1,196,100 in the third quarter of 2021. On April 11, 2023 the Company filed 2021 Q1, Q2 and Q3 941-X forms to claim a refund for the ERC. Due to the subjectivity of the credit, the Company elected to account for the ERC as a gain under ASC 450-30, Gain Contingencies. The Company will not recognize the credit until all uncertainties are resolved and the income is “realized” or “realizable.” 38 Table of Contents 11. 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 fiscal year 2021, 5,000 restricted shares were forfeited and later regranted to other participants. During fiscal year 2023, 10,000 restricted shares were forfeited, along with 969 additional shares purchased with dividends received from the original issue date. The 10,000 forfeited shares were re-granted to participants during the fiscal 2023 third quarter with an average grant-date fair value of $ 2.08 . The 969 shares purchased with dividends were not reissued. The 303,000 outstanding shares were vested on February 28, 2023. During fiscal year 2021, the Company granted 297,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $ 6.30 per share. During fiscal year 2023, 18,000 restricted shares were forfeited, along with 760 additional shares purchased with dividends received from the original issue date. The 18,000 forfeited shares were re-granted to participants during fiscal 2023 with an average grant-date fair value of $ 2.08 . The 760 shares purchased with dividends were not reissued. The remaining compensation expense of these awards, totaling approximately $769,500 as of February 28, 2023, will be recognized ratably over the remaining vesting period of 24 months. As of February 28, 2023, no shares were granted under the 2022 LTI Plan. A summary of compensation expense recognized in connection with restricted share awards as follows: Year Ended February 28, 2023 2022 Share-based compensation expense $ 907,800 $ 1,046,500 The following table summarizes stock award activity during 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 28,000 2.08 Vested ( 303,000 ) 9.68 Forfeited ( 28,000 ) 7.60 Outstanding at February 28, 2023 297,000 $ 6.04 39 Table of Contents As of February 28, 2023, total unrecognized share-based compensation expense related to unvested restricted shares was $ 769,500 , which we expect to recognize over a weighted-average period of 24.0 months. 12. 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 years 2023 and 2022, there were no repurchases under the 2019 stock repurchase plan. The maximum number of shares that may be repurchased in the future is 514,594 . 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended February 28, 2023 and February 28, 2022: Net Revenues Gross Margin Net Earnings (Loss) Basic Earnings (Loss) Per Share Diluted Earnings (Loss) Per Share 2023 First quarter $ 23,160,900 $ 15,309,400 $ 215,800 $ 0.03 $ 0.03 Second quarter 19,418,300 12,478,600 ( 801,900 ) ( 0.10 ) ( 0.10 ) Third quarter 30,269,400 19,228,000 900 0.00 0.00 Fourth quarter 14,980,400 9,053,800 ( 1,919,700 ) ( 0.24 ) ( 0.24 ) Total year $ 87,829,000 $ 56,069,800 $ ( 2,504,900 ) $ ( 0.31 ) $ ( 0.31 ) 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 14. BUSINESS SEGMENTS We have two reportable segments: PaperPie 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 PaperPie segment markets its products through a network of independent brand partners 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. See Note 3 for the impact of our updated distribution agreement on the Publishing segment. 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. 40 Table of Contents Information by industry segment for the years ended February 28, 2023 and February 28, 2022 is set forth below: NET REVENUES 2023 2022 Publishing $ 13,282,300 $ 13,250,300 PaperPie 74,546,700 128,978,500 Total $ 87,829,000 $ 142,228,800 EARNINGS (LOSS) BEFORE INCOME TAXES 2023 2022 Publishing $ 3,186,800 $ 3,639,800 PaperPie 9,170,600 24,437,500 Other ( 15,784,300 ) ( 16,841,400 ) Total $ ( 3,426,900 ) $ 11,235,900 15. 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 $ 34,253,500 and $ 24,521,600 as of February 28, 2023 and February 28, 2022, respectively. Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and collateral. 16. DEFERRED REVENUES The Company’s PaperPie 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, 2023 and February 28, 2022 are recorded as deferred revenues on the balance sheets. We received approximately $ 602,700 and $ 681,600 as of February 28, 2023 and February 28, 2022, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the fiscal year end. 17. SUBSEQUENT EVENTS On May 10, 2023, the Company executed the Second Amendment to our Loan Agreement with BOKF, NA. This amendment waived the fixed charge ratio default which occurred on February 28, 2023. The Second Amendment also added a cumulative maximum level of fiscal year to date inventory purchases through the expiration of the Revolving Loan Agreement, increased the borrowing rate on the Company’s Revolving Loan to Term SOFR Rate + 3.5% , reduced the revolving commitment from $ 15,000,000 to $ 14,000,000 , effective May 10, 2023, and further reduced the revolving commitment to $ 13,500,000 , effective July 15, 2023, among lesser items. See Note 9 for more information about our going concern assessment. 41