EDUCATIONAL DEVELOPMENT CORP - Quarter Report: 2022 November (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2022

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-04957

EDUCATIONAL DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

73-0750007

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5402 South 122nd East Ave, Tulsa, Oklahoma	74146
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (918) 622-4522

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.20 par value	EDUC	NASDAQ
(Title of class)	(Trading symbol)	(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
	Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
	Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ☐	Accelerated filer ☒

	Non-accelerated filer ☐	Smaller reporting company ☒

		Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
	Yes ☐ No ☒

As of December 27, 2022, there were 8,713,289 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	24
Signatures		25

CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS

The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties, and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended February 28, 2022 and in this quarterly report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report on Form 10-Q and speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED BALANCE SHEETS (UNAUDITED)

	November 30,			February 28,
ASSETS	2022			2022
CURRENT ASSETS
Cash and cash equivalents	$	654,900		$	361,200
Accounts receivable, less allowance for doubtful accounts of $247,400 (November 30) and $336,700 (February 28)		5,691,500			3,638,800
Inventories - net		60,970,200			71,553,600
Prepaid expenses and other assets		1,607,100			960,500
Total current assets		68,923,700			76,514,100

INVENTORIES - net		3,295,200			2,055,300
PROPERTY, PLANT AND EQUIPMENT - net		29,669,500			30,484,000
DEFERRED INCOME TAX ASSET		-			118,700
OTHER ASSETS		863,900			761,600
TOTAL ASSETS	$	102,752,300		$	109,933,700

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	3,928,500		$	12,411,800
Current maturities of long-term debt		1,800,000			2,542,200
Line of credit		8,994,500			17,723,500
Deferred revenues		1,409,900			681,600
Accrued salaries and commissions		2,031,600			1,890,200
Dividends payable		-			870,700
Income taxes payable		-			241,900
Other current liabilities		3,357,200			3,897,900
Total current liabilities		21,521,700			40,259,800

LONG-TERM DEBT - net		33,533,700			22,409,500
DEFERRED INCOME TAX LIABILITY		439,700			-
OTHER LONG-TERM LIABILITIES		373,400			498,900
Total liabilities		55,868,500			63,168,200

SHAREHOLDERS' EQUITY
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 (November 30 and February 28) shares; Outstanding 8,713,289 (November 30) and 8,707,247 (February 28) shares		2,540,400			2,540,400
Capital in excess of par value		12,925,700			12,246,600
Retained earnings		43,939,900			44,525,100
		59,406,000			59,312,100
Less treasury stock, at cost		(12,522,200	)		(12,546,600	)
Total shareholders' equity		46,883,800			46,765,500
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	102,752,300		$	109,933,700

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended November 30,						Nine Months Ended November 30,
	2022			2021			2022			2021
GROSS SALES	$	42,050,900		$	58,032,800		$	101,158,700		$	154,611,500
Less discounts and allowances		(13,975,400	)		(16,978,600	)		(33,968,700	)		(47,446,200	)
Transportation revenue		2,193,900			4,058,100			5,658,700			11,749,300
NET REVENUES		30,269,400			45,112,300			72,848,700			118,914,600
COST OF GOODS SOLD		11,041,400			13,897,300			25,832,600			36,426,000
Gross margin		19,228,000			31,215,000			47,016,100			82,488,600

OPERATING EXPENSES
Operating and selling		5,397,300			7,354,500			12,966,700			19,037,000
Sales commissions		8,982,300			14,515,500			21,489,800			37,587,400
General and administrative		4,635,700			5,915,000			13,037,500			15,847,900
Total operating expenses		19,015,300			27,785,000			47,494,000			72,472,300


INTEREST EXPENSE		600,600			228,300			1,516,900			609,800
OTHER INCOME		(389,100	)		(400,900	)		(1,175,600	)		(1,514,800	)

EARNINGS (LOSS) BEFORE INCOME TAXES		1,200			3,602,600			(819,200	)		10,921,300

INCOME TAXES		300			956,000			(234,000	)		2,938,400
NET EARNINGS (LOSS)	$	900		$	2,646,600		$	(585,200	)	$	7,982,900

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic	$	0.00		$	0.33		$	(0.07	)	$	0.99
Diluted	$	0.00		$	0.31		$	(0.07	)	$	0.94

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING
Basic		8,058,349			8,029,060			8,075,528			8,028,973
Diluted		8,249,069			8,430,221			8,075,528			8,449,183
Dividends per share	$	-		$	0.10		$	-		$	0.30

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 30, 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
Issuance of restricted share awards for vesting		-		-		-		-			(28,000	)		-			-
Share-based compensation expense - net		-		-		258,800		-			-			-			258,800
Net earnings		-		-		-		900			-			-			900
BALANCE - November 30, 2022		12,702,080	$	2,540,400	$	12,925,700	$	43,939,900			3,988,791		$	(12,522,200	)	$	46,883,800

FOR THE NINE MONTHS ENDED NOVEMBER 30, 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
Sales of treasury stock		-		-		43,500			-			(5,906	)		18,500			62,000
Dividends declared ($0.10/share)		-		-		-			(865,600	)		-			-			(865,600	)
Share-based compensation expense - net		-		-		261,600			-			-			-			261,600
Net earnings		-		-		-			2,646,600			-			-			2,646,600
BALANCE - November 30, 2021		12,702,080	$	2,540,400	$	11,683,000		$	45,071,900			4,045,945		$	(12,707,300	)	$	46,588,000

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended November 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)	$	(585,200	)	$	7,982,900
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		1,824,400			1,519,100
Deferred income taxes		558,400			(226,700	)
Provision for doubtful accounts		-			91,800
Provision for inventory valuation allowance		393,000			180,000
Share-based compensation expense - net		640,100			784,900
Changes in assets and liabilities:
Accounts receivable		(2,052,700	)		(1,476,700	)
Inventories - net		8,950,500			(18,817,000	)
Prepaid expenses and other assets		295,600			(159,000	)
Accounts payable		(8,483,300	)		4,451,400
Accrued salaries and commissions and other liabilities		(524,800	)		(841,000	)
Deferred revenues		728,300			(1,320,300	)
Income taxes payable/receivable		(1,040,600	)		453,900
Total adjustments		1,288,900			(15,359,600	)
Net cash provided by (used in) operating activities		703,700			(7,376,700	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(988,000	)		(3,387,100	)
Purchases of other assets		(257,200	)		-
Net cash used in investing activities		(1,245,200	)		(3,387,100	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on term debt		(25,450,100	)		(701,500	)
Payments on debt issue costs		(178,400	)		(50,000	)
Proceeds from term debt		36,000,000			15,244,700
Sales of treasury stock		63,400			154,400
Net payments on line of credit		(8,729,000	)		(2,225,900	)
Dividends paid		(870,700	)		(2,563,400	)
Net cash provided by financing activities		835,200			9,858,300
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		293,700			(905,500	)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		361,200			1,812,200
CASH AND CASH EQUIVALENTS - END OF PERIOD	$	654,900		$	906,700

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid for interest	$	1,345,900		$	606,300
Cash paid for income taxes (net of refunds)	$	95,800		$	2,708,000

See notes to condensed financial statements (unaudited).

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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 otherwise 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 was effective March 12, 2020 through December 31, 2022 (updated to December 31, 2024 by the December 2022 issuance of ASU 2022-06). 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.

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Note 2 – INVENTORIES

Inventories consist of the following:

	November 30, 2022			February 28, 2022
Current:
Book inventory	$	61,469,500		$	72,064,400
Inventory valuation allowance		(499,300	)		(510,800	)
Inventories net – current	$	60,970,200		$	71,553,600

Noncurrent:
Book inventory	$	3,793,700		$	2,437,600
Inventory valuation allowance		(498,500	)		(382,300	)
Inventories net – noncurrent	$	3,295,200		$	2,055,300

Inventory in transit totaled $291,900 and $2,732,400 at November 30, 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.

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 two 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	$	390,100
2024		1,568,900
2025		1,547,100
2026		1,524,300
2027		1,554,800
Thereafter		6,536,200
Total	$	13,121,400

The cost of the leased space was $10,637,900 and $10,834,300 at November 30, 2022 and February 28, 2022, respectively. The accumulated depreciation associated with the leased assets was $2,759,700 and $2,603,300 as of November 30, 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.

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Note 4 – DEBT

Debt consists of the following:

	November 30, 2022			February 28, 2022

Line of credit	$	8,994,500		$	17,723,500

Floating rate term loan(s) (1)	$	20,737,500		$	14,651,000
Fixed rate term loan		14,812,500			10,349,100
Total long-term debt		35,550,000			25,000,100

Less current maturities		(1,800,000	)		(2,542,200	)
Less debt issue cost		(216,300	)		(48,400	)
Long-term debt, net	$	33,533,700		$	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 5.48% at November 30, 2022)
	(v)	Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 6.23% at November 30, 2022)
	(vi)	Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at November 30, 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 $6,005,500 at November 30, 2022.

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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	$	450,000
2024		1,800,000
2025		1,800,000
2026		1,800,000
2027		1,800,000
Thereafter		27,900,000
Total	$	35,550,000

Note 5 – 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, 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 the remaining Usborne inventory for an agreed upon term not less than twelve months following the termination date. 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 will use a different distributor to supply retail accounts with its products. The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023. Usborne’s products sold within the Publishing Division accounted for 85.6% and 89.2% of all products sold during the three and nine months ended November 30, 2022, respectively. Additionally, an inventory purchase volume rebate from Usborne of $900,000, which was earned for purchases in fiscal 2022 and due to the Company, has been disputed. As a result of that dispute, the realization of that rebate became uncertain, resulting in the Company reversing the recorded rebate until the uncertainty is resolved.

Purchases received from Usborne were $4,782,200 and $10,728,800 for the three months ended November 30, 2022 and 2021, respectively. Total inventory purchases received from all suppliers were $6,738,100 and $15,946,700 for the three months ended November 30, 2022 and 2021, respectively.

Purchases received from Usborne were $9,565,700 and $35,144,100 for the nine months ended November 30, 2022 and 2021, respectively. Total inventory purchases received from all suppliers were $15,879,800 and $52,511,000 for the nine months ended November 30, 2022 and 2021, respectively.

Note 6 – 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.

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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 November 30,				Nine Months Ended November 30,
	2022		2021		2022			2021
Earnings (loss):
Net earnings (loss) applicable to common shareholders	$	900	$	2,646,600	$	(585,200	)	$	7,982,900

Weighted average shares:
Weighted average shares outstanding-basic		8,058,349		8,029,060		8,075,528			8,028,973
Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards		190,720		401,161		-			420,210
Weighted average shares outstanding-diluted		8,249,069		8,430,221		8,075,528			8,449,183

Earnings (loss) per share:
Basic	$	0.00	$	0.33	$	(0.07	)	$	0.99
Diluted	$	0.00	$	0.31	$	(0.07	)	$	0.94

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

November 30,

Nine Months Ended

November 30,

2022

2021

2022

2021

Weighted average shares:

Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards

280,852

Note 7 – 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.

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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 remaining compensation expense for the outstanding awards, totaling approximately $171,500 as of November 30, 2022, will be recognized ratably over the remaining vesting period of approximately 3 months.

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 the fiscal 2023 third quarter 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 $865,800 as of November 30, 2022, will be recognized ratably over the remaining vesting period of approximately 27 months.

As of November 30, 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 November 30,				Nine Months Ended November 30,
	2022		2021		2022			2021

Share-based compensation expense	$	258,800	$	261,600	$	782,000		$	784,900
Less reduction of expense for forfeitures		-		-		(141,900	)		-
Share-based compensation expense - net	$	258,800	$	261,600	$	640,100		$	784,900

The following table summarizes stock award activity during the first nine 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		28,000			2.08
Vested		-			-
Forfeited		(28,000	)		7.60
Outstanding at November 30, 2022		600,000		$	7.88

As of November 30, 2022, total unrecognized share-based compensation expense related to unvested granted or issued restricted shares was $1,037,300, which we expect to recognize over a weighted-average period of 23.0 months.

Note 8 – 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 $4,506,500 and $6,924,800 for the three months ended November 30, 2022 and 2021, respectively. These costs were $11,192,800 and $18,317,200 for the nine months ended November 30, 2022 and 2021, respectively.

Note 9 – 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.

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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 nine-month periods ended November 30, 2022 and 2021, are as follows:

NET REVENUES
	Three Months Ended November 30,				Nine Months Ended November 30,
	2022		2021		2022		2021
UBAM	$	25,452,700	$	41,397,800	$	61,401,700	$	108,532,800
Publishing		4,816,700		3,714,500		11,447,000		10,381,800
Total	$	30,269,400	$	45,112,300	$	72,848,700	$	118,914,600

EARNINGS (LOSS) BEFORE INCOME TAXES
	Three Months Ended November 30,						Nine Months Ended November 30,
	2022			2021			2022			2021
UBAM	$	3,019,800		$	7,536,000		$	8,049,100		$	20,976,400
Publishing		1,239,300			1,186,100			2,805,000			3,030,500
Other		(4,257,900	)		(5,119,500	)		(11,673,300	)		(13,085,600	)
Total	$	1,200		$	3,602,600		$	(819,200	)	$	10,921,300

Note 10 – 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 $34,781,100 and $24,521,600 as of November 30, 2022 and February 28, 2022, respectively. The term notes payable reflected on the Company’s condensed balance sheets were $35,550,000 and $25,000,100 as of November 30, 2022 and February 28, 2022, respectively. Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and collateral.

Note 11 – 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 November 30, 2022 or February 28, 2022 are recorded as deferred revenues on the condensed balance sheets. We received approximately $1,409,900 and $681,600, as of November 30, 2022 and February 28, 2022, respectively, in payments for sales orders which will be shipped subsequent to the end of the period.

Note 12 – SUBSEQUENT EVENTS

On December 22, 2022, the Company executed the First Amendment to our Credit Agreement with BOKF, NA. 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.

The Company completed rebranding its Home Business Division, replacing the name Usborne Books & More (“UBAM”) with its new name, PaperPie. PaperPie was announced on December 21, 2022 and the new name, website URL’s and rebranding was completed on January 3, 2023.

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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 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. 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, at a minimum, 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 products. These two segments each have their own customer base. The UBAM segment markets our complete line of 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 Kane Miller, Learning Wrap-Ups and SmartLab Toys 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 November 30,						Nine Months Ended November 30,
	2022			2021			2022			2021
Net revenues	$	30,269,400		$	45,112,300		$	72,848,700		$	118,914,600
Cost of goods sold		11,041,400			13,897,300			25,832,600			36,426,000
Gross margin		19,228,000			31,215,000			47,016,100			82,488,600

Operating expenses
Operating and selling		5,397,300			7,354,500			12,966,700			19,037,000
Sales commissions		8,982,300			14,515,500			21,489,800			37,587,400
General and administrative		4,635,700			5,915,000			13,037,500			15,847,900
Total operating expenses		19,015,300			27,785,000			47,494,000			72,472,300

Interest expense		600,600			228,300			1,516,900			609,800
Other income		(389,100	)		(400,900	)		(1,175,600	)		(1,514,800	)
Earnings (loss) before income taxes		1,200			3,602,600			(819,200	)		10,921,300

Income taxes		300			956,000			(234,000	)		2,938,400
Net earnings (loss)	$	900		$	2,646,600		$	(585,200	)	$	7,982,900

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.

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Non-Segment Operating Results for the Three Months Ended November 30, 2022

Total operating expenses not associated with a reporting segment decreased $1.3 million, or 24.5%, to $4.0 million for the three-month period ended November 30, 2022, when compared to $5.3 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a $0.8 million decrease in labor expenses, primarily within our warehouse operations, and a $0.3 million decrease in freight handling expenses, both resulting from a decrease in gross sales, along with a decrease of $0.2 million in other various cost changes.

Interest expense increased $0.4 million, or 200.0%, to $0.6 million for the three months ended November 30, 2022, when compared to $0.2 million for the same quarterly period a year ago, due to increased borrowings with our Lenders primarily associated with inventory and increases in floating interest rates.

Income taxes decreased $1.0 million, or 100.0%, to $0.0 million for the three months ended November 30, 2022, from $1.0 million for the same quarterly period a year ago, resulting from a decrease in gross sales. Our effective tax rate decreased to 25.0% for the quarter ended November 30, 2022, from 26.5% for the quarter ended November 30, 2021 due primarily 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 Nine Months Ended November 30, 2022

Total operating expenses not associated with a reporting segment decreased $2.7 million, or 19.3%, to $11.3 million for the nine-month period ended November 30, 2022, when compared to $14.0 million for the same period a year ago. Operating expenses decreased primarily as a result of a reduction in labor expenses of $2.1 million, primarily within our warehouse operations, and a decrease in freight handling costs of $0.8 million, both associated with a decrease in gross sales. Other various expenses in this segment decreased by $0.1 million. 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.

Interest expense increased $0.9 million, or 150.0%, to $1.5 million for the nine months ended November 30, 2022, when compared to $0.6 million for the same period a year ago, due to increased borrowings with our Lenders primarily associated with inventory and increases in floating interest rates.

Income taxes decreased $3.1 million, or 106.9%, to a tax benefit of $0.2 million for the nine months ended November 30, 2022, from a tax expense of $2.9 million for the same period a year ago, primarily resulting from operating losses experienced during our fiscal 2023 second quarter. Our effective tax rate increased to 28.6% for the nine months ended November 30, 2022, from 26.9% for the nine months ended November 30, 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 Nine Months Ended November 30, 2022

The following table summarizes the operating results of the UBAM segment:

	Three Months Ended November 30,						Nine Months Ended November 30,
	2022			2021			2022			2021
Gross sales	$	31,925,700		$	50,232,200		$	77,068,300		$	132,557,400
Less discounts and allowances		(8,664,100	)		(12,891,300	)		(21,317,300	)		(35,767,700	)
Transportation revenue		2,191,100			4,056,900			5,650,700			11,743,100
Net revenues		25,452,700			41,397,800			61,401,700			108,532,800

Cost of goods sold		8,372,000			11,961,700			19,619,400			30,848,200
Gross margin		17,080,700			29,436,100			41,782,300			77,684,600

Operating expenses
Operating and selling		4,318,700			6,069,000			10,264,900			15,628,600
Sales commissions		8,777,900			14,351,100			20,986,600			37,147,000
General and administrative		964,300			1,480,000			2,481,700			3,932,600
Total operating expenses		14,060,900			21,900,100			33,733,200			56,708,200

Operating income	$	3,019,800		$	7,536,000		$	8,049,100		$	20,976,400

Average number of active consultants		27,100			41,500			28,700			47,300

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UBAM Operating Results for the Three Months Ended November 30, 2022

UBAM net revenues decreased $15.9 million, or 38.4%, to $25.5 million during the three months ended November 30, 2022, when compared to $41.4 million during the same period a year ago. The average number of active consultants in the third quarter of fiscal 2023 was 27,100, a decrease of 14,400, or 34.7%, from 41,500 average active consultants selling in the third quarter of fiscal 2022. Our consultant numbers have declined 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 created a level of uncertainty with our consultants until we were able to effectively communicate the continuation of our relationship within the Direct Sales division. In addition, sales during the third quarter of fiscal 2023 continued to be negatively impacted by recent record inflation, resulting in high fuel cost and food price increases that continues to impact 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 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 $12.3 million, or 41.8%, to $17.1 million during the three months ended November 30, 2022, when compared to $29.4 million during the same period a year ago. Gross margin as a percentage of net revenues for the three months ended November 30, 2022 decreased to 67.1%, compared to 71.1% the same period a year ago. The decrease in gross margin as a percentage of net revenues is primarily attributed to higher discounts being offered to induce sales impacting margins by approximately $0.4 million, rising ocean freight costs on inbound inventory totaling approximately $0.3 million and reduced purchasing volume discounts/rebates totaling approximately $0.3 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 segment. Total operating expenses decreased $7.8 million, or 35.6%, to $14.1 million during the three-month period ended November 30, 2022, when compared to $21.9 million reported in the same quarter a year ago. Operating and selling expenses decreased $1.8 million, or 29.5%, to $4.3 million during the three-month period ended November 30, 2022, when compared to $6.1 million reported in the same quarter a year ago, primarily due to a decrease in outbound freight from fewer sales and shipments totaling approximately $2.2 million. This expense reduction was partially offset by a $0.4 million increase in consultant incentive trip accruals associated with promotions to bolster sales. Sales commissions decreased $5.6 million, or 38.9%, to $8.8 million during the three-month period ended November 30, 2022, when compared to $14.4 million reported in the same quarter a year ago, due primarily to the decrease in net revenues. General and administrative expenses decreased $0.5 million, or 33.3%, to $1.0 million during the three months ended November 30, 2022, when compared to $1.5 million during the same period a year ago, due primarily to $0.2 million of reduced bank fees from fewer credit card transactions, a $0.2 million reduction in consultant bonus awards, both resulting from the decrease in sales, as well as a $0.1 million reduction in payroll costs.

Operating income of the UBAM segment decreased $4.5 million, or 60.0% to $3.0 million during the three months ended November 30, 2022, when compared to $7.5 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 November 30, 2022 decreased to 11.9%, compared to 18.2% for the three months ended November 30, 2021. This change primarily resulted from increased cost of goods sold, increased freight costs and increased operating and selling expenses as a percent of net revenues.

UBAM Operating Results for the Nine Months Ended November 30, 2022

UBAM net revenues decreased $47.1 million, or 43.4%, to $61.4 million during the nine-month period ended November 30, 2022, compared to $108.5 million from the same period a year ago. The average number of active consultants in the nine-month period ended November 30, 2022 was 28,700, a decrease of 18,600, or 39.3%, from 47,300 selling in same period a year ago. Our consultant numbers declined from the prior 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. In addition, sales during the first nine months of fiscal 2023 were negatively impacted by recent record inflation, resulting in fuel cost and food price increases impacting 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.

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Gross margin decreased $35.9 million, or 46.2%, to $41.8 million during the nine-month period ended November 30, 2022, when compared to $77.7 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 68.0% for the nine-month period ended November 30, 2022, when compared to 71.6% for the same period a year ago. The decrease in gross margin as a percentage of net revenues is attributed to higher discounts being offered to induce sales impacting margins by approximately $0.6 million, rising ocean freight costs on inbound inventory totaling approximately $0.7 million and reduced purchasing volume discounts/rebates totaling approximately $0.9 million.

Total operating expenses decreased $23.0 million, or 40.6%, to $33.7 million during the nine-month period ended November 30, 2022, from $56.7 million for the same period a year ago. Operating and selling expenses decreased $5.3 million, or 34.0%, to $10.3 million during the nine-month period ended November 30, 2022, when compared to $15.6 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 $6.4 million. This expense reduction was partially offset by a $1.1 million increase in consultant incentive trip expenses and convention expenses. Sales commissions decreased $16.1 million, or 43.4%, to $21.0 million during the nine-month period ended November 30, 2022, when compared to $37.1 million reported in the same period a year ago, primarily due to the decrease in net revenues. General and administrative expenses decreased $1.4 million, or 35.9%, to $2.5 million, from $3.9 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes of $0.9 million and a $0.5 million reduction in consultant bonus awards, both resulting from the decrease in sales during the nine months ended November 30, 2022.

Operating income of the UBAM segment decreased $13.0 million, or 61.9%, to $8.0 million during the nine months ended November 30, 2022, when compared to $21.0 million reported in the same period last year. Operating income of the UBAM division as a percentage of net revenues for the nine months ended November 30, 2022 was 13.1%, compared to 19.3% for the nine months ended November 30, 2021. This change primarily resulted from increased cost of goods sold, increased freight costs and increased operating and selling expenses as a percent of net revenues.

Publishing Operating Results for the Three and Nine Months Ended November 30, 2022

The following table summarizes the operating results of the Publishing segment:

	Three Months Ended November 30,						Nine Months Ended November 30,
	2022			2021			2022			2021
Gross sales	$	10,125,200		$	7,800,600		$	24,090,400		$	22,054,100
Less discounts and allowances		(5,311,300	)		(4,087,300	)		(12,651,400	)		(11,678,500	)
Transportation revenue		2,800			1,200			8,000			6,200
Net revenues		4,816,700			3,714,500			11,447,000			10,381,800

Cost of goods sold		2,669,400			1,935,600			6,213,200			5,577,800
Gross margin		2,147,300			1,778,900			5,233,800			4,804,000

Total operating expenses		908,000			592,800			2,428,800			1,773,500

Operating income	$	1,239,300		$	1,186,100		$	2,805,000		$	3,030,500

Publishing Operating Results for the Three Months Ended November 30, 2022

Our Publishing division’s net revenues increased $1.1 million, or 29.7%, to $4.8 million during the three-month period ended November 30, 2022, from $3.7 million reported in the same period a year ago. During fiscal 2023, we entered into a new distribution agreement with Usborne. Under the terms in our new distribution agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne will use a different distributor to supply retail accounts with their products. The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023. The transition between distributors brought disruption concerns to many of our retail customers and resulted in additional sales orders before the November 15, 2022 transition date. Usborne’s products sold within the Publishing Division accounted for 85.6% of all products sold during the three months ended November 30, 2022.

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Gross margin increased $0.3 million, or 16.7%, to $2.1 million during the three-month period ended November 30, 2022, from $1.8 million reported in the same quarter a year ago, primarily due to the increase in net revenues. Gross margin as a percentage of net revenues decreased to 44.6% during the three-month period ended November 30, 2022, from 47.9% reported in the same quarter a year ago. Gross margin as a percentage of net revenues changed primarily from an increase in cost of goods sold resulting from rising ocean freight costs on inbound inventory of $0.1 million, as well as changes in the mix of products sold between Kane Miller and Usborne.

Total operating expenses of the Publishing segment increased $0.3 million, or 50.0%, to $0.9 million, from $0.6 million, during the three-month periods ended November 30, 2022 and 2021, respectively. This change was due to an increase of $0.1 million in wages for Learning Wrap-Ups not present in the prior year, a $0.1 million increase in freight expense due to higher shipping costs on increased sales and a $0.1 million increase in other various costs.

Operating income of the Publishing division remained consistent at $1.2 million for the three-month periods ended November 30, 2022 and 2021, respectively.

Publishing Operating Results for the Nine Months Ended November 30, 2022

Our Publishing division’s net revenues increased by $1.0 million, or 9.6%, to $11.4 million during the nine-month period ended November 30, 2022, from $10.4 million reported in the same period a year ago. During fiscal 2023, we entered into a new distribution agreement with Usborne. Under the terms in our new distribution agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne will use a different distributor to supply retail accounts with their products. The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023. The transition between distributors brought disruption concerns to many of our retail customers and resulted in additional sales orders before the November 15, 2022 transition date. Usborne’s products sold within the Publishing Division accounted for 89.2% of all products sold during the nine months ended November 30, 2022.

Gross margin increased $0.4 million, or 8.3%, to $5.2 million during the nine-month period ended November 30, 2022, from $4.8 million reported in the same period a year ago, primarily from increased net revenues. Gross margin as a percentage of net revenues decreased slightly to 45.7%, during the nine-month period ended November 30, 2022, from 46.3% reported in the same period a year ago primarily due to increased inbound transportation costs.

Total operating expenses of the Publishing segment increased $0.6 million, or 33.3%, to $2.4 million during the nine-month period ended November 30, 2022, from $1.8 million reported in the same period a year ago. This change was due to an increase of $0.3 million in wages and $0.1 million in other various expenses related to Learning Wrap-Ups, which was acquired in December 2021. Other increases include $0.1 million in outbound freight costs and $0.1 million in other various expenses related to the Publishing division.

Operating income of the Publishing segment decreased $0.2 million, or 6.7%, to $2.8 million during the nine-month period ended November 30, 2022 when compared to $3.0 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 flows. 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 nine months of fiscal year 2023, we experienced cash inflows from operations of $703,700. These cash inflows resulted from:

●net loss of $585,200

Adjusted for:

●depreciation and amortization expense of $1,824,400

●share-based compensation expense, net of $640,100

●deferred income taxes of $558,400

●provision for inventory allowance of $393,000

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Positively impacted by:

●decrease in inventories, net of $8,950,500

●increase in deferred revenues of $728,300

●decrease in prepaid expenses and other assets of $295,600

Negatively impacted by:

●decrease in accounts payable of $8,483,300

●increase in accounts receivable of $2,052,700

●decrease in income taxes payable of $1,040,600

●decrease in accrued salaries and commissions, and other liabilities of $524,800

Cash used in investing activities was $1,245,200 for capital expenditures, consisting of $658,200 associated with the purchase of SmartLab Toys, $484,900 of software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders, $99,000 of other assets associated with the Company’s rebrand of its UBAM sales division and $3,100 of other various changes.

Cash provided by financing activities was $835,200, 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 $25,450,100, net payments on the line of credit of $8,729,000, payments of $870,700 for dividends declared in fiscal 2022 and payments of debt issue costs of $178,400.

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 pay down existing debt. Following a return to profitability, any excess cash is expected to be distributed to our shareholders.

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 5.48% at November 30, 2022)
	(v)	Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 6.23% at November 30, 2022)
	(vi)	Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at November 30, 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 Company’s new Lender was approximately $6,005,500 at November 30, 2022.

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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	$	450,000
2024		1,800,000
2025		1,800,000
2026		1,800,000
2027		1,800,000
Thereafter		27,900,000
Total	$	35,550,000

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 November 30, 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 November 30, 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.

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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 November 30, 2022 and February 28, 2022, respectively. Noncurrent inventory valuation allowances were $0.5 million and $0.4 million at November 30, 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.

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 8.3% of our active consultants have maintained consignment inventory at the end of the third 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 $1.7 million and $1.4 million at November 30, 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 $1.0 million at November 30, 2022 and $0.9 million at 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 nine months of fiscal year 2023, the Company recognized $0.7 million of compensation expense associated with the shares granted, which was offset by a $0.1 million reduction of compensation expense during the fiscal second quarter associated with shares that were forfeited. These shares were re-issued under the terms of the 2019 LTI Plan during the fiscal third quarter.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We performed an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. 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 designed and 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 third quarter of the fiscal year covered by this report on Form 10-Q, 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.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Not applicable.

Item 1A. RISK FACTORS

Not required by smaller reporting company.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Period	Total # of Shares Purchased		Average Price Paid per Share		Total # of Shares Purchased as Part of Publicly Announced Plan (1)		Maximum # of Shares that may be Repurchased under the Plan (1)

September 1 - 30, 2022		-	$	-		-		514,594
October 1 - 31, 2022		-		-		-		514,594
November 1 - 30, 2022		-		-		-		514,594
Total		-	$	-		-

(1)

On February 4, 2019 the Board of Directors approved a new stock repurchase plan, replacing the former 2008 stock repurchase plan. The maximum number of shares which can be purchased under the new plan is 800,000. Amounts in the table reflect the remaining number of shares available to be repurchased. This plan has no expiration date.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

None.

Item 5. OTHER INFORMATION

None.

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Item 6. 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).

10.1		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).

10.2		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).

10.3		Credit Agreement dated August 9, 2002 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).

10.4**		First Amendment to Credit Agreement, dated December 22, 2022 by and between the Company and BOKF, NA, Tulsa, OK.

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 Chief Financial Officer and Corporate Secretary 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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	EDUCATIONAL DEVELOPMENT CORPORATION (Registrant)


Date: January 6, 2023	By	/s/ Craig M. White
		President and Chief Executive Officer (Principal Executive Officer)