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 ~~May~~August 31, 2023

☐ 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, or 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 ~~July 5,~~October 9, 2023, there were ~~8,575,088~~8,571,088 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1721
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2531
Item 4.	Controls and Procedures	2531

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	2632
Item 1A.	Risk Factors	2632
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2632
Item 3.	Defaults Upon Senior Securities	2632
Item 4.	Mine Safety Disclosures	2632
Item 5.	Other Information	2632
Item 6.	Exhibits	2733
Signatures		2834

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. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by 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 brand partners (formerly consultants),
	●	our ability to locate and procure desired books,
	●	product and supplier concentrations,
	●	our relationship with our primary supplier and the related distribution requirements and contractual limitations,
	●	adverse publicity associated with our Company or the industry,
	●	our ability to ship timely,
	●	changes to our primary sales channels, including social media and party plan platforms,
	●	changing consumer preferences and demands,
	●	legal matters,
	●	reliance on information technology infrastructure,
	●	restrictions imposed by covenants in the agreements governing our indebtedness,
	●	our ability to obtain adequate financing for working capital and capital expenditures,
	●	economic and competitive conditions, regulatory changes and other uncertainties,
	●	outstanding impacts from 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, 2023 and in this Quarterly Report on Form 10Q, all of which are difficult to predict.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. 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. As used in this Quarterly Report on Form 10-Q, the terms “the Company,” “EDC,” “we,” “our” or “us” mean Educational Development Corporation, a Delaware corporation, unless the context indicates otherwise.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED BALANCE SHEETS (UNAUDITED)

	May 31,			February 28,			August 31,			February 28,
ASSETS	2023			2023			2023			2023
CURRENT ASSETS
Cash and cash equivalents	$	876,100		$	689,100		$	1,480,900		$	689,100
Accounts receivable, less allowance for doubtful accounts of $134,000 (May 31) and $211,700 (February 28)		2,688,900			2,906,700
Inventories - net		56,344,000			59,086,500
Restricted cash								1,077,800			-
Accounts receivable, less allowance for doubtful accounts of $146,000 (August 31) and $211,700 (February 28)								1,990,600			2,906,700
Inventories – net								53,682,200			59,086,500
Prepaid expenses and other assets		806,700			869,300			862,300			869,300
Assets held for sale								811,800			-
Total current assets		60,715,700			63,551,600			59,905,600			63,551,600

LONG-TERM INVENTORIES - net		5,980,500			4,719,600			8,189,300			4,719,600
PROPERTY, PLANT AND EQUIPMENT - net		29,258,100			29,656,400			27,998,000			29,656,400
DEFERRED INCOME TAX ASSET		1,126,500			796,800			1,799,300			796,800
OTHER ASSETS		1,173,800			1,212,400			1,068,800			1,212,400
TOTAL ASSETS	$	98,254,600		$	99,936,800		$	98,961,000		$	99,936,800

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	4,631,000		$	3,863,900		$	4,977,100		$	3,863,900
Line of credit		10,959,200			10,634,500			9,723,100			10,634,500
Deferred revenues		970,500			602,700			689,600			602,700
Current maturities of term debt		34,456,100			34,894,900			1,800,000			34,894,900
Accrued salaries and commissions		850,200			828,200			765,000			828,200
Income taxes payable								1,041,600			-
Other current liabilities		1,997,400			3,294,000			2,249,000			3,294,000
Total current liabilities		53,864,400			54,118,200			21,245,400			54,118,200


LONG-TERM DEBT – net								32,217,300			-
OTHER LONG-TERM LIABILITIES		498,900			586,800			414,600			586,800
Total liabilities		54,363,300			54,705,000			53,877,300			54,705,000

SHAREHOLDERS' EQUITY
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 (May 31 and February 28) shares; Outstanding 8,575,088 (May 31) and 8,713,289 (February 28) shares		2,540,400			2,540,400
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 (August 31 and February 28) shares; Outstanding 8,571,088 (August 31) and 8,713,289 (February 28) shares								2,540,400			2,540,400
Capital in excess of par value		13,289,600			13,193,400			13,369,200			13,193,400
Retained earnings		41,147,400			42,020,200			42,209,100			42,020,200
Accumulated other comprehensive income								51,100			-
		56,977,400			57,754,000			58,169,800			57,754,000
Less treasury stock, at cost		(13,086,100	)		(12,522,200	)		(13,086,100	)		(12,522,200	)
Total shareholders' equity		43,891,300			45,231,800			45,083,700			45,231,800
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	98,254,600		$	99,936,800		$	98,961,000		$	99,936,800

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended May 31,						Three Months Ended August 31,						Six Months Ended August 31,
	2023			2022			2023			2022			2023			2022
GROSS SALES	$	20,586,600		$	31,338,200		$	15,372,800		$	27,769,500		$	35,959,400		$	59,107,700
Less discounts and allowances		(7,071,300	)		(10,085,200	)		(5,521,200	)		(9,908,100	)		(12,592,500	)		(19,993,300	)
Transportation revenue		1,008,700			1,907,900			741,500			1,556,900			1,750,200			3,464,800
NET REVENUES		14,524,000			23,160,900			10,593,100			19,418,300			25,117,100			42,579,200
COST OF GOODS SOLD		5,150,400			7,851,500			3,684,300			6,939,700			8,834,700			14,791,300
Gross margin		9,373,600			15,309,400			6,908,800			12,478,600			16,282,400			27,787,900

OPERATING EXPENSES
Operating and selling		2,397,900			3,770,600			1,916,000			3,798,800			4,313,900			7,569,400
Sales commissions		4,199,800			6,871,800			3,520,300			5,635,700			7,720,100			12,507,500
General and administrative		3,634,500			4,384,300			3,529,100			4,017,600			7,163,600			8,401,900
Total operating expenses		10,232,200			15,026,700			8,965,400			13,452,100			19,197,600			28,478,800


INTEREST EXPENSE		733,400			388,100			743,300			528,100			1,476,700			916,200
OTHER INCOME		(391,400	)		(390,700	)		(4,252,800	)		(396,000	)		(4,644,200	)		(786,700	)

EARNINGS (LOSS) BEFORE INCOME TAXES		(1,200,600	)		285,300			1,452,900			(1,105,600	)		252,300			(820,400	)

INCOME TAX EXPENSE (BENEFIT)		(327,800	)		69,500			391,200			(303,700	)		63,400			(234,300	)
NET EARNINGS (LOSS)	$	(872,800	)	$	215,800		$	1,061,700		$	(801,900	)	$	188,900		$	(586,100	)

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic	$	(0.11	)	$	0.03		$	0.13		$	(0.10	)	$	0.02		$	(0.07	)
Diluted	$	(0.11	)	$	0.03		$	0.13		$	(0.10	)	$	0.02		$	(0.07	)

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING
Basic		8,278,049			8,086,427			8,269,771			8,081,807			8,273,910			8,084,117
Diluted		8,278,049			8,473,610			8,269,771			8,081,807			8,283,221			8,084,117
Dividends per share	$	-		$	-		$	-		$	-		$	-		$	-

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF ~~CHANGES~~IN~~SHAREHOLDERS~~’ ~~EQUITY~~COMPREHENSIVE INCOME (UNAUDITED)

~~FOR~~~~THE THREE MONTHS~~~~ENDED~~~~MAY 31, 2023~~

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, 2023
12,702,080 $ 2,540,400 $ 13,193,400 $ 42,020,200 3,988,791 $ (12,522,200
)
$ 45,231,800
Purchases of treasury stock
- - - - 138,201 (563,900
)
(563,900
)
Share-based compensation expense - net
- - 96,200 - - - 96,200
Net loss
- - - (872,800 ) - - (872,800
)
BALANCE - May 31, 2023
12,702,080 $ 2,540,400 $ 13,289,600 $ 41,147,400 4,126,992 $ (13,086,100
)
$ 43,891,300

~~FOR~~~~THE THREE~~~~MONTHS~~~~ENDED~~~~MAY 31, 2022~~

Common Stock
(par value $0.20 per share)

Treasury Stock

Number of
Shares
Issued

Amount

Capital in
Excess of
Par Value

Retained
Earnings

Number
of
Shares

Amount

Shareholders'
Equity

BALANCE – February 28, 2022
12,702,080 $ 2,540,400 $ 12,246,600 $ 44,525,100 3,994,833 $ (12,546,600
)
$ 46,765,500
Sales of treasury stock
- - 39,000 - (7,771
)
24,400 63,400
Forfeiture of restricted shares
- - 95,700 - 16,180 (95,700
)
-
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 $ 12,642,900 $ 44,740,900 4,003,242 $ (12,617,900
)
$ 47,306,300

	Three Months Ended August 31,					Six Months Ended August 31,
	2023		2022			2023		2022
Net earnings (loss)	$	1,061,700	$	(801,900	)	$	188,900	$	(586,100	)
Other comprehensive income:
Unrealized gain on interest rate exchange agreement		51,100		-			51,100		-
Comprehensive income (loss)	$	1,112,800	$	(801,900	)	$	240,000	$	(586,100	)

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF ~~CASH~~CHANGES ~~FLOWS~~INSHAREHOLDERS’ EQUITY (UNAUDITED)

FORTHESIX MONTHSENDEDAUGUST 31, 2023

Three Months Ended
May 31,

2023

2022

CASH FLOWS FROM OPERATING ACTIVITIES

Net earnings (loss)
$ (872,800
)
$ 215,800
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization
683,600 599,600
Deferred income taxes
(329,700
)
1,400
Provision for inventory valuation allowance
51,200 -
Share-based compensation expense - net
96,200 261,600
Changes in assets and liabilities:

Accounts receivable
217,800 (204,100
)
Inventories - net
1,430,400 3,057,800
Prepaid expenses and other assets
128,000 (31,400
)
Accounts payable
767,100 (5,699,000
)
Accrued salaries and commissions and other liabilities
(1,362,500
)
(1,472,300
)
Deferred revenues
367,800 1,036,400
Income taxes payable/receivable
- 37,200
Total adjustments
2,049,900 (2,412,800
)
Net cash provided by (used in) operating activities
1,177,100 (2,197,000
)
CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property, plant and equipment
(300,900
)
(108,800
)
Net cash used in investing activities
(300,900
)
(108,800
)
CASH FLOWS FROM FINANCING ACTIVITIES

Payments on term debt
(450,000
)
(614,100
)
Cash paid to acquire treasury stock
(563,900
)
-
Sales of treasury stock
- 63,400
Net borrowings under line of credit
324,700 4,785,400
Dividends paid
- (870,700
)
Net cash provided by (used in) financing activities
(689,200
)
3,364,000
NET INCREASE IN CASH AND CASH EQUIVALENTS
187,000 1,058,200
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
689,100 361,200
CASH AND CASH EQUIVALENTS - END OF PERIOD
$ 876,100 $ 1,419,400

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION

Cash paid for interest
$ 722,200 $ 370,200
Cash paid for income taxes (net of refunds)
$ 8,400 $ 52,300

	Common Stock (par value $0.20 per share)											Treasury Stock
	Number of Shares Issued		Amount		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Income		Number of Shares		Amount			Shareholders' Equity

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
Purchases of treasury stock		-		-		-		-			-		138,201		(563,900	)		(563,900	)
Share-based compensation expense - net		-		-		96,200		-			-		-		-			96,200
Net loss		-		-		-		(872,800	)		-		-		-			(872,800	)
BALANCE - May 31, 2023		12,702,080	$	2,540,400	$	13,289,600	$	41,147,400		$	-		4,126,992	$	(13,086,100	)	$	43,891,300
Forfeiture of restricted shares		-		-		-		-			-		4,000		-			-
Share-based compensation expense - net		-		-		79,600		-			-		-		-			79,600
Unrealized gain on interest rate exchange agreement		-		-		-		-			51,100		-		-			51,100
Net earnings		-		-		-		1,061,700			-		-		-			1,061,700
BALANCE - August 31, 2023		12,702,080	$	2,540,400	$	13,369,200	$	42,209,100		$	51,100		4,130,992	$	(13,086,100	)	$	45,083,700

FORTHESIXMONTHSENDEDAUGUST 31, 2022

	Common Stock (par value $0.20 per share)											Treasury Stock
	Number of Shares Issued		Amount		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Income		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

See notes to condensed financial statements (unaudited).

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EDUCATIONALDEVELOPMENTCORPORATION

CONDENSEDSTATEMENTSOFCASHFLOWS(UNAUDITED)

	Six Months Ended August 31,
	2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)	$	188,900		$	(586,100	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		1,366,000			1,207,500
Deferred income taxes		(1,002,500	)		(239,000	)
Provision for inventory valuation allowance		105,400			-
Share-based compensation expense - net		175,800			381,300
Net gain on sale of assets		(46,500	)		-
Changes in assets and liabilities:
Accounts receivable		916,100			(263,800	)
Inventories - net		1,829,300			6,028,500
Prepaid expenses and other assets		221,600			214,200
Accounts payable		1,113,200			(7,970,300	)
Accrued salaries and commissions and other liabilities		(1,280,400	)		(2,263,200	)
Deferred revenues		86,900			103,900
Income taxes payable/receivable		1,041,600			(241,900	)
Total adjustments		4,526,500			(3,042,800	)
Net cash provided by (used in) operating activities		4,715,400			(3,628,900	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(546,200	)		(221,000	)
Proceeds from sale of assets		75,700			-
Purchases of other assets		-			(33,000	)
Net cash used in investing activities		(470,500	)		(254,000	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on term debt		(900,000	)		(25,175,900	)
Cash paid to acquire treasury stock		(563,900	)		-
Proceeds from term debt		-			36,000,000
Sales of treasury stock		-			63,400
Net payments under line of credit		(911,400	)		(5,662,600	)
Dividends paid		-			(870,700	)
Net cash provided by (used in) financing activities		(2,375,300	)		4,354,200
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		1,869,600			471,300
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - BEGINNING OF PERIOD		689,100			361,200
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - END OF PERIOD	$	2,558,700		$	832,500

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid for interest - net	$	1,513,600		$	838,600
Cash paid for income taxes -net of refunds	$	24,200		$	95,800

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, 2023, 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 ~~first quarter~~ fiscal year 2023 condensed statement of cash flows to conform to the classifications presented in fiscal year 2024. These reclassifications had no effect on net earnings.

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 toof our audited financial statements as of and for the year ended February 28, 2023, included in our Form 10-K.

Restricted Cash

The Company considers cash to be restricted when withdrawal or general use is restricted.

Assets Held for Sale

The Company classifies long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met per ASC 360: (1) management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; (2) the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups; (3) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; (4) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year; (5) the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

We initially measure a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. We assess the fair value of a long-lived asset or disposal group less any costs to sell each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset or disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale.

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Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company ceases depreciation of the asset and reports long-lived assets and/or the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale, respectively, in our condensed balance sheet. Refer to Note 3.

Interest Rate Swap Agreement

The interest rate swap agreement (“swap agreement”) is recognized on the balance sheet at its fair value. On the date the swap agreement is entered into, the Company designates the swap agreement as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash-flow hedge) if the applicable criteria are met. Changes in the fair value of the swap agreement are recorded in other comprehensive income until earnings are affected by the variability of cash flows.

The Company formally documents all relationships between hedging instruments and hedged items as well as its risk-management objective and strategy for undertaking various hedged transactions. This process includes linking all cash-flow hedges to specific assets and liabilities on the balance sheet or forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether they are highly effective in offsetting changes in cash flows of hedged items. When it is determined that the swap agreement is not highly effective or that it has ceased to be highly effective, the Company discontinues hedge accounting prospectively as discussed below.

The Company discontinues hedge accounting prospectively when (a) it is determined that the swap agreement is no longer effective in offsetting changes in the cash flows of a hedged item (including forecasted transactions); (b) the swap agreement expires or is sold, terminated or exercised; (c) the swap agreement is de-designated as a hedge instrument because it is unlikely that a forecasted transaction will occur; or (d) management determines that designation as a hedge instrument is no longer appropriate.

When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the swap agreement will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income or loss will be recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the swap agreement will be carried at its fair value on the balance sheet with subsequent changes in its fair value recognized in current-period earnings.

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.

Note 2 – ~~INVENTORIES~~CASH

~~Inventories consist~~The below table reconciles cash, cash equivalents and restricted cash as reported in the condensed balance sheets to the total of the ~~following:~~same amounts shown in the condensed statements of cash flows:

May 31, 2023

February 28, 2023

Current:

Product inventory
$ 56,900,700 $ 59,577,400
Inventory valuation allowance
(556,700
)
(490,900
)
Inventories net – current
$ 56,344,000 $ 59,086,500

Noncurrent:

Product inventory
$ 6,432,100 $ 5,135,200
Inventory valuation allowance
(451,600
)
(415,600
)
Inventories net – noncurrent
$ 5,980,500 $ 4,719,600

	August 31, 2023		August 31, 2022
Cash and cash equivalents	$	1,480,900	$	832,500
Restricted cash		1,077,800		-
Total cash, cash equivalents and restricted cash shown in the condensed statements of cash flows	$	2,558,700	$	832,500

~~Inventory~~The Company contracts with Braintree Payment Services and PayPal, Inc. (together “PayPal”), third-party merchant service processors, to capture PayPal, Visa, Discover and Mastercard payments from customers. Approximately 90% of all payments received by the Company are channeled through these processors. During the second quarter of fiscal 2024, PayPal, under the terms of our agreements, began to hold cash payments received from customers in ~~transit totaled $443,600 and $850,100 at May 31, 2023 and February 28, 2023, respectively.~~reserve to offset any potential chargebacks. The Company has classified the cash held in reserves as restricted cash.

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Note 3 – ASSETS HELD FOR SALE

During the second quarter of fiscal 2024, the Company executed the Third Amendment to the existing Credit Agreement with BOKF, NA. This amendment required the Company to list its real estate property located at 10302 East 55^th Place, Tulsa, Oklahoma 74146 for sale by August 18, 2023. This property was appraised for a market value of $5,100,000.

The Company ceased recording depreciation on the assets upon meeting the held for sale criteria at the end of its second quarter of fiscal 2024. The Company records assets held for sale at the lower of their carrying value or fair value less costs to sell. As of August 31, 2023, the total carrying value of assets held for sale was $811,800 and is separately recorded on the condensed balance sheets. The net cash received from the sale will be applied to the Term Loans outstanding in the Credit Agreement with the Company’s Bank.

Note 4 – INVENTORIES

Inventories consist of the following:

	August 31, 2023			February 28, 2023
Current:
Product inventory	$	54,317,200		$	59,577,400
Inventory valuation allowance		(635,000	)		(490,900	)
Inventories net – current	$	53,682,200		$	59,086,500

Noncurrent:
Product inventory	$	8,676,900		$	5,135,200
Inventory valuation allowance		(487,600	)		(415,600	)
Inventories net – noncurrent	$	8,189,300		$	4,719,600

Inventory in transit totaled $503,800 and $850,100 at August 31, 2023, and February 28, 2023, respectively.

Product 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 35 – 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,~~Oklahoma, all of which qualify as operating leases. 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 – Lessee

We recognize a lease liability, reported in other liabilities on the condensed 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 condensed 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.

	May 31, 2023			February 28, 2023			August 31, 2023			February 28, 2023
Operating lease assets:
Right-of-use assets	$	726,000		$	823,600		$	627,700		$	823,600

Operating lease liabilities:
Current lease liabilities	$	338,100		$	347,800		$	324,100		$	347,800
Long-term lease liabilities	$	387,900		$	475,800		$	303,600		$	475,800

Weighted-average remaining lease term (months)		33.3			36.3			30.3			36.3
Weighted-average discount rate		4.01	%		4.01	%		4.01	%		4.01	%

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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.

May 31, 2023

May 31, 2022

Fixed lease costs
$ 105,800 $ 37,900

Three Months Ended

August 31,

Six Months Ended

August 31,

2023

2022

2023

2022

Fixed lease costs

105,800

12,400

211,600

50,300

Future minimum rental payments under operating leases with initial terms greater than one year as of ~~May~~August 31, 2023, are as follows:

Years ending February 28 (29),
2024		296,900		$	191,200
2025		270,500			270,500
2026		122,200			122,200
2027		72,800			72,800
Total future minimum rental payments		762,400			656,700
Less: imputed interest		(36,400	)		(29,000	)
Total operating lease liabilities	$	726,000		$	627,700

The following table provides further information about our operating leases reported in our condensed financial statements:

May 31, 2023

May 31, 2022

Operating cash outflows – operating leases
$ 105,800 $ 37,900

Three Months Ended

August 31,

Six Months Ended

August 31,

2023

2022

2023

2022

Operating cash outflows – operating leases

105,800

12,400

211,600

50,300

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Operating Leases – Lessor

We recognize fixed rental income on a straight-line basis over the life of the lease as other income in 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),
2024	$	1,178,800	$	788,900
2025		1,547,100		1,547,100
2026		1,524,300		1,524,300
2027		1,554,800		1,554,800
2028		1,585,900		1,585,900
Thereafter		4,950,300		4,950,400
Total	$	12,341,200	$	11,951,400

The cost of the leased space was $10,637,900 at ~~May~~August 31, 2023 and February 28, 2023. The accumulated depreciation associated with the leased assets was ~~$2,946,700~~$3,039,900 and $2,853,200 as of ~~May~~August 31, 2023 and February 28, 2023, respectively. ~~Both the~~The leased assets and accumulated depreciation are included in assets held for sale and property, plant and equipment - net on the condensed balance sheets.

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Note 46 – DEBT

Debt consists of the following:

May 31, 2023

February 28, 2023

Line of credit
$ 10,959,200 $ 10,634,500

Floating rate term loan
$ 20,212,500 $ 20,475,000
Fixed rate term loan
14,437,500 14,625,000
Total term debt
34,650,000 35,100,000

Less current maturities
(34,456,100
)
(34,894,900
)
Less debt issue cost
(193,900
)
(205,100
)
Long-term debt, net
$ - $ -

	August 31, 2023			February 28, 2023

Line of credit	$	9,723,100		$	10,634,500

Floating rate term loan	$	19,950,000		$	20,475,000
Fixed rate term loan		14,250,000			14,625,000
Total long-term debt		34,200,000			35,100,000

Less current maturities		(1,800,000	)		(34,894,900	)
Less debt issue cost		(182,700	)		(205,100	)
Long-term debt, net	$	32,217,300		$	-

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 and executed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”). The Loan Agreement established 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”).

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.

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 and amended the financial covenant to not require the fixed charge ratio to be measured at May 31, 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%, required certain swap ~~agreements~~agreement be executed within 30 days of the amendment, 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.

~~Available credit under~~On June 6, 2023, pursuant to its interest rate risk and risk management strategy, the ~~current $14,000,000 revolving line of credit~~Company entered into a swap transaction (the “Swap Transaction”) with the ~~Company’s~~ Lender, ~~was approximately $3,040,800 at~~which converts a portion of the original $21,000,000 Floating Rate Term Loan from a floating interest rate to a fixed interest rate for the next two years. The Swap Transaction has a notional amount of $18,000,000 through fiscal quarter ending May 31, 2024, and then resets to $13,000,000 through May 30, 2025, while continuing to mirror the amortizing balance of the Floating Rate Term Loan. Under the terms of this agreement, the Company, in effect, has exchanged the floating interest rate of 30-Day Term SOFR Rate at the trade date of June 5, 2023, to a fixed rate of 4.73%. The Swap Transaction commenced on June 7, 2023, with a termination date of May 30, 2025.

On August 9, 2023, the Company executed the Third Amendment along with a Revised Credit Agreement (“Revised Loan Agreement”) with the Lender. This amendment extended the Revolving Loan maturity date to January 31, 2024 and introduced a stepdown to the Revolving Commitment from $13,500,000, through August 30, 2023; to $10,500,000 through October 30, 2023; to $9,000,000 through November 29, 2023; to $5,000,000 through December 30, 2023; to $4,500,000 through January 30, 2024; and to $4,000,000 on January 31, 2024. The amendment restricts the Company from entering into any new purchase orders and use its best efforts to cancel existing purchase orders. It also requires the Company to list its real estate property located at 10302 East 55th Place, Tulsa, Oklahoma, for sale with a licensed commercial real estate broker satisfactory to the Lender on or before August 18, 2023, among other items. Contingent upon the occurrence of an Event of Default in the agreement, the Company shall within 15 days list its real estate property for sale located at 5402 South 122nd Ave., Tulsa, Oklahoma (“Hilti Complex), with a licensed commercial real estate broker satisfactory to the Lender. The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50%, or 9.81% at August 31, 2023. The Revised Loan Agreement was updated for the changes in the Third Amendment as well as removed the fixed charge ratio and the ability for borrowings to be accelerated before the January 31, 2024 Revolving Loan maturity date.

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Available credit under the current $10,500,000 revolving line of credit with the Company’s Lender was approximately $776,900 at August 31, 2023.

Features of the Revised Loan Agreement ~~(as amended)~~ at ~~May~~August 31, 2023 include:

	(i)	Two Term ~~Loans~~Loan on 20-year amortization with 5-year maturity date of August 9, 2027
	(ii)	~~Revolving Loan maturity date of August 9, 2023~~
	~~(iii)~~	$15 Million Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26%
	~~(iv)~~(iii)	$21 Million Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was ~~6.79%~~7.06% at ~~May~~August 31, 2023)
	~~(v)~~(iv)	Stepdown Revolving Loan with maturity date of January 31, 2024. The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + ~~3.50%~~4.50% (effective rate was ~~8.54%~~9.81% at ~~May~~August 31, 2023)
	~~(vi)~~(v)	Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at ~~May~~August 31, 2023)

~~The~~Prior to the Third Amendment, executed on August 9, 2023, the Loan Agreement ~~contains~~contained provisions that ~~require~~required the Company to maintain a minimum fixed charge ~~ratio and limits any additional debt with other lenders.~~ratio. 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 and iswas not required to measure the fixed charge ratio as of May 31, 2023. ~~The Company does not expect~~Concurrent with the execution of the Third Amendment to ~~meet~~the Loan Agreement, the Loan Agreement was modified to incorporate the changes outlined in the Third Amendment and the fixed charge ratio ~~outlined in~~covenant was removed, as well as the amended Loan Agreement, during fiscal year 2024. Under the terms of the amended Loan Agreement, not meeting this ratio would represent an Event of Default. Should an Event of Default occur, the Lender will have theLender’s 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~~Loan due 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.~~

The short-term duration of the Revolving Loan, ~~Agreement, there is no guaranty that~~ the ~~Event~~uncertainty of ~~Default will be waived by~~ the ~~Lender,~~Company’s ability to meet the stepdown requirements outlined in the Third Amendment and the ~~bank may choose~~ability to ~~accelerate~~renew the ~~maturities of the Fixed Rate Term Loan and Floating Rate Term Loan. These conditions,~~line on January 31, 2024, among ~~others in the aggregate,~~other items 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~~that should it violate the ~~Lender, which will allow it to operate without default and reclassify the non-current portions~~terms of the ~~Fixed Rate~~Third Amendment or Revised Credit Agreement, the Company will sell the Hilti Complex and pay off the Term ~~Loan~~Loans and ~~Floating Rate Term Loan as long-term liabilities.~~Revolving Loan. The proceeds from the sale of the property are expected to generate sufficient cashflows to allow the Company to continue operations without borrowing funds from their bank. In addition, management’s plans include reducing inventory which will generate free cashflows and ~~related borrowing costs,~~ building the active number of PaperPie ~~Brand Partners~~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. Management expects these plans are probable of being achieved to alleviate the substantial doubt about continuing as a going concern and expects to generate sufficient liquidity to meet our obligations as they become due over the next twelve months.levels.

The following table reflects aggregate ~~current~~future scheduled maturities of ~~term~~long-term debt ~~excluding the Revolving Loan,~~ during the ~~current~~next five fiscal ~~year~~years as follows:

Year ending February 29,
Years ending February 28 (29),
2024	$	34,650,000	$	900,000
2025				1,800,000
2026				1,800,000
2027				1,800,000
2028				27,900,000
Total			$	34,200,000

Note 7 – OTHER INCOME

A summary of other income (loss) is show below:

	Three Months Ended August 31,				Six Months Ended August 31,
	2023		2022		2023		2022

Federal tax credits realized	$	3,808,700	$	-	$	3,808,700	$	-
Rental income		386,000		395,000		772,000		790,000
Other		58,100		1,000		63,500		(3,300	)
Total other income	$	4,252,800	$	396,000	$	4,644,200	$	786,700

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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 U.S. 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. Due to the subjectivity of the credit, the Company elected to account for the ERC as a gain analogizing to ASC 450-30, Gain Contingencies.

During the quarter ended August 31, 2023, the Department of Treasury notified the Company of ERC credits awarded under the CARES Act for the first three quarters of calendar 2021. During August 2023, the Company received three refund payments resulting from amended 2021 Q1, Q2 and Q3 941-X returns that were filed. As a result of receiving these refund payments, the Company is required to file amended fiscal 2021 and 2022 corporate income tax returns reducing the wages expense deduction associated with the credit received. The Company has recognized estimated federal and state tax liabilities associated with these amended returns of approximately $1,041,600 as of August 31, 2023, which are included in income taxes payable on the condensed balance sheets.

Note 58 – 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, based on Usborne’s fiscal year ending January 31st, 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. The Company did not meet the minimum purchase requirements for the fiscal period ending January 31, 2023, did not supply the letter of credit required under the Agreement and certain payments were not received timely, which could allow Usborne to exercise their option to terminate the Agreement. As of ~~May~~August 31, 2023, Usborne has not notified the Company of termination of the Agreement. During Usborne’s fiscal year ended January 31, 2022, the Company earned a volume rebate of approximately $1,000,000, which was documented in the new Agreement. Usborne has refused to pay the $1,000,000 volume rebate owed to the Company due to not meeting the minimum purchase requirements or supplying the required letter of credit. The Company is disputing the cancellation of the rebate but has not recognized any reduced cost of goods sold from the rebate in fiscal year 2024 due to its uncertainty.

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Under the terms of 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 slated 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 could begin distribution, and~~into the first quarter of fiscal 2024 at which time the Company continued to distribute Usborne products through April 30, 2023. Gross sales attributed to Usborne products sold within the Publishing division accounted for approximately 67.3%, or $2,740,000, during the quarter ended May 31, 2023, and 82.5%, or $5,451,000, during the quarter ended May 31, 2022. The Company continues to distribute Usborne products through our Direct Sales division, PaperPie. Grossdiscontinued sales of Usborne products ~~sold within the PaperPie division accounted for approximately 50.6%, or $8,362,300 during the quarter ended May 31, 2023, and 59.8%, or $14,791,700, during the quarter ended May 31, 2022.~~to its retail customers.

~~Purchases received from~~The following table summarizes Usborne ~~were approximately $935,600~~product gross sales by division and ~~$3,577,300 for the period ended May 31, 2023 and 2022, respectively. Total~~ inventory purchases ~~for those same periods were approximately $3,190,200 and $5,978,600, respectively.~~ by product type:

	Three Months Ended August 31,						Six Months Ended August 31,
	2023			2022			2023			2022
Gross sales of Usborne products by division:
PaperPie division	$	6,227,900		$	12,462,900		$	14,590,200		$	27,254,600
% of total PaperPie gross sales		48.8	%		61.1	%		49.8	%		60.4	%
Publishing division		-			6,214,200			2,740,000			11,665,200
% of total Publishing gross sales		0.0	%		84.5	%		41.1	%		83.5	%
Total gross sales of Usborne products	$	6,227,900		$	18,677,100		$	17,330,200		$	38,919,800

Purchases received by product type:
Usborne	$	625,200		$	1,206,200		$	1,560,700		$	4,783,500
% of total purchases received		21.9	%		38.1	%		25.8	%		52.3	%
All other product types		2,223,400			1,956,900			4,478,000			4,358,200
% of total purchases received		78.1	%		61.9	%		74.2	%		47.7	%
Total purchases received	$	2,848,600		$	3,163,100		$	6,038,700		$	9,141,700

Total Usborne inventory owned by the Company and included in our balance sheet was ~~$33,977,300~~$33,029,300 and $35,363,500 as of ~~May~~August 31, 2023 and February 28, 2023, respectively.

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Note 69 – EARNINGS (LOSS) 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.~~period excluding nonvested restricted stock awards. Diluted EPS ~~is based on~~includes the ~~combined weighted average number~~dilutive effect of ~~common shares outstanding~~issued unvested restricted stock awards and ~~dilutive~~additional potential common shares issuable ~~which include, where appropriate, the assumed exercise of~~under stock warrants, restricted stock and stock options, ~~and the assumed vesting of granted restricted share awards. In computing Diluted EPS, we have~~if applicable. We utilized the treasury stock ~~method.~~method in computing the potential common shares issuable under stock warrants, restricted stock and stock options.

The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted EPS is shown below:

	Three Months Ended May 31,					Three Months Ended August 31,					Six Months Ended August 31,
	2023			2022		2023		2022			2023		2022
Earnings (loss):
Net earnings (loss) applicable to common shareholders	$	(872,800	)	$	215,800	$	1,061,700	$	(801,900	)	$	188,900	$	(586,100	)

Weighted average shares:
Weighted average shares outstanding-basic		8,278,049			8,086,427		8,269,771		8,081,807			8,273,910		8,084,117
Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards		-			387,183		-		-			9,311		-
Weighted average shares outstanding-diluted		8,278,049			8,473,610		8,269,771		8,081,807			8,283,221		8,084,117

Earnings (loss) per share:
Basic	$	(0.11	)	$	0.03	$	0.13	$	(0.10	)	$	0.02	$	(0.07	)
Diluted	$	(0.11	)	$	0.03	$	0.13	$	(0.10	)	$	0.02	$	(0.07	)

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 May 31,				Three Months Ended August 31,				Six Months Ended August 31,
	2023		2022		2023		2022		2023		2022
Weighted average shares:
Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards		8,551		-		-		264,653		-		331,956

Note 10 – COMMITMENT AND CONTINGENCIES

During the second quarter the Company received a property tax assessment notice on our inventory balance at December 31, 2022 from Tulsa County totaling approximately $917,700. The Company appealed the assessment, requesting a reduction of the property tax assessment on inventory to approximately $175,500. On July 5, 2023, the Company met with the Tulsa County Board of Equalization (“Board”) and presented the appeal, which was granted by the Board. Subsequent to the Board’s decision, the Tulsa County Assessor appealed the Board’s decision by filing a case with the Oklahoma Court of Tax Review. The Company has accrued the property taxes associated with the Board’s decision of approximately $175,500 but awaits the final decision from the Oklahoma Court of Tax Review. Should the Court of Tax Review rule against the Board’s decision, the Company expects to further escalate the appeal to the Oklahoma Supreme Court.

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Note 711 – 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 Company did not exceed the defined metrics during these fiscal years and no shares were granted to members of management according to the Plan.

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~~These 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. During the second quarter of fiscal 2024, 4,000 restricted shares were forfeited. These forfeitures are available for reissue to remaining participants under the 2019 LTI Plan. The remaining unrecognized compensation expense of these awards, totaling approximately ~~$673,300~~$569,500 as of ~~May~~August 31, 2023, will be recognized ratably over the remaining vesting period of 2118 months.

A summary of compensation expense recognized in connection with restricted share awards follows:

Three Months Ended May 31,

2023

2022

Share-based compensation expense
$ 96,200 $ 261,600

	Three Months Ended August 31,						Six Months Ended August 31,
	2023			2022			2023			2022

Share-based compensation expense	$	96,200		$	261,600		$	192,400		$	523,200
Less reduction of expense for forfeitures		(16,600	)		(141,900	)		(16,600	)		(141,900	)
Share-based compensation expense - net	$	79,600		$	119,700		$	175,800		$	381,300

The following table summarizes stock award activity during the first ~~three~~six months of fiscal year ~~2024~~2023 under the 2019 LTI Plan:

	Shares		Weighted Average Fair Value (per share)		Shares			Weighted Average Fair Value (per share)

Outstanding at February 28, 2023		297,000	$	6.04		297,000		$	6.04
Granted		-		-		-			-
Vested		-		-		-			-
Forfeited		-		-		(4,000	)		6.04
Outstanding at May 31, 2023		297,000	$	6.04
Outstanding at August 31, 2023						293,000		$	6.04

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Note 812 – 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 ~~$1,938,100~~$1,414,200 and ~~$3,562,600~~$3,123,700 for the three months ended ~~May~~August 31, 2023 and 2022, respectively. These costs were $3,352,300 and $6,686,300 for the six months ended August 31, 2023 and 2022, respectively.

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Note 913 – 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 58 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, other income 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-month~~three and six-month periods ended ~~May~~August 31, 2023 and 2022, are as follows:

NET REVENUES	NET REVENUES					NET REVENUES
		Three Months Ended May 31,					Three Months Ended August 31,				Six Months Ended August 31,
		2023		2022			2023		2022		2023		2022
PaperPie		$	12,583,200	$	20,016,800		$	9,334,000	$	15,932,200	$	21,917,200	$	35,949,000
Publishing			1,940,800		3,144,100			1,259,100		3,486,100		3,199,900		6,630,200
Total		$	14,524,000	$	23,160,900		$	10,593,100	$	19,418,300	$	25,117,100	$	42,579,200

EARNINGS (LOSS) BEFORE INCOME TAXES	EARNINGS (LOSS) BEFORE INCOME TAXES							EARNINGS (LOSS) BEFORE INCOME TAXES
		Three Months Ended May 31,							Three Months Ended August 31,					Six Months Ended August 31,
		2023			2022				2023		2022			2023			2022
PaperPie		$	1,658,700		$	3,331,200			$	364,200	$	1,697,900		$	2,022,900		$	5,029,200
Publishing			460,000			749,800				436,600		815,900			896,600			1,565,600
Other			(3,319,300	)		(3,795,700	)			652,100		(3,619,400	)		(2,667,200	)		(7,415,200	)
Total		$	(1,200,600	)	$	285,300			$	1,452,900	$	(1,105,600	)	$	252,300		$	(820,400	)

Note 14 – INTEREST RATE SWAP AGREEMENT

The Company maintains an interest-rate risk-management strategy that uses interest-rate swap instruments to minimize significant, unanticipated earnings fluctuations caused by interest-rate volatility. The Company's specific goal is to lower the cost of its borrowed funds, when possible.

On June 5, 2023 the Company entered into a receive-variable (based on 30-Day SOFR)/pay-fixed interest-rate swap agreement related to $18,000,000 of our $21,000,000 Floating Rate Term Loan. This swap is utilized to manage interest-rate exposure over the period of the interest-rate swap and is designated as a highly effective cash-flow hedge. The differential to be paid or received on the swap agreement is accrued as interest rates change and is recognized in interest expense over the life of the agreement. The swap agreement amortizes down consistent with the $21,000,000 Floating Rate Term Loan, expires on May 30, 2025 and has effectively fixed the interest rate of $18,000,000 of the $21,000,000 Floating Rate Term Loan at 6.48%. The notional amount of the swap was $17,825,000 at August 31, 2023. The interest-rate swap contains no credit-risk–related contingent features and is cross-collateralized by all assets of the Company.

The effective portion of the unrealized gain or loss on this interest-rate swap is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the interest rate swap representing amounts excluded from the assessment of hedge effectiveness are recognized in current earnings.

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The fair value of the interest rate swap is included in the following caption on the condensed balance sheets as follows:

	August 31, 2023		February 28, 2023

Prepaid expenses and other assets	$	51,100	$	-

There was no portion of the unrealized gain that was excluded from the assessment of hedge effectiveness.

Note 1015 – FINANCIAL INSTRUMENTS

The following methods and assumptions are used in estimating the fair-value disclosures for financial instruments:

	-	The carrying amounts reported onin 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~~instruments.

	-	The estimated fair value of our assets held for sale was $4,694,000 as of August 31, 2023. We did not have any assets held for sale as of February 28, 2023. Management's estimates are based on the appraised market value and listing price of the asset less the costs to sell.

	-	The estimated fair value of our term notes payable is estimated by management to approximate ~~$33,981,600~~$33,588,100 and $34,253,500 as of ~~May~~August 31, 2023 and February 28, 2023, respectively. Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and collateral.

	-	The fair value of the Company’s interest rate swap is based on Level 2 inputs, including the present value of estimated future cash flows based on market expectations of the yield curve on variable interest rates.

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Note 1116 – DEFERRED REVENUES

The Company’s PaperPie 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 ~~May~~August 31, 2023 or February 28, 2023 are recorded as deferred revenues on the condensed balance sheets. We received approximately ~~$970,500~~$689,600 and $602,700 as of ~~May~~August 31, 2023 and February 28, 2023, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the end of the period.

Note 1217 – SUBSEQUENT EVENTS

~~On June 6,~~Effective September 11, 2023, ~~pursuant to its interest rate risk and risk management strategy,~~ the Company (“Seller”) entered into a ~~swap transaction (the “Swap Transaction”~~Contract of Sale of Real Estate (“Sale Agreement”) with ~~BOKF, NA, which converts a portion~~MA Temple Investments LLC (the “Buyer”), for the sale of the ~~original $21,000,000 Floating Rate Term Loan from a floating interest rate to a fixed interest rate for~~Company’s property located at 10302 East 55th Place, Tulsa, Oklahoma 74146 consisting of 104,875 rentable square feet on approximately 3.5 acres. The Sale Agreement price was $5,100,000. Per the ~~next two years. The Swap Transaction~~Sale Agreement, the closing process shall be completed on or before October 25, 2023, and has ~~a notional amount~~not closed by the time of ~~$18,000,000 through fiscal quarter ending May 31, 2024, and then resets to $13,000,000 through May 31, 2025, while continuing to match the amortizing balance of the original loan. Under~~this filing. In accordance with the terms of ~~this agreement,~~ the ~~Company, in effect, has exchanged~~Sale Agreement, upon closing of the ~~floating interest~~sale and commencing on the Closing Date, the Buyer and Seller shall execute a NNN (triple-net) Lease (the “Lease”) under which the Seller shall lease the entire building for a period of three years. The Seller will continue to have the right to sublease space within the building for the lease term. The initial lease rate ~~of 30-Day Term SOFR Rate + 1.75%, or 6.90%~~shall be $4.00 per rentable square foot, with 3% escalations at the ~~trade date~~beginning of ~~June 5,~~each year of the Lease. The Lease shall include NNN terms such that the Seller shall be responsible for utilities, insurance, property taxes and repairs and maintenance, excluding roof and structure, which shall be the Buyer’s responsibility. The Lease shall include other terms considered to be normal and customary in the local market. The net cash received from the sale will be applied to the Term Loans outstanding in the Credit Agreement with the Company’s Bank.

During September 2023, the cash held in reserve, presented as restricted cash on the Company’s condensed balance sheet, was increased to ~~a fixed rate of 4.73% + 1.75%, or 6.48%. The Swap Transaction commenced on June 7, 2023, with a termination date of May 30, 2025.~~

approximately $1,500,000.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Factors Affecting Forward-Looking Statements

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 existing inventory ~~purchases~~volumes are concentrated with Usborne. Our distribution agreement with Usborne includes annual minimum purchase volumes along with specific payment terms, which, if not met or if payments are not received in a timely manner, may result in termination of the agreement. During fiscal 2023, the Company did not meet the minimum purchase volumes, did not supply the letter of credit required under the Agreement and certain payments were not received timely. No notification of termination has been received by the Company as of the date of issuance of this Form ~~10-Q and Usborne continues to accept and fulfill purchase orders from the Company.~~10-Q. 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 sell our products through two separate divisions, PaperPie and Publishing. These two divisions each have their own customer base. The PaperPie division markets our complete line of products through a network of independent brand partners using a combination of home shows, internet party events and book fairs. The Publishing division 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 divisions. Other expenses consist primarily of the compensation for our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate offices and distribution facility.

The following table shows our condensed statements of operations data:

	Three Months Ended May 31,						Three Months Ended August 31,						Six Months Ended August 31,
	2023			2022			2023			2022			2023			2022
Net revenues	$	14,524,000		$	23,160,900		$	10,593,100		$	19,418,300		$	25,117,100		$	42,579,200
Cost of goods sold		5,150,400			7,851,500			3,684,300			6,939,700			8,834,700			14,791,300
Gross margin		9,373,600			15,309,400			6,908,800			12,478,600			16,282,400			27,787,900

Operating expenses
Operating and selling		2,397,900			3,770,600			1,916,000			3,798,800			4,313,900			7,569,400
Sales commissions		4,199,800			6,871,800			3,520,300			5,635,700			7,720,100			12,507,500
General and administrative		3,634,500			4,384,300			3,529,100			4,017,600			7,163,600			8,401,900
Total operating expenses		10,232,200			15,026,700			8,965,400			13,452,100			19,197,600			28,478,800

Interest expense		733,400			388,100			743,300			528,100			1,476,700			916,200
Other income		(391,400	)		(390,700	)		(4,252,800	)		(396,000	)		(4,644,200	)		(786,700	)
Earnings (loss) before income taxes		(1,200,600	)		285,300			1,452,900			(1,105,600	)		252,300			(820,400	)

Income tax expense (benefit)		(327,800	)		69,500			391,200			(303,700	)		63,400			(234,300	)
Net earnings (loss)	$	(872,800	)	$	215,800		$	1,061,700		$	(801,900	)	$	188,900		$	(586,100	)

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 ~~May~~August 31, 2023

Total operating expenses not associated with a reporting segment decreased ~~$0.8~~$0.6 million, or ~~21.1%~~17.1%, to ~~$3.0~~$2.9 million for the three-month period ended ~~May~~August 31, 2023, when compared to ~~$3.8~~$3.5 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a ~~$0.6~~$0.4 million decrease in labor, ~~expenses,~~ primarily within our warehouse operations, and a ~~$0.1~~$0.2 million decrease in freight handling expenses, ~~along with $0.1 million~~both resulting from a decrease in ~~combined lesser changes.~~gross sales.

Interest expense increased ~~$0.3~~$0.2 million, or ~~75.0%~~40.0%, to $0.7 million for the three months ended ~~May~~August 31, 2023, when compared to ~~$0.4~~$0.5 million for the same quarterly period a year ago due to increased interest rates on the Company’s variable rate borrowings, period over period.

~~Income taxes~~Other income ~~decreased $0.4~~increased $3.9 million, or ~~400.0%~~975.0%, to ~~a tax benefit of $0.3~~$4.3 million for the three months ended ~~May~~August 31, 2023, ~~from a tax expense of $0.1~~when compared to $0.4 million for the same quarterly period a year ago resulting ~~primarily~~from the receipt of the Employee Retention Credit totaling $3.8 million and a 0.1 million increase from the sale of assets.

Income taxes increased $0.7 million, or 233.3%, to a tax expense of $0.4 million for the three months ended August 31, 2023, from a ~~decrease~~tax benefit of $0.3 million for the same quarterly period a year ago, primarily resulting from operating losses in ~~gross sales.~~the second quarter ended August 31, 2022. Our effective tax rate ~~increased~~decreased to ~~27.3%~~26.9% for the quarter ended ~~May~~August 31, 2023, from ~~24.3%~~27.5% for the quarter ended ~~May~~August 31, 2022 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

Non-Segment Operating Results for the Six Months Ended August 31, 2023

Total operating expenses not associated with a reporting segment decreased $1.5 million, or 20.5%, to $5.8 million for the six-month period ended August 31, 2023, when compared to $7.3 million for the same period a year ago. Labor expenses decreased $0.9 million, primarily within our warehouse operations, and freight handling costs decreased $0.3 million for the six months ended August 31, 2023, both associated with reduced sales, and a $0.3 million decrease in other various expenses.

Interest expense increased $0.6 million, or 66.6%, to $1.5 million for the six months ended August 31, 2023, when compared to $0.9 million for the same period a year ago, due to increased interest rates on the Company’s variable rate borrowings, period over period.

Other income increased $3.8 million, or 475.0%, to $4.6 million for the six months ended August 31, 2023, when compared to $0.8 million for the same quarterly period a year ago, primarily resulting from the receipt of the Employee Retention Credit totaling $3.8 million.

Income taxes increased $0.3 million, or 150.0%, to a tax expense of $0.1 million for the six months ended August 31, 2023, from a tax benefit of $0.2 million for the same period a year ago, primarily resulting from operating losses for the six months ended August 31, 2022. Our effective tax rate decreased to 25.1% for the six months ended August 31, 2023, from 28.6% for the six months ended August 31, 2022 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.

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PaperPie Operating Results for the Three and Six Months Ended ~~May~~August 31, 2023

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

	Three Months Ended May 31,						Three Months Ended August 31,						Six Months Ended August 31,
	2023			2022			2023			2022			2023			2022
Gross sales	$	16,513,300		$	24,731,100		$	12,774,900		$	20,411,500		$	29,288,200		$	45,142,600
Less discounts and allowances		(4,937,000	)		(6,619,500	)		(4,169,300	)		(6,033,700	)		(9,106,300	)		(12,653,200	)
Transportation revenue		1,006,900			1,905,200			728,400			1,554,400			1,735,300			3,459,600
Net revenues		12,583,200			20,016,800			9,334,000			15,932,200			21,917,200			35,949,000

Cost of goods sold		4,186,300			6,162,000			3,230,900			5,085,500			7,417,200			11,247,500
Gross margin		8,396,900			13,854,800			6,103,100			10,846,700			14,500,000			24,701,500

Operating expenses
Operating and selling		1,875,400			2,985,500			1,612,900			2,960,700			3,488,300			5,946,200
Sales commissions		4,114,600			6,735,700			3,493,600			5,473,100			7,608,200			12,208,700
General and administrative		748,200			802,400			632,400			715,000			1,380,600			1,517,400
Total operating expenses		6,738,200			10,523,600			5,738,900			9,148,800			12,477,100			19,672,300

Operating income	$	1,658,700		$	3,331,200		$	364,200		$	1,697,900		$	2,022,900		$	5,029,200

Average number of active brand partners		23,200			32,200			18,100			26,800			20,600			29,500

PaperPie Operating Results for the Three Months Ended ~~May~~August 31, 2023

PaperPie net revenues decreased ~~$7.4~~$6.6 million, or ~~37.0%~~41.5%, to ~~$12.6~~$9.3 million during the three months ended ~~May~~August 31, 2023, when compared to ~~$20.0~~$15.9 million during the same period a year ago. The average number of active brand partners in the ~~first~~second quarter of fiscal 2024 was ~~23,200,~~18,100, a decrease of ~~9,000,~~8,700, or ~~28.0%~~32.5%, from ~~32,200~~26,800 average active brand partners selling in the ~~first~~second quarter of fiscal 2023. Recruiting and maintaining brand partners was negatively impacted throughout fiscal 2023, continuing through the first and second quarter of fiscal year 2024, by several factors ~~including;~~including record inflation, our new distribution agreement with Usborne and the rebranding of the division in the fourth quarter of fiscal year 2023. Inflation was most evident in increased food and fuel prices, which impacts the disposable income of our target customer base, which is families with small children. Sales during the ~~first~~second quarter of fiscal year 2024 continued to be negatively impacted by continuing inflationary pressures and we expect this to continue through the remainder of fiscal year 2024, as these pressures persist. Historically, when we have experienced these difficult inflationary times, our active brand partner numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living.

In the first fiscal quarter last year we executed a new distribution agreement with Usborne. The new distribution agreement created a level of uncertainty and distraction within our brand partners and continued through the fourth quarter as a result of our rebranding to PaperPie, which was a requirement of the new agreement. Rebranding this division disrupted sales in the fiscal fourth quarter and the impact continued into ~~the first quarter of~~ fiscal ~~year~~ 2024, as ~~Brand Partners~~brand partners had to update all of their individual marketing and training materials. We expect this impact to dissipate ~~this summer,~~during the remaining months of fiscal 2024, as all active ~~Brand Partners~~brand partners will have transitioned to a PaperPie ~~Brand Partner~~brand partner or will have made their first sale as a PaperPie ~~Brand Partner.~~

~~Table~~brand partner. This expectation was supported this summer as we saw an uptick in our active brand partner counts in August, which was the first time our brand partner count has grown since March 2023. We also expect growth in brand partners during the upcoming fall months, which is traditionally a growth period for our active brand partner levels as this is the most active selling period of ~~Contents~~

the year.

Net revenues during the fiscal 2024 ~~first~~second quarter were also negatively impacted from increased discounts. Discounts as a percentage of gross sales increased from ~~26.8%~~29.6% in the ~~first~~second quarter of fiscal 2023 to ~~29.9%~~32.6% in the ~~first~~second quarter of this year, ~~resulting in less net revenues of~~or approximately ~~$0.5~~$0.4 million. The increased discounts resulted from a change in order mix, with increased book fair order types that offer higher discounts impacting net revenues by ~~$0.4~~$0.2 million, along with additional product discounts offered to spur sales during the quarter impacting net revenues by ~~$0.1~~$0.2 million. ~~The order mix change resulted from an increase in book fair orders over web sales, which offer higher discounts and lower sales commissions to Brand Partners.~~

Gross margin decreased ~~$5.5~~$4.7 million, or ~~39.6%~~43.5%, to ~~$8.4~~$6.1 million during the three months ended ~~May~~August 31, 2023, when compared to ~~$13.9~~$10.8 million during the same period a year ago. Gross margin as a percentage of net revenues for the three months ended ~~May~~August 31, 2023, decreased to ~~66.7%~~65.4%, compared to ~~69.2%~~68.1% the same period a year ~~ago, representing a decrease of approximately $0.3 million.~~ago. The decrease in gross margin as a percentage of net revenues ~~was~~is primarily attributed to ~~increased discounts between~~ the ~~periods~~change in order mix and additional ~~shipping promotions.~~promotional discounts previously mentioned, as well as reduced purchasing volume discounts/rebates.

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PaperPie operating expenses ~~consists~~consist of operating and selling expenses, sales commissions and general and administrative expenses. Operating and selling expenses primarily ~~consists~~consist of freight expenses and materials and supplies. Sales commissions include amounts paid to ~~Brand Partners~~brand partners for new sales and promotions. These operating expenses are directly tied to the sales volumes of the PaperPie segment. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the segment.

Total operating expenses decreased ~~$3.8~~$3.4 million, or ~~36.2%~~37.4%, to ~~$6.7~~$5.7 million during the three-month period ended ~~May~~August 31, 2023, when compared to ~~$10.5~~$9.1 million reported in the same quarter a year ago. Operating and selling expenses decreased ~~$1.1~~$1.4 million, or ~~36.7%~~46.7%, to ~~$1.9~~$1.6 million during the three-month period ended ~~May~~August 31, 2023, when compared to $3.0 million reported in the same quarter a year ago, ~~primarily due to~~resulting from fewer sales and shipments leading to a decrease in outbound freight totaling approximately ~~$1.4 million. This expense reduction was partially offset by~~$1.2 million, along with a ~~$0.3~~$0.1 million ~~increase~~decrease in ~~consultant~~brand partner incentive ~~trip accruals associated with promotions to bolster sales.~~expenses and $0.1 million decrease in various other expenses. Sales commissions decreased ~~$2.6~~$2.0 million, or ~~38.8%~~36.4%, to ~~$4.1~~$3.5 million during the three-month period ended ~~May~~August 31, 2023, when compared to ~~$6.7~~$5.5 million reported in the same quarter a year ago, due primarily to the decrease in net ~~revenues. Sales commissions as~~revenues totaling approximately $2.3 million, offset by a ~~percentage of net revenues decreased from 33.7% to 32.7% between periods, primarily due to the~~one-time increase in ~~book fair orders~~commission bonuses of $0.3 million, which resulted from a bonus promotion run over ~~web sale orders, which earn less sales commissions overall.~~the summer. General and administrative expenses decreased $0.1 million, or ~~12.5%~~14.3%, to ~~$0.7~~$0.6 million during the three months ended ~~May~~August 31, 2023, when compared to ~~$0.8~~$0.7 million during the same period a year ago, ~~due primarily to $0.2 million of reduced bank fees from fewer~~driven by a reduction in credit card ~~transactions~~transaction fees resulting from the decrease in sales during the quarter ended August 31, 2023. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with ~~reduced sales, offset by a $0.1 million increase in other various costs.~~the PaperPie segment.

Operating income ~~for~~of the PaperPie segment decreased ~~$1.6~~$1.3 million, or ~~48.5%~~76.5% to ~~$1.7~~$0.4 million during the three months ended ~~May~~August 31, 2023, when compared to ~~$3.3~~$1.7 million reported in the same quarter a year ago. Operating income of the PaperPie division as a percentage of net revenues for the three months ended August 31, 2023 was 3.9%, compared to 10.7% for the three months ended August 31, 2022. Operating income for the PaperPie division decreased primarily from reduced sales; along with additional ~~product discounts, transportation~~promotional discounts and ~~incentive trip points~~commission bonus promotions offered to spur sales.

PaperPie Operating Results for the Six Months Ended August 31, 2023

PaperPie net revenues decreased $14.0 million, or 39.0%, to $21.9 million during the six-month period ended August 31, 2023, compared to $35.9 million from the same period a year ago. The average number of active brand partners in the six-month period ended August 31, 2023 was 20,600, a decrease of 8,900, or 30.2%, from 29,500 selling in same period a year ago. Recruiting and maintaining brand partners has been negatively impacted by several factors including record inflation, our new distribution agreement with Usborne and the rebranding of the division in the fourth quarter of fiscal year 2023. Inflation was most evident in increased food and fuel prices, which impacts the disposable income of our target customer base, which is families with small children. Sales during the first and second quarters of fiscal year 2024 continued to be negatively impacted by continuing inflationary pressures and we expect this to continue through the rest of fiscal year 2024, as these pressures persist. Historically, when we have experienced these difficult inflationary times, our active brand partner numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living.

Gross margin decreased $10.2 million, or 41.3%, to $14.5 million during the six-month period ended August 31, 2023, when compared to $24.7 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 66.2% for the six-month period ended August 31, 2023, when compared to 68.7% for the same period a year ago. The decrease in gross margin as a percentage of net revenues was primarily attributed to increased discounts and promotions between the periods along with additional shipping promotions offered in the current year.

Total operating expenses decreased $7.2 million, or 36.5%, to $12.5 million during the six-month period ended August 31, 2023, from $19.7 million for the same period a year ago. Operating and selling expenses decreased $2.4 million, or 40.7%, to $3.5 million during the six-month period ended August 31, 2023, when compared to $5.9 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 $2.5 million partially offset by a $0.1 million increase in brand partner incentive trip expenses. Sales commissions decreased $4.6 million, or 37.7%, to $7.6 million during the six-month period ended August 31, 2023, when compared to $12.2 million reported in the same period a year ago, primarily due to the decrease in net revenues. General and administrative expenses decreased $0.1 million, or 6.7%, to $1.4 million, from $1.5 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes totaling $0.3 million, which was offset by a $0.1 million increase in payroll expenses and a $0.1 million increase in depreciation expense.

Operating income of the ~~fiscal first quarter~~PaperPie segment decreased $3.0 million, or 60.0%, to $2.0 million during the six months ended August 31, 2023, when compared to $5.0 million reported in the same period last year. Operating income of the PaperPie division as a percentage of net revenues for the six months ended August 31, 2023 ~~also benefited~~was 9.2%, compared to 14.0% for the six months ended August 31, 2022. Operating income for the PaperPie division decreased primarily from ~~approximately $0.1 million~~reduced sales; along with additional promotional discounts and commission bonus promotions offered to spur sales.

Table of ~~volume discounts that did not repeat this quarter.~~

Contents

Publishing Operating Results for the Three and Six Months Ended ~~May~~August 31, 2023

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

Three Months Ended
May 31,

2023

2022

Gross sales
$ 4,073,300 $ 6,607,100
Less discounts and allowances
(2,134,300
)
(3,465,700
)
Transportation revenue
1,800 2,700
Net revenues
1,940,800 3,144,100

Cost of goods sold
964,100 1,689,500
Gross margin
976,700 1,454,600

Total operating expenses
516,700 704,800

Operating income
$ 460,000 $ 749,800

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	Three Months Ended August 31,						Six Months Ended August 31,
	2023			2022			2023			2022
Gross sales	$	2,597,900		$	7,358,000		$	6,671,200		$	13,965,100
Less discounts and allowances		(1,351,900	)		(3,874,400	)		(3,486,200	)		(7,340,100	)
Transportation revenue		13,100			2,500			14,900			5,200
Net revenues		1,259,100			3,486,100			3,199,900			6,630,200

Cost of goods sold		453,400			1,854,200			1,417,500			3,543,800
Gross margin		805,700			1,631,900			1,782,400			3,086,400

Total operating expenses		369,100			816,000			885,800			1,520,800

Operating income	$	436,600		$	815,900		$	896,600		$	1,565,600

Publishing Operating Results for the Three Months Ended ~~May~~August 31, 2023

Our Publishing division’s net revenues decreased ~~$1.2~~$2.2 million, or ~~38.7%~~62.9%, to ~~$1.9~~$1.3 million during the three-month period ended ~~May~~August 31, 2023, from ~~$3.1~~$3.5 million reported in the same period a year ago primarily due to the stoppage of distribution of Usborne products between the periods, which impacted net sales by approximately ~~$1.3~~$2.8 million, partially offset by an increase in Kane Miller and Learning Wrap-Ups sales of $0.4 million and new sales of SmartLab Toys totaling approximately $0.2 million. 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 right to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne was expected to use a different distributor to supply retail accounts with their products. The November 15, 2022 transition date, at Usborne’s request, was extended ~~until April 30, 2023. Net revenues~~into the first quarter of fiscal 2024. Gross sales attributed to Usborne products sold within the Publishing division accounted for ~~67.3%~~84.5%, or ~~$1.3~~$6.2 million during the quarter ended ~~May 31, 2023, and 82.5%, or $2.6 million during the quarter ended May~~August 31, 2022.

Gross margin decreased ~~$0.5~~$0.8 million, or ~~33.3%~~50.0%, to ~~$1.0~~$0.8 million during the three-month period ended ~~May~~August 31, 2023, from ~~$1.5~~$1.6 million reported in the same quarter a year ago, primarily due to the decrease in net revenues. Gross margin as a percentage of net revenues increased to ~~50.3%~~64.0% during the three-month period ended ~~May~~August 31, 2023, from ~~46.3%~~46.8% reported in the same quarter a year ago. Gross margin as a percentage of net revenues changed primarily from an increase in Learning Wrap-Ups sales, which carry a better margin.

Total operating expenses of the Publishing segment decreased $0.4 million, or 50.0%, to $0.4 million, from $0.8 million, during the three-month periods ended August 31, 2023 and 2022, respectively. This change was due to a $0.4 million decrease in freight expenses caused by lower sales.

Operating income of the Publishing division decreased $0.4 million or 50.0% to $0.4 million during the three-month period ended August 31, 2023, from $0.8 million for the three-month period ended August 31, 2022, respectively. The decrease in operating income was primarily associated with the decline in revenues associated with the new distribution agreement, which required the stoppage of Usborne products sold through this division.

Publishing Operating Results for the Six Months Ended August 31, 2023

Our Publishing division’s net revenues decreased by $3.4 million, or 51.5%, to $3.2 million during the six-month period ended August 31, 2023, from $6.6 million reported in the same period a year ago primarily due to the stoppage of distribution of Usborne products between the periods, which impacted net sales by approximately $4.1 million, partially offset by an increase in Kane Miller and Learning Wrap-Ups sales of $0.3 million and new sales of SmartLab Toys totaling approximately $0.4 million.

Gross margin decreased $1.3 million, or 41.9%, to $1.8 million during the six-month period ended August 31, 2023, from $3.1 million reported in the same period a year ago. Gross margin as a percentage of net revenues increased to 55.7%, during the six-month period ended August 31, 2023, from 46.6% reported in the same period a year ago. Gross margin as a percentage of net revenues changed primarily from changes in the mix of products sold between EDC-owned brands and Usborne, with Kane Miller, SmartLab Toys and Learning Wrap-Ups products carrying a better margin on average.

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Total operating expenses of the Publishing segment decreased ~~$0.2~~$0.6 million, or ~~28.6%~~40.0%, to ~~$0.5 million, from $0.7~~$0.9 million during the ~~three-month periods~~six-month period ended ~~May~~August 31, 2023, ~~and 2022, respectively.~~from $1.5 million reported in the same period a year ago. This change was due to a ~~$0.1~~$0.4 million decrease in freight expenses and a ~~$0.1~~$0.2 million decrease in sales commissions due to decreased overall ~~sales.~~sales and the restructuring of the Company’s internal sales department.

Operating income of the Publishing ~~division~~segment decreased ~~$0.2~~$0.7 million, or ~~28.6%~~43.8%, to ~~$0.5~~$0.9 million during the ~~three-month~~six-month period ended ~~May~~August 31, 2023 ~~from $0.7~~when compared to $1.6 million ~~for~~reported in the ~~three-month~~same period ~~ended May 31, 2022, respectively.~~a year ago, due primarily to the decrease in sales and operating expenses. The decrease in operating income was primarily associated with the decline in revenues associated with the ~~new distribution agreement, which required the~~ stoppage of Usborne ~~products sold through~~product sales in this division.

Liquidity and Capital Resources

EDC has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate. During periods of loss, ~~like the first quarter of fiscal year 2024,~~ EDC will ~~continue to~~ reduce purchases and sell through inventory to generate cash flows. The Company expects to reduce current excess inventory levels and use the cash proceeds to pay down the line of credit and portions of the term debt. ~~Available cash has historically been used to pay down outstanding bank loan balances, for capital expenditures, to pay dividends and to acquire treasury stock.~~ We utilize a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures when necessary. As of the end of the ~~first~~second fiscal quarter of 2024, our revolving bank credit facility loan balance was ~~$11.0~~$9.7 million with ~~$3.0~~$0.8 million in available capacity.

Available cash has historically been used to pay down outstanding bank loan balances, for capital expenditures, to pay dividends and to acquire treasury stock. We have $1.1 million of restricted cash held by our third-party credit card payment processor as of the end of our second fiscal quarter of 2024. The cash held in reserve was increased in September 2023 to approximately $1.5 million and is scheduled to increase again in October 2023 to approximately $2.0 million. The Company has requested the cash held in reserve be reduced and the cash be released back to the Company. PayPal has scheduled its next financial review in mid-October. The Company has engaged an alternate credit card processor to move to during the third quarter of fiscal 2024.

During the first ~~three~~six months of fiscal year 2024, we experienced cash inflows from operations of ~~$1,177,100.~~$4,700,300. These cash inflows resulted from:

●net ~~loss~~earnings of ~~$872,800~~$188,900, including the receipt of the employee retention tax credit of $3,808,700

Adjusted for:

●depreciation ~~and amortization~~ expense of ~~$683,600~~$1,366,000

●share-based compensation expense, net of ~~$96,200~~$175,800

●provision for inventory allowance of ~~$51,200~~

~~Offset by:~~$105,400

●deferred income taxes of ~~$329,700~~$39,100

●gain on sale of assets of $46,500

Positively impacted by:

●decrease in inventories, net of ~~$1,430,400~~$1,829,300

●increase in accounts payable of ~~$767,100~~

~~●increase in deferred revenues of $367,800~~$1,113,200

●decrease in accounts receivable of ~~$217,800~~$916,100

●decrease in prepaid expenses and other assets of ~~$128,000~~$221,600

~~Table~~●increase in deferred revenues of ~~Contents~~

$86,900

Negatively impacted by:

●decrease in accrued salaries and commissions, and other liabilities of ~~$1,362,500~~$1,280,400

Cash used in investing activities was ~~$300,900~~$470,500 for capital expenditures, consisting of ~~$288,100~~$510,200 in software upgrades to our proprietary systems that our PaperPie ~~Brand Partners~~brand partners use to monitor their business and place customer orders and ~~$12,800~~$36,000 of other various ~~purchases.~~purchases offset by the proceeds from the sale of assets of $75,700.

Cash used in financing activities was ~~$689,200,~~$2,375,300, which was comprised of net ~~borrowings~~payments on the line of credit of ~~$324,700 offset by~~$911,400, payments on term debt of $900,000 and cash paid in treasury stock transactions of ~~$563,900 and payments on term debt~~$563,900.

Table of ~~$450,000.~~

Contents

We continue to expect the cash generated from our operations, specifically from the reduction of excess inventory, and cash available through our line of credit with our Lender will provide us with the liquidity we need to support ongoing operations. Cash generated from operations will be used to purchase inventory in order to expand our product offerings and to pay down existing debt.

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 and amended the financial covenant to not require the fixed charge ratio to be measured at May 31, 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%, required certain swap agreement be executed within 30 days of the amendment, 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.

On June 6, 2023, pursuant to its interest rate risk and risk management strategy, the Company entered into a swap transaction (the “Swap Transaction”) with the Lender, which converts a portion of the original $21,000,000 Floating Rate Term Loan from a floating interest rate to a fixed interest rate for the next two years. The Swap Transaction has a notional amount of $18,000,000 through fiscal quarter ending May 31, 2024, and then resets to $13,000,000 through May 30, 2025, while continuing to mirror the amortizing balance of the Floating Rate Term Loan. Under the terms of this agreement, the Company, in effect, has exchanged the floating interest rate of 30-Day Term SOFR Rate at the trade date of June 5, 2023, to a fixed rate of 4.73%. The Swap Transaction commenced on June 7, 2023, with a termination date of May 30, 2025.

On August 9, 2023, the Company executed the Third Amendment along with a Revised Credit Agreement (“Revised Loan Agreement”) with the Lender. This amendment extended the Revolving Loan maturity date to January 31, 2024 and introduced a stepdown to the Revolving Commitment from $13,500,000, through August 30, 2023; to $10,500,000 through October 30, 2023; to $9,000,000 through November 29, 2023; to $5,000,000 through December 30, 2023; to $4,500,000 through January 30, 2024; and to $4,000,000 on January 31, 2024. The amendment restricts the Company from entering into any new purchase orders and use its best efforts to cancel existing purchase orders. It also required the Company to list its real estate property located at 10302 East 55th Place, Tulsa, Oklahoma, for sale with a licensed commercial real estate broker satisfactory to the Lender on or before August 18, 2023, among other items. Contingent upon the occurrence of an Event of Default in the agreement, the Company shall within 15 days list its real estate property for sale located at 5402 South 122nd Ave., Tulsa, Oklahoma (“Hilti Complex), with a licensed commercial real estate broker satisfactory to the Lender. The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50%, or 9.81% at August 31, 2023. The Revised Loan Agreement was updated for the changes in the Third Amendment as well as removed the fixed charge ratio and the ability for borrowings to be accelerated before the January 31, 2024 Revolving Loan maturity date.

Available credit under the current ~~$14,000,000~~$10,500,000 revolving line of credit with the Company’s Lender was approximately ~~$3,040,800~~$776,900 at ~~May~~August 31, 2023.

Features of the Revised Loan Agreement ~~(as amended)~~ at ~~May~~August 31, 2023 include:

	(i)	Two Term ~~Loans~~Loan on 20-year amortization with 5-year maturity date of August 9, 2027
	(ii)	~~Revolving Loan maturity date of August 9, 2023~~
	~~(iii)~~	$15 Million Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26%
	~~(iv)~~(iii)	$21 Million Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was ~~6.79%~~7.06% at ~~May~~August 31, 2023)
	~~(v)~~(iv)	Stepdown Revolving Loan with maturity date of January 31, 2024. The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + ~~3.50%~~4.50% (effective rate was ~~8.54%~~9.81% at ~~May~~August 31, 2023)
	~~(vi)~~(v)	Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at ~~May~~August 31, 2023)

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~~The~~

Prior to the Third Amendment, executed on August 9, 2023, the Loan Agreement ~~contains~~contained provisions that ~~require~~required the Company to maintain a minimum fixed charge ~~ratio and limits any additional debt with other lenders.~~ratio. 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 and iswas not required to measure the fixed charge ratio as of May 31, 2023. ~~The Company does not expect~~Concurrent with the execution of the Third Amendment to ~~meet~~the Loan Agreement, the Loan Agreement was modified to incorporate the changes outlined in the Third Amendment and the fixed charge ratio ~~outlined in~~covenant was removed, as well as the amended Loan Agreement, during fiscal year 2024. Under the terms of the amended Loan Agreement, not meeting this ratio would represent an Event of Default. Should an Event of Default occur, the Lender will have theLender’s 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~~Loan due 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.~~

~~Table of Contents~~

~~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~~covenant. Should the Company ~~will~~fail to meet any of the remaining terms outlined in the Revised Credit Agreement or fail to meet the stepdown requirements of the Revolving Loan, the Company shall within 15 days list its real estate property for sale located at 5402 South 122nd Ave., Tulsa, Oklahoma (“Hilti Complex”), with a licensed commercial real estate broker satisfactory to the Lender. Proceeds from the sale of the property would be ~~out of compliance in future periods. An Event of Default is expected associated~~used to pay off all the borrowings with the ~~amended Loan Agreement, there is no guaranty that~~Lender. A third-party appraisal was completed on the ~~Event of Default will be waived by the Lender, and the bank may choose to accelerate the maturities~~Hilti Complex, consisting of the ~~Fixed Rate Term Loan and Floating Rate Term Loan. These conditions, among others~~400,000 square feet building complex on approximately 40 acres, along with approximately 15 acres of adjacent unused land, in ~~the aggregate, raise substantial doubt over the Company's ability to continue as~~July of 2022 with a ~~going concern. Management has plans to enter into a new financing agreement by August 9, 2023, with the Lender, which will allow it to operate without default and reclassify the non-current portions~~market value 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. Management expects these plans are probable of being achieved to alleviate the substantial doubt about continuing as a going concern and expects to generate sufficient liquidity to meet our obligations as they become due over the next twelve months.$41,200,000.

Year ending February 29,
Years ending February 28 (29),
2024	$	34,650,000	$	900,000
2025				1,800,000
2026				1,800,000
2027				1,800,000
2028				27,900,000
Total			$	34,200,000

Risks and Uncertainties

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 condensed financial statements are issued.

As an Event of Default is expected associated with the Loan Agreement, and there is no guaranty that the Event of Default will be waived by BOKF, NA, there is sufficient uncertainty that, should the Lender choose to accelerate the maturitiesThe short-term duration of the ~~Fixed Rate Term Loan and Floating Rate Term~~Revolving Loan, the ~~Company could~~uncertainty of the Company’s ability to meet the stepdown requirements outlined in the Third Amendment and the ability to renew the line on January 31, 2024, raise substantial doubt over the Company's ability to continue as a going concern. Management has plans that should it violate the terms of the Third Amendment or Revised Credit Agreement, it will sell the Hilti Complex and pay off the Term Loans and Revolving Loan. The proceeds from a sale are expected to ~~enter into a new financing agreement by August 9, 2023, with BOKF, NA or another lender,~~generate sufficient cashflow to allow the Company to continue operations without borrowing funds from their bank. In addition, management’s plans include reducing inventory which will ~~allow it~~generate free cashflows and building the active PaperPie brand partners to ~~operate without default~~pre-pandemic levels. Although there is no guarantee these plans will be successful, management believes these plans, if achieved, should alleviate the substantial doubt about continuing as a going concern and ~~reclassify~~generate sufficient liquidity to meet our obligations as they become due over the ~~non-current portions of the Fixed Rate Term Loan and Floating Rate Term Loan as long-term liabilities.~~next twelve months.

~~Table of Contents~~

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States(“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report and in our audited financial statements as of and for the year ended February 28, 2023, 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.

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Revenue Recognition

Sales associated with product orders are recognized and recorded when products are shipped. Products are shipped FOB-Shipping Point. PaperPie’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 a product damaged in transit. Damaged returns are primarily received from the retail customers of our Publishing division. This damage occurs 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 ~~May~~August 31, 2023, and February 28, 2023.

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 $0.1 million and $0.2 million as of ~~May~~August 31, 2023, and February 28, 2023, respectively.

Inventory

Our inventory contains approximately 2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line is saleable as the products are not topical in nature and remain current in content today as well as in the future. Most of our products are printed in China, Europe, Singapore, India, Malaysia and Dubai typically resulting in a four to eight-month lead-time to have a title printed and delivered to us.

Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to the minimum order requirements of our suppliers. Noncurrent inventory is estimated by management using an anticipated turnover ratio by title, based primarily on historical trends and sales forecasts. 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 ~~$6.4~~$8.7 million and $5.1 million as of ~~May~~August 31, 2023, and February 28, 2023, respectively. Noncurrent inventory valuation allowances were $0.5 million and $0.4 million as of ~~May~~August 31, 2023, and February 28, 2023, respectively.

~~Table of Contents~~

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~~receiving 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.

Brand ~~Partners~~partners that meet certain eligibility requirements may request and receive inventory on consignment. We believe allowing our ~~Brand Partners~~brand partners 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 ~~9.0%~~10.0% of our active ~~Brand Partners~~brand partners have maintained consignment inventory at the end of the ~~first~~second quarter of fiscal year 2024. 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 ~~Brand Partners~~brand partners was ~~$1.4~~$1.6 million and $1.5 million as of ~~May~~August 31, 2023, and February 28, 2023, 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~~$1.1 million and $0.9 million as of ~~May~~August 31, 2023, and February 28, 2023, respectively.

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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 has 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 ~~three~~six months of fiscal year 2024, the Company recognized ~~$0.1~~$0.2 million of compensation expense associated with the shares granted.

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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 ~~first~~second 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

~~We are not a party to any material 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)

March 1 - 31, 2023
138,201 $ 4.08 138,201 376,393
April 1 - 30, 2023
- - - 376,393
May 1 - 31, 2023
- - - 376,393
Total
138,201 $ 4.08 138,201

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)

June 1 - 30, 2023		-	$	-		-		376,393
July 1 - 31, 2023		-		-		-		376,393
August 1 - 31, 2023		-		-		-		376,393
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. The 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		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).

10.2		Credit Agreement (as amended) dated August 9, ~~2002~~2022 by and between the Company and BOKF, NA, Tulsa, OK is incorporated herein by reference to Exhibit ~~10.01~~10.02 to form 8-K dated August ~~11, 2022~~9, 2023 (File No. 0-04957).

10.3		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).

10.4		Second Amendment to Credit Agreement, dated May 10, 2023 by and between the Company and BOKF, NA, Tulsa, ~~OK. Is~~OK is incorporated herein by reference to Exhibit 10.18 to Form 10-K dated February 28, 2023 (File No. 0-04957).

10.5		Third Amendment to Credit Agreement, dated August 9, 2023 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 17, 2023 (File No. 0-04957).

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: ~~July 13,~~October 16, 2023	By	/s/ Craig M. White
		President and Chief Executive Officer (Principal Executive Officer)

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iso4217:USD xbrli:shares

	May 31, 2023		May 31, 2022

Operating cash outflows – operating leases	$	105,800	$	37,900

	Three Months Ended May 31,
	2023		2022

Share-based compensation expense	$	96,200	$	261,600