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Item 7. Management’s Discussion and Analysis

2023-05-17 compared with 2022-05-05 · 186 added, 168 removed, 131 unchanged (73% of the section changed)

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Management Summary

We are the exclusive United States trade co-publisher of Usborne children’s books and the owner of Kane Miller.

We operate two separate segments;

UBAM and Publishing, to sell our Usborne and Kane Miller children’s books.

These two segments each have their own customer base.

The Publishing segment markets its products on a wholesale basis to various retail accounts.

The UBAM segment markets its products through a network of independent sales consultants using a combination of home shows, social media platform events (called “online parties”) and book fairs.

All other supporting administrative activities are recognized as other expenses outside of our two segments.

Other expenses are primarily compensation of our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate offices and distribution facilities.

UBAM Division

Our UBAM division uses a multi-level direct selling platform to market books through independent sales representatives (“consultants”) located throughout the United States.

The customer base of UBAM consists of individual purchasers, as well as schools and public libraries.

Revenues are primarily generated through book showings in individual homes, on social media collaboration platforms, through book fairs with school and public libraries and other events.

An important factor in the continued growth of the UBAM division is the addition of new sales consultants and the retention of existing consultants.

Current active consultants (defined as those with sales during the past six months) often recruit new sales consultants.

UBAM makes it easy to recruit by providing sign-up kits for which new consultants can earn rewards including discounted books and cash based on exceeding certain sales criteria.

In addition, our UBAM division provides our consultants with an extensive operational handbook, valuable training and an individual website they can customize and use to operate their business.

New Consultants Added During Fiscal Year

Active Consultants at End of Fiscal Year

Our UBAM division’s multi-level marketing platform presently has eight levels of sales representatives:

We are the owner and exclusive publisher of Kane Miller children’s books;

Learning Wrap-Ups, maker of educational manipulatives;

and SmartLab Toys, maker of STEAM-based toys and games.

We are also the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books.

Significant portions of our inventory purchases are concentrated with Usborne.

Our distribution agreement with Usborne includes annual minimum purchase volumes along with specific payment terms, which, if not met or if payments are not received timely, may result in termination of the agreement.

During fiscal 2023, the Company did not meet the minimum purchase volumes and certain payments were not received timely.

No notification of termination has been received and Usborne continues to accept and fulfill purchase orders from the Company.

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.

PaperPie Division

Our PaperPie division uses a multi-level direct selling organizational structure to market our products using independent sales representatives (“Brand Partners”) located throughout the United States.

The customer base of PaperPie consists of individual purchasers, as well as schools and public libraries.

Revenues are primarily generated through book showings in individual homes, on social media collaboration platforms, through book fairs with school and public libraries and other in-person events.

An important factor in the continued growth of the PaperPie division is the addition of new brand partners and the retention of existing Brand Partners.

Current active Brand Partners (defined as those with sales during the past six months) are primarily responsible for recruiting new brand partners.

PaperPie makes it easy to recruit by providing joining incentives to new brand partners including discounted products and cash bonus awards based on exceeding certain sales criteria.

In addition, our PaperPie division provides our Brand Partners with an extensive operational handbook, valuable training, and an individual website they can customize and use to generate sales.

The Company also provides a “back-office” operations platform that allows Brand Partners to track their individual and team business results.

Brand Partners

New Brand Partners Added During Fiscal Year

Active Brand Partners at End of Fiscal Year

Our PaperPie division’s multi-level marketing organizational structure presently has eight levels of sales representatives, collectively known as Brand Partners:

Brand Partners

Advanced Leaders

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Senior Directors

Upon signing up, sales representatives begin as “Consultants”.

Consultants receive “weekly commissions” from each sale they make;

the commission rate they receive on each sale is determined by the marketing program under which the sale is made.

In addition, Consultants receive a monthly sales bonus once their sales reach an established monthly goal and other awards (called “Home Office Challenges”) for meeting other individual sales and recruiting goals for the month.

Consultants who recruit a specified number of other consultants into their downline “central group” become “Team Leaders”.

Upon reaching this Team Leader level, consultants become eligible to receive “monthly override payments” which are calculated on sales made from their downline central group of recruits.

Upon signing up, sales representatives begin as “Brand Partners”.

Brand Partners receive “weekly commissions” from each sale they make;

the commission rate they receive on each sale is determined by the order type under which the sale is made.

In addition, Brand Partners receive a monthly sales bonus once their total sales reach an established monthly goal and other awards (called “Level Perks”) for meeting other individual sales and recruiting goals for the month.

Brand Partners who recruit a specified number of other Brand Partners into their downline become “Team Leaders”.

These downline recruits are known as their "Central Group".

Upon reaching this Team Leader level, Brand Partners become eligible to receive “monthly override payments” which are calculated on sales made by their Central Group and downlines up to two levels below.

Team Leaders that recruit and promote other Team Leaders, and meet other established criteria, are eligible to become “Advanced Leaders”.

Once Advanced Leaders promote a second level consultant, add additional recruits and meet other established criteria, they become “Senior Leaders”, “Executive Leaders”, “Senior Executive Leaders”, “Directors” or “Senior Directors”.

One-time bonus payments are made to consultants at each promotion level.

Executive Leaders and higher receive an additional monthly override payment based upon the sales of their downline groups.

Directors and higher receive an additional bonus payment if they promote an Advanced Leader to a Senior Leader from their central group.

The maximum override payment a leader can receive is calculated on three levels below their downline central group.

During fiscal year 2022, internet sales continued to be the largest sales channel within our UBAM division.

Once Advanced Leaders promote a second level Brand Partner, add additional recruits and meet other established criteria, they become “Senior Leaders”, “Executive Leaders”, “Senior Executive Leaders”, “Directors” or “Senior Directors”.

One-time cash bonus payments are made to Advance Leaders and higher at each promotion level.

Executive Leaders and higher receive an additional monthly override payment based upon the sales of their executive group.

Directors and higher receive an additional bonus payment if they promote a Team Leader from their Central Group.

The maximum override payment a leader can receive is calculated on their Central Group and three levels below.

During fiscal year 2023, internet sales continued to be the largest sales channel within our PaperPie division.

The use of social media and party plan platforms, such as those available on Facebook, continue to be popular sales tools.

These platforms allow consultants to “present” and customers to “attend” online purchasing events from any geographical location.

Customer’s internet orders are primarily received via the consultant’s customized website, which is hosted by the Company.

Consultants contact hosts or hostesses (collectively “hostess”) who then provide a list of contacts to invite to an online party.

During the online party, the consultant answers attendee’s questions and provides product recommendations.

These attendees then select desired products and place orders via the consultant’s customized website.

Internet orders are processed through a standard online “shopping cart checkout” and the consultant receives sales credit and commission on the transaction.

These platforms allow Brand Partners to “present” and customers to “attend” online purchasing events from any geographical location.

Customers’ internet orders are primarily received via the Brand Partner’s customized website, which is hosted by the Company.

Brand Partners contact hosts or hostesses (collectively “hostess”) who then provide a list of contacts to invite to an online party.

During the online party, the Brand Partner answers attendees’ questions and provides product recommendations.

These attendees then select desired products and place orders via the Brand Partner’s customized website.

Internet orders are processed through a standard online “shopping cart checkout” and the Brand Partner receives sales credit and commission on the transaction.

All internet orders are shipped directly to the end customer.

The hostess earns discounted books based on the total sales from the attendees at the online party.

Home parties occur when consultants contact hostesses to hold book shows in their homes.

The consultant assists the hostess in setting up the details for the show, makes a presentation at the show and takes orders for the books.

The hostess earns discounted books based on the total sales at the party, including internet orders for those customers who can only attend via online access.

Home party orders are typically shipped to the hostess who then distributes the books to the end customer.

The hostess earns discounted products based on the total sales from the attendees at the online party.

Brand Partners use the list of contacts provided by the hostess as additional contacts for future hostess and recruiting opportunities.

In-person parties also occur when Brand Partners contact hostesses to hold book shows in their homes.

The Brand Partner assists the hostess in setting up the details for the show, makes a presentation at the show and takes orders for the products.

The hostess earns discounted products based on the total sales at the party, including internet orders for those customers who can only attend via online access.

These orders are typically shipped to the hostess who then distributes the products to the end customer.

Customer specials are also available when customers, or their party, order above a specified amount.

Additionally, home shows often provide an excellent opportunity for recruiting new consultants.

UBAM net revenues also includes sales to schools and libraries through educational consultants.

The school and library program includes book fairs which are held with an organization as the sponsor.

The consultant provides promotional materials to introduce our books to parents.

Parents turn in their orders at a designated time.

The book fair program generates discounted books for the sponsoring organization.

UBAM also has various fundraiser programs.

Reach for the Stars is a pledge-based reading incentive program that provides cash and books to the sponsoring organization and books for the participating children.

An additional fundraising program, Cards for a Cause , offers our consultants the opportunity to help members of the community by sharing proceeds from the sale of specific items.

As with online parties, home shows often provide an excellent opportunity for recruiting new brand partners.

PaperPie net revenues also includes sales to schools and libraries through PaperPie Learning, a separate program for Brand Partners which requires them to pass certain qualifications and complete training requirements.

The PaperPie Learning program includes book fairs which are held with an organization as the sponsor.

The Brand Partner provides promotional materials to introduce our products to parents, who then turn in their orders at a designated time.

The book fair program generates discounted products for the sponsoring organization.

PaperPie also generates revenues through various fundraiser programs directed toward schools and community organizations.

Reach for the Stars is a pledge-based reading incentive program that provides cash and products to the sponsoring organization and products for the participating children.

An additional fundraising program, Cards for a Cause , offers our Brand Partners the opportunity to help members of the community by sharing proceeds from the sale of specific items.

Organizations sell variety boxes of greeting-type cards and donate a portion of the proceeds to help support their related causes.

Publishing Division

Our Publishing division operates in a market that is highly competitive, with a large number of retail companies engaged in the selling of books.

Our Publishing division operates in a market that is highly fragmented, with many types of retail companies engaged in selling children’s books and toys.

The Publishing division’s customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums.

To reach these markets, the Publishing division utilizes a combination of commissioned sales representatives located throughout the country and a commissioned in-house sales group located at our headquarters.

To reach these markets, the Publishing division utilizes a combination of commissioned sales representatives and an in-house sales group located at our headquarters.

The table below shows the percentage of net revenues from our Publishing division based on market type.

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Publishing uses a variety of methods to attract potential new customers and maintain current customers.

Our employees attend many of the national trade shows held by the book selling industry each year, allowing us to contact potential buyers who may be unfamiliar with our books.

We actively target the national book chains through joint promotional efforts and institutional advertising in trade publications.

Our products are then featured in promotions, such as catalogs, offered by the vendor.

We may also seek to acquire, for a fee, an end cap position (our products are placed on the end of a shelf) in a bookstore, which we and the publishing industry consider an advantageous location in the bookstore.

Publishing’s in-house sales group targets the smaller independent book and gift store customers.

This market has seen continued growth over the past several years as our sales to large bookstore chains have fluctuated based primarily on the number of promotions that we are able to run in the national chain stores.

Our semi-annual, full-color, 200-page catalogs, are mailed to over 4,000 customers and potential customers.

We also offer two display racks to assist stores in displaying our products.

Our Publishing division activities and sales were significantly impacted during fiscal year 2021 due to the COVID-19 pandemic.

Many of the national trade shows were canceled and a significant number of our retail customers temporarily closed to comply with their local health department recommendations.

However, Publishing sales significantly increased this fiscal year due to the addition of new customers and stores opening back up to pre-pandemic levels.

Our employees attend many of the national trade shows held by the book and toy selling industry each year, allowing us to contact potential buyers who may be unfamiliar with our products.

Our marketing strategy targets toy and specialty stores, in addition to bookstores and museum gift shops, through print media advertising in trade publications.

In some instances, our products are featured in promotions and catalogs by participation in co-ops with national chain retailers.

Publishing’s sales representatives actively target the smaller independent book and gift store customers.

This market has seen continued growth due to a resurgence in the opening of local bookstores, toy stores, and specialty stores across the U.S., coupled with the efforts of both our in-house and outside sales representatives to increase sales to local and independent businesses.

The Company shifted its focus toward independent stores as national chain stores saw a change in buying programs and purchasing slowed with COVID-19.

Our semi-annual, full-color, 128-page catalogs are mailed to approximately 4,000 customers and potential customers.

See Publishing Operating Results for discussion of our updated distribution agreement with Usborne.

Result of Operations

The following table shows our statements of earnings data:

The following table shows our statements of operations data:

Twelve Months Ended

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Interest expense

Earnings before income taxes

Earnings (loss) before income taxes

Net earnings (loss)

See the detailed discussion of net revenues, gross margin and operating expenses by reportable segment below.

The following is a discussion of significant changes in the non-segment related operating expenses, other income and expenses and income taxes during the respective periods.

Non-Segment Operating Results

Total operating expenses not associated with a reporting segment were $14.9 million for fiscal year ended February 28, 2023, compared to $17.8 million for the same period a year ago.

Operating expenses decreased $1.6 million primarily related to a decrease in warehouse labor of $1.6 million driven by efficiencies gained from the addition of two new pick-pack-ship lines in fiscal year 2022 and lower sales, plus a $1.0 million decrease in freight-handling costs from the decrease in number of outbound shipments, offset by a $0.5 million increase in depreciation expense related to the addition of the new pick-pack-ship lines and a $0.5 million increase in warehouse rent for the increase in inventory.

Interest expense increased $0.3 million, to $0.9 million for fiscal year ended February 28, 2022, compared to $0.6 million reported for fiscal year ended February 28, 2021 due primarily to the increase in our line of credit and the addition of the advancing term loans in the current fiscal year.

Income taxes decreased $1.7 million, to $2.9 million for fiscal year ended February 28, 2022, from $4.6 million for the same period a year ago.

Operating expenses decreased $2.9 million primarily as a result of a reduction in labor expenses of $2.5 million, with our warehouse payroll having the largest reduction, and a $0.9 million decrease in freight-handling costs, both associated with a decrease in gross sales, plus a $0.2 million decrease in warehouse rent for reduced inventory levels.

These expense reductions were offset by a $0.3 million increase in depreciation expense primarily related to the addition of the new pick-pack-ship lines placed into service in fiscal year 2022, a $0.3 million increase in property taxes and insurance costs, and a $0.1 million increase in expenses related to the purchase of SmartLab Toys and the addition of the Seattle, WA office location.

Interest expense increased $1.3 million, to $2.2 million for fiscal year ended February 28, 2023, compared to $0.9 million reported for fiscal year ended February 28, 2022, due to increased borrowings with our lenders primarily associated with inventory and increases in floating interest rates.

Other income decreased $0.6 million, to $1.3 million for fiscal year ended February 28, 2023, compared to $1.9 million reported for fiscal year ended February 28, 2022, due to $0.3 million of recovered losses in fiscal 2022 associated with a shipping vessel incident in fiscal 2021 that did not repeat in the current fiscal year, $0.2 million of startup costs recognized from the acquisition of SmartLab Toys and $0.1 million in other various changes.

Income taxes decreased $3.8 million, to a tax benefit of $0.9 million for fiscal year ended February 28, 2023, from a tax expense of $2.9 million for the same period a year ago.

This decrease was primarily related to a decrease in taxable income for the current fiscal year compared to the prior fiscal year.

The effective tax rate decreased by 0.6%, to 26.1% for fiscal year ended February 28, 2022, as compared to 26.7% for fiscal year ended February 28, 2021 primarily due to sales mix fluctuations between states.

The effective tax rate increased by 0.8%, to 26.9% for fiscal year ended February 28, 2023, as compared to 26.1% for fiscal year ended February 28, 2022, primarily due to sales mix fluctuations between states.

Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

UBAM Operating Results

The following table summarizes the operating results of the UBAM segment for the twelve months ended February 28:

PaperPie Operating Results

The following table summarizes the operating results of the PaperPie segment for the twelve months ended February 28:

Twelve Months Ended

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Operating income

Average number of active consultants

UBAM net revenues decreased $67.0 million, or 34.2%, to $129.0 million for fiscal year ended February 28, 2022, when compared with net revenues of $196.0 million reported for fiscal year ended February 28, 2021.

The average number of active consultants in fiscal year 2022 was 44,900, a decrease of 3,800, or 7.8%, from 48,700 in fiscal year 2021.

The Company reports the average number of active consultants as a key indicator for this division.

During fiscal year 2021, our active consultants grew from 29,600 at the beginning of the year to 57,600 at the end of the fiscal year.

This active consultant growth resulted from pandemic-related events such as seeking replacement income from loss of full-time employment, an increase in the need for work-from-home opportunities and an increased demand for educational products in the home.

During fiscal year 2022 our active consultant count has declined due to consultants returning to full-time work, as well as families experiencing children returning to the classroom, therefore requiring less learning-from-home materials than they had in the prior year.

While a decrease in sales and consultants has occurred in fiscal year 2022, our UBAM division’s active consultants and sales continue to exceed pre-pandemic levels.

UBAM gross margin decreased $48.6 million, or 34.6%, to $91.8 million for fiscal year ended February 28, 2022, from $140.4 million reported for fiscal year ended February 28, 2021.

Average number of active Brand Partners

PaperPie net revenues decreased $54.5 million, or 42.2%, to $74.5 million for fiscal year ended February 28, 2023, when compared with net revenues of $129.0 million reported for fiscal year ended February 28, 2022.

The average number of active Brand Partners in fiscal year 2023 was 28,000, a decrease of 16,900, or 37.6%, from 44,900 in fiscal year 2022.

The Company reports the average number of active Brand Partners as a key indicator for this division.

Our Brand Partner numbers have declined due to Brand Partners returning to full-time employment, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials than they had in the prior year.

We also saw new Brand Partner recruiting negatively impacted by the recent change in our distribution agreement with Usborne Publishing Limited.

The new agreement created a level of uncertainty with our Brand Partners until we were able to effectively communicate the continuation of our relationship within the Direct Sales division.

Further, sales were impacted in our fiscal fourth quarter as we rebranded our direct sales division from Usborne Books & More (“UBAM”) to PaperPie.

Our Brand Partners were challenged with updating their individual marketing materials, training videos and personal business websites to the new brand.

The time spent updating these business items reduced our Brand Partners’ available time to generate sales, most clearly identified in the first two weeks of January 2023.

In addition, sales during fiscal 2023 continued to be negatively impacted by economic factors that include recent record inflation, resulting in high fuel cost and food price increases that continue to impact the disposable income of our customers.

We expect this impact on sales to continue as inflationary pressures persist.

PaperPie gross margin decreased $41.9 million, or 45.6%, to $49.9 million for fiscal year ended February 28, 2023, from $91.8 million reported for fiscal year ended February 28, 2022.

Gross margin as a percentage of net revenues decreased 4.3% to 66.9% for fiscal year 2023 when compared to 71.2% for fiscal year 2022.

The decrease in gross margin as a percentage of net revenues was due to the change in mix of order types received.

In the current fiscal year, our web sales, which have the lowest discounts and pay the highest commissions decreased, while book fairs, school and library sales and other in-person sale types increased year over year, due to the lessening of COVID-19 restrictions and the reopening of schools and other in-person activities.

Total UBAM operating expenses decreased $40.2 million, or 37.4%, to $67.4 million during the fiscal year ended February 28, 2022, when compared with $107.6 million reported for fiscal year ended February 28, 2021.

Operating and selling expenses decreased $12.4 million, to $18.8 million for fiscal year ended February 28, 2022, from $31.2 million reported in the same period a year ago due to a $11.4 million decrease in shipping costs associated with the decrease in volume of orders shipped and a $1.0 million decrease in accruals for the Company’s annual incentive trip and other consultant rewards associated with the decrease in UBAM sales.

The decrease in gross margin as a percentage of net revenues is attributed to higher discounts being offered to induce sales and a change in the mix of order types received impacting margins by approximately $1.0 million, rising ocean freight costs on inbound inventory totaling approximately $1.2 million, which increased cost of goods sold, and reduced purchasing volume discounts/rebates totaling approximately $1.0 million.

Total PaperPie operating expenses decreased $26.7 million, or 39.6%, to $40.7 million during the fiscal year ended February 28, 2023, when compared with $67.4 million reported for fiscal year ended February 28, 2022.

Operating and selling expenses decreased $6.3 million, to $12.5 million for fiscal year ended February 28, 2023, from $18.8 million reported in the same period a year ago.

These decreases were due to a $7.5 million decrease in shipping costs associated with the decrease in volume of orders shipped from lower sales, offset by a $1.2 million increase in accruals for Brand Partner incentive trip expenses and convention expenses.

Sales commissions decreased $18.7 million, to $25.1 million during the fiscal year ended February 28, 2023, when compared to $43.8 million reported in the same period a year ago primarily due to the decrease in net revenues.

General and administrative expenses decreased $1.7 million, to $3.1 million during the fiscal year ended February 28, 2023, when compared with $4.8 million reported for fiscal year ended February 28, 2022.

This decrease was due to $1.5 million of decreased credit card transaction fees associated with decreased sales volumes and a $0.4 million decrease in promotions and marketing expenses associated with decreased consultant counts.

Operating income of our UBAM division decreased $8.4 million, or 25.6%, to $24.4 million for fiscal year ended February 28, 2022, as compared to $32.8 million reported for fiscal year ended February 28, 2021.

Operating income of the UBAM division as a percentage of net revenues for the year ended February 28, 2022 was 18.9%, compared to 16.7% for the year ended February 28, 2021, a change of 2.2%.

Operating income as a percentage of net revenues changed from the prior year primarily due to $1.3 million of reduced freight handling costs primarily from reduced peak surcharges in the current fiscal year due to lower shipping volumes, a $0.4 million decrease in accrual expenses for the Company’s annual incentive trip and other consultant rewards resulting from less award earners, offset by a $0.6 million increase in cost of goods sold resulting from fewer rebates and discounts associated with purchase volumes as well as increased ocean freight costs on inbound inventory and $0.3 million in other various cost changes.

This decrease was due to $1.0 million of decreased credit card transaction fees associated with decreased sales volumes, a $0.4 million decrease in promotions and marketing expenses associated with decreased Brand Partner counts, and a $0.3 million decrease in payroll and various other expenses.

Operating income of our PaperPie division decreased $15.2 million, or 62.3%, to $9.2 million for fiscal year ended February 28, 2023, as compared to $24.4 million reported for fiscal year ended February 28, 2022.

Operating income for the PaperPie division as a percentage of net revenues for the year ended February 28, 2023, was 12.3%, compared to 18.9% for the year ended February 28, 2022, a change of 6.6%.

Operating income as a percentage of net revenues changed from the prior year primarily due to the decrease in net revenues caused by higher discounts and lower transportation revenue, the increase in cost of goods sold resulting from higher inbound freight costs along with fewer rebates and discounts associated with purchase volumes and the increase in accrued expenses for the Company’s Brand Partners related to the annual incentive trip and convention.

Publishing Operating Results

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Operating income

Our Publishing division’s net revenues increased $4.7 million, or 54.7%, to $13.3 million for fiscal year ended February 28, 2022, when compared with net revenues of $8.6 million reported for fiscal year ended February 28, 2021.

Many Publishing customers closed their stores during the first and second quarters of fiscal year 2021 due to the COVID-19 pandemic and did not reopen until the third or fourth quarter of fiscal year 2021.

As such, much of the sales increase resulted from the return of customer activity to pre-pandemic levels in fiscal year 2022.

Gross margin increased $1.9 million, to $6.1 million for fiscal year ended February 28, 2022, from $4.2 million reported for fiscal year ended February 28, 2021.

The increase in gross margin primarily resulted from the increase in net revenues.

Gross margin as a percentage of net revenues decreased 2.5%, to 46.1% for fiscal year 2022, compared to 48.6% reported the same period a year ago.

The decrease in gross margin percentage resulted primarily from the increase in cost of goods sold resulting from fewer rebates and discounts associated with purchase volumes as well as increased ocean freight costs on inbound inventory and a change in our customer mix.

Our Publishing division’s net revenues remained consistent at $13.3 million for fiscal years ended February 28, 2023 and 2022.

During fiscal 2023, we entered into a new distribution agreement with Usborne.

Under the contracted terms in our new distribution agreement, the Company no longer had the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne was planning 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 their new supplier can start distribution in 2023.

Usborne’s products sold within the Publishing division accounted for 83.1%, or $23.2 million, of gross sales during the fiscal year ended February 28, 2023.

Gross margin remained consistent, increasing $0.1 million, to $6.2 million for fiscal year ended February 28, 2023, from $6.1 million reported for fiscal year ended February 28, 2022.

Gross margin as a percentage of net revenues increased 0.3%, to 46.4% for fiscal year 2023, compared to 46.1% reported the same period a year ago due to a change in customer mix.

Customers receive varying discounts due to higher sales volumes and contract terms.

Operating income for the segment increased $1.0 million, or 38.5%, to $3.6 million for fiscal year ended February 28, 2022, from $2.6 million reported during the same period last year.

The increase in operating income resulted primarily from increased gross margin from increased sales partially offset by increased inside sales commissions due to the addition of new retail customers.

Operating expenses increased $0.5 million, to $3.0 million for fiscal year ended February 28, 2023, from $2.5 million reported for fiscal year ended February 28, 2022.

The increase in operating expenses resulted from the full year inclusion of Learning Wrap-Ups office staff and related expenses in fiscal year 2023.

Learning Wrap-Ups was acquired in the fourth quarter of fiscal year 2022.

Operating income for the segment decreased $0.4 million, or 11.1%, to $3.2 million for fiscal year ended February 28, 2023, from $3.6 million reported during the same period last year.

The decrease in operating income resulted primarily from the increase in operating expenses attributable to a full year impact of Learning Wrap-Ups office staff and related expenses.

Liquidity and Capital Resources

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We typically fund our operations from the cash we generate.

We also use available cash to pay down outstanding bank loan balances, for capital expenditures, to pay dividends and to acquire treasury stock.

We utilized a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures, when necessary.

During periods of loss, like fiscal year 2023, EDC will 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 fiscal year 2023, our revolving bank credit facility loan balance was $10.6 million with $4.4 million in available capacity.

During fiscal year 2022, we experienced negative cash flows from operations of $21,143,300.

During fiscal year 2023, we experienced positive cash flows from operations of $58,500.

These cash flows resulted from:

● net earnings of $8,306,800

● net loss of $2,504,900

Adjusted for:

● depreciation expense of $2,126,700

● share-based compensation expense of $1,046,500

● provision for inventory valuation allowance of $235,700

● provision for doubtful accounts of $115,800

● depreciation and amortization expense of $2,478,700

● share-based compensation expense, net of $907,800

● provision for inventory allowance of $715,900

● deferred income taxes of $678,100

Positively impacted by:

● increase in income taxes payable of $111,700

● decrease in inventories, net of $9,086,900

● decrease in accounts receivable of $732,100

Negatively impacted by:

● increase in inventories, net of $21,396,900

● decrease in accounts payable of $8,547,900

● decrease in accrued salaries, commissions, and other liabilities of $1,578,000

● decrease in deferred revenue of $1,794,300

● increase in accounts receivable of $407,900

● decrease in income taxes payable of $241,900

● increase in prepaid expenses and other assets of $233,200

During the year our inventories increased significantly as we replenished quantities at volumes based on fiscal year 2021 sales.

As sales during fiscal year 2022 have decreased, we have reduced purchase order quantities back to more historical sales levels.

We expect our inventory levels to decline in fiscal year 2023 to more normalized levels.

Cash used in investing activities was $3,940,900 for capital expenditures, which were comprised of $2,722,900 in equipment purchased to increase our daily shipping capacity, $618,300 in software upgrades to our proprietary systems that our UBAM consultants use to monitor their business and place customer orders, $376,000 in other building and equipment improvements, and $223,700 in patents and trademarks from the purchase of Learning Wrap-Ups.

Cash provided by financing activities was $23,633,200 which was comprised of proceeds from term debt of $15,244,700, increase in borrowings on the line of credit of $12,478,200 and net cash received in treasury stock transactions of $617,100, offset by payments of $3,429,100 for dividends and payments on term debt of $1,277,700.

We continue to expect the cash generated from our operations and cash available through our line of credit with our Bank will provide us the liquidity we need to support ongoing operations.

Cash generated from operations will be used to pay down our line of credit, expand our product offerings, to liquidate existing debt, and any excess cash is expected to be distributed to our shareholders.

On February 15, 2021, the Company executed the Amended and Restated Loan Agreement with MidFirst Bank which replaced the prior loan agreement and includes multiple loans.

Term Loan #1 Tranche A (“Term Loan #1”), originally totaling $13.4 million, was part of the prior loan agreement.

Term Loan #1 had a fixed interest rate of 4.23%, with principal and interest payable monthly and a stated maturity date of December 1, 2025.

Term Loan #1 is secured by the primary office, warehouse and land.

Term Loan #1 was amended on April 1, 2021 by executing the First Amendment to the Loan Agreement which reduced the fixed interest rate to 3.12% and removed the prepayment premium from the Loan Agreement.

The outstanding borrowings on Term Loan #1 were $10.3 million and $11.0 million as of February 28, 2022 and February 28, 2021, respectively.

In addition, the Amended and Restated Loan Agreement provides a $6.0 million Advancing Term Loan #1 to be used to finance planned equipment purchases.

The Advancing Term Loan #1 required interest-only payments through July 15, 2021, at which time it was converted to a 60-month amortizing term loan maturing July 15, 2026.

The Advancing Term Loan #1 accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 3.00%.

Our borrowings outstanding under the Advancing Term Loan #1 at February 28, 2022 were $4.8 million.

The Amended and Restated Loan Agreement also provides a $20.0 million revolving loan (“line of credit”) through August 15, 2022 with interest payable monthly at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 3.00%.

On July 16, 2021, the Company executed the Second Amendment to the Loan Agreement which increased the Maximum Revolving Principal Amount from $15.0 million to $20.0 million.

On August 31, 2021, the Company executed the Third Amendment to the Loan Agreement which modified the advance rates used in the borrowing base certificate.

Our borrowings outstanding on our line of credit at February 28, 2022 and February 28, 2021 were $17.7 million and $5.2 million, respectively.

Available credit under the revolving line of credit was approximately $2.3 million and $9.6 million at February 28, 2022 and February 28, 2021, respectively.

On November 19, 2021, the Company executed the Fourth Amendment to the Loan Agreement which established Advancing Term Loan #2 in the principal amount of $10.0 million, amended the definition of LIBO Rate and LIBOR Margin and added Benchmark Replacement Provisions.

The Advancing Term Loan #2 is a 120-month amortizing loan maturing November 19, 2031 and accrues interest at the Bank-adjusted LIBOR Index plus a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio, with a minimum rate of 3.00%.

Our borrowings outstanding under the Advancing Term Loan #2 at February 28, 2022 were $9.9 million.

The Amended and Restated Loan Agreement also contains a provision for our use of the Bank’s letters of credit.

The Bank agrees to issue or obtain issuance of commercial or stand-by letters of credit provided that the sum of the line of credit plus the letters of credit issued would not exceed the borrowing base in effect at the time.

For the year ended February 28, 2022, we had no letters of credit outstanding.

The agreement contains provisions that require us to maintain specified financial ratios, place limitations on additional debt with other banks, limit the amounts of dividends declared and limits the amount of shares that can be repurchased using funding from the line of credit.

The following table reflects aggregate future maturities of long-term debt during the next five fiscal years as follows:

Years ending February 28 (29),

During fiscal year 2022 we continued our quarterly dividend payments of $0.10.

In April 2008, our Board of Directors amended our 1998 stock repurchase plan, establishing that we may purchase up to an additional 1,000,000 shares as market conditions warrant.

● decrease in deferred revenues of $78,900

Cash used in investing activities was $1,755,800 for capital expenditures, consisting of $852,500 of software upgrades to our proprietary systems that our Brand Partners use to monitor their business and place customer orders, $766,400 associated with the purchase of SmartLab Toys, $132,000 of other assets associated with the Company’s rebrand of the PaperPie sales division and $4,900 of other various changes.

Cash provided by financing activities was $2,025,200, which was comprised of net proceeds from term debt of $36,000,000 and cash received in treasury stock transactions of $63,400, offset by payments on term debt of $25,900,100, net payments on the line of credit of $7,089,000, payments of $870,700 for dividends declared in fiscal 2022 and paid in fiscal 2023 and payments of debt issuance costs of $178,400.

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 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 August 9, 2022, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Amended and Restated Loan Agreement dated February 15, 2021 (as amended), between the Company and MidFirst Bank.

The Company’s payment to MidFirst Bank, including interest, was approximately $45.0 million, which satisfied all the Company’s debt obligations with MidFirst Bank.

The Company did not incur any early termination penalties as a result of the repayment of indebtedness or termination of the Amended and Restated Loan Agreement, which provided Term Loan #1, Advancing Term Loan #1, Advancing Term Loan #2 and the Revolving Loan.

On August 9, 2022, the Company executed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”).

The Loan Agreement 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”).

Features of the Loan Agreement include:

Term Loans on 20-year amortization with 5-year maturity date of August 9, 2027

Revolving Loan maturity date of August 9, 2023

Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26%

Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was 6.28% at February 28, 2023)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 7.03% at February 28, 2023)

Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at February 28, 2023)

The Loan Agreement also contains provisions that require the Company to maintain a minimum fixed charge ratio and limit any additional debt with other lenders.

The Company was in violation of the minimum fixed charge ratio covenant as of February 28, 2023, for which the Company obtained a written waiver of compliance from the Lender.

Available credit under the current $15,000,000 revolving line of credit with the Lender was $4,365,500 at February 28, 2023.

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

This amendment waived the fixed charge ratio default which occurred on February 28, 2023.

The Second Amendment also added a cumulative maximum level of fiscal year to date inventory purchases through the expiration of the Revolving Loan Agreement, increased the borrowing rate on the Company’s Revolving Loan to Term SOFR Rate + 3.5%, reduced the revolving commitment from $15,000,000 to $14,000,000, effective May 10, 2023, and further reduced the revolving commitment to $13,500,000, effective July 15, 2023, among lesser items.

The Company does not expect to meet the fixed charge ratio, outlined in the Credit Agreement, during fiscal year 2024.

Under the terms of the Credit Agreement, not meeting this ratio could represent an Event of Default.

Under the terms of the Credit Agreement, should an Event of Default occur, the Lender will have the right to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan.

As an Event of Default is expected, and no waiver of the Event of Default is guaranteed to be received by the Lender, the long-term portions of the Fixed Rate Term Loan and Float Rate Term Loan have been reclassified as current liabilities.

The following table reflects aggregate current maturities of term debt, excluding the Revolving Loan, during the next fiscal year as follows:

Year ending February 29,

In April 2008, our Board of Directors amended our 1998 stock repurchase plan, establishing that we may purchase up to an additional 1,000,000 shares of Company common stock as market conditions warrant.

In February 2019, our Board of Directors approved a new stock repurchase plan to replace the amended 2008 plan.

Under the new 2019 plan, the Company is authorized to purchase up to 800,000 shares of common stock, which represented approximately 9% of the outstanding shares as of February 28, 2022, of which 514,594 remains available to purchase as of February 28, 2022.

Management believes using excess liquidity to purchase outstanding shares enhances the value to the remaining shareholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity.

Under the new 2019 plan, the Company is authorized to purchase up to 800,000 shares of Company common stock, which represented approximately 9% of the outstanding shares as of February 28, 2023, of which 514,594 remains available to purchase as of February 28, 2023.

Management has no plans to repurchase any outstanding shares until the Company returns to profitability.

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 consolidated 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 bank choose to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan, the Company could continue as a going concern.

Management has plans to enter into a new financing agreement by August 9, 2023, with BOKF, NA or another lender, that will allow it to operate without default and reclassify the non-current portions of the Fixed Rate Term Loan and Floating Rate Term Loan as long-term liabilities.

Contractual Obligations

4 unchanged sentences

Historically, we have experienced an increase in inventory during the Summer in anticipation for the Fall increase in sales.

In addition, new titles are typically released twice a year, in the Spring and Fall, which increases our inventory the months preceding these scheduled releases.

The Company uses available cash or working capital borrowings to fund these increases in inventory.

In addition, new titles are typically released twice a year, in the Spring and Fall, which increases our inventory in the months preceding these scheduled releases.

We do not expect inventory to increase in fiscal year 2024 as we continue to sell down excess inventory.

Critical Accounting Policies

16 unchanged sentences

The Company recognizes share-based compensation expense only for the portion of the restricted share awards that are considered probable of vesting.

Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employees have been established.

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.

4 unchanged sentences

Products are shipped FOB-Shipping Point.

UBAM’s sales are generally paid at the time the product is ordered.

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.

3 unchanged sentences

Management uses a moving average calculation to estimate the allowance for sales returns.

We are not responsible for product damaged in transit.

We are not responsible for a product damaged in transit.

Damaged returns are primarily received from the retail customers of our Publishing division.

Those damages occur in the stores, not in shipping to the stores, and we typically do not offer credit for damaged returns.

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.

3 unchanged sentences

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 $0.3 million for the fiscal years ended February 28, 2022 and February 28, 2021.

Our inventory contains over 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 books 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 six-month lead-time to have a title printed and delivered to us.

Management has estimated and included an allowance for doubtful accounts of $0.2 million and $0.3 million for the fiscal years ended February 28, 2023 and February 28, 2022, respectively.

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.

1 unchanged sentence

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 was estimated by management using the current year turnover ratio by title and anticipated sales of specific titles.

Noncurrent inventory is estimated by management using an anticipated turnover ratio by title, based primarily on historical trends.

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 $5.1 million and $2.4 million at February 28, 2023 and February 28, 2022, respectively.

Noncurrent inventory valuation allowances were $0.4 million and $0.2 million at February 28, 2022 and February 28, 2021, respectively.

Consultants that meet certain eligibility requirements may request and receive inventory on consignment.

We believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events;

Noncurrent inventory valuation allowances were $0.4 million at February 28, 2023 and February 28, 2022.

Brand Partners that meet certain eligibility requirements may request and receive inventory on consignment.

We believe allowing our 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 6.4% of our active consultants have maintained consignment inventory at the end of fiscal year 2022.

Approximately 8.5% of our active Brand Partners have maintained consignment inventory at the end of fiscal year 2023.

Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company.

The total cost of inventory on consignment with consultants was $1.4 million and $1.1 million at February 28, 2022 and February 28, 2021, respectively.

The total cost of inventory on consignment with Brand Partners was $1.5 million and $1.4 million at February 28, 2023 and February 28, 2022, respectively.

Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company.

Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory.

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.9 million and $0.7 million at February 28, 2022 and February 28, 2021, respectively.

Our principal supplier, based in England, generally requires a minimum re-order of 6,500 or more of a title in order to get a solo print run.

Smaller orders would require a shared print run with the supplier’s other customers, which can result in lengthy delays to receive the ordered title.

Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series.

We then place the initial order or re-order 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.

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.9 million at February 28, 2023 and February 28, 2022.

New Accounting Pronouncements

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis