EDUCATIONAL DEVELOPMENT CORP 10-K

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management ’ s Discussion and Analysis of Financial Condition and Results of Operations contains a discussion of our business, including a general overview of our segments, our results of operations, our liquidity and capital resources, and our quantitative and qualitative disclosures about market risk. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of our control. Our actual results could differ materially from those discussed in these forward-looking statements. See “ Cautionary Remarks Regarding Forward Looking Statements ” in the front of this Annual Report on Form 10-K. Management Summary 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. 7 Table of Contents 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 FY 2023 FY 2022 New Brand Partners Added During Fiscal Year 16,500 26,100 Active Brand Partners at End of Fiscal Year 24,600 36,100 Our PaperPie division’s multi-level marketing organizational structure presently has eight levels of sales representatives, collectively known as Brand Partners: ● Brand Partners ● Team Leaders ● Advanced Leaders ● Senior Leaders ● Executive Leaders ● Senior Executive Leaders ● Directors ● Senior Directors 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 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 Brand Partners to “present” and customers to “attend” online purchasing events from any geographical location. 8 Table of Contents 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 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. 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 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 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. Publishing Division Net Revenues by Market Type FY 2023 FY 2022 National chain bookstores 2 % 2 % All other 98 % 98 % Total net revenues 100 % 100 % 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 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. 9 Table of Contents Result of Operations The following table shows our statements of operations data: Twelve Months Ended February 28, 2023 2022 Net revenues $ 87,829,000 $ 142,228,800 Cost of goods sold 31,759,200 44,297,500 Gross margin 56,069,800 97,931,300 Operating expenses Operating and selling 15,780,600 23,010,400 Sales commissions 25,676,100 44,377,500 General and administrative 17,195,100 20,302,200 Total operating expenses 58,651,800 87,690,100 Other (income) expense Interest expense 2,172,300 916,400 Other income (1,327,400 ) (1,911,100 ) Earnings (loss) before income taxes (3,426,900 ) 11,235,900 Income taxes (922,000 ) 2,929,100 Net earnings (loss) $ (2,504,900 ) $ 8,306,800 See the detailed discussion of net revenues, gross margin and operating expenses by reportable segment below. 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 $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 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. 10 Table of Contents PaperPie Operating Results The following table summarizes the operating results of the PaperPie segment for the twelve months ended February 28: Twelve Months Ended February 28, 2023 2022 Gross sales $ 94,795,700 $ 159,303,800 Less discounts and allowances (27,271,100 ) (44,187,200 ) Transportation revenue 7,022,100 13,861,900 Net revenues 74,546,700 128,978,500 Cost of goods sold 24,639,000 37,150,600 Gross margin 49,907,700 91,827,900 Operating expenses Operating and selling 12,501,100 18,800,300 Sales commissions 25,095,100 43,801,300 General and administrative 3,140,900 4,788,800 Total operating expenses 40,737,100 67,390,400 Operating income $ 9,170,600 $ 24,437,500 Average number of active Brand Partners 28,000 44,900 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 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 $1.0 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. 11 Table of Contents 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 The following table summarizes the operating results of the Publishing segment for the twelve months ended February 28: Twelve Months Ended February 28, 2023 2022 Gross sales $ 27,896,200 $ 28,163,000 Less discounts and allowances (14,624,400 ) (14,922,100 ) Transportation revenue 10,500 9,400 Net revenues 13,282,300 13,250,300 Cost of goods sold 7,120,200 7,146,900 Gross margin 6,162,100 6,103,400 Total operating expenses 2,975,300 2,463,600 Operating income $ 3,186,800 $ 3,639,800 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 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 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 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. 12 Table of Contents During fiscal year 2023, we experienced positive cash flows from operations of $58,500. These cash flows resulted from: ● net loss of $2,504,900 Adjusted for: ● depreciation and amortization expense of $2,478,700 ● share-based compensation expense, net of $907,800 ● provision for inventory allowance of $715,900 Offset by: ● deferred income taxes of $678,100 Positively impacted by: ● decrease in inventories, net of $9,086,900 ● decrease in accounts receivable of $732,100 Negatively impacted by: ● decrease in accounts payable of $8,547,900 ● decrease in accrued salaries, commissions, and other liabilities of $1,578,000 ● decrease in income taxes payable of $241,900 ● increase in prepaid expenses and other assets of $233,200 ● 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”). 13 Table of Contents Features of the Loan Agreement include: (i) Term Loans on 20-year amortization with 5-year maturity date of August 9, 2027 (ii) Revolving Loan maturity date of August 9, 2023 (iii) Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26% (iv) Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was 6.28% at February 28, 2023) (v) Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 7.03% at February 28, 2023) (vi) Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at February 28, 2023) The Loan Agreement also contains provisions that require the Company to maintain a minimum fixed charge ratio and 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, 2024 $ 35,100,000 Total $ 35,100,000 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 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. 14 Table of Contents 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 We are a smaller reporting company and are not required to provide this information. Off-Balance Sheet Arrangements As of February 28, 2023, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Seasonality The Company experiences increased sales in the Fall season. 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 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 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. 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. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions. 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 fiscal years 2023 and 2022, the Company recognized $0.9 million and $1.0 million, respectively, of compensation expense associated with the shares granted. 15 Table of Contents 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 for the fiscal years ended February 28, 2023 and February 28, 2022. Allowance for Doubtful Accounts We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns, when applicable (collectively “allowance for doubtful accounts”). An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends. Management has estimated and included an allowance for doubtful accounts of $0.2 million and $0.3 million for the fiscal years ended February 28, 2023 and February 28, 2022, 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. 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 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 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 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 at February 28, 2023 and February 28, 2022. New Accounting Pronouncements See the New Accounting Pronouncements section of Note 1 to our financial statements, included in Part IV, Item 15 of this report, for further details of recent accounting pronouncements. 16 Table of Contents Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company and are not required to provide this information. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 begins at page 25. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None