What changed in this filing

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Item 1. Financial Statements

2023-07-13 compared with 2023-01-06 · 243 added, 278 removed, 311 unchanged (63% of the section changed)

5 unchanged sentences

Accounts receivable, less allowance for doubtful accounts of

$ 247,400 (November 30) and $ 336,700 (February 28)

$ 134,000 (May 31) and $ 211,700 (February 28)

Inventories - net

1 unchanged sentence

Total current assets

INVENTORIES - net

LONG-TERM INVENTORIES - net

PROPERTY, PLANT AND EQUIPMENT - net

3 unchanged sentences

Accounts payable

Current maturities of long-term debt

Line of credit

Deferred revenues

Current maturities of term debt

Accrued salaries and commissions

Dividends payable

Income taxes payable

Other current liabilities

Total current liabilities

LONG-TERM DEBT - net

DEFERRED INCOME TAX LIABILITY

OTHER LONG-TERM LIABILITIES

3 unchanged sentences

Authorized 16,000,000 shares;

Issued 12,702,080 (November 30 and February 28) shares;

Outstanding 8,713,289 (November 30) and 8,707,247 (February 28) shares

Issued 12,702,080 (May 31 and February 28) shares;

Outstanding 8,575,088 (May 31) and 8,713,289 (February 28) shares

Capital in excess of par value

7 unchanged sentences

Three Months Ended

Nine Months Ended

Less discounts and allowances

8 unchanged sentences

EARNINGS (LOSS) BEFORE INCOME TAXES

INCOME TAX EXPENSE (BENEFIT)

NET EARNINGS (LOSS)

5 unchanged sentences

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2022

FOR THE THREE MONTHS ENDED MAY 31, 2023

(par value $0.20 per share)

2 unchanged sentences

BALANCE – February 28, 2023

Sales of treasury stock

Forfeiture of restricted shares

Purchases of treasury stock

Share-based compensation expense - net

BALANCE - May 31, 2023

Forfeiture of restricted shares

Share-based compensation expense - net

BALANCE - August 31, 2022

Issuance of restricted share awards for vesting

Share-based compensation expense - net

BALANCE - November 30, 2022

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2021

FOR THE THREE MONTHS ENDED MAY 31, 2022

(par value $0.20 per share)

3 unchanged sentences

Sales of treasury stock

Dividends declared ($ 0.10 /share)

Forfeiture of restricted shares

Share-based compensation expense - net

BALANCE - May 31, 2022

Sales of treasury stock

Issuance of restricted share awards for vesting

Dividends declared ($ 0.10 /share)

Share-based compensation expense - net

BALANCE - August 31, 2021

Sales of treasury stock

Dividends declared ($ 0.10 /share)

Share-based compensation expense - net

BALANCE - November 30, 2021

See notes to condensed financial statements (unaudited).

1 unchanged sentence

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended November 30,

Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES

3 unchanged sentences

Deferred income taxes

Provision for doubtful accounts

Provision for inventory valuation allowance

12 unchanged sentences

Purchases of property, plant and equipment

Purchases of other assets

Net cash used in investing activities

1 unchanged sentence

Payments on term debt

Payments on debt issue costs

Proceeds from term debt

Cash paid to acquire treasury stock

Sales of treasury stock

Net payments on line of credit

Net borrowings under line of credit

Dividends paid

Net cash provided by financing activities

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Net cash provided by (used in) financing activities

NET INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD

15 unchanged sentences

Reclassifications

Certain reclassifications have been made to the fiscal year 2022 condensed statement of cash flows and footnotes to conform to the classifications used in fiscal year 2023.

Certain reclassifications have been made to the first quarter fiscal year 2023 condensed statement of cash flows to conform to the classifications presented in fiscal year 2024.

These reclassifications had no effect on net earnings.

COVID-19 Update

The Company has taken numerous steps, and will continue to take further actions, in its approach to minimize the impact of the COVID-19 pandemic.

We are closely monitoring the impact of the COVID-19 pandemic and continually assessing its potential effects on our business.

The long-term severity and duration of the pandemic are uncertain and the extent to which our results are affected by COVID-19 cannot be accurately predicted.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information on the impact COVID-19 had during the current fiscal period.

Use of Estimates in the Preparation of Financial Statements

5 unchanged sentences

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting.

We have reviewed the recently issued accounting standards updates (“ASU”) and concluded that the following recently issued accounting standard applies to us:

In March 2020, the FASB issued ASU 2020-04:

Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This update provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are discontinued, such as London Interbank Offered Rate (“LIBOR”).

This ASU includes practical expedients for contract modifications due to reference rate reform.

Generally, contract modifications related to reference rate reform may be considered an event that does not require remeasurement or reassessment of a previous accounting determination at the modification date.

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

With the execution of the Company’s new Credit Agreement with BOKF, NA on August 9, 2022, the Company no longer has a loan agreement utilizing interest rates that reference LIBOR.

The Company’s new Credit Agreement utilizes the Secured Overnight Financing Rate (“SOFR”) published by the Chicago Mercantile Exchange.

We have reviewed the recently issued pronouncements and concluded that no new accounting standard updates (“ASU”) had or may have a material impact on the Company.

Note 2 – INVENTORIES

Inventories consist of the following:

November 30, 2022

February 28, 2023

Book inventory

Product inventory

Inventory valuation allowance

Inventories net – current

Book inventory

Product inventory

Inventory valuation allowance

Inventories net – noncurrent

Inventory in transit totaled $ 291,900 and $ 2,732,400 at November 30, 2022 and February 28, 2022, respectively.

Book inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2½ years of anticipated sales, are included in noncurrent inventory.

Inventory in transit totaled $ 443,600 and $ 850,100 at May 31, 2023 and February 28, 2023, respectively.

Product inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2½ years of anticipated sales, are included in noncurrent inventory.

Note 3 – LEASES

We have both lessee and lessor arrangements.

Our leases are evaluated at inception or at any subsequent modification.

Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under Accounting Standards Codification (“ASC”) 842 - Leases.

Our lessee arrangements include two rental agreements where we have the exclusive use of dedicated office space in San Diego, California, as well as warehouse and office space in Layton, Utah, and both qualify as an operating lease.

Our lessee arrangements include four rental agreements where we have the exclusive use of dedicated office space in San Diego, California, warehouse and office space in Layton, Utah, warehouse and office space in Seattle, Washington, and warehouse space locally in Tulsa, OK, all of which qualify as operating leases.

Our lessor arrangements include two rental agreements for warehouse and office space in Tulsa, Oklahoma, and each qualify as an operating lease under ASC 842.

Operating Leases – Lessee

We recognize a lease liability, reported in other liabilities on the condensed balance sheets, for each lease based on the present value of remaining minimum fixed rental payments (which includes payments under any renewal option that we are reasonably certain to exercise), using a discount rate that approximates the rate of interest we would have to pay to borrow on a collateralized basis over a similar term.

We also recognize a right-of-use asset, reported in other assets on the condensed balance sheets, for each lease, valued at the lease liability and adjusted for prepaid or accrued rent balances existing at the time of initial recognition.

The lease liability and right-of-use asset are reduced over the term of the lease as payments are made and the assets are used.

February 28, 2023

Operating lease assets:

Right-of-use assets

Operating lease liabilities:

Current lease liabilities

Long-term lease liabilities

Weighted-average remaining lease term (months)

Weighted-average discount rate

Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses in our statements of operations.

Variable and short-term rental payments are recognized as costs and expenses as they are incurred.

Fixed lease costs

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

Years ending February 28 (29),

Total future minimum rental payments

imputed interest

Total operating lease liabilities

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

Operating cash outflows – operating leases

Operating Leases – Lessor

We recognize fixed rental income on a straight-line basis over the life of the lease as other income on our condensed statements of operations.

We recognize fixed rental income on a straight-line basis over the life of the lease as other income in our condensed statements of operations.

Future minimum payments receivable under operating leases with terms greater than one year are estimated as follows:

Years ending February 28 (29),

The cost of the leased space was $ 10,637,900 and $ 10,834,300 at November 30, 2022 and February 28, 2022, respectively.

The accumulated depreciation associated with the leased assets was $ 2,759,700 and $ 2,603,300 as of November 30, 2022 and February 28, 2022, respectively.

The cost of the leased space was $ 10,637,900 at May 31, 2023 and February 28, 2023.

The accumulated depreciation associated with the leased assets was $ 2,946,700 and $ 2,853,200 as of May 31, 2023 and February 28, 2023, respectively.

Both the leased assets and accumulated depreciation are included in property, plant and equipment - net on the condensed balance sheets.

1 unchanged sentence

Debt consists of the following:

November 30, 2022

February 28, 2023

Line of credit

Floating rate term loan(s) (1)

Floating rate term loan

Fixed rate term loan

Total long-term debt

Total term debt

Less current maturities

1 unchanged sentence

Long-term debt, net

(1) The February 28, 2022 floating rate term loans balance of $14,651,000 was comprised of the MidFirst Bank advancing term loans #1 and #2.

The Company’s payment to MidFirst Bank, including interest, was $ 45,028,600 , which satisfied all of the Company’s debt obligations with MidFirst Bank.

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

In connection with the repayment of outstanding indebtedness, the Company was automatically and permanently released from all security interests, mortgages, liens and encumbrances under the Amended and Restated Loan Agreement with MidFirst Bank.

The material terms of the Amended and Restated Loan Agreement with MidFirst Bank are described in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 5, 2022.

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

The Loan Agreement establishes a fixed rate term loan in the principal amount of $ 15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $ 21,000,000 (the “Floating Rate Term Loan”;

On August 9, 2022, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Amended and Restated Loan Agreement dated February 15, 2021 (as amended), between the Company and MidFirst Bank and executed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”).

The Loan Agreement established a fixed rate term loan in the principal amount of $ 15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $ 21,000,000 (the “Floating Rate Term Loan”;

together with the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving promissory note in the principal amount up to $ 15,000,000 (the “Revolving Loan” or “Line of Credit”).

Features of the Loan Agreement include:

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

This amendment clarified the definition of the Fixed Charge Coverage Ratio to exclude dividends paid prior to November 30, 2022, and placed restrictions on acquisitions and cash dividends.

On May 10, 2023, the Company executed the Second Amendment to our Loan Agreement with the Lender.

This amendment waived the fixed charge ratio default which occurred on February 28, 2023 and amended the financial covenant to not require the fixed charge ratio to be measured at May 31, 2023.

The Second Amendment also added a cumulative maximum level of fiscal year to date inventory purchases through the expiration of the Revolving Loan Agreement, increased the borrowing rate on the Company’s Revolving Loan to Term SOFR Rate plus 3.5%, required certain swap agreements be executed within 30 days of the amendment, reduced the revolving commitment from $15,000,000 to $ 14,000,000 , effective May 10, 2023, and further reduced the revolving commitment to $ 13,500,000 , effective July 15, 2023, among other items.

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

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

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

1 unchanged sentence

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 5.48 % at November 30, 2022)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50 % (effective rate was 6.23 % at November 30, 2022)

Revolving Loan allows for Letters of Credit up to $ 7,500,000 upon bank approval (none were outstanding at November 30, 2022)

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

Available credit under the current $ 15,000,000 revolving line of credit with the Lender was approximately $ 6,005,500 at November 30, 2022.

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

Years ending February 28 (29),

Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75 % (effective rate was 6.79 % at May 31, 2023)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 3.50 % (effective rate was 8.54 % at May 31, 2023)

Revolving Loan allows for Letters of Credit up to $ 7,500,000 upon bank approval (none were outstanding at May 31, 2023)

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

The Company was in violation of the minimum fixed charge ratio covenant as of February 28, 2023, for which the Company obtained a written waiver of compliance from the Lender and is not required to measure the fixed charge ratio as of May 31, 2023.

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

Under the terms of the amended Loan Agreement, not meeting this ratio would represent an Event of Default.

Should an Event of Default occur, the Lender will have the right to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan.

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

While the Company received a waiver for the fixed charge ratio default that occurred on February 28, 2023, the borrowing and purchasing capacity was restricted and management's forecast indicated that the Company will be out of compliance in future periods.

An Event of Default is expected associated with the amended Loan Agreement, there is no guaranty that the Event of Default will be waived by the Lender, and the bank may choose to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan.

These conditions, among others in the aggregate, raise substantial doubt over the Company's ability to continue as a going concern.

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

In addition, management’s plans include reducing inventory and related borrowing costs, building the active PaperPie Brand Partners to pre-pandemic levels, as the distraction and costs associated with the rebrand that occurred in fiscal year 2023 are expected to have a lesser impact in the future, reducing expenses due to lower revenue volumes and receipt of the contingent Employee Retention Credit.

Management expects these plans are probable of being achieved to alleviate the substantial doubt about continuing as a going concern and expects to generate sufficient liquidity to meet our obligations as they become due over the next twelve months.

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

Year ending February 29,

Note 5 – BUSINESS CONCENTRATION

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During fiscal 2023, we entered into a new distribution agreement (“Agreement”) with Usborne.

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

Should termination of the agreement occur, the Company will be allowed to sell through the remaining Usborne inventory for an agreed upon term not less than twelve months following the termination date.

Under the terms in the Agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne will use a different distributor to supply retail accounts with its products.

The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023.

Usborne’s products sold within the Publishing Division accounted for 85.6 % and 89.2 % of all products sold during the three and nine months ended November 30, 2022, respectively.

Additionally, an inventory purchase volume rebate from Usborne of $ 900,000 , which was earned for purchases in fiscal 2022 and due to the Company, has been disputed.

As a result of that dispute, the realization of that rebate became uncertain, resulting in the Company reversing the recorded rebate until the uncertainty is resolved.

Purchases received from Usborne were $ 4,782,200 and $ 10,728,800 for the three months ended November 30, 2022 and 2021, respectively.

Total inventory purchases received from all suppliers were $ 6,738,100 and $ 15,946,700 for the three months ended November 30, 2022 and 2021, respectively.

Purchases received from Usborne were $ 9,565,700 and $ 35,144,100 for the nine months ended November 30, 2022 and 2021, respectively.

Total inventory purchases received from all suppliers were $ 15,879,800 and $ 52,511,000 for the nine months ended November 30, 2022 and 2021, respectively.

Note 6 – EARNINGS PER SHARE

Basic earnings (loss) per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period excluding nonvested restricted stock awards.

Diluted EPS includes the dilutive effect of issued unvested restricted stock awards and additional potential common shares issuable under stock warrants, restricted stock and stock options, if applicable.

We utilized the treasury stock method in computing the potential common shares issuable under stock warrants, restricted stock and stock options.

The Agreement includes annual minimum purchase volumes, based on Usborne’s fiscal year ending January 31st, along with specific payment terms and letter of credit requirements, which if not met may result in Usborne having the right to terminate the Agreement on less than 30 days’ written notice.

Should termination of the Agreement occur, the Company will be allowed to sell its remaining Usborne inventory for an agreed upon period, but not less than twelve months following the termination date.

The Company did not meet the minimum purchase requirements for the fiscal period ending January 31, 2023, did not supply the letter of credit required under the Agreement and certain payments were not received timely, which could allow Usborne to exercise their option to terminate the Agreement.

As of May 31, 2023, Usborne has not notified the Company of termination of the Agreement.

During Usborne’s fiscal year ended January 31, 2022, the Company earned a volume rebate of approximately $ 1,000,000 , which was documented in the new Agreement.

Usborne has refused to pay the $1,000,000 volume rebate owed to the Company due to not meeting the minimum purchase requirements or supplying the required letter of credit.

The Company is disputing the cancellation of the rebate but has not recognized any reduced cost of goods sold from the rebate in fiscal year 2024 due to its uncertainty.

Under the terms of the Agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne was slated to use a different distributor to supply retail accounts with its products.

As a courtesy upon Usborne’s request, the November 15, 2022 transition was extended until their new supplier could begin distribution, and the Company continued to distribute Usborne products through April 30, 2023.

Gross sales attributed to Usborne products sold within the Publishing division accounted for approximately 67.3 %, or $ 2,740,000 , during the quarter ended May 31, 2023, and 82.5 %, or $ 5,451,000 , during the quarter ended May 31, 2022.

The Company continues to distribute Usborne products through our Direct Sales division, PaperPie.

Gross sales of Usborne products sold within the PaperPie division accounted for approximately 50.6 %, or $ 8,362,300 during the quarter ended May 31, 2023, and 59.8 %, or $ 14,791,700 , during the quarter ended May 31, 2022.

Purchases received from Usborne were approximately $ 935,600 and $ 3,577,300 for the period ended May 31, 2023 and 2022, respectively.

Total inventory purchases for those same periods were approximately $ 3,190,200 and $ 5,978,600 , respectively.

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

Note 6 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“EPS”) is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period.

Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options and the assumed vesting of granted restricted share awards.

In computing Diluted EPS, we have utilized the treasury stock method.

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

Three Months Ended

Nine Months Ended

Earnings (loss):

7 unchanged sentences

Three Months Ended

Nine Months Ended

Weighted average shares:

12 unchanged sentences

The 2022 LTI Plan established up to 300,000 shares of restricted stock available to be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2022 or 2023.

The number of restricted shares to be distributed depends on attaining the performance metrics defined by the 2022 LTI Plan and may result in the distribution of a number of shares that is less than, but not greater than, the number of restricted shares outlined in the terms of the 2022 LTI Plan.

Restricted shares granted under the 2022 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.

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

During fiscal year 2019, the Company granted 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $ 9.94 per share.

3 unchanged sentences

The 969 shares purchased with dividends were not reissued.

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

The 303,000 outstanding shares were vested on February 28, 2023.

During fiscal year 2021, the Company granted 297,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $ 6.30 per share.

2 unchanged sentences

The 760 shares purchased with dividends were not reissued.

The remaining compensation expense of these awards, totaling approximately $ 865,800 as of November 30, 2022, will be recognized ratably over the remaining vesting period of approximately 27 months.

As of November 30, 2022, no shares have been granted under the 2022 LTI Plan.

The remaining unrecognized compensation expense of these awards, totaling approximately $ 673,300 as of May 31, 2023, will be recognized ratably over the remaining vesting period of 21 months.

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

Three Months Ended November 30,

Nine Months Ended November 30,

Three Months Ended May 31,

Share-based compensation expense

Less reduction of expense for forfeitures

Share-based compensation expense - net

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

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

Weighted Average Fair Value (per share)

Outstanding at February 28, 2023

Outstanding at November 30, 2022

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

Outstanding at May 31, 2023

Note 8 – SHIPPING AND HANDLING COSTS

1 unchanged sentence

Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies.

These costs were $ 4,506,500 and $ 6,924,800 for the three months ended November 30, 2022 and 2021, respectively.

These costs were $ 11,192,800 and $ 18,317,200 for the nine months ended November 30, 2022 and 2021, respectively.

These costs were $ 1,938,100 and $ 3,562,600 for the three months ended May 31, 2023 and 2022, respectively.

Note 9 – BUSINESS SEGMENTS

We have two reportable segments:

Usborne Books & More (“UBAM”) and Publishing.

PaperPie and Publishing.

These reportable segments are business units that offer different methods of distribution to different types of customers.

They are managed separately based on the fundamental differences in their operations.

Our UBAM segment markets its products through a network of independent sales consultants using a combination of internet sales, direct sales, home shows and book fairs.

Our PaperPie segment markets its products through a network of independent brand partners using a combination of internet sales, direct sales, home shows and book fairs.

Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores, museums, trade and specialty wholesalers, through commissioned sales representatives and our internal tele-sales group.

See Note 5 for the impact of our updated distribution agreement on the Publishing segment.

The accounting policies of the segments are the same as those of the rest of the Company.

We evaluate segment performance based on earnings (loss) before income taxes of the segments, which is defined as segment net revenues reduced by cost of sales and direct expenses.

We evaluate segment performance based on earnings before income taxes of the segments, which is defined as segment net revenues reduced by cost of sales and direct expenses.

Corporate expenses, depreciation, interest expense and income taxes are not allocated to the segments but are listed in the “Other” row below.

1 unchanged sentence

Our assets and liabilities are not allocated on a segment basis.

Information by reporting segment for the three- and nine-month periods ended November 30, 2022 and 2021, are as follows:

Information by reporting segment for the three-month periods ended May 31, 2023 and 2022, are as follows:

Three Months Ended

Nine Months Ended

EARNINGS (LOSS) BEFORE INCOME TAXES

Three Months Ended

Nine Months Ended

Note 10 – FINANCIAL INSTRUMENTS

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

The carrying amounts reported in the condensed balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.

The estimated fair value of our term notes payable is estimated by management to approximate $ 34,781,100 and $ 24,521,600 as of November 30, 2022 and February 28, 2022, respectively.

The term notes payable reflected on the Company’s condensed balance sheets were $ 35,550,000 and $ 25,000,100 as of November 30, 2022 and February 28, 2022, respectively.

The carrying amounts reported on the balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments

The estimated fair value of our term notes payable is estimated by management to approximate $ 33,981,600 and $ 34,253,500 as of May 31, 2023 and February 28, 2023, respectively.

Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and collateral.

Note 11 – DEFERRED REVENUES

The Company’s UBAM division receives payments on orders in advance of shipment.

Any payments received prior to the end of the period that were not shipped as of November 30, 2022 or February 28, 2022 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 1,409,900 and $ 681,600 , as of November 30, 2022 and February 28, 2022, respectively, in payments for sales orders which will be shipped subsequent to the end of the period.

The Company’s PaperPie division receives payments on orders in advance of shipment.

Any payments received prior to the end of the period that were not shipped as of May 31, 2023 or February 28, 2023 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 970,500 and $ 602,700 as of May 31, 2023 and February 28, 2023, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the end of the period.

Note 12 – SUBSEQUENT EVENTS

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

This amendment clarified the definition of the Fixed Charge Coverage Ratio to exclude dividends paid prior to November 30, 2022, and placed restrictions on acquisitions and cash dividends.

The Company completed rebranding its Home Business Division, replacing the name Usborne Books & More (“UBAM”) with its new name, PaperPie.

PaperPie was announced on December 21, 2022 and the new name, website URL’s and rebranding was completed on January 3, 2023.

On June 6, 2023, pursuant to its interest rate risk and risk management strategy, the Company entered into a swap transaction (the “Swap Transaction”) with BOKF, NA, which converts a portion of the original $ 21,000,000 Floating Rate Term Loan from a floating interest rate to a fixed interest rate for the next two years.

The Swap Transaction has a notional amount of $ 18,000,000 through fiscal quarter ending May 31, 2024, and then resets to $ 13,000,000 through May 31, 2025, while continuing to match the amortizing balance of the original loan.

Under the terms of this agreement, the Company, in effect, has exchanged the floating interest rate of 30-Day Term SOFR Rate + 1.75 %, or 6.90 % at the trade date of June 5, 2023, to a fixed rate of 4.73% + 1.75%, or 6.48 %.

The Swap Transaction commenced on June 7, 2023, with a termination date of May 30, 2025.

MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Factors Affecting Forward-Looking Statements

The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance.

The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control.

Our actual results could differ materially from those discussed in these forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, our success in recruiting and retaining new consultants, our ability to locate and procure desired books, our ability to ship the volume of orders that are received without creating backlogs, our ability to obtain adequate financing for working capital and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, the COVID-19 pandemic, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 28, 2022 and this Quarterly Report on Form 10-Q, all of which are difficult to predict.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur.

See “ Cautionary Remarks Regarding Forward-Looking Statements ” in the front of this Quarterly Report on Form 10-Q.

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Significant portions of our inventory purchases are concentrated with Usborne.

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

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

During fiscal 2023, the Company did not meet the minimum purchase volumes, did not supply the letter of credit required under the Agreement and certain payments were not received timely.

No notification of termination has been received by the Company as of the date of issuance of this Form 10-Q and Usborne continues to accept and fulfill purchase orders from the Company.

Should termination of the agreement occur, the Company will be allowed, at a minimum, to sell through their remaining Usborne inventory over the twelve months following the termination date.

We operate two separate segments, UBAM and Publishing, to sell our products.

These two segments each have their own customer base.

The UBAM segment markets our complete line of products through a network of independent sales consultants using a combination of home shows, internet party plan events and book fairs.

The Publishing segment markets Kane Miller, Learning Wrap-Ups and SmartLab Toys on a wholesale basis to various retail accounts.

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

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

We sell our products through two separate divisions, PaperPie and Publishing.

These two divisions each have their own customer base.

The PaperPie division markets our complete line of products through a network of independent brand partners using a combination of home shows, internet party events and book fairs.

The Publishing division markets Kane Miller, Learning Wrap-Ups and SmartLab Toys on a wholesale basis to various retail accounts.

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

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

The following table shows our condensed statements of operations data:

Three Months Ended

Nine Months Ended

Cost of goods sold

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Earnings (loss) before income taxes

Income tax expense (benefit)

Net earnings (loss)

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

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

Total operating expenses not associated with a reporting segment decreased $1.3 million, or 24.5%, to $4.0 million for the three-month period ended November 30, 2022, when compared to $5.3 million for the same quarterly period a year ago.

Operating expenses decreased primarily as a result of a $0.8 million decrease in labor expenses, primarily within our warehouse operations, and a $0.3 million decrease in freight handling expenses, both resulting from a decrease in gross sales, along with a decrease of $0.2 million in other various cost changes.

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

Income taxes decreased $1.0 million, or 100.0%, to $0.0 million for the three months ended November 30, 2022, from $1.0 million for the same quarterly period a year ago, resulting from a decrease in gross sales.

Our effective tax rate decreased to 25.0% for the quarter ended November 30, 2022, from 26.5% for the quarter ended November 30, 2021 due primarily to sales mix fluctuations between states.

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

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

Total operating expenses not associated with a reporting segment decreased $2.7 million, or 19.3%, to $11.3 million for the nine-month period ended November 30, 2022, when compared to $14.0 million for the same period a year ago.

Operating expenses decreased primarily as a result of a reduction in labor expenses of $2.1 million, primarily within our warehouse operations, and a decrease in freight handling costs of $0.8 million, both associated with a decrease in gross sales.

Other various expenses in this segment decreased by $0.1 million.

These expense reductions were offset by a $0.3 million increase in depreciation expense primarily driven by last year’s addition of two new pick/pack/ship lines.

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

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

Our effective tax rate increased to 28.6% for the nine months ended November 30, 2022, from 26.9% for the nine months ended November 30, 2021 due to sales mix fluctuations between states.

Non-Segment Operating Results for the Three Months Ended May 31, 2023

Total operating expenses not associated with a reporting segment decreased $0.8 million, or 21.1%, to $3.0 million for the three-month period ended May 31, 2023, when compared to $3.8 million for the same quarterly period a year ago.

Operating expenses decreased primarily as a result of a $0.6 million decrease in labor expenses, primarily within our warehouse operations, a $0.1 million decrease in freight handling expenses, along with $0.1 million in combined lesser changes.

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

Income taxes decreased $0.4 million, or 400.0%, to a tax benefit of $0.3 million for the three months ended May 31, 2023, from a tax expense of $0.1 million for the same quarterly period a year ago, resulting primarily from a decrease in gross sales.

Our effective tax rate increased to 27.3% for the quarter ended May 31, 2023, from 24.3% for the quarter ended May 31, 2022 due primarily to sales mix fluctuations between states.

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

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

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

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

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

Three Months Ended

Nine Months Ended

Less discounts and allowances

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Operating income

Average number of active consultants

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

UBAM net revenues decreased $15.9 million, or 38.4%, to $25.5 million during the three months ended November 30, 2022, when compared to $41.4 million during the same period a year ago.

The average number of active consultants in the third quarter of fiscal 2023 was 27,100, a decrease of 14,400, or 34.7%, from 41,500 average active consultants selling in the third quarter of fiscal 2022.

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

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

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

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

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

Historically, when we have experienced these difficult inflationary times, our active consultant numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living.

Gross margin decreased $12.3 million, or 41.8%, to $17.1 million during the three months ended November 30, 2022, when compared to $29.4 million during the same period a year ago.

Gross margin as a percentage of net revenues for the three months ended November 30, 2022 decreased to 67.1%, compared to 71.1% the same period a year ago.

The decrease in gross margin as a percentage of net revenues is primarily attributed to higher discounts being offered to induce sales impacting margins by approximately $0.4 million, rising ocean freight costs on inbound inventory totaling approximately $0.3 million and reduced purchasing volume discounts/rebates totaling approximately $0.3 million.

UBAM operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses.

Average number of active brand partners

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

PaperPie net revenues decreased $7.4 million, or 37.0%, to $12.6 million during the three months ended May 31, 2023, when compared to $20.0 million during the same period a year ago.

The average number of active brand partners in the first quarter of fiscal 2024 was 23,200, a decrease of 9,000, or 28.0%, from 32,200 average active brand partners selling in the first quarter of fiscal 2023.

Recruiting and maintaining brand partners was negatively impacted throughout fiscal 2023, continuing through the first quarter of fiscal year 2024 by several factors including;

record inflation, our new distribution agreement with Usborne and the rebranding of the division in the fourth quarter of fiscal year 2023.

Inflation was most evident in increased food and fuel prices, which impacts the disposable income of our target customer base, which is families with small children.

Sales during the first quarter of fiscal year 2024 continued to be negatively impacted by continuing inflationary pressures and we expect this to continue through fiscal year 2024, as these pressures persist.

Historically, when we have experienced these difficult inflationary times, our active brand partner numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living.

In the first fiscal quarter last year we executed a new distribution agreement with Usborne.

The new distribution agreement created a level of uncertainty and distraction within our brand partners and continued through the fourth quarter as a result of our rebranding to PaperPie, which was a requirement of the new agreement.

Rebranding this division disrupted sales in the fiscal fourth quarter and the impact continued into the first quarter of fiscal year 2024, as Brand Partners had to update all of their individual marketing and training materials.

We expect this impact to dissipate this summer, as all active Brand Partners will have transitioned to a PaperPie Brand Partner or will have made their first sale as a PaperPie Brand Partner.

Net revenues during the fiscal 2024 first quarter were also negatively impacted from increased discounts.

Discounts as a percentage of gross sales increased from 26.8% in the first quarter of fiscal 2023 to 29.9% in the first quarter of this year, resulting in less net revenues of approximately $0.5 million.

The increased discounts resulted from a change in order mix, impacting net revenues by $0.4 million, along with additional product discounts offered to spur sales during the quarter impacting net revenues by $0.1 million.

The order mix change resulted from an increase in book fair orders over web sales, which offer higher discounts and lower sales commissions to Brand Partners.

Gross margin decreased $5.5 million, or 39.6%, to $8.4 million during the three months ended May 31, 2023, when compared to $13.9 million during the same period a year ago.

Gross margin as a percentage of net revenues for the three months ended May 31, 2023 decreased to 66.7%, compared to 69.2% the same period a year ago, representing a decrease of approximately $0.3 million.

The decrease in gross margin as a percentage of net revenues was primarily attributed to increased discounts between the periods and additional shipping promotions.

PaperPie operating expenses consists of operating and selling expenses, sales commissions and general and administrative expenses.

Operating and selling expenses primarily consists of freight expenses and materials and supplies.

Sales commissions include amounts paid to consultants for new sales and promotions.

These operating expenses are directly tied to the sales volumes of the UBAM segment.

Sales commissions include amounts paid to Brand Partners for new sales and promotions.

These operating expenses are directly tied to the sales volumes of the PaperPie segment.

General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the segment.

Total operating expenses decreased $7.8 million, or 35.6%, to $14.1 million during the three-month period ended November 30, 2022, when compared to $21.9 million reported in the same quarter a year ago.

Operating and selling expenses decreased $1.8 million, or 29.5%, to $4.3 million during the three-month period ended November 30, 2022, when compared to $6.1 million reported in the same quarter a year ago, primarily due to a decrease in outbound freight from fewer sales and shipments totaling approximately $2.2 million.

Total operating expenses decreased $3.8 million, or 36.2%, to $6.7 million during the three-month period ended May 31, 2023, when compared to $10.5 million reported in the same quarter a year ago.

Operating and selling expenses decreased $1.1 million, or 36.7%, to $1.9 million during the three-month period ended May 31, 2023, when compared to $3.0 million reported in the same quarter a year ago, primarily due to fewer sales and shipments totaling approximately $1.4 million.

This expense reduction was partially offset by a $0.3 million increase in consultant incentive trip accruals associated with promotions to bolster sales.

Sales commissions decreased $5.6 million, or 38.9%, to $8.8 million during the three-month period ended November 30, 2022, when compared to $14.4 million reported in the same quarter a year ago, due primarily to the decrease in net revenues.

General and administrative expenses decreased $0.5 million, or 33.3%, to $1.0 million during the three months ended November 30, 2022, when compared to $1.5 million during the same period a year ago, due primarily to $0.2 million of reduced bank fees from fewer credit card transactions, a $0.2 million reduction in consultant bonus awards, both resulting from the decrease in sales, as well as a $0.1 million reduction in payroll costs.

Operating income of the UBAM segment decreased $4.5 million, or 60.0% to $3.0 million during the three months ended November 30, 2022, when compared to $7.5 million reported in the same quarter a year ago.

Operating income of the UBAM division as a percentage of net revenues for the three months ended November 30, 2022 decreased to 11.9%, compared to 18.2% for the three months ended November 30, 2021.

This change primarily resulted from increased cost of goods sold, increased freight costs and increased operating and selling expenses as a percent of net revenues.

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

UBAM net revenues decreased $47.1 million, or 43.4%, to $61.4 million during the nine-month period ended November 30, 2022, compared to $108.5 million from the same period a year ago.

The average number of active consultants in the nine-month period ended November 30, 2022 was 28,700, a decrease of 18,600, or 39.3%, from 47,300 selling in same period a year ago.

Our consultant numbers declined from the prior period due to consultants returning to full-time employment, as well as families experiencing children returning to the classroom, therefore requiring less learning from home materials.

In addition, sales during the first nine months of fiscal 2023 were negatively impacted by recent record inflation, resulting in fuel cost and food price increases impacting the disposable income of our customers.

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

Historically, when we have experienced these difficult inflationary times, our UBAM active consultant numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living.

Gross margin decreased $35.9 million, or 46.2%, to $41.8 million during the nine-month period ended November 30, 2022, when compared to $77.7 million during the same period a year ago, due primarily to a decrease in net revenues.

Gross margin as a percentage of net revenues decreased to 68.0% for the nine-month period ended November 30, 2022, when compared to 71.6% for the same period a year ago.

The decrease in gross margin as a percentage of net revenues is attributed to higher discounts being offered to induce sales impacting margins by approximately $0.6 million, rising ocean freight costs on inbound inventory totaling approximately $0.7 million and reduced purchasing volume discounts/rebates totaling approximately $0.9 million.

Total operating expenses decreased $23.0 million, or 40.6%, to $33.7 million during the nine-month period ended November 30, 2022, from $56.7 million for the same period a year ago.

Operating and selling expenses decreased $5.3 million, or 34.0%, to $10.3 million during the nine-month period ended November 30, 2022, when compared to $15.6 million reported in the same period a year ago, primarily due to a decrease in shipping costs associated with the decrease in volume of orders shipped totaling approximately $6.4 million.

This expense reduction was partially offset by a $1.1 million increase in consultant incentive trip expenses and convention expenses.

Sales commissions decreased $16.1 million, or 43.4%, to $21.0 million during the nine-month period ended November 30, 2022, when compared to $37.1 million reported in the same period a year ago, primarily due to the decrease in net revenues.

General and administrative expenses decreased $1.4 million, or 35.9%, to $2.5 million, from $3.9 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes of $0.9 million and a $0.5 million reduction in consultant bonus awards, both resulting from the decrease in sales during the nine months ended November 30, 2022.

Operating income of the UBAM segment decreased $13.0 million, or 61.9%, to $8.0 million during the nine months ended November 30, 2022, when compared to $21.0 million reported in the same period last year.

Operating income of the UBAM division as a percentage of net revenues for the nine months ended November 30, 2022 was 13.1%, compared to 19.3% for the nine months ended November 30, 2021.

This change primarily resulted from increased cost of goods sold, increased freight costs and increased operating and selling expenses as a percent of net revenues.

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

Sales commissions decreased $2.6 million, or 38.8%, to $4.1 million during the three-month period ended May 31, 2023, when compared to $6.7 million reported in the same quarter a year ago, due primarily to the decrease in net revenues.

Sales commissions as a percentage of net revenues decreased from 33.7% to 32.7% between periods, primarily due to the increase in book fair orders over web sale orders, which earn less sales commissions overall.

General and administrative expenses decreased $0.1 million, or 12.5%, to $0.7 million during the three months ended May 31, 2023, when compared to $0.8 million during the same period a year ago, due primarily to $0.2 million of reduced bank fees from fewer credit card transactions associated with reduced sales, offset by a $0.1 million increase in other various costs.

Operating income for the PaperPie segment decreased $1.6 million, or 48.5% to $1.7 million during the three months ended May 31, 2023, when compared to $3.3 million reported in the same quarter a year ago.

Operating income for the PaperPie division decreased primarily from reduced sales;

along with additional product discounts, transportation discounts and incentive trip points offered to spur sales.

The operating income of the fiscal first quarter of 2023 also benefited from approximately $0.1 million of volume discounts that did not repeat this quarter.

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

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

Three Months Ended

Nine Months Ended

Less discounts and allowances

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Operating income

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

Our Publishing division’s net revenues increased $1.1 million, or 29.7%, to $4.8 million during the three-month period ended November 30, 2022, from $3.7 million reported in the same period a year ago.

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

Under the terms in our new distribution agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne will use a different distributor to supply retail accounts with their products.

The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023.

The transition between distributors brought disruption concerns to many of our retail customers and resulted in additional sales orders before the November 15, 2022 transition date.

Usborne’s products sold within the Publishing Division accounted for 85.6% of all products sold during the three months ended November 30, 2022.

Gross margin increased $0.3 million, or 16.7%, to $2.1 million during the three-month period ended November 30, 2022, from $1.8 million reported in the same quarter a year ago, primarily due to the increase in net revenues.

Gross margin as a percentage of net revenues decreased to 44.6% during the three-month period ended November 30, 2022, from 47.9% reported in the same quarter a year ago.

Gross margin as a percentage of net revenues changed primarily from an increase in cost of goods sold resulting from rising ocean freight costs on inbound inventory of $0.1 million, as well as changes in the mix of products sold between Kane Miller and Usborne.

Total operating expenses of the Publishing segment increased $0.3 million, or 50.0%, to $0.9 million, from $0.6 million, during the three-month periods ended November 30, 2022 and 2021, respectively.

This change was due to an increase of $0.1 million in wages for Learning Wrap-Ups not present in the prior year, a $0.1 million increase in freight expense due to higher shipping costs on increased sales and a $0.1 million increase in other various costs.

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

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

Our Publishing division’s net revenues increased by $1.0 million, or 9.6%, to $11.4 million during the nine-month period ended November 30, 2022, from $10.4 million reported in the same period a year ago.

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

Our Publishing division’s net revenues decreased $1.2 million, or 38.7%, to $1.9 million during the three-month period ended May 31, 2023, from $3.1 million reported in the same period a year ago primarily due to the stoppage of distribution of Usborne products between the periods, which impacted net sales by approximately $1.3 million, partially offset by new sales of SmartLab Toys totaling approximately $0.2 million.

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

The November 15, 2022 transition date, at Usborne’s request, was extended until January 31, 2023.

The transition between distributors brought disruption concerns to many of our retail customers and resulted in additional sales orders before the November 15, 2022 transition date.

Usborne’s products sold within the Publishing Division accounted for 89.2% of all products sold during the nine months ended November 30, 2022.

Gross margin increased $0.4 million, or 8.3%, to $5.2 million during the nine-month period ended November 30, 2022, from $4.8 million reported in the same period a year ago, primarily from increased net revenues.

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

Total operating expenses of the Publishing segment increased $0.6 million, or 33.3%, to $2.4 million during the nine-month period ended November 30, 2022, from $1.8 million reported in the same period a year ago.

This change was due to an increase of $0.3 million in wages and $0.1 million in other various expenses related to Learning Wrap-Ups, which was acquired in December 2021.

Other increases include $0.1 million in outbound freight costs and $0.1 million in other various expenses related to the Publishing division.

Operating income of the Publishing segment decreased $0.2 million, or 6.7%, to $2.8 million during the nine-month period ended November 30, 2022 when compared to $3.0 million reported in the same period a year ago, due primarily to the increase in operating expenses.

Under the terms in our new distribution agreement, the Company no longer has the right to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne was expected to use a different distributor to supply retail accounts with their products.

The November 15, 2022 transition date, at Usborne’s request, was extended until April 30, 2023.

Net revenues attributed to Usborne products sold within the Publishing division accounted for 67.3%, or $1.3 million during the quarter ended May 31, 2023, and 82.5%, or $2.6 million during the quarter ended May 31, 2022.

Gross margin decreased $0.5 million, or 33.3%, to $1.0 million during the three-month period ended May 31, 2023, from $1.5 million reported in the same quarter a year ago, primarily due to the decrease in net revenues.

Gross margin as a percentage of net revenues increased to 50.3% during the three-month period ended May 31, 2023, from 46.3% reported in the same quarter a year ago.

Gross margin as a percentage of net revenues changed primarily from changes in the mix of products sold between EDC-owned brands and Usborne, with Kane Miller, SmartLab Toys and Learning Wrap-Ups products carrying a better margin on average.

Total operating expenses of the Publishing segment decreased $0.2 million, or 28.6%, to $0.5 million, from $0.7 million, during the three-month periods ended May 31, 2023 and 2022, respectively.

This change was due to a $0.1 million decrease in freight expenses and a $0.1 million decrease in sales commissions due to decreased overall sales.

Operating income of the Publishing division decreased $0.2 million or 28.6% to $0.5 million during the three-month period ended May 31, 2023 from $0.7 million for the three-month period ended May 31, 2022, respectively.

The decrease in operating income was primarily associated with the decline in revenues associated with the new distribution agreement, which required the stoppage of Usborne products sold through this division.

Liquidity and Capital Resources

EDC has a history of profitability and positive cash flows.

EDC has a history of profitability and positive cash flow.

We typically fund our operations from the cash we generate.

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

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

During the first nine months of fiscal year 2023, we experienced cash inflows from operations of $703,700.

During periods of loss, like the first quarter of fiscal year 2024, EDC will continue to reduce purchases and sell through inventory to generate cash flows.

The Company expects to reduce current excess inventory levels and use the cash proceeds to pay down the line of credit and portions of the term debt.

Available cash has historically been used to pay down outstanding bank loan balances, for capital expenditures, to pay dividends and to acquire treasury stock.

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

As of the end of the first fiscal quarter of 2024, our revolving bank credit facility loan balance was $11.0 million with $3.0 million in available capacity.

During the first three months of fiscal year 2024, we experienced cash inflows from operations of $1,177,100.

These cash inflows resulted from:

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

●deferred income taxes of $558,400

●provision for inventory allowance of $51,200

●deferred income taxes of $329,700

Positively impacted by:

●decrease in inventories, net of $1,430,400

●increase in accounts payable of $767,100

●increase in deferred revenues of $367,800

●decrease in accounts receivable of $217,800

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

Negatively impacted by:

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

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

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

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

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

Cash provided by financing activities was $835,200, which was comprised of net proceeds from term debt of $36,000,000 and cash received in treasury stock transactions of $63,400, offset by payments on term debt of $25,450,100, net payments on the line of credit of $8,729,000, payments of $870,700 for dividends declared in fiscal 2022 and payments of debt issue costs of $178,400.

During fiscal year 2023, we continue to expect the cash generated from our operations and cash available through our line of credit with our Lender will provide us the liquidity we need to support ongoing operations.

We expect to generate positive operational cash flow as we normalize inventory levels.

Cash used in investing activities was $300,900 for capital expenditures, consisting of $288,100 in software upgrades to our proprietary systems that our PaperPie Brand Partners use to monitor their business and place customer orders and $12,800 of other various purchases.

Cash used in financing activities was $689,200, which was comprised of net borrowings on the line of credit of $324,700 offset by cash paid in treasury stock transactions of $563,900 and payments on term debt of $450,000.

We continue to expect the cash generated from our operations, specifically from the reduction of excess inventory, and cash available through our line of credit with our Lender will provide us with the liquidity we need to support ongoing operations.

Cash generated from operations will be used to purchase inventory in order to expand our product offerings and to pay down existing debt.

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

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

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

The Loan Agreement establishes a fixed rate term loan in the principal amount of $15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $21,000,000 (the “Floating Rate Term Loan”;

together with the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving promissory note in the principal amount up to $15,000,000 (the “Revolving Loan”).

Features of the Loan Agreement include:

The Loan Agreement established a fixed rate term loan in the principal amount of $15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $21,000,000 (the “Floating Rate Term Loan”;

together with the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving promissory note in the principal amount up to $15,000,000 (the “Revolving Loan” or “Line of Credit”).

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

This amendment clarified the definition of the Fixed Charge Coverage Ratio to exclude dividends paid prior to November 30, 2022, and placed restrictions on acquisitions and cash dividends.

On May 10, 2023, the Company executed the Second Amendment to our Loan Agreement with the Lender.

This amendment waived the fixed charge ratio default which occurred on February 28, 2023 and amended the financial covenant to not require the fixed charge ratio to be measured at May 31, 2023.

The Second Amendment also added a cumulative maximum level of fiscal year to date inventory purchases through the expiration of the Revolving Loan Agreement, increased the borrowing rate on the Company’s Revolving Loan to Term SOFR Rate plus 3.5%, required certain swap agreement be executed within 30 days of the amendment, reduced the revolving commitment from $15,000,000 to $14,000,000, effective May 10, 2023, and further reduced the revolving commitment to $13,500,000, effective July 15, 2023, among other items.

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

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

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

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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 5.48% at November 30, 2022)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 2.50% (effective rate was 6.23% at November 30, 2022)

Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at November 30, 2022)

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

Available credit under the current $15,000,000 revolving line of credit with the Company’s new Lender was approximately $6,005,500 at November 30, 2022.

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

Years ending February 28 (29),

Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75% (effective rate was 6.79% at May 31, 2023)

Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 3.50% (effective rate was 8.54% at May 31, 2023)

Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at May 31, 2023)

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

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

Under the terms of the amended Loan Agreement, not meeting this ratio would represent an Event of Default.

Should an Event of Default occur, the Lender will have the right to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan.

These conditions, among others in the aggregate, raise substantial doubt over the Company's ability to continue as a going concern.

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

Year ending February 29,

Risks and Uncertainties

In accordance with ASU No.

2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed financial statements are issued.

As an Event of Default is expected associated with the Loan Agreement, and there is no guaranty that the Event of Default will be waived by BOKF, NA, there is sufficient uncertainty that, should the Lender choose to accelerate the 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, which 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.

Critical Accounting Policies

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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.

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

We are not responsible for product damaged in transit.

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

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

We are not responsible for a product damaged in transit.

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

This damage occurs in the stores, not in shipping to the stores, and we typically do not offer credit for damaged returns.

It is industry practice to accept non-damaged returns from retail customers.

Management has estimated and included a reserve for sales returns of $0.2 million as of November 30, 2022 and February 28, 2022.

Management has estimated and included a reserve for sales returns of $0.2 million as of May 31, 2023 and February 28, 2023.

Allowance for Doubtful Accounts

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An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends.

Management has estimated and included an allowance for doubtful accounts of $0.2 million and $0.3 million at November 30, 2022 and February 28, 2022, respectively.

Our inventory contains over 2,000 titles, each with different sell through rates depending upon the nature and popularity of the title.

We maintain very few titles that are topical in nature.

As such, the majority of the titles we sell remain current in content for several years.

Most of our products are printed in China, Europe, Singapore, India, Malaysia and Dubai resulting in a six to eight-month lead-time to have a title printed and delivered to us.

Management has estimated and included an allowance for doubtful accounts of $0.1 million and $0.2 million as of May 31, 2023 and February 28, 2023, 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.

Management continually estimates and calculates the amount of noncurrent inventory.

Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to minimum order requirements of our suppliers.

Noncurrent inventory was estimated by management using an anticipated turnover ratio by title.

Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to the minimum order requirements of our suppliers.

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

Inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory.

These inventory quantities have additional exposure for storage damages and related issues, and therefore have higher obsolescence reserves.

Noncurrent inventory balances prior to valuation allowances were $3.8 million and $2.4 million at November 30, 2022 and February 28, 2022, respectively.

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

Noncurrent inventory balances prior to valuation allowances were $6.4 million and $5.1 million as of May 31, 2023 and February 28, 2023, respectively.

Noncurrent inventory valuation allowances were $0.5 million and $0.4 million as of May 31, 2023 and February 28, 2023, respectively.

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

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These factors and historical analysis have led our management to determine that 2½ years represents a reasonable estimate of the normal operating cycle for our products.

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

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

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 8.3% of our active consultants have maintained consignment inventory at the end of the third quarter of fiscal year 2023.

Approximately 9.0% of our active Brand Partners have maintained consignment inventory at the end of the first quarter of fiscal year 2024.

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

The total cost of inventory on consignment with consultants was $1.7 million and $1.4 million at November 30, 2022 and February 28, 2022, respectively.

The total cost of inventory on consignment with Brand Partners was $1.4 million and $1.5 million as of May 31, 2023 and February 28, 2023, respectively.

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

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

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $1.0 million at November 30, 2022 and $0.9 million at February 28, 2022.

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $1.0 million and $0.9 million as of May 31, 2023 and February 28, 2023, respectively.

Share-Based Compensation

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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.

The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.

During the first nine months of fiscal year 2023, the Company recognized $0.7 million of compensation expense associated with the shares granted, which was offset by a $0.1 million reduction of compensation expense during the fiscal second quarter associated with shares that were forfeited.

These shares were re-issued under the terms of the 2019 LTI Plan during the fiscal third quarter.

During the first three months of fiscal year 2024, the Company recognized $0.1 million of compensation expense associated with the shares granted.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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-Q

Item 1. Financial Statements