What changed in this filing

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Item 1. Financial Statements

2024-01-11 compared with 2023-10-16 · 228 added, 203 removed, 567 unchanged (43% of the section changed)

6 unchanged sentences

Accounts receivable, less allowance for doubtful accounts of

$ 146,000 (August 31) and $ 211,700 (February 28)

$ 144,300 (November 30) and $ 211,700 (February 28)

Inventories – net

21 unchanged sentences

Authorized 16,000,000 shares;

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

Outstanding 8,571,088 (August 31) and 8,713,289 (February 28) shares

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

Outstanding 8,571,088 (November 30) and 8,713,289 (February 28) shares

Capital in excess of par value

8 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Less discounts and allowances

17 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Net earnings (loss)

5 unchanged sentences

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED AUGUST 31, 2023

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2023

(par value $0.20 per share)

10 unchanged sentences

BALANCE - August 31, 2023

FOR THE SIX MONTHS ENDED AUGUST 31, 2022

Share-based compensation expense - net

Unrealized loss on interest rate exchange agreement

BALANCE - November 30, 2023

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2022

(par value $0.20 per share)

Treasury Stock

Accumulated Other Comprehensive Income

Shareholders'

7 unchanged sentences

BALANCE - August 31, 2022

Issuance of restricted share awards for vesting

Share-based compensation expense - net

BALANCE - November 30, 2022

See notes to condensed financial statements (unaudited).

1 unchanged sentence

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended August 31,

Nine Months Ended November 30,

CASH FLOWS FROM OPERATING ACTIVITIES

Net earnings (loss)

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

Depreciation and amortization

Deferred income taxes

Provision for doubtful accounts

Provision for inventory valuation allowance

10 unchanged sentences

Total adjustments

Net cash provided by (used in) operating activities

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES

2 unchanged sentences

Purchases of other assets

Net cash used in investing activities

Net cash provided by (used in) investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Payments on term debt

Payments on debt issue costs

Cash paid to acquire treasury stock

21 unchanged sentences

The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year due to the seasonality of our product sales .

Reclassifications

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

These reclassifications had no effect on net earnings.

Use of Estimates in the Preparation of Financial Statements

6 unchanged sentences

Assets Held for Sale

The Company classifies long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met per ASC 360:

The Company classifies long-lived assets, or disposal groups to be sold, as held for sale in the period in which all of the following criteria are met per Accounting Standards Codification (“ASC”) 360:

(1) management, having the authority to approve the action, commits to a plan to sell the asset or disposal group;

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

We have reviewed the recently issued pronouncements and concluded the following new accounting standard updates (“ASU”) apply to us:

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses and increased interim disclosure requirements, among others.

The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted, and the amendments should be applied retrospectively.

This ASU will be effective for our Form 10-K for fiscal 2025 and our Form 10-Q for the first quarter of fiscal 2026.

We are currently evaluating the impact this ASU may have on our financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures, which provides qualitative and quantitative updates to the rate reconciliation and income taxes paid disclosures, among others, in order to enhance the transparency of income tax disclosures, including consistent categories and greater disaggregation of information in the rate reconciliation and disaggregation by jurisdiction of income taxes paid.

The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted.

The amendments should be applied prospectively;

however, retrospective application is also permitted.

This ASU will be effective for our Form 10-K for fiscal 2026.

We are currently evaluating the impact this ASU may have on our financial statement disclosures.

Note 2 – CASH

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

August 31, 2023

August 31, 2022

November 30, 2023

November 30, 2022

Cash and cash equivalents

1 unchanged sentence

Total cash, cash equivalents and restricted cash shown in the condensed statements of cash flows

The Company contracts with Braintree Payment Services and PayPal, Inc.

The Company has historically contracted with Braintree Payment Services and PayPal, Inc.

(together “PayPal”), third-party merchant service processors, to capture PayPal, Visa, Discover and Mastercard payments from customers.

Approximately 90% of all payments received by the Company are channeled through these processors.

Approximately 90% of all payments received by the Company have been channeled through these processors.

During the second quarter of fiscal 2024, PayPal, under the terms of our agreements, began to hold cash payments received from customers in reserve to offset any potential chargebacks.

The Company has classified the cash held in reserves as restricted cash.

During the third quarter of fiscal 2024, the Company switched merchant services for Visa, Discover and Mastercard from Braintree to Nexio.

This switch allowed a portion of the reserves to be released prior to November 30, 2023.

The Company has classified the remaining cash held in reserves by PayPal as restricted cash.

Note 3 – ASSETS HELD FOR SALE

1 unchanged sentence

This amendment required the Company to list its real estate property located at 10302 East 55 th Place, Tulsa, Oklahoma 74146 for sale by August 18, 2023.

This property was appraised for a market value of $ 5,100,000 .

The Company ceased recording depreciation on the assets upon meeting the held for sale criteria at the end of its second quarter of fiscal 2024.

During the third quarter of fiscal 2024, the Company entered into a sale agreement and closed on the sale of this this property of $ 5,100,000 .

The gain from the sale of the property of approximately $ 4,017,000 is reflected in other income in the condensed statement of operations.

Subsequent to the closing of the sale, the Company executed a lease agreement on the property with the third-party buyer for 36 months.

See Note 5 for further details.

Also, during the third quarter of fiscal 2024, the Company listed its real estate property located at 5404 S.

122nd East Ave, Tulsa, Oklahoma 74146 for sale.

This property, consisting of approximately 402,000 square feet of office and warehouse space on 35 -acres (the “Hilti Complex”), along with 17 -acres of adjacent undeveloped land, was appraised in July, 2023 with a market value of $ 41,970,000 .

The Company ceased recording depreciation on the assets upon meeting the held for sale criteria at the end of the third quarter of fiscal 2024.

The Company records assets held for sale at the lower of their carrying value or fair value less costs to sell.

As of August 31, 2023, the total carrying value of assets held for sale was $ 811,800 and is separately recorded on the condensed balance sheets.

As of November 30, 2023, the total carrying value of assets held for sale was $ 18,281,100 and is separately recorded on the condensed balance sheets.

The net cash received from the sale will be applied to the Term Loans outstanding in the Credit Agreement with the Company’s bank.

1 unchanged sentence

Inventories consist of the following:

August 31, 2023

November 30, 2023

February 28, 2023

5 unchanged sentences

Inventories net – noncurrent

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

Inventory in transit totaled $ 405,400 and $ 850,100 at November 30, 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.

1 unchanged sentence

We have both lessee and lessor arrangements.

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

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

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

2 unchanged sentences

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.

Certain leased properties include areas which are subleased to other tenants.

As part of our lease agreements (“master lease”), we recognize the entire lease liability and right-of-use asset associated with the leased property.

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.

August 31, 2023

November 30, 2023

February 28, 2023

6 unchanged sentences

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.

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

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

Three Months Ended

Six Months Ended

Nine Months Ended

Fixed lease costs

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

Future minimum rental payments under operating leases with initial terms greater than one year as of November 30, 2023, are as follows:

Years ending February 28 (29),

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Operating cash outflows – operating leases

3 unchanged sentences

Years ending February 28 (29),

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

The accumulated depreciation associated with the leased assets was $ 3,039,900 and $ 2,853,200 as of August 31, 2023 and February 28, 2023, respectively.

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

The cost of the leased space was $ 10,637,900 at November 30, 2023 and February 28, 2023.

The accumulated depreciation associated with the leased assets was $ 3,098,400 and $ 2,853,200 as of November 30, 2023, and February 28, 2023, respectively.

The leased assets, net of accumulated depreciation, are included in assets held for sale on the condensed balance sheets.

Note 6 – DEBT

Debt consists of the following:

August 31, 2023

November 30, 2023

February 28, 2023

15 unchanged sentences

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

The Swap Transaction has a notional amount of $ 18,000,000 through fiscal quarter ending May 31, 2024, and then resets to $ 13,000,000 through May 30, 2025, while continuing to mirror the amortizing balance of the Floating Rate Term Loan.

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

The Swap Transaction has a notional amount of $ 18,000,000 through fiscal quarter ending May 31, 2024, and then resets to $ 13,000,000 through May 30, 2025, while continuing to mirror a portion of the amortizing balance of the Floating Rate Term Loan.

Under the terms of this agreement, the Company, in effect, has exchanged the floating interest rate of 30-Day Term SOFR Rate at the trade date of June 5, 2023, to a fixed rate of 4.73 % on the amortizing balance of the Swap Transaction.

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

9 unchanged sentences

Contingent upon the occurrence of an Event of Default in the agreement, the Company shall within 15 days list its real estate property for sale located at 5402 South 122nd Ave., Tulsa, Oklahoma (“Hilti Complex), with a licensed commercial real estate broker satisfactory to the Lender.

The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50 %, or 9.81 % at August 31, 2023.

The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50 %, or 9.82 % at November 30, 2023.

The Revised Loan Agreement was updated for the changes in the Third Amendment as well as removed the fixed charge ratio and the ability for borrowings to be accelerated before the January 31, 2024 Revolving Loan maturity date.

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

Features of the Revised Loan Agreement at August 31, 2023 include:

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

On December 21, 2023, subsequent to quarter end, the Company executed the Fourth Amendment to the Revised Loan Agreement.

See Note 17 for further details.

Available credit under the current $ 5,000,000 revolving line of credit with the Lender was approximately $ 1,900 at November 30, 2023.

Features of the Revised Loan Agreement at November 30, 2023 include:

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

$ 15 Million Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26 %

$ 21 Million Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75 % (effective rate was 7.06 % at August 31, 2023)

$ 21 Million Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75 % (effective rate was 7.08 % at November 30, 2023)

Stepdown Revolving Loan with maturity date of January 31, 2024 .

The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 4.50 % (effective rate was 9.81 % at August 31, 2023)

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

The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 4.50 % (effective rate was 9.83 % at November 30, 2023)

Revolving Loan allows for Letters of Credit upon bank approval (none were outstanding at November 30, 2023)

Prior to the Third Amendment, executed on August 9, 2023, the Loan Agreement contained provisions that required the Company to maintain a minimum fixed charge ratio.

1 unchanged sentence

Concurrent with the execution of the Third Amendment to the Loan Agreement, the Loan Agreement was modified to incorporate the changes outlined in the Third Amendment and the fixed charge ratio covenant was removed, as well as the Lender’s right to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan due to the fixed charge ratio covenant.

Should the Company fail to meet any of the remaining terms outlined in the Revised Credit Agreement or fail to meet the stepdown requirements of the Revolving Loan, the Company shall within 15 days list its real estate property for sale located at 5402 South 122nd Ave., Tulsa, Oklahoma (“Hilti Complex”), with a licensed commercial real estate broker satisfactory to the Lender.

Proceeds from the sale of the property would be used to pay off all the borrowings with the Lender.

A third-party appraisal was completed on the Hilti Complex, consisting of the 400,000 square feet building complex on approximately 40 acres, along with approximately 15 acres of adjacent unused land, in July of 2022 with a market value of $ 41,200,000 .

The short-term duration of the Revolving Loan, the uncertainty of the Company’s ability to meet the stepdown requirements outlined in the Third Amendment and the ability to renew the line on January 31, 2024, among other items raise substantial doubt over the Company's ability to continue as a going concern.

Management has plans that should it violate the terms of the Third Amendment or Revised Credit Agreement, the Company will sell the Hilti Complex and pay off the Term Loans and Revolving Loan.

The short-term duration of the Revolving Loan, among other items raise substantial doubt over the Company's ability to continue as a going concern.

Management has plans to sell the Hilti Complex and pay off the Term Loans and Revolving Loan.

The proceeds from the sale of the property are expected to generate sufficient cashflows to allow the Company to continue operations without borrowing funds from their bank.

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Federal tax credits realized

Gain from sale of assets

Rental income

9 unchanged sentences

As a result of receiving these refund payments, the Company is required to file amended fiscal 2021 and 2022 corporate income tax returns reducing the wages expense deduction associated with the credit received.

The Company has recognized estimated federal and state tax liabilities associated with these amended returns of approximately $ 1,041,600 as of August 31, 2023, which are included in income taxes payable on the condensed balance sheets.

The Company has recognized estimated federal and state tax liabilities associated with these amended returns of approximately $ 1,041,600 as of November 30, 2023, which are included in income taxes payable on the condensed balance sheets.

Note 8 – BUSINESS CONCENTRATION

4 unchanged sentences

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

As of November 30, 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.

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Gross sales of Usborne products by division:

9 unchanged sentences

Total purchases received

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

Total Usborne inventory owned by the Company and included in our condensed balance sheets was $ 30,475,500 and $ 35,363,500 as of November 30, 2023 and February 28, 2023, respectively.

Note 9 – EARNINGS (LOSS) PER SHARE

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Earnings (loss):

7 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Weighted average shares:

23 unchanged sentences

These forfeitures are available for reissue to remaining participants under the 2019 LTI Plan.

The remaining unrecognized compensation expense of these awards, totaling approximately $ 569,500 as of August 31, 2023, will be recognized ratably over the remaining vesting period of 18 months.

The remaining unrecognized compensation expense of these awards, totaling approximately $ 474,500 as of November 30, 2023, will be recognized ratably over the remaining vesting period of 15 months.

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

Three Months Ended

Six Months Ended

Nine Months Ended

Share-based compensation expense

1 unchanged sentence

Share-based compensation expense - net

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

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

Weighted Average Fair Value (per share)

Outstanding at February 28, 2023

Outstanding at August 31, 2023

Outstanding at November 30, 2023

Note 12 – 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 $ 1,414,200 and $ 3,123,700 for the three months ended August 31, 2023 and 2022, respectively.

These costs were $ 3,352,300 and $ 6,686,300 for the six months ended August 31, 2023 and 2022, respectively.

These costs were $ 2,152,700 and $ 4,506,500 for the three months ended November 30, 2023 and 2022, respectively.

These costs were $ 5,505,000 and $ 11,192,800 for the nine months ended November 30, 2023 and 2022, respectively.

Note 13 – BUSINESS SEGMENTS

5 unchanged sentences

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 8 for the impact of our updated distribution agreement on the Publishing segment.

See Note 8 for the impact of our updated Usborne distribution agreement on the Publishing segment.

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

3 unchanged sentences

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

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

Information by reporting segment for the three and nine-month periods ended November 30, 2023 and 2022, are as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

EARNINGS (LOSS) BEFORE INCOME TAXES

Three Months Ended

Six Months Ended

Nine Months Ended

Note 14 – INTEREST RATE SWAP AGREEMENT

4 unchanged sentences

The differential to be paid or received on the swap agreement is accrued as interest rates change and is recognized in interest expense over the life of the agreement.

The swap agreement amortizes down consistent with the $21,000,000 Floating Rate Term Loan, expires on May 30, 2025 and has effectively fixed the interest rate of $18,000,000 of the $21,000,000 Floating Rate Term Loan at 6.48 %.

The notional amount of the swap was $ 17,825,000 at August 31, 2023.

The swap agreement offsets a corresponding portion of the amortizing $21,000,000 Floating Rate Term Loan, expires on May 30, 2025 , and has effectively fixed the interest rate on the offsetting, outstanding balance of the $21,000,000 Floating Rate Term Loan at 6.48 %.

The notional amount of the swap and the offsetting, outstanding portion of the term loan were $ 17,562,500 on November 30, 2023.

The interest-rate swap contains no credit-risk–related contingent features and is cross-collateralized by all assets of the Company.

2 unchanged sentences

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

August 31, 2023

November 30, 2023

February 28, 2023

Prepaid expenses and other assets

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

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

Note 15 – FINANCIAL INSTRUMENTS

1 unchanged sentence

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 assets held for sale was $ 4,694,000 as of August 31, 2023.

We did not have any assets held for sale as of February 28, 2023.

Management's estimates are based on the appraised market value and listing price of the asset less the costs to sell.

The estimated fair value of our term notes payable is estimated by management to approximate $ 33,588,100 and $ 34,253,500 as of August 31, 2023 and February 28, 2023, respectively.

The estimated fair value of our assets held for sale was $ 40,019,200 as of November 30, 2023.

The Company did not have any assets held for sale as of February 28, 2023.

Management's estimates are based on the appraised market value and listing price of the Hilti Complex and land, less the estimated costs to sell.

The estimated fair value of our term notes payable is estimated by management to approximate $ 28,524,300 and $ 34,253,500 as of November 30, 2023, and February 28, 2023, respectively.

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

2 unchanged sentences

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 August 31, 2023 or February 28, 2023 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 689,600 and $ 602,700 as of August 31, 2023 and February 28, 2023, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the end of the period.

Any payments received prior to the end of the period that were not shipped as of November 30, 2023, or February 28, 2023 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 2,094,300 and $ 602,700 as of November 30, 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 17 – SUBSEQUENT EVENTS

Effective September 11, 2023, the Company (“Seller”) entered into a Contract of Sale of Real Estate (“Sale Agreement”) with MA Temple Investments LLC (the “Buyer”), for the sale of the Company’s property located at 10302 East 55th Place, Tulsa, Oklahoma 74146 consisting of 104,875 rentable square feet on approximately 3.5 acres.

The Sale Agreement price was $ 5,100,000 .

Per the Sale Agreement, the closing process shall be completed on or before October 25, 2023, and has not closed by the time of this filing.

In accordance with the terms of the Sale Agreement, upon closing of the sale and commencing on the Closing Date, the Buyer and Seller shall execute a NNN (triple-net) Lease (the “Lease”) under which the Seller shall lease the entire building for a period of three years .

The Seller will continue to have the right to sublease space within the building for the lease term.

The initial lease rate shall be $ 4.00 per rentable square foot, with 3% escalations at the beginning of each year of the Lease.

The Lease shall include NNN terms such that the Seller shall be responsible for utilities, insurance, property taxes and repairs and maintenance, excluding roof and structure, which shall be the Buyer’s responsibility.

The Lease shall include other terms considered to be normal and customary in the local market.

The net cash received from the sale will be applied to the Term Loans outstanding in the Credit Agreement with the Company’s Bank.

During September 2023, the cash held in reserve, presented as restricted cash on the Company’s condensed balance sheet, was increased to approximately $ 1,500,000 .

Subsequent to November 30, 2023, the Company executed the Fourth Amendment to the Credit Agreement (“Amendment”) with the Lender.

The Amendment, effective December 1, 2023, increases the Revolving Loan commitment to $ 8,000,000 and extends the maturity date to May 31, 2024.

The Amendment also requires the Company to list the Hilti Complex for sale, allows the Company to execute additional purchase orders, subject to the lenders approval, not to exceed $ 2,100,000 between December 1, 2023 and March 31, 2024, among other items.

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

18 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of goods sold

10 unchanged sentences

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 August 31, 2023

Total operating expenses not associated with a reporting segment decreased $0.6 million, or 17.1%, to $2.9 million for the three-month period ended August 31, 2023, when compared to $3.5 million for the same quarterly period a year ago.

Operating expenses decreased primarily as a result of a $0.4 million decrease in labor, primarily within our warehouse operations, and a $0.2 million decrease in freight handling expenses, both resulting from a decrease in gross sales.

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

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

Income taxes increased $0.7 million, or 233.3%, to a tax expense of $0.4 million for the three months ended August 31, 2023, from a tax benefit of $0.3 million for the same quarterly period a year ago, primarily resulting from operating losses in the second quarter ended August 31, 2022.

Our effective tax rate decreased to 26.9% for the quarter ended August 31, 2023, from 27.5% for the quarter ended August 31, 2022 due to sales mix fluctuations between states.

Non-Segment Operating Results for the Three Months Ended November 30, 2023

Total operating expenses not associated with a reporting segment decreased $1.1 million, or 27.5%, to $2.9 million for the three-month period ended November 30, 2023, when compared to $4.0 million for the same quarterly period a year ago.

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

Interest expense increased $0.1 million, or 16.7%, to $0.7 million for the three months ended November 30, 2023, when compared to $0.6 million for the same quarterly period a year ago due to increased interest rates on the Company’s variable rate borrowings, period over period.

Other income increased $4.0 million, or 1,000.0%, to $4.4 million for the three months ended November 30, 2023, when compared to $0.4 million for the same quarterly period a year ago resulting from the sale of the old HQ building located at 10302 E 55 th totaling $4.0 million.

Income taxes increased $0.7 million, or 100.0%, to $0.7 million for the three months ended November 30, 2023, from $0.0 million for the same quarterly period a year ago, primarily resulting from taxes on the gain on the sale of the old building offset by operational losses incurred during the quarter.

Our effective tax rate increased to 26.8% for the quarter ended November 30, 2023, from 25.0% for the quarter ended November 30, 2022, due to sales mix fluctuations between states.

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

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

Total operating expenses not associated with a reporting segment decreased $1.5 million, or 20.5%, to $5.8 million for the six-month period ended August 31, 2023, when compared to $7.3 million for the same period a year ago.

Labor expenses decreased $0.9 million, primarily within our warehouse operations, and freight handling costs decreased $0.3 million for the six months ended August 31, 2023, both associated with reduced sales, and a $0.3 million decrease in other various expenses.

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

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

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

Our effective tax rate decreased to 25.1% for the six months ended August 31, 2023, from 28.6% for the six months ended August 31, 2022 due primarily to sales mix fluctuations between states.

Non-Segment Operating Results for the Nine Months Ended November 30, 2023

Total operating expenses not associated with a reporting segment decreased $2.6 million, or 23.0%, to $8.7 million for the nine-month period ended November 30, 2023, when compared to $11.3 million for the same period a year ago.

Labor expenses decreased $1.8 million, primarily within our warehouse operations, and freight handling costs decreased $0.5 million for the nine months ended November 30, 2023, both associated with reduced sales, and a $0.3 million decrease in other various expenses.

Interest expense increased $0.7 million, or 46.7%, to $2.2 million for the nine months ended November 30, 2023, when compared to $1.5 million for the same period a year ago, due to increased interest rates on the Company’s variable rate borrowings, period over period.

Other income increased $7.8 million, or 650.0%, to $9.0 million for the nine months ended November 30, 2023, when compared to $1.2 million for the same quarterly period a year ago, primarily resulting from the receipt of the Employee Retention Credit totaling $3.8 million and from the sale of the old HQ building located at 10302 E 55 th totaling $4.0 million.

Income taxes increased $1.0 million, or 500.0%, to a tax expense of $0.8 million for the nine months ended November 30, 2023, from a tax benefit of $0.2 million for the same period a year ago, primarily resulting from income associated with the Employee Retention Credit and the sale of the old HQ building, offset by operating losses for the nine months ended November 30, 2023.

Our effective tax rate decreased to 26.7% for the nine months ended November 30, 2023, from 28.6% for the nine months ended November 30, 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.

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

PaperPie Operating Results for the Three and Nine Months Ended November 30, 2023

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

Three Months Ended

Six Months Ended

Nine Months Ended

Less discounts and allowances

8 unchanged sentences

Average number of active brand partners

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

PaperPie net revenues decreased $6.6 million, or 41.5%, to $9.3 million during the three months ended August 31, 2023, when compared to $15.9 million during the same period a year ago.

The average number of active brand partners in the second quarter of fiscal 2024 was 18,100, a decrease of 8,700, or 32.5%, from 26,800 average active brand partners selling in the second quarter of fiscal 2023.

Recruiting and maintaining brand partners was negatively impacted throughout fiscal 2023, continuing through the first and second quarter of fiscal year 2024, by several factors including record inflation, our new distribution agreement with Usborne and the rebranding of the division in the fourth quarter of fiscal year 2023.

PaperPie Operating Results for the Three Months Ended November 30, 2023

PaperPie gross revenues decreased $9.6 million, or 30.1%, to $22.3 million during the three months ended November 30, 2023, when compared to $31.9 million during the same period a year ago.

The decline in gross sales was primarily attributed to our reduced levels of active brand partners.

The average number of active brand partners in the third quarter of fiscal 2024 was 16,400, a decrease of 10,700, or 39.5%, from 27,100 average active brand partners selling in the third quarter of fiscal 2023.

Recruiting and maintaining brand partners was negatively impacted throughout fiscal 2023, continuing through the first three quarters 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 second quarter of fiscal year 2024 continued to be negatively impacted by continuing inflationary pressures and we expect this to continue through the remainder of fiscal year 2024, as these pressures persist.

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

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

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

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

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

We expect this impact to dissipate during the remaining months of fiscal 2024, 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.

This expectation was supported this summer as we saw an uptick in our active brand partner counts in August, which was the first time our brand partner count has grown since March 2023.

We also expect growth in brand partners during the upcoming fall months, which is traditionally a growth period for our active brand partner levels as this is the most active selling period of the year.

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

Discounts as a percentage of gross sales increased from 29.6% in the second quarter of fiscal 2023 to 32.6% in the second quarter of this year, or approximately $0.4 million.

The increased discounts resulted from a change in order mix, with increased book fair order types that offer higher discounts impacting net revenues by $0.2 million, along with additional product discounts offered to spur sales during the quarter impacting net revenues by $0.2 million.

Gross margin decreased $4.7 million, or 43.5%, to $6.1 million during the three months ended August 31, 2023, when compared to $10.8 million during the same period a year ago.

Gross margin as a percentage of net revenues for the three months ended August 31, 2023, decreased to 65.4%, compared to 68.1% the same period a year ago.

The decrease in gross margin as a percentage of net revenues is primarily attributed to the change in order mix and additional promotional discounts previously mentioned, as well as reduced purchasing volume discounts/rebates.

In the first fiscal quarter last year we executed a new distribution agreement with Usborne which required we rebrand our direct sales division.

We completed the rebranding of the division to PaperPie in the fourth quarter of fiscal 2023, and the impact of this rebranding continued to impact us through fiscal 2024, most reflected in our reduced Brand Partner levels.

During the summer, we saw our active brand partner levels stabilize.

Brand partner levels increased during the fall, which typically occurs during this period as this is our busiest selling season of the year.

Discounts as a percentage of gross sales increased from 27.1% in the third quarter of fiscal 2023 to 31.2% in the third quarter of this year, or approximately $0.9 million.

During the quarter, we ran several e-commerce site-wide sales, marketing directly to past customers, and offered other discounts including discounted book bundles to increase sales.

Transportation revenue was also negatively impacted during the fiscal 2024 third quarter from reduced transportation charges on e-commerce orders.

During the quarter, the freight charge for outbound e-commerce orders was reduced to $5.00 on orders up to $30 in size and then free on orders above $30.

This new freight charge, along with additional days offered with “free freight”, negatively impacted transportation revenues during the quarter by approximately $1.2 million.

Gross margin decreased $6.7 million, or 39.2%, to $10.4 million during the three months ended November 30, 2023, when compared to $17.1 million during the same period a year ago.

Gross margin as a percentage of net revenues for the three months ended November 30, 2023, decreased to 66.3%, compared to 67.1% the same period a year ago.

The decrease in gross margin as a percentage of net revenues is primarily attributed to the additional promotional discounts along with reduced freight charges on e-commerce orders.

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

3 unchanged sentences

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

Total operating expenses decreased $3.4 million, or 37.4%, to $5.7 million during the three-month period ended August 31, 2023, when compared to $9.1 million reported in the same quarter a year ago.

Operating and selling expenses decreased $1.4 million, or 46.7%, to $1.6 million during the three-month period ended August 31, 2023, when compared to $3.0 million reported in the same quarter a year ago, resulting from fewer sales and shipments leading to a decrease in outbound freight totaling approximately $1.2 million, along with a $0.1 million decrease in brand partner incentive expenses and $0.1 million decrease in various other expenses.

Sales commissions decreased $2.0 million, or 36.4%, to $3.5 million during the three-month period ended August 31, 2023, when compared to $5.5 million reported in the same quarter a year ago, due primarily to the decrease in net revenues totaling approximately $2.3 million, offset by a one-time increase in commission bonuses of $0.3 million, which resulted from a bonus promotion run over the summer.

General and administrative expenses decreased $0.1 million, or 14.3%, to $0.6 million during the three months ended August 31, 2023, when compared to $0.7 million during the same period a year ago, driven by a reduction in credit card transaction fees resulting from the decrease in sales during the quarter ended August 31, 2023.

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

Operating income of the PaperPie segment decreased $1.3 million, or 76.5% to $0.4 million during the three months ended August 31, 2023, when compared to $1.7 million reported in the same quarter a year ago.

Operating income of the PaperPie division as a percentage of net revenues for the three months ended August 31, 2023 was 3.9%, compared to 10.7% for the three months ended August 31, 2022.

Total operating expenses decreased $5.3 million, or 37.6%, to $8.8 million during the three-month period ended November 30, 2023, when compared to $14.1 million reported in the same quarter a year ago.

Operating and selling expenses decreased $1.8 million, or 41.9%, to $2.5 million during the three-month period ended November 30, 2023, when compared to $4.3 million reported in the same quarter a year ago, resulting primarily from fewer sales and shipments leading to a decrease in outbound freight totaling approximately $1.8 million.

Sales commissions decreased $3.2 million, or 36.4%, to $5.6 million during the three-month period ended November 30, 2023, when compared to $8.8 million reported in the same quarter a year ago, due primarily to the decrease in net revenues totaling approximately $9.8 million.

General and administrative expenses decreased $0.2 million, or 20.0%, to $0.8 million during the three months ended November 30, 2023, when compared to $1.0 million during the same period a year ago, driven primarily by a reduction in credit card transaction fees resulting from the decrease in sales during the quarter ended November 30, 2023.

Operating income of the PaperPie segment decreased $1.4 million, or 46.7% to $1.6 million during the three months ended November 30, 2023, when compared to $3.0 million reported in the same quarter a year ago.

Operating income of the PaperPie division as a percentage of net revenues for the three months ended November 30, 2023 was 10.3%, compared to 11.9% for the three months ended November 30, 2022.

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

along with additional promotional discounts and commission bonus promotions offered to spur sales.

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

PaperPie net revenues decreased $14.0 million, or 39.0%, to $21.9 million during the six-month period ended August 31, 2023, compared to $35.9 million from the same period a year ago.

The average number of active brand partners in the six-month period ended August 31, 2023 was 20,600, a decrease of 8,900, or 30.2%, from 29,500 selling in same period a year ago.

along with additional promotional discounts and reduced freight charges offered to spur sales.

PaperPie Operating Results for the Nine Months Ended November 30, 2023

PaperPie gross revenues decreased $25.5 million, or 33.1%, to $51.6 million during the nine-month period ended November 30, 2023, compared to $77.1 million from the same period a year ago.

The average number of active brand partners in the nine-month period ended November 30, 2023 was 19,200, a decrease of 9,500, or 33.1%, from 28,700 selling in same period a year ago.

Recruiting and maintaining brand partners has been negatively impacted by several factors including record inflation, our new distribution agreement with Usborne and the rebranding of the division in the fourth quarter of fiscal year 2023.

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

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

Gross margin decreased $10.2 million, or 41.3%, to $14.5 million during the six-month period ended August 31, 2023, when compared to $24.7 million during the same period a year ago, due primarily to a decrease in net revenues.

Gross margin as a percentage of net revenues decreased to 66.2% for the six-month period ended August 31, 2023, when compared to 68.7% for the same period a year ago.

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

Total operating expenses decreased $7.2 million, or 36.5%, to $12.5 million during the six-month period ended August 31, 2023, from $19.7 million for the same period a year ago.

Operating and selling expenses decreased $2.4 million, or 40.7%, to $3.5 million during the six-month period ended August 31, 2023, when compared to $5.9 million reported in the same period a year ago, primarily due to a decrease in shipping costs associated with the decrease in volume of orders shipped totaling approximately $2.5 million partially offset by a $0.1 million increase in brand partner incentive trip expenses.

Sales commissions decreased $4.6 million, or 37.7%, to $7.6 million during the six-month period ended August 31, 2023, when compared to $12.2 million reported in the same period a year ago, primarily due to the decrease in net revenues.

General and administrative expenses decreased $0.1 million, or 6.7%, to $1.4 million, from $1.5 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes totaling $0.3 million, which was offset by a $0.1 million increase in payroll expenses and a $0.1 million increase in depreciation expense.

Operating income of the PaperPie segment decreased $3.0 million, or 60.0%, to $2.0 million during the six months ended August 31, 2023, when compared to $5.0 million reported in the same period last year.

Operating income of the PaperPie division as a percentage of net revenues for the six months ended August 31, 2023 was 9.2%, compared to 14.0% for the six months ended August 31, 2022.

During the summer of fiscal 2024, we saw our brand partner levels stabilize.

Brand partner levels increased during the fall, which typically occurs during this period as this is our busiest selling season of the year.

Additionally, when we have experienced 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.

Discounts as a percentage of gross sales increased from 27.7% in during the first nine months of fiscal 2023 to 31.1% in the during the first nine months of fiscal 2024, impacting net revenues by approximately $1.8 million.

During the first nine months of fiscal 2024, we ran several e-commerce site-wide sales, marketing directly to past customers, and offered other discounts including discounted book bundles to increase sales.

Transportation revenue was also negatively impacted during the first nine months of fiscal 2024 from reduced transportation charges on e-commerce orders.

During fiscal 2024, PaperPie has offered additional free shipping days to spur sales and during the third quarter implemented a change to the freight charged for outbound e-commerce orders;

which was reduced to $5.00 on orders up to $30 in size and then free on orders above $30.

These freight changes, along with additional days offered with “free freight”, negatively impacted transportation revenues during first three fiscal quarters by approximately $1.7 million.

Gross margin decreased $16.9 million, or 40.4%, to $24.9 million during the nine-month period ended November 30, 2023, when compared to $41.8 million during the same period a year ago, due primarily to a decrease in net revenues.

Gross margin as a percentage of net revenues decreased to 66.2% for the nine-month period ended November 30, 2023, when compared to 68.0% for the same period a year ago.

The decrease in gross margin as a percentage of net revenues was primarily attributed to increased discounts and promotions and reduced freight charges offered during fiscal 2024 to spur sales.

Total operating expenses decreased $12.4 million, or 36.8%, to $21.3 million during the nine-month period ended November 30, 2023, from $33.7 million for the same period a year ago.

Operating and selling expenses decreased $4.4 million, or 42.7%, to $5.9 million during the nine-month period ended November 30, 2023, when compared to $10.3 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 $4.3 million.

Sales commissions decreased $7.8 million, or 37.1%, to $13.2 million during the nine-month period ended November 30, 2023, when compared to $21.0 million reported in the same period a year ago, primarily due to the decrease in net revenues, along with $0.3 million increase in additional sales bonuses paid in the second quarter of fiscal 2024 to spur sales.

General and administrative expenses decreased $0.3 million, or 12.0%, to $2.2 million, from $2.5 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes totaling $0.5 million, which was offset by a $0.2 million increase in operating expenses primarily associated with the addition of SmartLab Toys.

Operating income of the PaperPie segment decreased $4.4 million, or 55.0%, to $3.6 million during the nine months ended November 30, 2023, when compared to $8.0 million reported in the same period last year.

Operating income of the PaperPie division as a percentage of net revenues for the nine months ended November 30, 2023 was 9.7%, compared to 13.1% for the nine months ended November 30, 2022.

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

along with additional promotional discounts and commission bonus promotions offered to spur sales.

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

along with additional promotional discounts and additional commission bonus payments offered to spur sales.

Publishing Operating Results for the Three and Nine Months Ended November 30, 2023

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

Three Months Ended

Six Months Ended

Nine Months Ended

Less discounts and allowances

3 unchanged sentences

Operating income

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

Our Publishing division’s net revenues decreased $2.2 million, or 62.9%, to $1.3 million during the three-month period ended August 31, 2023, from $3.5 million reported in the same period a year ago primarily due to the stoppage of distribution of Usborne products between the periods, which impacted net sales by approximately $2.8 million, partially offset by an increase in Kane Miller and Learning Wrap-Ups sales of $0.4 million and new sales of SmartLab Toys totaling approximately $0.2 million.

Publishing Operating Results for the Three Months Ended November 30, 2023

Our Publishing division’s net revenues decreased $3.6 million, or 75.0%, to $1.2 million during the three-month period ended November 30, 2023, from $4.8 million reported in the same period a year ago primarily due to the stoppage of distribution of Usborne products between the periods, which impacted net sales by approximately $4.3 million, partially offset by an increase in Kane Miller and Learning Wrap-Ups sales of $0.1 million and new sales of SmartLab Toys totaling approximately $0.6 million.

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

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

The November 15, 2022 transition date, at Usborne’s request, was extended into the first quarter of fiscal 2024.

Gross sales attributed to Usborne products sold within the Publishing division accounted for 84.5%, or $6.2 million during the quarter ended August 31, 2022.

Gross margin decreased $0.8 million, or 50.0%, to $0.8 million during the three-month period ended August 31, 2023, from $1.6 million reported in the same quarter a year ago, primarily due to the decrease in net revenues.

Gross margin as a percentage of net revenues increased to 64.0% during the three-month period ended August 31, 2023, from 46.8% reported in the same quarter a year ago.

Gross margin as a percentage of net revenues changed primarily from an increase in Learning Wrap-Ups sales, which carry a better margin.

Total operating expenses of the Publishing segment decreased $0.4 million, or 50.0%, to $0.4 million, from $0.8 million, during the three-month periods ended August 31, 2023 and 2022, respectively.

This change was due to a $0.4 million decrease in freight expenses caused by lower sales.

Operating income of the Publishing division decreased $0.4 million or 50.0% to $0.4 million during the three-month period ended August 31, 2023, from $0.8 million for the three-month period ended August 31, 2022, respectively.

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

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

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

Gross margin decreased $1.3 million, or 41.9%, to $1.8 million during the six-month period ended August 31, 2023, from $3.1 million reported in the same period a year ago.

Gross margin as a percentage of net revenues increased to 55.7%, during the six-month period ended August 31, 2023, from 46.6% reported in the same period a year ago.

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

Total operating expenses of the Publishing segment decreased $0.6 million, or 40.0%, to $0.9 million during the six-month period ended August 31, 2023, from $1.5 million reported in the same period a year ago.

Under the terms in our new distribution agreement, the Company no longer has the right to distribute Usborne’s products to retail customers after the first quarter of fiscal 2024.

Net sales attributed to Usborne products sold within the Publishing division accounted for 89.6%, or $4.3 million during the quarter ended November 30, 2022.

Gross margin decreased $1.4 million, or 66.7%, to $0.7 million during the three-month period ended November 30, 2023, from $2.1 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 58.3% during the three-month period ended November 30, 2023, from 44.6% reported in the same quarter a year ago.

Gross margin as a percentage of net revenues changed primarily from an increase in sales of Learning Wrap-Ups and SmartLab Toys, which carry a lower cost of goods sold percentage.

Total operating expenses of the Publishing segment decreased $0.5 million, or 55.6%, to $0.4 million, from $0.9 million, during the three-month periods ended November 30, 2023 and 2022, respectively.

This change was primarily due to $0.4 million of reduced freight expenses resulting from lower sales.

Operating income of the Publishing division decreased $0.9 million or 75.0% to $0.3 million during the three-month period ended November 30, 2023, from $1.2 million for the three-month period ended November 30, 2022, respectively.

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

Publishing Operating Results for the Nine Months Ended November 30, 2023

Our Publishing division’s net revenues decreased by $7.0 million, or 61.4%, to $4.4 million during the nine-month period ended November 30, 2023, from $11.4 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 $8.5 million, offset by increases in Kane Miller sales of $0.3 million, Learning Wrap-Ups sales of $0.3 million and new sales of SmartLab Toys totaling approximately $0.9 million.

Gross margin decreased $2.7 million, or 51.9%, to $2.5 million during the nine-month period ended November 30, 2023, from $5.2 million reported in the same period a year ago.

Gross margin as a percentage of net revenues increased to 56.4%, during the nine-month period ended November 30, 2023, from 45.7% reported in the same period a year ago.

Gross margin as a percentage of net revenues changed primarily from increased sales of EDC-owned brands including Kane Miller, SmartLab Toys and Learning Wrap-Ups, which carry a lower cost of goods sold.

Total operating expenses of the Publishing segment decreased $1.1 million, or 45.8%, to $1.3 million during the nine-month period ended November 30, 2023, from $2.4 million reported in the same period a year ago.

This change was due to a $0.8 million decrease in freight expenses and a $0.3 million decrease in sales commissions due to decreased overall sales and the restructuring of the Company’s internal sales department.

Operating income of the Publishing segment decreased $0.7 million, or 43.8%, to $0.9 million during the six-month period ended August 31, 2023 when compared to $1.6 million reported in the same period a year ago, due primarily to the decrease in sales and operating expenses.

Operating income of the Publishing segment decreased $1.6 million, or 57.1%, to $1.2 million during the nine-month period ended November 30, 2023 when compared to $2.8 million reported in the same period a year ago, due primarily to the decrease in sales and operating expenses.

The decrease in operating income was primarily associated with the decline in revenues associated with the stoppage of Usborne product sales in this division.

3 unchanged sentences

During periods of loss, 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.

The Company expects to continue to liquidate its buildings and reduce current excess inventory levels and use the cash proceeds to pay down borrowings with our bank.

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 second fiscal quarter of 2024, our revolving bank credit facility loan balance was $9.7 million with $0.8 million in available capacity.

As of the end of the third fiscal quarter of 2024, our revolving bank credit facility loan balance was $5.0 million with no available capacity.

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

We have $1.1 million of restricted cash held by our third-party credit card payment processor as of the end of our second fiscal quarter of 2024.

The cash held in reserve was increased in September 2023 to approximately $1.5 million and is scheduled to increase again in October 2023 to approximately $2.0 million.

The Company has requested the cash held in reserve be reduced and the cash be released back to the Company.

PayPal has scheduled its next financial review in mid-October.

The Company has engaged an alternate credit card processor to move to during the third quarter of fiscal 2024.

During the first six months of fiscal year 2024, we experienced cash inflows from operations of $4,700,300.

We have $1.1 million of restricted cash held by our third-party credit card payment processor as of the end of our third fiscal quarter of 2024.

During the first nine months of fiscal year 2024, we experienced cash inflows from operations of $11,618,800.

These cash inflows resulted from:

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

● net earnings of $2,161,000, including the receipt of the employee retention tax credit of $3,808,700 and the gain from the sale of the old HQ building of $3,970,600

Adjusted for:

●gain on sale of assets of ($4,017,100)

●depreciation expense of $1,995,500

●share-based compensation expense, net of $270,700

●provision for inventory allowance of $105,400

●deferred income taxes of ($199,500)

●gain on sale of assets of $46,500

●provision for doubtful accounts of $19,800

●provision for inventory allowance of $9,300

Positively impacted by:

●decrease in inventories, net of $1,829,300

●increase in accounts payable of $1,113,200

● decrease in accounts receivable of $1,041,900

● decrease in inventories, net of $5,867,700

● decrease in prepaid expenses and other assets of $107,300

● increase in accounts payable of $1,271,200

● increase in accrued salaries and commissions, and other liabilities of $637,700

● increase in deferred revenues of $1,491,600

Negatively impacted by:

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

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

● increase in income taxes payable of $961,700

Cash provided by investing activities was $4,183,000 consisting of proceeds from the sale of assets of $4,858,200 offset by capital expenditures of $638,100 in software upgrades to our proprietary systems that our PaperPie brand partners use to monitor their business and place customer orders and $37,100 of other various purchases.

Cash used in financing activities was $12,249,400, which was comprised of net payments on the line of credit of $5,636,400, payments on term debt of $6,049,100 and cash paid in treasury stock transactions of $563,900.

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.

We continue to expect the cash generated from the sale of our owned real estate along with 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 the building sales and operations will be used to pay down existing debt and excess will be used to purchase inventory in order to expand our product offerings.

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”).

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and to $4,000,000 on January 31, 2024.

The amendment restricts the Company from entering into any new purchase orders and use its best efforts to cancel existing purchase orders.

The amendment restricts the Company from entering into any new purchase orders and uses its best efforts to cancel existing purchase orders.

It also required the Company to list its real estate property located at 10302 East 55th Place, Tulsa, Oklahoma, for sale with a licensed commercial real estate broker satisfactory to the Lender on or before August 18, 2023, among other items.

The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50%, or 9.81% at August 31, 2023.

The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50%, or 9.83% at November 30, 2023.

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

Features of the Revised Loan Agreement at August 31, 2023 include:

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

Available credit under the current $5,000,000 revolving line of credit with the Company’s Lender was approximately $1,900 at November 30, 2023.

Features of the Revised Loan Agreement include:

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

$15 Million Fixed Rate Term Loan bears interest at a fixed rate per annum equal to 4.26%

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The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 4.50% (effective rate was 9.83% at August 31, 2023)

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

Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at November 30, 2023)

Prior to the Third Amendment, executed on August 9, 2023, the Loan Agreement contained provisions that required the Company to maintain a minimum fixed charge ratio.

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Years ending February 28 (29),

Subsequent to November 30, 2023, the Company executed the Fourth Amendment to the Credit Agreement (“Amendment”) with the Lender.

The Amendment, effective December 1, 2023, increases the Revolving Loan commitment to $8,000,000 and extends the maturity date to May 31, 2024.

The Amendment also requires the Company to list the Hilti Complex for sale, allows the Company to execute additional purchase orders, subject to the lender’s approval and conditions, not to exceed $2,100,000 between December 1, 2023 and March 31, 2024, among other items.

Risks and Uncertainties

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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.

The short-term duration of the Revolving Loan, the uncertainty of the Company’s ability to meet the stepdown requirements outlined in the Third Amendment and the ability to renew the line on January 31, 2024, raise substantial doubt over the Company's ability to continue as a going concern.

Management has plans that should it violate the terms of the Third Amendment or Revised Credit Agreement, it will sell the Hilti Complex and pay off the Term Loans and Revolving Loan.

The proceeds from a sale are expected to generate sufficient cashflow to allow the Company to continue operations without borrowing funds from their bank.

The short-term duration of the Revolving Loan and uncertainty of the bank’s ongoing support beyond May 31, 2024 raise substantial doubt over the Company's ability to continue as a going concern.

Management has plans to sell the Hilti Complex and pay off the Term Loans and Revolving Loan.

The proceeds from the sale are expected to generate sufficient cashflow to allow the Company to continue operations without borrowing funds from their bank.

In addition, management’s plans include reducing inventory which will generate free cashflows and building the active PaperPie brand partners to pre-pandemic levels.

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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 August 31, 2023, and February 28, 2023.

Management has estimated and included a reserve for sales returns of $0.2 million as of November 30, 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 $0.1 million and $0.2 million as of August 31, 2023, and February 28, 2023, respectively.

Management has estimated and included an allowance for doubtful accounts of $0.1 million and $0.2 million as of November 30, 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.

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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 $8.7 million and $5.1 million as of August 31, 2023, and February 28, 2023, respectively.

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

Noncurrent inventory balances prior to valuation allowances were $10.2 million and $5.1 million as of November 30, 2023, and February 28, 2023, respectively.

Noncurrent inventory valuation allowances were $0.5 million and $0.4 million as of November 30, 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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in summary, having consignment inventory leads to additional sales opportunities.

Approximately 10.0% of our active brand partners have maintained consignment inventory at the end of the second quarter of fiscal year 2024.

Approximately 11.6% of our active brand partners have maintained consignment inventory at the end of the third quarter of fiscal year 2024.

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

The total cost of inventory on consignment with brand partners was $1.6 million and $1.5 million as of August 31, 2023, and February 28, 2023, respectively.

The total cost of inventory on consignment with brand partners was $1.4 million and $1.5 million as of November 30, 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 $1.1 million and $0.9 million as of August 31, 2023, and February 28, 2023, respectively.

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $0.9 million as of November 30, 2023, and February 28, 2023, respectively.

Share-Based Compensation

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

During the nine months of fiscal year 2024, the Company recognized $0.3 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