What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-05-21 compared with 2023-05-17 · 110 added, 94 removed, 223 unchanged (48% of the section changed)

10 unchanged sentences

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

Significant portions of our inventory purchases are concentrated with Usborne.

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

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

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

Significant portions of our product offering, and inventory are concentrated with Usborne.

Our distribution agreement with Usborne includes annual minimum purchase volumes along with specific payment terms, which, if not met or if payments are not received in a timely manner, offer Usborne the right to terminate the agreement.

During fiscal 2023 and fiscal 2024, the Company did not meet the minimum purchase volumes and certain payments were not received timely.

No notification of non-compliance or termination has been received from Usborne.

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.

9 unchanged sentences

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

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

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

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

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

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

PaperPie entices new recruits by providing joining incentives to new Brand Partners including discounted products and cash bonus awards based on exceeding certain sales criteria.

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

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

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

the commission rate they receive on each sale is determined by the “order type” assigned to the sale.

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

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

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

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

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

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

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

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

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

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

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

During fiscal year 2024, internet sales continued to be the largest sales channel within our PaperPie division.

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

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

PaperPie net revenues also include sales to schools and libraries through PaperPie Learning, a separate program for eligible Brand Partners which requires certain qualifications and the completion of additional training requirements.

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

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

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

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

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

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

Publishing Division

13 unchanged sentences

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

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

Our annual catalogs are mailed to approximately 4,000 customers and potential customers.

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

2 unchanged sentences

Twelve Months Ended

February 29 (28),

Cost of goods sold

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Non-Segment Operating Results

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

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

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

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

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

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

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

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

Total operating expenses not associated with a reporting segment were 11.3 million for the fiscal year ended February 29, 2024, compared to $14.9 million for the same period a year ago.

Operating expenses decreased $3.6 million primarily as a result of a reduction in labor expenses of $2.6 million, with our warehouse payroll having the largest reduction, and a $0.7 million decrease in freight-handling costs, both associated with a decrease in gross sales, plus a $0.3 million decrease in depreciation expense due to the sale of the Company’s old headquarters and classification as assets held for sale of our current headquarters and warehouse , $0.2 million decrease in legal costs primarily related to the negotiation of our new Usborne distribution agreement which was executed in fiscal 2023, offset by a $0.2 million increase in personal property taxes due to the Company no longer qualifying for an exemption on long term inventory.

Interest expense increased $0.6 million, to $2.8 million for fiscal year ended February 29, 2024, compared to $2.2 million reported for fiscal year ended February 28, 2023, due primarily to increases in Secured Overnight Financing Rates (“SOFR”) interest rates, partially offset by reduced borrowings in fiscal 2024.

Other income increased $8.1 million, to $9.4 million for fiscal year ended February 29, 2024, compared to $1.3 million reported for fiscal year ended February 28, 2023, due to $3.8 million of other income related to the Employee Retention Credit, $4.0 million gain from the sale of the old headquarters building, $0.1 million gain from the sale of equipment, $0.1 million decrease in startup costs recognized from the acquisition of SmartLab Toys in 2023, and $0.1 million in other various changes.

Income taxes increased $1.1 million, to a tax expense of $0.2 million for fiscal year ended February 29, 2024, from a tax benefit of $0.9 million for the same period a year ago.

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

The effective tax rate decreased by 1.3%, to 25.6% for fiscal year ending February 29, 2024, as compared to 26.9% for fiscal year ended February 28, 2023, primarily due to sales mix fluctuations between states.

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

2 unchanged sentences

Twelve Months Ended

February 29 (28),

Less discounts and allowances

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

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

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

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

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

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

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

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

Further, sales were impacted beginning in the fourth quarter of fiscal 2023 and continuing through the first two quarters of fiscal 2024, associated with the rebranding of the direct sales division from Usborne Books & More (“UBAM”) to PaperPie.

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

These efforts resulted in less sales and less new recruiting success.

In addition, sales during fiscal 2024 continued to be negatively impacted by economic factors that include recent record inflation, resulting in high fuel costs and food price increases that continue to impact the disposable income of our customers.

The reduced sales resulted in increased Brand Partner turnover and lower levels of new Brand Partner recruits.

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

1 unchanged sentence

Gross margin as a percentage of net revenues decreased 1.4% to 65.5% for fiscal year 2024 when compared to 66.9% for fiscal year 2023.

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

The decrease in gross margin as a percentage of net revenues is primarily attributed to reduced freight revenues resulting from a discounted freight promotion that began in the third quarter of fiscal 2024 that continued through the fiscal fourth quarter impacting gross margins by $1.0 million, offset by increased margins on product mix of $0.4 million.

Total PaperPie operating expenses decreased $14.9 million, or 36.6%, to $25.8 million during the fiscal year ended February 29, 2024, when compared with $40.7 million reported for fiscal year ended February 28, 2023.

Operating and selling expenses decreased $5.3 million, to $7.2 million for fiscal year ended February 29, 2024, from $12.5 million reported in the same period a year ago.

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

These decreases were due to a $5.2 million decrease in shipping costs associated with the decrease in volume of orders shipped from lower sales, and a decrease of $0.2 million in accruals for Brand Partner incentive trip expenses, offset by a $0.1 million increase in accruals for Brand Partner meetings and convention expenses.

Sales commissions decreased $9.2 million, to $15.9 million during the fiscal year ended February 29, 2024, when compared to $25.1 million reported in the same period a year ago primarily due to the decrease in net revenues.

General and administrative expenses decreased $0.4 million, to $2.7 million during the fiscal year ended February 29, 2024, when compared with $3.1 million reported for fiscal year ended February 28, 2023.

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

This decrease was due to $0.6 million of decreased credit card transaction fees associated with decreased sales volumes, a $0.2 million decrease in payroll and various other expenses, offset by $0.4 million increase in amortization and depreciation expenses related to the SmartLab Toys acquisition.

Operating income of our PaperPie division decreased $5.1 million, or 55.4%, to $4.1 million for fiscal year ended February 29, 2024, as compared to $9.2 million reported for fiscal year ended February 28, 2023.

Operating income for the PaperPie division as a percentage of net revenues for the year ended February 29, 2024, was 9.1%, compared to 12.3% for the year ended February 28, 2023, a change of 3.2%.

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

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

Publishing Operating Results

1 unchanged sentence

Twelve Months Ended

February 29 (28),

Less discounts and allowances

3 unchanged sentences

Operating income

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

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

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

The November 15, 2022 transition date, at Usborne’s request, was extended until their new supplier can start distribution in 2023.

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

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

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

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

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

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

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

Our Publishing division’s net revenues decreased $7.9 million, or to $5.4 million for fiscal year ended February 29, 2024 from $13.3 million reported for fiscal year ended February 28, 2023.

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

Under the contracted terms in our new distribution agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers.

The Company discontinued sales to retail customers in the first quarter of fiscal 2024 when Usborne introduced their new distribution vendor.

Usborne’s products sold within the Publishing division decreased to 24.2%, or $2.7 million of net sales during the fiscal year ended February 29, 2024 from 83.4%, or $11.1 million, of net sales during the fiscal year ended February 28, 2023.

Gross margin decreased $3.1 million, to $3.1 million for fiscal year ended February 29, 2024, from $6.2 million reported for fiscal year ended February 28, 2023.

Gross margin as a percentage of net revenues increased 11.1%, to 57.5% for fiscal year 2024, compared to 46.4% reported the same period a year ago due to a change in customer order mix and the addition of SmartLab Toys.

Operating expenses decreased $1.1 million, to $1.9 million for fiscal year ended February 29, 2024, from $3.0 million reported for fiscal year ended February 28, 2023.

The decrease in operating expenses resulted from the decrease in sales commissions of $0.4 million, a decrease in freight expense of $0.9 million, both due to decreased sales, offset by a $0.2 million increase in Learning Wrap Ups compensation expense resulting from earnout payments to sellers that reached their initial sales hurdle outlined in the purchase agreements of Learning Wrap-Ups in December 2021.

Operating income for the segment decreased $2.0 million, or 62.5%, to $1.2 million for fiscal year ended February 29, 2024, from $3.2 million reported during the same period last year.

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

The decrease in operating income resulted primarily from lower sales volumes compared to the previous fiscal year partially offset by the decrease in sales commissions and freight expenses.

Liquidity and Capital Resources

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We typically fund our operations from the cash we generate.

During periods of loss, like fiscal year 2023, EDC will reduce purchases and sell through inventory to generate cash flows.

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

During periods of operating losses, EDC will reduce purchases and sell through inventory to generate cash flow.

During fiscal 2024, the Company generated cash flows from reducing inventory that offset operating losses along with the receipt of $3.8 million in Employee Retention Credit and $4.9 million in proceeds from the sale of our old headquarters building.

The Company expects to reduce current excess inventory levels and use the cash proceeds to offset any future operating losses, and 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.

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These cash flows resulted from:

● net loss of $2,504,900

● net earnings of $546,400

Adjusted for:

1 unchanged sentence

● share-based compensation expense, net of $212,000

● provision for inventory allowance of $715,900

● provision for credit losses of $33,300

● provision for inventory valuation allowance of $85,900

● net gain on sale of assets of $4,016,700

● deferred income taxes of $609,700

2 unchanged sentences

● decrease in accounts receivable of $936,500

● increase in income taxes payable of $773,400

● decrease in prepaid expenses and other assets of $197,100

● increase in accounts payable of $46,300

Negatively impacted by:

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

● decrease in accrued salaries, commissions, and other liabilities of $51,900

● decrease in income taxes payable of $241,900

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

● decrease in deferred revenues of $19,200

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

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

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

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

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

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

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

Cash provided by investing activities was $4,037,100 consisting of proceeds from the sale of assets of $4,858,900 offset by capital expenditures of $821,800 in software upgrades to our proprietary systems that our PaperPie Brand Partners use to monitor their business and place customer orders.

Cash used in financing activities was $12,199,400 which was comprised of net payments on the line of credit of $5,136,400, payments on term debt of $6,499,100 and cash paid in treasury stock transactions of $563,900.

We continue to expect that 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 any excess may be used to purchase inventory to continue 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”).

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

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

Features of the Loan Agreement include:

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

Revolving Loan maturity date of August 9, 2023

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

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

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

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

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

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

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

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

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 Credit Agreement with the Lender.

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

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

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

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

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

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

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

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

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

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

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

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

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

On August 9, 2023, the Company executed the Third Amendment along with a Revised Credit Agreement (“Revised Loan Agreement”) with the Lender.

This amendment extended the Revolving Loan maturity date to January 31, 2024 and introduced a stepdown to the Revolving Commitment from $13,500,000, through August 30, 2023;

to $10,500,000 through October 30, 2023;

to $9,000,000 through November 29, 2023;

to $5,000,000 through December 30, 2023;

to $4,500,000 through January 30, 2024;

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

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

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

Contingent upon the occurrence of an Event of Default in the agreement, the Company shall within 15 days list the Hilti Complex with a licensed commercial real estate broker satisfactory to the Lender.

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.

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 was not required to measure the fixed charge ratio as of May 31, 2023.

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 the 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 50 acres, along with approximately 15 acres of adjacent unused land, in July of 2023 with a market value of $41,970,000.

On 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.

Available credit under the current $8,000,000 revolving line of credit with the Company’s Lender was approximately $2,501,900 at February 29, 2024.

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%

$21 Million Floating Rate Term Loan bears interest at a rate per annum equal to Term SOFR Rate + 1.75%

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

The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 4.50% (effective rate was 9.82% at February 29, 2024)

Revolving Loan allows for Letters of Credit up to $7,500,000 upon bank approval (none were outstanding at February 29, 2024)

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

Year ending February 29,

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

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

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

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

Years ending February 28 (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 consolidated financial statements are issued.

As an Event of Default is expected associated with the Loan Agreement, and there is no guaranty that the Event of Default will be waived by BOKF, NA, there is sufficient uncertainty that, should the bank choose to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan, the Company could continue as a going concern.

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

In accordance with ASC 205-40, Going Concern , 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 the financial statements are issued.

The short-term duration of the Revolving Loan and uncertainty of the bank’s ongoing support beyond May 31, 2024, along with recurring operating losses and 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 are expected to generate sufficient cashflow to allow the Company to continue operations with limited borrowings.

The Company expects these borrowings to be available through local banks or other financing sources.

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

Although there is no guarantee these plans will be successful, management believes these plans, if achieved, will alleviate the substantial doubt about continuing as a going concern and generate sufficient liquidity to meet our obligations as they become due over the next twelve months.

Contractual Obligations

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Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report.

However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.

However, we consider the following accounting policies to be significantly more dependent on the use of estimates and assumptions.

Share-Based Compensation

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Management has estimated and included a reserve for sales returns of $0.2 million for the fiscal years ended February 29, 2024 and February 28, 2023.

Allowance for Doubtful Accounts

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns, when applicable (collectively “allowance for doubtful accounts”).

Allowance for Credit Losses

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

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

Management has estimated and included an allowance for credit losses of $0.1 million and $0.2 million for the fiscal years ended February 29, 2024 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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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.

These inventory quantities have additional exposure for storage damages, aging of topical related content and associated issues, and therefore have higher obsolescence reserves.

Noncurrent inventory balances prior to valuation allowances were $12.3 million and $5.1 million at February 29, 2024 and February 28, 2023, respectively.

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

Noncurrent inventory valuation allowances were $0.6 million at February 29, 2024 and $0.4 million at February 28, 2023.

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

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in summary, having consignment inventory leads to additional sales opportunities.

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

Approximately 11.6% of our active Brand Partners maintained consignment inventory at the end 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.

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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-K

Item 7. Management’s Discussion and Analysis