What changed in this filing

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Item 1. Financial Statements

2024-07-15 compared with 2024-01-11 · 288 added, 408 removed, 387 unchanged (64% of the section changed)

5 unchanged sentences

Restricted cash

Accounts receivable, less allowance for doubtful accounts of

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

Accounts receivable, less allowance for credit losses of

$ 135,900 (May 31) and $ 129,000 (February 29)

Inventories - net

2 unchanged sentences

Total current assets

LONG-TERM INVENTORIES - net

INVENTORIES - net

PROPERTY, PLANT AND EQUIPMENT - net

DEFERRED INCOME TAX ASSET

OPERATING LEASE RIGHT-OF-USE ASSETS

LIABILITIES AND SHAREHOLDERS' EQUITY

3 unchanged sentences

Deferred revenues

Current maturities of term debt

Operating lease liabilities, current

Current maturities of long-term debt

Accrued salaries and commissions

3 unchanged sentences

LONG-TERM DEBT - net

OPERATING LEASE LIABILITIES, non-current

OTHER LONG-TERM LIABILITIES

3 unchanged sentences

Authorized 16,000,000 shares;

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

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

Issued 12,702,080 shares;

Outstanding 8,579,088 (May 31) and 8,575,088 (February 29) shares

Capital in excess of par value

8 unchanged sentences

Three Months Ended

Nine Months Ended

Less discounts and allowances

7 unchanged sentences

INTEREST EXPENSE

EARNINGS (LOSS) BEFORE INCOME TAXES

INCOME TAX EXPENSE (BENEFIT)

NET EARNINGS (LOSS)

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING

LOSS BEFORE INCOME TAXES

INCOME TAX BENEFIT

BASIC AND DILUTED LOSS PER SHARE

WEIGHTED AVERAGE NUMBER OF COMMON

AND EQUIVALENT SHARES OUTSTANDING:

Dividends per share

1 unchanged sentence

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended

Nine Months Ended

Net earnings (loss)

Other comprehensive income:

Unrealized gain on interest rate exchange agreement

Comprehensive income (loss)

Comprehensive loss

See notes to condensed financial statements (unaudited).

1 unchanged sentence

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS ’ EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2023

FOR THE THREE MONTHS ENDED MAY 31, 2024

(par value $0.20 per share)

3 unchanged sentences

BALANCE – February 29, 2024

Purchases of treasury stock

Sale of treasury stock

Share-based compensation expense - net

Change in fair value of interest rate exchange agreement

BALANCE - May 31, 2024

Forfeiture of restricted shares

Share-based compensation expense - net

Unrealized gain on interest rate exchange agreement

BALANCE - August 31, 2023

Share-based compensation expense - net

Unrealized loss on interest rate exchange agreement

BALANCE - November 30, 2023

FOR THE NINE MONTHS ENDED NOVEMBER 30, 2022

FOR THE THREE MONTHS ENDED MAY 31, 2023

(par value $0.20 per share)

2 unchanged sentences

BALANCE – February 28, 2023

Sales of treasury stock

Forfeiture of restricted shares

Purchases of treasury stock

Share-based compensation expense - net

BALANCE - May 31, 2023

Forfeiture of restricted shares

Share-based compensation expense - net

BALANCE - August 31, 2022

Issuance of restricted share awards for vesting

Share-based compensation expense - net

BALANCE - November 30, 2022

See notes to condensed financial statements (unaudited).

1 unchanged sentence

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended November 30,

Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES

Net earnings (loss)

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

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

Deferred income taxes

Provision for doubtful accounts

Provision for credit losses

Provision for inventory valuation allowance

Share-based compensation expense - net

Net gain on sale of assets

Net loss on sale of assets

Changes in assets and liabilities:

11 unchanged sentences

Proceeds from sale of assets

Purchases of other assets

Net cash provided by (used in) investing activities

Net cash used in investing activities

CASH FLOWS FROM FINANCING ACTIVITIES

Payments on term debt

Payments on debt issue costs

Cash paid to acquire treasury stock

Proceeds from term debt

Sales of treasury stock

Net payments under line of credit

Dividends paid

Net cash provided by (used in) financing activities

Net borrowings under line of credit

Net cash used in financing activities

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

2 unchanged sentences

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION

Cash paid for interest - net

Cash paid for interest

Cash paid for income taxes (net of refunds)

14 unchanged sentences

Significant Accounting Policies

Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented herein and unless otherwise disclosed, are consistent with those disclosed in Note 1 of our audited financial statements as of and for the year ended February 28, 2023, included in our Form 10-K.

Restricted Cash

The Company considers cash to be restricted when withdrawal or general use is restricted.

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 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;

(2) the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups;

(3) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated;

(4) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year;

(5) the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value;

and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

We initially measure a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell.

Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met.

Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale.

We assess the fair value of a long-lived asset or disposal group less any costs to sell each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset or disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale.

Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company ceases depreciation of the asset and reports long-lived assets and/or the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale, respectively, in our condensed balance sheet.

Refer to Note 3.

Interest Rate Swap Agreement

The interest rate swap agreement (“swap agreement”) is recognized on the balance sheet at its fair value.

On the date the swap agreement is entered into, the Company designates the swap agreement as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash-flow hedge) if the applicable criteria are met.

Changes in the fair value of the swap agreement are recorded in other comprehensive income until earnings are affected by the variability of cash flows.

The Company formally documents all relationships between hedging instruments and hedged items as well as its risk-management objective and strategy for undertaking various hedged transactions.

This process includes linking all cash-flow hedges to specific assets and liabilities on the balance sheet or forecasted transactions.

The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether they are highly effective in offsetting changes in cash flows of hedged items.

When it is determined that the swap agreement is not highly effective or that it has ceased to be highly effective, the Company discontinues hedge accounting prospectively as discussed below.

The Company discontinues hedge accounting prospectively when (a) it is determined that the swap agreement is no longer effective in offsetting changes in the cash flows of a hedged item (including forecasted transactions);

(b) the swap agreement expires or is sold, terminated or exercised;

(c) the swap agreement is de-designated as a hedge instrument because it is unlikely that a forecasted transaction will occur;

or (d) management determines that designation as a hedge instrument is no longer appropriate.

When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the swap agreement will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income or loss will be recognized immediately in earnings.

In all other situations in which hedge accounting is discontinued, the swap agreement will be carried at its fair value on the balance sheet with subsequent changes in its fair value recognized in current-period earnings.

Our significant accounting policies, other than the adoption of new accounting pronouncements separately documented herein and unless otherwise disclosed, are consistent with those disclosed in Note 1 to our audited financial statements as of and for the year ended February 29, 2024 included in our Form 10-K.

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 that the financial statements are issued.

Determining the extent to which conditions or events raise substantial doubt about our ability to continue as a going concern and the extent to which mitigating plans sufficiently alleviate any such substantial doubt requires significant judgment and estimation by us.

Our significant estimates related to this analysis may include identifying business factors such as completing the planned sale of owned real estate, changes in our Brand Partners, sales growth and profitability used in the forecasted financial results and liquidity.

Further, we make assumptions about the probability that management's plans will be effectively implemented and alleviate substantial doubt and our ability to continue as a going concern.

We believe that the estimated values used in our going concern analysis are based on reasonable assumptions.

However, such assumptions are inherently uncertain and actual results could differ materially from those estimates.

The short-term duration of the Revolving Loan and uncertainty of the bank’s ongoing support beyond October 4, 2024, along with recurring operating losses and other items, raise substantial doubt over the Company's ability to continue as a going concern.

To address these concerns, the Company has taken steps in its plans to reduce debt by selling owned real estate.

On June 6, 2024 the Company executed an agreement to sell the Hilti Complex for $ 35,500,000 , the closing of which remains subject to the satisfaction of various closing conditions.

Upon closing, the proceeds from the sale are expected to pay off the Term Loans and Revolving Loan.

Following the loan payoff, management plans to fund ongoing operations with limited borrowings 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.

New Accounting Pronouncements

15 unchanged sentences

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:

November 30, 2023

November 30, 2022

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

Cash and cash equivalents

Restricted cash

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

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

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.

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

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.

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.

During the third quarter of fiscal 2024, the Company switched most merchant services for Visa, Discover and Mastercard from Braintree to Nexio, which required a shorter hold period.

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

Note 3 – ASSETS HELD FOR SALE

During the second quarter of fiscal 2024, the Company executed the Third Amendment to the existing Credit Agreement with BOKF, NA.

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.

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.

During the third quarter of fiscal 2024, the Company listed its real estate property located at 5402 S.

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.

See Note 15 for the real estate contract for the Hilti Complex that occurred subsequent to May 31, 2024.

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

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.

As of May 31, 2024 and February 29, 2024, the total carrying value of assets held for sale, consisting of the Hilti Complex with excess land of 17-acres, was $ 18,281,100 and is separately recorded on the balance sheets.

Note 4 – INVENTORIES

Inventories consist of the following:

November 30, 2023

February 29, 2024

5 unchanged sentences

Inventories net – noncurrent

Inventory in transit totaled $ 405,400 and $ 850,100 at November 30, 2023, and February 28, 2023, respectively.

Inventory in transit totaled $ 98,100 and $ 264,000 at May 31, 2024 and February 29, 2024, 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 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.

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, and two leases for warehouse space locally in Tulsa, Oklahoma, all of which qualify as an operating lease.

Our lessor arrangements include one rental agreement for warehouse and office space in Tulsa, Oklahoma, and qualifies as an operating lease under ASC 842.

Operating Leases – Lessee

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

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

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.

November 30, 2023

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

Expected payments in the next twelve months are classified as current lease liabilities.

Payments in excess of twelve months are classified as long-term lease liabilities.

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

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

February 29, 2024

1 unchanged sentence

Right-of-use assets

$ 1,447,900 $ 1,614,900

Operating lease liabilities:

Current lease liabilities

$ 688,100 $ 726,900

Long-term lease liabilities

$ 759,800 $ 888,000

Weighted-average remaining lease term (months)

Weighted-average discount rate

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

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

Three Months Ended

Nine Months Ended

4.34 % 4.34 %

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

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

Fixed lease costs

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

Future minimum rental payments under operating leases with initial terms greater than one year as of May 31, 2024, are as follows:

Years ending February 28 (29),

3 unchanged sentences

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

Three Months Ended

Nine Months Ended

Operating cash outflows – operating leases

Operating Leases – Lessor

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

In connection with the 2015 purchase of the Hilti Complex, we entered into a 15 -year lease with the seller, a non-related third party, who leases 181,300 square feet, or 45.3 % of the facility.

The lessee pays $ 123,900 per month, through the lease anniversary date of December 2024 with a 2.0% annual increase adjustment on each anniversary date thereafter.

The lease terms allow for one five-year extension, which is not a bargain renewal option, at the expiration of the 15-year term.

Revenues associated with the lease are being recorded on a straight-line basis over the initial lease term and are reported in other income in the statements of operations.

We recognize variable rental payments as revenue in the period in which the changes in facts and circumstances, on which the variable lease payments are based, occur.

See Note 15 for the additional lease that commenced subsequent to May 31, 2024.

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

Years ending February 28 (29),

The cost of the leased space was $ 10,637,900 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.

The cost of the leased space was $ 10,159,500 at May 31, 2024 and February 29, 2024.

The accumulated depreciation associated with the leased assets was $ 2,776,400 at May 31, 2024 and February 29, 2024, respectively.

During the third quarter of fiscal 2024, the Company announced its plans to sell the Hilti Complex and reclassified the land and buildings from property, plant and equipment to assets held for sale.

The leased space was included in this reclassification.

See Note 15 for the real estate contract for the Hilti Complex that occurred subsequent to May 31, 2024.

Note 6 – DEBT

November 30, 2023

Debt consists of the following:

February 29, 2024

2 unchanged sentences

Fixed rate term loan

Total long-term debt

Total term debt

Less current maturities

1 unchanged sentence

Long-term debt, net

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”).

On August 9, 2022, the Company executed a 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”;

4 unchanged sentences

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.

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

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 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 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.

6 unchanged sentences

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.

It also requires 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 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 9.82 % at November 30, 2023.

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.

The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50 %, or 9.82 % at May 31, 2024.

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.

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 7.08 % 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 9.83 % 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.

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.

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

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

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

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

The Amendment also required the Company to list the Hilti Complex for sale, allowed 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.

Proceeds from the sale of the property are to be used to pay down 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 17 acres of adjacent unused land, in July of 2023 with a market value of $ 41,970,000 .

On June 13, 2024, the Company executed the Fifth Amendment to the Existing Credit Agreement with the Lender.

The Amendment, effective May 31, 2024, adjusts the maximum availability of the Revolving Loan commitment to $ 7,000,000 through the maturity date of October 4, 2024 .

The Amendment also requires an additional decrease in the Revolving Loan to $ 4,500,000 from the effective date of the sale of the Hilti Complex among other restrictions and requirements.

Available credit under the current $ 7,000,000 revolving line of credit with the Company’s Lender was approximately $ 1,401,900 at May 31, 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 %

$ 7 Million Revolving Loan with maturity date of October 4, 2024 .

The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 4.50 % (effective rate was 9.82 % at May 31, 2024)

Revolving Loan allows for Letters of Credit upon bank approval (none were outstanding at May 31, 2024)

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

Years ending February 28 (29),

Note 7 – OTHER INCOME

A summary of other income (loss) is show below:

Three Months Ended

Nine Months Ended

Federal tax credits realized

Gain from sale of assets

Rental income

Total other income

As a response to the COVID-19 outbreak, the U.S.

government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which contained a number of programs to assist workers, families and businesses.

Part of the CARES Act provides an Employee Retention Credit (“ERC”) which is a refundable tax credit against certain employment taxes equal to 50% of qualified wages paid, up to $10,000 per employee annually, from March 12, 2020 through January 1, 2021.

Additional relief provisions were passed by the U.S.

government, which extended and expanded the qualified wage caps on these credits to 70% of qualified wages paid, up to $10,000 per employee per quarter, through September 30, 2021.

Due to the subjectivity of the credit, the Company elected to account for the ERC as a gain analogizing to ASC 450-30, Gain Contingencies.

During the quarter ended August 31, 2023, the Department of Treasury notified the Company of ERC credits awarded under the CARES Act for the first three quarters of calendar 2021.

During August 2023, the Company received three refund payments resulting from amended 2021 Q1, Q2 and Q3 941-X returns that were filed.

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 November 30, 2023, which are included in income taxes payable on the condensed balance sheets.

Note 7 – BUSINESS CONCENTRATION

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

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

The Agreement includes annual minimum purchase volumes along with specific payment terms and letter of credit requirements, which if not met offer Usborne the right to terminate the Agreement on less than 30 days’ written notice.

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

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

As of 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.

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

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

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

As a courtesy upon Usborne’s request, the November 15, 2022 transition was extended into the first quarter of fiscal 2024 at which time the Company discontinued sales of Usborne products to its retail customers.

The following table summarizes Usborne product gross sales by division and inventory purchases by product type:

Three Months Ended

Nine Months Ended

Gross sales of Usborne products by division:

PaperPie division

% of total PaperPie gross sales

Publishing division

% of total Publishing gross sales

Total gross sales of Usborne products

Purchases received by product type:

% of total purchases received

All other product types

% of total purchases received

Total purchases received

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

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

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

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

As of February 28, 2024, the Company did not meet the minimum purchase requirements and did not supply the letter of credit required under the Agreement, which offers Usborne the right to exercise their option to terminate the Agreement.

Usborne has not notified the Company of termination of the Agreement.

Usborne has refused to pay the $ 1.0 million volume rebate owed to the Company from purchases made during fiscal 2022.

The Company is disputing the cancellation of the rebate but has not recognized any rebate due to its uncertainty.

Additionally, under the terms in the Agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers.

The Company discontinued selling Usborne products to retail customers in the first quarter of fiscal 2024.

Gross sales attributed to Usborne’s products sold within the Publishing division accounted for $ 0 , during the quarter ended May 31, 2024, and 67.3 %, or $ 2,740,000 , during the quarter ended May 31, 2023.

Gross sales of Usborne products sold within the PaperPie division accounted for approximately 45.1 %, or $ 5,875,700 during the quarter ended May 31, 2024, and 50.6 %, or $ 8,362,300 , during the quarter ended May 31, 2023.

Purchases received from Usborne were approximately $ 51,800 and $ 935,600 for the period ended May 31, 2024 and 2023, respectively.

Total inventory purchases for those same periods were approximately $ 767,000 and $ 3,190,200 , respectively.

Total Usborne inventory owned by the Company and included in our condensed balance sheets were $ 27,574,300 and $ 29,010,200 as of May 31, 2024 and February 29, 2024 respectively.

Note 8 – LOSS PER SHARE

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

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

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

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

Three Months Ended

Nine Months Ended

Earnings (loss):

Net earnings (loss) applicable to common shareholders

Net loss per share:

Net loss applicable to common shareholders

Weighted average shares:

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Weighted average shares outstanding-diluted

Earnings (loss) per share:

As shown in the table below, the following shares have not been included in the calculation of diluted earnings (loss) per share as they would be anti-dilutive to the calculation above.

Loss per share:

As shown in the table below, the following shares have not been included in the calculation of diluted loss per share as they would be anti-dilutive to the calculation above.

Three Months Ended

Nine Months Ended

Weighted average shares:

Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards

Note 10 – COMMITMENT AND CONTINGENCIES

During the second quarter the Company received a property tax assessment notice on our inventory balance at December 31, 2022 from Tulsa County totaling approximately $ 917,700 .

The Company appealed the assessment, requesting a reduction of the property tax assessment on inventory to approximately $175,500.

On July 5, 2023, the Company met with the Tulsa County Board of Equalization (“Board”) and presented the appeal, which was granted by the Board.

Subsequent to the Board’s decision, the Tulsa County Assessor appealed the Board’s decision by filing a case with the Oklahoma Court of Tax Review.

The Company has accrued the property taxes associated with the Board’s decision of approximately $ 175,500 but awaits the final decision from the Oklahoma Court of Tax Review.

Should the Court of Tax Review rule against the Board’s decision, the Company expects to further escalate the appeal to the Oklahoma Supreme Court.

Note 9 – SHARE-BASED COMPENSATION

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The granted shares under the 2019 LTI Plan “cliff vest” after five years from the fiscal year that the defined metrics were exceeded.

In July 2021, our shareholders approved the Company’s 2022 Long-Term Incentive Plan (“2022 LTI Plan”).

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

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

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

In fiscal year 2021, 5,000 restricted shares were forfeited and later regranted to other participants.

During fiscal year 2023, 10,000 restricted shares were forfeited, along with 969 additional shares purchased with dividends received from the original issue date.

These 18,000 forfeited shares were re-granted to participants during the fiscal 2023 third quarter with an average grant-date fair value of $ 2.08 .

The 10,000 forfeited shares were re-granted to participants during the fiscal 2023 third quarter with an average grant-date fair value of $ 2.08 .

The 969 shares purchased with dividends were not reissued.

During the second quarter of fiscal 2024, 4,000 restricted shares were forfeited.

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

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.

The remaining first tranche of granted shares totaling 303,000 shares vested on February 28, 2023.

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

During fiscal year 2023, 18,000 restricted shares were forfeited, along with 760 additional shares purchased with dividends received from the original issue date.

The 18,000 forfeited shares were re-granted to participants during fiscal 2023 with an average grant-date fair value of $ 2.08 .

The 760 shares purchased with dividends were not reissued.

During fiscal year 2024, 35,285 restricted shares were forfeited and regranted to participants with an average grant-date fair value of $ 1.84 .

The remaining unrecognized compensation expense of these awards, totaling approximately $ 302,700 as of May 31, 2024, will be recognized ratably over the remaining vesting period of 9 months.

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

Three Months Ended

Nine Months Ended

Three Months Ended May 31,

Share-based compensation expense

Less reduction of expense for forfeitures

Share-based compensation expense - net

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

The following table summarizes stock award activity during the first three months of fiscal year 2025 under the 2019 LTI Plan:

Weighted Average Fair Value (per share)

Outstanding at February 29, 2024

Outstanding at November 30, 2023

Outstanding at May 31, 2024

Note 10 – SHIPPING AND HANDLING COSTS

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

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.

These costs were $ 1,546,600 and $ 1,938,100 for the three months ended May 31, 2024 and 2023, respectively.

Note 11 – BUSINESS SEGMENTS

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

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

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

Corporate expenses include the executive department, accounting department, information services department, general office management, warehouse operations and building facilities management.

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

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

Information by reporting segment for the three-month periods ended May 31, 2024 and 2023, are as follows:

Three Months Ended

Nine Months Ended

EARNINGS (LOSS) BEFORE INCOME TAXES

LOSS BEFORE INCOME TAXES

Three Months Ended

Nine Months Ended

Note 14 – INTEREST RATE SWAP AGREEMENT

Note 12 – INTEREST RATE EXCHANGE AGREEMENT

The Company maintains an interest-rate risk-management strategy that uses interest-rate swap instruments to minimize significant, unanticipated earnings fluctuations caused by interest-rate volatility.

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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 notional amount of the swap and the offsetting, outstanding portion of the term loan were $ 17,037,500 on May 31, 2024.

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

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

November 30, 2023

February 29, 2024

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

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

The estimated fair value of our 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.

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

The estimated fair value of our assets held for sale was $ 37,000,000 as of May 31, 2024 and February 29, 2024, respectively.

Management's estimates are based on the recent sale agreement for the price of the Hilti Complex less the estimated costs to sell plus an estimated value of the excess land of approximately 17 acres for $ 2,500,000 .

The estimated fair value of our term notes payable is estimated by management to approximate $ 27,665,500 and $ 28,152,800 as of May 31, 2024 and February 29, 2024, respectively.

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

The fair value of the Company’s interest rate swap is based on Level 2 inputs, including the present value of estimated future cash flows based on market expectations of the yield curve on variable interest rates.

The fair value of the Company’s interest rate swap of $ 47,300 is based on Level 2 inputs, including the present value of estimated future cash flows based on market expectations of the yield curve on variable interest rates.

Note 14 – DEFERRED REVENUES

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 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.

Any payments received prior to the end of the period that were not shipped as of May 31, 2024 or February 29, 2024 are recorded as deferred revenues on the condensed balance sheets.

We received approximately $ 450,800 and $ 583,500 as of May 31, 2024 and February 29, 2024, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the end of the period.

Note 15 – SUBSEQUENT EVENTS

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.

On May 26, 2024, the Company entered into a triple-net lease agreement for approximately 111,000 square feet of available office and warehouse space in the Hilti Complex to a new tenant.

The initial lease term is five years , commencing July 1, 2024, and includes an option to extend the lease term for an additional five years .

The initial lease rate shall be $9.05 per rentable square foot, with 3% escalations at the beginning of each year of the lease.

The lease includes standard triple-net terms such that the Tenant shall be responsible for utilities, insurance, property taxes and repairs and maintenance, excluding roof and structure, which shall be the Landlords’ responsibility.

The lease also includes other terms considered to be normal and customary in the local market.

On June 6, 2024, the Company executed a Commercial Real Estate Sale Contract (“Contract”) with Rockford Holdings, LLC (“Buyer”) for the Hilti Complex.

The agreed upon sale price of the Hilti Complex per the executed Contract totaled $ 35,500,000 , the closing of which remains subject to the satisfaction of various closing conditions.

The proceeds from the sale will be utilized to pay off the Term Loans and Revolving Loan outstanding in the Credit Agreement with the Company's Bank.

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

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

Significant portions of our existing inventory volumes 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, may result in termination of the agreement.

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

No notification of termination has been received by the Company as of the date of issuance of this Form 10-Q.

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

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.

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Three Months Ended

Nine Months Ended

Cost of goods sold

5 unchanged sentences

Interest expense

Earnings (loss) before income taxes

Income tax expense (benefit)

Net earnings (loss)

Loss before income taxes

Income tax benefit

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

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

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

Non-Segment Operating Results for the Three Months Ended May 31, 2024

Total operating expenses not associated with a reporting segment decreased $0.3 million, or 10.0%, to $2.7 million for the three-month period ended May 31, 2024, when compared to $3.0 million for the same quarterly period a year ago.

Operating expenses decreased primarily as a result of a $0.2 million decrease in labor expenses, primarily within our warehouse operations, and a $0.1 million decrease in freight handling expenses.

Interest expense decreased $0.1 million, or 14.3%, to $0.6 million for the three months ended May 31, 2024, when compared to $0.7 million for the same quarterly period a year ago, due to reduced borrowings of debt, period over period.

Income taxes increased $0.2 million, or 66.7%, to a tax benefit of $0.5 million for the three months ended May 31, 2024, from a tax benefit of $0.3 million for the same quarterly period a year ago, resulting primarily from a decrease in gross sales.

Our effective tax rate decreased to 26.8% for the quarter ended May 31, 2024, from 27.3% for the quarter ended May 31, 2023 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 Nine Months Ended November 30, 2023

PaperPie Operating Results for the Three Months Ended May 31, 2024

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

Three Months Ended

Nine Months Ended

Less discounts and allowances

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Average number of active brand partners

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 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 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.

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

PaperPie Operating Results for the Three Months Ended May 31, 2024

PaperPie net revenues decreased $3.7 million, or 29.4%, to $8.9 million during the three months ended May 31, 2024, when compared to $12.6 million during the same period a year ago.

The average number of active brand partners in the first quarter of fiscal 2025 was 13,400, a decrease of 9,800, or 42.2%, from 23,200 average active brand partners selling in the first quarter of fiscal 2024.

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

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

This agreement required the rebranding of the direct sales division from Usborne Books & More (“UBAM”) to PaperPie.

This rebranding was completed on in the fourth quarter of fiscal 2023.

Subsequent to the rebranding, Brand Partner levels declined due to several reasons including 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 through fiscal 2025.

Net revenues during the fiscal 2025 first quarter were also negatively impacted from increased discounts.

Discounts as a percentage of gross sales increased from 29.8% in the first quarter of fiscal 2024 to 36.8% in the first quarter of this year, resulting in less net revenues of approximately $0.5 million.

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

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

Gross margin decreased $2.6 million, or 31.0%, to $5.8 million during the three months ended May 31, 2024, when compared to $8.4 million during the same period a year ago.

Gross margin as a percentage of net revenues for the three months ended May 31, 2024 decreased to 65.3%, compared to 66.7% the same period a year ago, representing a decrease of $0.3 million.

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

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

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

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

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

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 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.

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.

Total operating expenses decreased $1.7 million, or 25.4%, to $5.0 million during the three-month period ended May 31, 2023, when compared to $6.7 million reported in the same quarter a year ago.

Operating and selling expenses decreased $0.4 million, or 21.1%, to $1.5 million during the three-month period ended May 31, 2024, when compared to $1.9 million reported in the same quarter a year ago, primarily due to less freight expense on fewer sales and shipments totaling approximately $0.3 million along with a decrease in trip accrual expense of $0.1 million due to reduced sales.

Sales commissions decreased $1.1 million, or 26.8%, to $3.0 million during the three-month period ended May 31, 2024, when compared to $4.1 million reported in the same quarter a year ago, due primarily to the decrease in net revenues.

Sales commissions as a percentage of net revenues increased from 32.7% to 34.1% between periods, primarily due to the mix of order type.

Web orders pay higher commissions than special programs such as book fairs.

General and administrative expenses decreased $0.2 million, or 28.6%, to $0.5 million during the three months ended May 31, 2024, when compared to $0.7 million during the same period a year ago, due primarily to $0.1 million of reduced bank fees from fewer credit card transactions associated with reduced sales and $0.1 million of reduced payroll associated with division staffing.

Operating income for the PaperPie segment decreased $0.9 million, or 52.9% to $0.8 million during the three months ended May 31, 2024, when compared to $1.7 million reported in the same quarter a year ago.

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

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

along with additional product and transportation discounts partially offset by reduced operating expenses.

Publishing Operating Results for the Three Months Ended May 31, 2024

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

Three Months Ended

Nine Months Ended

Less discounts and allowances

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Operating income

Publishing Operating Results for the Three Months Ended November 30, 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 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 $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.

Publishing Operating Results for the Three Months Ended May 31, 2024

Our Publishing division’s net revenues decreased $0.8 million, or 42.1%, to $1.1 million during the three-month period ended May 31, 2024, from $1.9 million reported in the same period a year ago.

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.

Net revenues from the sale of Usborne products in the first quarter of fiscal 2024 totaled $1.3 million.

There were no Usborne sales through the Publishing division in the first quarter of fiscal 2025.

Gross margin decreased $0.4 million, or 40.0%, to $0.6 million during the three-month period ended May 31, 2024, from $1.0 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 59.2% during the three-month period ended May 31, 2024, from 50.3% reported in the same quarter a year ago.

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

Total operating expenses of the Publishing segment decreased $0.1 million, or 20.0%, to $0.4 million, from $0.5 million, during the three-month periods ended May 31, 2024 and 2023, respectively.

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

Operating income of the Publishing division decreased $0.3 million or 60.0% to $0.2 million during the three-month period ended May 31, 2024 from $0.5 million for the three-month period ended May 31, 2023, respectively.

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

Liquidity and Capital Resources

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We typically fund our operations from the cash we generate.

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

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

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

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.

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.

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

As of the end of the first fiscal quarter of 2025, our revolving bank credit facility loan balance was $5.6 million with $1.4 million in available capacity.

During the first three months of fiscal year 2025, we experienced positive cash inflows from operations of $1,201,600.

These cash inflows resulted from:

● 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

●net loss of $1,279,000

Adjusted for:

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

●depreciation expense of $1,995,500

●depreciation and amortization expense of $486,600

●share-based compensation expense, net of $100,800

●deferred income taxes of ($199,500)

●provision for doubtful accounts of $19,800

●provision for inventory allowance of $40,700

●provision for credit losses of $29,600

●deferred income taxes of $138,800

●net loss on sale of assets of $3,700

Positively impacted by:

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

●decrease in inventories, net of $2,820,700

● 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

●increase in income taxes payable of $335,600

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 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.

Negatively impacted by:

●decrease in accrued salaries and commissions, and other liabilities of $427,400

●increase in accounts receivable of $407,200

●decrease in accounts payable of $217,200

●increase in prepaid expenses and other assets of $13,800

●decrease in deferred revenues of $132,700

Cash used in investing activities was $108,200 for capital expenditures, consisting of $112,200 in software upgrades to our proprietary systems that our PaperPie Brand Partners use to monitor their business and place customer orders and offset by $4,000 from the sale of machinery and equipment.

Cash used in financing activities was $341,400, which was comprised of net borrowings on the line of credit of $100,000 and $8,600 from the sale of treasury stock, offset by payments on term debt of $450,000.

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

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

On August 9, 2022, the Company executed a 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”;

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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.

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

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.

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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 uses its best efforts to cancel existing purchase orders.

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

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.

The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50%.

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%

$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 August 31, 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 9.83% 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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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.

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

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

The Amendment also required the Company to list the Hilti Complex for sale, allowed 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.

Proceeds from the sale of the property are to be used to pay down 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.

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

On June 13, 2024, the Company executed the Fifth Amendment to the Existing Credit Agreement with the Lender.

The Amendment, effective May 31, 2024, adjusts the maximum availability of the Revolving Loan commitment to $7,000,000 through the maturity date of October 4, 2024.

The Amendment also requires an additional decrease in the Revolving Loan to $4,500,000 from the effective date of the sale of the Hilti Complex among other restrictions and requirements.

Available credit under the current $7,000,000 revolving line of credit with the Company’s Lender was approximately $1,401,900 at May 31, 2024.

Features of the Loan Agreement (as amended) at May 31, 2024 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%

$7 Million Revolving Loan with maturity date of October 4, 2024.

The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 4.50% (effective rate was 9.82% at May 31, 2024)

Revolving Loan allows for Letters of Credit upon bank approval (none were outstanding at May 31, 2024)

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

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

In accordance with ASU No.

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

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.

To address these concerns, the Company has taken steps in its plans to reduce debt by selling owned real estate.

On June 6, 2024 the Company executed an agreement sell the Hilti Complex for $35,500,000, the closing of which remains subject to the satisfaction of various closing conditions Upon closing, the proceeds from the sale are expected to pay off the Term Loans and Revolving Loan.

Following the loan payoff, management plans to fund ongoing operations with limited borrowings 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, should 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.

Critical Accounting Policies

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

Share-Based Compensation

We account for share-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant.

For awards subject to service conditions, compensation expense is recognized over the vesting period on a straight-line basis.

Awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche.

Forfeitures are recognized when they occur.

Any cash dividends declared after the restricted stock award is issued, but before the vesting period is completed, will be reinvested in Company shares at the opening trading price on the dividend payment date.

Shares purchased with cash dividends will also retain the same restrictions until the completion of the original vesting period associated with the awarded shares.

The restricted share awards under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) and 2022 Long-Term Incentive Plan (“2022 LTI Plan”) contain both service and performance conditions.

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

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

The fair value of these awards is determined based on the closing price of the shares on the grant date.

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

During the first three months of fiscal year 2025, the Company recognized $0.1 million of compensation expense associated with the shares granted.

Revenue Recognition

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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 November 30, 2023, 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”).

Management has estimated and included a reserve for sales returns of $0.2 million for May 31, 2024 and February 29, 2024, respectively.

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 $0.1 million and $0.2 million as of November 30, 2023, and February 28, 2023, respectively.

Management has estimated and included an allowance for credit losses of $0.1 million for both May 31, 2024 and February 29, 2024, 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 arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to the minimum order requirements of our suppliers.

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

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 $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.

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

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

We then place the initial order or reorder based upon this analysis.

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

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

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

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

Noncurrent inventory balances prior to valuation allowances were $14.3 million and $12.3 million as of May 31, 2024 and February 29, 2024, respectively.

Noncurrent inventory valuation allowances were $0.6 million as of May 31, 2024 and February 29, 2024, respectively.

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

Approximately 12.2% of our active Brand Partners have maintained consignment inventory at the end of the first quarter of fiscal year 2025.

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 $1.4 million and $1.5 million as of November 30, 2023, and February 28, 2023, respectively.

The total cost of inventory on consignment with Brand Partners was $1.2 million and $1.4 million at May 31, 2024 and February 29, 2024, respectively.

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

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

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

Share-Based Compensation

We account for share-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at the date of grant.

For awards subject to service conditions, compensation expense is recognized over the vesting period on a straight-line basis.

Forfeitures are recognized when they occur.

Shares purchased with cash dividends will also retain the same restrictions until the completion of the original vesting period associated with the awarded shares.

The restricted share awards under the 2019 Long-Term Incentive Plan (“2019 LTI Plan”) and 2022 Long-Term Incentive Plan (“2022 LTI Plan”) contain both service and performance conditions.

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

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

The fair value of these awards is determined based on the closing price of the shares on the grant date.

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

During the nine months of fiscal year 2024, the Company recognized $0.3 million of compensation expense associated with the shares granted.

Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $1.0 million at May 31, 2024 and February 29, 2024, respectively.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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What changed 10-Q

Item 1. Financial Statements