Ennis, Inc.: Form 10-Q for the period ended Nov 30, 2023

Cautionary Statement Regarding Forward-Looking Statements

The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read together with the unaudited consolidated financial statements and related notes of Ennis, Inc. (collectively with its subsidiaries, the “Company,” “Registrant,” “Ennis,” or “we,” “us,” or “our”), included in Part 1, Item 1 of this report, and with the audited consolidated financial statements and the related notes of the Company included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023.

All of the statements in this report, other than historical facts, are forward-looking statements, including, without limitation, the statements made in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As a general matter, forward-looking statements are those focused upon anticipated events or trends, expectations, and beliefs relating to matters that are not historical in nature. The words “could,” “should,” “feel,” “anticipate,” “aim,” “preliminary,” “expect,” “believe,” “estimate,” “intend,” “intent,” “plan,” “will,” “foresee,” “project,” “forecast,” or the negative thereof or variations thereon, and similar expressions identify forward-looking statements.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for these forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that forward-looking statements are subject to known and unknown risks, uncertainties and other factors relating to its operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company. These known and unknown risks, uncertainties and other factors could cause actual results to differ materially from those matters expressed in, anticipated by or implied by such forward-looking statements.

These statements reflect the current views and assumptions of management with respect to future events. The Company does not undertake, and hereby disclaims, any duty to update these forward-looking statements, even though its situation and circumstances may change in the future. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. The inclusion of any statement in this report does not constitute an admission by the Company or any other person that the events or circumstances described in such statement are material.

We believe these forward-looking statements are based upon reasonable assumptions. All such statements involve risks and uncertainties, and as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including but not limited to: general economic, business and labor conditions and the potential adverse effects of potential recessionary concerns, inflationary issues and supply chain disruptions and the potential impact on our operations; our ability to implement our strategic initiatives and control our operational costs; dependence on a limited number of key suppliers; our ability to recover the rising cost of raw materials and other costs (including energy, freight, labor and benefit costs) in markets that are highly price competitive and volatile; uninsured losses, including those from natural disasters, catastrophes, pandemics, theft, sabotage; the impact of the novel coronavirus COVID-19 pandemic or future pandemics on the U.S. and local economies, our business operations, our workforce, our supply chain and our customer base; our ability to timely or adequately respond to technological changes in the industry; cybersecurity risks, the impact of the internet and other electronic media on the demand for forms and printed materials; the impact of foreign competition, tariffs, trade regulations and import restrictions; customer credit risk; competitors’ pricing strategies; a decline in business volume and profitability could result in an impairment in our reported goodwill negatively impacting our operational results; our ability to retain key management personnel; our ability to identify, manage or integrate acquisitions.; In addition to the factors indicated above, you should carefully consider the risks described in and incorporated by reference herein and in the risk factors in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023 before making an investment in our common stock.

Overview

Ennis, Inc. (formerly Ennis Business Forms, Inc.) (collectively with its subsidiaries, “the “Company,” “Registrant,” Ennis,” or “we,” “us,” or “our”) was organized under the laws of Texas in 1909. We and our subsidiaries print and manufacture a broad line of business forms and other business products. We distribute business products and forms throughout the United States primarily through independent distributors. This distributor channel encompasses independent print distributors, commercial printers, direct mail, fulfillment companies, payroll and accounts payable software companies, and advertising agencies, among others. We also sell products to many of our competitors to satisfy their customers’ needs.

Business Overview

Our management believes we are the largest provider of business forms, pressure-seal forms, labels, tags, envelopes, and presentation folders to independent distributors in the United States.

We are in the business of manufacturing, designing, and selling business forms and other printed business products primarily to distributors located in the United States. We operate 59 manufacturing plants throughout the United States in 20 strategically located states as one reportable segment. Approximately 96% of the business products we manufacture are custom and semi-custom products, constructed in a wide variety of sizes, colors, number of parts, and quantities on an individual job basis, depending upon the customers’ specifications.

The products we sell include snap sets, continuous forms, laser cut sheets, tags, labels, envelopes, integrated products, jumbo rolls and pressure sensitive products in short, medium and long runs under the following labels: Ennis®, Royal Business Forms®, Block Graphics®, 360º Custom LabelsSM, ColorWorx®, Enfusion®, Uncompromised Check Solutions®, VersaSeal®, Ad ConceptsSM, FormSource LimitedSM, Star Award Ribbon Company®, Witt Printing®, B&D Litho®, Genforms®, PrintGraphics®, Calibrated Forms®, PrintXcel®, Printegra®, Forms ManufacturersSM, Mutual Graphics®, TRI-C Business FormsSM, Major Business SystemsSM, Independent PrintingSM, Hoosier Data Forms®, Hayes Graphics®, Wright Business GraphicsSM, Wright 360SM, Integrated Print & GraphicsSM, the Flesh CompanySM, Impressions DirectSM, AmeriPrintSM, StylecraftSM, UMC PrintSM; Eagle GraphicsSM and Diamond GraphicsSM. We also sell the Adams McClure® brand (which provides Point of Purchase advertising); the Admore®, Folder Express®, and Independent Folders® brands (which provide presentation folders and document folders); Ennis Tag & LabelSM (which provides custom printed, high performance labels and custom and stock tags); Allen-Bailey Tag & LabelSM, Atlas Tag & Label®, Kay Toledo Tag®, and Special Service Partners® (SSP) (which provides custom and stock tags and labels); Trade Envelopes®, Block Graphics®, Wisco®, and National Imprint Corporation® (which provide custom and imprinted envelopes) and Northstar® and General Financial Supply® (which provide financial and security documents); InfosealSM and PrintXcel® (which provide custom and stock pressure seal documents). School Photo Marketing is a one-stop shop for over 1,400 school portrait photographers and professional photo labs nationwide, providing them with a complete array of products and services that reach over 15 million families and 30,000 schools, primarily in the K-8 market. We sell predominantly through independent distributors, as well as to many of our competitors. Northstar Computer Forms, Inc., one of our wholly-owned subsidiaries, also sells direct to a small number of customers, generally large banking organizations (where a distributor is not acceptable or available to the end-user). Adams McClure, LP, a wholly-owned subsidiary, also sells direct to a small number of customers, where sales are generally through advertising agencies.

The printing industry generally sells its products either predominantly to end users, a market dominated by a few large manufacturers such as R.R. Donnelley and Sons, Staples, Inc., Standard Register Co. (a subsidiary of Taylor Corporation), and Cenveo, Inc., or, like the Company, through a variety of independent distributors and distributor groups. While it is not possible, because of the lack of adequate public statistical information, to determine the Company’s share of the total business products market, management believes the Company is the largest producer of business forms, pressure-seal forms, labels, tags, envelopes, and presentation folders in the United States distributing primarily through independent distributors.

There are a number of competitors that operate in this segment, ranging in size from single employee-owned operations to multi-plant organizations. We believe our strategic locations and buying power permit us to compete on a favorable basis within the distributor market on competitive factors, such as service, quality, and price.

Distribution of business forms and other business products throughout the United States is primarily done through independent distributors, including business forms distributors, resellers, direct mail, commercial printers, payroll and accounts payable software companies, and advertising agencies.

Raw materials principally consist of a wide variety of weights, widths, colors, sizes, and qualities of paper for business products purchased primarily from one major supplier at favorable prices based on the volume of business.

Business products usage in the printing industry is generally not seasonal. General economic conditions and contraction of the traditional business forms industry are the predominant factors in quarterly volume fluctuations.

Recent Acquisitions

On October 11, 2023, we acquired the assets and business of Eagle Graphics, Inc. in Annville, Pennsylvania, and Diamond Graphics, Inc. in Bensalem, Pennsylvania. The acquisition of Eagle Graphics and Diamond Graphics, which prior to the acquisition generated approximately $8.7 million in sales for its fiscal year ended December 31, 2022, strengthens our production capabilities to serve our large and growing customer base in the Northeast part of the country.

On June 2, 2023, we acquired the assets and business of UMC Print in Overland Park, Kansas. The acquisition of UMC Print, which prior to the acquisition generated approximately $16 million in sales for its fiscal year ended December 31, 2022, adds strategic locations and capabilities to drive growth with our distributor partners.

On May 23, 2023 we acquired the real estate and operations of Stylecraft Printing Company in Canton, Michigan which prior to the acquisition generated approximately $7.0 million in sales for its fiscal year ended December 31, 2022. Stylecraft is a trade only printer since 1967 specializing in business forms, integrated products and commercial printing.

On November 30, 2022, we acquired the net assets and business from School Photo Marketing ("SPM") in Morganville, New Jersey, which prior to the acquisition generated approximately $5.9 million in sales for its fiscal year ended December 31, 2021. SPM provides printing, yearbook publishing and marketing related services to over 1,400 school and sports photographers servicing schools around the country.

Our Business Challenges

Our industry is currently experiencing consolidation of traditional supply channels, product obsolescence, paper supplier capacity adjustments, and increased pricing and potential supply allocations due to demand/supply curve imbalance. Technology advances have made electronic distribution of documents, internet hosting, digital printing and print-on-demand valid, cost-effective alternatives to traditional custom-printed documents and customer communications. Improved equipment has become more accessible to our competitors. We face highly competitive conditions throughout our supply chain in a price-competitive print industry. The challenges of our business include the following:

Inflation and COVID-19 Pandemic – Our sales were significantly impacted by economic conditions driven by the COVID-19 pandemic and resulted in a decrease in sales volume and earnings in fiscal year 2021. We expect that its acute impact is mostly behind us as the demand for our products strengthened in fiscal year 2022 and fiscal year 2023. Changes in macroeconomic factors, particularly high inflation and the resulting rise in interest rates could dampen business activity which could reduce demand for our products. While the markets appear to have recovered from the more direct negative impacts of the pandemic, we remain watchful as the longer term effects of the pandemic, including supply chain disruptions and inflationary pressures, are unknown. We will continue to monitor incoming order volume as well as rising raw material and other input costs so that we can proactively adjust our pricing and costs accordingly.

Transformation of our portfolio of products – While traditional business documents are essential in order to conduct business, many are being replaced through the use of cheaper paper grades or imported paper, or devalued with advances in digital technologies, causing steady declines in demand for a portion of our current product line. Transforming our product offerings in order to continue to provide innovative, valuable solutions through lower labor and fixed charges to our customers on a proactive basis will require us to make investments in new and existing technology and to develop key strategic business relationships, such as print-on-demand services and product offerings that assist customers in their transition to digital business environments. In addition, we will continue to look for new market opportunities and niches through acquisitions, such as the addition of our envelope offerings, tag offerings, folder offerings, healthcare wristbands, specialty packaging, direct mail, pressure seal products, secure document solutions, innovative in-mold label offerings and long-run integrated products with high color web printing, which provide us with an opportunity for growth and differentiate us from our competition. The ability to make investments in new and existing technology and/or to acquire new market opportunities through acquisitions is dependent on the Company’s liquidity and operational results.

Production capacity and price competition within our industry – In 2022 there was a build-up of paper mill’s customer inventory and 2023 data showed an inventory correction in reduced spending. Paper mill shipments were down across the board through the first half of 2023 as buyers worked through elevated inventories of their products. Uncoated Free Sheet and Coated Free Sheet shipments through the first half of 2023 sustained levels near 2020 COVID lows when the government implemented mandatory lockdowns. Producers responded to the sluggish demand conditions with heavy downtime rather than permanent closures keeping prices mostly stable. Foreign imports have fallen from previous years as demand levels are low. The current quarter reflected demand for North America Printing and Writing Paper has stabilized indicating the severe destocking cycle is dissipating. While margins remain under pressure due to the resulting weak volumes, we intend to continue to focus on effectively managing and controlling our product costs through the use of forecasting, production and costing models, as well as working closely with our domestic suppliers to reduce our procurement costs, in order to minimize effects on our operational results. In addition, we will continue to look for ways to reduce and leverage our fixed costs and focus on maintaining our margins.

Continued consolidation of our customers – Our customers are distributors, many of which are consolidating or are being acquired by competitors. We continue to maintain a majority of the business we have had with our customers historically, but it is possible that these consolidations and acquisitions, which we expect to continue in the future, ultimately will impact our margins and sales.

For further information, please see “Cautionary Statement Regarding Forward-Looking Statements,” above and “Risk Factors” contained within our Annual Report on Form 10-K for the fiscal year ended February 28, 2023.

Critical Accounting Estimates

Our Annual Report on Form 10-K for the year ended February 28, 2023, includes a description of certain critical accounting estimates, including those with respect to the pension plan, goodwill and other intangible assets, revenue recognition and inventories, which we believe are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. During the quarter ended November 30, 2023, there have been no material changes to the critical accounting estimates described in our Annual Report on Form 10-K for the year ended February 28, 2023.

Recent Accounting Pronouncements

See Note 1 of the accompanying unaudited condensed consolidated financial statements for a discussion of recent accounting guidance.

Results of Operations

The following discussion provides information which we believe is relevant to understanding our results of operations and financial condition. The discussion and analysis should be read in conjunction with the accompanying interim unaudited consolidated financial statements and notes included in this filing. The operating results of the Company for the three and nine months ended November 30, 2023 and the comparative period for 2022 are set forth in the tables below.

Consolidated Summary

Unaudited Consolidated Statements of

25

Three months ended November 30, 2023 compared to three months ended November 30, 2022

Net Sales. Our net sales were $104.6 million for the quarter ended November 30, 2023, compared to $110.2 million for the same quarter in the prior year, a decrease of $5.6 million, or -5.1%. Sales decreased $11.6 million due to weaker volume demand and stock rebalancing by legacy customers, as well as some of our print partners experiencing slowness in their sales and reducing their outsourced work to us. These decreases were offset by approximately $6.0 million in revenues from our recent acquisitions for the quarter ended November 30, 2023 compared to the quarter ended November 30, 2022.

Cost of Goods Sold and Gross Profit Margin. As a result of decreased sales volume, our cost of goods sold decreased $2.7 million, or 3.5%, from $76.8 million for the three months ended November 30, 2022 to $74.1 million for the three months ended November 30, 2023. Our gross profit was $30.5 million or 29.2% of revenue for the quarter ended November 30, 2023 compared to $33.5 million or 30.4% of revenue for the same quarter in the prior year. Our gross profit margin for the quarter of 29.2% showed a 180 basis point decline from 31.0% in the immediately preceding quarter ending August 31, 2023 and declined 120 basis points to 29.2% compared to 30.4% in the same prior year quarter. Our gross profit margin as a percentage of sales was impacted by our recent acquisitions, which had a dilutive impact of approximately 40 basis points on our margin for the third quarter. We believe once we have fully analyzed the acquired business’ cost structures and implemented our ERP system, the margins of the acquired businesses will improve to expected levels.

Selling, general, and administrative expense. For the three months ended November 30, 2023, our selling, general, and administrative ("SG&A") expenses were $17.4 million compared to $17.3 million for the three months ended November 30, 2022, a slight increase of $0.1 million, or 0.6%. As a percentage of net sales, SG&A expenses for the current quarter were 16.6% and 15.7% for the three months ended November 30, 2023 and November 30, 2022, respectively. Our recent acquisitions added $0.9 million in SG&A expenses during the quarter which was offset by lower expenses related to lower product volume.

Gain from disposal of assets. The $1,000 net loss from disposal of assets during the three-month period ended November 30, 2023 and the $15,000 net loss from disposal of assets during the three-month period ended November 30, 2022 was primarily attributed to the sale of equipment.

Income from operations. Primarily due to factors described above, our income from operations for the three months ended November 30, 2023 was $13.1 million, or 12.5% of net sales, as compared to $16.2 million, or 14.7 % of net sales, for the three months ended November 30, 2022. Income from operations declined on a sequential quarter basis by $1.6 million and was $14.7 million for the quarter ended August 31, 2023.

Other income (expense). Other income was $0.7 million for the three months ended November 30, 2023 compared to other expense of $0.5 million for the three months ended November 30, 2022. Our increase in income was primarily from an increase in interest income from higher interest rates in the current quarter, $1.0 million for the three months ended November 30, 2023 compared to $0.2 million for the three months ended November 30, 2022.

Provision for income taxes. Our effective tax rate was 28.3% and 28.0% for the three months ended November 30, 2023 and November 30, 2022, respectively.

Net earnings. Net earnings, due to the factors above, were $9.9 million for the three months ended November 30, 2023 as compared to $11.3 million for the comparable quarter in the prior year. Net earnings per diluted share for the three months ended November 30, 2023 were $0.38, compared to $0.44 for the same quarter in the prior year. Diluted earnings per share were negatively impacted approximately $0.02 per diluted earnings per share. Additional expense related to the recent acquisitions negatively impacted the quarter earnings.

Nine months ended November 30, 2023 compared to nine months ended November 30, 2022

Net Sales. Our net sales were $322.7 million for the nine-month period ended November 30, 2023, compared to $329.1 million for the same period last year, a decrease of $6.5 million, or 2.0%. Sales decreased approximately $23.2 million due to weaker volume demand and customers stock rebalancing by legacy customers, as well as some of our print partners experiencing slowness in their sales and reducing their outsourced work to us. This decrease was offset by approximately $16.7 million in revenues from our recent acquisitions for the nine-month period ended November 30, 2023 compared to the nine-month period ended November 30, 2022.

Cost of Goods Sold and Gross Profit Margin. Our cost of goods sold decreased $1.4 million, or -0.6%, from $226.4 million for the nine months ended November 30, 2022 to $225.0 million for the nine months ended November 30, 2023. Our gross profit was $97.7 million for the nine-month period ended November 30, 2023 compared to $102.7 million for the same period in the prior year. Our gross profit margin of 30.3% for the current nine-month period, decreasing from the prior year nine-month period of 31.2%, is within our target range. Our gross profit margin as a percentage of sales was higher in the prior year nine-month period ending November 30, 2022 due to a higher absorption of fixed costs driven from greater volumes shipped.

Selling, general, and administrative expense. For the nine months ended November 30, 2023, our SG&A expenses were $54.1 million compared to $52.9 million for the nine months ended November 30, 2022, an increase of $1.2 million, or 2.2%. As a percentage of net sales, SG&A expenses for the period were 16.8% and 16.1% for the nine months ended November 30, 2023 and November 30, 2022, respectively. Our recent acquisitions added $2.4 million in SG&A expenses during the current nine-month period. We continue to look for ways to more fully leverage our SG&A expenses, and to reduce SG&A expenses following acquisitions through the implementation of our systems and processes, which allows us to integrate many of the acquired companies’ back-office processes.

Gain from disposal of assets. The $53,000 net loss from disposal of assets during the nine-month period ended November 30, 2023 and the $15,000 net loss from disposal of assets during the nine-month period ended November 30, 2022 was primarily attributed to the sale of equipment.

Income from operations. Primarily due to factors described above, our income from operations for the nine months ended November 30, 2023 was $43.5 million, or 13.5% of net sales, as compared to $49.8 million, or 15.1% of net sales, for the nine months ended November 30, 2022.

Other income (expense). Other income was $1.7 million for the nine months ended November 30, 2023 compared to expense of $1.0 million for the nine months ended November 30, 2022. Our increase in income was primarily from an increase in interest income from higher interest rates in the current period, $2.7 million for the nine months ended November 30, 2023 compared to $0.3 million for the nine months ended November 30, 2022.

Provision for income taxes. Our effective tax rate was 28.3% and 28.0% for the nine months ended November 30, 2023 and November 30, 2022, respectively.

Net earnings. Net earnings, due to the factors above, were $32.5 million for the nine months ended November 30, 2023 as compared to $35.1 million for the comparable period in the prior year, a decrease of $2.7 million. Net earnings per diluted share for the nine months ended November 30, 2023 was $1.25, compared to $1.36 for the same period in the prior year. Our recent acquisitions added approximately $0.04 in diluted earnings per share for the nine-month period offset by sales volume decline.

Liquidity and Capital Resources

We rely on our cash flows generated from operations to meet all cash requirements of our business. The primary cash requirements of our business are payments to vendors in the normal course of business, capital expenditures, compensation to employees and the payment of dividends to our shareholders. We have no debt and anticipate timely access to credit should larger acquisition opportunities materialize. We believe that our current cash balance of $83.9 million and cash flows from operations should be adequate to cover the next twelve months and beyond of our operating and capital requirements. Our capital requirements are expected to be within our historical levels of between $3.0 million and $6.0 million.

(Dollars in thousands)

Working Capital. On November 30, 2023, we had $83.9 million in cash and $18.5 million in short-term investments. During the period, our cash position decreased by $10.1 million and our working capital increased $9.7 million or 6.2%, from $155.4 million at February 28, 2023 to $165.0 million at November 30, 2023. Our current ratio, calculated by dividing our current assets by our current liabilities, increased from 4.8 to 1.0 at February 28, 2023 to 5.8 to 1.0 at November 30, 2023. Our working capital and current ratio were positively impacted primarily by an increase in our cash and inventories offset by a decrease in our accounts payable and accrued expenses.

(Dollars in thousands)

Cash flows from operating activities. Cash provided by operating activities was $52.5 million in the nine months ended November 30, 2023 compared to $34.0 million in the comparative period ended November 30, 2022. A decrease in accounts receivable, net of accounts receivable from acquired business since the prior fiscal year end provided cash of $8.2 million in the current year nine-month period, while an increase in accounts receivable used cash of $5.9 million in the comparable nine-month period of the prior year. A decrease in inventories provided cash of $6.8 million in the nine-month period ended November 30, 2023 and used cash of $10.9 million in the same period of 2022. A decrease in accounts payable and accrued expenses used cash of $7.8 million in the current year nine-month period and an increase in accounts payable and accrued expenses provided cash of $1.5 million in the prior year comparable nine-month period. The decrease in accounts receivable in the current period was primarily due to decreased sales. The decrease in inventory, accounts payable and accrued expenses during the current period was primarily due to a decrease in purchasing activities and improved predictability in the supply chain conditions. We continue to monitor incoming orders and adjust raw material purchases accordingly.

Cash flows from investing activities. Cash used in investing activities was $43.2 million in the nine months ended November 30, 2023 compared to $12.1 million in the nine months ended November 30, 2022. Capital expenditures primarily of equipment was $4.9 million and $3.3 million for the nine months ended November 30, 2023 and November 30, 2022, respectively. In the nine months ended November 30, 2023, $19.9 million was used to acquire businesses, compared to $8.8 million used to acquire businesses for the first nine months of the prior year. During the current period, we purchased approximately $18.4 million of U.S. government treasury bills with staggered maturities of between three months and twelve months.

Cash flows from financing activities. We used $1.1 million less cash in financing activities during the nine months ended November 30, 2023 compared to the same period in the prior year. The decrease in cash used during the nine months ended November 30, 2023 resulted from $1.1 million common stock repurchased under our stock repurchase program in the nine months ended November 30, 2022.

Credit Facility – We did not renew our Credit Agreement, which expired November 11, 2021. We have had no outstanding long-term debt under the revolving credit line since paid in full in August 2019. As of November 30, 2023, we had $0.3 million outstanding under a standby letters of credit arrangement secured by a cash collateral bank account. It is anticipated that our cash and funds from operating cash flows will be sufficient to fund anticipated future expenses.

Pension Plan – The funded status of our Pension Plan and funding requirements is dependent on many factors, including returns on invested assets, the level of market interest rates and the level of funding. Assuming a stable funding status, we would expect that our future contributions to be between $1.0 million and $3.0 million per year. However, changes in actual investment returns or in discount rates could change this amount significantly. There was a $2.0 million contribution made in September 2022 to avoid a Pension Benefit Guaranty Corporation variable premium and we anticipate making a required contribution of approximately $1.2 million prior to the end of the current fiscal year. As our Pension Plan assets are invested in marketable securities, fluctuations in market values could potentially impact our funding status, associated liabilities recorded and future required minimum contributions. At November 30, 2023, we had an unfunded pension liability recorded on our balance sheet of $0.6 million.

Inventories – We believe our inventory levels are sufficient to satisfy our customer demands and we anticipate having adequate sources of raw materials to meet future business requirements. We have long-term contracts in effect with paper suppliers that govern prices, but do not require minimum purchase commitments. Certain of our rebate programs do, however, require minimum purchase volumes.

Capital Expenditures – We continue to make capital expenditures for operational maintenance purposes, as may be required. Additionally, we will carefully review and make new capital expenditures for equipment to the extent such expenditures make economic sense by improving our operations and not jeopardizing our strong liquidity position. We expect our capital requirements for our current fiscal year, exclusive of capital required for possible acquisitions, will be within our historical levels of between $3.0 million and $6.0 million. For the nine months ended November 30, 2023, we have spent approximately $4.9 million on capital expenditures. We expect to fund these expenditures through existing cash on the November 30, 2023 balance sheet.

Contractual Obligations – There have been no significant changes in our contractual obligations since February 28, 2023 that have, or are reasonably likely to have, a material impact on our results of operations or financial condition. We do not have off-balance sheet arrangements or special-purpose entities.

Market Risk

Interest Rates

From time to time, we are exposed to interest rate risk on short-term and long-term financial instruments carrying variable interest rates. We may from time to time utilize interest rate swaps to manage overall borrowing costs and reduce exposure to adverse fluctuations in interest rates. We do not use derivative instruments for trading purposes. While we had no outstanding debt at November 30, 2023, we will be exposed to interest rate risk if we borrow in the future.

This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic and global financial markets.

Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosures. Our controls and procedures are tested and evaluated at regular intervals to confirm that they are adequate and followed by our personnel to prevent misstatement of the Company’s financial statements. Due to the inherent limitations of control systems, not all misstatements may be detected. Those inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. Our management, with the participation of our Chairman of the Board, President and Chief Executive Officer (“CEO”) and Chief Financial Officer and Treasurer (“CFO”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO have concluded that, as of November 30, 2023, our disclosure controls and procedures are effective to provide reasonable assurance that information relating to us (including our consolidated subsidiaries), which is required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a–15(f) or Rule 15d–15(f) of the Exchange Act) that occurred during the nine months ended November 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in our Risk Factors as previously discussed in our Annual Report on Form 10-K for the year ended February 28, 2023.