# Educational Development Corp: Form 10-Q for the period ended Aug 31, 2023

- Company: [Educational Development Corp](/companies/educ.md) (CIK 31667)
- Form: 10-Q
- Filed: 2023-10-16
- Accepted by EDGAR: Oct 16, 2023, 20:04 ET
- Period: 2023-08-31
- Accession: 0001185185-23-001068
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/31667/000118518523001068/edc20230831_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/31667/000118518523001068/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-06-01 to 2023-08-31 | $10.6m | us-gaap:Revenues |
| Revenue | 6 months, 2023-03-01 to 2023-08-31 | $25.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-06-01 to 2023-08-31 | $3.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-03-01 to 2023-08-31 | $8.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-06-01 to 2023-08-31 | $6.9m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-03-01 to 2023-08-31 | $16.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-06-01 to 2023-08-31 | $1.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-03-01 to 2023-08-31 | $4.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Interest expense | 3 months, 2023-06-01 to 2023-08-31 | $743.3k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-03-01 to 2023-08-31 | $1.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-06-01 to 2023-08-31 | $391.2k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-03-01 to 2023-08-31 | $63.4k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-06-01 to 2023-08-31 | $1.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-03-01 to 2023-08-31 | $188.9k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-06-01 to 2023-08-31 | $0.13 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-03-01 to 2023-08-31 | $0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-06-01 to 2023-08-31 | $0.13 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-03-01 to 2023-08-31 | $0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-06-01 to 2023-08-31 | 8,269,771 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-03-01 to 2023-08-31 | 8,283,221 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-03-01 to 2023-08-31 | $4.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-03-01 to 2023-08-31 | $546.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-03-01 to 2023-08-31 | $0 | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2023-03-01 to 2023-08-31 | $563.9k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-08-31 | $1.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-08-31 | $59.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-08-31 | $99.0m | us-gaap:Assets |
| Current liabilities | at 2023-08-31 | $21.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-08-31 | $53.9m | us-gaap:Liabilities |
| Long-term debt | at 2023-08-31 | $32.2m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-08-31 | $1.8m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-08-31 | $45.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,426 characters.

### Factors Affecting Forward-Looking Statements

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

### Overview

We are the owner and exclusive publisher of Kane Miller children’s books; Learning Wrap-Ups, maker of educational manipulatives; and SmartLab Toys, maker of STEAM-based toys and games. 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. Should termination of the agreement occur, the Company will be allowed, at a minimum, to sell through their remaining Usborne inventory over the twelve months following the termination date.

We sell our products through two separate divisions, PaperPie and Publishing. These two divisions each have their own customer base. The PaperPie division markets our complete line of products through a network of independent brand partners using a combination of home shows, internet party events and book fairs. The Publishing division markets Kane Miller, Learning Wrap-Ups and SmartLab Toys on a wholesale basis to various retail accounts. All other supporting administrative activities are recognized as other expenses outside of our two divisions. Other expenses consist primarily of the compensation for our office, warehouse and sales support staff as well as the cost of operating and maintaining our corporate offices and distribution facility.

The following table shows our condensed statements of operations data:

|  | Three Months Ended August 31, 2023 | 2022 | Six Months Ended August 31, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net revenues | $10,593,100 | $19,418,300 | $25,117,100 | $42,579,200 |
| Cost of goods sold | 3,684,300 | 6,939,700 | 8,834,700 | 14,791,300 |
| Gross margin | 6,908,800 | 12,478,600 | 16,282,400 | 27,787,900 |
| Operating expenses |  |  |  |  |
| Operating and selling | 1,916,000 | 3,798,800 | 4,313,900 | 7,569,400 |
| Sales commissions | 3,520,300 | 5,635,700 | 7,720,100 | 12,507,500 |
| General and administrative | 3,529,100 | 4,017,600 | 7,163,600 | 8,401,900 |
| Total operating expenses | 8,965,400 | 13,452,100 | 19,197,600 | 28,478,800 |
| Interest expense | 743,300 | 528,100 | 1,476,700 | 916,200 |
| Other income | (4,252,800) | (396,000) | (4,644,200) | (786,700) |
| Earnings (loss) before income taxes | 1,452,900 | (1,105,600) | 252,300 | (820,400) |
| Income tax expense (benefit) | 391,200 | (303,700) | 63,400 | (234,300) |
| Net earnings (loss) | $1,061,700 | $(801,900) | $188,900 | $(586,100) |

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 August 31, 2023

*Total operating expenses* not associated with a reporting segment decreased $0.6 million, or 17.1%, to $2.9 million for the three-month period ended August 31, 2023, when compared to $3.5 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a $0.4 million decrease in labor, primarily within our warehouse operations, and a $0.2 million decrease in freight handling expenses, both resulting from a decrease in gross sales.

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

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

*Income taxes* increased $0.7 million, or 233.3%, to a tax expense of $0.4 million for the three months ended August 31, 2023, from a tax benefit of $0.3 million for the same quarterly period a year ago, primarily resulting from operating losses in the second quarter ended August 31, 2022. Our effective tax rate decreased to 26.9% for the quarter ended August 31, 2023, from 27.5% for the quarter ended August 31, 2022 due to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

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

*Total operating expenses* not associated with a reporting segment decreased $1.5 million, or 20.5%, to $5.8 million for the six-month period ended August 31, 2023, when compared to $7.3 million for the same period a year ago. Labor expenses decreased $0.9 million, primarily within our warehouse operations, and freight handling costs decreased $0.3 million for the six months ended August 31, 2023, both associated with reduced sales, and a $0.3 million decrease in other various expenses.

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

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

*Income taxes* increased $0.3 million, or 150.0%, to a tax expense of $0.1 million for the six months ended August 31, 2023, from a tax benefit of $0.2 million for the same period a year ago, primarily resulting from operating losses for the six months ended August 31, 2022. Our effective tax rate decreased to 25.1% for the six months ended August 31, 2023, from 28.6% for the six months ended August 31, 2022 due primarily to sales mix fluctuations between states. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

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

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

|  | Three Months Ended August 31, 2023 | 2022 | Six Months Ended August 31, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Gross sales | $12,774,900 | $20,411,500 | $29,288,200 | $45,142,600 |
| Less discounts and allowances | (4,169,300) | (6,033,700) | (9,106,300) | (12,653,200) |
| Transportation revenue | 728,400 | 1,554,400 | 1,735,300 | 3,459,600 |
| Net revenues | 9,334,000 | 15,932,200 | 21,917,200 | 35,949,000 |
| Cost of goods sold | 3,230,900 | 5,085,500 | 7,417,200 | 11,247,500 |
| Gross margin | 6,103,100 | 10,846,700 | 14,500,000 | 24,701,500 |
| Operating expenses |  |  |  |  |
| Operating and selling | 1,612,900 | 2,960,700 | 3,488,300 | 5,946,200 |
| Sales commissions | 3,493,600 | 5,473,100 | 7,608,200 | 12,208,700 |
| General and administrative | 632,400 | 715,000 | 1,380,600 | 1,517,400 |
| Total operating expenses | 5,738,900 | 9,148,800 | 12,477,100 | 19,672,300 |
| Operating income | $364,200 | $1,697,900 | $2,022,900 | $5,029,200 |
| Average number of active brand partners | 18,100 | 26,800 | 20,600 | 29,500 |

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

PaperPie net revenues decreased $6.6 million, or 41.5%, to $9.3 million during the three months ended August 31, 2023, when compared to $15.9 million during the same period a year ago. The average number of active brand partners in the second quarter of fiscal 2024 was 18,100, a decrease of 8,700, or 32.5%, from 26,800 average active brand partners selling in the second quarter of fiscal 2023. Recruiting and maintaining brand partners was negatively impacted throughout fiscal 2023, continuing through the first and second quarter of fiscal year 2024, by several factors including record inflation, our new distribution agreement with Usborne and the rebranding of the division in the fourth quarter of fiscal year 2023. Inflation was most evident in increased food and fuel prices, which impacts the disposable income of our target customer base, which is families with small children. Sales during the second quarter of fiscal year 2024 continued to be negatively impacted by continuing inflationary pressures and we expect this to continue through the remainder of fiscal year 2024, as these pressures persist. Historically, when we have experienced these difficult inflationary times, our active brand partner numbers have been positively impacted as more families look for non-traditional income streams to offset rising costs of living.

In the first fiscal quarter last year we executed a new distribution agreement with Usborne. The new distribution agreement created a level of uncertainty and distraction within our brand partners and continued through the fourth quarter as a result of our rebranding to PaperPie, which was a requirement of the new agreement. Rebranding this division disrupted sales in the fiscal fourth quarter and the impact continued into fiscal 2024, as brand partners had to update all of their individual marketing and training materials. We expect this impact to dissipate during the remaining months of fiscal 2024, as all active brand partners will have transitioned to a PaperPie brand partner or will have made their first sale as a PaperPie brand partner. This expectation was supported this summer as we saw an uptick in our active brand partner counts in August, which was the first time our brand partner count has grown since March 2023. We also expect growth in brand partners during the upcoming fall months, which is traditionally a growth period for our active brand partner levels as this is the most active selling period of the year.

Net revenues during the fiscal 2024 second quarter were also negatively impacted from increased discounts. Discounts as a percentage of gross sales increased from 29.6% in the second quarter of fiscal 2023 to 32.6% in the second quarter of this year, or approximately $0.4 million. The increased discounts resulted from a change in order mix, with increased book fair order types that offer higher discounts impacting net revenues by $0.2 million, along with additional product discounts offered to spur sales during the quarter impacting net revenues by $0.2 million.

Gross margin decreased $4.7 million, or 43.5%, to $6.1 million during the three months ended August 31, 2023, when compared to $10.8 million during the same period a year ago. Gross margin as a percentage of net revenues for the three months ended August 31, 2023, decreased to 65.4%, compared to 68.1% the same period a year ago. The decrease in gross margin as a percentage of net revenues is primarily attributed to the change in order mix and additional promotional discounts previously mentioned, as well as reduced purchasing volume discounts/rebates.

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. Sales commissions include amounts paid to brand partners for new sales and promotions. These operating expenses are directly tied to the sales volumes of the PaperPie segment. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the segment.

Total operating expenses decreased $3.4 million, or 37.4%, to $5.7 million during the three-month period ended August 31, 2023, when compared to $9.1 million reported in the same quarter a year ago. Operating and selling expenses decreased $1.4 million, or 46.7%, to $1.6 million during the three-month period ended August 31, 2023, when compared to $3.0 million reported in the same quarter a year ago, resulting from fewer sales and shipments leading to a decrease in outbound freight totaling approximately $1.2 million, along with a $0.1 million decrease in brand partner incentive expenses and $0.1 million decrease in various other expenses. Sales commissions decreased $2.0 million, or 36.4%, to $3.5 million during the three-month period ended August 31, 2023, when compared to $5.5 million reported in the same quarter a year ago, due primarily to the decrease in net revenues totaling approximately $2.3 million, offset by a one-time increase in commission bonuses of $0.3 million, which resulted from a bonus promotion run over the summer. General and administrative expenses decreased $0.1 million, or 14.3%, to $0.6 million during the three months ended August 31, 2023, when compared to $0.7 million during the same period a year ago, driven by a reduction in credit card transaction fees resulting from the decrease in sales during the quarter ended August 31, 2023. General and administrative expenses include payroll, outside services, inventory reserves and other expenses directly associated with the PaperPie segment.

Operating income of the PaperPie segment decreased $1.3 million, or 76.5% to $0.4 million during the three months ended August 31, 2023, when compared to $1.7 million reported in the same quarter a year ago. Operating income of the PaperPie division as a percentage of net revenues for the three months ended August 31, 2023 was 3.9%, compared to 10.7% for the three months ended August 31, 2022. Operating income for the PaperPie division decreased primarily from reduced sales; along with additional promotional discounts and commission bonus promotions offered to spur sales.

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

PaperPie net revenues decreased $14.0 million, or 39.0%, to $21.9 million during the six-month period ended August 31, 2023, compared to $35.9 million from the same period a year ago. The average number of active brand partners in the six-month period ended August 31, 2023 was 20,600, a decrease of 8,900, or 30.2%, from 29,500 selling in same period a year ago. Recruiting and maintaining brand partners has been negatively impacted by several factors including record inflation, our new distribution agreement with Usborne and the rebranding of the division in the fourth quarter of fiscal year 2023. Inflation was most evident in increased food and fuel prices, which impacts the disposable income of our target customer base, which is families with small children. Sales during the first and second quarters of fiscal year 2024 continued to be negatively impacted by continuing inflationary pressures and we expect this to continue through the rest of fiscal year 2024, as these pressures persist. 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.

Gross margin decreased $10.2 million, or 41.3%, to $14.5 million during the six-month period ended August 31, 2023, when compared to $24.7 million during the same period a year ago, due primarily to a decrease in net revenues. Gross margin as a percentage of net revenues decreased to 66.2% for the six-month period ended August 31, 2023, when compared to 68.7% for the same period a year ago. The decrease in gross margin as a percentage of net revenues was primarily attributed to increased discounts and promotions between the periods along with additional shipping promotions offered in the current year.

Total operating expenses decreased $7.2 million, or 36.5%, to $12.5 million during the six-month period ended August 31, 2023, from $19.7 million for the same period a year ago. Operating and selling expenses decreased $2.4 million, or 40.7%, to $3.5 million during the six-month period ended August 31, 2023, when compared to $5.9 million reported in the same period a year ago, primarily due to a decrease in shipping costs associated with the decrease in volume of orders shipped totaling approximately $2.5 million partially offset by a $0.1 million increase in brand partner incentive trip expenses. Sales commissions decreased $4.6 million, or 37.7%, to $7.6 million during the six-month period ended August 31, 2023, when compared to $12.2 million reported in the same period a year ago, primarily due to the decrease in net revenues. General and administrative expenses decreased $0.1 million, or 6.7%, to $1.4 million, from $1.5 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes totaling $0.3 million, which was offset by a $0.1 million increase in payroll expenses and a $0.1 million increase in depreciation expense.

Operating income of the PaperPie segment decreased $3.0 million, or 60.0%, to $2.0 million during the six months ended August 31, 2023, when compared to $5.0 million reported in the same period last year. Operating income of the PaperPie division as a percentage of net revenues for the six months ended August 31, 2023 was 9.2%, compared to 14.0% for the six months ended August 31, 2022. Operating income for the PaperPie division decreased primarily from reduced sales; along with additional promotional discounts and commission bonus promotions offered to spur sales.

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

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

|  | Three Months Ended August 31, 2023 | 2022 | Six Months Ended August 31, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Gross sales | $2,597,900 | $7,358,000 | $6,671,200 | $13,965,100 |
| Less discounts and allowances | (1,351,900) | (3,874,400) | (3,486,200) | (7,340,100) |
| Transportation revenue | 13,100 | 2,500 | 14,900 | 5,200 |
| Net revenues | 1,259,100 | 3,486,100 | 3,199,900 | 6,630,200 |
| Cost of goods sold | 453,400 | 1,854,200 | 1,417,500 | 3,543,800 |
| Gross margin | 805,700 | 1,631,900 | 1,782,400 | 3,086,400 |
| Total operating expenses | 369,100 | 816,000 | 885,800 | 1,520,800 |
| Operating income | $436,600 | $815,900 | $896,600 | $1,565,600 |

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

Our Publishing division’s net revenues decreased $2.2 million, or 62.9%, to $1.3 million during the three-month period ended August 31, 2023, from $3.5 million reported in the same period a year ago primarily due to the stoppage of distribution of Usborne products between the periods, which impacted net sales by approximately $2.8 million, partially offset by an increase in Kane Miller and Learning Wrap-Ups sales of $0.4 million and new sales of SmartLab Toys totaling approximately $0.2 million. During fiscal 2023, we entered into a new distribution agreement with Usborne. Under the terms in our new distribution agreement, the Company no longer has the right to distribute Usborne’s products to retail customers after November 15, 2022, at which time Usborne was expected to use a different distributor to supply retail accounts with their products. The November 15, 2022 transition date, at Usborne’s request, was extended into the first quarter of fiscal 2024. Gross sales attributed to Usborne products sold within the Publishing division accounted for 84.5%, or $6.2 million during the quarter ended August 31, 2022.

Gross margin decreased $0.8 million, or 50.0%, to $0.8 million during the three-month period ended August 31, 2023, from $1.6 million reported in the same quarter a year ago, primarily due to the decrease in net revenues. Gross margin as a percentage of net revenues increased to 64.0% during the three-month period ended August 31, 2023, from 46.8% reported in the same quarter a year ago. Gross margin as a percentage of net revenues changed primarily from an increase in Learning Wrap-Ups sales, which carry a better margin.

Total operating expenses of the Publishing segment decreased $0.4 million, or 50.0%, to $0.4 million, from $0.8 million, during the three-month periods ended August 31, 2023 and 2022, respectively. This change was due to a $0.4 million decrease in freight expenses caused by lower sales.

Operating income of the Publishing division decreased $0.4 million or 50.0% to $0.4 million during the three-month period ended August 31, 2023, from $0.8 million for the three-month period ended August 31, 2022, respectively. The decrease in operating income was primarily associated with the decline in revenues associated with the new distribution agreement, which required the stoppage of Usborne products sold through this division.

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

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

Gross margin decreased $1.3 million, or 41.9%, to $1.8 million during the six-month period ended August 31, 2023, from $3.1 million reported in the same period a year ago. Gross margin as a percentage of net revenues increased to 55.7%, during the six-month period ended August 31, 2023, from 46.6% reported in the same period a year ago. Gross margin as a percentage of net revenues changed primarily from changes in the mix of products sold between EDC-owned brands and Usborne, with Kane Miller, SmartLab Toys and Learning Wrap-Ups products carrying a better margin on average.

Total operating expenses of the Publishing segment decreased $0.6 million, or 40.0%, to $0.9 million during the six-month period ended August 31, 2023, from $1.5 million reported in the same period a year ago. This change was due to a $0.4 million decrease in freight expenses and a $0.2 million decrease in sales commissions due to decreased overall sales and the restructuring of the Company’s internal sales department.

Operating income of the Publishing segment decreased $0.7 million, or 43.8%, to $0.9 million during the six-month period ended August 31, 2023 when compared to $1.6 million reported in the same period a year ago, due primarily to the decrease in sales and operating expenses. The decrease in operating income was primarily associated with the decline in revenues associated with the stoppage of Usborne product sales in this division.

### Liquidity and Capital Resources

EDC has a history of profitability and positive cash flow. 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 reduce current excess inventory levels and use the cash proceeds to pay down the line of credit and portions of the term debt. We utilize a bank credit facility and other term loan borrowings to meet our short-term cash needs, as well as fund capital expenditures when necessary. As of the end of the second fiscal quarter of 2024, our revolving bank credit facility loan balance was $9.7 million with $0.8 million in available capacity.

Available cash has historically been used to pay down outstanding bank loan balances, for capital expenditures, to pay dividends and to acquire treasury stock. We have $1.1 million of restricted cash held by our third-party credit card payment processor as of the end of our second fiscal quarter of 2024. The cash held in reserve was increased in September 2023 to approximately $1.5 million and is scheduled to increase again in October 2023 to approximately $2.0 million. The Company has requested the cash held in reserve be reduced and the cash be released back to the Company. PayPal has scheduled its next financial review in mid-October. The Company has engaged an alternate credit card processor to move to during the third quarter of fiscal 2024.

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

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

Adjusted for:

- depreciation expense of $1,366,000
- share-based compensation expense, net of $175,800
- provision for inventory allowance of $105,400
- deferred income taxes of $39,100
- gain on sale of assets of $46,500

Positively impacted by:

- decrease in inventories, net of $1,829,300
- increase in accounts payable of $1,113,200
- decrease in accounts receivable of $916,100
- decrease in prepaid expenses and other assets of $221,600
- increase in deferred revenues of $86,900

Negatively impacted by:

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

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

Cash used in financing activities was $2,375,300, which was comprised of net payments on the line of credit of $911,400, payments on term debt of $900,000 and cash paid in treasury stock transactions of $563,900.

We continue to expect the cash generated from our operations, specifically from the reduction of excess inventory, and cash available through our line of credit with our Lender will provide us with the liquidity we need to support ongoing operations. Cash generated from operations will be used to purchase inventory in order to expand our product offerings and to pay down existing debt.

On August 9, 2022, the Company repaid in full all outstanding indebtedness and terminated all commitments and obligations under its Amended and Restated Loan Agreement dated February 15, 2021 (as amended), between the Company and MidFirst Bank and executed a new Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”). The Loan Agreement established a fixed rate term loan in the principal amount of $15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $21,000,000 (the “Floating Rate Term Loan”; together with the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving promissory note in the principal amount up to $15,000,000 (the “Revolving Loan” or “Line of Credit”).

On December 22, 2022, the Company executed the First Amendment to our Loan Agreement with the Lender. This amendment clarified the definition of the Fixed Charge Coverage Ratio to exclude dividends paid prior to November 30, 2022, and placed restrictions on acquisitions and cash dividends.

On May 10, 2023, the Company executed the Second Amendment to our Loan Agreement with the Lender. This amendment waived the fixed charge ratio default which occurred on February 28, 2023 and amended the financial covenant to not require the fixed charge ratio to be measured at May 31, 2023. The Second Amendment also added a cumulative maximum level of fiscal year to date inventory purchases through the expiration of the Revolving Loan Agreement, increased the borrowing rate on the Company’s Revolving Loan to Term SOFR Rate plus 3.5%, required certain swap agreement be executed within 30 days of the amendment, reduced the revolving commitment from $15,000,000 to $14,000,000, effective May 10, 2023, and further reduced the revolving commitment to $13,500,000, effective July 15, 2023, among other items.

On June 6, 2023, pursuant to its interest rate risk and risk management strategy, the Company entered into a swap transaction (the “Swap Transaction”) with the Lender, which converts a portion of the original $21,000,000 Floating Rate Term Loan from a floating interest rate to a fixed interest rate for the next two years. The Swap Transaction has a notional amount of $18,000,000 through fiscal quarter ending May 31, 2024, and then resets to $13,000,000 through May 30, 2025, while continuing to mirror the amortizing balance of the Floating Rate Term Loan. Under the terms of this agreement, the Company, in effect, has exchanged the floating interest rate of 30-Day Term SOFR Rate at the trade date of June 5, 2023, to a fixed rate of 4.73%. The Swap Transaction commenced on June 7, 2023, with a termination date of May 30, 2025.

On August 9, 2023, the Company executed the Third Amendment along with a Revised Credit Agreement (“Revised Loan Agreement”) with the Lender. This amendment extended the Revolving Loan maturity date to January 31, 2024 and introduced a stepdown to the Revolving Commitment from $13,500,000, through August 30, 2023; to $10,500,000 through October 30, 2023; to $9,000,000 through November 29, 2023; to $5,000,000 through December 30, 2023; to $4,500,000 through January 30, 2024; and to $4,000,000 on January 31, 2024. The amendment restricts 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 its real estate property for sale located at 5402 South 122nd Ave., Tulsa, Oklahoma (“Hilti Complex), with a licensed commercial real estate broker satisfactory to the Lender. The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50%, or 9.81% at August 31, 2023. The Revised Loan Agreement was updated for the changes in the Third Amendment as well as removed the fixed charge ratio and the ability for borrowings to be accelerated before the January 31, 2024 Revolving Loan maturity date.

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

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

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

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

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

(iv) Stepdown Revolving Loan with maturity date of January 31, 2024. The Revolving Loan bears interest at a rate per annum equal to Term SOFR Rate + 4.50% (effective rate was 9.81% at August 31, 2023)

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

27

Prior to the Third Amendment, executed on August 9, 2023, the Loan Agreement contained provisions that required the Company to maintain a minimum fixed charge ratio. The Company was in violation of the minimum fixed charge ratio covenant as of February 28, 2023, for which the Company obtained a written waiver of compliance from the Lender and was not required to measure the fixed charge ratio as of May 31, 2023. Concurrent with the execution of the Third Amendment to the Loan Agreement, the Loan Agreement was modified to incorporate the changes outlined in the Third Amendment and the fixed charge ratio covenant was removed, as well as the Lender’s right to accelerate the maturities of the Fixed Rate Term Loan and Floating Rate Term Loan due to the fixed charge ratio covenant. Should the Company fail to meet any of the remaining terms outlined in the Revised Credit Agreement or fail to meet the stepdown requirements of the Revolving Loan, the Company shall within 15 days list its real estate property for sale located at 5402 South 122nd Ave., Tulsa, Oklahoma (“Hilti Complex”), with a licensed commercial real estate broker satisfactory to the Lender. Proceeds from the sale of the property would be used to pay off all the borrowings with the Lender. A third-party appraisal was completed on the Hilti Complex, consisting of the 400,000 square feet building complex on approximately 40 acres, along with approximately 15 acres of adjacent unused land, in July of 2022 with a market value of $41,200,000.

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

| Years ending February 28 (29), |  |
| --- | ---: |
| 2024 | $900,000 |
| 2025 | 1,800,000 |
| 2026 | 1,800,000 |
| 2027 | 1,800,000 |
| 2028 | 27,900,000 |
| Total | $34,200,000 |

### 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, the uncertainty of the Company’s ability to meet the stepdown requirements outlined in the Third Amendment and the ability to renew the line on January 31, 2024, raise substantial doubt over the Company's ability to continue as a going concern. Management has plans that should it violate the terms of the Third Amendment or Revised Credit Agreement, it will sell the Hilti Complex and pay off the Term Loans and Revolving Loan. The proceeds from a sale are expected to generate sufficient cashflow to allow the Company to continue operations without borrowing funds from their bank. 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

*Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States(“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.*

*Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report and in our audited financial statements as of and for the year ended February 28, 2023, included in our Form 10-K. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.*

### Revenue Recognition

Sales associated with product orders are recognized and recorded when products are shipped. Products are shipped FOB-Shipping Point. PaperPie’s sales are generally paid at the time the product is ordered. Sales which have been paid for but not shipped are classified as deferred revenue on the balance sheet. Sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted. Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.

Estimated allowances for sales returns are recorded as sales are recognized. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for a product damaged in transit. Damaged returns are primarily received from the retail customers of our Publishing division. This damage occurs in the stores, not in shipping to the stores, and we typically do not offer credit for damaged returns. It is industry practice to accept non-damaged returns from retail customers. Management has estimated and included a reserve for sales returns of $0.2 million as of August 31, 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”). An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends. Management has estimated and included an allowance for doubtful accounts of $0.1 million and $0.2 million as of August 31, 2023, and February 28, 2023, respectively.

### Inventory

Our inventory contains approximately 2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line is saleable as the products are not topical in nature and remain current in content today as well as in the future. Most of our products are printed in China, Europe, Singapore, India, Malaysia and Dubai typically resulting in a four to eight-month lead-time to have a title printed and delivered to us.

Certain inventory is maintained in a noncurrent classification. Management continually estimates and calculates the amount of noncurrent inventory. Noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to the minimum order requirements of our suppliers. Noncurrent inventory is estimated by management using an anticipated turnover ratio by title, based primarily on historical trends and sales forecasts. Inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory. These inventory quantities have additional exposure for storage damages and related issues, and therefore have higher obsolescence reserves. Noncurrent inventory balances prior to valuation allowances were $8.7 million and $5.1 million as of August 31, 2023, and February 28, 2023, respectively. Noncurrent inventory valuation allowances were $0.5 million and $0.4 million as of August 31, 2023, and February 28, 2023, respectively.

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.

Brand partners that meet certain eligibility requirements may request and receive inventory on consignment. We believe allowing our brand partners to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows, book fairs and other events; in summary, having consignment inventory leads to additional sales opportunities. Approximately 10.0% of our active brand partners have maintained consignment inventory at the end of the second quarter of fiscal year 2024. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with brand partners was $1.6 million and $1.5 million as of August 31, 2023, and February 28, 2023, respectively.

Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company. Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory. Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $1.1 million and $0.9 million as of August 31, 2023, and February 28, 2023, respectively.

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

## Controls and procedures

As filed, 1,568 characters.

#### Evaluation of Disclosure Controls and Procedures

We performed an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer).

Based on that evaluation, these officers concluded that our disclosure controls and procedures were designed and were effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to them, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported in accordance with the time periods specified in SEC rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events.

#### Changes in Internal Control over Financial Reporting

During the second quarter of the fiscal year covered by this report on Form 10-Q, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Oct 16, 2023.
Source: SEC EDGAR, the filing index for accession 0001185185-23-001068. Last ingested by Listed: Oct 24, 2026, 14:52 ET. No prices; not investment advice.