EDUCATIONAL DEVELOPMENT CORP [EDUC] Filings

10-Q 1 edc20240831_10q.htm FORM 10-Q edc20240831_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2024

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-04957

EDUCATIONAL DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

73-0750007

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5402 South 122nd East Ave, Tulsa, Oklahoma	74146
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (918) 622-4522

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.20 par value	EDUC	NASDAQ
(Title of class)	(Trading symbol)	(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
	Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
	Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ☐	Accelerated filer ☐

	Non-accelerated filer ☒	Smaller reporting company ☒

		Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
	Yes ☐ No ☒

As of October 8, 2024, there were 8,581,601 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		34

CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS

The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties and we can give no assurance that such expectations or assumptions will be achieved. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to,

	●	our success in recruiting and retaining new brand partners,
	●	our ability to locate and procure desired books,
	●	product and supplier concentrations,
	●	our relationship with our primary supplier and the related distribution requirements and contractual limitations,
	●	adverse publicity associated with our Company or the industry,
	●	our ability to ship timely,
	●	changes to our primary sales channels, including social media and party plan platforms,
	●	changing consumer preferences and demands,
	●	cybersecurity threats and incidents,
	●	legal matters,
	●	reliance on information technology infrastructure,
	●	restrictions imposed by covenants in the agreements governing our indebtedness,
	●	our ability to obtain adequate financing for working capital and capital expenditures,
	●	economic and competitive conditions, regulatory changes and other uncertainties, as well as
	●	those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended February 29, 2024 and in this Quarterly Report on Form 10Q, all of which are difficult to predict.

In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report on Form 10-Q and speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. As used in this Quarterly Report on Form 10-Q, the terms “the Company,” “EDC,” “we,” “our” or “us” mean Educational Development Corporation, a Delaware corporation, unless the context indicates otherwise.

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED BALANCE SHEETS (UNAUDITED)

	August 31,			February 29,
ASSETS	2024			2024
CURRENT ASSETS:
Cash and cash equivalents	$	753,800		$	844,500
Restricted cash		376,600			432,900
Accounts receivable, less allowance for credit losses of $117,500 (August 31) and $129,000 (February 29)		2,079,100			1,936,900
Inventories - net		35,533,400			43,913,200
Prepaid expenses and other assets		873,800			630,800
Assets held for sale		19,233,900			18,281,100
Total current assets		58,850,600			66,039,400

INVENTORIES - net		14,745,100			11,677,000
PROPERTY, PLANT AND EQUIPMENT - net		7,242,800			8,939,600
DEFERRED INCOME TAX ASSET		2,366,200			1,406,500
OPERATING LEASE RIGHT-OF-USE ASSETS		1,560,100			1,614,900
OTHER ASSETS		430,100			427,600
TOTAL ASSETS	$	85,194,900		$	90,105,000

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,623,000		$	3,910,200
Line of credit		6,098,100			5,498,100
Deferred revenues		500,400			583,500
Operating lease liabilities, current		794,400			726,900
Current maturities of long-term debt		1,800,000			1,800,000
Accrued salaries and commissions		425,400			384,400
Income taxes payable		1,126,900			773,400
Other current liabilities		2,648,300			3,338,100
Total current liabilities		16,016,500			17,014,600

LONG-TERM DEBT - net		25,763,100			26,640,700
OPERATING LEASE LIABILITIES, non-current		765,700			888,000
OTHER LONG-TERM LIABILITIES		111,000			111,000
Total liabilities		42,656,300			44,654,300


SHAREHOLDERS' EQUITY:
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,702,080 shares; Outstanding 8,581,601 (August 31) and 8,575,088 (February 29) shares		2,540,400			2,540,400
Capital in excess of par value		13,599,900			13,405,400
Retained earnings		39,484,200			42,566,600
Accumulated other comprehensive income (loss)		(20,400	)		24,400
		55,604,100			58,536,800
Less treasury stock, at cost		(13,065,500	)		(13,086,100	)
Total shareholders' equity		42,538,600			45,450,700
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	85,194,900		$	90,105,000

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended August 31,						Six Months Ended August 31,
	2024			2023			2024			2023
PRODUCT REVENUES, net of discounts and allowances	$	6,119,600		$	9,851,600		$	15,710,500		$	23,366,900
Transportation revenue		389,600			741,500			792,100			1,750,200
NET REVENUES		6,509,200			10,593,100			16,502,600			25,117,100
COST OF GOODS SOLD		2,862,500			3,684,300			6,396,500			8,834,700
Gross margin		3,646,700			6,908,800			10,106,100			16,282,400

OPERATING EXPENSES
Operating and selling		1,385,800			1,916,000			3,265,800			4,313,900
Sales commissions		1,850,900			3,520,300			4,909,700			7,720,100
General and administrative		2,905,500			3,529,100			6,105,100			7,163,600
Total operating expenses		6,142,200			8,965,400			14,280,600			19,197,600


INTEREST EXPENSE		545,700			743,300			1,122,400			1,476,700
OTHER INCOME		(575,100	)		(4,252,800	)		(1,083,800	)		(4,644,200	)

EARNINGS (LOSS) BEFORE INCOME TAXES		(2,466,100	)		1,452,900			(4,213,100	)		252,300

INCOME TAX EXPENSE (BENEFIT)		(662,700	)		391,200			(1,130,700	)		63,400
NET EARNINGS (LOSS)	$	(1,803,400	)	$	1,061,700		$	(3,082,400	)	$	188,900

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic	$	(0.22	)	$	0.13		$	(0.37	)	$	0.02
Diluted	$	(0.22	)	$	0.13		$	(0.37	)	$	0.02

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING
Basic		8,272,217			8,269,771			8,269,494			8,273,910
Diluted		8,272,217			8,269,771			8,269,494			8,283,221
Dividends per share	$	-		$	-		$	-		$	-

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

	Three Months Ended August 31,					Six Months Ended August 31,
	2024			2023		2024			2023
Net earnings (loss)	$	(1,803,400	)	$	1,061,700	$	(3,082,400	)	$	188,900
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate exchange agreement		(67,700	)		51,100		(44,800	)		51,100
Comprehensive income (loss)	$	(1,871,100	)	$	1,112,800	$	(3,127,200	)	$	240,000

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE SIX MONTHS ENDED AUGUST 31, 2024

	Common Stock (par value $0.20 per share)													Treasury Stock
	Number of Shares Issued		Amount		Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income			Number of Shares			Amount			Shareholders' Equity

BALANCE – February 29, 2024		12,702,080	$	2,540,400	$	13,405,400		$	42,566,600		$	24,400			4,126,992		$	(13,086,100	)	$	45,450,700
Sale of treasury stock		-		-		(4,100	)		-			-			(4,000	)		12,700			8,600
Share-based compensation expense - net		-		-		100,800			-			-			-			-			100,800
Change in fair value of interest rate exchange agreement		-		-		-			-			22,900			-			-			22,900
Net loss		-		-		-			(1,279,000	)		-			-			-			(1,279,000	)
BALANCE - May 31, 2024		12,702,080	$	2,540,400	$	13,502,100		$	41,287,600		$	47,300			4,122,992		$	(13,073,400	)	$	44,304,000
Sale of treasury stock		-		-		(3,000	)		-			-			(2,513	)		7,900			4,900
Share-based compensation expense - net		-		-		100,800			-			-			-			-			100,800
Change in fair value of interest rate exchange agreement		-		-		-			-			(67,700	)		-			-			(67,700	)
Net loss		-		-		-			(1,803,400	)		-			-			-			(1,803,400	)
BALANCE - August 31, 2024		12,702,080	$	2,540,400	$	13,599,900		$	39,484,200		$	(20,400	)		4,120,479		$	(13,065,500	)	$	42,538,600

FOR THE SIX MONTHS ENDED AUGUST 31, 2023

	Common Stock (par value $0.20 per share)											Treasury Stock
	Number of Shares Issued		Amount		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Income		Number of Shares		Amount			Shareholders' Equity

BALANCE – February 28, 2023		12,702,080	$	2,540,400	$	13,193,400	$	42,020,200		$	-		3,988,791	$	(12,522,200	)	$	45,231,800
Purchases of treasury stock		-		-		-		-			-		138,201		(563,900	)		(563,900	)
Share-based compensation expense - net		-		-		96,200		-			-		-		-			96,200
Net loss		-		-		-		(872,800	)		-		-		-			(872,800	)
BALANCE - May 31, 2023		12,702,080	$	2,540,400	$	13,289,600	$	41,147,400		$	-		4,126,992	$	(13,086,100	)	$	43,891,300
Forfeiture of restricted shares		-		-		-		-			-		4,000		-			-
Share-based compensation expense - net		-		-		79,600		-			-		-		-			79,600
Unrealized gain on interest rate exchange agreement		-		-		-		-			51,100		-		-			51,100
Net earnings		-		-		-		1,061,700			-		-		-			1,061,700
BALANCE - August 31, 2023		12,702,080	$	2,540,400	$	13,369,200	$	42,209,100		$	51,100		4,130,992	$	(13,086,100	)	$	45,083,700

See notes to condensed financial statements (unaudited).

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EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended August 31,
	2024			2023
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)	$	(3,082,400	)	$	188,900
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		972,200			1,366,000
Deferred income taxes		(959,700	)		(1,002,500	)
Provision for credit losses		41,600			-
Provision for inventory valuation allowance		191,300			105,400
Share-based compensation expense - net		201,600			175,800
Net loss (gain) on sale of assets		3,700			(46,500	)
Changes in assets and liabilities:
Accounts receivable		(183,800	)		916,100
Inventories - net		5,120,400			1,829,300
Prepaid expenses and other assets		(259,000	)		221,600
Accounts payable		(1,287,200	)		1,113,200
Accrued salaries and commissions and other liabilities		(693,600	)		(1,280,400	)
Deferred revenues		(83,100	)		86,900
Income taxes payable/receivable		353,500			1,041,600
Total adjustments		3,417,900			4,526,500
Net cash provided by operating activities		335,500			4,715,400
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(200,000	)		(546,200	)
Proceeds from sale of assets		4,000			75,700
Net cash used in investing activities		(196,000	)		(470,500	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on term debt		(900,000	)		(900,000	)
Cash paid to acquire treasury stock		-			(563,900	)
Sales of treasury stock		13,500			-
Net borrowings (payments) under line of credit		600,000			(911,400	)
Net cash used in financing activities		(286,500	)		(2,375,300	)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(147,000	)		1,869,600
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - BEGINNING OF PERIOD		1,277,400			689,100
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - END OF PERIOD	$	1,130,400		$	2,558,700

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid for interest	$	1,128,800		$	1,513,600
Cash paid for income taxes (net of refunds)	$	33,800		$	24,200

See notes to condensed financial statements (unaudited).

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying Unaudited Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim condensed financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Unaudited Condensed Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended February 29, 2024 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year due to the seasonality of our product sales.

Use of Estimates in the Preparation of Financial Statements

The preparation of the Unaudited Condensed Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.

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 to our audited financial statements as of and for the year ended February 29, 2024 included in our Form 10-K.

Reclassifications

Certain reclassifications have been made to the fiscal 2024 condensed statements of operations to combine Gross Sales and Discounts and allowances now presented as Product Revenues, net of discount and allowances to conform with the current year financial statement presentation. These reclassifications had no effect on net earnings.

Liquidity

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 January 4, 2025 (See Note 17), 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 September 19, 2024 the Company executed an agreement to sell the Hilti Complex for $38,250,000, 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.

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New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded the following new accounting standard updates (“ASU”) apply to us:

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses and increased interim disclosure requirements, among others. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively. This ASU will be effective for our Form 10-K for fiscal 2025 and our Form 10-Q for the first quarter of fiscal 2026. We are currently evaluating the impact this ASU may have on our financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which provides qualitative and quantitative updates to the rate reconciliation and income taxes paid disclosures, among others, in order to enhance the transparency of income tax disclosures, including consistent categories and greater disaggregation of information in the rate reconciliation and disaggregation by jurisdiction of income taxes paid. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied prospectively; however, retrospective application is also permitted. This ASU will be effective for our Form 10-K for fiscal 2026. We are currently evaluating the impact this ASU may have on our financial statement disclosures.

Note 2 – CASH

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

	August 31, 2024		August 31, 2023
Cash and cash equivalents	$	753,800	$	1,480,900
Restricted cash		376,600		1,077,800
Total cash, cash equivalents and restricted cash shown in the condensed statements of cash flows	$	1,130,400	$	2,558,700

The Company has historically contracted with Braintree Payment Services and PayPal, Inc. (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 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 third quarter of fiscal 2024, the Company listed its real estate property located at 5402 S. 122nd E. 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 17 for the real estate contract for the Hilti Complex that occurred subsequent to August 31, 2024.

During the second quarter of fiscal year 2025, 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. To create space for this new tenant, the Company removed certain operating equipment and reclassified the assets from property plant and equipment to assets held for sale upon meeting the held for sale criteria at the end of the second quarter.

The Company records assets held for sale at the lower of their carrying value or fair value less costs to sell. The total carrying value of assets held for sale was $19,233,900 and $18,281,100 as of August 31, 2024 and February 29, 2024 and is separately recorded on the balance sheets.

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Note 4 – INVENTORIES

Inventories consist of the following:

	August 31, 2024			February 29, 2024
Current:
Product inventory	$	35,978,600		$	44,303,000
Inventory valuation allowance		(445,200	)		(389,800	)
Inventories net – current	$	35,533,400		$	43,913,200

Noncurrent:
Product inventory	$	15,453,200		$	12,269,200
Inventory valuation allowance		(708,100	)		(592,200	)
Inventories net – noncurrent	$	14,745,100		$	11,677,000

Inventory in transit totaled $0 and $264,000 at August 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.

Note 5 – LEASES

We have both lessee and lessor arrangements. Our lessee arrangements include six rental agreements where we have the exclusive use of dedicated office space in San Diego, California, warehouse and office space in Seattle, Washington, warehouse and office space in Layton, Utah, two leases for warehouse space locally in Tulsa, Oklahoma, and warehouse space in Joplin, Missouri, all of which qualify as an operating lease. Our lessor arrangements include three rental agreements for warehouse and office space in Tulsa, Oklahoma, and qualify as operating leases under ASC 842.

Operating Leases – Lessee

We recognize a lease liability, reported 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, 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.

	August 31, 2024			February 29, 2024
Operating lease assets:
Right-of-use assets	$	1,560,100		$	1,614,900

Operating lease liabilities:
Current lease liabilities	$	794,400		$	726,900
Long-term lease liabilities	$	765,700		$	888,000

Weighted-average remaining lease term (months)	20.5				25.8
Weighted-average discount rate		4.57	%		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.

Three Months Ended

August 31,

Six Months Ended

August 31,

2024

2023

2024

2023

Fixed lease costs

189,800

105,800

379,500

211,600

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

Years ending February 28 (29),
2025	$	431,500
2026		750,500
2027		472,400
Total future minimum rental payments		1,654,400
Less: imputed interest		(94,300	)
Total operating lease liabilities	$	1,560,100

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

Three Months Ended

August 31,

Six Months Ended

August 31,

2024

2023

2024

2023

Operating cash outflows – operating leases

189,800

105,800

379,500

211,600

Operating Leases – Lessor

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.

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, commenced July 1, 2024, and includes an option to extend the lease term for an additional five years. The lessee pays $84,000 per month, 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.

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

Years ending February 28 (29),
2025	$	1,307,600
2026		2,657,700
2027		2,666,300
2028		2,676,600
2029		2,741,400
Thereafter		3,711,200
Total	$	15,760,800

The cost of the leased space was $16,313,300 and $10,159,500 at August 31, 2024 and February 29, 2024. The accumulated depreciation associated with the leased asset was $3,891,200 and $2,776,400 at August 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.

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Note 6 – DEBT

Debt consists of the following:

	August 31, 2024			February 29, 2024

Line of credit	$	6,098,100		$	5,498,100

Floating rate term loan	$	16,775,000		$	17,300,000
Fixed rate term loan		10,925,900			11,300,900
Total term debt		27,700,900			28,600,900

Less current maturities		(1,800,000	)		(1,800,000	)
Less debt issue cost		(137,800	)		(160,200	)
Long-term debt, net	$	25,763,100		$	26,640,700

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”; 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 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 the amortizing balance of the Floating Rate Term Loan. Under the terms of this agreement, the Company, in effect, has exchanged the floating interest rate of 30-Day Term SOFR Rate at the trade date of June 5, 2023, to a fixed rate of 4.73%. The Swap Transaction commenced on June 7, 2023, with a termination date of May 30, 2025.

On August 9, 2023, the Company executed the Third Amendment along with a Revised Credit Agreement (“Revised Loan Agreement”) with the Lender. This amendment extended the Revolving Loan maturity date to January 31, 2024 and introduced a stepdown to the Revolving Commitment from $13,500,000, through August 30, 2023; to $10,500,000 through October 30, 2023; to $9,000,000 through November 29, 2023; to $5,000,000 through December 30, 2023; to $4,500,000 through January 30, 2024; and to $4,000,000 on January 31, 2024. The amendment restricted the Company from entering into any new purchase orders and use its best efforts to cancel existing purchase orders. It also required the Company to list its real estate property located at 10302 East 55th Place, Tulsa, Oklahoma, for sale with a licensed commercial real estate broker satisfactory to the Lender on or before August 18, 2023, among other items. Contingent upon the occurrence of an Event of Default in the agreement, the Company shall within 15 days list the Hilti Complex with a licensed commercial real estate broker satisfactory to the Lender. The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50%, or 9.85% at August 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.

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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.

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 402,000 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 $901,900 at August 31, 2024.

Subsequent to quarter end, the Company executed the Sixth Amendment to the Existing Credit Agreement with the Lender, see Note 17.

Features of the Revised Loan Agreement include:

	(i)	Two Term Loans 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%
	(iv)	$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 9.85% at August 31, 2024)
	(v)	Revolving Loan allows for Letters of Credit upon bank approval (none were outstanding at August 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),
2025	$	900,000
2026		1,800,000
2027		1,800,000
2028		23,200,900
Total	$	27,700,900

Note 7 – OTHER INCOME

A summary of other income is shown below:

	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023

Federal tax credits realized	$	-	$	3,808,700	$	-	$	3,808,700
Rental income		564,400		386,000		950,400		772,000
Other		10,700		58,100		133,400		63,500
Total other income	$	575,100	$	4,252,800	$	1,083,800	$	4,644,200

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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 August 31, 2023, which are included in income taxes payable on the condensed balance sheets.

Note 8 – BUSINESS CONCENTRATION

Significant portions of our inventory purchases are concentrated with an England-based publishing company, Usborne Publishing Limited (“Usborne”). During fiscal 2023, we entered into a new distribution agreement (“Agreement”) with Usborne. 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. As of February 29, 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.

The following table summarizes Usborne product revenues net of discounts by division and inventory purchases by product type:

	Three Months Ended August 31,						Six Months Ended August 31,
	2024			2023			2024			2023
Product revenues, net of discounts of Usborne products by division:
PaperPie division	$	1,848,000		$	4,195,300		$	5,480,600		$	9,943,300
% of total PaperPie Product revenues, net of discounts		36.6	%		48.8	%		40.4	%		49.3	%
Publishing division		-			-			-			1,304,000
% of total Publishing Product revenues, net of discounts		0.0	%		0.0	%		0.0	%		40.9	%
Total Product revenues, net of discounts of Usborne products	$	1,848,000		$	4,195,300		$	5,480,600		$	11,247,300

Purchases received by product type:
Usborne	$	48,800		$	625,200		$	100,600		$	1,560,700
% of total purchases received		6.8	%		21.9	%		6.8	%		25.8	%
All other product types		665,000			2,223,400			1,380,200			4,478,000
% of total purchases received		93.2	%		78.1	%		93.2	%		74.2	%
Total purchases received	$	713,800		$	2,848,600		$	1,480,800		$	6,038,700

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Total Usborne inventory owned by the Company and included in our condensed balance sheets was $26,565,100 and $29,010,200 as of August 31, 2024 and February 29, 2024, respectively.

Note 9 – EARNINGS (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 August 31,					Six Months Ended August 31,
	2024			2023		2024			2023
Earnings (loss):
Net earnings (loss) applicable to common shareholders	$	(1,803,400	)	$	1,061,700	$	(3,082,400	)	$	188,900

Weighted average shares:
Weighted average shares outstanding-basic		8,272,217			8,269,771		8,269,494			8,273,910
Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards		-			-		-			9,311
Weighted average shares outstanding-diluted		8,272,217			8,269,771		8,269,494			8,283,221

Earnings (loss) per share:
Basic	$	(0.22	)	$	0.13	$	(0.37	)	$	0.02
Diluted	$	(0.22	)	$	0.13	$	(0.37	)	$	0.02

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

August 31,

Six Months Ended

August 31,

2024

2023

2024

2023

Weighted average shares:

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

181,030

160,890

Note 10 – COMMITMENT AND CONTINGENCIES

During the first quarter of fiscal 2025, the Company received a property tax assessment notice on our inventory balance at December 31, 2022 from Tulsa County totaling approximately $700,000. The Company appealed the assessment, requesting a reduction of the property tax assessment on inventory to approximately $290,000. On June 25, 2024, 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 in the District Court in and for Tulsa County. The Company has accrued the property taxes associated with the Board’s decision of approximately $290,000 but awaits the final decision from the District Court.

Note 11 – 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. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and share awards are updated and compensation expense is adjusted based on updated information.

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In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan established up to 600,000 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 2019, 2020 or 2021. The Company exceeded all defined metrics during these fiscal years and 600,000 shares were granted to members of management according to the Plan. 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. 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. 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 $201,800 as of August 31, 2024, will be recognized ratably over the remaining vesting period of 6 months.

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

	Three Months Ended August 31,					Six Months Ended August 31,
	2024		2023			2024		2023

Share-based compensation expense	$	100,800	$	96,200		$	201,600	$	192,400
Less reduction of expense for forfeitures		-		(16,600	)		-		(16,600	)
Share-based compensation expense - net	$	100,800	$	79,600		$	201,600	$	175,800

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

	Shares		Weighted Average Fair Value (per share)

Outstanding at February 29, 2024		297,000	$	5.53
Granted		-		-
Vested		-		-
Forfeited		-		-
Outstanding at August 31, 2024		297,000	$	5.53

Note 12 – SHIPPING AND HANDLING COSTS

We classify shipping and handling costs as operating and selling expenses in the condensed statements of operations. Shipping and handling costs include postage, freight, handling costs, as well as shipping materials and supplies. These costs were $968,500 and $1,414,200 for the three months ended August 31, 2024 and 2023, respectively. These costs were $2,515,100 and $3,352,300 for the six months ended August 31, 2024 and 2023, respectively.

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Note 13 – BUSINESS SEGMENTS

We have two reportable segments: PaperPie and Publishing. These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. Our PaperPie segment markets its products through a network of independent brand partners using a combination of internet sales, direct sales, home shows and book fairs. Our Publishing segment markets its products to retail accounts, which include book, school supply, toy and gift stores, museums, trade and specialty wholesalers, through commissioned sales representatives and our internal tele-sales group. See Note 8 for the impact of our updated Usborne distribution agreement on the Publishing segment.

The accounting policies of the segments are the same as those of the rest of the Company. 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 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 six-month periods ended August 31, 2024 and 2023, are as follows:

NET REVENUES
	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
PaperPie	$	5,440,300	$	9,334,000	$	14,340,600	$	21,917,200
Publishing		1,068,900		1,259,100		2,162,000		3,199,900
Total	$	6,509,200	$	10,593,100	$	16,502,600	$	25,117,100

EARNINGS (LOSS) BEFORE INCOME TAXES
	Three Months Ended August 31,					Six Months Ended August 31,
	2024			2023		2024			2023
PaperPie	$	(470,700	)	$	364,200	$	300,400		$	2,022,900
Publishing		255,200			436,600		486,800			896,600
Other		(2,250,600	)		652,100		(5,000,300	)		(2,667,200	)
Total	$	(2,466,100	)	$	1,452,900	$	(4,213,100	)	$	252,300

Note 14 – 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. The Company's specific goal is to lower the cost of its borrowed funds, when possible.

On June 5, 2023, the Company entered into a receive-variable (based on 30-Day SOFR)/pay-fixed interest-rate swap agreement related to $18,000,000 of our $21,000,000 Floating Rate Term Loan. This swap is utilized to manage interest-rate exposure over the period of the interest-rate swap and is designated as a highly effective cash-flow hedge. The differential to be paid or received on the swap agreement is accrued as interest rates change and is recognized in interest expense over the life of the agreement. The swap agreement 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 was $11,775,000 on August 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 effective portion of the unrealized gain or loss on this interest-rate swap is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the interest rate swap representing amounts excluded from the assessment of hedge effectiveness are recognized in current earnings.

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

	August 31, 2024		February 29, 2024

Prepaid expenses and other assets	$	-	$	24,400
Other current liabilities	$	20,400	$	-

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

Note 15 – FINANCIAL INSTRUMENTS

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

	-	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 for the Hilti complex was $37,000,000 as of August 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 along with the estimated fair value of equipment held for sale of approximately $1,000,000.
	-	The estimated fair value of our term notes payable is estimated by management to approximate $27,425,500 and $28,152,800 as of August 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 of $(20,400) 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 16 – 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 August 31, 2024 or February 29, 2024 are recorded as deferred revenues on the condensed balance sheets. We received approximately $500,400 and $583,500 as of August 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 17 – SUBSEQUENT EVENTS

On September 18, 2024, the Company executed a Lease Termination Agreement associated with the warehouse and office space located in Layton, Utah. The term of the lease was set to expire on November 30, 2026, however the Landlord agreed to an early termination of the lease which shall be effective October 1, 2024. The Landlord also agreed that there will be no lease termination fee required.

On September 19, 2024, the Company executed a Commercial Real Estate Sale Contract (“Contract”) with Partner Holdings, LLC (“Buyer”) for the Hilti Complex. The agreed upon sale price of the Hilti Complex per the executed Contract totaled $38,250,000 less buyer fees and closing costs. 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. At closing, EDC will assign the existing Hilti tenant lease to the Buyer. EDC will retain sublease rights to the Crusoe Energy System leased space and will execute a separate Triple-Net Lease (the "Lease") for the remaining approximate 218,000 square feet. The Contract does not include the excess land parcel, consisting of approximately 17 acres of undeveloped land adjacent to the Hilti Complex, which will remain under the ownership of EDC. The initial term of the new lease with the Buyer will be for 15 years, and the initial lease rate will be $8.52 per square foot, with 2.5% annual escalations beginning in year two of the lease. The Lease will also include triple-net terms, where the Seller will be responsible for utilities, insurance, property taxes, and regular maintenance, excluding roof and structural maintenance, which will be the Buyer's responsibility. Additionally, the Seller will retain the rights to sublease, subject to buyer approval, any available unused space in the building during the lease term. The Lease will also encompass other standard terms that are customary in the local market.

Subsequent to quarter end, the Company executed the Sixth Amendment to the Existing Credit Agreement with the Lender. The Amendment, effective October 3, 2024, extends the maturity date to January 4, 2025 and includes required step downs on the Revolving Loan to $5.5 million by November 30, 2024.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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,						Six Months Ended August 31,
	2024			2023			2024			2023
Net revenues	$	6,509,200		$	10,593,100		$	16,502,600		$	25,117,100
Cost of goods sold		2,862,500			3,684,300			6,396,500			8,834,700
Gross margin		3,646,700			6,908,800			10,106,100			16,282,400

Operating expenses
Operating and selling		1,385,800			1,916,000			3,265,800			4,313,900
Sales commissions		1,850,900			3,520,300			4,909,700			7,720,100
General and administrative		2,905,500			3,529,100			6,105,100			7,163,600
Total operating expenses		6,142,200			8,965,400			14,280,600			19,197,600

Interest expense		545,700			743,300			1,122,400			1,476,700
Other income		(575,100	)		(4,252,800	)		(1,083,800	)		(4,644,200	)
Earnings (loss) before income taxes		(2,466,100	)		1,452,900			(4,213,100	)		252,300

Income tax expense (benefit)		(662,700	)		391,200			(1,130,700	)		63,400
Net earnings (loss)	$	(1,803,400	)	$	1,061,700		$	(3,082,400	)	$	188,900

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.

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

Total operating expenses not associated with a reporting segment decreased $0.6 million, or 20.7%, to $2.3 million for the three-month period ended August 31, 2024, when compared to $2.9 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a $0.4 million decrease in labor from staff reductions across all departments associated with the reduction in revenues, and a $0.2 million decrease in depreciation expense.

Interest expense decreased $0.2 million, or 28.6%, to $0.5 million for the three months ended August 31, 2024, when compared to $0.7 million for the same quarterly period a year ago due to paydown on the Company’s borrowings, period over period.

Other income decreased $3.7 million, or 86.0%, to $0.6 million for the three months ended August 31, 2024, when compared to $4.3 million for the same quarterly period a year ago resulting from the receipt of the Employee Retention Credit totaling $3.8 million and $0.1 million from the gain on the sale of assets, both in the quarter ended August 31, 2023, offset by a $0.2 million increase in rental income in the quarter ended August 31, 2024 from the new tenant in the Hilti Complex.

Income taxes decreased $1.1 million, or 275.0%, to a tax benefit of $0.7 million for the three months ended August 31, 2024, from a tax expense of $0.4 million for the same quarterly period a year ago, primarily resulting from operating losses in the second quarter ended August 31, 2024. Our effective tax rate stayed the same 26.9% for the quarter ended August 31, 2024 and August 31, 2023. 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, 2024

Total operating expenses not associated with a reporting segment decreased $0.8 million, or 13.8%, to $5.0 million for the six-month period ended August 31, 2024, when compared to $5.8 million for the same period a year ago. Labor expenses decreased $0.6 million from staff reductions across all departments and freight handling costs decreased $0.2 million for the six months ended August 31, 2024, both associated with reduced sales.

Interest expense decreased $0.4 million, or 26.7%, to $1.1 million for the six months ended August 31, 2024, when compared to $1.5 million for the same period a year ago, due to decreased borrowings period over period.

Other income decreased $3.5 million, or 76.1%, to $1.1 million for the six months ended August 31, 2024, when compared to $4.6 million for the same quarterly period a year ago, primarily from the receipt of the Employee Retention Credit totaling $3.8 million and $0.1 million from the gain on the sale of assets, both in the quarter ended August 31, 2023, offset by a $0.2 million increase in rental income from the new tenant in the Hilti Complex and a $0.1 increase in other income related to a Chik-fil-A promotion.

Income taxes decreased $1.2 million, or 1200.0%, to a tax benefit of $1.1 million for the six months ended August 31, 2024, from a tax expense of $0.1 million for the same period a year ago, primarily resulting from operating losses for the six months ended August 31, 2024. Our effective tax rate increased to 26.8% for the six months ended August 31, 2024, from 25.1% for the six months ended August 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.

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PaperPie Operating Results for the Three and Six Months Ended August 31, 2024

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

	Three Months Ended August 31,					Six Months Ended August 31,
	2024			2023		2024		2023
Net revenues	$	5,440,300		$	9,334,000	$	14,340,600	$	21,917,200

Cost of goods sold		2,440,100			3,230,900		5,526,500		7,417,200
Gross margin		3,000,200			6,103,100		8,814,100		14,500,000

Operating expenses
Operating and selling		1,180,100			1,612,900		2,672,900		3,488,300
Sales commissions		1,827,100			3,493,600		4,860,900		7,608,200
General and administrative		463,700			632,400		979,900		1,380,600
Total operating expenses		3,470,900			5,738,900		8,513,700		12,477,100

Operating income	$	(470,700	)	$	364,200	$	300,400	$	2,022,900

Average number of active brand partners		13,900			18,100		13,700		20,600

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

PaperPie net revenues decreased $3.9 million, or 41.9%, to $5.4 million during the three months ended August 31, 2024, when compared to $9.3 million during the same period a year ago. The average number of active brand partners in the second quarter of fiscal 2025 was 13,900, a decrease of 4,200, or 23.2%, from 18,100 average active brand partners selling in the second 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 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 second quarter were also negatively impacted from increased discounts. Discounts as a percentage of sales before discounts and allowances increased from 32.6% in the second quarter of fiscal 2024 to 55.3% in the second quarter of this fiscal year, resulting in less net revenues of approximately $2.2 million. The increased discounts resulted from recruiting promotions to increase band partner levels and additional customer discounts offered to spur sales during the quarter.

Gross margin decreased $3.1 million, or 50.8.%, to $3.0 million during the three months ended August 31, 2024, when compared to $6.1 million during the same period a year ago. Gross margin as a percentage of net revenues for the three months ended August 31, 2024 decreased to 55.1%, compared to 65.4% the same period a year ago, representing a decrease of $0.6 million. The decrease in gross margin as a percentage of net revenues was primarily attributed to increased discounts between the periods related to recruiting promotions and increased customer discounts.

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. 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.

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Total operating expenses decreased $2.2 million, or 38.6%, to $3.5 million during the three-month period ended August 31, 2024, when compared to $5.7 million reported in the same quarter a year ago. Operating and selling expenses decreased $0.4 million, or 25.0%, to $1.2 million during the three-month period ended August 31, 2024, when compared to $1.6 million reported in the same quarter a year ago, primarily due to less freight expense on fewer sales. Sales commissions decreased $1.7 million, or 48.6%, to $1.8 million during the three-month period ended August 31, 2024, when compared to $3.5 million reported in the same quarter a year ago, due to the decrease in net revenues. Sales commissions as a percentage of net revenues decreased from 37.4% to 33.6% 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 $0.1 million, or 16.7%, to $0.5 million during the three months ended August 31, 2024, when compared to $0.6 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.

Operating income (loss) for the PaperPie segment decreased $0.9 million, or 225.0% to an operating loss of $(0.5) million during the three months ended August 31, 2024, when compared to $0.4 million reported in the same quarter a year ago. Operating income (loss) for the PaperPie division decreased primarily from reduced sales; along with additional recruiting and product discounts partially offset by reduced operating expenses.

PaperPie Operating Results for the Six Months Ended August 31, 2024

PaperPie net revenues decreased $7.6 million, or 34.7%, to $14.3 million during the six-month period ended August 31, 2024, compared to $21.9 million from the same period a year ago. The average number of active brand partners in the six-month period ended August 31, 2024 was 13,700, a decrease of 6,900, or 33.5%, from 20,600 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 2025, 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 $5.7 million, or 39.3%, to $8.8 million during the six-month period ended August 31, 2024, when compared to $14.5 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 61.5% for the six-month period ended August 31, 2024, when compared to 66.2% for the same period a year ago. The decrease in gross margin as a percentage of net revenues was primarily attributed to increased recruiting promotions offered to increase brand partner levels and additional discounts offered to customers between the periods to spur sales.

Total operating expenses decreased $4.0 million, or 32.0%, to $8.5 million during the six-month period ended August 31, 2024, from $12.5 million for the same period a year ago. Operating and selling expenses decreased $0.8 million, or 22.9%, to $2.7 million during the six-month period ended August 31, 2024, when compared to $3.5 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 $0.6 million and a $0.2 million decrease in brand partner incentive trip expenses as fewer brand partners are expected to earn the trip this year. Sales commissions decreased $2.7 million, or 35.5%, to $4.9 million during the six-month period ended August 31, 2024, when compared to $7.6 million reported in the same period a year ago, primarily due to the decrease in net revenues. General and administrative expenses decreased $0.4 million, or 28.6%, to $1.0 million, from $1.4 million recognized during the same period last year, due primarily to decreased credit card transaction fees associated with decreased sales volumes totaling $0.2 million and a $0.2 million decrease in payroll expenses.

Operating income of the PaperPie segment decreased $1.7 million, or 85.0%, to $0.3 million during the six months ended August 31, 2024, when compared to $2.0 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, 2024 was 2.1%, compared to 9.2% for the six months ended August 31, 2023. Operating income for the PaperPie division decreased primarily from reduced sales; along with additional recruiting promotions and customer discounts offered to increase brand partner levels and spur sales in the current year.

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Publishing Operating Results for the Three and Six Months Ended August 31, 2024

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

	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Net revenues	$	1,068,900	$	1,259,100	$	2,162,000	$	3,199,900