Educational Development Corp 10-Q for FY2025 Q2
Educational Development Corp (EDUC)
About this 10-Q
Educational Development Corp filed this 10-Q on October 10, 2024, covering the quarter ended August 31, 2024 (FY2025 Q2).
Headline figures
Quarter ended August 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $6.51M
- down 38.6% from $10.59M a year earlier
- Net loss
- $1.8M
- compared with net income of $1.06M a year earlier
- Diluted EPS
- -$0.22
- compared with $0.13 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to .
Commission file number:
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
| | | |
| (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. | |
|
| |
| 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). | |
|
| |
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 ☐ |
|
|
|
|
|
| | 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
TABLE OF CONTENTS
|
|
|
Page |
|
PART I. FINANCIAL INFORMATION |
|
|
|
Item 1. |
5 |
|
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
21 |
|
Item 3. |
31 |
|
|
Item 4. |
31 |
|
|
|
|
|
|
PART II. OTHER INFORMATION |
|
|
|
Item 1. |
32 |
|
|
Item 1A. |
32 |
|
|
Item 2. |
32 |
|
|
Item 3. |
32 |
|
|
Item 4. |
32 |
|
|
Item 5. |
32 |
|
|
Item 6. |
33 |
|
|
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.
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 |
$ | $ | ||||||
|
Restricted cash |
||||||||
| Accounts receivable, less allowance for credit losses of $ |
||||||||
|
Inventories - net |
||||||||
|
Prepaid expenses and other assets |
||||||||
|
Assets held for sale |
||||||||
|
Total current assets |
||||||||
|
INVENTORIES - net |
||||||||
|
PROPERTY, PLANT AND EQUIPMENT - net |
||||||||
|
DEFERRED INCOME TAX ASSET |
||||||||
|
OPERATING LEASE RIGHT-OF-USE ASSETS |
||||||||
|
OTHER ASSETS |
||||||||
|
TOTAL ASSETS |
$ | $ | ||||||
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
||||||||
|
CURRENT LIABILITIES: |
||||||||
|
Accounts payable |
$ | $ | ||||||
|
Line of credit |
||||||||
|
Deferred revenues |
||||||||
|
Operating lease liabilities, current |
||||||||
|
Current maturities of long-term debt |
||||||||
|
Accrued salaries and commissions |
||||||||
|
Income taxes payable |
||||||||
|
Other current liabilities |
||||||||
|
Total current liabilities |
||||||||
|
LONG-TERM DEBT - net |
||||||||
|
OPERATING LEASE LIABILITIES, non-current |
||||||||
|
OTHER LONG-TERM LIABILITIES |
||||||||
|
Total liabilities |
||||||||
|
SHAREHOLDERS' EQUITY: |
||||||||
| Common stock, $ Issued Outstanding |
||||||||
|
Capital in excess of par value |
||||||||
|
Retained earnings |
||||||||
|
Accumulated other comprehensive income (loss) |
( |
) | ||||||
|
Less treasury stock, at cost |
( |
) | ( |
) | ||||
|
Total shareholders' equity |
||||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
$ | $ | ||||||
See notes to condensed financial statements (unaudited).
|
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 |
$ | $ | $ | $ | ||||||||||||
|
Transportation revenue |
||||||||||||||||
|
NET REVENUES |
||||||||||||||||
|
COST OF GOODS SOLD |
||||||||||||||||
|
Gross margin |
||||||||||||||||
|
OPERATING EXPENSES |
||||||||||||||||
|
Operating and selling |
||||||||||||||||
|
Sales commissions |
||||||||||||||||
|
General and administrative |
||||||||||||||||
|
Total operating expenses |
||||||||||||||||
|
INTEREST EXPENSE |
||||||||||||||||
|
OTHER INCOME |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
EARNINGS (LOSS) BEFORE INCOME TAXES |
( |
) | ( |
) | ||||||||||||
|
INCOME TAX EXPENSE (BENEFIT) |
( |
) | ( |
) | ||||||||||||
|
NET EARNINGS (LOSS) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE |
||||||||||||||||
|
Basic |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
Diluted |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING |
||||||||||||||||
|
Basic |
||||||||||||||||
|
Diluted |
||||||||||||||||
|
Dividends per share |
$ | $ | $ | $ | ||||||||||||
See notes to condensed financial statements (unaudited).
|
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) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
Other comprehensive income (loss): |
||||||||||||||||
|
Unrealized gain (loss) on interest rate exchange agreement |
( |
) | ( |
) | ||||||||||||
|
Comprehensive income (loss) |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
See notes to condensed financial statements (unaudited).
|
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 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
|
Sale of treasury stock |
- | - | ( |
) | - | - | ( |
) | ||||||||||||||||||||||||
|
Share-based compensation expense - net |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Change in fair value of interest rate exchange agreement |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Net loss |
- | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||||||||||||
|
BALANCE - May 31, 2024 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
|
Sale of treasury stock |
- | - | ( |
) | - | - | ( |
) | ||||||||||||||||||||||||
|
Share-based compensation expense - net |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Change in fair value of interest rate exchange agreement |
- | - | - | - | ( |
) | - | - | ( |
) | ||||||||||||||||||||||
|
Net loss |
- | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||||||||||||
|
BALANCE - August 31, 2024 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
|
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 |
$ | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||||||||||||
|
Purchases of treasury stock |
- | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||
|
Share-based compensation expense - net |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Net loss |
- | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||||||||||||
|
BALANCE - May 31, 2023 |
$ | $ | $ | $ | - | $ | ( |
) | $ | |||||||||||||||||||||||
|
Forfeiture of restricted shares |
- | - | - | - | - | - | - | |||||||||||||||||||||||||
|
Share-based compensation expense - net |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Unrealized gain on interest rate exchange agreement |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
Net earnings |
- | - | - | - | - | - | ||||||||||||||||||||||||||
|
BALANCE - August 31, 2023 |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||||||
See notes to condensed financial statements (unaudited).
|
EDUCATIONAL DEVELOPMENT CORPORATION |
|
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) |
|
Six Months Ended August 31, |
||||||||
|
2024 |
2023 |
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
|
Net earnings (loss) |
$ | ( |
) | $ | ||||
|
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |
||||||||
|
Depreciation and amortization |
||||||||
|
Deferred income taxes |
( |
) | ( |
) | ||||
|
Provision for credit losses |
||||||||
|
Provision for inventory valuation allowance |
||||||||
|
Share-based compensation expense - net |
||||||||
|
Net loss (gain) on sale of assets |
( |
) | ||||||
|
Changes in assets and liabilities: |
||||||||
|
Accounts receivable |
( |
) | ||||||
|
Inventories - net |
||||||||
|
Prepaid expenses and other assets |
( |
) | ||||||
|
Accounts payable |
( |
) | ||||||
|
Accrued salaries and commissions and other liabilities |
( |
) | ( |
) | ||||
|
Deferred revenues |
( |
) | ||||||
|
Income taxes payable/receivable |
||||||||
|
Total adjustments |
||||||||
|
Net cash provided by operating activities |
||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
|
Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
|
Proceeds from sale of assets |
||||||||
|
Net cash used in investing activities |
( |
) | ( |
) | ||||
|
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
|
Payments on term debt |
( |
) | ( |
) | ||||
|
Cash paid to acquire treasury stock |
( |
) | ||||||
|
Sales of treasury stock |
||||||||
|
Net borrowings (payments) under line of credit |
( |
) | ||||||
|
Net cash used in financing activities |
( |
) | ( |
) | ||||
|
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
( |
) | ||||||
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - BEGINNING OF PERIOD |
||||||||
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH - END OF PERIOD |
$ | $ | ||||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION |
||||||||
|
Cash paid for interest |
$ | $ | ||||||
|
Cash paid for income taxes (net of refunds) |
$ | $ | ||||||
See notes to condensed financial statements (unaudited).
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 $
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
|
August 31, 2024 |
August 31, 2023 |
|||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Restricted cash |
||||||||
|
Total cash, cash equivalents and restricted cash shown in the condensed statements of cash flows |
$ | $ | ||||||
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
During the second quarter of fiscal year 2025, the Company entered into a triple-net lease agreement for approximately
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 $
Note 4 – INVENTORIES
|
August 31, 2024 |
February 29, 2024 |
|||||||
|
Current: |
||||||||
|
Product inventory |
$ | $ | ||||||
|
Inventory valuation allowance |
( |
) | ( |
) | ||||
|
Inventories net – current |
$ | $ | ||||||
|
Noncurrent: |
||||||||
|
Product inventory |
$ | $ | ||||||
|
Inventory valuation allowance |
( |
) | ( |
) | ||||
|
Inventories net – noncurrent |
$ | $ | ||||||
Inventory in transit totaled $
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 | $ | $ | ||||||
| Operating lease liabilities: | ||||||||
| Current lease liabilities | $ | $ | ||||||
| Long-term lease liabilities | $ | $ | ||||||
| Weighted-average remaining lease term (months) | | |||||||
| Weighted-average discount rate | % | % | ||||||
Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses in our 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 |
$ | $ | $ | $ | ||||||||||||
|
Years ending February 28 (29), |
||||
|
2025 |
$ | |||
|
2026 |
||||
|
2027 |
||||
|
Total future minimum rental payments |
||||
|
Less: imputed interest |
( |
) | ||
|
Total operating lease liabilities |
$ |
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 |
$ | $ | $ | $ | ||||||||||||
Operating Leases – Lessor
In connection with the 2015 purchase of the Hilti Complex, we entered into a
On May 26, 2024, the Company entered into a triple-net lease agreement for approximately
|
Years ending February 28 (29), |
||||
|
2025 |
$ | |||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
2029 |
||||
|
Thereafter |
||||
|
Total |
$ |
The cost of the leased space was $
Note 6 – DEBT
Debt consists of the following:
|
August 31, 2024 |
February 29, 2024 |
|||||||
|
Line of credit |
$ | $ | ||||||
|
Floating rate term loan |
$ | $ | ||||||
|
Fixed rate term loan |
||||||||
|
Total term debt |
||||||||
|
Less current maturities |
( |
) | ( |
) | ||||
|
Less debt issue cost |
( |
) | ( |
) | ||||
|
Long-term debt, net |
$ | $ | ||||||
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 $
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
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 $
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 $
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 $
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 $
Available credit under the current $
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 |
|
| (ii) | $ |
|
| (iii) | $ |
|
| (iv) | $ |
|
| (v) | Revolving Loan allows for Letters of Credit upon bank approval (none were outstanding at August 31, 2024) |
|
Years ending February 28 (29), |
||||
|
2025 |
$ | |||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
Total |
$ |
Note 7 – OTHER INCOME
|
Three Months Ended August 31, |
Six Months Ended August 31, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Federal tax credits realized |
$ | $ | $ | $ | ||||||||||||
|
Rental income |
||||||||||||||||
|
Other |
||||||||||||||||
|
Total other income |
$ | $ | $ | $ | ||||||||||||
As a response to the COVID-19 outbreak, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which contained a number of programs to assist workers, families and businesses. Part of the CARES Act provides an Employee Retention Credit (“ERC”) which is a refundable tax credit against certain employment taxes equal to 50% of qualified wages paid, up to $10,000 per employee annually, from March 12, 2020 through January 1, 2021. Additional relief provisions were passed by the U.S. government, which extended and expanded the qualified wage caps on these credits to 70% of qualified wages paid, up to $10,000 per employee per quarter, through September 30, 2021. Due to the subjectivity of the credit, the Company elected to account for the ERC as a gain analogizing to ASC 450-30, Gain Contingencies.
During the quarter ended August 31, 2023, the Department of Treasury notified the Company of ERC credits awarded under the CARES Act for the first three quarters of calendar 2021. During August 2023, the Company received three refund payments resulting from amended 2021 Q1, Q2 and Q3 941-X returns that were filed. As a result of receiving these refund payments, the Company is required to file amended fiscal 2021 and 2022 corporate income tax returns reducing the wages expense deduction associated with the credit received. The Company has recognized estimated federal and state tax liabilities associated with these amended returns of approximately $
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 $
|
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 |
$ | $ | $ | $ | ||||||||||||
|
% of total PaperPie Product revenues, net of discounts |
% | % | % | % | ||||||||||||
|
Publishing division |
||||||||||||||||
|
% of total Publishing Product revenues, net of discounts |
% | % | % | % | ||||||||||||
|
Total Product revenues, net of discounts of Usborne products |
$ | $ | $ | $ | ||||||||||||
|
Purchases received by product type: |
||||||||||||||||
|
Usborne |
$ | $ | $ | $ | ||||||||||||
|
% of total purchases received |
% | % | % | % | ||||||||||||
|
All other product types |
||||||||||||||||
|
% of total purchases received |
% | % | % | % | ||||||||||||
|
Total purchases received |
$ | $ | $ | $ | ||||||||||||
Total Usborne inventory owned by the Company and included in our condensed balance sheets was $
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.
|
Three Months Ended August 31, |
Six Months Ended August 31, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Earnings (loss): |
||||||||||||||||
|
Net earnings (loss) applicable to common shareholders |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
Weighted average shares: |
||||||||||||||||
|
Weighted average shares outstanding-basic |
||||||||||||||||
|
Issued unvested restricted stock and assumed shares issuable under granted unvested restricted stock awards |
||||||||||||||||
|
Weighted average shares outstanding-diluted |
||||||||||||||||
|
Earnings (loss) per share: |
||||||||||||||||
|
Basic |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
Diluted |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
|
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 |
||||||||||||||||
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 $
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.
In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”).
In July 2021, our shareholders approved the Company’s 2022 Long-Term Incentive Plan (“2022 LTI Plan”).
During fiscal year 2019, the Company granted
During fiscal year 2021, the Company granted
|
Three Months Ended August 31, |
Six Months Ended August 31, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Share-based compensation expense |
$ | $ | $ | $ | ||||||||||||
|
Less reduction of expense for forfeitures |
( |
) | ( |
) | ||||||||||||
|
Share-based compensation expense - net |
$ | $ | $ | $ | ||||||||||||
|
Shares |
Weighted Average Fair Value (per share) |
|||||||
|
Outstanding at February 29, 2024 |
$ | |||||||
|
Granted |
||||||||
|
Vested |
||||||||
|
Forfeited |
||||||||
|
Outstanding at August 31, 2024 |
$ | |||||||
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 $
Note 13 – BUSINESS SEGMENTS
We have
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.
|
NET REVENUES |
||||||||||||||||
|
Three Months Ended August 31, |
Six Months Ended August 31, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
PaperPie |
$ | $ | $ | $ | ||||||||||||
|
Publishing |
||||||||||||||||
|
Total |
$ | $ | $ | $ | ||||||||||||
|
EARNINGS (LOSS) BEFORE INCOME TAXES |
||||||||||||||||
|
Three Months Ended August 31, |
Six Months Ended August 31, |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
PaperPie |
$ | ( |
) | $ | $ | $ | ||||||||||
|
Publishing |
||||||||||||||||
|
Other |
( |
) | ( |
) | ( |
) | ||||||||||
|
Total |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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 $
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.
|
August 31, 2024 |
February 29, 2024 |
|||||||
|
Prepaid expenses and other assets |
$ | $ | ||||||
|
Other current liabilities |
$ | $ | ||||||
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 $ |
|
| - | The estimated fair value of our term notes payable is estimated by management to approximate $ |
|
| - | The fair value of the Company’s interest rate swap of $( |
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 $
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 $
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 $
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.
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.
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.
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.
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 | ||||||||
|
Cost of goods sold |
422,400 | 453,400 | 870,000 | 1,417,500 | ||||||||||||
|
Gross margin |
646,500 | 805,700 | 1,292,000 | 1,782,400 | ||||||||||||
|
Total operating expenses |
391,300 | 369,100 | 805,200 | 885,800 | ||||||||||||
|
Operating income |
$ | 255,200 | $ | 436,600 | $ | 486,800 | $ | 896,600 | ||||||||
Publishing Operating Results for the Three Months Ended August 31, 2024
Our Publishing division’s net revenues decreased $0.2 million, or 15.4%, to $1.1 million during the three-month period ended August 31, 2024, from $1.3 million reported in the same period a year ago. During the quarter ended August 31, 2023, the company received a large order from not-for-profit customer order totaling $0.4 million that did not repeat in the quarter ended August 31, 2024, partially offset by $0.2 million of increased customer orders between the periods.
Gross margin decreased $0.2 million, or 25.0%, to $0.6 million during the three-month period ended August 31, 2024, from $0.8 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 decreased to 60.5% during the three-month period ended August 31, 2024, from 64.0% reported in the same quarter a year ago. Gross margin as a percentage of net revenues changed primarily due to large customer order received in the quarter ended August 31, 2023 with higher margin products that did repeat this year.
Total operating expenses of the Publishing segment remained consistent at $0.4 million during the three-month periods ended August 31, 2024 and 2023.
Operating income of the Publishing division decreased $0.1 million or 25.0% to $0.3 million during the three-month period ended August 31, 2024 from $0.4 million for the three-month period ended August 31, 2023, respectively. The decrease in operating income was primarily associated with the decline in net revenues compared to the previous period.
Publishing Operating Results for the Six Months Ended August 31, 2024
Our Publishing division’s net revenues decreased by $1.0 million, or 31.3%, to $2.2 million during the six-month period ended August 31, 2024, from $3.2 million reported in the same period a year ago primarily due to the stoppage of distribution of Usborne products between the periods. Usborne sales in the first quarter of fiscal 2024 totaled $1.3 million.
Gross margin decreased $0.5 million, or 27.8%, to $1.3 million during the six-month period ended August 31, 2024, from $1.8 million reported in the same period a year ago. Gross margin as a percentage of net revenues increased to 59.8%, during the six-month period ended August 31, 2024, from 55.7% 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 $0.1 million, or 11.1%, to $0.8 million during the six-month period ended August 31, 2024, from $0.9 million reported in the same period a year ago. This change was due to a $0.1 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 $0.4 million, or 44.4%, to $0.5 million during the six-month period ended August 31, 2024 when compared to $0.9 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 operating losses, EDC will reduce purchases and sell through inventory to generate cash flow. The Company expects to reduce current excess inventory levels and use the cash proceeds to offset any future operating losses, and to pay down the line of credit and portions of the term debt. Available cash has historically been used to pay down outstanding bank loan balances, for capital expenditures, to pay dividends and to acquire treasury stock. We 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 2025, our revolving bank credit facility loan balance was $6.1 million with $0.9 million in available capacity.
During the first six months of fiscal year 2025, we experienced positive cash inflows from operations of $335,500. These cash inflows resulted from:
●net loss of $3,082,400
Adjusted for:
●depreciation and amortization expense of $972,200
●share-based compensation expense, net of $201,600
●provision for inventory allowance of $191,300
●provision for credit losses of $41,600
Offset by:
●deferred income taxes of $959,700
●net loss on sale of assets of $3,700
Positively impacted by:
●decrease in inventories, net of $5,120,400
●increase in income taxes payable of $353,500
Negatively impacted by:
●decrease in accrued salaries and commissions, and other liabilities of $693,600
●increase in accounts receivable of $183,800
●decrease in accounts payable of $1,287,200
●increase in prepaid expenses and other assets of $259,000
●decrease in deferred revenues of $83,100
Cash used in investing activities was $196,000 for capital expenditures, consisting of $200,000 in new software development costs to add new features to our proprietary systems that PaperPie Brand Partners use to monitor their business and place customer orders and offset by $4,000 from the sale of machinery and equipment.
Cash used in financing activities was $286,500, which was comprised of net borrowings on the line of credit of $600,000 and $13,500 from the sale of treasury stock, offset by payments on term debt of $900,000.
We continue to expect the cash generated from our operations, specifically from the reduction of excess inventory, and cash available through our line of credit with our Lender will provide us with the liquidity we need to support ongoing operations. Cash generated from operations will be used to purchase inventory in order to expand our product offerings and to pay down existing debt.
On August 9, 2022, the Company executed a Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma” or the “Lender”). The Loan Agreement established a fixed rate term loan in the principal amount of $15,000,000 (the “Fixed Rate Term Loan”), a floating rate term loan in the principal amount of $21,000,000 (the “Floating Rate Term Loan”; 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 uses 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%. 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.
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 400,000 square feet building complex on approximately 50 acres, along with approximately 15 acres of adjacent unused land, in July of 2023 with a market value of $41,970,000.
On 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. 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.
Features of the Loan Agreement (as amended) at August 31, 2024 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 |
Risks and Uncertainties
In accordance with ASC 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.
The short-term duration of the Revolving Loan and uncertainty of the bank’s ongoing support beyond January 4, 2025, 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. 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.
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 29, 2024 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.
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 2025, the Company recognized $0.2 million of compensation expense associated with the shares granted.
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 for August 31, 2024 and February 29, 2024, respectively.
Allowance for Credit Losses
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 “credit losses”). An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends. Management has estimated and included an allowance for credit losses of $0.1 million for both August 31, 2024 and February 29, 2024.
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. Inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory. These inventory quantities have additional exposure for storage damages, aging of topical related content and associated issues, and therefore have higher obsolescence reserves. Noncurrent inventory balances prior to valuation allowances were $15.5 million and $12.3 million as of August 31, 2024 and February 29, 2024, respectively. Noncurrent inventory valuation allowances were $0.7 million and $0.6 million as of August 31, 2024 and February 29, 2024, respectively.
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 11.3% of our active Brand Partners have maintained consignment inventory at the end of the second quarter of fiscal year 2025. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total cost of inventory on consignment with Brand Partners was $1.2 million and $1.4 million at August 31, 2024 and February 29, 2024, respectively.
Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected to be sold or returned to the Company. Management estimates the inventory obsolescence allowance for both current and noncurrent inventory, which is based on management’s identification of slow-moving inventory. Management has estimated a valuation allowance for both current and noncurrent inventory, including the reserve for consigned inventory, of $1.2 million and $1.0 million at August 31, 2024 and February 29, 2024, respectively.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. CONTROLS AND PROCEDURES
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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
Item 1A. RISK FACTORS
Not required by smaller reporting company.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Period |
Total # of Shares Purchased |
Average Price Paid per Share |
Total # of Shares Purchased as Part of Publicly Announced Plan (1) |
Maximum # of Shares that may be Repurchased under the Plan (1) |
||||||||||||
|
June 1 - 30, 2024 |
- | $ | - | - | 376,393 | |||||||||||
|
July 1 - 31, 2024 |
- | - | - | 376,393 | ||||||||||||
|
August 1 - 31, 2024 |
- | - | - | 376,393 | ||||||||||||
|
Total |
- | $ | - | - | ||||||||||||
|
(1) |
|
On February 4, 2019 the Board of Directors approved a new stock repurchase plan, replacing the former 2008 stock repurchase plan. The maximum number of shares which can be purchased under the new plan is 800,000. The amounts in the table reflect the remaining number of shares available to be repurchased. This plan has no expiration date. |
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
None.
Item 5. OTHER INFORMATION
Item 6. EXHIBITS
|
3.1* |
|
Restated Certificate of Incorporation dated April 26, 1968 and Certificate of Amendment thereto dated June 21, 1968 are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10-K (File No. 0-04957). |
|
|
|
|
|
3.2* |
|
Certificate of Amendment of Restated Certificate of Incorporation dated August 27, 1977 is incorporated herein by reference to Exhibit 20.1 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957). |
|
|
|
|
|
3.3* |
|
By-Laws, as amended, are incorporated herein by reference to Exhibit 20.2. to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-04957). |
|
|
|
|
|
3.4* |
|
Certificate of Amendment of Restated Certificate of Incorporation dated November 17, 1986 is incorporated herein by reference to Exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-04957). |
|
|
|
|
|
3.5 |
|
|
|
|
|
|
|
3.6 |
|
|
|
|
|
|
|
3.7 |
|
|
|
|
|
|
|
10.1 |
|
|
|
|
|
|
|
10.2 |
|
|
|
|
|
|
|
10.3 |
|
|
|
|
|
|
|
10.4 |
|
|
|
|
|
|
|
10.5 |
|
|
|
|
|
|
|
10.6 |
|
|
|
|
|
|
|
10.7 |
|
|
|
10.8 |
|
|
|
31.1** |
|
|
|
|
|
|
|
31.2** |
|
|
|
|
|
|
|
32.1** |
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document |
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema |
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase |
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase |
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase |
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase |
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Paper Filed
** Filed Herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
||
|
|
EDUCATIONAL DEVELOPMENT CORPORATION (Registrant) |
|
|
|
|
|
|
|
|
|
|
Date: October 10, 2024 |
By |
/s/ Craig M. White |
|
|
|
Craig M. White President and Chief Executive Officer (Principal Executive Officer) |
|
|
||
|
|
|
|
|
Date: October 10, 2024 |
By |
/s/ Dan E. O’Keefe |
|
|
|
Dan E. O’Keefe Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) |
Exhibit 31.1
CERTIFICATION
I, Craig M. White, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Educational Development Corporation; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
|
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: October 10, 2024
/s/ Craig M. White
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, Dan E. O’Keefe, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Educational Development Corporation; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
|
|
b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
|
|
c. |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
|
|
|
|
|
d. |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
|
5. |
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
|
|
a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
|
|
|
|
|
b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: October 10, 2024
/s/ Dan E. O’Keefe
Chief Financial Officer and Corporate Secretary
(Principal Financial and Accounting Officer)
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
In connection with the quarterly report of Educational Development Corporation (the “Company”) on Form 10-Q for the period ended August 31, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: October 10, 2024 |
By |
/s/ Craig M. White |
|
|
|
Craig M. White President and Chief Executive Officer (Principal Executive Officer) |
|
Date: October 10, 2024 |
By |
/s/ Dan E. O’Keefe |
|
|
|
Dan E. O’Keefe Chief Financial Officer and Corporate Secretary (Principal Financial and Accounting Officer) |