Educational Development Corporation

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 2025 and fiscal 2026, 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 our remaining Usborne inventory over a period of 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 compensation for our office, warehouse, and sales support staff as well as the cost of operating and maintaining our corporate offices, warehouses and distribution facility.

The following table shows our condensed statements of operations data:

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 May 31, 2026

Total operating expenses not associated with a reporting segment decreased $0.5 million, or 22.7%, to $1.7 million for the three-month period ended May 31, 2026, when compared to $2.2 million for the same quarterly period a year ago. Operating expenses decreased primarily as a result of a $0.2 million decrease in labor expenses and a $0.1 million decrease in freight expense, due primarily to a lower number of outbound shipments, and a $0.1 million decrease in outside services expense as well as a $0.1 million decrease in various other general and administrative expenses.

Interest expense decreased $0.5 million, or 100.0%, to $0.0 million for the three months ended May 31, 2026, when compared to $0.5 million for the same quarterly period a year ago, due to reduced borrowings of debt, period over period.

Income taxes increased $0.4 million, or 100.0%, to $0.0 million expense for the three months ended May 31, 2026, from a tax benefit of $0.4 million for the same quarterly period a year ago, resulting primarily from a decrease in gross sales along with tax valuation allowance offsetting our net operating loss benefit due to the uncertainty that our deferred tax asset will be realizable. Our effective tax rate decreased to (1.2)% for the quarter ended May 31, 2026, from 25.8% for the quarter ended May 31, 2025 due primarily to sales mix fluctuations between states and the tax valuation allowance booked during the quarter. Our tax rates are lower than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes offset by the tax valuation allowance.

PaperPie Operating Results for the Three Months Ended May 31, 2026

The following table summarizes the operating results of the PaperPie segment for the three months ended May 31, 2026 and 2025:

PaperPie Operating Results for the Three Months Ended May 31, 2026

PaperPie net revenues decreased $1.9 million, or 31.1%, to $4.2 million during the three months ended May 31, 2026, when compared to $6.1 million during the same period a year ago. The average number of active brand partners in the first quarter of fiscal 2027 was 5,300, a decrease of 2,400, or 31.2%, from 7,700 average active brand partners selling in the first quarter of fiscal 2026. The Company reports the average number of active Brand Partners as a key indicator for this division. Recruiting and maintaining Brand Partners has been negatively impacted by several factors including inflation and our distribution agreement with Usborne whereby Usborne actively sells their products through discounted retailers in the U.S. market. Inflation was most evident in the increase of food and fuel prices, both impacting the disposable income of our target customer base, which is families with small children. Sales during fiscal 2026 continued to be negatively impacted by continuing inflationary pressures and we expect this to continue into the next fiscal year, 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.

Recent sales levels have also been impacted by the lack of new titles being introduced and certain out-of-stock items due to purchasing restrictions placed on us from our lender in the first three quarters of fiscal year 2026. Following the sale of the Hilti Complex in fiscal 2026 and corresponding payoff of the revolver and term loans with our bank which removed our purchasing restrictions, we have begun a conservative plan to place reorders and purchase new titles. The Company is returning to our past practice of introducing new titles, along with additional enhancements to our PaperPie e-commerce and “Backoffice” systems that are expected to create existing Brand Partner excitement and should increase our number of new recruits in this division.

PaperPie gross margin decreased $1.1 million, or 30.6%, to $2.5 million during the three months ended May 31, 2026, when compared to $3.6 million during the same period a year ago. Gross margin as a percentage of net revenues for the three months ended May 31, 2026 increased to 59.7%, compared to 59.3% the same period a year ago. The increase in gross margin as a percentage of net revenues was primarily attributed to product mix.

Total PaperPie operating expenses decreased $1.0 million, or 32.3%, to $2.1 million during the three-month period ended May 31, 2026, when compared to $3.1 million reported in the same quarter a year ago. Operating and selling expenses decreased $0.2 million, or 28.6%, to $0.5 million during the three-month period ended May 31, 2026, when compared to $0.7 million reported in the same quarter a year ago. These decreased expenses were due to a $0.1 million decrease in shipping costs associated with the decrease in volume of orders shipped and a decrease of $0.1 million in accruals for Brand Partner incentive trip expenses. Sales commissions decreased $0.7 million, or 35.0%, to $1.3 million during the three-month period ended May 31, 2026, when compared to $2.0 million reported in the same quarter a year ago, due primarily to the decrease in net revenues. General and administrative expenses decreased $0.1 million, or 25.0%, to $0.3 million during the three months ended May 31, 2026, when compared to $0.4 million during the same period a year ago. This decrease was due to a $0.1 million decrease in depreciation expense associated with the discontinued operation of line equipment currently in assets held for sale.

Operating income for the PaperPie segment decreased $0.1 million, or 20.0% to $0.4 million during the three months ended May 31, 2026, when compared to $0.5 million reported in the same quarter a year ago. Operating income for the PaperPie division as a percentage of net revenues for the year ended May 31, 2026 was 9.1%, compared to 7.6% for the year ended May 31, 2025, an increase of 1.5%. Operating income as a percentage of net revenues changed from the prior year primarily due to both the decrease in operating and selling expenses and general and administrative expenses compared to last fiscal year.

Publishing Operating Results for the Three Months Ended May 31, 2026

The following table summarizes the operating results of the Publishing segment for the three months ended May 31, 2026 and 2025:

Publishing Operating Results for the Three Months Ended May 31, 2026

Our Publishing division’s net revenues decreased $0.4 million, or 40.0%, to $0.6 million during the three-month period ended May 31, 2026, from $1.0 million reported in the same period a year ago. The change in net revenues was primarily from an overall sales volume decrease that was driven by the decrease in new titles available to present to our retail customers due to the purchasing restrictions in fiscal 2026 imposed by our lender.

Gross margin decreased $0.2 million, or 40.0%, to $0.3 million during the three-month period ended May 31, 2026, from $0.5 million reported in the same quarter a year ago, primarily due to the decrease in net revenues. Gross margin as a percentage of net revenues increased to 56.7% during the three-month period ended May 31, 2026, from 52.2% reported in the same quarter a year ago. Gross margin as a percentage of net revenues changed primarily from additional discounts offered to retail customers in the first quarter of last year to spur sales.

Total operating expenses of the Publishing segment decreased $0.1 million, or 33.4%, to $0.2 million, from $0.3 million, during the three-month periods ended May 31, 2026 and 2025, respectively. This change was primarily due to a $0.1 million decrease in different general and administrative expenses associated with the decrease in volume of orders shipped.

Operating income of the Publishing division decreased $0.1 million, or 50.0%, to $0.1 from $0.2 million for the three-month periods ending May 31, 2026 and 2025, respectively. Operating income for the Publishing division as a percentage of net revenues for the year ended May 31, 2026 was 15.7%, compared to 20.0% for the year ended May 31, 2025, a decrease of 4.3%. Operating income as a percentage of net revenues changed from the prior year primarily due to the decrease in operating and selling expenses compared to last fiscal year.

Liquidity and Capital Resources

Prior to the last two fiscal years, which have been challenged with higher product discounting to spur sales and increased interest rates on borrowings, 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 excess 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 until it returns to profitability. In addition, the Company sold its owned real estate and paid off the revolving line of credit and term debts with our bank. Available cash has historically been used to pay down the outstanding bank loan balances, for capital expenditures, to pay dividends, and to acquire treasury stock.

During the first three months of fiscal year 2027, we experienced positive cash inflows from operations of $564,300. These cash inflows resulted from:

Adjusted for:

Offset by:

Positively impacted by:

Negatively impacted by:

Cash used in investing activities was $95,200 for capital expenditures, consisting of $96,000 in upgrades to our proprietary systems that our PaperPie Brand Partners use to monitor their business and place customer orders offset by $800 from the sale of machinery and equipment.

The Company continues to expect the cash generated from operations, specifically from the reduction of excess inventory, will provide us with the liquidity we need to support ongoing operations. Additionally, we have obtained a $2 million short-term loan to fund any short-term cash flow needs. Cash generated from operations will be used to acquire new inventory and pay down any short-term borrowings we expect to obtain.

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, provision for credit losses, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report and in our audited financial statements as of and for the year ended February 28, 2026 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.

Leases

Our lessee arrangements include six rental agreements where we have the exclusive use of dedicated office space in San Diego, California, Ogden, Utah, a warehouse space in Joplin, Missouri and three leases for office and warehouse space locally in Tulsa, Oklahoma, all of which qualify as operating leases under ASC 842.

We recognize an operating lease liability 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 operating lease liabilities. Payments in excess of twelve months are classified as long-term operating lease liabilities. We also recognize an operating lease right-of-use asset on the balance sheets, valued at the lease liability and adjusted for prepaid or accrued rent balances existing at the time of initial recognition. The operating lease liability and right-of-use assets are reduced over the term of the lease as payments are made and the assets are used.

The Company assesses its leases to determine whether it is reasonably certain that these renewal options will be exercised. In general, most of the office space outside of Tulsa, Oklahoma is associated with remote employees. Their continued employment determines the need for this space. Much of the warehouse space outside of the Hilti Complex is used to store non-current inventory. As the Company sells down excess inventory, less outside space will be needed, and any renewals will be for less space. The Company also considered the renewal options for the operating lease at the Hilti Complex and is not reasonably certain to exercise the renewal options. Accordingly, the renewal options are not included in the calculation of its right-of-use assets and lease liabilities, as the Company does not believe that it is reasonably certain that these renewal options will be exercised.

 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 an 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 May 31, 2026 and February 28, 2026, respectively.

Inventory

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

Certain inventory is maintained in a non-current classification. Management continually estimates and calculates the amount of non-current 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, as well as reduced sales volumes. 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 $21.0 million and $21.1 million at May 31, 2026 and February 28, 2026, respectively. Noncurrent inventory valuation allowances were $0.9 million at May 31, 2026 and $0.8 million at February 28, 2026.

Brand Partners that meet certain eligibility requirements may request and receive inventory on consignment. We believe allowing 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 19.5% of our active Brand Partners maintained consignment inventory at the end of the first quarter of fiscal year 2027. 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 $1.0 million and $1.1 million at May 31, 2026 and February 28, 2026, 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 at May 31, 2026 and February 28, 2026.