EDUCATIONAL DEVELOPMENT CORP

Previous wording

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.

Current wording

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 the previous fiscal years, 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.

Previous wording

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.

Current wording

Total operating expenses not associated with a reporting segment decreased $0.1 million, or 5.0%, to $1.9 million for the three-month period ended August 31, 2026, when compared to $2.0 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 from staff reductions across all departments, offset by a $0.1 million increase in building rent due to the sale and leaseback of the Hilti Complex in the third quarter of fiscal year 2026.

Previous wording

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.

Current wording

Interest expense decreased $0.6 million, or 100.0%, to $0.0 million for the three months ended August 31, 2026, when compared to $0.6 million for the same quarterly period a year ago, due to paying off all our debt in third quarter of fiscal year 2026.

Previous wording

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.

Current wording

Income taxes increased $0.5 million, or 100.0%, to a tax expense of $0.0 million for the three months ended August 31, 2026, from a tax benefit of $0.5 million for the same quarterly period a year ago, resulting primarily from a decrease in gross sales along with a 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 (1.1) % for the quarter ended August 31, 2026, from 26.0% for the quarter ended August 31, 2025 due primarily to sales 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.

Previous wording

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

Current wording

PaperPie Operating Results for the Three and Six Months Ended August 31, 2026

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

PaperPie net revenues decreased $0.5 million, or 13.5%, to $3.2 million during the three months ended August 31, 2026, when compared to $3.7 million during the same quarterly period a year ago. The average number of active brand partners in the second quarter of fiscal 2027 was 5,100, a decrease of 700, or 12.1%, from 5,800 average active brand partners selling in the second 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 with 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 the quarter continued to be negatively impacted by continuing inflationary pressures and we expect this to continue through the rest of the 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.

Previous wording

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.

Current wording

PaperPie gross margin decreased $0.3 million, or 13.6%, to $1.9 million during the three months ended August 31, 2026, when compared to $2.2 million during the same quarterly period a year ago. Gross margin as a percentage of net revenues for the three-months ended August 31, 2026 increased to 61.4% when compared to 57.9% for the same quarterly period a year ago. The increase in gross margin as a percentage of net revenues was primarily attributed to product mix and more discounts offered to spur sales in the previous fiscal year.

Previous wording

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.

Current wording

Total PaperPie operating expenses decreased $0.4 million, or 18.2%, to $1.8 million during the three-month period ended August 31, 2026, when compared to $2.2 million reported in the same quarter a year ago. Operating and selling expenses decreased $0.2 million, or 33.3%, to $0.4 million during the three-month period ended August 31, 2026, when compared to $0.6 million reported in the same quarterly period a year ago. The decrease in operating and selling expenses was due to a $0.1 million decrease in shipping costs associated with the decrease in volume of orders shipped and a $0.1 million decrease in accruals for Brand Partner incentive trip expenses, as the division expects less trip earners this year. Sales commissions decreased $0.1 million, or 8.3%, to $1.1 million during the three-month period ended August 31, 2026, when compared to $1.2 million reported in the same quarterly period 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 August 31, 2026, when compared to $0.4 million during the same quarterly period a year ago. This decrease was due to a $0.1 million decrease in depreciation associated with the Smart Lab Toys Molds and Tooling being completely depreciated in fiscal 2027.

Previous wording

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.

Current wording

Operating income for the PaperPie segment increased to $0.1 million during the three months ended August 31, 2026, when compared to an operating loss of $0.0 million reported in the same quarterly period a year ago. Operating income for the PaperPie division as a percentage of net revenues for the year ended August 31, 2026 was 3.6%, compared to (0.4) % for the year ended August 31, 2025. Operating income as a percentage of net revenues changed from the prior year primarily due to the decrease in product discounts offered along with the decrease in operating and selling expenses and general and administrative expenses, primarily from reduced sales volumes, compared to the previous fiscal year.

Previous wording

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.

Current wording

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 the 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. This change includes managements plans of returning to our past practice of introducing these new titles, along with additional enhancements to our PaperPie e-commerce and “Backoffice” systems. These changes are expected to create existing Brand Partner excitement and should increase the number of active new recruits in this division.

Previous wording

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.

Current wording

Operating income for the PaperPie segment increased $0.1 million, or 20.0% to $0.5 million during the six months ended August 31, 2026, when compared to $0.4 million reported in the same period a year ago. Operating income for the PaperPie division as a percentage of net revenues for the first six months ended August 31, 2026 was 6.7%, compared to 4.6% for the six months ended August 31, 2025, an increase of 2.1%. Operating income as a percentage of net revenues changed from the prior year primarily due to the less product discounts offered in fiscal 2027 and the decrease in total operating and selling expenses.

Previous wording

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

Current wording

Publishing Operating Results for the Three and Six Months Ended August 31, 2026

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

Total operating expenses of the Publishing segment decreased $0.2 million, or 28.6%, to $0.5 million during the six-month period ended August 31, 2026, from $0.7 million reported in the same period a year ago. This change was due to a $0.1 million decrease in shipping costs associated with the decrease in volume of orders shipped and a $0.1 million decrease in other various general and administrative expenses.

Previous wording

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.

Current wording

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. Available cash has historically been used to pay down the outstanding bank loan balances, for capital expenditures, to pay dividends, and to acquire treasury shares.

Previous wording

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

Current wording

During the first six months of fiscal year 2027, we experienced positive cash inflows from operations of $33,900. These cash inflows resulted from:

Previous wording

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.

Current wording

Cash used in investing activities was $188,000 for capital expenditures, consisting of $188,800 in upgrades to our proprietary systems that our PaperPie Brand Partners use to monitor their business and place customer orders, offset by an $800 gain from the sale of machinery and equipment.

Previous wording

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.

Current wording

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 $2.0 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.

Previous wording

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.

Current wording

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 August 31, 2026 and February 28, 2026.

Previous wording

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.

Current wording

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 $20.5 million at August 31, 2026 and $21.1 million at February 28, 2026, respectively. Noncurrent inventory valuation allowances were $0.8 million at August 31, 2026 and February 28, 2026.

Previous wording

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.

Current wording

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 14.7% of our active Brand Partners maintained consignment inventory at the end of the second 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 at August 31, 2026 and $1.1 million at February 28, 2026, respectively.

Previous wording

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.

Current wording

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 $1.3 million at August 31, 2026 and $1.2 million at February 28, 2026, respectively.