EDUCATIONAL DEVELOPMENT CORP (0000031667) (Filer)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended August 31, 2026

OR

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

For the transition period from                            to                         .

Commission file number: 000-04957

EDUCATIONAL DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒   No ☐

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

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 5, 2026, there were 8,524,964 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.

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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,

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

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

See notes to condensed financial statements (unaudited).

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See notes to condensed financial statements (unaudited).

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See notes to condensed financial statements (unaudited).

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See notes to condensed financial statements (unaudited).

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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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

Basis of Presentation

The accompanying Unaudited Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim condensed financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Unaudited Condensed Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended February 28, 2026 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results 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 28, 2026 included in our Form 10-K.

Reclassifications

Certain reclassifications have been made to the August 31, 2025 notes to condensed financial statements to conform to the August 31, 2026 notes to condensed financial statements presentation. These reclassifications had no effect on net earnings.

 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:

New Accounting Standards or Updates Not Yet Adopted

In December 2025, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2025-11, Interim Reporting (Topic 270) Improvements to Interim Disclosure Requirements. The standard clarifies disclosure requirements for interim financial statements and is effective for interim periods beginning after December 15, 2027. Early adoption is permitted. We are currently evaluating the impact this ASU may have on our financial statement disclosures.

In December 2025, the FASB issued ASU 2025-12, Codification Improvements (“ASU 2025-12”). ASU 2025-12 addresses suggestions received from stakeholders regarding the Accounting Standards Codification and makes other incremental improvements to U.S. GAAP. The update represents changes to the Codification that clarify, correct errors in or make other improvements to a variety of topics that are intended to make it easier to understand and apply. ASU 2025-12 is effective for fiscal years beginning after December 15, 2026 and interim periods within those fiscal years. Entities are required to apply the amendments to ASC 260 retrospectively. All other amendments may be applied prospectively or retrospectively. We are currently evaluating the impact this ASU may have on our financial statement disclosures.

In September 2025, the FASB issued ASU 2025-06, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software (“ASU 2025-06”), which requires software capitalization to begin when both of the following occur: (1) management has authorized and committed to funding the software project; and (2) it is probable that the project will be completed and the software will be used to perform the function intended. For public entities, the provisions within ASU 2025-06 are effective for the first annual and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The provisions within ASU 2025-06 allow for a prospective, modified, or retrospective transition approach. The Company is currently evaluating this ASU to determine its impact on the Company’s financial statements and disclosures.

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which requires disclosure about the types of costs and expenses included in certain expense captions presented on the income statement. The new disclosure requirements are effective for annual reporting periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted, and may be applied either prospectively or retrospectively. The Company is currently evaluating the ASU to determine its impact on the Company’s financial statements and disclosures.

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Note 2 – CASH

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

The Company has contracted with Nexio and PayPal, Inc., third-party merchant service processors, to capture Visa, Discover, Mastercard and PayPal payments from customers. Approximately 90% of all payments received by the Company are channeled through these processors. These processors hold cash payments received from customers in reserve for a specified number of days to offset any potential chargebacks. The Company also has a short-term certificate of deposit with a local lender in the amounts of $25,000 and $100,000 as of August 31, 2026 and August 31, 2025, as collateral for business credit card use. The Company has classified the cash held in reserves by Nexio and PayPal and the restricted certificate of deposit as restricted cash. 

Note 3 – ASSETS HELD FOR SALE

Equipment

During the second quarter of fiscal year 2025, the Company entered into a triple-net lease agreement for approximately 111,000 square feet of available office and warehouse space in the Hilti Complex to a new tenant. To create space for this new tenant, the Company removed three production lines from the warehouse before July 31, 2024. As a result, in the second quarter of fiscal 2025, the Company made available and committed to sell the disassembled equipment. The Company is actively marketing unused equipment using a national on-line auction house as of August 31, 2026. The Company is subject to the presentation and disclosure requirements since the equipment meets all the criteria and is classified as an “Asset Held for Sale.” Once management determined that the disassembled equipment met the criteria to be classified as held for sale, the Company ceased depreciation of the asset and reported it separately on the balance sheet, beginning on August 31, 2024. In the third quarter of fiscal 2026, the Company evaluated the carrying amount of the assets and the estimated fair values less costs to sell and recorded an impairment loss on the assets of $287,100. In the first quarter of fiscal 2027 the Company again evaluated the carrying amount of the assets and the estimated fair values less costs to sell and recorded another impairment loss on the assets of $113,600, further reducing the assets held for sale account.

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 $450,000 and $563,600 as of August 31, 2026, and February 28, 2026, respectively, and is separately recorded on the balance sheet. 

Note 4 – INVENTORIES

Inventories consist of the following:

Inventory in transit totaled $84,000 and $147,900 at August 31, 2026 and February 28, 2026, respectively.

Product inventory quantities in excess of what we expect will be sold within the normal operating cycle, based on 2½ years of anticipated sales, are included in noncurrent inventory.

Note 5 – LEASES

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.

The following summarizes right-of-use assets and lease liabilities reported in our condensed balance sheets:

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The following summarizes the lease expense activity for periods reported in our condensed statements of operations:  

Future minimum rental payments under operating leases with initial terms greater than one year as of August 31, 2026, are as follows:

The following table provides further cash flow information about our operating leases reported in our condensed statements of cash flows:

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Note 6 – DEBT

In March 2026, the Company executed a new credit agreement with Regent Bank (the Lender). The loan agreement establishes a revolving promissory note in the principal amount up to $2,000,000. Interest shall be calculated each month on the outstanding borrowings. The credit agreement was secured by the assets of the Company including accounts receivable, inventory, equipment and land. The Lender also required the personal guarantee of Craig White, President, Chief Executive Officer, and Chairman of the Board of the Company. Available credit under the current revolving line of credit with the Company’s Lender was $2,000,000 as of August 31, 2026.

Features of the loan agreement include:

Note 7 – 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 August 31, 2026, 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. In addition, Usborne has refused to pay the $1.0 million volume rebate owed to the Company from purchases made during fiscal 2022. The Company is disputing the cancellation of the rebate but has not recognized any rebate due to its uncertainty. Additionally, under the terms in the Agreement, the Company no longer has the rights to distribute Usborne’s products to retail customers through our Publishing division. As a result, the Company discontinued selling Usborne products to retail customers in the first quarter of fiscal 2024.

Total Usborne inventory owned by the Company and included in our balance sheets was $18,976,400 and $20,158,500 as of August 31, 2026, and February 28, 2026, respectively.

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Note 8 – INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising our net deferred tax assets and liabilities are as follows:

The reconciliation of taxes at the federal statutory rate to our provision for income taxes for the six months ended August 31, 2026 was as follows:

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The components of income tax expense (benefit) are as follows:

The following reconciles our expected income tax rate to the U.S. federal statutory income tax rate:

Note 9 – 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 $499,500 and $571,800 for the three months ended August 31, 2026 and 2025, respectively. These costs were $1,070,500 and $1,377,000 for the six months ended August 31, 2026 and 2025, respectively.

Note 10 – BUSINESS SEGMENTS

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

The accounting policies for the segments are the same as those for 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. Direct expenses are composed of payroll, commissions, general and administrative, and operating and selling expenses. Corporate expenses, depreciation, interest expense, other income, 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. Separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. For the Company, the Chief Executive Officer is the CODM. 

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Information by reporting segment for the three and six-month periods ended August 31, 2026 and 2025, is as follows:

PAPERPIE OPERATING RESULTS

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

PUBLISHING OPERATING RESULTS

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

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Information for the Other segment above for the three and six months ended August 31, 2026 and 2025 is set forth below:

OTHER NON-SEGMENT LOSS BEFORE INCOME TAXES

Note 11 – FINANCIAL INSTRUMENTS

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

Note 12 – 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, 2026 or February 28, 2026 are recorded as deferred revenues on the balance sheets. We received approximately $300,100 and $320,500 as of August 31, 2026 and February 28, 2026, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the end of the period.

Note 13 – SUBSEQUENT EVENTS

On September 1, 2026, the Company entered into a two-year commercial lease agreement in Tulsa, Oklahoma. The first year is for approximately 50,000 square feet of available warehouse space with initial lease rate of $5.00 per rentable square foot and then the second year is for 25,000 square feet of available warehouse space with a lease rate of $5.15 per rentable square foot. The lease includes standard commercial lease terms such that the tenant shall be responsible for utilities, insurance on product stored, and minor maintenance associated with using the space, excluding facility maintenance, property taxes, roof and structure, which shall be the Landlords’ responsibility. The lease also includes other terms considered to be normal and customary in the local market.

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

Factors Affecting Forward-Looking Statements

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

Overview

We are the owner and exclusive publisher of Kane Miller children’s books; Learning Wrap-Ups, maker of educational manipulatives; and SmartLab Toys, maker of STEAM-based toys and games. We are also the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited (“Usborne”) children’s books. Significant portions of our product offering and inventory are concentrated with Usborne. Our distribution agreement with Usborne includes annual minimum purchase volumes along with specific payment terms, which, if not met or if payments are not received in a timely manner, offer Usborne the right to terminate the agreement. During 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.

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.

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Non-Segment Operating Results for the Three Months Ended August 31, 2026

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.

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.

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.

Non-Segment Operating Results for the Six Months Ended August 31, 2026

Total operating expenses not associated with a reporting segment decreased $0.5 million, or 11.9%, to $3.7 million for the six-month period ended August 31, 2026, when compared to $4.2 million for the same period a year ago. Labor expenses decreased $0.4 million from staff reductions across all departments and freight handling costs decreased $0.1 million for the six months ended August 31, 2026, both associated with reduced sales.

Interest expense decreased $1.1 million or 100.0%, to $0.0 million for the six months ended August 31, 2026, when compared to $1.1 million for the same period a year ago, due to paying off all our debt in third quarter of fiscal year 2026.

Other income decreased $1.4 million, or 107.7%, to an expense of $0.1 million for the six months ended August 31, 2026, when compared to income of $1.3 million for the same period a year ago, primarily from a $1.3 million decrease in rental income due to the sale of the Hilti Complex in the third quarter of fiscal year 2026 coupled with a $0.1 million decrease in other income related to the loss associated with the impairment on the line equipment in assets held for sale.

Income taxes decreased $0.8 million, or 100.0%, to a tax expense of $0.0 million for the six months ended August 31, 2026, from a tax benefit of $0.8 million for the same period a year ago primarily related to reduced operating losses between the periods coupled 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 six months ended August 31, 2026, from 25.9% for the six months ended August 31, 2025, due primarily to the sales mix fluctuations between states and the tax valuation allowance booked during the first six months of the fiscal year. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state income and franchise taxes.

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

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

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

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.

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 the third quarter of fiscal 2026 and the corresponding payoff of the revolver and term loans with our bank, that removed our purchasing restrictions, we began 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.

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.

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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.

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.

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

PaperPie net revenues decreased $2.5 million, or 25.5%, to $7.3 million during the six-month period ended August 31, 2026, compared to $9.8 million from the same period a year ago. The average number of active brand partners in the six-month period ended August 31, 2026, was 5,200, a decrease of 1,600, or 23.5%, from 6,800 selling in same period a year ago. 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 first two quarters of fiscal 2027 continue to be negatively impacted by continuing inflationary pressures and we expect this to continue 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.

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.

PaperPie gross margin decreased $1.4 million, or 24.1%, to $4.4 million during the six months ended August 31, 2026, when compared to $5.8 million during the same period a year ago. Gross margin as a percentage of net revenues for the six months ended August 31, 2026 increased to 60.4%, compared to 58.8% the same period a year ago. The increase in gross margin as a percentage of net revenues was primarily attributed to product mix and higher discounts offered in the previous fiscal year to spur sales.

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Total PaperPie operating expenses decreased $1.3 million, or 24.5%, to $4.0 million during the six-month period ended August 31, 2026, from $5.3 million for the same period a year ago. Operating and selling expenses decreased $0.4 million, or 30.8%, to $0.9 million during the six-month period ended August 31, 2026, when compared to $1.3 million reported in the same period a year ago. This decrease relates primarily to a decrease in shipping costs associated with the decrease in volume of orders shipped, totaling approximately $0.2 million coupled with a $0.1 million decrease in brand partner incentive trip expenses, as fewer brand partners are expected to earn the trip this year and a $0.1 million decrease in various other operating and selling expenses. Sales commissions decreased $0.8 million, or 25.0%, to $2.4 million during the six-month period ended August 31, 2026, when compared to $3.2 million reported in the same period a year ago, primarily due to the decrease in net revenues. General and administrative expenses decreased $0.2 million, or 25.0%, to $0.6 million during the six-month period ended August 31, 2026, from $0.8 million recognized during the same period last year, due to a $0.1 million decrease in depreciation expense associated with the Smart Lab Toys Molds and Tooling, being fully depreciated in fiscal 2027 and a $0.1 million decrease in other various general and administrative expenses.

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.

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

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

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

Our Publishing operating results, including the division's net revenues, gross margin, and operating expenses, were consistent for the three-month period ended August 31, 2026 compared to the same period a year ago.

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

Our Publishing division’s net revenues decreased by $0.4 million, or 21.1%, to $1.5 million during the six-month period ended August 31, 2026, from $1.9 million reported in the same period a year ago. The decrease in net revenues was primarily from the decrease in sales to our largest customers in the first quarter of fiscal year 2027.

Gross margin decreased $0.3 million, or 27.3%, to $0.8 million during the six-month period ended August 31, 2026, from $1.1 million reported in the same period a year ago. Gross margin as a percentage of net revenues decreased to 54.9%, during the six-month period ended August 31, 2026, from 55.4% 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.

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.

Operating income of the Publishing segment decreased $0.1 million, or 25.0%, to $0.3 million during the six-month period ended August 31, 2026 when compared to $0.4 million reported in the same period a year ago, due primarily to the decrease in sales.

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. 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.

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

Adjusted for:

Offset by:

Positively impacted by:

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Negatively impacted by:

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.

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.

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.

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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 August 31, 2026 and February 28, 2026.

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 $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.

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.

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.

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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 and Chairman of the Board (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.

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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

Item 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4.  MINE SAFETY DISCLOSURES

None.

Item 5.  OTHER INFORMATION

None. 

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Item 6.  EXHIBITS

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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.

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