{"url_path":"/sec/educ/10-k/2026/item-7","section_key":"item-7","section_title":"Item 7 MANAGEMENT’S DISCUSSION AND ANALYSIS","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-05-19","source_url":"https://www.sec.gov/Archives/edgar/data/31667/0001185185-26-001927-index.html","accession_number":"0001185185-26-001927","cik":"0000031667","ticker":"EDUC","issuer_name":"EDUCATIONAL DEVELOPMENT CORP","edgar_url":"https://www.sec.gov/Archives/edgar/data/31667/0001185185-26-001927-index.html","primary_entity_key":"0000031667","primary_entity_name":"EDUCATIONAL DEVELOPMENT CORP"},"word_count":5215,"has_tables":true,"body_markdown":"Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS\nOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS\n\n \n\n*This Management*’*s\nDiscussion and Analysis of Financial Condition and Results of Operations contain a discussion of our business, including a general overview\nof our segments, our results of operations, our liquidity and capital resources, and our quantitative and qualitative disclosures about\nmarket risk.*\n\n \n\n*The following discussion\ncontains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements\nare dependent upon events, risks and uncertainties that may be outside of our control. Our actual results could differ materially from\nthose discussed in these forward-looking statements. See*“*Cautionary Remarks Regarding Forward Looking Statements*”\n*in the front of this Annual Report on Form 10-K.*\n\n \n\n**Management Summary**\n\n \n\nWe are the owner and exclusive\npublisher of Kane Miller children’s books; Learning Wrap-Ups, maker of educational manipulatives; and SmartLab Toys, maker of STEAM-based\ntoys and games. We are also the exclusive United States Multi-Level Marketing (“MLM”) distributor of Usborne Publishing Limited\n(“Usborne”) children’s books. Significant portions of our product offering and inventory are concentrated with Usborne.\nOur distribution agreement with Usborne includes annual minimum purchase volumes along with specific payment terms, which, if not met\nor if payments are not received in a timely manner, offer Usborne the right to terminate the agreement. During fiscal 2025 and fiscal\n2026, the Company did not meet the minimum purchase volumes. No notification of non-compliance or termination has been received from Usborne.\nShould termination of the agreement occur, the Company will be allowed, at a minimum, to sell through our remaining Usborne inventory\nover a period of twelve months following the termination date.\n\n \n\n8\n\n[Table of Contents](#TableOfContents)\n\n \n\nWe sell our products through\ntwo separate divisions, PaperPie and Publishing. These two divisions each have their own customer base. The PaperPie division markets\nour complete line of products through a network of independent Brand Partners using a combination of home shows, internet party events,\nand book fairs. The Publishing division markets Kane Miller, Learning Wrap-Ups, and SmartLab Toys on a wholesale basis to various retail\naccounts. All other supporting administrative activities are recognized as other expenses outside of our two divisions. Other expenses\nconsist primarily of compensation for our office, warehouse, and sales support staff as well as the cost of operating and maintaining\nour corporate offices, warehouses and distribution facility.\n\n \n\n**PaperPie Division**\n\n \n\nOur PaperPie division uses\na multi-level direct selling organizational structure to market our products using independent sales representatives (“Brand Partners”)\nlocated throughout the United States. The customer base of PaperPie consists of individual purchasers, as well as schools and public libraries.\nRevenues are primarily generated through book showings in individual homes, on social media collaboration platforms, through book fairs\nwith school and public libraries, and other in-person events.\n\n \n\nAn important factor in the\ngrowth of the PaperPie division is the addition of new Brand Partners and the retention of existing Brand Partners. Active Brand Partners\n(defined as those with sales during the past six months) are primarily responsible for recruiting new Brand Partners. PaperPie entices\nnew recruits by providing joining incentives to new Brand Partners, including discounted products and cash bonus awards based on exceeding\ncertain sales criteria. In addition, our PaperPie division provides our Brand Partners with an extensive operational handbook, valuable\ntraining, and an individual website they can customize and use to generate sales. The Company also provides a “back-office”\noperations platform that allows Brand Partners to track their individual and team business results.\n\n \n\nBrand Partners\n\n \n\n  \nFY 2026  \nFY 2025 \n\nNew Brand Partners Added During Fiscal Year \n 2,700  \n 7,800 \n\nActive Brand Partners at End of Fiscal Year \n 4,300  \n 7,800 \n\n \n\nOur PaperPie division’s\nmulti-level marketing organizational structure currently has eight levels of sales representatives, collectively known as Brand Partners:\n\n \n\n \n●\nBrand Partners\n\n \n\n \n●\nTeam Leaders\n\n \n\n \n●\nAdvanced Leaders\n\n \n\n \n●\nSenior Leaders\n\n \n\n \n●\nExecutive Leaders\n\n \n\n \n●\nSenior Executive Leaders\n\n \n\n \n●\nDirectors\n\n \n\n \n●\nSenior Directors\n\n \n\nUpon signing up, sales representatives\nbegin as “Brand Partners.” Brand Partners receive “weekly commissions” from each sale they make; the commission\nrate they receive on each sale is determined by the “order type” assigned to the sale. In addition, Brand Partners receive\na monthly sales bonus once their total sales reach an established monthly goal, as well as other awards (called “Level Perks”)\nfor meeting other individual sales and recruiting goals for the month. Brand Partners who recruit a specified number of other Brand Partners\ninto their downline become “Team Leaders.” These downline recruits are known as their “Central Group.” Upon reaching\nthis Team Leader level, Brand Partners become eligible to receive “monthly override payments” which are calculated on sales\nmade by their Central Group and downlines up to two levels below their Central Group. Team Leaders that recruit and promote other Team\nLeaders and meet other established criteria are eligible to become “Advanced Leaders.”\n\n \n\n9\n\n[Table of Contents](#TableOfContents)\n\n \n\nOnce Advanced Leaders promote\na second level Brand Partner, add additional recruits, and meet other established criteria, they become “Senior Leaders,”\n“Executive Leaders,” “Senior Executive Leaders,” “Directors” or “Senior Directors.” One-time\ncash bonus payments are awarded at each promotion level above Brand Partner with increasing award amounts at each promotion level. Executive\nLeaders and higher receive an additional monthly override payment based upon the sales of their executive group. Directors and higher\nreceive an additional bonus payment if they promote a Team Leader from their Central Group. The maximum override payment a leader can\nreceive is calculated on the sales of their Central Group and three levels below.\n\n \n\nDuring fiscal year 2026, internet\nsales continued to be the largest sales channel within our PaperPie division. The use of social media and party plan platforms, such as\nthose available on Facebook, continue to be popular sales tools. These platforms allow Brand Partners to “present” and customers\nto “attend” online purchasing events from any geographical location.\n\n  \n\nCustomers’ internet\norders are primarily received via the Brand Partner’s customized website, which is hosted by the Company. Brand Partners contact\nhosts or hostesses (collectively “hostess”) who then provide a list of contacts to invite to an online party. During the online\nparty, the Brand Partner answers attendees’ questions and provides product recommendations. These attendees then select desired\nproducts and place orders via the Brand Partner’s customized website. Internet orders are processed through a standard online “shopping\ncart checkout” and the Brand Partner receives sales credit and commission on the transaction. All internet orders are shipped directly\nto the end customer. The hostess earns discounted products based on the total sales from the attendees at the online party. Brand Partners\nuse the list of contacts provided by the hostess as additional contacts for future hostess and recruiting opportunities.\n\n \n\nIn-person parties also occur\nwhen Brand Partners contact hostesses to hold book shows in their homes. The Brand Partner assists the hostess in setting up the details\nfor the show, makes a presentation at the show, and takes orders for the products. The hostess earns discounted products based on the\ntotal sales at the party, including internet orders for those customers who can only attend via online access. These orders are typically\nshipped to the hostess, who then distributes the products to the end customer. Customer specials are also available when customers, or\ntheir party, order above a specified amount. As with online parties, home shows often provide an excellent opportunity to recruit new\nBrand Partners.\n\n \n\nPaperPie net revenues also\ninclude sales to schools and libraries through PaperPie Learning. PaperPie Learning is a separate program for eligible Brand Partners\nwhich requires certain qualifications and the completion of additional training requirements. The PaperPie Learning program includes book\nfairs which are held within an organization as the sponsor. The Brand Partner provides promotional materials to introduce our products\nto parents, who then turn in their orders at a designated time. The book fair program generates discounted products for the sponsoring\norganization.\n\n \n\nPaperPie also generates revenues\nthrough various fundraiser programs directed toward schools and community organizations. *Reach for the Stars*is a pledge-based\nreading incentive program that provides cash and products to the sponsoring organization, and products for the participating children.\nAn additional fundraising program, *Gathered Goods (2026)*, which replaced *Cards for a Cause (2025)*offers Brand Partners\nthe opportunity to help members of the community by sharing proceeds from the sale of specific items. Organizations do this by selling\na variety package of educational items and donating a portion of the proceeds to help support their related causes.\n\n \n\n**Publishing Division**\n\n \n\nOur Publishing division operates\nin a market that is highly fragmented, with many types of retail companies engaged in selling children’s books and toys. The Publishing\ndivision’s customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores,\nand museums. To reach these markets, the Publishing division utilizes a combination of commissioned sales representatives, as well as\nan in-house sales group located at our headquarters.\n\n \n\nThe table below shows the percentage\nof net revenues from our Publishing division based on market type:\n\n \n\nPublishing Division Net Revenues by Market Type\n\n \n\n  \nFY 2026  \nFY 2025 \n\nNational chain bookstores \n 11% \n 11%\n\nAll other \n 89% \n 89%\n\nTotal net revenues \n 100% \n 100%\n\n \n\n10\n\n[Table of Contents](#TableOfContents)\n\n \n\nPublishing uses a variety\nof methods to attract potential new customers and maintain current customers. Our employees attend many of the national trade shows held\nby the book and toy selling industry each year, allowing us to contact potential buyers who may be unfamiliar with our products. Our marketing\nstrategy targets toy and specialty stores, in addition to bookstores and museum gift shops, through print media advertising in trade publications.\nIn some instances, our products are featured in promotions and catalogs by participation in co-ops with national chain retailers.\n\n \n\nPublishing’s sales representatives\nactively target the smaller independent bookstore and gift shop customers. This market has seen continued growth due to a resurgence in\nthe opening of local bookstores, toy stores, and specialty stores across the U.S., coupled with the efforts of both our in-house and outside\nsales representatives to increase sales to local and independent businesses. References to our online Publishing catalog are mailed out\nto approximately 3,500 customers and potential customers on a yearly basis. See Publishing Operating Results for discussion of our updated\ndistribution agreement with Usborne.\n\n** **\n\n**Result of Operations**\n\n \n\nThe following table shows\nour statements of operations data:\n\n \n\n  \nTwelve Months Ended\nFebruary 28, \n\n  \n2026  \n2025 \n\nProduct revenues, net of discounts and allowances \n$21,814,500  \n$32,547,700 \n\nTransportation revenue \n 1,099,100  \n 1,643,300 \n\nNet revenues \n 22,913,600  \n 34,191,000 \n\nCost of goods sold \n 9,309,300  \n 13,163,300 \n\nGross margin \n 13,604,300  \n 21,027,700 \n\n  \n    \n   \n\nOperating expenses \n    \n   \n\nOperating and selling \n 3,462,400  \n 5,751,600 \n\nSales commissions \n 6,399,200  \n 10,096,600 \n\nGeneral and administrative \n 10,928,100  \n 11,955,100 \n\nTotal operating expenses \n 20,789,700  \n 27,803,300 \n\n  \n    \n   \n\nInterest expense \n 1,478,900  \n 2,188,400 \n\nOther income \n (14,011,100) \n (2,109,000)\n\nEarnings (loss) before income taxes \n 5,346,800  \n (6,855,000)\n\n  \n    \n   \n\nIncome tax expense (benefit) \n 3,021,600  \n (1,591,400)\n\nNet earnings (loss) \n$2,325,200  \n$(5,263,600)\n\n \n\nSee the detailed discussion\nof net revenues, gross margin and operating expenses by reportable segment below:\n\n \n\n**Non-Segment Operating Results**\n\n \n\n*Total operating expenses*\nnot associated with a reporting segment were $8.9 million for the fiscal year ended February 28, 2026, compared to $9.9 million for the\nsame period a year ago. Operating expenses decreased primarily because of a $0.6 million decrease in labor expense within our warehouse\noperations due to lower number of orders, a decrease of $0.3 million in depreciation due to Lines 1, 2 & 3 moved to ‘Assets\nHeld for Sale” in Fiscal 25, as well as a $0.1 million in other various operating expenses.\n\n \n\n*Interest expense* decreased\n$0.7 million, to $1.5 million for fiscal year ended February 28, 2026, compared to $2.2 million reported for fiscal year ended February\n28, 2025 due to the Company selling the Hilti Complex at the end of October 2025 and paying in full all outstanding indebtedness and terminating\nall commitments and obligations under its Credit Agreement dated August 9, 2022 between the Company and its Lender.\n\n \n\n11\n\n[Table of Contents](#TableOfContents)\n\n \n\n*Other income* increased\n$11.9 million, to $14.0 million for fiscal year ended February 28, 2026, compared to $2.1 million reported for fiscal year ended February\n28, 2025, resulting from the gain of $12.4 million from the sale of the Hilti Complex, offset by a $0.5 million decrease in rental income\nfrom existing tenant leases that were assigned to the buyer with the sale of the Hilti Complex.\n\n \n\n*Income taxes* increased\n$4.6 million, to a tax expense of $3.0 million for the fiscal year ended February 28, 2026, from a tax benefit of $1.6 million for the\nsame period a year ago, resulting primarily from an increase in other income as result of the sale of the Hilti Complex and a valuation\nallowance adjustment of $1.5 million in the fourth quarter of fiscal 2026 offsetting the Company’s net deferred tax asset position.\nThis increase was primarily related to the increase in taxable income for the current fiscal year compared to the prior fiscal year. The\neffective tax rate increased by 33.3%, to 56.5% for fiscal year ending February 28, 2026, as compared to 23.2% for fiscal year ended February\n28, 2025, primarily due to the valuation adjustment, the sales mix fluctuations between states, and the credits eligible for research\nand development expenses. Our tax rates are higher than the federal statutory rate of 21% due to the one-time valuation adjustment and\ninclusion of state income and franchise taxes.\n\n \n\n**PaperPie Operating Results**\n\n \n\nThe following table summarizes\nthe operating results of the PaperPie segment for the twelve months ended February 28:\n\n \n\n  \nTwelve Months Ended\nFebruary 28, \n\n  \n2026  \n2025 \n\nNet revenues \n$19,344,700  \n$29,850,300 \n\n  \n    \n   \n\nCost of goods sold \n 7,763,100  \n 11,406,000 \n\nGross margin \n 11,581,600  \n 18,444,300 \n\n  \n    \n   \n\nOperating expenses \n    \n   \n\nOperating and selling \n 2,598,700  \n 4,575,400 \n\nSales commissions \n 6,305,500  \n 9,998,800 \n\nGeneral and administrative \n 1,733,100  \n 1,919,300 \n\nTotal operating expenses \n 10,637,300  \n 16,493,500 \n\n  \n    \n   \n\nOperating income \n$944,300  \n$1,950,800 \n\n  \n    \n   \n\nAverage number of active Brand Partners \n 5,800  \n 12,300 \n\n \n\nPaperPie net revenues decreased\n$10.6 million, or 35.5%, to $19.3 million for the fiscal year ended February 28, 2026, when compared with net revenues of $29.9 million\nreported for the fiscal year ended February 28, 2025. The average number of active Brand Partners in fiscal year 2026 was 5,800, a decrease\nof 6,500, or 52.8%, from 12,300 in fiscal year 2025. The Company reports the average number of active Brand Partners as a key indicator\nfor this division. Recruiting and maintaining Brand Partners has been negatively impacted by several factors including inflation, our\ndistribution agreement with Usborne whereby Usborne actively sells their products through discounted retailers in the U.S. market, and\nthe rebranding of the division in the fourth quarter of fiscal year 2023. Inflation was most evident in the increase of food and fuel\nprices, both impacting the disposable income of our target customer base, which is families with small children. Sales during fiscal 2026\ncontinued to be negatively impacted by continuing inflationary pressures and we expect this to continue into the next fiscal year, as\nthese pressures persist. Historically, when we have experienced these difficult inflationary times, our active brand partner numbers have\nbeen positively impacted as more families look for non-traditional income streams to offset rising costs of living.\n\n \n\nRecent sales levels have also\nbeen impacted by the lack of new titles being introduced and certain out-of-stock items due to purchasing restrictions placed on us from\nour lender in the first three quarters of this fiscal year. We have begun a conservative plan to place reorders and purchase new titles\nsince the sale of the Hilti Complex, the payoff of the revolver and term loans with our bank and subsequent removal of purchasing restrictions.\nThe Company is now returning to our past practice of introducing new titles, along with additional enhancements to our PaperPie e-commerce\nand “Backoffice” systems that are expected to create existing Brand Partner excitement and should increase our number of new\nrecruits in this division.\n\n \n\n12\n\n[Table of Contents](#TableOfContents)\n\n \n\nPaperPie gross\nmargin decreased $6.8 million, or 37.0%, to $11.6 million for the fiscal year ended February 28, 2026, from $18.4 million reported for\nfiscal year ended February 28, 2025. Gross margin as a percentage of net revenues decreased 1.9% to 59.9% for fiscal year 2026 when compared\nto 61.8% for fiscal year 2025. The decrease in gross margin as a percentage of net revenues was primarily attributed to increased recruiting\npromotions offered to increase Brand Partner levels and additional discounts offered to customers between the periods to spur sales,\nas well as increased cost of goods from the tariffs implemented by the current administration on our SmartLab Toys product line. \n\n \n\nTotal PaperPie operating expenses\ndecreased $5.9 million, or 35.8%, to $10.6 million during the fiscal year ended February 28, 2026, when compared with $16.5 million reported\nfor the fiscal year ended February 28, 2025. Operating and selling expenses decreased $2.0 million, to $2.6 million for the fiscal year\nended February 28, 2026, from $4.6 million reported in the same period a year ago. This decrease relates primarily to a decrease in shipping\ncosts associated with the decrease in volume of orders shipped, totaling approximately $1.4 million, as well as a $0.6 million decrease\nin brand partner incentive trip and meeting expenses as fewer brand partners participated in various meetings and earn the trip this year.\nSales commissions decreased $3.7 million to $6.3 million during the fiscal year ended February 28, 2026, when compared to $10.0 million\nreported in the same period a year ago, primarily due to the decrease in net revenues, which resulted in a decrease of commissions of\n$3.6 million, as well as a decrease in sales bonuses of $0.1 million. General and administrative expenses decreased $0.2 million, to $1.7\nmillion during the fiscal year ended February 28, 2026, when compared with $1.9 million reported for the fiscal year ended February 28,\n2025, due primarily to $0.3 million of decreased credit card transaction fees associated with decreased sales volumes offset by a $0.1\nmillion increase in other various general and administrative expenses.\n\n \n\nOperating income of our PaperPie\ndivision decreased $1.1 million, or 55.0%, to $0.9 million for the fiscal year ended February 28, 2026, as compared to $2.0 million reported\nfor fiscal year ended February 28, 2025. Operating income for the PaperPie division as a percentage of net revenues for the year ended\nFebruary 28, 2026 was 4.9%, compared to 6.5% for the year ended February 28, 2025, a decrease of 1.6%. Operating income as a percentage\nof net revenues changed from the prior year primarily due to the decrease in net revenues from the reduced number of active brand partners\nin addition to higher discounts offered to spur sales, which were both offset by the decrease in operating expenses.\n\n \n\n**Publishing Operating Results**\n\n \n\nThe following table summarizes\nthe operating results of the Publishing segment for the twelve months ended February 28:\n\n \n\n  \nTwelve Months Ended\nFebruary 28, \n\n  \n2026  \n2025 \n\nNet revenues \n$3,568,900  \n$4,340,700 \n\n  \n    \n   \n\nCost of goods sold \n 1,546,200  \n 1,757,300 \n\nGross margin \n 2,022,700  \n 2,583,400 \n\n  \n    \n   \n\nTotal operating expenses \n 1,274,900  \n 1,428,000 \n\n  \n    \n   \n\nOperating income \n$747,800  \n$1,155,400 \n\n \n\nOur Publishing division’s\nnet revenues decreased $0.7 million, or 16.3%, to $3.6 million for fiscal year ended February 28, 2026 from $4.3 million reported for\nfiscal year ended February 28, 2025. The change in net revenues was directly associated with the decrease in overall sales volume offset\nby a slight decrease in discounts.\n\n \n\nGross margin decreased $0.6\nmillion, or 23.1%, to $2.0 million for fiscal year ended February 28, 2026, from $2.6 million reported for fiscal year ended February\n28, 2025. Gross margin as a percentage of net revenues decreased 2.8%, to 56.7% for fiscal year 2026, compared to 59.5% reported in the\nsame period a year ago mainly due to product mix change and from the increase in cost of goods due to the additional tariffs implemented\nby the current administration on our SmartLab Toys product line. \n\n \n\nTotal operating expenses of\nthe Publishing segment decreased $0.1 million, or 7.1%, to $1.3 million for fiscal year ended February 28, 2026, from $1.4 million reported\nfor fiscal year ended February 28, 2025. The decrease in operating expenses resulted from the decrease in freight expense of $0.1 million\nassociated with lower sales.\n\n \n\n13\n\n[Table of Contents](#TableOfContents)\n\n \n\nOperating income decreased\n$0.5 million, or 41.7%, to $0.7 million for fiscal year ended February 28, 2026, from $1.2 million for fiscal year ended February 28,\n2025. The decrease in operating income was primarily associated with the decline in net revenues associated with the decrease in gross\nsales in addition to the increase in cost of goods due to the additional tariffs implemented by the current administration on our SmartLab\nToys product line.\n\n** **\n\n**Liquidity and Capital Resources**\n\n \n\nDuring the past two years\nwe have offered higher product discounts to spur sales and experienced increased interest rates on borrowings due to restrictions imposed\nby our lender. Prior to this period EDC had a history of profitability and positive cash flow. We typically fund our operations from the\ncash we generate. During periods of operating losses, EDC will reduce purchases and sell through excess inventory to generate cash flow.\nThe Company expects to reduce current excess inventory levels and use the cash proceeds to offset any future operating losses until it\nreturns to profitability. In addition, the Company sold the real estate it owned, the Hilti Complex, and paid off the revolving line of\ncredit and term debts with our bank. Available cash has historically been used to pay down the outstanding bank loan balances, for capital\nexpenditures, to pay dividends, and to acquire treasury stock. \n\n \n\nDuring fiscal year 2026, we\nexperienced positive cash flows from operations of $2,005,300. These cash flows resulted from:\n\n \n\n \n●\nnet gain of $2,325,200\n\n \n\nAdjusted for:\n\n \n\n \n●\ndepreciation and amortization expense of $1,391,700\n\n \n\n \n●\nDeferred income taxes of $2,536,100\n\n \n\n \n●\nimpairment on assets held for sale of $287,100\n\n \n\n \n●\nprovision for inventory allowance of $144,000\n\n \n\n \n●\nprovision for credit losses of $36,000\n\n \n\nOffset by:\n\n \n\n \n●\nnet gain on sale of assets of $12,190,900\n\n \n\nPositively impacted by:\n\n \n\n \n●\ndecrease in inventories, net of $6,884,200\n\n \n\n \n●\ndecrease in accounts receivable of $1,228,700\n\n \n\n \n●\nIncrease in income taxes payable of $685,900\n\n \n\n \n●\ndecrease in prepaid expenses and other assets of $297,800\n\n \n\nNegatively impacted by:\n\n \n\n \n●\ndecrease in accrued salaries and commissions, and other liabilities of $1,288,200\n\n \n\n \n●\ndecrease in deferred revenues of $171,300\n\n \n\n \n●\ndecrease in accounts payable of $161,000\n\n \n\n14\n\n[Table of Contents](#TableOfContents)\n\n \n\nCash provided by investing\nactivities totaled $29,389,800, consisting of $29,932,600 in proceeds from the sale of the Hilti Complex, along with a few other assets,\noffset by $378,200 in software upgrades to our proprietary systems that our PaperPie Brand Partners use to monitor their business and\nplace customer orders and $164,600 in building improvements in Assets Held for Sale.\n\n \n\nCash used in financing activities\nwas $31,031,200, consisting of $26,715,400 to pay down existing term debt, $4,198,100 to pay down existing line of credit, $137,900 paid\nto acquire treasury stock, offset by cash received of $20,200 from the sale of treasury stock.\n\n \n\nThe Company continues to expect\nthe cash generated from operations, specifically from the reduction of excess inventory, will provide us with the liquidity we need to\nsupport ongoing operations. Additionally, subsequent to the fiscal year end, we obtained a $2,000,000 line of credit from a new lender\nto fund any short-term cash flow needs. Cash generated from operations will be used to acquire new inventory and pay down any short-term\nborrowings we expect to obtain. \n\n \n\n**Contractual Obligations**\n\n \n\nWe are a smaller reporting company and are not\nrequired to provide this information.\n\n \n\n**Off-Balance Sheet Arrangements**\n\n \n\nAs of February 28, 2026, we\nhad no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial\ncondition, results of operations, liquidity, capital expenditures or capital resources.\n\n \n\n**Seasonality**\n\n \n\nThe Company experiences increased\nsales in the Fall season along with increased sales during the Annual PaperPie Day sale annually on 3/14 as well as the Easter holiday\nseason. Historically, we have experienced an increase in inventory during the Summer in anticipation for the Fall increase in sales.\n\n \n\n**Critical Accounting Policies**\n\n \n\n*Our discussion and analysis\nof our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with\naccounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates\nand judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets\nand liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, provision for\ncredit losses, allowance for sales returns, long-lived assets, and deferred income taxes. We base our estimates on historical experience\nand on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making\njudgments about the carrying values of assets and liabilities that are not readily apparent from other sources.*\n\n \n\n*Actual results may materially\ndiffer from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially\nfrom those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial\nstatements included elsewhere in this report. However, we consider the following accounting policies to be significantly more dependent\non the use of estimates and assumptions.*\n\n \n\n15\n\n[Table of Contents](#TableOfContents)\n\n \n\n**Leases**\n\n** **\n\nWe have both lessee and lessor\narrangements. Our lessee arrangements include six rental agreements where we have the exclusive use of dedicated office space in San Diego,\nCalifornia, Ogden, Utah, a warehouse space in Joplin, Missouri and three leases for office and warehouse space locally in Tulsa, Oklahoma,\nall of which qualify as operating leases under ASC 842. Our lessor arrangements include one rental agreement for warehouse and office\nspace in Tulsa, Oklahoma, and qualify as operating leases under ASC 842.\n\n \n\nWe recognize an operating\nlease liability on the balance sheets for each lease based on the present value of remaining minimum fixed rental payments (which includes\npayments under any renewal option that we are reasonably certain to exercise), using a discount rate that approximates the rate of interest\nwe would have to pay to borrow on a collateralized basis over a similar term. Expected payments in the next twelve months are classified\nas current operating lease liabilities. Payments in excess of twelve months are classified as long-term operating lease liabilities. We\nalso recognize an operating lease right-of-use asset on the balance sheets, valued at the lease liability and adjusted for prepaid or\naccrued rent balances existing at the time of initial recognition. The operating lease liability and right-of-use assets are reduced over\nthe term of the lease as payments are made and the assets are used.\n\n \n\nThe Company assesses its leases\nto determine whether it is reasonably certain that these renewal options will be exercised. In general, most of the office space outside\nof Tulsa, Oklahoma is associated with remote employees. Their continued employment determines the need for this space. Much of the warehouse\nspace outside of the Hilti Complex is used to store non-current inventory. As the Company sells down excess inventory, less outside space\nwill be needed, and any renewals will be for less space. The Company also considered the renewal options for the operating lease at the\nHilti Complex and is not reasonably certain to exercise the renewal options. Accordingly, the renewal options are not included in the\ncalculation of its right-of-use assets and lease liabilities, as the Company does not believe that it is reasonably certain that these\nrenewal options will be exercised.\n\n \n\n**Revenue Recognition**\n\n \n\nSales associated with product\norders are recognized and recorded when products are shipped. Products are shipped FOB-Shipping Point. PaperPie’s sales are generally\npaid at the time the product is ordered. Sales which have been paid for but not shipped are classified as deferred revenue on the balance\nsheet. Sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted.\nTransportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.\n\n \n\nEstimated allowances for sales\nreturns are recorded as sales are recognized. Management uses a moving average calculation to estimate the allowance for sales returns.\nWe are not responsible for product getting damaged in transit. Damaged returns are primarily received from the retail customers of our\nPublishing division. This damage occurs in the stores, not in shipping to the stores, and we typically do not offer credit for damaged\nreturns. It is an industry practice to accept non-damaged returns from retail customers. Management has estimated and included a reserve\nfor sales returns of $0.2 million for the fiscal years ended February 28, 2026 and February 28, 2025.\n\n \n\n**Inventory**\n\n \n\nOur inventory contains approximately\n2,000 titles, each with different rates of sale depending upon the nature and popularity of the title. Almost all of our product line\nis 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\nare printed in China, Europe, Singapore, India, Malaysia, and Dubai typically resulting in a four- to eight-month lead-time to have a\ntitle printed and delivered to us.\n\n \n\n16\n\n[Table of Contents](#TableOfContents)\n\n \n\nCertain inventory is maintained in\na non-current classification. Management continually estimates and calculates the amount of non-current inventory. Noncurrent inventory\narises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle, due to the\nminimum order requirements of our suppliers, as well as reduced sales volumes. Noncurrent inventory is estimated by management using\nan anticipated turnover ratio by title, based primarily on historical sales. Inventory in excess of 2½ years of anticipated sales\nis classified as noncurrent inventory. These inventory quantities have additional exposure for storage damages, aging of topical related\ncontent, and associated issues, and therefore have higher obsolescence reserves. Noncurrent inventory balances prior to valuation allowances\nwere $21.1 million and $16.3 million at February 28, 2026 and February 28, 2025, respectively. Noncurrent inventory valuation allowances\nwere $0.8 million at February 28, 2026 and $0.7 million at February 28, 2025. \n\n \n\nBrand Partners that meet certain\neligibility requirements may request and receive inventory on consignment. We believe allowing Brand Partners to have consignment inventory\ngreatly increases their ability to be successful in making effective presentations at home shows, book fairs, and other events; in summary,\nhaving consignment inventory leads to additional sales opportunities. Approximately 21.6% of our active Brand Partners maintained consignment\ninventory at the end of fiscal year 2026. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory\nthat is not expected to be sold or returned to the Company. The total cost of inventory on consignment with Brand Partners was $1.1 million\nand $1.3 million at February 28, 2026 and February 28, 2025, respectively.\n\n \n\nInventories are presented\nnet of a valuation allowance, which includes reserves for inventory obsolescence and reserves for consigned inventory that is not expected\nto be sold or returned to the Company. Management estimates the inventory obsolescence allowance for both current and noncurrent inventory,\nwhich is based on management’s identification of slow-moving inventory. Management has estimated a valuation allowance for both\ncurrent and noncurrent inventory, including the reserve for consigned inventory, of $1.2 million at both February 28, 2026 and February\n28, 2025.\n\n \n\n**New Accounting Pronouncements**\n\n \n\nSee the New Accounting Pronouncements\nsection of Note 1 to our financial statements, included in Part IV, Item 15 of this report, for further details of recent accounting pronouncements."}