Item 1A. Risk Factors 5
Item 1B. Unresolved Staff Comments 5
Item 1C. Cybersecurity 5
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Mine Safety Disclosures 6
PART II
Item 6. [Reserved] 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9A. Controls and Procedures 18
Item 9B. Other Information 19
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 19
PART III
Item 10. Directors, Executive Officers and Corporate Governance 20
Item 11. Executive Compensation 20
Item 14. Principal Accounting Fees and Services 20
PART IV
Item 15. Exhibits and Financial Statement Schedules 21
Table of Contents
PART
I
FORWARD-LOOKING
STATEMENTS
CAUTIONARY
REMARKS REGARDING FORWARD LOOKING STATEMENTS
The
information discussed in this Annual Report on Form 10-K includes “forward-looking statements.” These forward-looking
statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,”
“project,” “plan,” “believe,” “intend,” “achievable,”
“anticipate,” “continue,” “potential,” “should,” “could,”
and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable,
they do involve certain assumptions, risks and uncertainties and we can give no assurance that such expectations or assumptions will
be achieved. Known and unknown risks, uncertainties and other factors may cause our actual results, performance, or achievements to be
materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Factors
that could cause or contribute to such differences include, but are not limited to,
● our success in recruiting and retaining new brand partners,
● our ability to locate and procure desired books,
● product and supplier concentrations,
● adverse publicity associated with our Company or the industry,
● our ability to ship timely,
● changing consumer preferences and demands,
● cybersecurity threats and incidents,
● legal matters,
● reliance on information technology infrastructure,
● restrictions imposed in the agreements governing our indebtedness,
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 Annual Report on Form 10-K and speak only as of the date of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K, the terms “the
Company,” “EDC,” “we,” “our” or “us” mean
Educational Development Corporation, a Delaware corporation, unless the context indicates otherwise.
Item
1.BUSINESS
(a)
General Description of Business
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. We are a corporation incorporated under the
laws of the State of Delaware on August 23, 1965. Our fiscal year ends on February 28 (29).
Our
Company vision statement reflects “We believe that education is the catalyst for wonderment, kindness, and connection. Our vision
is to empower the world by sparking a child’s natural curiosity and lifelong love of learning through products and experiences
that meet at the intersection of education and play.”
Our
Company mission statement reflects “We are creating the story of tomorrow through people, products, and purpose.”
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(b)
Financial Information about Our Segments
We
sell children’s books, educational toys and games and other related products (collectively referred to as “products”
or “books”) through two business segments described below, which we refer to as “divisions” or “sales channels:”
Percent
of Net Revenues by Division
Additional
financial information relating to the Company’s reportable segments is included in Note 16, “Business Segments”, of the
Notes to Financial Statements in Item 15, “Exhibits and Financial Statement Schedules,” which is included herein.
(c)
Narrative Description of Business
Products
EDC’s
current catalog contains approximately 2,000 titles, with new additions added periodically across all lines of our products. Additionally,
a similar number of titles that do not have sufficient sales are identified as “out of print” and these titles are no longer
re-printed or included in future catalogs. The Company sells the remaining quantities of these out-of-print titles through their normal
sales channels at normal pricing and has not historically participated in the publishing industry’s “remainder” market.
Many of our products are interactive in nature, including our touchy-feely board books, activity books and flashcards, adventure and
search books, art books, sticker books, foreign language books, learning manipulatives and toys. We also have a broad line of ‘internet-linked’
books which allow readers to expand their educational experience by referring them to relevant non-Company websites. Our books also include
science and math titles, as well as chapter books and novels. Many of our Kane Miller books were originally published in other countries,
in their native languages, and we translate them to common American English and have exclusive rights to publish the titles in the United
States. Certain Kane Miller agreements include North American rights, and these titles are also sold into Canada. Our SmartLab Toys and
Learning Wrap-Ups imprints are owned product lines that are sold domestically and internationally, including the sale of foreign distribution
rights to specific customers.
Seasonality
Sales
for both divisions are greatest during the fall due to the holiday season. Additionally, there is a seasonal increase in spring associated
with Easter holiday season.
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Competition
While
we have the exclusive rights to sell Kane Miller books, Learning Wrap-Ups, and SmartLab Toys and are the exclusive United States Multi-Level
Marketing (“MLM”) distributor of Usborne books, we face competition from other publishers selling on the internet and directly
to our customer base. Our PaperPie division competes in recruiting and retaining Brand Partners, whom continuously receive opportunities
to work for other direct selling companies, as well as other non-traditional employment opportunities, especially in the gig marketplace
that provides multiple opportunities for part-time supplemental income. We also compete with other publishers in the school and library
book fair market, of which Scholastic Corporation is the largest.
Our
Publishing division faces competition from U.S. and international publishing companies that sell online and through the same retail bookstores,
toy stores, and gift and novelty stores that also offer a variety of non-book products.
Employees
As
of February 28, 2025, 83 full-time employees worked at our Tulsa, OK, San Diego, CA, and Ogden, UT facilities. Of these employees, approximately
49% work in our distribution warehouse in Tulsa, OK.
Company
Reports
Pursuant
to Section 13 or 15 of the Exchange Act, as soon as reasonably practicable after filing electronically or otherwise furnishing it to
the Securities and Exchange Commission (“SEC”), we make available, free of charge, on our website (www.edcpub.com) copies
of our Annual Reports, Quarterly Reports and Definitive Proxy Statements. Our website also includes an internet link to the federal SEC
website that contains additional public reports, including Current Reports on Form 8-K, amendments to those reports filed or furnished
to the SEC and reports of holdings of our securities filed by our officers and directors under Section 16 of the Exchange Act. These
reports can also be provided electronically, free of charge, upon request.
Item
1A.RISK FACTORS
We
are a smaller reporting company and are not required to provide this information.
Item
1B.UNRESOLVED STAFF COMMENTS
None
Item
1C.CYBERSECURITY
The
Company has developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity, and
availability of our critical systems and information. We designed and assessed our cybersecurity risk based on the Payment Card Industry
Data Security Standard (PCI DSS). This does not imply that we meet any particular technical standards, specifications, or requirements,
only that we use these frameworks as a guide to help us identify, assess, and manage cybersecurity risks relevant to our business.
Our
cybersecurity risk management program is integrated into our overall enterprise risk management program and shares common methodologies,
reporting channels, and governance processes that apply across the enterprise risk management program to other legal, compliance, strategic,
operational, and financial risk areas. Our cybersecurity risk management program includes:
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We
have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, that have materially
affected the Company, including our operations, business strategy, results of operations, or financial condition. We face risks from
cybersecurity threats that, if realized, are reasonably likely to materially affect us, including our operations, business strategy,
results of operations, or financial condition.
Cybersecurity
Governance
Our
Board considers cybersecurity risk as part of its risk oversight function and has delegated oversight of cybersecurity and other information
technology risks to the Company’s Chief Executive Officer and Chief Financial Officer, who oversee management’s implementation
of our cybersecurity risk management program and incident response plans.
Our
management team and incident response team have overall responsibility for assessing and managing our material risks from cybersecurity
threats. The team has primary responsibility for our overall cybersecurity risk management program and supervises both our internal cybersecurity
personnel and our retained external cybersecurity consultants that conduct vulnerability scans on a quarterly basis per PCI DSS standards.
While cyber-attacks are common threats to all businesses, the Company did not experience a material cyber security incident in either
fiscal year 2025 or 2024.
Our
management team is informed about and monitors the prevention, detection, mitigation, and remediation of key cybersecurity risks and
incidents through various means. This may include briefings from internal security personnel, threat intelligence and other information
obtained from governmental, public, or private sources, including external consultants engaged by us, and alerts and reports produced
by security tools deployed in the information technology environment.
Item
2.PROPERTIES
Our
headquarters office and distribution warehouse is located on a 50-acre complex at 5402 South 122nd East Ave, Tulsa, Oklahoma. The Company
headquarters includes multiple buildings that combine to total approximately 402,000 square feet of office and warehouse space; of which
109,700 is utilized by us and 292,300 is occupied by two third-party tenants. Substantially all customer orders are fulfilled from our
85,000 square foot warehouse, in Tulsa, Oklahoma, using multiple flow-rack systems, referred to as “lines,” to expedite order
completion, packaging, and shipment.
During
the third quarter of fiscal 2024, the Company listed for sale/leaseback our headquarters office and warehouse property. The listing of
the property for sale resulted in a reclassification of the owned property as “Assets Held For Sale” in the Company’s
financial statements.
In
addition to this owned property, we also lease additional warehouse space in Tulsa, Oklahoma and Joplin, Missouri as needed for overflow
inventory, an office space in San Diego, California that is used by our Kane Miller employees, office space in Ogden, Utah, and office
space in Seattle, Washington. We believe that our operating facilities meet both present and future capacity needs.
Item
3.LEGAL PROCEEDINGS
We
are not a party to any material pending legal proceedings.
Item
4.MINE SAFETY DISCLOSURES
None
6
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PART
II
Item
5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The
common stock of EDC is traded on NASDAQ (symbol “EDUC”). The number of shareholders of record of EDC’s common stock as of
May 12, 2025, was 446.
For
information regarding our compensation plans see Note 13 of the notes to the financial statements and our definitive Proxy Statement
to be filed in connection with the Annual Meeting of Shareholders to be held on July 2, 2025, as outlined in Part III, Item 12 in this
Annual Report.
Issuer
Purchases of Equity Securities
Item
6.[RESERVED]
Item
7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a discussion of our business,
including a general overview of our segments, our results of operations, our liquidity and capital resources, and our quantitative and
qualitative disclosures about market risk.
The
following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance.
The forward-looking statements are dependent upon events, risks and uncertainties that may be outside of our control. Our actual results
could differ materially from those discussed in these forward-looking statements. See “Cautionary Remarks Regarding Forward
Looking Statements” in the front of this Annual Report on Form 10-K.
Management
Summary
We
are the owner and exclusive publisher of Kane Miller children’s books; Learning Wrap-Ups, maker of educational manipulatives; and
SmartLab Toys, maker of STEAM-based toys and games. We are also the exclusive United States Multi-Level Marketing (“MLM”)
distributor of Usborne Publishing Limited (“Usborne”) children’s books. Significant portions of our product offering
and inventory are concentrated with Usborne. Our distribution agreement with Usborne includes annual minimum purchase volumes along with
specific payment terms, which, if not met or if payments are not received in a timely manner, offer Usborne the right to terminate the
agreement. During fiscal 2024 and fiscal 2025, 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.
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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.
PaperPie
Division
Our
PaperPie division uses a multi-level direct selling organizational structure to market our products using independent sales representatives
(“Brand Partners”) located throughout the United States. The customer base of PaperPie consists of individual purchasers,
as well as schools and public libraries. Revenues are primarily generated through book showings in individual homes, on social media
collaboration platforms, through book fairs with school and public libraries, and other in-person events.
An
important factor in the growth of the PaperPie division is the addition of new Brand Partners and the retention of existing Brand Partners.
Active Brand Partners (defined as those with sales during the past six months) are primarily responsible for recruiting new Brand Partners.
PaperPie entices new recruits by providing joining incentives to new Brand Partners, including discounted products and cash bonus awards
based on exceeding certain sales criteria. In addition, our PaperPie division provides our Brand Partners with an extensive operational
handbook, valuable training, and an individual website they can customize and use to generate sales. The Company also provides a “back-office”
operations platform that allows Brand Partners to track their individual and team business results.
Brand
Partners
New Brand Partners Added During Fiscal Year 7,800 10,800
Active Brand Partners at End of Fiscal Year 7,800 15,000
Our
PaperPie division’s multi-level marketing organizational structure currently has eight levels of sales representatives, collectively
known as Brand Partners:
● Brand Partners
● Team Leaders
● Advanced Leaders
● Senior Leaders
● Executive Leaders
● Senior Executive Leaders
● Directors
● Senior Directors
Upon
signing up, sales representatives begin as “Brand Partners.” Brand Partners receive “weekly commissions” from
each sale they make; the commission rate they receive on each sale is determined by the “order type” assigned to the sale.
In addition, Brand Partners receive a monthly sales bonus once their total sales reach an established monthly goal, as well as other
awards (called “Level Perks”) for meeting other individual sales and recruiting goals for the month. Brand Partners who recruit
a specified number of other Brand Partners into their downline become “Team Leaders.” These downline recruits are known as
their “Central Group.” Upon reaching this Team Leader level, Brand Partners become eligible to receive “monthly override
payments” which are calculated on sales made by their Central Group and downlines up to two levels below their Central Group. Team
Leaders that recruit and promote other Team Leaders and meet other established criteria are eligible to become “Advanced Leaders.”
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Once
Advanced Leaders promote a second level Brand Partner, add additional recruits, and meet other established criteria, they become “Senior
Leaders,” “Executive Leaders,” “Senior Executive Leaders,” “Directors” or “Senior Directors.”
One-time cash bonus payments are awarded at each promotion level above Brand Partner with increasing award amounts at each promotion
level. Executive Leaders and higher receive an additional monthly override payment based upon the sales of their executive group. Directors
and higher receive an additional bonus payment if they promote a Team Leader from their Central Group. The maximum override payment a
leader can receive is calculated on the sales of their Central Group and three levels below.
During
fiscal year 2025, internet sales continued to be the largest sales channel within our PaperPie division. The use of social media and
party plan platforms, such as those available on Facebook, continue to be popular sales tools. These platforms allow Brand Partners to
“present” and customers to “attend” online purchasing events from any geographical location.
Customers’
internet orders are primarily received via the Brand Partner’s customized website, which is hosted by the Company. Brand Partners
contact hosts or hostesses (collectively “hostess”) who then provide a list of contacts to invite to an online party. During
the online party, the Brand Partner answers attendees’ questions and provides product recommendations. These attendees then select
desired products and place orders via the Brand Partner’s customized website. Internet orders are processed through a standard
online “shopping cart checkout” and the Brand Partner receives sales credit and commission on the transaction. All internet
orders are shipped directly to the end customer. The hostess earns discounted products based on the total sales from the attendees at
the online party. Brand Partners use the list of contacts provided by the hostess as additional contacts for future hostess and recruiting
opportunities.
In-person
parties also occur when Brand Partners contact hostesses to hold book shows in their homes. The Brand Partner assists the hostess in
setting up the details for the show, makes a presentation at the show, and takes orders for the products. The hostess earns discounted
products based on the total sales at the party, including internet orders for those customers who can only attend via online access.
These orders are typically shipped to the hostess, who then distributes the products to the end customer. Customer specials are also
available when customers, or their party, order above a specified amount. As with online parties, home shows often provide an excellent
opportunity to recruit new Brand Partners.
PaperPie
net revenues also include sales to schools and libraries through PaperPie Learning. PaperPie Learning is a separate program for eligible
Brand Partners which requires certain qualifications and the completion of additional training requirements. The PaperPie Learning program
includes book fairs which are held within an organization as the sponsor. The Brand Partner provides promotional materials to introduce
our products to parents, who then turn in their orders at a designated time. The book fair program generates discounted products for
the sponsoring organization.
PaperPie
also generates revenues through various fundraiser programs directed toward schools and community organizations. Reach for the Stars
is a pledge-based reading incentive program that provides cash and products to the sponsoring organization, and products for the
participating children. An additional fundraising program, Cards for a Cause, offers Brand Partners the opportunity to help members
of the community by sharing proceeds from the sale of specific items. Organizations do this by selling a variety box of greeting-type
cards and donating a portion of the proceeds to help support their related causes.
Publishing
Division
Our
Publishing division operates in a market that is highly fragmented, with many types of retail companies engaged in selling children’s
books and toys. The Publishing division’s customer base includes national book chains, regional and local bookstores, toy and gift
stores, school supply stores, and museums. To reach these markets, the Publishing division utilizes a combination of commissioned sales
representatives, as well as an in-house sales group located at our headquarters.
The
table below shows the percentage of net revenues from our Publishing division based on market type:
Publishing
Division Net Revenues by Market Type
National chain bookstores 11 % 2 %
Publishing
uses a variety of methods to attract potential new customers and maintain current customers. Our employees attend many of the national
trade shows held by the book and toy selling industry each year, allowing us to contact potential buyers who may be unfamiliar with our
products. Our marketing strategy targets toy and specialty stores, in addition to bookstores and museum gift shops, through print media
advertising in trade publications. In some instances, our products are featured in promotions and catalogs by participation in co-ops
with national chain retailers.
Publishing’s
sales representatives actively target the smaller independent bookstore and gift shop customers. This market has seen continued growth
due to a resurgence in the opening of local bookstores, toy stores, and specialty stores across the U.S., coupled with the efforts of
both our in-house and outside sales representatives to increase sales to local and independent businesses. Our annual catalogs are mailed
out to approximately 4,000 customers and potential customers on a yearly basis. See Publishing Operating Results for discussion of our
updated distribution agreement with Usborne.
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Result
of Operations
The
following table shows our statements of operations data:
Twelve Months Ended February 28 (29),
Operating expenses
See
the detailed discussion of net revenues, gross margin and operating expenses by reportable segment below:
Non-Segment
Operating Results
Total
operating expenses not associated with a reporting segment were $9.9 million for the fiscal year ended February 28, 2025, compared
to $11.3 million for the same period a year ago. Operating expenses decreased $1.4 million primarily as a result of a reduction in labor
expenses of $0.9 million, with our warehouse payroll having the largest reduction, plus a $0.7 million decrease in depreciation expense
due to the sale of the Company’s old headquarters and classification as assets held for sale of our current headquarters and excess
warehouse and machinery and equipment, and a $0.4 million decrease in freight-handling costs associated with a decrease in product revenues
prior to discounts and allowances, offset by a $0.4 million increase in building rent due to sale and leaseback of our excess warehouse
facility and additional warehouse space in Tulsa and Missouri used to house excess inventory, $0.1 million increase in personal property
taxes, and $0.1 million increase in reserve for bad debt due to an increase in long-term and consignment inventory reserves.
Interest
expense decreased $0.6 million, to $2.2 million for fiscal year ended February 28, 2025, compared to $2.8 million reported for fiscal
year ended February 29, 2024, with a $0.3 million decrease due primarily to the paydown of the line of credit required by the bank, and
a $0.3 million decrease from the reduction of principle on the two term loans.
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Other
income decreased $7.3 million, to $2.1 million for fiscal year ended February 28, 2025, compared to $9.4 million reported for fiscal
year ended February 29, 2024, due to a $3.8 million decrease of other income related to the Employee Retention Credit received in fiscal
2024, a $4.0 million decrease due to the gain from the sale of the excess warehouse facility recognized in fiscal 2024, and a $0.3 million
decrease from the loss associated with the abandonment of the Host Portal IT project, offset by $0.7 million increase in rental income
due to the new tenant lease in our headquarters facility that started in the second quarter of fiscal 2025, and a $0.1 million increase
related to royalties received from a promotion with Chick-fil-A which used a version of our books to distribute with their kids meals.
Income
taxes decreased $1.8 million, to a tax benefit of $1.6 million for the fiscal year ended February 28, 2025, from a tax expense of
$0.2 million for the same period a year ago. This decrease was primarily related to the decrease in taxable income for the current fiscal
year compared to the prior fiscal year. The effective tax rate decreased by 2.4%, to 23.2% for fiscal year ending February 28, 2025,
as compared to 25.6% for fiscal year ended February 29, 2024, primarily due to sales mix fluctuations between states and credits eligible
for research and development expenses. Our tax rates are higher than the federal statutory rate of 21% due to the inclusion of state
income and franchise taxes.
PaperPie
Operating Results
The
following table summarizes the operating results of the PaperPie segment for the twelve months ended February 28 (29):
Twelve Months Ended February 28 (29),
Operating expenses
Average number of active Brand Partners 12,300 18,300
PaperPie
net revenues decreased $15.7 million, or 34.4%, to $29.9 million for the fiscal year ended February 28, 2025, when compared with net
revenues of $45.6 million reported for the fiscal year ended February 29, 2024. The average number of active Brand Partners in fiscal
year 2025 was 12,300, a decrease of 6,000, or 32.8%, from 18,300 in fiscal year 2024. The Company reports the average number of active
Brand Partners as a key indicator for this division. The Company saw new Brand Partner recruiting negatively impacted due to several
factors including economic factors that include inflation, resulting in high fuel costs and food price increases that continue to impact
the disposable income of our customers. Additionally, the Company executed a new distribution agreement with Usborne Publishing Limited
in fiscal 2023. This agreement required the rebranding of the direct sales division from Usborne Books & More (“UBAM”)
to PaperPie. This rebranding was completed in the fourth quarter of fiscal 2023. The reduced sales and uncertainty resulting from the
new Usborne distribution agreement increased Brand Partner turnover and negatively impacted new Brand Partner recruits. We expect this
impact on sales to continue as inflationary pressures persist.
PaperPie
gross margin decreased $11.5 million, or 38.5%, to $18.4 million for the fiscal year ended February 28, 2025, from $29.9 million reported
for fiscal year ended February 29, 2024. Gross margin as a percentage of net revenues decreased 3.7% to 61.8% for fiscal year 2025 when
compared to 65.5% for fiscal year 2024. The decrease in gross margin as a percentage of net revenues is primarily attributed to increased
discounts and promotions offered in fiscal 2025 to spur sales and turn excess inventory into cash, which was used to pay down payables
and bank debts.
Total
PaperPie operating expenses decreased $9.3 million, or 36.0%, to $16.5 million during the fiscal year ended February 28, 2025, when compared
with $25.8 million reported for the fiscal year ended February 29, 2024. Operating and selling expenses decreased $2.6 million, to $4.6
million for the fiscal year ended February 28, 2025, from $7.2 million reported in the same period a year ago. These decreased expenses
were due to a $1.7 million decrease in shipping costs associated with the decrease in volume of orders shipped, and a decrease of $0.8
million in accruals for Brand Partner incentive trip expenses, as well as a $0.1 million decrease in various other expenses. Sales commissions
decreased $5.9 million, to $10.0 million during the fiscal year ended February 28, 2025, when compared to $15.9 million reported in the
same period a year ago primarily due to the decrease in net revenues. General and administrative expenses decreased $0.8 million, to
$1.9 million during the fiscal year ended February 28, 2025, when compared with $2.7 million reported for the fiscal year ended February
29, 2024. This decrease was due to a $0.4 million decrease in credit card transaction fees and $0.2 million decrease in payroll expenses,
both associated with decreased sales volumes, as well as $0.2 million decrease in various other expenses.
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Operating
income of our PaperPie division decreased $2.1 million, or 51.2%, to $2.0 million for the fiscal year ended February 28, 2025, as compared
to $4.1 million reported for fiscal year ended February 29, 2024. Operating income for the PaperPie division as a percentage of net revenues
for the year ended February 28, 2025 was 6.5%, compared to 9.1% for the year ended February 29, 2024, a decrease of 2.6%. Operating income
as a percentage of net revenues changed from the prior year primarily due to the decrease in net revenues due primarily from the reduced
number of active brand partners and higher discounts offered to spur sales.
Publishing
Operating Results
The
following table summarizes the operating results of the Publishing segment for the twelve months ended February 28 (29):
Twelve Months Ended February 28 (29),
Our
Publishing division’s net revenues decreased $1.1 million, or 20.4%, to $4.3 million for fiscal year ended February 28, 2025 from
$5.4 million reported for fiscal year ended February 29, 2024. The Publishing divisions net revenues decreased as the new distribution
agreement with Usborne does not allow the retail division to sell these products. Retail sales of Usborne products discontinued in the
first quarter of fiscal 2024.
Gross
margin decreased $0.5 million, or 16.1%, to $2.6 million for fiscal year ended February 28, 2025, from $3.1 million reported for fiscal
year ended February 29, 2024. Gross margin as a percentage of net revenues increased 2.0%, to 59.5% for fiscal year 2025, compared to
57.5% reported in the same period a year ago mainly due to product mix change. During fiscal 2025, sales of SmartLab Toys increased,
which has a lower cost of goods sold than the Usborne product line that was discontinued in fiscal 2024.
Operating
expenses decreased $0.5 million, or 26.3%, to $1.4 million for fiscal year ended February 28, 2025, from $1.9 million reported for fiscal
year ended February 29, 2024. The decrease in operating expenses resulted from the decrease in sales commissions of $0.1 million for
EDC Publishing due to lower net revenues and the restructuring of our in-house sales department, a decrease in freight expense of $0.1
million associated with lower sales, and a decrease of $0.3 million in payroll expenses.
Operating
income for the segment remained consistent at $1.2 million for fiscal year ended February 28, 2025 and February 29, 2024.
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Liquidity
and Capital Resources
EDC
has a history of profitability and positive cash flow. We typically fund our operations from the cash we generate. During periods of
operating losses, EDC will reduce purchases and sell through 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, and to pay down the revolving line of credit
and portions of the 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. We utilize a bank credit facility and other term loan borrowings
to meet our short-term cash needs, as well as fund capital expenditures, when necessary. As of the end of fiscal year 2025, our revolving
bank credit facility loan balance was $4.2 million with $0.6 million of borrowing availability.
During
fiscal year 2025, we experienced positive cash flows from operations of $3,211,700. These cash flows resulted from:
Adjusted
for:
● depreciation and amortization expense of $1,724,900
● share-based compensation expense, net of $403,300
● net loss on sale of assets of $321,400
● provision for inventory allowance of $144,000
● provision for credit losses of $48,000
Offset
by:
● deferred income taxes of $1,129,600
Positively
impacted by:
● decrease in inventories, net of $10,754,100
● increase in deferred revenues of $91,700
Negatively
impacted by:
● decrease in accounts payable of $2,062,800
● decrease in income taxes payable of $312,500
● increase in accounts receivable of $237,100
● increase in prepaid expenses and other assets of $168,300
Cash
used in investing activities was $429,600 for capital expenditures, consisting of $396,200 in new software development costs to add new
features to our proprietary systems that PaperPie Brand Partners use to monitor their business and place customer orders and $43,200
in building improvements, offset by $9,800 from the sale of machinery and equipment.
Cash
used in financing activities was $3,083,000, which was comprised of net payments on the line of credit of $1,300,000 and payments on
term debt of $1,800,000, offset by $17,000 from other financing activities.
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The
Company continues to expect the cash generated from operations, specifically from the reduction of excess inventory, and cash available
through our line of credit with our Lender, will provide us with the liquidity we need to support ongoing operations. Cash generated
from operations will be used to pay down existing debts with our bank and to purchase replacement inventory and new inventory in order
to improve our product offerings.
On
August 9, 2022, the Company executed a Credit Agreement (“Loan Agreement”) with BOKF, NA (“Bank of Oklahoma”
or the “Lender”). The Loan Agreement established a fixed rate term loan in the principal amount of $15,000,000 (the “Fixed
Rate Term Loan”), a floating rate term loan in the principal amount of $21,000,000 (the “Floating Rate Term Loan”;
together with the Fixed Rate Term Loan, collectively, the “Term Loans”), and a revolving promissory note in the principal
amount up to $15,000,000 (the “Revolving Loan” or “Line of Credit”).
On
December 22, 2022, the Company executed the First Amendment to our Loan Agreement with the Lender. This amendment clarified the definition
of the Fixed Charge Coverage Ratio to exclude dividends paid prior to November 30, 2022, and placed restrictions on acquisitions and
cash dividends.
On
May 10, 2023, the Company executed the Second Amendment to our Loan Agreement with the Lender. This amendment waived the fixed charge
ratio default which occurred on February 28, 2023 and amended the financial covenant to not require the fixed charge ratio to be measured
at May 31, 2023. The Second Amendment also added a cumulative maximum level of fiscal year to date inventory purchases through the expiration
of the Revolving Loan Agreement, increased the borrowing rate on the Company’s Revolving Loan to Term SOFR Rate plus 3.5%, required
certain swap agreements be executed within 30 days of the amendment, reduced the revolving commitment from $15,000,000 to $14,000,000,
effective May 10, 2023, and further reduced the revolving commitment to $13,500,000, effective July 15, 2023, among other items.
On
June 6, 2023, pursuant to its interest rate risk and risk management strategy, the Company entered into a swap transaction (the “Swap
Transaction”) with the Lender, which converts a portion of the original $21,000,000 Floating Rate Term Loan from a floating interest
rate to a fixed interest rate for the next two years. The Swap Transaction has a notional amount of $18,000,000 through fiscal quarter
ending May 31, 2024, and then resets to $13,000,000 through May 30, 2025, while continuing to mirror the amortizing balance of the Floating
Rate Term Loan. Under the terms of this agreement, the Company, in effect, has exchanged the floating interest rate of 30-Day Term SOFR
Rate at the trade date of June 5, 2023, to a fixed rate of 4.73%. The Swap Transaction commenced on June 7, 2023, with a termination
date of May 30, 2025.
On
August 9, 2023, the Company executed the Third Amendment along with a Revised Credit Agreement (“Revised Loan Agreement”)
with the Lender. This amendment extended the Revolving Loan maturity date to January 31, 2024 and introduced a stepdown to the Revolving
Commitment from $13,500,000, through August 30, 2023; to $10,500,000 through October 30, 2023; to $9,000,000 through November 29, 2023;
to $5,000,000 through December 30, 2023; to $4,500,000 through January 30, 2024; and to $4,000,000 on January 31, 2024. The amendment
restricted the Company from entering into any new purchase orders and encouraged the Company to use its best efforts to cancel existing
purchase orders. The Third Amendment also increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50%. The Revised
Loan Agreement was updated for the changes in the Third Amendment as well as removed the fixed charge ratio and the ability for borrowings
to be accelerated before the January 31, 2024 Revolving Loan maturity date.
Prior
to the Third Amendment, executed on August 9, 2023, the Loan Agreement contained provisions that required the Company to maintain a minimum
fixed charge ratio. The Company was in violation of the minimum fixed charge ratio covenant as of February 28, 2023, for which the Company
obtained a written waiver of compliance from the Lender and was not required to measure the fixed charge ratio as of May 31, 2023. Concurrent
with the execution of the Third Amendment to the Loan Agreement, the Loan Agreement was modified to incorporate the changes outlined
in the Third Amendment and the fixed charge ratio covenant was removed, as well as the Lender’s right to accelerate the maturities
of the Fixed Rate Term Loan and Floating Rate Term Loan due to the fixed charge ratio covenant.
On
November 30, 2023, the Company executed the Fourth Amendment to the Credit Agreement (“Amendment”) with the Lender. The Amendment,
effective December 1, 2023, increased the Revolving Loan commitment to $8,000,000 and extended the maturity date to May 31, 2024. The
Amendment also required the Company to list the Hilti Complex for sale, allowed the Company to execute additional purchase orders, subject
to the lender’s approval and conditions, not to exceed $2,100,000 between December 1, 2023 and March 31, 2024, among other items.
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On
June 13, 2024, the Company executed the Fifth Amendment to the Existing Credit Agreement with the Lender. The Amendment, effective May
31, 2024, adjusts the maximum availability of the Revolving Loan commitment to $7,000,000 through the maturity date of October 4, 2024.
The Amendment also requires an additional decrease in the Revolving Loan to $4,500,000.
On
October 7, 2024, the Company executed the Sixth Amendment to the Existing Credit Agreement with the Lender. The Amendment, effective
October 3, 2024, extended the maturity date to January 4, 2025 and includes required step downs on the Revolving Loan to $5,500,000 by
November 30, 2024.
On
January 13, 2025, the Company executed the Seventh Amendment to the Existing Credit Agreement with the Lender. The Amendment, effective
January 4, 2025, adjusted the maximum availability of the Revolving Loan commitment to $4,750,000 through the maturity date of April
4, 2025.
On
April 16, 2025, the Company executed the Eighth Amendment to the Existing Credit Agreement with the Lender. The Amendment, effective
April 4, 2025, increases the Revolving Loan interest rate on the effective date to SOFR + 6.00%, extends the maturity date of the Revolving
Loan to July 11, 2025, and includes a required step down on the Revolving Loan to $4,500,000 million by May 31, 2025. The Amendment also
redefined the maturity dates of the two term loans to September 19, 2025 (see Note 20 of the notes to the financial statements).
Available
credit under the current $4,750,000 revolving line of credit with the Company’s Lender was approximately $551,900 at February 28,
2025.
Features
of the Revised Loan Agreement include:
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Risks
and Uncertainties
In
accordance with ASC 205-40, Going Concern, the Company has evaluated whether there are conditions and events considered in the
aggregate that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date
the financial statements are issued.
The
short-term duration of the revolving and term loans and uncertainty of the bank’s ongoing support beyond July 11, 2025, along with
recurring operating losses and other items, raise substantial doubt over the Company’s ability to continue as a going concern. To address
these concerns, the Company has taken steps in its plans to reduce debt by selling owned real estate. The proceeds from the sale are
expected to pay off the Term Loans and Revolving Loan. Following the loan payoff, management plans to fund ongoing operations with limited
borrowings through local banks or other financing sources. In addition, management’s plans include reducing inventory, which will
generate free cash flows, and building the active PaperPie Brand Partners to pre-pandemic levels. Although there is no guarantee these
plans will be successful, management believes these plans, if achieved, will alleviate the substantial doubt about continuing as a going
concern and generate sufficient liquidity to meet our obligations as they become due over the next twelve months.
Contractual
Obligations
We
are a smaller reporting company and are not required to provide this information.
Off-Balance
Sheet Arrangements
As
of February 28, 2025, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material
effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Seasonality
The
Company experiences increased sales in the Fall season along with increased sales during the Easter holiday season. Historically, we
have experienced an increase in inventory during the Summer in anticipation for the Fall increase in sales. We do not expect inventory
to increase in fiscal year 2026 as we continue to sell-down excess inventory.
Critical