Educational Development Corporation Stock

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for fiscal 2027 first quarter results. As a reminder, this conference is being recorded. On the call today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer.

After the market closed this afternoon, the company issued a press release announcing its results for the fiscal 2027 first quarter results. The release will be available later today on the company's website at www.edcpub.com. Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors.

We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition.

With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Thank you, Kelly, and welcome, everyone, to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter, then I will pass the call over to Dan to run through the financials, after which Heather will provide an update on sales and marketing and IT projects and then I will provide an update on our plans for the rest of fiscal 2027.

So during March, we ran a recruiting special surrounding our March 14 Pie Day which yielded better-than-expected results. We added over 1,300 new main partners, which brought our active brand partner numbers above 5,200, and we have maintained this level of brand proneness to this day. This was a 20% growth in Brand Partners' numbers since the end of last year, and continuing our Brand partner growth is a key focus.

Also, at the beginning of the quarter, we made several expense reductions, which are expected to exceed $1.2 million in savings for the fiscal year. These savings, which include decreases in pay for our executive team, were made to improve our cash flow and give us the ability to continue to execute our conservative purchasing plan to replenish some of our best selling titles as well as bring in new titles. Bringing in new titles energizes our Brand partners and gives our retail reps some new products to present.

I'm happy to say that many of these new titles came in throughout the last several months, and we have introduced them with much very early success. That is some confirmation that our strategy is on point. The results for the quarter were driven by our lower revenue levels, offset by lower expenses.

The focus of our fiscal 2027 turnaround plan remains on growing our revenue and Brand partner levels back to pre-pandemic levels, and I'm happy with the initial progress our team has achieved. Heather will talk more about this progress in her marketing update. As I have said before, our turnaround plan is not an overnight change, but a carefully developed plan for growth over the next few quarters and years.

With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of financials.

Thank you, Craig. Our 2027 fiscal first quarter results compared to the first quarter last year included net revenues were $4.8 million compared to $7.1 million. Our average Active Brand Partners for the quarter totaled 5,300 compared to 7,700 last year. Loss before income taxes were $1.4 million in both quarters. Net loss totaled $1.4 million for the quarter compared to a net loss last year of $1.1 million in the first quarter. Loss per share totaled $0.16 compared to a loss per share of $0.13 on a fully diluted basis.

Now for an update on our working capital. Inventory levels decreased from $37.7 million at the beginning of fiscal year 2027 to $36.2 million at the end of May, generating $1.5 million of cash flow from inventory reductions. Our cash balance increased from $1.3 million at the end of February to $1.8 million at the end of the first quarter.

I would also like to mention an unusual accounting adjustment we continue to make. Due to our historical losses and operating expectations during the turnaround period, we evaluated the need for a valuation allowance for our deferred tax assets. Based on this evaluation, we continue to recognize a valuation adjustment offsetting the deferred tax asset, eliminating the tax benefit on our income statement. This adjustment has no cash flow impact but had a direct impact to our tax expense, net earnings and earnings per share.

When the company returns to profitability, this evaluation adjustment will be reversed. The reversal will have no cash flow impact will have a direct impact to tax expense, net earnings and earnings per share. This concludes the financial update. I will now turn the call back to Heather Cobb for our sales and marketing updater?

Thanks, Dan. As Craig mentioned, our paper Pie Day celebration in March delivered positive results across the business. The promotion generated strong recruiting activity drove sales through our sitewide offer, increased engagement with our newly created account credits program and helped introduce several new titles to customers. It was a great example of how coordinated initiatives can create engagement across multiple areas of the company at the same time.

In April, members of our team attended the Bellona Children's Book Fair, the premier event in children's publishing. The fair provides an important opportunity to discover new content, strengthen relationships with our publishing partners and evaluate future additions to our catalog. We also had the privilege of then traveling and celebrating many of our top performers during our incentive trip to Bermuda, recognizing those who continue to share our products and build driving businesses, helping to expand our reach and impact.

May brought the announcement of our next story scape incentive trip, which will take earners to Zion National Park in 2027. These experiences continue to be a powerful way to recognize achievement while inspiring future growth across the field. While brand partners were focused on serving customers and building their businesses throughout the spring, our home office team was busy preparing for unfold our annual convention.

The event generated tremendous energy and optimism as attendees explored new product releases, participated in recruiting focus initiatives and received an early look at several technology enhancements currently in development. These include our new AI-assisted Book study named Reed, which launched this week as well as our upcoming projects like our Wish List and registry options and the ability to identify and market to specific audiences with targeted offers. The response to all of this reinforce what we're seeing throughout the organization, a strong belief in where we're headed and excitement about what lies ahead.

Throughout this time period, our retail team was attending trade shows and showrooms, highlighting the new titles that we have available as well as our vast backlist offerings. As we move forward through the summer months, our attention is centered on our well read summer campaign. We're leaning into the growing consumer interest in analog experiences, reading and intentional time together by focusing on book levers and families seeking alternatives to screen-based entertainment.

With additional promotions planned throughout the season, we believe that there are tailwinds to build on the engagement that we've seen so far this year. I will now turn the call back over to Craig White.

Thank you, Heather, and Dan. As I mentioned before, we are happy with the initial results of our turnaround plan. Specifically, we are continuing our effort to build our brand partner levels, and they are excited about our new titles and our IT improvements. You heard from Heather about some of our recent IT initiatives are focused on making it easier to do business with us and adapting to the new way that different generations prefer to transact with us. This new generation presents challenges, not just for our company, but many companies in the direct selling industry to revise their engagement methods. I can tell you that our sales and marketing as well as IT departments are working actively to ensure our strategies take into account this important group.

Lastly, I want to thank all shareholders for their patients, our employees for their commitment to our mission and our customers and very partners for their loyalty. I am confident that the steps we have taken and will continue to take will result in sales growth and our return to profitability. Now that we have provided a summary of some recent activity. I'll now turn the call back over to the operator for question and answer.

[Operator Instructions]

We have a question from Paul Carter from Capstone Asset Management.

So first question is more of a housekeeping question. Most shareholders probably know Randall White swung history [indiscernible] I was just curious about the beneficial owners disclosure in your porting circular. He's no longer listed as a 5% beneficial owner. Was there an ownership transition? Or was that a [indiscernible].

Well, it's a good question, Paul. The challenge is we don't know -- he's not a novo owner, and we have no visibility to these ownership levels. So we could not include it in the proxy because we could not confirm its shareowners.

Okay. so that -- and then just to clarify 1 thing on the brand partner numbers the press release referenced average Active Brand Partners of 300 for the quarter, but then your comment that started at 4,300 and in the quarter that can -- what happened there is just like is that a reflection of the increase in red after the March promotion and the end of the quarter or...

Well, Yes. So it increased in March and then kind of remained pretty consistent through the end of the quarter.

Yes. Based on our -- the way we count active -- at the end of every month, there's some people that fall off that we had such a great addition that, that's why we increased as a net.

Okay. Okay. Great. And then just related to that, maybe this is a question for Heather I know in in your fiscal fourth quarter around, I think, was 4,500 in Q1 as a of margin -- so by the end of May, average number was up I'm just trying to understand the 3 -- like do you feel -- you have a pipeline of new recruiting initiatives a you can continue use to expand to the brand partner of the base from here? Or was kind of the margin recruiting promotion will come a big one that caught sort of going forward, like that.

That's a great question, Paul. I would say it's -- we consistently offer a variety of different kind of recruiting initiatives and promotions, not only just because we know that different audiences may be paying attention at different times of the year, but also different things attract different audiences as well. And so when we offer any sort of recruiting special or promotion, it will vary in some way, shape or form, whether it's cost or what is available as part of the kit different things like that.

So we did a promotion immediately out of convention. We have other promotions planned coming later in the year as well. I don't think that we're are now or have ever been in the business that we can lean solely on a single promotion in a year and think that, that is a place that we're in good standing. -- direct selling as a whole is a business of people coming in and people staying and people going at some sort of some sort of level. And so I think that we're definitely looking ahead and planning ahead, both in the current day and in the coming 6 months to a year. So does that answer your question?

Let me add just a little bit, Paul. While I'm certainly not forecasting what's going to be happening the rest of this year, I think this is evidence that our strategy is somewhat working. I mean they were waiting for new titles -- and now that we've released some new titles, everyone's excited. There's a buzz in the field. Vito was incredible. That's how it works.

It's word of mouth and while our Brand Partners are energized and excited and enthusiastic, it's just easier for them to recruit. So I think that's basically what's happening.

Actually, that's a really good point. I'm curious, do you measure that? I'm sure you measure a lot of the partners. But since you are now able to buy new titles. Are you noticing in data that Brand Partners are sticking around and be active for longer than maybe they were a year ago? Or is it just just too early to.

That's a great question. I will say we do look at all sorts of data like that. I think considering our new titles dropped, we released a few in March and April. But when I say a few, I mean that pretty literally -- and so considering we're not even a full month into our full release of new title. It's really too early to look at any concrete data that would show that.

Okay. Great. And then just switching gears, and I apologize, I just have a quick questions here. So last quarter, you talked about moving away from diesel promotion just retaining more to more like historical gross margin. You had product promotions during Q1 gross margins kind of move closer to historical levels -- are you still seeing some impact from some of the accent.

I would say that we're still seeing impact related to that. The promotions that we ran and the site like that we ran the surrounding our paper Pie Day kind of was consistent with the promotions that we ran in the first quarter last year. So we don't see a lot of margin improvement yet.

Okay. Just One observation about that? So I know like as of now, I think your book value per share is around $4. You said that post quite a bit about your stock price but 90% of that give or take is represented by inventory. I recognize that we could generate cash and improve inventory turn -- given the amount of shareholder value that's tied up in inventory, how are you balancing the desire to like reduce inventory level with ensuring that you're not or pricing in terms of gross margin through promotions?

Well again, good question. It's kind of a balancing act, right? I mean we need to bring in cash, but we don't want to reduce the value of our product. So it is -- I mean, we look at it every single month, okay, do we need to do something in the next quarter or things like that. So it's not -- well, I'd like to say it's an overall strategy where we're not going to discount as much and that is the case. But there's just times where it's necessary.

Is it -- is that balance sort of shifting or not sacrificing gross margin? Because you said as top obviously, when you have the bank facility and ongoing need and pressure from your bank.Now you don't have that, and I think you said your to during the order. It doesn't sound like you kind of actively need cash or at least your cash balance grow as much as we did in the past and just sort of wondering if that is like directly playing into your decision on...?

Well, it's a great question. I'd like to say we're back, but we just so recently come out of difficult periods. I'm somewhat conservative, but I think you're right. We need to focus on new title acquisition and really make sure we're not missing the window of opportunity here. So it's a point well taken, and I agree with you, we need to try to reduce the times that we're discounting to it. So you're right.

I think I'll add too, Paul, that when we do look at times that we're discounting, we're looking at it through a different loan. When we were doing deep discounting across the board as a site-wide sales that looks very different than some of the things that we've done recently, where we've done more of a category sale approach. And so we've discounted a handful of titles as opposed to just an across the board things like that, that while from an outside view, it might look like, oh, they're still offering site-wide sales.

If you dig a little deeper, you will see that move that will get us back to those normal gross margins without just stopping that activity altogether in anticipation that the consumers are ready for that.

Our next question is from Igor Novgorodtsev.

[indiscernible].

There's an echo that makes it hard to series.

So it's better now. Now it's a little better about this. Okay. Sounds good. So I have several questions, and hopefully, I want to take that much of your time. So regarding the new, we're happy to see the new partners. I actually want to point out, I think I did a count today, this is the first time in 10 quarters that the partner number is actually up, not down. So that's nice to see. However, I don't look like it's translated into actual sales and I understand this is a new partner, and it takes time. So what's it like typical ramp-up time when you start seeing the actual tangible results from these new partners.

Yes. That's a great question. I think that, that goes back a little bit to the question that Paul had about is it -- we've released new titles. We have these new brand partners, do we consider that a success? We brought in these new brand partners in March. We have a decent amount of turnaround time to get them into the culture into selling, introducing new titles different things like that.

And so I would say within the next couple of quarters, we'll definitely see some of that fall into place in the bottom line.

Okay. So there is a significant lag just because you sign up new partners, it takes some time basically to get up to speed and to start delivering the revenue. It's usually -- there is a couple of quarters link, right? That's how I understood this.

It can be. It can also happen the other way where you see an immediate bolt to that and then it continues. So it can happen either way. We just don't consider it slightly negative if it doesn't happen that way immediately.

Right. So fair enough. I know you put some effort on the promotion, but promotion cannot be continuous. How are you planning to keep the numbers of partners up going forward? What are your points? What are you going to do differently because the count has been falling for 2 years. And this time, it seems to be turning around. But obviously, you're just in the beginning of a turnaround. So what are your plans to keep the numbers up?

Yes. I think that's a great question. And I think it's what Craig and I both mentioned and alluded to as we shared the summary, 2 main things are making sure that our inventory that we have in place is really what consumers are looking for right now, whether that means new titles or staying in stock of some of the most beloved titles that we need to order reprint for and things like that. That's where our conservative phase purchasing approach, we really feel is key as part of that strategy.

The other thing is those IP initiatives that we mentioned. Some of the ones that we very specifically mentioned is are they all filter through this lens of just removing any sort of friction points and making it easier, not only for the consumer to actually make that purchase but also for the brand partner to get the information to them and help them along through the process of finding what they're looking for.

That's helpful on titles. I know it's not a precise equation, but could you give us some sense of how your mix of sales has changed or hasn't changed so far like or new titles versus the title coming of your inventory? Or how it's going to change going forward as the percentages? Or how do you think about this?

Yes, that's a great question. We are going to have to really dig through the data on that 1 since we haven't introduced new titles in quite a bit of time. And as we shared with Paul, we did that big drop in the middle of June, and so we aren't even a month into full sale cycle of new titles. So it really is too early to tell any of those percentages -- if I were to give any sort of percentages right now, they'd be so inflated with people that are buying new titles because they're excited about them that it really wouldn't be accurate of the representation of what that means going forward.

Yes. I just going to add that the new title drop was in the second quarter, so it's not been reported. I just alluded in my summary that we're happy with the results. So you could that however you'd like.

Okay. No, no, no, I get it. So what we're looking at is strictly all titles so that makes sense.

Speaking about the Q2, and I know you're not providing guidance, but Q2 is summer is usually you usually the slowest quarter. Do you think this is going to remain this way? Is that always seasonally this way or something that's different about this summer?

No, I think it's still hot and people are still on vacation. And so I think unless something drastically changes there, summer just remains just one of the lowest quarters for us as a whole.

Right. So Q3 is basically where we'll probably see like the real results if things are turning around, right, realistically speaking.

Well, all the results that we report were comparing not sequentially but year-over-year. So I mean even though Q2 low, we're still hoping and planning and working towards it being up over last summer. I'm not saying it is, but that's the plan.

Yes. Okay. So you alluded that there is a significant expense reduction. I can see that you basically doing much better on a much lower revenue level, which is nice. I have a twofold question. Cash flow. So you basically right now earnings are not that important because we understand there is a depreciation amortization and all that, and I don't have your balance sheet empire. But I just want to understand how -- what does your cash flow look like from operations? -- is it really -- you were -- even with your flowing revenue levels, you were still able to pay the bank loan and the cash flow stays positive.

Is that still the story that you expect that your cash flow will sell it to stay positive even at these reduced levels.

Well, I'll answer that kind of on 2 points. The first point is that we have $1.4 million of operating losses in this quarter that we just reported, but our cash build was $0.5 million. So turning inventory into cash, it should translate into positive cash flow. Now the key thing for us is sales grew because the faster we grow brand partners and now that we're able to have new titles for our retail side, the faster we grow revenues overall, the more cash will build.

Now I don't have the crystal lens to tell you how much cash flow we're going to build over the next 3 quarters of fiscal 2027, but the plan is to be cash flow positive and hopefully be very cash flow positive.

Okay. So the cash flow cash increase came out of your inventory reduction, not from reduction of your accounts receivable, right? Is that what I'm reading from?

Yes, receivables dropped a little bit, but it was primarily from inventory reductions.

Okay. That's really great to hear, and that's sort of give comfort investors hard -- my last question on the sort of a comment. I know that I read your presentation and that's one of the things that says we said no to Amazon but given that you have so much inventory, have so many titles and actually do the Gigante your titles and you have some tremendous its have been around forever, and you have a pipe intellectual property, the ownership. Do you guys would ever consider partnering with somebody to move some of your biggest inventory items, which are slow moving or you have too much and maybe not make it much exclusive and putting them sale, maybe not doing your own channels, I understand that takes cash on time, but maybe partnering with somebody to put it in an aligned store? Any thoughts to add?

Yes. That's a good question. We made the concerted effort and decision to not directly to Amazon over a decade ago. And we would say that we still consider that to be a good decision for us and both of our sales channels. We do focus on the retail side with brick-and-mortar stores mainly whether it be independent book stores or larger entities like a Barnes & Noble or something like that.

In addition to that, our retail side, we have several partnerships with various different distributors and reps who sell the places, which it sounds like are ones that you were recommending, and we continue to work with places that are interested in potential large quantities. We've worked on that over time and are continuing to do so to sell off larger quantities of inventory where we can.

So right now, I believe you something around 15% is nonpartner revenue part. Do you think you can grow that part?

I think it can grow. Can it grow to 50%. We don't anticipate that's the case. But it definitely has potential to grow. We've seen great response not only in the book selling side of it, but also in swan gift, especially related to our Smart Web toys division and our learning wrap-ups line. And so yes, I definitely think that there's room to grow.

There are no questions at this time. I would now like to turn the conference back to Craig. Please go ahead.

Thank you, everyone, for joining us on the call today. I always appreciate the questions and the interest. So again, appreciate you and have a good day.

This concludes today's conference. Thank you for attending. You may now disconnect.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for its fiscal fourth quarter and full year results. As a reminder, this conference is being recorded.

On the call today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O’Keefe, Chief Financial Officer.

After the market closed this afternoon, the company issued a press release announcing its results for the fiscal 2026 fourth quarter and year-end results. The release will be available after today on the company's website at www.edcpub.com.

Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition.

With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig, please go ahead.

Thank you, Alan, and welcome, everyone, to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter, then I will pass the call over to Dan to run through the financials. After which Heather will provide an update on sales and marketing and IT projects, and then I will provide an update on our plans for fiscal 2027.

Much of our fourth quarter was focused on our turnaround plan of selecting and ordering critical inventory. During the quarter, we began a conservative purchasing plan to replenish some of our best-selling out-of-stock items as well as purchased new titles. To remind everyone, it takes anywhere from 4 to 6 months from the time we issue a purchase order until the product is received and available for sale.

I am pleased to report that we have received some of these replenishment and new titles and I've seen the excitement this has created in both our sales divisions. We are still expecting most of these new titles over the next few weeks and plan to showcase them at our annual convention in June. Heather will talk more about this in her marketing update. As I've said before, our turnaround plan is not an overnight change, but a carefully developed plan for growth over the next few quarters and years.

With that, I'll now turn the call over to Dan O’Keefe to provide a brief overview of the financials.

Thank you, Craig. To start our fourth quarter summary compared to the prior year fourth quarter, net revenues for the quarter were $4.2 million compared to $6.6 million. Average active PaperPie brand partners totaled 4,500 compared to 9,400. Loss before income taxes were $2.1 million, a $600,000 decline over the prior fiscal fourth quarter.

Income tax for the quarter -- income tax expense for the quarter was $1 million due to a onetime valuation allowance of $1.5 million. Net loss for the quarter totaled $3.1 million, a decline of $1.8 million over the prior year fiscal fourth quarter. Loss per share totaled $0.37 compared to a loss per share of $0.16 on a fully diluted basis.

Next to the fiscal year summary compared to the prior year, net revenues of $22.9 million compared to $34.2 million. Average active PaperPie brand partners totaled 5,800 compared to 12,300. Earnings before income taxes totaled $5.3 million, excluding the gain on the building sale of $12.2 million, the loss before income taxes were $6.9 million. Income tax expense was $3 million with an effective tax rate of 56.5% due to a onetime valuation allowance of $1.5 million. Net earnings totaled $2.3 million. Earnings per share totaled $0.27 compared to a loss of $0.63 last year on a fully diluted basis.

Now for an update on our working capital. Inventory levels decreased from $44.7 million at the beginning of the fiscal year to $37.7 million at the end of the fiscal year, generating $7 million of cash flow from inventory reductions. At the end of the fiscal year, the company had approximately $1.3 million of cash on our balance sheet.

I would also like to mention some unusual accounting adjustments made during the fourth quarter. First, due to our accounting policy surrounding classification of long-term inventory, coupled with our decline in sales, we made a $3.6 million reclass of inventory during the fourth quarter from current inventory to long-term inventory. The reclass had no P&L impact as it only means that we have a longer-term supply of titles, we continue to sell each month based on current sales volumes. As sales increase, we expect more and more inventory to be reclassed from long-term inventory to current inventory.

Secondly, due to our historical losses prior to the fiscal 2026, our operational and our operational expectations during our turnaround period, we evaluated the need for a valuation allowance offsetting our net deferred tax assets. Based on this evaluation, we recognized a onetime valuation adjustment of $1.5 million to offset our net deferred tax assets. This adjustment had no cash flow impact but had a direct impact on our fourth quarter tax expense, net earnings and earnings per share. When the company returns to profitability, this valuation adjustment will be reversed. The reversal will have no cash flow impact, but will have a direct impact to our tax expense, net earnings and earnings per share.

This concludes the financial update. I'll now turn the call over to Heather Cobb for a sales, marketing and IT update. Heather?

Thanks, Dan. While our current results reflect the challenges of the past 2 years, we remain confident in both the direction of our strategy and the opportunity ahead of us. One of the clearest drivers of future growth for our business is growth on our PaperPie side through the brand partner community. As our active brand partner count increases, we count on that momentum to positively impact sales, customer engagement and overall business performance.

For that reason, much of our sales and marketing focus in fiscal 2027 is centered on attracting, onboarding and retaining new brand partners while also continuing to engage existing leaders and teams. We were encouraged by the response to our March joint special, which produced meaningful engagement, adding almost 1,400 new brand partners, showing that there is still strong interest in our opportunity when paired with the right timing, messaging and product excitement. We have additional strategically timed initiatives planned throughout the year that are designed to support both recruiting and sales activities.

At the same time, we are being intentional about protecting the long-term value of our products and our brand. We believe there is an important balance between offering thoughtful promotions or sales that meet consumer expectations while avoiding excessive discounting that can weaken our overall brand perception over time. Our strategy moving forward is focused on creating excitement and urgency in purposeful ways while continuing to reinforce the quality, educational value and uniqueness of our product offering. We also believe we are well positioned within a growing cultural shift towards more intentional and analog experiences.

Parents and families are increasingly looking for opportunities to disconnect from constant screen time and reconnect through hands-on learning, reading, creativity and meaningful interaction. That trend aligns directly with who we have always been as a company. Our mission is creating the story of tomorrow through people, purpose and products continues to resonate and we believe our educational books, games and learning resources meet an important need in today's marketplace.

As Craig mentioned earlier, the arrival of new titles and replenishment inventory has already generated renewed excitement across both of our sales channels. Combined with our continued investment in technology and enterprise-level initiatives, we believe we are building a stronger foundation for long-term growth. Our IT and marketing teams are actively developing tools and platform enhancements designed to simplify how brand partners share our products while also creating a more seamless and enjoyable customer experience.

Upcoming initiatives include a variety of platform enhancements, focused on improving product discovery, streamlining and personalizing the customer journey, expanding functionality for both brand partners and customers and supporting long-term engagement and retention.

While we continue to adapt to changes in consumer behavior and the direct selling landscape as a whole, our overall strategy remains consistent, increase our retail presence, strengthen the brand partner experience, provide exceptional products that support literacy and learning and create sustainable growth through community connection and product sharing. And one of the best ways that we do that, and Craig referenced it earlier is through our National Convention that happens each year.

Next month, we will have several hundred brand partners come into Tulsa to hear from speakers like Rory Vaden, 2 of our Kane Miller author and creators and we'll spend an entire weekend focusing on solving the problem of disconnection with a way to connect with both their customers, new hosts and next team member. We understand that turnarounds take time, and we are encouraged by the progress that we are making and confident in the path ahead. Our team remains deeply committed to the mission of this company, and we believe that, that commitment, combined with strategic execution and renewed sales force growth positions us to build momentum throughout fiscal 2027 and beyond.

Now I will turn the call back over to Craig.

Thank you, Heather and Dan. As Dan mentioned, we had some unusual adjustments during the quarter but expect these to improve our results in the future with the execution of our turnaround plan. During the last couple of years, we have been challenged to operate our business under restrictions from our bank. I am excited about the position we are in today and the plan for growth in fiscal 2027. While we need to execute on our plan that increases sales and therefore, cash, we're putting the most focus on increasing our brand partner counts and retaining existing brand partners.

Over the last 2 years, our sales force has been anxious and waiting to see what will happen. A major factor for the reduced activity has been the lack of new products for them to get excited about for the last 2 years. As I mentioned initially, we have already received a few of these new titles and are seeing the sales excitement from both of our sales channels. We have continued to work with our vendors and are very excited about what is recently been presented to us for release in the new year.

As always, and as you heard extensively from Heather, increasing our brand partner count is a big part of our overall strategy, and that means putting consistent effort toward attracting Gen Z. This new generation is challenging, not just for our company, but all companies in the direct selling industry to revise the recruiting and engagement methods. Many of our recent IT initiatives are focused on getting Gen Z to join as new brand partners by making it easier to do business with us. They work and shop differently, and we are well positioned to meet them where they are.

These are revisions to our existing model that's certainly not an overhaul. We are evaluating programs and systems that haven't brought enough of a return and trying new tactics in new markets. We are embracing AI not as a strategy to eliminate or replace employees but to become more effective so that as we grow, we do not have to hire as many new employees. We are already seeing returns in system development or coding and basic inquiries to support tickets.

I also want to make sure everyone understands that we expect to generate cash flow from inventory reductions to fund operations. Having said this, we executed a new agreement for a $2 million line of credit with our new bank to ensure we have the cash needed for growth. And although we are currently not using line and have a higher cash balance than we had at year-end, this line ensures we can capitalize on new opportunities.

Also, at the end of the fiscal year, as the next step in our turnaround plan, we executed a strategic restructuring of our office and warehouse staff, including executive pay reductions, a small reduction in force along with other expense reductions.

Lastly, I want to thank all of our shareholders for their patience, our employees, customers and brand partners for their commitment to our mission and our vendors for their willingness to stick with us. I am confident in our collective ability to emerge stronger and more resilient than ever before because I really believe we are tackling our growth from a plan -- our growth plan from a position of strength. While we were doing what we had to do to satisfy the bank, we are also thinking and planning for when we are out from under their control and continue to build.

Now that we have provided a summary of some recent activity, I will now turn the call back over to Alan for question and answer. Alan?

[Operator Instructions]. Your first question comes from Igor Novgorodtsev of Lares Capital.

Thank you for taking my question and pronouncing my last name correctly. I have 2 questions. Unfortunately, I cannot see for some reason, your balance sheet on your press release. Could you talk a little bit how much inventory was reduced in this quarter? And as related to this, how much was the cash flow from the inventory reduction from operations.

This is Dan O’Keefe. I'm sorry, I don't have that information for you right now. We will be filing the 10-K later today. And you can obviously glean that from the 10-K coming out.

Okay. Fair enough. But would it be fair to say that the cash flow still stayed positive in Q4?

Well, Q4 is typically our softest quarter that in the summer months, which is Q2, our 2 softest quarters of the year. So I would say that cash flow, when you look at inventory reductions and our losses for the -- our earnings before losses for the quarter would have been close to netting even.

Okay. Fair enough. I'll just wait for your 10-K. My next question is, I appreciate that you take a revolving loan just in case, and it's actually nice to know. So hopefully, that shows to -- points towards the improvement of your business. But are there any covenants on your revolving loan than if your business improves enough doesn't allow you to buy stock back or pay a dividend to the shareholders? Or there is no such covenants?

There are no covenants with the new $2 million line of credit.

Okay. Excellent. Again, it's a little bit too early. I understand you just removed your biggest problem is the overhang from the loan. But did you have already made any improvements to your inventory or your operations in this quarter or that you basically just didn't have a time or given that this is the weakest quarter traditionally, these will not see the results until the next quarter?

Okay. So we touched on it briefly. But once we sold the building and knew we were going to be able to resolve all of our debt with our previous bank, we executed a Phase 1 of our purchasing plan, which is a very conservative $0.5 million in purchases, which was executed in the fourth quarter. We are kind of just now seeing new titles come in. But as we see the results of selling new titles, we've already kind of started our Phase 2, which is another $0.5 million. Does that answer your question?

Yes. Somewhat -- okay. Sorry, somebody was adding something, I believe? Can I just continue? Is it okay?

Yes.

I just run a quick numbers on your revenue per partner, and I know that's an interesting trend in the last 2 quarters, your revenue per partner actually increased, like if you do the comparable revenue per partner, it's actually increasing and despite the account of the partner is falling, the revenue is increasing. Is that because there is something operationally changed about the partners or simply the partners that remained as the most active ones?

That's a great question. One of the trends that we're seeing that tends to mean slightly higher sales per brand partner is the growth in our in-person events that are happening whether that's book fairs, inside schools or in-person booths and things like that, which even goes back to what I mentioned in my report of moving from digital to analog. Some people are having even more in-person home parties, which we haven't done in several years. And so we believe that, that trend that you are referencing point back to the growth of these in-person events.

Okay. That's great to know. And my last question, and hopefully, it's not a long question. Given that you have such a large inventory, do you consider any of your inventory unsellable or you try to basically go for some inventory put through liquidation channels? Or you think that it's just slow moving and it will just take time, but everything is potentially sellable still?

Yes. We consider everything salable still. And that's why I want to reiterate the move to long-term inventory. It's not that we're going to have to write off anything at all. It's still all good sellable inventory is just going to take a little longer.

That being said, we make mistakes in purchasing every now and again. It happens very, very rarely. We're kind of exploring the remainder market, but the returns are just not worth it. So while we're looking into it, it's very unlikely that we'll participate in the remainder of market. Yes, we're looking at other creative marketing ways to move this inventory. And it's more of a kind of one-off here and there of the things that are more highly inventory.

Your next question comes from Paul Carter of Capstone Asset Management.

Craig, your comments about exploring the remainder market [indiscernible] say that. Is there -- can you provide some numbers around that, like what percentage of your long-term inventory are you thinking about in ways such as that?

Well, yes, no, the creative marketing ways were as opposed to the remainder market. We looked into it, it's just not worth our time. We're just going to find other ways. As an example, just some quotes that we got back, we get like 2% of the retail price. It's just not even remotely worth it. So we're not going to participate in that.

Paul, I'll jump into you and say that in our meetings, one of the points of conversation that was important to us that may be important to you is using our time and energy and resources on this as a potential short-term or one-off strategy didn't seem like our best use of resources. And so since this wasn't going to be an ongoing strategy for us, once we discovered that it wasn't going to be worth it, we just aren't really pursuing it.

Okay. Fair enough. And maybe more to that point, is -- of my question is sort of how much of your $37.7 million of inventory [indiscernible] characterize as inventory that you don't -- that you would want to maybe get rid [indiscernible] obviously not through the remainder of market. Obviously, you looked at the remainder market because you felt there was a sufficient amount of inventory that may be [indiscernible]. Can you just give us some numbers around what that is and what that is?

No. It's roughly in the neighborhood of $500,000. I mean, it's not even a big part of our inventory.

Okay. No, that's great. And then Craig, you mentioned in the press release throughout fiscal '26, you continue to run promotions with -- pricing, prioritizing cash flow, et cetera. And I know that was obviously driven [indiscernible] driven by the bank. Was that the case in Q4 or maybe -- I'm sorry, I missed a little bit of your earlier comments, maybe you already talked [indiscernible] what was your gross margin change year-over-year [indiscernible] the fourth quarter?

Yes. We haven't disclosed gross margin yet, Paul. And I don't have that information right in front of me, but I'm thinking back to the fourth quarter, Heather, did we run some promotional sales in December, January and February.

Yes. I mean there's always some sort of saving shelf-type promotions. It's not one of the quarters that we typically do large sales. I will say that oftentimes, our Black Friday sale trickles over into the fourth quarter just because of when the date falls on the calendar. So that can have them impact there.

But would you say that the whatever promotional activity you have been experiencing, obviously, as not -- you're not feeling the pressure of the bank anymore. So that [indiscernible] coming back -- kind of normal, would you say?

Yes. That's kind of what I was alluding to when I talked about trying to meet consumer expectations, which even on the other side of it as a consumer, I like to shop a good sale. But putting out there the fact that our books are so reasonably priced with an average price point hovering right around, if not below $10, not discounting ourselves and the value that we can offer even at regular price. And so we're trying to temper that by not throwing as many large-scale promotional sales out at them, but more falling in line with the traditional timing of the Black Friday sale or a Summer Blowout or something like that. It's kind of expected, but not negatively impacting our business side of things.

Okay. And then just lastly, regarding [indiscernible] admittedly, 4,500 is lower than if [indiscernible] a couple of years ago, and that's obviously [indiscernible]. It sounds like the March joint special that you mentioned -- positively. Is it kind of [indiscernible] the current quarter average active brand partner count might be higher than 4,500?

The fourth quarter that we just reported on or the current quarter that we're working on.

The quarter we're in right now, the March, April quarter.

Yes. I mean as always, and you're familiar with how this works, we constantly have ins and outs of people coming. We have been energized and hopeful about what we saw with what happened in March and are focusing even more than normal on not only bringing those people in, but also retaining them. And so I do think that we will see more of a balance shift to more coming and staying than we have losing.

Okay. Great. Thanks very much, everybody.

Thanks, Paul.

[Operator Instructions]. There are no further questions at this time. I would hand over the call to Craig White for closing comments. Please go ahead.

Yes. It looks like maybe Igor jumped in late. Do we want to -- I'm happy to take his question.

Sure, no problem. Go ahead and Igor Novgorodtsev of Lares Capital for the next question. Your line is already open.

Sorry, I jumped in a little bit late. Yes, I just have a couple of follow-up questions. So now that you're going to start getting finally new titles, what kind of gross margin you're thinking about if we just said the old titles also side, just purely for the new titles? What would you consider like for your new businesses, acceptable gross margin?

Well, hopefully getting back to more business as usual, if we're not discounting and when we've talked about discounting to satisfy the bank, we were talking about 40%, 50%, 60% discounting, and that's absolutely not normal. So if we do kind of some not normal discounting to meet customers' expectations, it's going to be in the 10% to 15% range. So our gross margins are going to be getting closer back to business as usual.

What was your traditional margin like over the years?

So Igor, we have kind of a pretty simple model. As Heather said, our average book is $10. The average cost -- landed cost of that book is $2.50. And when we sell it through the retail division like Barnes & Noble or Ingram's or one of our retail customers, we sell that $10 book to them for $5 and they sell it for $10 to their customers and they make $5 and we get $5 on that $2.50 book. When we sell it through PaperPie, we typically sell it for the retail price of $10. But we pay out commissions to the salespeople and overrides to the leadership team of about $5. So on both -- in both sales channels, we get $5 for a $10 book that cost $2.50 and then -- and we have $2.50 to run our business on.

Right. This is very, very helpful. My other question is about...

Do we lose Igor?

I think we lost him.

Well, all right. Somebody let Igor know he can e-mail me.

Are there no further questions at this time, I would hand over the call to Craig White for closing remarks. Please go ahead.

Yes. I have nothing else to add. I appreciate everyone's questions and the interest in the call. So thank you for joining us, and have a good day. We'll talk to you in July. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for its fiscal 2026 third quarter and year-to-date results. As a reminder, this conference is being recorded.

On the call today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results for the fiscal 2026 third quarter and year-to-date results. The release will be available later today on the company's website at www.edcpub.com.

Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition.

With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Thank you, Alan, and welcome, everyone, to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter, then I will pass the call over to Dan to run through the financials, after which Heather will provide an update on our sales and marketing, and then I will provide an update on our plans for fiscal 2027.

During the third quarter, we completed the sale of our Hilti Complex, which was a big achievement for the company and our shareholders. Selling the complex saves -- paves the way for us to move forward into fiscal year 2027 with no bank restrictions, which allows us to execute our strategy to return to growth and profitability. Our plan is not an overnight change with expected immediate results, but a carefully developed strategy for long-term growth.

With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of the financials.

Thank you, Craig. Third quarter financial summary compared to the prior year third quarter, net revenues were $7 million compared to $11.1 million. Average active brand partners for the quarter totaled 5,100 compared to 12,400. Earnings before income taxes were $10.6 million compared to a loss of $1.1 million in the third quarter last year.

Excluding the building gain from the sale of $12.2 million, our loss before income taxes would have been $1.6 million. Net earnings totaled $7.8 million for the quarter compared to an $800,000 loss in the third quarter last year. Earnings per share totaled $0.91 compared to a loss of $0.10 on a fully diluted basis.

Year-to-date summaries compared to the prior year, net revenues of $18.7 million compared to $27.6 million. Average active brand partners totaled 6,200 compared to 13,300. Our earnings before income taxes totaled $7.4 million compared to a loss of $5.3 million last year. Excluding the building sale gain of $12.2 million, our loss before income taxes were $4.8 million. Net earnings totaled $5.4 million compared to $3.9 million loss last year. Earnings per share totaled $0.63 compared to a loss last year of $0.47 on a fully diluted basis.

Now for an update on our working capital. Inventory levels decreased from $44.7 million at the beginning of fiscal year 2026 to $39.1 million at the end of November, generating $5.6 million of cash flows from inventory reductions. This cash flow has been used to pay down vendors, reduce our bank debts and fund our operational losses. In October, following the building sale, we paid off our line of credit, our term loans with our bank, Bank of Oklahoma. At the end of the quarter, we had $3.4 million of cash, $800,000 of receivables, $39.1 million of inventory and $2.0 million of accounts payable and $0 owed to our bank. That concludes the financial update.

Now I'll turn the call over to Heather Cobb for a sales and marketing update. Heather?

Thank you, Dan. One of the most significant milestones this quarter was the launch of Gathered Goods, our reimagined fundraising program. This program represents a meaningful shift in both strategy and execution. Unlike our previous Cards for a Cause fundraiser, Gathered Goods features custom products designed and created in-house, allowing us to better control quality, storytelling and brand alignment.

From a financial perspective, this also delivers stronger margins, which is increasingly important in today's cost-sensitive environment. Equally important to this project was the online opportunity embedded within the program. Gathered Goods allows individuals and organizations to fundraise digitally, expanding reach beyond a single event or community and making participation easier for the supporters. While still early, this program positions us well for scalable, modern fundraising and opens the door for broader participation in future quarters.

This quarter also included our Black Friday, which we call Book Friday promotion, a large site-wide sale that continues to be a cornerstone of our Q3 marketing strategy. Book Friday drove strong engagement across customers and brand partners, reinforcing the value of our catalog and our ability to generate excitement through well-timed broad-based promotions.

While discount-driven events are not our priority or preferred strategy, this sale remains an important visibility and volume driver in the midst of the holiday season.

Turning to the results themselves. While the decline in brand partner count is significant and clearly reflected in the top line, it's important to look at what the data tells us beneath the surface. First, the drop in revenue is not proportional to the decline in brand partner count. This tells us that the brand partners who remain active are, in fact, more productive and more engaged than in recent years. We are seeing fewer casual or inactive participants and a higher concentration of truly active sellers.

Second, when we look specifically at our leader levels, the decline is not occurring at anywhere near the same rate as the overall field. Historically, leaders are our most loyal group. They are the ones who persevere through challenging cycles, adapt their approach and continue building even when conditions are not ideal. Just as important, leaders are also the primary drivers of new brand partner recruitment. Their relative stability gives us confidence that while the field may be smaller today, the foundation for future growth remains intact.

In summary, this quarter reflects a business in transition, smaller in size, but more focused and more resilient. We are investing in programs like Gathered Goods that improve margin quality and scalability, maintaining strong seasonal promotional moments and seeing encouraging signs that our sales force is highly engaged and leader-driven. As we look to the future, the combination of a committed leader base, more productive brand partners and strategic program innovation gives us reason to be optimistic about the path ahead.

Craig, I'll turn it back over to you.

Thanks, Heather and Dan. As Dan mentioned, with the closing of the building sale, we paid off all of our bank debts, which will have a positive impact on our cash flows of approximately $1 million per year. While the last couple of years have been challenging to operate our business under the restrictions from our bank, I'm excited about the position we are in today and the plan for growth in fiscal 2027 and beyond.

Since fiscal 2024, we have had to prioritize cash. While we need to execute on a plan that increases sales and therefore, cash, we are putting more focus on increasing our brand partner counts. Our actions necessitated by the bank's restrictions have given red flags to our sales force, and they have been anxious and waiting to see what would happen.

A major factor for the reduced activity has been the lack of new products for them to get excited about and therefore, share with their customer base. As we got closer to closing on the sale, we put together a reorder and new title purchase plan in conservative phases.

We were ready to act on Phase 1 within a few days of closing and placed reprint orders on some key out-of-stock items as well as several new titles that we expect will energize our customers and sales force, giving our brand partners another item to help build momentum. We are excited about the arrival of those titles beginning in late spring and early summer.

Another key component to attracting new brand partners is a refreshed marketing strategy. We know we need to adapt to what the next generation entering the workforce, Gen Z, is seeking in a business opportunity. These would be tweaks to our existing model, including language used for marketing, onboarding once they have activated their account, et cetera, but would certainly not require an overhaul. We are still working on putting the pieces in place for this to be implemented and can move quickly once that is finalized.

We have continued to focus on being prepared to execute a growth plan once restrictions were lifted. You heard from Heather about one of the major enterprise initiatives being our online fundraising program, Gathered Goods. We are very excited about that program's successful launch and have a few other exciting upgrades and initiatives being implemented very soon.

Also, I have recently pulled together an AI task force. Some of our employees had already begun exploring, so I formalized an opportunity for collaboration, allowing a safe space to see how we can best utilize it as part of our overall strategy. So far, we have implemented in ways that automate rote tasks, which can save money. We are excited about this starting point and continue to work together on transformational ideas that will propel us forward and allow us to compete in both retail and direct-to-consumer spaces.

Lastly, I want to thank all of our shareholders for their patience, our employees for their hard work and commitment to our mission and our retail customers and brand partners for their loyalty during this challenging period. Having seen the resilience of all involved, I am confident in our collective ability to emerge stronger than ever before. I truly believe we are tackling our growth plan from a position of strength with our team of employees as well as the strategies being built and implemented with our sales and marketing and IT initiatives.

Now that we have provided a summary of some recent activity, I will turn the call back over to the operator for questions and answers.

[Operator Instructions] Your first question comes from Paul Carter of Capstone Asset Management.

Well, good afternoon, everybody, and Happy New Year. So I know you've described in the past how your sales force has kind of been sitting on the sidelines waiting for the company to, I guess, to get out of hock with your bank. And I know it's only been 2.5 months or so since you sold your building, but do you have any evidence yet that this transaction has reinvigorated your sales force for a more productive 2026?

Well, I think one of the main factors in that reinvigoration, as you mentioned, was bringing in new titles and reorders of out-of-stock bestsellers. But also what we see is the uptick or the increased activity in leader promotions. That's been very exciting. I started in the last month or two calling all brand partners that promoted to upper level leadership. And there's a lot of excitement out there. So that's my couple of points.

Heather, would you like to expand?

No. I mean I would echo what he said, Paul. Specifically, I think it's hard to say specifically that just the sale of the building was going to be enough for them to just immediately roll back into action. We announced just immediately after we made the purchases from that Phase 1 of new titles and reprints that they would be coming as we shared with you, late spring, early summer.

We concluded our incentive trip promotion in December with just on target the anticipated number of earners that we had predicted. We launched a new incentive in January. And so while it's hard to say in the midst of the holidays, especially with Christmas and New Year, that we see specific things that are happening, we can definitely say that the energy feels slightly different in a much more positive way than it has in a while.

Well, that's good to hear. And then just changing gears. So obviously, it's nice to hear about the $0 debt balance. But do you have a new credit line in place? I know you've been talking about putting something small in place once this transaction was completed.

Yes. We're talking to a few banks and also talking to some other options. We're right now in a cash position where we're, I think that we're looking for just a relationship for banking to go forward with. And so we're talking to some local banks that have some interest and hope to have something in place here in the next few months.

Okay. Great. Just talking about your balance sheet. So I know the value of your inventory is like I think it's more than 3x the market cap of your company. So obviously, that's pretty important to investors. And I just wanted to ask a couple of questions about that. I guess, first of all, is your inventory like fully insured against all risks like water damage or pests or anything? Because I know some of them have been sort of sitting in boxes for a while up on the shelf. But -- and is your inventory like insured at replacement cost or something else?

It is insured at replacement cost. So what we have on the books is what it's insured for. So if we've got $39.1 million on the books at the end of November, that's what it's insured for, full replacement cost. Now we don't want to talk about any worst-case scenarios with disaster...

Yes. No, fair enough. Yes, I was just sort of wondering about that because I know -- and actually sort of related to that, we're not really damaged, but I'm just thinking about kind of the nature of your inventory. So I know most of your titles are things like zoo animals or whatever that don't go out of date. But like do you have a sense for what percentage of your inventory could be out of date and therefore, worthless in like 3 or 5 years if there's not a lot of sell-through in certain titles?

So I would -- the only thing I would say in response to that is our track record has been we've carried inventory sometimes for in excess of 10 years on certain titles before we sell through them. And we've never historically written down inventory, and we've never basically offloaded the title or gone into the remainder market to sell the title. So that's kind of reflected in our reserve. Our reserve is very small on our short-term inventory and also on our long-term inventory because our history says we typically don't participate in the remainder market and don't have topics, as you mentioned earlier, that go stale or out of favor.

Yes. Paul, unless you know something we don't, and they're going to change the alphabet on us, I think we're fairly safe.

Okay. No, that's good to hear. And I figured that was the case, but I just know that's one of the hesitations, I guess, that some investors have is that if you're sitting on so much inventory relative to current sales that maybe that inventory isn't worth a hundred cents on the dollar. But obviously, that's -- you're a little bit of a different company than a grocery store or something like that.

Okay. And then just -- I know this will come out in your 10-Q, but how much of your $39.1 million of inventory is Usborne-related?

About 50%.

Okay. And then can you provide an update on the status of your relationship with Usborne Publishing? I don't know that you've talked about them in a little while.

Yes. There's really been no change. Dan actually has monthly or at a minimum quarterly calls with their -- the equivalent of their, Chief Financial Officer. They're anxious for us to get back and start ordering titles again. So because of the new distribution agreement, we're not required to purchase every title they offer, which is good for us. But yes, there's been no negative change in the relationship.

Okay. Okay. That's great. And then just the last one here, totally random question. But just regarding that 17-acre attractive excess land beside the Hilti Complex there. What is your plan for that? Are you just going to hold on to it for the time being? Or do you have sort of longer-term plans for it?

Well, it's kind of been an ace in the hole. I kind of kept that in my back pocket for now. It's -- there's been some flurry of activity on it recently, actually, which is interesting. Some people have kind of come across it and inquired about it. We've been given a proposal to develop it, which is intriguing. But in that particular proposal, the return for us just wasn't what I thought it could be or should be.

So for now, we're just kind of holding on to it. It could be something that we develop for ourselves. It could be something that we sell if need be or develop it and retain ownership of it. So there's lots of options. It hasn't been necessary to do anything with it at all, and it continues to appreciate. So I'm happy to continue to do that.

[Operator Instructions]

I guess we did better than ever. Answering everyone's questions before they asked it.

There are no further questions at this time. I would hand over the call to Craig White for closing remarks. Please go ahead.

Thank you. Thanks, everyone, for joining us on our call today. We appreciate your continued support and expect to provide an additional update on the -- well, not the Hilti sale progress, but our banking relationship and just moving forward our growth plan. So again, thank you for joining us, and we'll talk again in May.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Educational Development Corporation's financial and operating results for its fiscal 2026 second quarter and year-to-date results. As a reminder, this conference is being recorded.

On the call today are Craig White, President and Chief Executive Officer; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, Chief Financial Officer.

After the market closed this afternoon, the company issued a press release announcing its results for the fiscal 2026 second quarter and year-to-date results. The release will be available later today on the company's website at www.edcpub.com.

Before turning to the prepared remarks, I would like to remind you that some of the statements made today will be forward-looking and are protected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition.

With that, I would like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig, please go ahead.

Thank you, operator, and welcome, everyone, to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter, then I'll pass the call over to Dan to run through the financials. After which, I will provide an update on our sales and marketing and end up the call with an update on our progress of the sale leaseback of our headquarters, the Hilti Complex.

During the second quarter, we experienced decreased sales compared to the prior year second quarter. This was driven primarily by our reduced brand partner levels within our PaperPie division. Also, recent sale events which offer our products at higher than normal discounts have been short-term tactics used to generate cash and to reduce our borrowings.

Over the past year, we have seen our brand partner levels decline due primarily to the challenging sales environment with the fact that we have not introduced new titles that typically energize our sales force for roughly 18 months. We have developed a conservative phased approach to introducing new products for post building sale close arriving later in the spring.

Further, the direct sales industry, especially those within the product sector, have experienced a challenging period of sales. We are focusing our IT and marketing efforts toward increasing brand partner counts as opposed to only focusing on the incoming cash. With this focused effort, we are targeting a new generation to the industry, young millennials and older Gen Z. Recent studies have shown this age group is very receptive to this business model, but a few have taken steps to join this industry.

There's a great opportunity right now. We know they have very little patience for technology that is clunky or unnecessary. As a result, we are improving our technology to have a mobile-first impact and make it easier to do business with us, including our onboarding process.

Next, I am encouraged with our continued focus on reducing our costs and improving our results by seeing lower losses even on lower sales. The next big step towards profitability will be returning to revenue growth, which will be driven by adding brand partners, as mentioned before.

With that, I will now turn the call over to Dan O'Keefe to provide a brief overview of the financials. Dan?

Thank you, Craig. Second quarter summary compared to the prior year second quarter: Net revenues were $4.6 million compared to $6.5 million. Average active PaperPie brand partners totaled 5,800 for the quarter compared to 13,900 in the second quarter last year. Losses before income taxes were $1.8 million compared to a loss of $2.5 million in the second quarter. Net loss totaled $1.3 million compared to a loss of $1.8 million, and loss per share totaled $0.15 compared to a loss of $0.22 on a fully diluted basis.

Year-to-date number compared to the prior year: Net revenues were $11.7 million compared to $16.5 million. Our average active PaperPie brand partners totaled 6,800 compared to 13,700. Losses before income taxes totaled $3.2 million compared to $4.2 million, and net losses totaled $2.4 million compared to $3.1 million. Our loss per share totaled $0.28 year-to-date compared to $0.37 on a fully diluted basis.

Now for an update on our working capital and banking relationship. Inventory levels have decreased from $44.7 million at the beginning of fiscal year 2026 to $40.7 million at the end of August, generating $4 million cash flow from inventory reductions. This cash flow has been used to pay down vendors, reduce bank debts and to fund our operational losses.

Our bank loan agreement expired on September 19, and the bank has indicated that they are not going to renew them at this time. Following the credit agreement expiration, we received a notice of default and reservation of rights from the bank detailing their ability to demand payments, liquidate collateralized assets and charge an additional default rate on our loans of 2%. To date, the bank has not taken any of the rights outlined in the notice of default. Craig will discuss this further on in the call.

That concludes the financial update, and I'll turn it over to Heather Cobb for a sales and marketing update. Heather?

Thanks, Dan. During the second quarter, our sales and marketing efforts focused on engagement, recognition and positioning the business for future growth. In June, we wrapped up our 2025 StoryMaker Summit events, a 5-city training series that brought together brand partners and leaders from across the country. These regional summits happened in Dallas, Atlanta, Salt Lake City, Chicago and Philadelphia, and offered hands-on training, leadership development and inspiring keynote sessions from field experts. The feedback from attendees was incredibly positive and the energy generated at those events will resonate throughout the field.

These gatherings are a key investment in our people, helping brand partners feel equipped, supported and connected not only to our mission of gathering for good around literacy and learning, but also to other brand partners, leaders and home office team members.

In July, we celebrated our StoryScape incentive trips to Scotland, recognizing top-performing brand partners who achieved outstanding sales and leadership milestones. These incentive trips are an important part of our culture. They both reward hard work and dedication, and they also strengthen relationships and loyalty within our PaperPie community, which directly contributes to retention and sustained engagement across the field.

As we moved into late summer and early fall, our focus shifted to the upcoming seasonal selling period, historically one of our strongest times of the year. The team has been executing targeted promotions and end-of-year campaigns to drive customer engagement and increase order activity, while also spending time and strategic planning for 2026. Those planning efforts include improving the brand partner experience, refining our sales programs and aligning our product and promotional calendars to support growth in the coming year.

On the retail side of our business, we continue to see steady performance, particularly in the specialty, toy and gift markets. Our products remained well received and our relationships with key retail partners continue to strengthen. This channel provides an important layer of consistency and diversification in our overall revenue base. While the broader selling environment remains challenging, we are encouraged by the enthusiasm and resilience of our brand partners, the strength of our retail partnerships and the groundwork that we are laying for 2026.

Craig, back to you.

Thank you, Heather and Dan. As Dan mentioned, we no longer have an active credit agreement with our bank and our loans are currently in default status. The notice of default and reservation of rights is merely a formality and used to put pressure on us to complete the building sale. We have continued to make our monthly interest and principal payments, and our working capital is sufficient to meet our ongoing needs until the sale is completed.

The bank understands that the sale of the building will pay off their loan balances and they support this direction. We expect the sale to be completed prior to the allotted close period deadline of November 25, 2025, and our brokers are targeting an earlier close date. We continue to develop options for financing post building sale close. So this will be resolved shortly, and we can get back to focusing on growing our business.

Lastly, I want to thank all of our shareholders for their patience, our employees for their commitment to our mission, and our customers and brand partners for their loyalty during this difficult period. I'm confident in our collective ability to emerge stronger and more resilient than ever before.

Now that we've provided a summary of some recent activity, I'll now turn the call back over to the operator for questions and answers. Operator?

[Operator Instructions] Your first question comes from Paul Carter of Capstone Asset Management.

So just quick -- first of all, on the real estate. So can you confirm, is the buyer group, are they related to 10Mark Holdings in Encino, California, who have quite a bit of real estate holdings in Oklahoma City and Tulsa?

Yes, they are. The -- yes, as you -- it sounds like you researched, they have a great deal of real estate in the Oklahoma market. So they understand the area. They understand the environment. So yes, we're very pleased.

And then how much was the earnest money that you now are entitled to?

Well, it's $100,000. I think it's probably stayed in escrow until closing.

Okay. And then do you know yet sort of how much you're going to net from the property sale in November after commissions and any other costs?

We do. There are several things that need to probably shake out, but we're going to come out with enough to kind of get us started on our plans. Do you want to add anything to that, Dan?

No, it's good.

Yes. We'll have a little bit left over to get us started.

Okay. So -- and I know you're probably tired of thinking about the real estate sale. But on this one, it seems a little bit more encouraging than maybe some of the other tentative transactions that you entered into. How confident would you say that this one will actually close at the $32.2 million level?

Net degree -- high degree, Paul.

Very high degree. Very, very confident. There's third parties that know this buyer. And since they know the area so well, we are very confident it's going to close.

Okay. Great. And then I know once you pay off the debt, you mentioned that you're looking at having some sort of credit line with a different party. I guess, number one, how close are you to establishing that? And number two, do you have an idea of like how much flexibility you want there? Is it going to be a fairly small like $2 million or $3 million? Or is it going to be closer to $10 million? What's your thoughts there?

Yes. We're developing several options. We're just -- honestly, most of the banks are kind of waiting to see that this sale does close. We're looking at some alternate forms of financing, which are not necessarily tied to the building close. But -- so we're just kind of developing several options, but it's going to be very conservative. We're going to start with the smaller $3 million to $5 million number.

Okay. Okay. And then -- so I know, obviously, your brand partner count has been coming down most quarters and you're sort of trying to keep up by cutting costs. I guess maybe just in the last couple of quarters, what is it that you -- what costs have you cut out of the business? And what is left to cut? Like at 5,800 -- at a brand partner count of 5,800, understanding you want that to grow from here. But at that level, like is it possible to get to accounting profitability? Or like are there still cuts that could be made to get there? Or do you need that number to come back up somewhat?

That's a good question, Paul. And it's been several years since we've been at this kind of level with brand partner numbers. But some of the biggest impacts to our P&L, interest expense is a big one. And so that's going to be negligible. That's the #1 and biggest item. After that, discounts are actually the next biggest impact to our P&L. We've done some aggressive discounting with some of the sales as Craig mentioned earlier, that are not in our normal business model. And so those 2 items will have the biggest impact.

Now there are some smaller items that we're always looking to improve on. We do have excess inventory. We do have additional outside warehouse rental space that is about $1 million a year by itself. So working down the excess inventory, exiting these short-term storage facilities will be another big impact on a -- we're talking about big numbers, right, big changes. But then we're always -- I mean, we've got 2 or 3 cost savings initiatives ongoing right now that are in the $50,000 to $100,000 ranges.

Okay. Okay. And then -- so I know -- and this is hard to kind of figure out exactly, but your brand partner count has obviously been decimated in the last few years. There's a lot of different reasons for that. Some are related -- unrelated to you, the economy and inflation and all that. But do you -- how much of that decline do you figure is because of your inability to sort of energize the sales force through new titles? And a different way of asking, I guess, would be once you get from -- out from under the bank and you're able to start buying some new titles, like can we expect and do you expect like an immediate turnaround in that number from 5,800 back up to closer to the 10,000 level? Or -- and I know there's other factors still at play, but can you give a little bit of sense for what your expectations are there?

Sure, Paul, that's a great question. I think that the thing to remember is that as you stated at the end, there's a number of factors and being able to introduce new titles is definitely a big one. But there's other things that, as we alluded to, we are working on for end of calendar year as well as into 2026 initiatives and programs, updates and different things like that. We think that the -- all total of all of those is what will eventually result in those numbers turning around.

So I don't think it's a matter of your words of like new titles are introduced and all of a sudden, that number doubles. But I think all of the "red flags" that we've been throwing up of not introducing new titles, not reordering some of our best sellers and different things like that as each of those become green flag, we'll definitely see those numbers continue to rise.

Yes. And let me just add on to that a bit, Paul. I think with the new titles, it would definitely stem the loss of brand partners and then with some of our marketing and IT efforts will attract again more brand partners or maybe reactivate ones that left when they were frustrated with our lack of new titles. So there's a lot around new titles. But then we're doing everything we can. It's our major focus to increase that.

Okay. Okay. Great. And then just last question for me, and this might sound like a dumb question considering you just received a notice of default on your credit agreement. But assuming everything goes according to plan with real estate sale and then you kind of reinvigorate the business a little bit from new titles and whatnot, I know the original plan was to -- once you got out from underneath the bank that you would be generating cash -- positive cash flow just from working down the excess inventory and then reinstate the quarterly dividend that you haven't had in place for a few years now. Is that still the plan? And if so, have you decided what that dividend might possibly look like 3 or 6 months down the road?

Easy there, killer. Let us get out from under this and get this thing turned around to where it makes sense. But yes, definitely, I mean, we'd like to say some of these things will happen immediately, but that's just probably not realistic. I mean, it's going to take us some time to increase headcount, increase sales, all those things. So it's definitely the goal. I wouldn't see it for a quarter or 2 at least.

Your next question comes from Alexander Smithley of Mitchell DeClerck.

This is Alex here. I just had two questions, so not quite the gauntlet Paul just had for you, and they're fairly simple. The first one that I have is I know that the notice of default is merely formality likely, but you mentioned there are a couple like rights they had towards collateralized items. What items are collateralized, if any?

Yes. So our bank agreement cross-collateralizes all of our assets. So that includes the building, AR, inventory and equipment and land.

Okay. Okay. Sorry about that.

No problem. All of those will be released when we sell the building and pay them off. We'll be left with AR, inventory, excess land and our equipment.

Okay. Yes. That makes sense. My last question is I was also following along with the brand partner numbers. And you mentioned that you were going to do some like sort of marketing. What sort of plans do you have for actually increasing the brand partner account? Is it going to be like some sort of technological ad campaign or something like that?

Yes. Good question, Alex. It's a multipronged approach because the way that our business is structured that brand partners recruit new brand partners, we basically take a top-down approach that we provide them with various different tools and assets and different things like that, that enable them to go out and find the next brand partner and the next person who is going to want to sell our products.

So having said that, as I mentioned in response to Paul's question about new titles, that will definitely generate interest and garner a lot of attention on its own. We do have some enterprise IT and marketing initiatives that we also believe will definitely attract quite a bit of attention and that specific audience that Craig referred to of the younger millennials and older Gen Zs, which are the new parents having babies, raising toddlers and different things like that right now that are just the perfect audience for what we have to offer.

[Operator Instructions] There are no further questions at this time. I would hand over the call to Craig White for closing remarks. Please go ahead.

Thank you. Thanks, everyone, for joining us on our call today. We appreciate your continued support and expect to provide an additional update on the Hilti Complex sale progress prior to our next scheduled earnings call. As always, you can reach out if you have further questions to me, and I'd be happy to answer them.

So with that, have a great day, and we'll talk to you again sometime in the next few months. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.