Transcript
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 first quarter results. As a reminder, this conference is being recorded. On the call today are Craig White, President and Chief Executive 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 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 Mr. Craig White, the company's President and Chief Executive Officer. Craig?
Thank you, operator, and welcome, everyone, to the call. We appreciate your continued interest. I want to quickly mention that Heather is taking time to be with family as there was a recent death in her family. 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 sales and marketing and finish up the call with an update on our progress of the sale leaseback of our headquarters, the Hilti Complex. During the first quarter, we experienced decreased sales compared to the prior year first quarter. This was driven primarily by our reduced brand partner levels within our PaperPie division, along with continued customer sales events offered to promote our PaperPie sales division and generate cash to meet our lenders' requirements. We view these sales events as short-term tactics used to generate cash and to reduce our borrowings with our bank. Over the past year, we have seen our brand partner levels decline due to several factors, including the challenging sales environment with high inflation and reduced disposable income of families with small children. Further, the direct sales industry, especially those within the product sector, has experienced a challenging period for new consultant recruiting. While we have been through downturns in the industry before, the current environment is having a short-term impact on our operating levels. While we generated less sales during the quarter, our loss before taxes declined from last year. This reflects our continued focus on reducing expenses during this difficult environment. With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of the financials. Dan?
Thank you, Craig. To our first quarter results compared to the prior first quarter last year, net revenues were $7.1 million compared to $10 million, our average active brand partners for the quarter totaled 7,700 compared to 13,400 in the first quarter last year. Loss before income taxes totaled a negative $1.4 million compared to negative $1.7 million in the first quarter of fiscal 2025. Net loss totaled $1.1 million compared to $1.3 million loss last year. Loss per share totaled $0.13 compared to a loss per share of $0.15 on a fully diluted basis. Now for an update on our working capital positions. Net inventories decreased $2.7 million from $44.7 million at February 28, 2025, to $42 million at May 31, 2025. Borrowings on our working capital line of credit totaled $4.2 million as of May 31, 2025, meeting the step-down required by our bank agreement to be under $4.5 million starting June 1, 2025. That concludes the financial update, and I'll now turn the call back over to Craig White. Craig?
Thanks, Dan. As I mentioned earlier, we continue to make strategic changes to bring new initiatives for success to our brand partners. We concluded a successful incentive challenge. We launched our next incentive trip, which has gone very well so far. Our percent of sales decline has been lessened. I've started going to more industry type events to get a perspective around the industry, which has been great. We've made some great connections from not only vendors but other companies. And so I'm going to continue to do that. From an IT perspective, we launched guest checkout, which the goal of any IT project is to make it easier to do business with us, whether it's our customers or our brand partners. And the guest checkout process has been received very, very well. We've had a successful partnership with Ticket to Dream, allowing us to place thousands of books into the hands of foster kids and families. So we've also concluded our summits, which took the place of convention for this year. We had Dallas, Atlanta, Salt Lake City, Chicago, and Philly, and we just had Philly in the last few weeks, and we left there very encouraged. There would seem to be a lot of excitement. As each summit happened, we have more information about our financial stability, our sales, and our inventory levels. In these more intimate size level meetings, I'm able to have one-on-one conversations. It's things that I can't say from the stage without any kind of context or explanation that people that have been with us for 10, 15, 20 years, I can have conversations with. We started promotions to encourage promotion to leadership, which in turn encourages recruiting, but we've got to have new titles. So as we have a clearer picture of whether we're going to complete the sale transaction, we've already started coming up with our Phase 1, 2, and 3 plans for purchasing new titles and replenishing bestsellers. All these things are necessary to make it look like we're thriving business to our sales force. Okay. That concludes our sales and marketing update. Now for a building sale update. In May, we executed an agreement to sell the Hilti Complex. This agreement outlined a 90-day due diligence period. Recently, we announced an amendment of this agreement extending the due diligence period as well as a shortened close period. The purpose of this amendment was to give the buyer more time to perform their due diligence and structure the building acquisition financing. We continue to work with the buyer group and provide requested information timely so they can perform their necessary work as quickly as possible. We continue to expect the sale to be completed before the end of September. The proceeds from the sale are expected to fully pay back the bank, leaving us with no debt, and we expect to have limited borrowing needs moving forward. 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 am confident in our collective ability to emerge stronger and more resilient than ever before. So I think I'll turn it back over to the operator for questions.
And your first question comes from Paul Carter from Capstone Asset Management.
I understand that the sale of the Hilti Complex has taken much longer than anticipated. At this point, it's evident that the success of the business depends on completing that sale. The count of brand partners has decreased by another 18% this quarter, and there are no clear signs of stabilization, as you have previously explained. If this recent transaction does not go through, which we hope it will, what plans does the Board have in place? Would you consider hiring an adviser to formally look into strategic alternatives for the business? I don't believe it's feasible to simply try again and postpone the resolution of this transaction for another five or six months.
Yes. Good question. And yes, certainly to the point, we have not only do we have other offers. And again, I understand your point about not wanting to go through another 90- to 100-day to 120-day process, and I agree with you that that's not necessarily where we want to go. So anything that we do obviously has to have bank input, if not final approval. But we have a plan B, a viable plan B. Our plan A is to sell the building, which brings us the most proceeds, but our plan B also gets us out of bank debt, and we can move forward. So my intention is that one way or another, we will have executed plan A or plan B and have it finalized by the end of September.
Can you share anything about this plan B?
We've received other offers that include a quick closing option. Over the past six months, we've refined a couple of elements. While they may not be as favorable as our main plan, they certainly are better than having no plan at all. There are some smaller loans and similar options that could help us move forward. I feel optimistic about this situation, even though I understand that optimism should be tempered with caution. The investor group from Oklahoma is familiar with the region and has been aware of this building for quite some time. Several smaller groups are collaborating as a comprehensive investor team. I'm confident in this approach, but past experiences have taught me that confidence alone isn't enough. Therefore, we've created a backup plan that we believe is solid, and if necessary, we can implement it quickly.
Okay. And I think I — or I asked last quarter if you were able to share anything more about this buyer group, it's TG OTC, I think it is. Are you able to share any more about them? Is this just sort of a group of individual investors? Or is it a real estate like REIT or something like that?
It is a real estate company. They've reached out for advice from friends, if you will, that may become partial investors in the group. But I would feel a lot more comfortable after this initial due diligence period is closed. Since we gave a 30-day extension, I think it closes July 30.
28th.
July 28th is the end of this initial due diligence period, in which case half their deposit goes hard. So we'll know a lot more by the end of July, whether we're moving forward with plan A or pivoting to plan B.
Okay. Great. And then just my second question, this is just a governance question. But apart from you, Craig, nobody on the Board holds a material stake or a material equity stake in the company. Has the Board considered implementing minimum ownership requirements just to better align director incentives with long-term shareholder value? And I know that's generally considered good governance, especially in small-cap situations like this. So just wondering if that's something that's been discussed or is being considered.
Yes. Over the last couple of years, we've been focused on growing the business back. Board makeup and governance has been near the front of my mind as well, though. We've been transitioning to make it more my Board than the previous CEO's Board. Board members don't make much money for being here on our Board. We have started giving them small amounts of stock. So we're trying to make it more like a big company Board. Now we've got some strides to make, and we're not there yet, but there are still going to be some changes over the next 9 to 12 months, hopefully partially the compensation and then partially the Board makeup.
Okay. Okay. That's good to hear. Okay. Well, that's great. Well, good luck, and we'll just, I guess, hope for plan A here coming through.
And your next question comes from the line of Daniel Bakken.
My question is about the three phases of acquiring new titles. Why do you believe this strategy will be effective given our already significant inventory levels?
Well, we have to have new titles. That's what energizes the sales force. All of our inventory is still selling and selling through at a rate, but we have to have new titles. And Phases 1, 2, and 3 are very conservative. They're not adding much to the inventory. Each phase is made up of half new titles, which may be 15 or 20 new titles and then replenishment of some good sellers, which may be another 10 to 15 titles. So it's a very conservative approach. It's not going to increase inventory levels that much. But that's the first green flag, if you will, that shows our sales force that, hey, we're still a viable business, and we've got new product coming in, and we want you to reach out to your customers and it kind of energizes them.
I see. And what will the selling process be for the remaining inventory once those new titles have come through?
Well, we won't have to drastically change prices of older inventory. I mean as we kind of said earlier in the call, we've had strategic sales, but that's just to try to bring in infusions of cash to pay down bank debt, but we know that strategy is short term. If we continue radically reducing the sale of our product, we diminish the value of our products, and that's just not a long-term strategy at all. We're trying to break that cycle where we don't have to discount. So all of our product sales, of course, there's some that's getting a little bit older in the length of time that we've had it, and so we may discount stuff a little bit, but that's always been the case. We've always done that as a strategy to reduce older inventory.
Okay. With this normalization, what is the target net revenue run rate? What is the target average brand partners? What does this normalization really look like?
Sure. It's going to take some time. We need to slow everything down and start rebuilding. We're beginning to put the pieces in place, and we have a strong IT foundation. We are making it easier to do business with us and continuously launching new projects that excite the team. All of these factors contribute to recruiting new salespeople. When our current salespeople are satisfied, they are more likely to bring more people into the business. It starts with simplifying our processes, introducing new titles, and increasing earnings. This will be a slow and gradual process. Once things begin to gain momentum, they will start to compound. Our goal is to create forecasts for various stakeholders like banks, investors, and potential buyers. We have set conservative targets for low, medium, and high expectations. It's going to take some time.
Has there been any discussion in terms of similar sort of businesses, which you might be interested in some sort of small acquisition of Educational Development?
We get requests occasionally, and we vet them for how serious they really are. We use our IR firm or our previous IR rep, who's now on our Board, to vet any of these offers, and most of them are not very serious. But we haven't seriously...
Received any serious offers.
Right. Why do you think that would be?
Well, probably because we haven't...
Why so many offers?
To buy our company?
I've been here for 8 years, Daniel, we've never had an unsolicited offer to buy the company that I'm aware of.
And who knows why that is? Maybe we're not on many people's radar. I really don't know. I can't even speculate on that. But we would entertain it. That's not our first thought right now at all.
Just a final question. What is the current state of your banking relationship? It seems like they are still providing some flexibility. How does your personal relationship influence that? Once you have paid off the outstanding debt, will you maintain a relationship regarding working capital, such as the facility? Will that continue?
That's probably not the goal. I'll never say never. That so far, our relationship has been good. I mean, obviously, each amendment gets a little more restrictive, and that's just trying to make sure we're completely focused on bringing in whatever cash is necessary to pay them back. But they've understood every step of this process. They've supported us through every step of the process. Now there is a sense of urgency to be paid back. But again, they agree with every step that we've taken. They're involved with every step. And so it's been good so far.
Okay. When is the next call? When is the next piece of earnings release?
It will be in October. We haven't announced the earnings call date, but the second quarter earnings call will be in October, probably around that time frame.
So it should be after completion of this sale process.
And there are no further questions at this time. I will now hand the call back to Mr. Craig White for any closing remarks.
Thank you. Thanks, everyone, for joining us on the call. I appreciate your continued support and expect to provide additional updates on the Hilti Complex sale progress prior to the next scheduled meeting in October. We'll file an 8-K as necessary. So you probably know before the next Board meeting or before the next earnings call. But anyway, good questions. I appreciate everyone's support. Thank you.
Thank you.
Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.