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 2027 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 2027 second quarter and year-to-date results. The release will be available later today on 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, Ellen, 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. First, I would like to remind everyone that our second quarter is typically our softest quarter of the year, and our quarters cannot be analyzed sequentially. During the quarter, we saw progress in the execution of our turnaround strategy. This is most evident by a reduction in our sales decline. Over the past quarters, we have reported sales declines of 30% or more, and our forecasts have been for 35% down.
During the second quarter, our sales decline decreased to 11%. This shows that our strategies and turnaround plan is working. During the quarter, we were able to replenish some existing best-selling titles that were out of stock, as well as introduce several new titles, both energizing our sales force. The overall 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 progress we've made in the second quarter, which, as I said, is our softest period of the year. Heather will talk more about this progress 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. Dan?
Thank you, Craig. Our fiscal 2027 second quarter results compared to the second quarter last year include net revenues were $4.1 million compared to $4.6 million, a decrease of approximately 11%. Average active Brand Partners totaled 5,100 compared to 5,800 at the end of August 2025. Our average active Brand Partners increased from 4,300 at the end of February 2026 to 5,100 at the end of August 2026, an increase of approximately 19%. Our loss before income taxes were $1.6 million, compared to a loss in the second quarter last year of $1.8 million. Net loss totaled $1.6 million in the second quarter, compared to $1.3 million in the second quarter last year. Loss per share totaled $0.19 compared to a loss of $0.15 on a fully diluted basis. Now for an update on our working capital.
Inventory levels have decreased from $37.7 million at the beginning of the fiscal year to $34.9 million at the end of August, generating $2.8 million of cash flow from inventory reductions. Our cash balance decreased slightly from $1.3 million at the end of February 2026 to $1.1 million at the end of August. We had no borrowings under our $2 million line of credit during the quarter. I would also like to mention an unusual accounting adjustment that continues through the second quarter. Due to our historical losses and operational expectations during our turnaround period, we evaluated the need for a valuation allowance for our net deferred tax assets. Based on this evaluation, we continue to recognize a valuation adjustment offsetting the deferred tax asset and eliminating the tax benefit on our income statement.
This adjustment has no cash flow impact but had a direct impact on our tax expense, net earnings, and earnings per share. When the company shows sign of returning to profitability, this valuation adjustment will be reversed. The reversal will have no cash flow impact, but it will have a direct impact to our tax expense, net earnings, and earnings per share. That concludes the financial update. I'll now turn the call back over to Heather Cobb for a sales and marketing update. Heather?
Thanks, Dan. As Craig mentioned earlier, our second quarter is traditionally our slowest selling period. As we entered June, our internal sales projections anticipated a decline of approximately 35% compared to the prior year, reflecting the trends we had seen in recent quarters. Instead, we finished the quarter with an overall revenue decline of approximately 11%, significantly outperforming those internal expectations. While we recognize there is still work ahead, we are encouraged by this progress, especially as several important initiatives began coming together during the quarter.
One of the most significant developments was the return of new product intros. In mid to late June, we released our first full group of new titles, and over the past several months, we have also replenished inventory for several of our best-selling titles and series. We have shared previously that new titles are an important sales driver for our business, and we believe the sales results we are seeing continue to reinforce that. Even more importantly, we are moving back toward a consistent release schedule with two main season and two mid-season product intros planned each year. This is an integral step forward because it creates a more predictable flow of new products and gives our Brand Partners and retail sales reps more opportunities to reconnect with customers, generate excitement, and drive repeat purchases throughout the year.
We are seeing encouraging activity within our EDC Pub retail division, where our retail partners continue to respond positively to our offerings across Kane Miller Books, Learning Wrap-Ups, and SmartLab Toys. We are receiving strong interest in sizable orders across these brands, reinforcing the demand we are seeing for our educational products. The response to our recently introduced new titles has been enthusiastic, and we are already seeing excitement surrounding additional releases planned for January from both Kane Miller and SmartLab Toys. As we return to a more consistent product intro schedule, we believe these offerings will create additional sales opportunities across both our sales channels. Alongside product availability, another key priority remains rebuilding and strengthening our PaperPie Brand Partner community.
During the quarter, we offered a special activation opportunity in June, along with a targeted summer sales event designed to encourage engagement, generate customer activity, and support our Brand Partners during a traditionally slower season. While our Brand Partner population remains below where it was a year ago, we are encouraged that we have grown from approximately 4,300 active Brand Partners at the beginning of the fiscal year to approximately 5,100 at the end of August. As Dan mentioned, that represents an increase of nearly 19% over the first six months of our fiscal year. We recognize that growing our Brand Partner community is only one part of the equation. Equally important is helping those Brand Partners become active, productive, and successful in building their businesses. We continue to focus on both growth and new customer acquisition because those two priorities are closely connected.
We're also taking a renewed strategic approach to social media and communications, focusing on strengthening our PaperPie brand presence, creating more consistent and engaging content, and expanding our reach to new audiences. We've added team members to support these efforts with an emphasis on connecting with today's consumers and the next generation of Brand Partners. Looking beyond the quarter, we've begun additional outreach directly to former Brand Partners, highlighting the many improvements we've made to our products, programs, and technology, and inviting them to take another look at the opportunities available with PaperPie today. That brings me to our IT and enterprise initiatives, where we've continued to make significant progress. Over the past several months, our team has successfully completed and launched numerous enhancements to our e-commerce platform and supporting systems.
These improvements are an important part of our overall strategy because we're not simply focused on bringing more people to PaperPie. We're also focused on making it easier for them to shop, share, and build their businesses. We continue to enhance our mobile shopping experience, knowing it's where most shopping trips happen today. We've also introduced Read, our new AI-assisted book discovery and search tool on the e-commerce site. Read helps customers navigate our product selection and discover books based on their interests, needs, and preferences, creating a much more personalized and intuitive shopping experience. Additionally, we've launched new wish list and registry features, making it easier for customers to save and share their favorite products with family and friends. While these may all sound like individual website enhancements, collectively, they represent something much more important.
We're building a much more modern, accessible, and efficient shopping platform that supports both the customers and the productivity of our Brand Partners. As we move into the second half of our fiscal year, our priorities remain clear. We're focused on growing and engaging our Brand Partner community, reaching new customers, maintaining a consistent flow of new products, and continuing to improve the tools and technology that support our business. We're especially encouraged to enter our stronger selling season period with improved product availability, new titles in the market, and these additional new releases on the horizon. We understand that sustainable growth won't happen overnight, and we recognize that we still have work to do.
But we're encouraged by the progress we've made this quarter, not only in our sales performance relative to our expectations, but also in restoring important elements of our business and strengthening the foundation that we have for future growth. We believe our products, people, and increasingly modernized tools and systems position us to keep making meaningful progress in the quarters ahead. As we continue to develop these things, we're placing an increased emphasis on improving internal efficiencies, simplifying processes, and creating technology solutions that can support this growth without requiring proportional increases in operating costs, which Craig will share a bit more about. With that, I'll turn the call back over to Craig.
Thank you, Dan and Heather. As I mentioned before, we are happy with the initial results of our turnaround plan. Specifically, we are building 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 that are focused on making it easier to do business with us and improving the shopping experience. I believe you have also heard me say that I am a big proponent of AI, not as a solution to all our problems, but as a tool to assist in achieving our strategic goals. It is also not part of the plan to further reduce headcount as part of our AI strategy.
I want it to be used to make our current employees more efficient so that we do not need to hire as many new employees as we get back to growth. Part of my overall strategy is to help us more effectively build community. AI can assist with this by recognizing patterns, good or bad, very quickly. I began using AI to help me create more touch points with our Brand Partners by recognizing certain achievements much closer to real time. I send weekly emails for large orders recognizing effort and impact, and emails when new Brand Partners make their first sale. It has been very well-received. Another key initiative is to be recognized by customers and the greater community as experts in providing educational resources, our books and toys, for their children.
This, in part, can be achieved by establishing blogs or social media posts to build trust in our brands. This will, in turn, strengthen our positioning in AI LLMs recommendations of our products, which is becoming the new search engines. This is a major undertaking that we have many, many assets available for use and a clear path to get there, aided by our two new hires. In general, I support any employee or department in their AI exploration process to transform EDC. I believe that AI can help automate processes to free up employees to do more critical thinking work. We have also engaged a company who has created their own front end sitting on our data, which will allow us to ask natural language questions without IT involvement to make more informed, timely decisions.
For example, I can use the software to provide me daily morning briefs of milestones that were achieved overnight as a result of posted sales. It just provides readily useful data more quickly. Many companies in the direct selling industry are evaluating their recruiting and engagement methods to attract and retain Brand Partners and customers. I can tell you that our PaperPie sales and marketing teams and the IT department are working actively to analyze our strategies to engage this target group as well. I really feel like we're rebuilding from a position of strength. What our small, scrappy staff throughout the building can accomplish is really amazing, and we have solid short-term strategies that everyone can get behind. We are truly all pulling in the same direction.
Lastly, I want to thank our shareholders for their patience, our employees for their commitment to our mission, and our customers and Brand Partners for their loyalty. I'm 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 will now turn the call back over to the operator for question and answer. Ellen?
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Igor Novgorodtsev of Lares Capital. Your line is already open.
Thank you, and hello, and nice to see that at least attrition is declining. I understand it will take some time to come around. So I have quite a few questions, and I'll probably ask a few, and if nobody else defines me, then I'll probably get some more and get back to the line. So let me get started by asking about the new versus titles already in your inventory. So you started selling new titles in June. How much, like what percentage of the titles that were sold is new titles, and what percentage is the titles from the inventory? And what is your inventory level looks like after this quarter?
I'll take the first part as far as the percentages. The percentage of new titles that go into actual sales of overall sales is actually relatively small. What it does is it provides that excitement and bump of enthusiasm to get out and share with customers. And what we consistently see over time is that when those new titles are placed on an order, they are almost always accompanied by what we call backlist titles, which are the additional titles that have always been there and available for purchase, but that people are going ahead and taking advantage of buying while they're on the site and doing so.
Okay, fair enough. We do not have the inventory levels yet. I assume I have to wait for the 10-Q, right, to see that?
No, I think, Igor, you joined just a little bit late. We said that early on. Our inventory levels decreased from $37.7 million at the beginning of fiscal year 2027 to $34.9 million.
Oh, so very sorry. Okay. Thank you so much. Okay. Yeah. My next question is about the current quarter and active members. Obviously, right now is your most important quarter of the year. How is it looking? What is like active members? Are they increasing? What do the sales look like as much as you guys can tell us at this point now that you're halfway through the month?
Sure. I referenced that a little bit in my conversation, and Dan mentioned it as well. While the active Brand Partner count year-over-year is lower than it was at the same time last year, we've seen an almost 20% increase since the beginning of fiscal year 2027, which is promising and something that we look at as extremely positive.
Maybe we can just dig in a little bit more. I believe you run a promotion in last quarter, and at one point of time, you had 5,300 members. Now, I understand that is something is churning off and now it's 5,100 members. Should we expect that the numbers will start increasing or stabilize, or how should we look at that?
Igor, I will tell you that historically, in the fall, we have an increase in Brand Partners because it's the strongest selling season of the year. We have some Brand Partners that go inactive during the year but come back to us in the fall. Typically, our fall is our timeframe where our Brand Partner numbers increase. The summer is typically a time when they actually decrease because a lot of the fall people that join in the fall off in the summer, because they don't make a sale during the first six months of the year. But then they come back in the fall each year. Fall is typically our highest Brand Partner levels.
Okay. Fair enough. Maybe you can talk a little bit about that operating expenses. I know that you've been doing a good job reducing your operating expenses. I'm just curious, is the job less done at this point, or you're still working on significantly reducing operating expenses going forward? I assume everything stays more or less equal.
Yeah. I'll take this one, too. We kind of mentioned at our fiscal year-end, our 10-K call and our Q1 call that we reduced our operating expenses for the budget for the fiscal 2027 year by $1.2 million. That includes some expense reductions immediately. Our executive team took compensation reductions. We actually did a staff reduction immediately in the beginning of the fiscal year. But we also have expenses that are dropping off during the year. For example, we have an outside warehouse facility that we're vacating in October, and it will save us $15,000 a month in rent expense by not using that outside warehouse, and that'll start in November. So throughout the year, we're doing expense cutting, but cumulatively, we expect our operating expenses to be about $1.2 million below where they were last year.
Okay. My next question is, then I'll get in queue and see if anybody else wants to ask questions. I'm a bit confused about the cash flow. Your press release specifically said that you had a positive cash flow, yet the cash has been reduced, I believe, by $100,000 from the beginning, $1.3 million to $1.2 million, and you had $1.8 million in May, if I'm not mistaken. Could you just kind of walk me through this? I understand that I would need to see your cash flow statement to fully understand it, but what did you allude to in a press release when you said that the cash flow in the first half was positive?
Well, the cash flow in the first half of the year is positive because we're reducing our inventory levels. From a simple standpoint, we reduced our inventory levels $2.8 million, and all that inventory is fully paid for, Igor, so that just generates positive cash for us. Now, over the first six months, we've lost our earnings before taxes were negative $2.9 million. From a simple math perspective, $2.8 million of positive cash flow offset by $2.9 million of operating losses is negative $100,000, and that's what our cash decreased over the first six months. I will also tell you that the fall selling season is our busiest selling season of the year, and we expect cash to be higher at the end of this quarter than it is right now.
No, I understand. I would need to, I see this, but do you expect you're fairly confident that on a trailing 12 months, your operating cash flow will be positive this year, it seems, right? It's fair to say that, given that there's one quarter left and that's your strongest quarter. Basically, cash at the end of the year should be higher than it was in the beginning of the year. Are they on target on that?
I don't want to give forward-looking statements to Q4 since it's kind of ways, but I can tell you that typically at the end of Q3 is our biggest cash position of the year.
Oh, sorry. I may have skipped you. Right. Correct. Sorry. I'll try to get back into queue, and if nobody else is on, then I'll ask more questions, and if not, then I'll ask at the end. Thank you.
Yeah. Thank you, Igor.
Ladies and gentlemen, as a reminder, if you have a question, please press star one. The next question comes from Igor Novgorodtsev of Lares Capital. Your line is already open.
Okay. I guess it's me again. All right, so let me ask a couple of more questions, if you don't mind. Usborne inventory. Last time I checked, it looks like about half of your inventory is from Usborne. Correct me if I'm wrong. It seems to be about one-third of your sales. Do you guys have any active conversations with Usborne? Because I would imagine some of the inventory is moving a little better, but some of it should be very slow-moving. I did a little bit of a deep dive into Usborne titles, and it seems to be that the titles do not change that much. Would they be interested in, let's say, maybe taking back some of the inventory and giving you credit and replacing with some other inventory?
Is any kind of the deal to basically push your slow-moving inventory through their channels, so you don't have to basically spend years trying to sell it off? What are your conversations right now with Usborne, if any?
We have, at this point, limited conversations with Usborne. Dan has frequent, regularly scheduled conversations with them. It's not been a regular practice that they ever take back titles, so we're not counting on that. Our sales plans are like any of our other titles, just to sell through them best we can, replenish the bestsellers, and keep moving forward.
Yeah, Igor, I'll jump in there as well and say they do offer new titles just as any publisher does. As you've potentially heard Craig White say before, our books are on topics and in formats that don't go out of style. They're not necessarily trending topics, but more ABCs and 123s and all of the things that all parents want or should want to have in their homes for their kids. So we don't have any concern of them not lasting to a point that we would not be able to sell them.
Let me just understand this, because it seems to be, I just did a little projection, you have several years at the current sales level of Usborne inventory. Wouldn't they want to take this inventory at a discount? If I was Usborne, I would be all over it and, say, give you credit, so you can get some of the money because they sell it on Amazon, through HarperCollins, and through stores and so on. So they have other channels where they can actually move it through much quicker. Then in the end times, they can potentially give you credits, and you guys can buy their much higher hot items from them. It just seems strange that you guys don't have any active conversations. It's not policy based, talking about an unusual situation and kind of a deal where you guys have several years' worth of inventory.
Well, we have several years of inventory at current sales levels. If we increase Brand Partners and increase sales, then the inventory will come down much quicker. Let's be realistic. They've already made that sale to us. There's no incentive for them to take it back. We'll sell through it. We're not concerned about that at all, us being able to sell through it. Again, like I said, if we increase Brand Partners and sales, it'll reduce more rapidly.
Just for me to understand the inventory from their perspective, do you have a lot of titles that's no longer being sold except the new inventory? Or pretty much the vast majority of Usborne titles are still being actively sold, let's say, by you and elsewhere, and they're still actively releasing them?
Yeah, that's a great question. The vast majority are still being sold. You could find them in other markets. Like I said, they're not on trending topics that are going to expire. Yeah, just as a whole, the publishing industry doesn't tend to rotate through, where they stop selling titles after two years. As long as those titles are still available, they will sell them and make them available to customers.
Right. My last question is, I know that you said no to Amazon and to others, and I can kind of understand that you don't want to be competing with discount and the race to the bottom. But again, given your high inventory level, did you guys talk to any third parties of potentially moving some of your inventory through internet? Not necessarily explicitly as you, but perhaps through third parties or something like that. Because I see a lot of titles that you carry on the internet. That is obviously a significant market for this. Is that a consideration?
Sure. While our overall strategy is not to sell to Amazon or big box stores, we do work with third parties already that are selling significant quantities of our titles and making those available to the market in a variety of different ways.
I see. So potentially somebody on Amazon may be selling your titles. It just would be a third party buying from you, something like this, right? Or eBay, or that-
Yeah. Through our retail division, we opted not to sell direct to Amazon because that gives us a little bit less control of the sales price that it can go for and things like that. So as we sell to a customer that may or may not have a storefront on Amazon, we can give them more parameters and guidelines of strict discounting opportunities or different things like that. So yes, they could be available on Amazon.
Okay. My last question, and I am sorry for asking so many questions, but I think hopefully it is useful for other people who will read the transcripts. Gross margins and promotions. Last year, you mentioned several times that you had to do promotional activity and your gross margins were not particularly good. I have not had a chance to see your gross margins, but maybe you can talk a little bit. Have your gross margins improved, or you expect them to improve now that you do not have a bank breathing down your neck, so to speak?
Well, we do not have a bank breathing down our neck, but we do have lots of inventory. We do have to discount, or we have employed that tool or tactic in the past. Our plans are to do those fewer and further between, right? We do not want our customers only thinking they want to purchase from us when they are on discount. We need to get back to full retail, but it has still been a tactic that we have used periodically.
Okay. So the gross margins are no longer deteriorating, would be fair to say that, right? If I look at the aggregate as far as the first half of the year.
Right.
Okay. All right. I do not have anything else, and thank you so much for taking your time to answer all my questions.
Yeah, no problem. Like you said, I think others would probably have the same questions, so I appreciate it.
There are no further questions at this time. I would hand over the call to Craig White for closing comments. Please go ahead.
Yeah. I think we're not raising the banner that says mission accomplished. We know we have work to do, but we feel this has been a positive step in the right direction, so we're feeling better right now. Anyway, appreciate everyone being on the call. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.