EDUC

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 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 filing 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, Chloe, and welcome everyone to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter. 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. During March, we ran a recruiting special surrounding our March 14th, Pi Day, which yielded better than expected results. We added over 1,300 new brand partners, which brought our active brand partner numbers above 5,200, and we have maintained this level of brand partners 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 include 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 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 and 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 but 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 a sales and marketing update. Heather?

Thanks, Dan. As Craig mentioned, our PaperPie Day celebration in March delivered positive results across the business. The promotion generated strong recruiting activity, drove sales through our site-wide 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 Bologna 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 thriving businesses, helping to expand our reach and impact. May brought the announcement of our next StoryScape 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 buddy named Read, 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 reinforced 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 lovers 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. 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 patience, our employees for their commitment to our mission. Our customers and brand 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.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To join the question queue, you may press star then one on your touchtone phone. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then the number 2. We'll pause for a moment to compile the Q&A roster. We have a question from Paul Carter from Capstone Asset Management. Your line is open.

Thank you. Good afternoon, everyone. Thanks for taking my questions.

Sure.

First question is more of a housekeeping question. Most shareholders probably know Randall White's long history with EDC. I was just curious about the beneficial owners disclosure in your proxy circular. He's no longer listed as a 5% beneficial owner. Was there an ownership transition or was that just?

It's a good question, Paul. The challenge is we don't know. He's not a NOBO owner. We have no visibility to his ownership levels. We could not include it in the proxy because we could not confirm his share ownership.

Okay. No, that's fine. I was just curious about that. Just to clarify one thing on the brand partner numbers. Your press release referenced average active brand partners of 5,300 for the quarter. Your comment said that it started at 4,300 and then ended the quarter at 5,200. What happened there? Is that a reflection of an increased quite a bit after the March promotion and then sort of even then towards the end of the quarter?

Well, it increased in March and then kind of remained pretty consistent through the end of the quarter. Yeah. Based on 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, great. Just related to that, maybe this is a question for Heather. I know in your fiscal fourth quarter, the average Beachbody account, I think, was 4,500. In Q1, you ran several recruiting promotions, including that successful March initiative. By the end of May, the average number was up to 5,200, which is definitely encouraging. I'm just trying to understand the sustainability of this trajectory. Do you feel you have a pipeline of new recruiting initiatives and ideas that you can continue to use to expand the Brand Partner base from here, or was the March recruiting promotion the big one that caused a spike in anything, and sort of going forward might not be as big as that?

That's a great question, Paul. I would say 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. 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. 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 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 level. I think that we're definitely looking ahead and planning ahead, both in the current day and in the coming six months to a year. Does that answer your question?

Yeah, that's helpful.

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. 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. Convention 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. 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 behaviors within the Brand Partners, but since you are now able to buy new titles, are you noticing in the data that Brand Partners are sticking around and being active for longer than maybe they were a year ago, or is it just too early to say at this point?

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. Considering we're not even a full month into our full release of new titles, it's really too early to look at any concrete data that would show that.

Okay, great. Just switching gears, and I apologize, I just have two quick last questions here. Last quarter, you talked about moving away from deeper promotional discounting and just returning more towards historical gross margins. You had product promotions during Q1 to reduce inventory. Did gross margins kind of move closer to historical levels, or are you still seeing some impact from clearing out some of that excess inventory?

I would say that we're still seeing impact related to that. The promotions that we ran and the site-wide sale we ran were surrounding our PaperPie Day, kind of was consistent with the promotions that we ran in the first quarter last year. We don't see a lot of margin improvement yet.

Okay. Just one observation about that. I know as of now, I think your book value per share is around $4.87, which is obviously quite a bit above your current stock price. 90% of that, give or take, is represented by inventory. I recognize the need to generate cash and improve inventory turns, but given the amount of shareholder value that's tied up in inventory, how are you balancing the desire to reduce inventory levels with ensuring that you're not sacrificing too much in terms of gross margin through promotions?

Well, again, good question. It's kind of a balancing act, right? We need to bring in cash, but we don't want to reduce the value of our product. We look at it every single month. Okay, do we need to do something in the next quarter or things like that. It's not, 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 that balance shifting more towards not sacrificing gross margin? You said you need to raise cash, and obviously when you had the bank facility, there was that ongoing need and pressure from your bank. You don't have that, and I think you said your cash actually went up from $1 million to $1.5 million during the quarter. It doesn't sound like you actively need cash, or at least your cash balance to grow as much as maybe you did in the past, and just wondering if that is directly playing into your decision on promotions.

Well, it's a great question. I'd like to say we're back, we've just so recently come out of difficult periods. I am 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. It's a point well taken, I agree with you. We need to try to reduce the times that we're discounting so much. 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 lens. When we were doing deep discounting across the board as a site-wide sale, that looks very different than some of the things that we've done recently, where we've done more of a category sale approach. We've deep discounted a handful of titles as opposed to just an across the board. Things like 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.

Okay. That's great. That's very helpful. Well, that's it for me. Thanks very much, everybody.

Yeah, appreciate it.

Thanks, Paul.

Thanks, Paul.

Our next question is from Ignov Krotsov. Your line is open.

Thank you very much. Can you hear me okay?

There's an echo that makes it hard to hear you.

Okay. It should be better now. Now it's a little better, right? Apologies.

Yes.

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

Yeah, that's a great question. I think that goes back a little bit to the question that Paul had about, 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. I would say within the next couple of quarters, we'll definitely see some of that fall into place in the bottom line.

There is a significant lag. Just because you sign up new partners, it takes them time, basically, to get up to speed and to start delivering the revenue. It's usually there's a couple of quarters lag, 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. It can happen either way. We just don't consider it completely negative if it doesn't happen that way immediately.

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

Yeah, 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. Two 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 reprints 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 IT initiatives that we mentioned.

Some of the ones that we very specifically mentioned is 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.

Okay, that's helpful. Regarding the new 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 has it changed so far? Like of new titles versus the titles coming of your inventory, or how it's going to change going forward. Is there percentages or how do you think about this?

Yeah, that's a great question. We are going to have to really dig through the data on that one since we haven't introduced new titles in quite a bit of time. 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 sales cycle of new titles. 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.

Well.

Oh.

Oh, sorry. Go ahead.

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

Okay. No, I get it. What that would be looking at is strictly old titles, so that makes sense.

Right.

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

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

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

Well, all the results that we report, we're comparing not sequentially, but year-over-year.

Right.

I mean, even though Q2 was slow, 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.

Right.

Yeah. Okay. You alluded that there is a significant expense reduction. I can see that you're basically doing much better on a much lower revenue level, which is nice. I have a twofold question. Cash flow. 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 in front of me. I just want to understand, what does your cash flow look like from operations? Even with your falling revenue levels, you were still able to pay the bank loan and your cash flow stayed positive. Is that still the story that you expect that your cash flow will still stay positive even at this reduced levels?

Well, I'll answer that on two points. The first point is that we had $1.4 million of operating losses in this quarter that we just reported, but our cash build was at $500,000. Turning inventory into cash, it should translate into positive cash flow. The key thing for us is sales growth, 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 we'll build. I don't have the crystal lens to tell you how much cash flow we're going to build over the next three quarters of fiscal 2027, the plan is to be cash flow positive and hopefully be very cash flow positive.

Okay. 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 the comments?

Yeah. Receivables dropped a little bit, it was primarily from inventory reductions.

Okay. That's really great to hear and that sort of gives comfort to investors' heart. My last question, and it's sort of a comment. I know that I read your presentation, and that's one of the things it says, you said no to Amazon. Given that you have so much inventory, have so many titles, and I actually did a dig into your titles, and you have some tremendous titles that have been around forever, and you have IP to them, 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 making not exclusive and putting them on sale? Maybe not building your own channels, I understand that takes cash and time, but maybe partnering with somebody to put it on an online store. Any thoughts to that?

Yeah. That's a good question. We made the concerted effort and decision to not sell 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 bookstores or larger entities like a Barnes & Noble or someplace like that. In addition to that, our retail side, we have several partnerships with various different distributors and reps who sell through places, which it sounds like are ones that you are recommending. 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.

Right now, I believe you're something around 15% is non-partner 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 that's the case. It definitely has the potential to grow. We've seen great response, not only in the book-selling side of it, but also in toy and gift, especially related to our SmartLab Toys division, and our Learning Wrap-Ups line. Yeah, I definitely think that there's room to grow.

Okay. Thank you very much. I don't have any more questions.

Thank you.

Thanks for your question.

Good afternoon, everyone. 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 purchase new titles. To remind everyone, it takes anywhere from four to six 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 was 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 expense for the quarter was $1 million due to a one-time 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 one-time 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. Due to our historical losses prior to the fiscal 2026, 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 one-time valuation adjustment of $1.5 million to offset our net deferred tax assets. This adjustment had no cash flow impact, 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 two 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 join 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 toward 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 of 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. 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, 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. 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 two 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 two 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 book vendors and are very excited about what has 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 their 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, but 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 through 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.

Although we are currently not using the 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 plan from a position of strength.

While we are 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?

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 Larus Capital. Your line is already open.

Hello, thank you for taking my question and pronouncing my last name correctly. I have a few questions. I unfortunately 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? As related to this, how much was the cash flow from the inventory reduction or from operations?

Hi, Igor. 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. Would it be fair to say that the cash flow still stayed positive in Q4?

Well, Q4 is typically our softest quarter. That and the summer months, which is Q2, are our two softest quarters of the year. I would say that cash flow, you know, when you look at inventory reductions and 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 that's actually nice to know. Hopefully that points towards the improvement of your business. Are there any covenants on your revolving loan that 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 as the overhang from the loan. 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, we will not see the results until the next quarter?

Okay. We touched on it briefly, but once we sold the building and knew we were gonna be able to resolve all of our debt with our previous bank, we executed a phase I of our purchasing plan, which is a very conservative half a million in purchases, which was executed in the 4th quarter. We're kinda just now seeing new titles come in. As we see the results of selling these new titles, we've already kind of started our phase II, which is another half a million. Does that answer your question?

Oh, yes, somewhat. Okay. Sorry, someone there was adding something, I believe.

Yeah.

Yep.

No, that was it.

No, can I just continue? Is it okay?

Yeah. Yeah.

Yeah. I just run a quick numbers on your revenue per partner. 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 that the account of the non-partners is falling, the revenue is increasing. Is that because there is something operationally changed about the partners or simply the partners that remained are 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, in-home parties, which we haven't done in several years. We believe that that trend, that you are referencing points back to the growth of these in-person events.

Okay. That's great to know. 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? You think that it's just slow-moving and it will just take time, but everything is potentially sellable still?

Yeah. We consider everything sellable still, and that's why I wanted to reiterate the move to long-term inventory. It's not that we're gonna have to write off anything at all. It's still all good sellable inventory. It's just gonna take a little longer. That being said, you know, 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. While we're looking into it's very unlikely that we'll participate in the remainder market. Yeah. We're looking at other creative marketing ways to move this inventory, and it's more of a kinda one-off here and there of the things that are, you know, more highly inventory.

Okay. Thank you very much. I'll get back in the queue and maybe I'll ask questions if nobody else is asking.

Okay. Perfect. Thank you, Igor.

Your next question comes from Paul Carter of Capstone Asset Management. Your line is already open.

Great. Thanks very much. Hi, everybody.

Hello.

Craig, your comment about exploring the remainder market, that was the first time I've heard you say that. Can you provide some numbers around that? Like, what percentage of your long-term inventory are you thinking about creative marketing ways such as that?

Yeah, 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 gonna 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 gonna participate in that.

Paul, I'll jump in too 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. 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. Maybe, more to the point is of my question is sort of how much of your $37.7 million of inventory you would characterize as inventory that you don't necessarily, you know, that you would want to maybe get rid of if you could, obviously not through the remainder market. Obviously, you looked at the remainder market because you felt there was a sufficient amount of inventory that maybe you weren't going to move within the next few years. Can you just give some numbers around 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. Okay. No, that's great. Then, Craig, you mentioned in the press release that throughout fiscal 2026, you continued to run promotions with discounted pricing, prioritizing cash flow, et cetera. I know that was obviously driven by the bank. Was that the case in Q4? Or maybe sorry, I missed a little bit of the earlier comment, so maybe you already touched on this. What was your gross margin change year-over-year in the fourth quarter compared to last year?

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

Yeah. Well, I mean, there's always some sort of, you know, 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. That, that can have some impact there.

But would you say that the-

Yeah.

whatever promotional activity you have been experiencing obviously is not, you're not feeling the pressure of the bank anymore, that level of promotional activity is kind of back to quote normal, would you say?

Yeah. That's kind of what I was alluding to when I talked about, you know, trying to meet consumer expectations, which even on the other side of it, as a consumer, I like to shop a good sale. You know, 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 in the value that we can offer even at regular price. 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 a Black Friday sale or, you know, a summer blowout or something like that. That's kind of expected, but not negatively impacting our business side of things.

Okay. Then just lastly, regarding your brand partner count, admittedly 4,500 is lower than I would have thought at the beginning of the year if you'd asked me a couple of years ago. That's obviously a pretty low number when looking at your history. It sounded like the March joint special that you mentioned, you were receiving positively. Is it kind of fair to expect that 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 in?

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

Yeah. 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, you know, not only bringing those people in, but also retaining them. I do think that we will see more of a balance shift to more coming and staying than we have leaving.

Okay, great. That's it for me. Thanks very much, everybody.

Thanks, Paul.

Ladies and gentlemen, as a reminder, if you have a question, please press star one. 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 mean, it looks like maybe Igor jumped in late. Do we want to? I'm happy to take his question.

Sure, no problem. I'll go ahead and select Igor Novgorodtsev of Larus Capital for the next question. Your line is already open.

Oh, thank you so much. Sorry, I jumped in a little bit late. Yeah, just have a couple of follow-up questions. Now that you're gonna start getting finally new titles, what kind of gross margin you're thinking about if you just set the old titles aside? Just purely for the new titles, what would you consider like for your new business as acceptable gross margin?

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

What was your traditional margin like over the years?

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. When we sell it through the retail division, like Barnes & Noble or Ingram 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.

In both sales channels, we get $5 for a $10 book that costs $2.50, and we have $2.50 to run our business on.

Great. This is very, very helpful. My other question is.

Did we lose you, Igor?

Oh, it-

I think he dropped off.

I think we lost him.

Well, all right. Somebody let Igor know he can email me.

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

Yeah. I have nothing else to add. I appreciate everyone's questions and interest in the call, thank you for joining us. 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.