Educational Development - Earnings Call - Q3 2025

Executive Summary

• Q3 FY2025 revenue was $11.05M with net loss of $(0.84)M and EPS of $(0.10); results improved sequentially from Q2 (revenue $6.51M, EPS $(0.22)) but remained below prior year (revenue $16.94M, EPS $0.24).
• Management emphasized continued cost reductions and efficiency actions; sequential improvement driven by lower operating costs, while elevated discounting to turn inventory into cash pressured gross margins in the quarter.
• Building sale/leaseback (Hilti Complex) remains the key catalyst: timeline moved from “around year-end 2024” to “by early March 2025,” with bank credit agreement extended to April 4, 2025 to bridge closing; buyer’s due diligence initially expiring Jan 19 with option to extend 30 days.
• Strategic initiatives to reignite growth include e-commerce enhancements, a shipping subscription, online fundraiser program, and an “ambassador” affiliate layer aimed at boosting Brand Partner count; SmartLab Toys cited as a bright spot in retail.
• Wall Street consensus (S&P Global) was not available for Q3 FY2025 at query time, so estimate comparisons could not be provided (see Estimates Context).

What Went Well and What Went Wrong

What Went Well

• Sequential improvement: loss per share improved to $(0.10) in Q3 from $(0.22) in Q2 on higher revenue, reflecting ongoing cost reductions and efficiencies starting to flow through.
• Operating discipline: management highlighted multiple efficiency actions (space leased to a tenant, freight carrier switch cutting ~20% per-shipment cost, and warehouse consolidation) with benefits visible into Q3.
• Strategic initiatives: e-commerce upgrades, a new shipping subscription (reduced/free shipping + perks), forthcoming online fundraiser capability, and a brand ambassador (affiliate) layer are intended to ease customer acquisition and improve Brand Partner success; SmartLab Toys performance in retail was called out as strong.

What Went Wrong

• Year-over-year contraction: Q3 revenue fell to $11.05M from $16.94M; EPS swung to $(0.10) from $0.24 as the business remains below historical levels.
• Margin pressure: management intentionally increased discounting to convert excess inventory to cash, which negatively impacted gross margin and the bottom line in the quarter.
• Salesforce headwinds: average active Brand Partners declined to 12,400 (Q3) from 16,400 in the prior-year quarter; management cited MLM reputational challenges and a “wait-and-see” posture among partners pending balance sheet normalization.

Transcript

Operator (participant)

This call is being recorded on Monday, January 13, 2025. I would now like to turn the conference over to Mr. Steven Hooser, Investor Relations. Please go ahead.

Steven Hooser (Head of Investor Relations)

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's Fiscal Third Quarter 2025 earnings call. On the call with me 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 third quarter and year-to-date results. The release will be available later today on the company's website at www.edcpub.com. Before turning the call over, 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 more details on the company's financial conditions and full forward-looking statements. With that, I'd now like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Craig White (President and CEO)

Thank you, Steven, 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 and Heather to run through the financials and provide an update on our sales and marketing. Finally, I will wrap up the call with an update on our progress of the sale-leaseback of our headquarters, the Hilti Complex, and provide some comments on strategy for fiscal 2025. During the third quarter last year, we recognized a $4 million gain on the sale of our old warehouse. Without this one-time event, our third quarter pre-tax losses would have been $1.3 million compared to the pre-tax loss of $1.1 million in the third quarter of this year.

Our third quarter results on lower than historical revenue levels reflect the continued operational improvements we have made over the past year and our continued focus on driving continued operational and cost efficiencies. During the quarter, we continued intentionally to offer additional discounts to our customers, which negatively impacted our gross margin and bottom line. Our increased discounting has solely been to boost sales and turn excess inventory into cash to be used to pay down our bank debt. This is a short-term strategy that we will continue to strategically pursue until we sell our building and pay back all of our borrowings. At that time, we will be able to return to more historical promotions and pricing, which should have a positive impact on our cash flow and margins. With that, I will now turn the call over to Dan O'Keefe to provide a brief overview of the financials.

Dan?

Dan O'Keefe (CFO)

Thank you, Craig. To our third quarter results compared to the prior year third quarter, net revenues were $11.1 million compared to $16.9 million. Average active brand partners totaled 12,400 compared to 16,400. Loss before income taxes totaled $1.1 million compared to income of $2.7 million. Net loss totaled $800,000 for the quarter compared to a net income of $2 million in the third quarter last year. Loss per share for the quarter totaled $0.10 compared to earnings per share last year of $0.24 on a fully diluted basis. Now for a year-to-date summary compared to the prior year. Year-to-date net revenues totaled $27.6 million compared to $42.1 million. Our average active brand PaperPie brand partner totaled 13,300 compared to 19,200 last year. Loss before income taxes totaled $5.3 million compared to income before taxes of $2.9 million.

Net loss after taxes totaled $3.9 million compared to income of $2.2 million. Loss per share totaled $0.47 compared to earnings per share of $0.26 on a fully diluted basis. Now for a quick update on our working capital positions. Net inventories decreased $8.8 million from $55.6 million at February 28, 2024, to $46.8 million at November 30, 2024. Borrowings on our working capital line of credit totaled $4.3 million at the end of November 2024, with $1.2 million of availability at the end of the quarter. That concludes the financial update. I will now turn the call over to Heather Cobb to talk about sales and marketing opportunities in further detail. Heather?

Heather Cobb (Chief Sales and Marketing Officer)

Thank you, Dan. At PaperPie, we remain committed to strategic initiatives that drive growth and success for our brand partners. This quarter, we introduced key efforts designed to deliver both immediate results and long-term value. The first was the shipping subscription launch. In November, we introduced a membership program offering customers the opportunity to qualify for reduced or free shipping, along with value-added perks such as monthly emails, birthday postcards for the children in their lives, and more. The program has been met with overwhelming positive feedback from both brand partners and customers, affirming its value as a relationship-building and revenue-driving tool. Our Black Friday promotion, known as Book Friday, was expanded this year, launching earlier in alignment with broader retail trends. The excitement generated by social media activity and direct messaging translated directly into sales performance throughout the event, and our StoryMaker Summits.

In 2025, PaperPie will host five StoryMaker Summits in major cities across the U.S., running from January through June. This shift from a single national convention allows us to engage with more brand partners in smaller, more intimate regional settings, facilitating deeper connections between attendees and home office staff. Registration opened in Q3, and the enthusiastic response suggests this format may become a part of a new every-other-year rhythm for the business, alternating with our national convention. Looking ahead a bit in 2025, we're preparing innovative projects and initiatives across both the PaperPie and retail divisions, with a continued focus on expanding our impact and enhancing brand partner success. We remain confident in our products and mission. Print books continue to be the overwhelming preferred choice for reading, particularly in the children's market.

As education and learning needs will persist, EDC is well-positioned to meet those demands with our diverse collection of quality books and educational toys and resources. This concludes our sales and marketing update. I will turn the call back over to Craig for our closing remarks. Craig?

Craig White (President and CEO)

Thank you both, Heather and Dan, and now for an update on the Hilti Complex building sale process. In September of 2024, we announced that we had executed a new letter of intent, and in late October, we announced the asset sale agreement, which started the due diligence timeline with the buyer group. The initial due diligence period is scheduled to expire on January 19, and the buyer has an option to extend the due diligence period for another 30 days. As such, we hope to have the transaction completed by the beginning of March. While this timeframe is longer than we are hoping, a transaction of this size is not something that moves quickly. One positive side in the delayed closing of this transaction is that we will continue to make monthly paydowns on our debts with our bank, and thus our available cash at closing will be higher.

The proceeds from this sale will not only bring savings from reduced interest expenses, but will allow us to build a positive cash position as we continue to work down our excess inventory levels, which was approximately $30 million at the end of November. As previously stated, the agreement excludes the 17 acres of excess land, which will remain under EDC's ownership and provide further strength to our balance sheet post-building sale. 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. While the building sale is a large project, we continue to focus on growing our brand partner levels and sales. We continue to pursue additional enterprise projects between our IT and marketing teams that we feel will generate positive momentum in the upcoming fiscal year.

Lastly, I want to thank all of our shareholders for their patience, our employees for their commitment to our mission, and our customers and brand partners for their loyalty during this difficult period. I'm confident in our collective ability to emerge stronger and more resilient than ever before. Now that we have provided a summary of some recent activity, I will now turn the call back over to the Operator for questions and answers. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a prompt that your hand has been raised, and should you wish to cancel a request, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star and one to ask a question. One moment, please, for your first question. Your first question comes from the line of Olivier Dotti from, please go ahead.

Olivier Dotti (Analyst)

Yes. Hello. It's Olivier Dotti from Geneva. Thank you for taking my question. Thank you for your update. I have two questions. Do you hear me well?

Dan O'Keefe (CFO)

I do.

Olivier Dotti (Analyst)

Okay. Good. So the first question is about the new markets maybe you are taking into account right now. Have you any ideas about new markets? And where are you? Where is EDC now about that? And the second one is about the new IT implementation. First, on the partner side, what are your returns? And on the customer side, do you think about digital extension of your products? Or where are you again on this side of customers with your new implementation?

Dan O'Keefe (CFO)

Okay. I think I've got those. As far as new markets, we're always looking for new markets. I would say, while it's not necessarily a new market, our SmartLab Toys in the retail division have done very, very well for us. So kind of almost consider that a new market. But I don't have anything necessarily new to report at this time about new markets. What I will say, and I can expand on it during the IT questions, is that we've been very successfully implementing a couple of major projects in IT. First of all, being the e-commerce, as you know, roughly a year ago, has gone very well. We continue to make tweaks and add new features consistently. We've had the Shipping Subscription, which is a big project that launched in that third quarter, which has been successful.

Kind of moving forward, we have our online fundraiser program that will kind of add new ability with it being online, but that's going to be in the next couple of months. We're also talking about making a slight tweak to our model, not abandoning our model, but adding Brand Ambassador, which is kind of more of an affiliate-type program. There's been more than a couple of multi-level marketing companies that have attempted that and not done well, but I'm very excited with what we've come up with. It's probably not quite as aggressive as other multi-level marketing companies, but it does expand us into a different, I wouldn't say market per se, but it does give us the ability to increase Brand Partner counts without signing up through our traditional model. So that's kind of what we have on the horizon for it. I hope that answers your question.

Olivier Dotti (Analyst)

Yes. Yes. Maybe a little update. Have you any news from Usborne?

Dan O'Keefe (CFO)

Dan has quarterly or maybe monthly calls with their CFO. Everyone's just kind of patiently waiting for us to get through this difficult period. We don't have any news to report, but as restrictions for purchasing are lifted, we anticipate that we will.

Olivier Dotti (Analyst)

Return to normal.

Dan O'Keefe (CFO)

Yeah, return to normal purchases with Usborne.

Olivier Dotti (Analyst)

Okay. Okay. Thank you.

Dan O'Keefe (CFO)

Thank you.

Operator (participant)

Thank you. And your next question comes from the line of Paul Carter from Capstone Asset Management. Please go ahead.

Paul Carter (Chief Investment Officer)

Oh, good afternoon, everybody. Thanks for taking my questions and happy New Year. Just to start off, minor question. So you previously announced that on September 19, you executed a commercial real estate sales contract and that the due diligence period started that day on September 19. But now you're saying that was only a letter of intent and the due diligence period only started on October 28. So can you just maybe explain what happened there?

Dan O'Keefe (CFO)

Well, the LOI is just that. It's just a letter of intent. And so we had to wait until we could get an asset purchase agreement documented for the due diligence piece to be defined and start. So what the real issue, Paul, and from a macro perspective was we were kind of under the impression with the buyer group that they wanted to close this by year-end. And so when we went to the bank and we asked them for the last amendment and we kind of put everything out in a timeline, we were really geared towards a year-end close. And so our amendment with our bank and our disclosures were all geared towards that. What's ended up happening is the buyer group has kind of had another transaction that they said that kind of took all their focus away from year-end.

And so they didn't start a lot of their work until towards the November, December timeframe, which slowed them down. And so now we're left with the asset purchase agreement definitions, which outline that they've got 75 days from the delivery of certain key documents to them, which started in basically early November. And so that puts our timeline for the initial due diligence period to be January 19. We also have—they have in the asset purchase agreement a 30-day option to extend that, which would put them into mid-February. And then they're still closing after that. So that's why we've gone to the bank. We've recently executed a new, pardon me, a new amendment to extend our line out until April 4 to give us sufficient time to close the transaction. And it's just kind of a—so that's the current timeline.

Paul Carter (Chief Investment Officer)

Okay. That's fair. That's fair. Thanks for that detail. And is the sales price still $38.3 million, or was that changed?

Dan O'Keefe (CFO)

No. The terms of the asset purchase agreement were consistent with the LOI, so nothing changed.

Paul Carter (Chief Investment Officer)

Okay. Great. And then just another unrelated question. For the quarter, your average active brand partners was 12,400. Are you able to say what you ended the quarter at?

Dan O'Keefe (CFO)

That's the average for the quarter. We don't report monthly numbers for our active average brand partners.

Paul Carter (Chief Investment Officer)

Okay. No, fair enough. All right. So this is, apologies for the rather blunt question, but I'll ask it anyway. So four years ago, you were doing about $200 million in net revenues, and we're growing your capacity to get up to $400-$450 million. And now you're down to a net revenue run rate of about, call it, $30 million, give or take. And I guess there isn't a lot of evidence yet that things have totally bottomed. And I totally understand, and you know I've been following you for a long time. I understand you've been facing multiple challenges all at the same time, like inflation, the Usborne relationship, the overhang of your debt agreement, etc. But rather than just selling your building, has the board considered hiring a banker and pursuing all strategic alternatives, including selling the company to maybe another party with greater resources?

If the board hasn't done that, I'd just be interested in why not?

Dan O'Keefe (CFO)

I mean, the closing of the current building sale transaction is imminent. I mean, it doesn't seem appropriate to look at options until that either closes or doesn't. That being said, we've got several options on the table as well that we've kind of been thinking about not moving forward as the current contract is exclusive, but we have several options. If, in fact, we do get the transaction closed and we're out of bank debt, then we're kind of back going again. We feel like our sales force is kind of sitting on the sideline to see what happens. Honestly, we've kind of thrown up several red flags with the heavy discounting and selling off assets. It does look like we're going out of business, but we're not.

If we complete this transaction, we're in a much stronger financial position, and we can run our business how we need to. It's been two years that we've been under BOK's thumb, if you will. So we haven't been able to operate our business as we would normally.

Paul Carter (Chief Investment Officer)

Yeah. No, that's fair enough. Yeah. I thought I'd just throw that out there just to kind of get your reaction. But yeah, it does sound like closing of this transaction will hopefully be a bit of a catalyst for an inflection point. But that's it for me, everybody. Thanks very much.

Operator (participant)

Thank you, Paul. Thank you. And your next question comes from the line of Joseph Beebe. Please go ahead.

Oh, hello. Quick question about the brand partner numbers. If you can just comment a little more on those.

Dan O'Keefe (CFO)

Just kind of the numbers and what's generally happening?

Yeah. Just kind of the decrease in them and just how you feel the trend is and the motivations of the brand partners for leaving, if you have an idea of that?

Heather Cobb (Chief Sales and Marketing Officer)

Sure. I mean, I think that Paul alluded to some things even in his question talking about economy and the headwinds that everyone has been facing there. I think that there are the overarching things that we are up against just as an MLM. We've talked about those several times on the calls. The reputation that MLM tends to carry with it. And then Craig alluded to some others that we do sense that they are sort of waiting, kind of in a waiting game. They're in a wait-and-see attitude. But the overwhelming response that we get from any sort of a release of new title or a conversation about what's next and all of those things that we are privy to that unfortunately the public can't see is always overwhelmingly positive. The heart of the mission and the foundation of why we do what we do continues.

Operator (participant)

The impact, we believe, just continues to be able to grow, and so while the numbers have decreased, unfortunately, we don't think that that is a trend that will continue into future years, but it's something that we believe will get turned around as the sale of the building is done and we are purchasing again and things look more normal for us from a business standpoint.

Paul Carter (Chief Investment Officer)

Okay. Thank you. That was my only question.

Operator (participant)

Thank you. There are no further questions at this time. I will now hand the call back to Mr. Craig White for any closing remarks.

Craig White (President and CEO)

Thank you. Before I get into my closing, I do want to just reiterate what Dan mentioned. It was in the press release at 3:00 P.M. that we signed an amendment that now extends through April 4, which I feel is a very good sign. What it tells me is that the bank believes we're doing everything we can to pay them back. We're doing everything we can to get back to a stronger financial position, so until further notice, that's what we're doing. We're trying to get back to business as usual. If we can purchase some new titles, make it look like a normal new title release, our sales force will get excited, and we're kind of back going again, but anyway, that remains to be seen. Thanks, everyone, for joining us on our call today.

We appreciate your continued support and look forward to providing an additional update in May. Next one will be in May. Next one will be in May 2025. Thank you. Have a great day. Thanks, everybody.

Operator (participant)

Thank you. And this concludes today's call. Thank you for participating. You may now disconnect.