Thank you for joining the Educational Development Corporation's Third Quarter Earnings Call. Before beginning the call, we 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.

Thank you, and welcome, everyone, to the call. With me today are Randall White, our Executive Chairman of the Board; Heather Cobb, Chief Sales and Marketing Officer; and Dan O'Keefe, our Chief Financial Officer. Before I turn it over to Dan to go over the financial results, I'd like to recognize what a challenging year it has been, probably mostly from a staffing perspective. I'm so proud of the team that we have here at EDC as the team continues to get better and better. We handled most of the staffing challenges very well, predominantly in the warehouse and really didn't miss a beat in the challenging staffing environment out there. We didn't have any outbreaks in the office and really had mostly a healthy and safe environment here at EDC. So I want to recognize that first. Now I'd like to turn the call over to Dan O'Keefe, our Chief Financial Officer, to provide a brief overview of the financials.

Thank you, Craig. Now for a brief overview of our third quarter financials. Our net revenues for the third quarter totaled $45.1 million, a decrease of $21.7 million or 32.5% compared to $66.8 million reported in the third quarter of last year. Earnings before income taxes for the third quarter totaled $3.6 million, a decrease of $2.2 million or 37.9% compared to $5.8 million reported in the third quarter of fiscal 2021. Net earnings totaled $2.6 million compared to $4.3 million, a decrease of $1.7 million or 39.5% from the third quarter last year. Earnings per share totaled $0.31 compared to $0.51, down 39.2% on a fully diluted basis. That concludes the report for the third quarter financial results, and I'll now turn the call back over to Craig.

Thanks, Dan. A couple of items I would like to begin with today that you may have heard from me in the last couple of quarterly calls and at conferences. The COVID pandemic affected most businesses in the world, either positively or negatively last year, and our company was no different. Fiscal 2021 was a normal year for us. Along with the initial surge in sales from the pandemic last summer, we experienced an increased demand for non-traditional income opportunities from parents looking to supplement or replace pre-COVID income streams. These factors or pandemic-related issues drove our revenues to record levels last year. Our fiscal third quarter is typically our largest sales quarter of the year due to the seasonality of the business. This year's third quarter sales were more in line with pre-COVID years, and that's why we've presented our most current pre-COVID year comparison in today's press release. While our third quarter revenues are down significantly from the third quarter of last year, they are up over pre-COVID levels, primarily due to our increased publishing division sales and the impact of our UBAM division's increased consultant count. We see both these contributors continuing to drive sales in fiscal 2022 and into fiscal 2023. So in the last couple of quarterly calls, I said we had an incredible, unusual year, and while we're still facing unusual factors, the pandemic is not gone. We've had this in and out of school and in and out of work and all those things. It's just an incredibly challenging year to compare to. So let me next turn it over to Heather Cobb, our Chief Sales and Marketing Officer, to discuss our sales.

Thanks, Craig. During our third quarter, we continued to experience an increase in our Publishing division sales and a decrease in sales from our UBAM division when compared to last year, in the throes of the pandemic. Our Publishing division sales increased 44% to $3.7 million in the third quarter, primarily due to the return of business from customers that were temporarily closed last year due to the guidelines published by local authorities. In addition, our Publishing division has added several new customers and experienced growth with existing customers that are driving this division's sales to record levels in fiscal 2022. Our UBAM sales declined 35% to $41.4 million in the third quarter of fiscal '22, primarily due to the anomaly that last year was. During last year, we experienced unusual growth in our active consultant count that began in the summer of 2020 and peaked at around 60,000 in November last year. This growth in active consultants drove our revenues to record levels during fiscal '21. Throughout fiscal '22, we've seen our active consultant count decline due to consultants returning to full-time work as the drain on parents' available time associated with the continued pandemic and their children's returning to school. The recurring obstacles of new strains of the pandemic impact our consultants' available time to run their business. But while our consultant counts have declined, they are certainly above the pre-pandemic levels that Craig mentioned and our consultants are still having success, generating sales, earning commissions, and building their business. This was evidenced during this third quarter as our active consultants generated similar sales and commission per consultant to the third quarter of last year and the pre-pandemic third quarter of fiscal 2020. These sales and commission results give us support that our existing consultants are experiencing a consistent level of success that they achieved without benefiting from the increased demand that occurred in the early days of the pandemic, most noticeably in that first and second quarter of fiscal '21. In addition, we continue to introduce new technology-based tools to help our consultants be more successful in reaching new customers and expand their recruiting and business building efforts. We believe that this will help retain the current consultants we have as well as recruit new people to the business. Two upcoming enhancements that we expect to roll out in the next three months include an upgrade to our platform with additional features that will improve our new consultant experience as well as our new e-commerce platform. We delayed rolling out that e-commerce platform in the third quarter of this fiscal year because our internal team, as well as our top-level leaders, had valuable input to make that platform even better. These new technologies are expected to have a positive impact on both new consultant experience, customer experience, as well as the sales and commissions earned by those new consultants during their initial period with the company. With that, I'll turn the call back over to Craig.

Thanks, Heather. One other impact you see from our recently published financials is our continued high levels of working capital. We have increased inventory levels and increased working capital borrowings. These increased levels are temporary and will rebalance as we turn inventory into cash over the next few quarters. As inventory turns to cash, we will pay down our borrowings and expect to be back to a more normalized working capital within the next year. And the good news is that the cost of carrying this inventory is less than the current replacement costs given the unusual ocean shipping challenges that are occurring. One of the other highlights for our third quarter was our strong pretax profit levels. Our pretax profit as a percentage of net revenues totaled 8%. These pretax results on lower revenue levels than the third quarter of last year reflect the strength of our business model and management's attention to cost containment. We are excited to see the rebound from certain sales channels that were negatively impacted by the pandemic, including sales through school booth fairs. While this started to return this year, the new versions of the COVID-19 virus have stalled the return of this income stream and the return of booth and fair booths, which also continue to be impacted by the new COVID-19 variants. These two sales channels combined for about $30 million of the business that we expect will be returning to us in future quarters. We saw evidence that they were kind of starting to come back and then again with this new variant, kind of shut those things back down a little bit. So I can expand on any of those points. But at this point, we want to open it up to questions from our investors.

Your first question comes from the line of David Wright from Henry Investment.

Is your inventory higher than you'd like it to be right now?

Absolutely. No question. I'm glad you asked. Well, do you have a follow-up question or can I answer that one?

Please do.

I have been asked about our inventory levels on every call with investors and at every investor conference. Our inventory is indeed a bit high. While we did not anticipate an increase in sales by 80%, 50%, or even 10% to 15% this year, last year's third quarter was particularly problematic in terms of inventory. We increased our inventory levels, which were acquired in January, February, and March, and we are just now receiving those items in September, October, and November. We have not actively purchased any backlist titles in the last six months. The only inventory acquisitions we have made recently are for new titles, which are essential for our sales organization. There is some positive aspect to our situation; as I mentioned earlier, we mostly avoided the chaos affecting the current supply chain. We observed container costs from China rise drastically, from $5,000 to sometimes $35,000 per container. Although we are over-inventoried, we largely missed the accompanying cost increases and delays from China. While we have excess inventory, it helped us navigate a challenging time, and none of it is obsolete—it will all sell. Over the next four to five months, we expect to reduce this inventory, convert it into cash, and be in excellent shape by next summer or the third quarter.

Right. So historically, your fourth quarter is usually the slowest and the first quarter is only a little better. Based on current business conditions, where would you have liked inventories to be at November 30?

Yes. For the current sales levels, probably $45 million to $50 million would have been a more appropriate level. I think we peaked at $70 million or just slightly north of $70 million. So we have about $20 million to $25 million too much inventory. But again, we're not actively purchasing except for new titles, and we'll sell that down over the next couple of quarters.

Okay. I also wanted to ask about cash flow. Cash flow from operations in the first six months was positive $12.4 million; it's now negative $7.4 million, indicating it's $119.8 million in the third quarter. Do you anticipate that the fourth quarter will produce positive cash flow from operations?

Craig, do you want me to address that?

That would be great.

Sure. The fourth quarter is usually not our strongest sales period. We don't anticipate an increase in inventory. Our cash flow from operations will be influenced by three main factors: income from the business, changes in inventory, and changes in accounts payable. As we do not expect inventory to rise, it should not adversely affect our cash flow. However, accounts payable will decrease slightly due to some payables coming due. We are still early in the fourth quarter, so I hesitate to commit to a cash flow positive outcome. As noted, the fourth quarter typically does not have a significant impact on inventory changes. We expect to see a reduction in inventory during the first quarter of the next year, particularly in March, April, and May, which is our second-largest quarter, coinciding with the Easter holiday and various school activities. While we currently have $25 million more inventory than the average of the last two years, there are positives to being slightly over-inventoried, mainly because replacement costs are significantly higher than our current inventory carrying costs. We acknowledge our elevated inventory levels and working capital position, but this should normalize in the next three quarters.

Thanks, Dan. It seems like an appropriate time also to mention that we have a very solid relationship with our bank, and their involvement and support of our business is very strong. So that's a positive as well.

Your next question comes from the line of Randy Freed from RL Capital.

I'm not sure who this question could be directed to, but it's probably either Craig or Dan. I'm looking at the table in the earnings announcement near the beginning where you talked about the average number of consultants and then the net revenue and the net earnings after-tax profit percentage. And I'm trying to reconcile in my own mind some of the statements you made a little bit past that in the next paragraph or two and a couple of statements you made on this call, where you said that you're happy with the strong pretax profit level and you're very happy with the cost containment. So when I'm looking at this table here for the current quarter and comparing it to the one from two years ago, I see an after-tax profit margin of 5.9% versus a year ago was 6.7%. And I see the net earnings down just very slightly compared to the one from two years ago, even though sales were up about 10%. So that's the problem I'm having in my mind reconciling sort of what's going on. I was wondering if maybe something happened this quarter, or if there was an unusual expense or something, and I'll quiet, let you talk.

Yes. Craig, if it's okay, I'll take that one.

Yes, go ahead. I have some things to add to, but go ahead.

The third quarter is usually our largest and most profitable quarter of the year, as we can spread fixed costs over greater revenue. The changes in profitability compared to pre-COVID levels mainly stem from increased outbound freight costs. Our small parcel carrier introduced two types of surcharges due to COVID—a peak season surcharge and an additional holiday surcharge during the peak season. We have had to absorb these costs, which have impacted our bottom line in the third quarter this year compared to before COVID. Additionally, looking at the year-to-date figures, our after-tax margin is 6.7% for the current year, compared to 5.5% before COVID. Despite experiencing peak season surcharges this year and last, overall, these have not significantly affected us. We've also implemented some rate increases this year that have contributed to achieving the current after-tax margin.

Yes. Let me add to that. We kind of internally use pretax profit as a KPI. And so we had a very challenging September, actually. That seemed to be the most chaotic as it related to the pandemic as kids were kind of going back to school. We seemed to be coming out of the pandemic with people going back to work. So there was a little bit of chaos. September was not good. And then we followed that up with October with our best pretax profit that I remember in years. And then November, we did a lot of promotions with some free shipping and things, but it was still a very solid pretax profit. So we're maintaining a good pretax profit level.

I noticed your comments regarding the 6.7% compared to the 5.5%, which leads me to the observation that when comparing the fiscal year-to-date sales from two years ago to this year for the first nine months, sales were up about 28% from two years ago for the first three quarters combined. This year, however, they increased by only about 10% or 11%. So while sales have risen, the overall percentage increase for the entire fiscal year is not as significant.

Well, that's not exactly accurate. 1.2% on the 5.5% is more like 23% or 24%. So it's not 10% or 11%, it's about 20%.

No, I was talking about the net revenue is what I was talking about. I'm still in that same table.

Okay. I thought you were talking about the after-tax profit, I'm sorry.

No. That's fine. Let me just ask one last question. So you're talking about strong pretax profit levels, etc. and I know you really can't project this at all. But for the next fiscal year, which I guess is talking about March 1 of this year or 12 months after that. I mean you've talked a lot about efficiencies and things like that. Do you have any idea or do you think the pretax or the after-tax profit levels are going to be sort of consistent? If you look at this whole table here, you can see no matter what we're talking about, they're pretty consistent right between 5.5% at the worst and 6.7% at the best, just looking at this table, which I know there's different columns there. But do you sort of project that as being roughly the same? Or do you think that potentially could increase in the future?

Yes. I think you probably recognize kind of our model, and we have 25% to our business. So we're hitting 8% to 10% and maybe a little bit north of 10% on a pretax profit, but the chances of getting much higher than that are challenging. I think it's going to be very consistent. What I will add is that we could have been more efficient this third quarter this year because the staffing challenges were crazy. We hired roughly 300 people, and about 30 of them quit. So that time and effort to train people for them to leave at lunch and never come back or not come back the second day or all of those factors, we could have been a little more efficient this year, even this third quarter. So, but still, I expect them to remain consistent. Yes.

Okay. That's what I was hoping you'd get into a little bit of what you just said that there were a lot of challenges this quarter. And like you said, with staffing and people not coming back. And then what Dan already talked about with the freight costs and the peak season surcharges. So thank you for that information.

There are no further questions at this time. Presenters, you may continue.

Okay. Great. While we aren't thrilled with the results so far this year, we are encouraged and satisfied. We still consider ourselves to be in growth mode when compared to the last normal year. We've experienced two very unusual years, and our growth pattern is around 30% to 40% compared to the same timeframe in calendar 2019. We have positive forecasts and are looking forward to the upcoming year. Although we're not ecstatic, we are pleased with our achievements. Thank you all for joining us, and we'll talk to you next time.

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