Thank you for joining the Educational Development Corporation's Third Quarter Earnings Call. Before beginning the call, 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'd like to turn the call over to Craig White, the company's President and Chief Executive Officer. Sir, you may now begin.

Thank you, and welcome, everyone, to the call. With me today are Heather Cobb, our Chief Sales and Marketing Officer; and Dan O'Keefe, our Chief Financial Officer. As we have signaled in all of our previous calls, we continue to look at our business as compared to pre-pandemic levels given the COVID-created record demand and results from our company. I'm pleased that we exceeded pre-pandemic levels in our fiscal fourth quarter with increases in net revenues and average number of consultants resulting in continued profitability. Now to address the elephant in the room, we have decided to temporarily suspend our dividend. The dividend has always been a priority for the company as part of our long-term capital allocation strategy to create shareholder return. This strategy remains unchanged, but given the strong positive COVID tailwind, our inventory levels are at record highs, and this decision is solely to protect our balance sheet. As our inventory levels normalize later this year, our plan is to reinstate our historical dividends, and this remains a priority. With that, I will now turn the call over to Dan O'Keefe, our Chief Financial Officer, to provide a brief overview of the financials for our fiscal year 2022.

Thanks, Craig. So for some fiscal year 2022 highlights, our net revenues for fiscal year 2022 totaled $142.2 million, a decrease of $62.4 million or 30.5% compared to $204.6 million reported for fiscal 2021. Earnings before income taxes for the fiscal year totaled $11.2 million, a decrease of $6 million or 34.9% compared to $17.2 million reported in fiscal 2021. Net earnings totaled $8.3 million compared to $12.6 million, a decrease of $4.3 million or 34.1% from last year. And finally, earnings per share on a fully diluted basis totaled $0.98 compared to $1.50, down 34.7% on a fully diluted basis. As Craig mentioned, to discuss some of the recent events that have happened with EDC. As you might have read in the 10-K that was filed earlier today and our subsequent event footnote, we increased our working capital line from $20 million to $25 million to strengthen our balance sheet during this quarter. We ended the fiscal year 2022 with approximately $73 million of inventory. We expect this to be our peak inventory level and see a significant amount of inventory turning into revenue and cash over the next three quarters. In addition to our working capital line, causing a dividend, as Craig announced earlier, will increase our cash position by about $1 million a quarter, on a temporary basis. This concludes the financial report. And now I'll turn the call back over to Craig.

Thanks, Dan. A couple of items I'd like to begin with. Our fiscal year 2022 was the second largest revenue and earnings per share in our company's history. And while we experienced a decline in revenues, our pretax profits remain strong, which reflects the overall strength of our business model, a model that generates profits, not only to increase growth but also during periods of decline. Our fiscal 2022 results could not have happened without the hard work of our UBAM sales consultants and our Publishing sales teams. Both groups continued the sales efforts into fiscal 2023. It's still not a normal sales environment out there with the pandemic and now world views, but let me hand this over to Heather to further talk about our sales opportunities.

Thanks, Craig. During the fourth 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. Our Publishing Division sales totaled $2.9 million in the fourth quarter and $13.3 million for the year. Our Publishing Division's fiscal year 2022 sales grew $4.6 million or 53.6% over fiscal '21 and represented a 15.6% growth over our largest Publishing sales year of $11.5 million in fiscal 2016. While some of this growth came from the return of normal sales activities to stores that were temporarily closed during fiscal '21, our Publishing sales team was able to add several new customers and gain business with existing customers that resulted in these record sales. Our UBAM sales declined 35% to $17.6 million in the fourth quarter of fiscal '22, primarily due to the anomalies of last year's pandemic. Throughout fiscal '22, we have seen our active consultant count decline due to consultants returning to full-time work as well as their children returning to school. Although our consultant counts have been declining, they still are above the pre-pandemic levels that we have experienced. Our active consultant count averaged 37,500 in the fourth quarter, which was 19% higher than the fourth quarter of fiscal 2020. This increased consultant count has driven our increase in revenues over pre-pandemic levels. In addition, we continue to introduce new technology-based tools to help our consultants be more successful in reaching new customers and expanding their recruiting efforts, which we anticipate will ultimately lead to overall sales consultant growth and re-consent. During the fourth quarter, we rolled out our new online training platform. Some enhancements that we've made with this platform include several touchpoints with our field sales force. We have regularly scheduled new consultant meetings as well as new leader meetings, allowing us to reach these leaders and consultants in ways that we haven't done before. We also plan to roll out our new e-commerce website, which will add mobility and other additional features. We're very excited about this new e-commerce website as it will allow us to bring additional features that will make it easier for our consultants to do business as well as allow us to develop additional enhancements on that site to improve our customer experiences. This concludes our sales update, and I'll turn it back over to Craig.

Thanks, Heather. One other impact you will 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 need to increase levels are temporary and will rebalance or return 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 normalized working capital within fiscal 2023. Now, you've heard me say this in the last couple of calls, and I just want to make sure everyone is clear and understands the inventory levels that we're seeing now are from inventory that was purchased in February, March, to April of fiscal 2022. And so it's just coming in October, November, December, January, which means our inventory levels kind of peaked at the end of the fiscal year. And now 90 to 120 days later, those inventory purchases are coming due. So that's why our working capital line needed to be increased. During this first quarter of fiscal 2023, we have experienced some headwinds against sales of our UBAM division due to the impact of inflation. As fuel prices and steel prices have increased at record levels, our customers have been forced to slow down on spending in other areas. In an effort to spur revenues, we have recently introduced new online specials and additional consultants to energize our UBAM sales force and give them tools to help generate sales in this challenging environment. We're also excited to see rebounding sales from UBAM sales channels that were negatively impacted by the pandemic, including school book fairs and booths at fairs. These two channels have taken a positive turn back towards pre-pandemic levels. Now that we have provided historical and current information, I will open the call up to questions from our investors.

Our first question is from the line of.

First, I will make a complaint, which has nothing to do with the earnings, but has to do with the fact that if you're going to report at the end of the day, the ensuing conference call should be either the end of that day or the beginning of the next day. It should not be 24 hours after you report. It would have been theoretically just for this report, to report today after the close and have the conference call at 4:30. This is especially so as you're going to report news which might be unsettling to the market. So now that I've said that, now I have gotten off my shares. Since we'd like to go back and compare it to 2019, in 2019, inventory was about $30-odd million. If we're going to compare the increase in sales, we'll bring that up 20% to $36 million relative to the sales we had in the last year. Should I take back to me that we have $40 million roughly of excess inventory? You got it how we look at it?

Well, I understand how you're looking at it. It's not exactly accurate. I would estimate that we have more like $15 million to $20 million excess inventory.

So that going forward, assuming sales are flat, I understand it would be nice for them to grow, but if sales are flat, what we're going to free up is this, I call it $15 million to $17.5 million, will split the difference of inventory. And therefore, regarding cash flow and paying down debt, that will remain well above where it had been three years ago despite the earnings over the last couple of years, if that's what you're going to free up.

No. Okay. Good point. We didn't specify that we're going to be flat though. And if we're...

Not. I mean...

I'm sorry, go ahead.

No, no, I understand that. I'm just making generalized assumptions. No assumption, I use the thing. And so the issue remains and the financial position and the elimination temporarily or longer of this dividend is a function of, again, inventories and debt levels. I realize this is being redundant, but that basically is as you did earn $1 last year, roughly.

Right. correct.

Was there a covenant issue that caused you to borrow more money, or did you consider it prudent to cut the dividend?

At this time, it was just what we felt was prudent. We did not run into a covenant issue at this time. I'm not going to have any issue in the near future there. I'm just saying that it was just a prudent decision.

Okay. And lastly, given your relationship with the largest shareholders, do you have an idea of what the company's financial condition regarding debt would need to be for a dividend to be reinstated? Is there a consideration that if we reduce it now, we might be able to bring it back under certain conditions?

I have something in mind. It's not necessarily based on statistics, but it's likely to be third quarter. So we've missed the second quarter and be back in the third quarter. Now to give you specific details, we have to talk about it. But if we're turning inventory into cash and we're getting our working capital line from the neighborhood of $25 million down to between $10 million to $15 million, then I would absolutely reinstate it. And it didn't have to get down that level in my opinion, but down in the $10 to $15 ranges were projected.

Okay. And just lastly, since I had said and I know you're not going to forecast, but with some minor exception, my statement of fact looking at the year, you would still hope not forecast, but hope that earnings and revenues this year should exceed last year. I guess a point for forecast.

Yes, that's close to forecast. There are too many economic external pressures right now. I mean, let's say if children's books are discretionary purchases and until the economy and gas prices and food prices start to turn down, I can't forecast or anything. We believe in our sales model, we believe in our sales position. So if all these economic pressures were reduced, we would feel very good.

Walter, I’d just add to Craig’s comment there. We kind of put out some current, what’s going on right now for the last couple of months, we’ve seen with the war in Ukraine and, of course, the following levels of inflation jump up, we’ve seen the immediate impact of that as a key indicator of our current environment right now. That’s why we’re being as protected as we can with our balance sheet. We’re seeing headwinds against this with inflation and as consumers of purchases of children’s books, these are typically families that have to distinguish between what are we buying fuel, food or children’s books. And so we’ve seen some pressure, and we want to be prepared for this for the long term. We don’t know when – as Craig said, when the current environment is going to change. And so we just want to be conservative right now.

Speakers, next question is from the line of.

So my question has to do with a very recent change that I've been concerned about for some time after researching the company. And I've been very impressed by the adaptability ever since the company came about 2014 or started before in 2014. But there's a lot of market uncertainty right now. And one of the things that has suddenly changed is the management. And Craig, as you are trying to sell things that it is without pulling punches, I kind of have a one-dimensional understanding of you having an IT background, having been around people that are of that type. Sometimes, they want to manage things as opposed to people. And I think that the people relationships are very important, especially in a business like this. What I want to know, and I would appreciate specific examples, can you kind of round out how you have transitioned into the role of CEO from your IT background? And what experts do you surround yourself with and take counsel from? Feel free to give specific examples, please.

Sure. Well, obviously, I surround myself with two experts, our CFO, Dan and our Chief Sales and Marketing Officer Heather. But what I've done, and I recognize that I've been more maybe a quiet person, but you have to understand that Randall is a big personality, and there's not a whole lot of room behind them. And so we're not kind of taking over. I've instituted weekly and monthly calls at the next level down, with our directors because let's face that they're doing the lion's share of the work in the company. Our level of directors, there's nine of them. It's the strongest it's ever been. So I feel like we're working very well on communication within the company. We're working on culture in the company. I'm not trying to say anything negative about Randall, but easing the older gentleman, and he comes from a different generation. And so I'm trying to change the culture a bit and improve the communication. In my previous role, I managed relationships with UPS, software vendors, things like that. So I've had great relationships with all of those groups. I've been working under Randall's leadership for 30 years. So I kind of learned what I need to and some of those things. But the management team has basically been the same throughout the transition. The Board numbers have been consistent throughout the transition. So I appreciate your sentiment that I'm excited about the opportunity, and I am absolutely driven to create my own success. So I don't know if that answers your question, but that's a little bit...

That's helpful. I also wanted to mention that I've been impressed by the changes you have made for the company, whether through software or the picking and packing lines, and the adaptability you've shown there. Are you demonstrating your capabilities? As a follow-up question, can we expect to see a CEO letter from you soon?

Yes. Yes, absolutely. An annual report is where we usually have one. So that will be out in the next six to eight weeks, right?

Speakers, next question is from the line of Joseph Fuller.

I have a question about the impact of inflation on demand. I appreciate your insights on that. Given that one of the benefits of purchasing all this inventory was acquiring it at a lower cost, I'm curious about your perspective on how the replenishment of this inventory over the next year will affect costs. Additionally, do you plan to implement any price increases before then, or do you intend to maintain current pricing? What is your strategy regarding this?

Good question. So all of our inventory is in fact at lower costs. We haven’t raised prices across the board ever. We’ve only ever increased prices here and there where it was necessary. So I would anticipate that there might be some major pricing changes over the next year or two, but no wholesale changes, nothing like that. Yes. And Dan reminded me that the prices are printed on the back of the book. So there are some challenges to raising prices, that’s the key. And I think we’ve done a great job of keeping our prices low. We haven’t, like I said, had any wholesale changes. So a few price increases over the next year or two would probably be prudent.

Next question is from the line of.

Can you hear me?

We can.

All right. Okay. So I have three really quick questions. Looking at the earnings on the announcement, and it looks like the share count went down by about 3% or 4%. Is that because you were buying back stock or do they have something sort of a more complicated reason for that?

Well, I wasn't aware of that. We've not had any significant share ownership changes. We haven't bought back any stock or issued any additional stock outside of some shares that were issued last year 2021 associated with our long-term incentive plan.

Yes. So if anything, the members outstanding will act a little bit, but they shouldn't have gone down. When we're healthier in a better cash position, we'll look at buying back shares, but you know that we can't do that right now.

Okay. So I'm looking at the table in the announcement. It shows for the 12 months ended February of '21, there were 8.352 million shares outstanding. And for the 12 months that just ended, there were 8.039. So unless I'm missing something, sorry, we don't have tables around.

Yes, we're looking at that real quick.

I want to make a little bit what you're looking at.

Now the diluted was about the same, at least for 12 months, but the basic went down and for the 3 months, the diluted also went down.

Yes, let me look at that, and we need to make a correction, and we will make a correction on that. But Randy, just to confirm, we really haven't. Other than the long-term incentive plan, we haven't had shares. And we have a...

Yes, there might have been an error in that table, and correcting it could improve clarity. Regarding my second question about net profit margin, I understand projections for the upcoming fiscal year aren't possible, but as you mentioned, you're currently focusing on inventory and costs for the next two to three quarters. In the recent quarter, your net earnings were around 1.5% of total revenues. Are you able to provide any insight on whether you might not be profitable for a quarter or two, given the changes you're implementing to maintain profitability? Would that be a fair assessment?

Yes. So there's a part of our business that is affected by seasonality. So our third quarter is typically the most profitable quarter we have and it is usually about – it's our largest revenue quarter. And then the third quarter is followed by the first quarter and then the second quarter and then last is the fourth quarter. So typically, our fourth quarter has the least amount of profitability, but it's also because it's – when you look at the four quarters, the four quarters of our fiscal year, our fourth quarter is typically the smallest quarter. But as Heather is listening to me here, she caught it, but of course, we don’t forecast. I'm giving you historical seasonality of our business by quarter.

Okay. So quite, the next couple of quarters have been a...

We invent crystal balls, I'll buy some.

This is somewhat of a personal question for Heather and Dan, so you may want to correct me. I understand this might be sensitive, but there's a website where you can check if anyone has bought or sold your stock as an insider. Are there any plans for you to purchase stock at these levels? I realize you might not be able to disclose this, but what are your thoughts?

We offer our stock through our 401(k) plan, and I can tell you that the three of us consistently buy stock through our 401(k) plan each quarter. There's no need for us to revisit that. If you look back, you'll find some Form 4 filings showing that we have continually purchased shares each year.

Yes. I saw that. Yes.

We are continuously investing and exploring opportunities. We do purchase shares outside of our plan, and we announce these actions when they occur. Given the current price levels, it is indeed an attractive time to buy.

Okay. Just the first gentleman made a statement about that you had the comments and call it 24 hours after your earnings advancement. I didn't really consider asking you to address that, but what do you think? Is that something you may consider in the future? Or I personally don't care that much. I don't think it's really matter like if you had your conference call right after you had your announcement, I mean the market the next day is going to do what it's going to do anyway.

We aim to conduct the earnings announcement and the call within a 24-hour window while maintaining consistency in our approach. Our Investor Relations team is made up of three advisers, and we will bring this feedback to them. If there are ways to make our process more equitable and adhere to best practices, we definitely want to explore those options. We will discuss this feedback with our Investor Relations group and look for opportunities for improvement.

Yes. I certainly wouldn’t have any problem with what you’re doing, a lot of companies do it that way. Another company that reported that I own after the market closed yesterday had their call this morning, just a little bit after the market opened. So I don’t think it really matters a lot.

Speakers, next question is from the line of Jon Jung.

Craig, I wonder if you could tell me something about the contract you have with Usborne, who provides most of the content of the books that you're selling. How long does your agreement with them last? And do you have any requirements in terms of how much you purchased from them each year?

No, we do not have any requirements for how much we purchase. The original agreement mentioned $3.5 million, which is a very low number. The contract is evergreen. We've gone through a transition where I'm the new CEO, and Nicola, who is Peter Usborne's daughter, seems to be taking on more responsibilities there. I have made efforts to improve my relationship with her so that we can collaborate effectively in the future.

Okay. So there are no current contracts that help a number of years are gone or any specifics in terms of what your relationship with Usborne is?

No, nothing. Right. Correct.

So Jon, just to be clear, we have a contract with Usborne that dates back to 1988. That’s the current agreement. As Craig outlined, it has some purchase requirements in it, but it’s very, very small. I think, as Craig said, it’s less than $5 million. And we’ve been buying $50 million a year from them for the last couple of years. So we’re – we certainly meet those minimum requirements. Any other questions?

No further questions. In fact, we have one more. The next question is from the line of.

I have two questions. First, with a detailed analysis of your online consultant database, so is that a number of consultants who have fallen another quarter to 50% from the end of February until today. Why haven't you been able to slow this decline? That's the first question. And secondly, considering the cash cost that you're in, how much does this market decline in consultants increased the company's insolvency?

Well, the first question is based on a statistic that is completely incorrect. While we have declined from our peak in 2020, the figures we provided earlier in the call reflect our current state. I've seen others attempt to analyze our consultant searches and derive figures from them, but that approach lacks rigor. The numbers we've shared are correct. As for the second question, I don't even recall what it was.

Solvency.

Yes, solvency. So the key thing is last year, we were very profitable. We expect to be profitable going forward. I think last year, as we announced, we made $0.98 a share. We expect to be profitable this year. I think if you look at our historical financials going back into the late '80s, you will find that EDC has been a profitable company over the years. So we think, for sure, that we'll be profitable going forward and we have no concerns about solvency.

Thank you for participating. I'll now turn the call back over to Craig White for final comments.

Thank you, Jessie. I appreciate the question about my personal approach, as not many people know me well. One of my core values is honesty; I don’t shy away from the truth or try to spin things. However, that doesn’t mean I have a negative outlook. I truly believe we’re heading in a positive direction and will return to positive results. Collaboration is key for me. Whenever we face tough decisions, I immediately involve Dan, Heather, and sometimes Randell, depending on the issue at hand. I don’t hesitate; I analyze all possible solutions and then make a decision to move forward. We strive to do our best every day, and our current focus is on boosting sales. There are many new incentives being introduced, and the field is extremely motivated, as shown in a couple of calls we had this week. We look forward to making progress. Thanks to everyone, and I’ll see you on the next call.

This concludes today's conference. I wanted to thank you all for joining the call. You may now disconnect.