Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's First Quarter Fiscal Year 2024 Earnings Call. This call is being recorded on Thursday, the 13th of July 2023. 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 the Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition. I would now like to turn the conference over to Jean Marie Young from Three Part Advisors. Please go ahead.

Thank you, JP, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's Fiscal First Quarter Earnings Call. On the call with us 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 first quarter. The release is available on the company's website at www.edcpub.com. With that, I'd like to turn the call over to Craig White, the company's President and CEO. Craig?

Thank you, Jean, and welcome, everyone, to the call. I will start today's call with some general comments regarding the quarter, and I will pass the call off 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 some comments on strategy and the fiscal 2024 outlook. During the first quarter, our sales continued to be impacted by high inflation, which we will likely face for the remainder of the year. As we have said on previous calls, our sales results are primarily driven by our active brand partners. This is our key indicator that reflects current sales levels and where we expect them to trend in the future. Our brand partner levels decreased again this quarter. We believe this was for a variety of reasons, as we mentioned, the economy, rebranding, etc. As I mentioned on the fourth quarter earnings call, some of this was carryover from rebranding, which takes some time to work through our entire network of sales partners. We are still making additional changes to improve our sales to not only make our brand partners more successful but also entice new brand partners to join PaperPie. I'll let Heather talk further about that later in the call. On a more positive note, our brand partners at leadership levels remain higher than pre-pandemic numbers, and they are primary drivers for new recruiting and overall sales growth. Brand partner success generates additional brand partners, and that continues to be our #1 focus. We will be looking at the numbers of our active brand partner count from this summer as an indicator for the future. This is due to the fact that by the end of the summer, based on our definition of active, which hasn't changed, that each of our brand partners will either have joined under the new PaperPie brand and/or made a sale under this new brand. As you will hear Heather discuss a bit more, our marketing promotions and programs are focused on building this number back to higher levels. Another positive in the first quarter was the continued results from our SmartLab Toys product line. We introduced 13 new SmartLab Toys to our Publishing and PaperPie customers, and our sales have exceeded expectations. Not only have we received great reception from our retail customers, but we have also picked up some nice international orders as well. Our PaperPie division continues to drive the total sales for our company, and the sales of SmartLab Toys from this division are exceeding our original expectations. During the quarter, our gross sales of SmartLab Toy products exceeded $1.4 million. We introduced 10 new products in June and have another 15 or so over the next 12 months. Some of these are customers I've never seen before, so we've started new development since we've owned them. With that, I will now turn the call over to Dan to provide a brief overview of the financials. Dan?

Thank you, Craig. To our fiscal first quarter results compared to the first quarter of last year, net revenues of $14.5 million, a decrease of $8.7 million or 37.5% compared to $23.2 million. Our average active PaperPie brand partners for the first quarter totaled 23,200 compared to 32,200 in the first quarter last year, a decrease of 9,000 or 28%. Loss before income taxes totaled $1.2 million, a decrease of $1.5 million, compared to an income of $0.3 million in the first quarter last year. After-tax loss totaled $900,000 compared to $200,000, a decrease of $1.1 million. Loss per share for the quarter was $0.11 compared to income of $0.03 per share on a fully diluted basis. To update everyone on our inventory and working capital levels, inventories decreased $8.3 million from $70.6 million at May 31, 2022, compared to $62.3 million at May 31, 2023. Our working capital line of credit was $11 million at the end of May 2023. That concludes the financial update, and I'll turn the call over to Heather Cobb to talk about sales and marketing opportunities in further detail. Heather?

Thank you, Dan. As Craig mentioned earlier, we have made some recent changes to bring success to our brand partners this summer. We know that success begets success, and this is true with our brand partners as well. Success with our current brand partners leads to better recruiting, which leads to more sales. The most impactful change that we have made is to reduce the freight charge on outbound shipping to our customers. That's reducing hurdles that prevent them from shopping with our brand partners. Prior to this change, we saw a reduction in the number of smaller orders overall, and we believe that this is a direct reflection of the impact of inflation on the economy. By reducing our freight charge, through a simple flat rate structure, we expect to entice these customers to complete a purchase with a smaller order as opposed to abandoning their cart and not buying anything from their brand partner. We also expect for our number of higher-dollar orders to stay approximately the same. An additional benefit from these smaller orders is that they introduce more new customers to our products. Having more customers introduced to these products gives our brand partners more opportunities to find their next party host and possibly even recruit their next brand partner. We've heard stories from all levels of our brand partners that they join for the books. But then, they turn their discount into a successful business. Because we want our brand partners to be even more successful with their business this summer, we've offered them additional cash bonuses on their sales. This is due to the fact that we have seen a direct correlation between our brand partners who sell during the summer months and them continuing to sell and have success during the fall, which is always our busiest season of the year. We have also added other promotions and specials this summer to give our brand partners reasons to contact their existing and potential new customers with these new and exciting offers. The summer is normally our slowest time of the year, so we are giving our brand partners lots of reasons to stay engaged and build their businesses. This concludes our sales and marketing update for today. I'm turning the call back over to Craig now for closing remarks. Craig?

Thank you, Heather and Dan. As I mentioned earlier, EDUC has a long history of profitability. It's usually easier to improve profitability when revenues are increasing and expenses are controlled. However, we are currently experiencing a decline in revenues, which requires us to manage our costs carefully. We are making ongoing adjustments each month to cut expenses. The most significant cost reduction this year will result from normalizing our high inventory levels. As we lower our inventory, it converts into free cash flow that will be used to pay down debt and subsequently reduce the interest expenses reflected in our profit and loss statement. This will significantly enhance our profitability in fiscal 2024. To normalize inventory levels, we are implementing a two-pronged strategy. First, as Heather noted earlier, we are taking substantial steps to motivate our sales team. We plan to roll out new incentives and promotions starting in December and continuing throughout the year. Additionally, we will rigorously manage our purchasing habits. Over the past year, we have made considerable efforts to cut the number of titles we are printing and to place orders more frequently. We anticipate that this dual approach will help normalize our inventory levels more rapidly. For instance, our purchases have been about half of last year's levels and roughly one-fourth of what we ordered before the pandemic. We have also reduced payroll and other operating expenses and continue to seek opportunities to enhance our bottom line. We will stay the course until we achieve profitability. Once we are profitable and have reduced our debt levels, we intend to reinstate our previous practice of paying quarterly dividends to our shareholders, which remains a top priority for both myself and our shareholders. I'd like to highlight that we've just completed a couple of our largest initiatives to energize our sales force and make our PaperPie division as appealing as possible. In June, we held our convention, which attracted a good average number of attendees. Feedback indicated that many came primarily to learn more about our rebranding, and everyone left feeling much more positive than they arrived. They were impressed by the efforts of our sales and marketing teams, and we remained committed to our mission of promoting children's literacy and education. The convention made a strong positive impact. Currently, Heather and I are attending our sales incentive trip, having just returned from Rome, where around 40 people attended with family members. We brought about 125 people in total. Now we are in Punta Cana, Dominican Republic, with around 400 attendees, including family members. The trips we provide for those who earn rewards serve as one of our strongest recruitment tools for PaperPie. We are very optimistic following the convention and these trips, and we look forward to the fall. Now that I've shared some recent developments, I will turn the call back to the operator for questions and answers.

Your first question comes from the line of Ed Norcini, private investor.

Craig, I haven't talked to you in a while. I'm on the call and I was looking at the 10-K that was published in February of this year, February 28. Your inventory at that level was $59 million. Today, it's $62 million, so it went up $3 million from the last quarter. It seems to me that inventory has gone in the wrong direction. Do you have anything to say?

This is Dan O'Keefe. I want to clarify because I believe there is some confusion regarding the numbers. According to our press release, our inventory at the end of February was $63.8 million when combining both current and long-term inventory. By the end of May, it decreased to $62.3 million, resulting in a decline of about $1.5 million this quarter. I wanted to make sure to clarify the drop in inventory of $1.5 million.

Well, Dan, my point is, and Craig also, also in that 10-K that you released, you're having problems with the bank. They need their money. Is there any plans? Do you have any plans to sell any of your assets in bulk, like, for example, sell on the Hilti complex or sell Kane Miller or maybe sell $30 million worth of this inventory back to Usborne or another distributor? Do you have any plans to get some massive amount of cash in to pay off these debts? I'm worried about it.

Yes, you raised several points, and I was trying to keep track to address them. Firstly, regarding inventory levels, we will continue to order new titles, but as mentioned earlier in the call, we are reducing the quantities and potentially the number of new titles we’re ordering. We are being very aggressive in cutting our purchases, significantly more than in the past. As we sell our inventory, it will convert to cash, which we will use to pay back the bank. You also mentioned our debt to the bank. Yes, we do owe a considerable amount, and we have a renewal coming up next month. There are no indications that we won't be able to renew successfully. This pertains to our working capital line. Regarding the sale of assets, we have engaged a firm to explore the market for a building of our size, and the market conditions are favorable. We could potentially sell the building within 60 to 90 days, but I prefer to keep that option as a last resort. We have plans for this property once sales improve, so I am reluctant to let it go right now, though we can if necessary. I want to emphasize that we have a good relationship with the bank, and I have received no indication that renewing the line of credit would be an issue. With respect to the building debt, Hilti covers their share, while we pay a smaller amount. We have never defaulted on any payments, and the bank is not concerned about the building debt; they are focused on us reducing the working capital line, which we are managing by selling our inventory.

Okay. That's helpful, Craig. And my other main concern, for right now, in my mind, you have no concrete plans to sell $30 million, $40 million worth of that inventory back to Usborne or another distributor. Because I'm looking, Craig, at your 2017 fiscal ending, we had approximately 25,000 consultants, which are probably what you have today. You had $34 million in inventory. So it seems like to me, you're like close to $30 million over what you need based on 2017, okay?

That's correct.

So wouldn't it be helpful if we just had a mass sale just because it seems like the consultants aren't producing enough sales to reduce this inventory to normal levels?

Yes, that's a good point. We are looking at options to do some mass inventory reductions. But whatever we do, we don't want to damage our brand partners' ability to continue to sell inventory. As far as selling it back to Usborne or other distributors, that's not an option. They have no incentive to buy back inventory from us. So again, we're looking at some major foundations. We're looking at some other inventory reduction in sales and things like that.

I'll also just add, Ed, that one of the things that we know that you look to us to do for the company is to manage not only the short-term challenges as well as successes but with long-term things in mind. And so I'll just kind of reiterate what Craig said. We're looking at what all of our options are now, but one of the last things that we want to do is some sort of short-term strategy that will end up in some sort of damaging long-term effect that none of us want to see. So while, yes, we are looking at various different creative and alternative ways to reduce this inventory, we definitely want to do it in a way that will allow us to continue the business as we've done with PaperPie as well as with our retail division for the long term.

And Ed, this is Dan. I'll kind of add another thought as well. You mentioned the 2017 period. If you recall during that time, we were also over inventory. And the over-inventory issue is we have excess quantities of our best-selling items. Those were the titles that we ordered the most quantity of, the titles that are our best sellers. And so in 2017, what we did is just we worked through it. And through 2017 to 2018, we reduced our inventory from the high 40s down to about $30 million, reaching about $18 million. And so that's kind of the approach we're taking right now, too. We're a little bit more aggressive on the purchasing than we were back in 2017, as Craig has explained earlier. But the excess inventory is working down and it's in our best-selling items.

Okay. That's understood. My other question is about your relationship with Usborne. I read in the 10-K that you are in violation of the new distribution requirement. Is that correct? You're not buying enough minimum amounts from Usborne, so you're in violation. According to the 10-K, they can cut you off at any minute because you're violating the contract. What do you say to that? What kind of assurances can you provide since you've been dealing with these people for decades? Also, they mentioned that they're not paying you $1 million from last year. To me, it seems that after working with them for decades, it's concerning that they are contesting a $1 million discount rebate. What do you say to that?

Yes. We have had a long-standing relationship with Usborne for many years. I've recently taken over handling the account myself for the past two years. Unfortunately, Nicola's father, Peter Usborne, the company's founder, has recently passed away, so I am currently working solely with Nicola. There is no reason for them to terminate the distribution agreement. While they might consider this, they understand that we need to return the inventory situation to normal levels before we can resume purchasing at our usual rates. They have no alternate options to replace us on the PaperPie side. Although they are replacing us as a distributor for our retail division, it will take a considerable amount of time for them to build up the necessary inventory to effectively support that division. Therefore, I really believe it is not in their best interest to make that change. We are taking precautions and preparing ourselves. In the event of any cancellation of the distribution agreement, we will have a period to sell off inventory. This will help us strengthen our financial position and give us more leverage with Usborne. That is the strategy we are implementing.

Well, my other question. Dan, what's the status of the employee retention credit?

Well, we filed for it. So we're waiting on the IRS to take action.

So nothing concrete there.

No, it's working towards.

Okay. So I was just wondering if there's no definitive answer from the IRS on that.

Not yet.

We meet the requirements, so I would expect that we would get it at some level, which, man, if we can get some cash from that would be outstanding. It's not necessary or required for us to continue on, but it sure would be great.

Okay, Craig, I've been wanting to ask you this question. Let's go back some time. Do you remember Christmas of 2016 when you moved into the Hilti complex and purchased a software package from a company in Florida that ended up failing? It was quite a disaster, with your father and grandchildren trying to get all the packages out while customer service was overwhelmed. As I recall, you paid around $1 million for the software package. Did you ever manage to get your money back for it?

Well, of course, I've been with the company for 30 years. I remember that. Of course, I do. Both sides were working in good faith, and we had just determined that it was not in our best interest to continue with them, so we severed the tie, and we moved on. We developed all the software programs we needed in-house. And so that's a distant memory.

Yes, if I remember correctly, it nearly led to your company's bankruptcy at that time because you were also breaching your agreements with the bank, which I believe was Midwest Bank. Right now, it seems like you are in a difficult situation, and you need to either clear out this inventory or secure some cash to settle with the bank, as you appear to be negotiating a waiver based on the recent 10-K. How accommodating will they be with this waiver? They could possibly cut you off by August 9, which might put you out of business.

No. That is highly unlikely.

Your next question comes from the line of Frank Goodell from Jean Goodell Associates.

Am I on?

Yes, we can hear you.

Yes, I had a couple of comments off of what Ed has said. I noticed the sales volumes are down quite a bit. Everything gets healed, of course. I've been in business myself many years; everything gets healed if you can increase sales. What's the outlook for the next year or so realistically?

Well, we don't provide guidance on revenue, just to clarify before turning the call back to Craig. As a small reporting company, our practice has been to remain conservative and not issue guidance. Craig, I'll hand it over to you.

Yes. That's good. Thank you. Well, things are looking up. We're doing all kinds of things to help increase sales, retain brand partners. And it takes a little time for those things to come to fruition. The sentiment right now is more positive than it has been. We're going to be releasing some of our software projects in the next couple of months, which will be a positive impact. Our products get better and better. When we keep our brand partners and salespeople and customers focused on our mission of children's literacy and learning, things always go better. So we're doing all the right things. It's just taking a little longer than we hoped. But we will survive this tough period and increase sales.

Second question I had. What are the insiders within EDUC doing as far as stock retention?

All 3 of us are buying.

Yes, same here.

I wanted to note that the insiders, specifically the White family and the Board, have not been selling any shares. Additionally, as Craig mentioned, Heather, Craig, and I continue to purchase shares every quarter. We have also recently filed some Form 4s that show our activity for the first quarter.

Okay. To that point, one way you obviously improved cash flow is to pay in shares rather than salaries. Obviously, people have to make a certain amount of money to maintain a standard of living. Companies I've worked for in the past often did that. Call them golden handcuffs, whatever, but they paid with shares when times are hard to reduce losses, I guess, you could say, by having high salaries.

I’m not sure how long ago you’re referring to, but Frank, the important thing is that it’s a great idea and something that Craig and I have discussed previously. Before I hand the call over to Craig, I want to clarify that under SEC rules, we cannot issue shares to management without shareholder approval. To proceed with that, we would need to file a registration statement to register the shares and hold a shareholder vote. That's the current guidance from the SEC. Craig, I’ll let you share your thoughts on this.

Yes. I wanted to mention that we have both short-term and long-term incentives. The long-term incentives are in the form of shares. These were earned, and the first portion was awarded this past March after a 5-year vesting period. Additionally, there are other stocks that our top 15 to 20 management team members have earned over the past several years, which are still vesting. Therefore, we do have long-term incentive plans in place. We also have small cash bonuses for short-term incentives, though those have been larger in the past. Currently, we're offering minimal short-term cash incentives, but I like the direction we're taking.

I believe you have a strong motivation to improve this company instead of leaving when challenges arise, and you are currently facing significant difficulties. As a shareholder, I can be patient if I have hope. However, if that hope diminishes, my patience will fade as well. It has been a challenging time for EDUC in my investment portfolio. Fortunately, I have other assets, but it is concerning to witness a company's stock decline as significantly as EDUC has over the past three years.

I hear you. Right. I'm probably in the top 10 largest shareholders, including institutional. So I get what you're saying. I've been through a lot of the good times, some of the bad times. And yes, ever since I took over, it's been a little bit of a tough stretch with the pandemic and the economy and things like that, but I'm here for the long haul. I've got to look at this as a long-term turnaround, and we're here for it.

There are no further questions at this time. I will now hand over to Craig. Please continue.

Thanks, everyone, for joining us on the call today. We appreciate your continued support and look forward to providing you an additional update when we report quarter 2 in October. We know it's been a tough time. We're doing everything we can to get this turned around. We're seeing positive indicators, so hang in there. Have a great day. Thank you.

Thank you, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.