Good afternoon, ladies and gentlemen and welcome to the Educational Development Corporation's Third Quarter Fiscal Year 2024 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Thursday, January 11th of 2024. 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. I would now like to turn the conference over to Steven Hooser, Investor Relations. Please go ahead.

Thank you, Alan, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's third quarter 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. The release is available on the company's website at www.edcpub.com. Additionally, as the operator noted, today's conference call and prepared remarks are being recorded and there are forward-looking statements. With that, I would now like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Thank you, Steven. Welcome, everyone, to the call. 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 sales and marketing. Finally, I will wrap up the call with some comments on strategy and fiscal 2024 outlook. We are encouraged as we have seen our active brand partner count stabilize this summer and remain at consistent levels through our fiscal third quarter, which is traditionally our largest sales quarter of the year. During the third quarter, our sales within our PaperPie division decreased approximately 30% from the third quarter last year, primarily due to the lower active brand partner levels. The sales in our Publishing division were also lower this quarter due to the stoppage of selling Usborne products. As a reminder, this was in part due to our new distribution agreement with Usborne Publishing that we entered into May of last year. However, the decrease in Usborne sales was partially offset by strong orders for our new product line, SmartLab Toys, along with increased sales of Kane Miller books and Learning Wrap-Ups products. We continue to be excited about the demand for all of our products, especially when we look at the growth opportunities within SmartLab Toys, where we have only introduced 25 initial products through the third quarter. During the quarter, we offered sales promotions and strategically reduced freight charges to increase demand and make it easier for our brand partners to engage new customers. These changes impacted our third quarter operating profits that were aligned with our goals to intentionally reduce our excess inventory levels and improve long-term brand partner success. Brand partner success generates future brand partner success, and that continues to be our number one focus. With that, I will now turn the call over to Dan O'Keefe to provide a brief overview of our financials. Dan?

Thank you, Craig. To our fiscal third quarter results compared to the third quarter last year, net revenues for the third quarter totaled $16.9 million, a decrease of $13.4 million or 44% compared to $30.3 million in the third quarter last year. Average active PaperPie brand partners for the quarter totaled 16,400 compared to 27,100 in the third quarter last year, a decrease of 10,700 or 39%. Earnings before income taxes totaled $2.7 million compared to a breakeven level of earnings before taxes in the third quarter last year. After-tax income totaled $2 million compared to breakeven last year. Income per share for the quarter totaled $0.24. To update everyone on our inventory and working capital levels, net inventories decreased $6.3 million from $64.3 million at November 30th, 2022 compared to $57.9 million at November 30th, 2023. Now for a working capital update. Our working capital line of credit borrowed was $5 million at the end of the quarter on November 30th, 2023. During the quarter, the company met the line of credit step-down requirements from $13.5 million in August to $5 million in November, as outlined in the company's credit agreement with our bank. Subsequent to the end of the quarter, the company executed the fourth amendment to its credit agreement with increased borrowing availability to $8 million, enabling us to purchase new inventory of $2.1 million between December 1st, 2023 and March 31st, 2024. The line of credit maturity was also extended from January 31st to May 31st, 2024, which is the expected sale period of our recently listed Hilti Complex, which Craig will touch on briefly. The proceeds from the sale of the Hilti Complex will be used to pay down the line of credit and term loans with our bank. Also during the third quarter, the company switched our credit card processor from PayPal to Nexio, which released a majority of the increased reserves of cash held during the quarter. That concludes the financial update, and I'll now 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 continue to make changes to bring new success to our brand partners. As an example, during the third quarter, we ran several promotions, including site-wide sales and sent marketing communications to previous customers, making them aware of the ability to purchase products from their brand partners at discounted pricing from 10% to 30% off retail prices. In addition, as Craig mentioned, in September, we began offering $5 flat rate shipping on our e-commerce orders with free shipping taking effect at $30. This change in shipping charges has been well received by our customers and brand partners alike. On January 3rd of this year, we celebrated the first anniversary of the reveal of PaperPie, marking the rebrand of our direct sales division. This milestone is important as it provides an opportunity for reflection, assessment, and celebration, and marks the completion of the introduction of this new brand. Not just the outward marks like our name, colors, and logo, but also more intrinsically, our mission of gathering for good around literacy and learning is now more recognizable in communities around the country. This anniversary also provides a foundation for us to build momentum and sustain the positive changes initiated by this rebrand. Another significant upcoming improvement will be the launch of our new e-commerce platform later this month for PaperPie. We are thrilled with the opportunity to share with our brand partners and our customers a more intuitive, efficient, and visually stunning platform, allowing for a mobile-friendly experience. Our retail sales team continues to focus on opening new accounts and selling to our established customers. As Craig stated earlier, the addition of the SmartLab Toys line has provided some sales momentum for us alongside our Kane Miller and Learning Wrap-Ups line of products. We are continuing to introduce new SmartLab Toys in fiscal 2025, which we expect will continue to have a positive impact on the sales within this division. This concludes our sales and marketing update. I will turn the call back over to Craig for closing remarks. Craig?

Thank you, both Heather and Dan. Now I'd like to talk about some recent changes before opening the call up for questions. During the second quarter, we received $3.8 million in funds from the employee retention credit. These funds were part of the government-sponsored CARES Act offered to employers who maintained employees during COVID. During the third quarter, we listed and sold our old headquarters building, which was primarily used for warehousing for $5.1 million. The funds received from the sale were used to pay down our term loans with our bank. Paying down our existing debts has been the primary focus for excess cash flow, as this will reduce our interest expense and improve our overall financial performance. To continue this focus of improving our financial profile, we have recently listed our current headquarters consisting of approximately 402,000 square feet of office and warehouse space for $40 million. The proceeds from this sale are expected to pay all of our line of credit and term loans with our bank. As part of the listing, we have agreed to lease back the property to continue our normal business operations. The terminal leaseback will be contingent on the offers received and we are proposing a leaseback period of approximately seven years. We believe selling this building and executing a leaseback is in the best interest of our long-term shareholders and strategic direction. Repaying our bank debts and removing future interest expenses is the fastest path to restoring our long history of profitability. We also expect to generate a significant amount of cash from reducing our excess inventory levels. As of November 30th, 2023, we have approximately $30 million of excess inventory. Selling this inventory through our existing sales channels will have a significant impact on our overall liquidity and profitability. During the quarter, we also continued our focus on reducing costs. While there is no magic wand to cut our way to profitability, we look for every opportunity and are laser-focused on improving our bottom line results. Once we return to profitability, we plan to reinstate our past practice of paying quarterly dividends to our shareholders. This has been and continues to be a top priority for myself and our shareholders. Now that we have provided a summary of some recent activity, I'll turn the call back over to the operator for question-and-answers.

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Your first question comes from Paul Carter of Capstone Asset Management. Your line is already open.

Thank you. Thanks for taking my questions. So it looks like your inventory just for the quarter was down about $4 million. So what was your cash flow from operations for the quarter, if you have that?

Well, I don’t have the cash flow from operations for the quarter available right now. It will be published later today at 4 O'clock. The overall profitability for the quarter was largely due to the sale of our old headquarters building, which resulted in a gain of approximately $4 million. From an operational perspective, we were not profitable for the quarter, but we did show profitability before tax.

Right, but I'm thinking if your inventory came down $4 million, that would have, there might have been some positive cash flow from operations to offset the operating loss?

With inventory dropping $4 million in operational losses of $1 million in cash flow from the inventory reduction, we would have generated $3 million, $4 million of cash flow. That was all used to pay down the line of credit. And that, as I mentioned in the call, Paul, we reduced our line of credit with our bank from $13.5 million down to $5 million at the end of November.

Okay, great. You're launching your new e-commerce platform later this month. I'm curious about the current capital expenditures. They've been relatively low recently, but considering cash flow, what does your ongoing capital expenditure look like?

Our ongoing capital expenditures are mainly focused on the development of our internal IT systems. Non-IT capital expenditures are under a couple of hundred thousand dollars each year. Last year, we spent a considerable amount on IT capital expenditures, but this has been significantly reduced as we prepare to launch our new e-commerce platform. Currently, we do not have a budget for next year, but we anticipate that our capital expenditures will be much lower than they were this year.

Okay. Great. And just sort of bigger picture. So your third quarter net revenue was like $17 million. I know third quarter is a good quarter for you typically. So seasonally adjusted, it means that right now, you're running at an annual kind of run rate of somewhere in the neighborhood of like $40 million of net revenue, give or take. So if you stabilize that net revenue at the $40 million level, you'll be doing something like, I don't know, $27 million, $28 million in gross profits depending on a lot of different factors, of course. But are you confident that you can get to consistent sort of operating profitability at that level? If you like, I guess, just assume no growth, even with the increase in the rent expense that you're going to have to take on going forward once you sell your building?

Yes, we are confident that we have significantly reduced expenses over the past eight months. We expect that selling the building, along with our lease payments and interest expenses, will still result in a positive outcome. That’s our largest expense. However, in the last six months, we have been forced to adopt short-term strategies to generate cash to repay the bank. Some of these strategies were less profitable than our historical performance. We will need to assess whether this approach will continue to be necessary or if we can revert to normal operations. Regarding the normalized $40 million in sales, we are not satisfied with that figure, and we are doing everything possible to boost sales. Our ability to cut costs further is limited, especially in personnel, which is a significant expense, so we are as lean as we can be. At this point, our focus needs to be on increasing sales.

Yeah, I guess, that was sort of the gist of my question is, I mean, I know you want to increase sales, but the question is, do you need to? Like if you don't, just because of macro issues or whatever kids are on their computers rather than looking at books or what have you. If that just sort of stabilizes at $40 million, I mean, is EDC able to get to operating profitability?

Yes, we can.

Okay. Great. I know you have mentioned before that reinstating your quarterly dividend is a significant priority for you and the Board. Even if you don’t achieve operating profitability or net GAAP profitability, if you're able to reduce your inventory, you could be free cash flow positive. Would you consider restarting the dividend before reaching operating profitability if you anticipate profitability in the near future?

That's a good question. There are some hurdles in the way right now. I would say anything is possible, but we would definitely want to be confident that profitability is on the horizon before we reinstate it. So I don't anticipate it this quarter or maybe even next quarter, but it's something we're always looking at.

Okay, that's helpful. Shifting topics a bit, I wanted to mention that a couple of months ago, John Clerico stepped down from the Board, and it seemed to happen somewhat unexpectedly after nearly 20 years of service. Since he was your lead Independent Director and chaired all your committees, that's a significant event. Can you discuss the circumstances surrounding his departure?

Yes, sure. He had some health issues back in the summer, and he's 82 years old. He was just looking to spend his time in other ways. There was no disagreement. There was no fight in the circumstances around why he left. So it was just time for him.

Okay. Because it just, I mean the timing of it was right sort of pretty closely aligned to the decision to sell the healthy headquarters. And I was wondering if that had anything to do with it.

Yeah, no, he had no discrepancies or disagreements with management. That was just a coincidence. He did not disagree with our decision to sell the building.

Okay. Great.

He agreed. It was a unanimous vote on the consent to list the building for sale. So he agreed to that before he resigned from the Board. And I will say further that as Craig mentioned, his age is not necessarily in NASDAQ guidelines for an ideal Board of Director, and his replacement in the Audit Committee Chair, Brad Stoots, is a financial expert with a long history in public accounting and is a partner in public accounting. And so we're very happy with the replacement for the Audit Committee and the addition of the new board member last year.

Okay. So I know you're not on side with NASDAQ right now. You need to add another independent director. Where are you in the process of that?

We have until our next Annual Shareholders Meeting in July. I'm beginning interviews with some strong candidates from the MLM industry over the next couple of weeks. We feel very positive about our possibilities there.

Okay. And then just sort of last question, really big picture. But I mean, obviously, you're a publicly traded company, public company costs are extremely high, I would think, relative to kind of the size of your company. Have you thought of any either sort of no longer being public or doing a going dark transaction to just kind of reduce costs? Because I sort of wonder from an investor point of view like doing a going dark transaction probably wouldn't hurt you at this point and conversely being a large shareholder in the company doing like a take private transaction or something might be palatable. Is that something you guys have considered?

Not anything that we've discussed with the Board or made any kind of management recommendations in that direction. There's always what the future holds is what the future holds, right? But from a management recommendation or from an outside approach, we've not been approached by anybody nor have we made any recommendations to our Board to go private.

Okay. All right. Well, that's it for me. I'll pass the floor over to others. So thank you very much.

Thank you, Paul.

Thanks, Paul. Good to have you back, by the way. Thanks.

Your next question comes from Philip Smith, Private Investor. Your line is already open.

Thank you. Craig, I just had a quick question regarding the status of the contractually required purchases from Usborne books.

Good question. We have not met the contractual agreement, but they have not given us any indication that they're going to take any action. They understand where we are, what the environment holds; many publishers in this space are kind of facing the same thing. So they're not pressing right now for that. So I don't anticipate that's going to be a concern in the short-term future.

Okay. So Nicola isn't pushing back and making any demand at this point?

Not at this point. She understands the environment.

Thank you very much.

Thank you, Phil.

Your next question comes from Daniel Balchin, Private Investor. Your line is already open.

Hi Craig.

Hello.

Hi, I have a brief question. Does the Board have an estimate of the company's worth in terms of how you evaluate it, including different segments like SmartLab Toys and Learning Wrap-Ups? Is there a figure the Board considers to be a fair value for the company right now?

There are many perspectives on this matter. The management team believes that the current trading value does not accurately reflect our true worth. We have a book value of $5 per share and no goodwill on our balance sheet. Our priority is to return to that book value, which is primarily based on our inventory and buildings. The carrying value of our buildings is under $20 million, but we anticipate selling them for around $40 million.

Yes. And is there sort of like a net present value that you've got on that inventory? Because obviously there's $57.9 million on the books. But after all of those sort of costs and everything, do you have like a sort of net present value of what that inventory is sort of worth in today's money?

Well, we believe it's worth the carrying value for sure because otherwise, we'd have to write it down. So I mean our carrying value of our books is typically about 25% of the retail value that we sell them for.

Right. And in terms of just sort of like the Learning Wrap-Ups business, SmartLab Toys, what's the sort of growth trajectory within that? Could that sort of be a separate business to the selling of the Usborne books, that sort of thing?

No, it's just another product line or another couple of product lines that we sell. The cost of goods between Usborne and some of our other books versus Learning Wrap-Ups and SmartLab is different. But they're not significantly different. SmartLab, we kind of focused a few times in this presentation just because it's new. We're very excited. Sales are going very well. We have a great release plan over the next 18 months, and we're excited about that. But they shouldn't be treated differently than anything else we sell.

Okay. Thank you. That's all from me.

Thank you.

There are no further questions at this time. I would hand over the call to Craig White. Please proceed.

Thank you. So a little bit of late-breaking news, no one asked me about it, a little bit surprised. While we don't have final confirmation from NASDAQ itself, today does mark the 10th day above a $1 threshold, and thus we expect to regain compliance. So we don't anticipate that, that's something that we will have to worry about again in the near future. So that's a good piece of news there. Anyway, thank you, everyone, for joining us on the call today. We appreciate your continued support. We look forward to providing an additional update in January of 2024. Thank you. Have a good day.

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