Educational Development Q1 2024 Earnings Call Transcript

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July 13, 2023

There are 5 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's First Quarter Fiscal Year 20 24 Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, 13th July, 2023. Before beginning the call, we listen, Reform Act of 1995.

Operator

Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to the Education to Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition. I I'd now like to turn the conference over to Jean Marie Yang from 3 Part Advisors. Please go ahead.

Speaker 1

Thank you, JP, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's fiscal 1st quarter earnings call. On the call with us today are Craig White, to our 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 Q1. The release is available on the company's website over to Craig White, the company's President and CEO.

Speaker 1

Craig?

Speaker 2

Thank you, Gene, and welcome everyone for the call. Finally, I will wrap up the call with some comments on strategy and fiscal 2024 outlook. During the Q1, 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.

Speaker 2

Our rank order levels decreased again this quarter. We believe this is for a variety of reasons, like you mentioned, the economy, rebrand, etcetera. As I mentioned on the Q4 earnings call, some of this was to 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 Paper Pie. I will let Heather talk further about that later in the call.

Speaker 2

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 Partners success generates additional Brand Partners and that continues to be our number one focus. We will be looking at numbers of our to 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 Paper Pie 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 at the higher levels.

Speaker 2

Another positive in the Q1 was the continued results from our SmartLab Toys product line. We introduced 13 new Smart Lock toys to our publishing and Paper Pie 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 Paper Pie division continues to drive the total sales for our company and the sales of Smart Life Toys from this division are exceeding our original expectations. During the quarter, our gross sales of SmartLive products exceeded $1,400,000 We introduced 10 new products in June and have another 15 or so over the next 12 months.

Speaker 2

Some of these our customers have never seen before. So we've started new developments 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.

Speaker 2

To our fiscal Q1 results compared to the Q1 of last year, net revenues of 14,500,000 Our average active Paper Pie brand partners for the Q1 totaled 23,200 compared to 32,200 in the Q1 last year, a decrease of $9,000 or 28 percent. Loss before income taxes totaled $1,200,000 a decrease of 1,500,000 to $900,000 compared to $200,000 a decrease of 1,100,000 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 $8,300,000 from $70,600,000 at May 31, 2022 compared to $62,300,000 at May 31, 2023. Our working capital line of to Heather Cobb to talk about sales and marketing opportunities in further detail.

Speaker 2

Heather?

Speaker 1

Thank you, Dan. As Craig mentioned earlier, we have made some to 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 and the impact of inflation on the economy.

Speaker 1

By reducing our freight charge to a simple flat rate structure, we expect to entice these customers to 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 sale.

Speaker 1

This is due to the fact that we have seen a direct correlation between to our brand partners who sell during the summer months and then 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 first. 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.

Speaker 1

Craig?

Speaker 2

Thank you, both Heather and Dan. As I have said before, EDC has decades long history of profitability. Naturally, it's easier to grow profitability when revenues are increasing and steadily outpacing expenses. However, we are in a period where we have seen our revenues decline and thus we are having to manage our costs. We are continuing to make operating adjustments each month to reduce our costs.

Speaker 2

The single most significant cost reduction this year will come from normalizing our inflated inventory levels. As we reduce inventory, it turns into free cash flow, which will be used to pay down debt, which will reduce the interest expense that hits our P and L. This will be one of the most significant improvements to profitability in fiscal 2024. To normalize inventory levels, we are executing a 2 pronged approach. 1st and foremost, as Heather mentioned earlier, we are taking significant steps to energize our sales force.

Speaker 2

We expect to introduce new incentives and promotions not only this summer, but throughout the rest of the year. Additionally, we will maintain a strict discipline in our purchasing. Over the past 12 months, we have made significant efforts to reduce the quantities of titles we are printing and put increased focus to ordering more frequently. We expect this 2 pronged approach will normalize our inventory faster. As an example, we have purchased roughly half of what we did last year and about a quarter of what we did pre pandemic levels.

Speaker 2

We have also reduced payroll and other operating costs and look for every opportunity to improve our bottom line performance. We will continue on this path until we reach profitability. Once we return to profitability and pay down debt levels, we plan to reinstate our fast practice to paying quarterly dividends to our shareholders. This has been and continues to be a top priority for myself and our shareholders. I'd like to take this opportunity also to mention, we've just come off a couple of our largest to opportunities to energize our sales force and make our paper pie division as attractive as possible.

Speaker 2

In June, we had our convention where we had a good average number of attendees. But what we kind of heard is that a lot of them are coming to just kind of see what the brand, the rebrand was all about. And to a person, every single person left are much more positive than they come into it. They were very impressed with what our sales and marketing teams have done with the brand. And we really, really focused on our mission, which is children's literacy and learning.

Speaker 2

So those things at convention was a very positive impact. And right now, I happen to be Heather and I happen to be on our sales incentive trip. So we came from Rome last week where we had roughly that was that's the highest level of trip, had roughly 40 people that were family members and such. We brought about 125 people. And now we're in Punta Cana, Dominican Republic, where we have roughly 400 people and that's not all earners, but that's including family members.

Speaker 2

So that's the biggest recruiting factor or One of the biggest recruiting factors for Paper Pie is to see the amazing trips we take people to earn on. So anyway, We're very encouraged coming out of convention and out of these trips and we're looking forward to the fall. Now that we have provided a summary some recent activity. I will now turn the call back over to the operator for question and answer.

Operator

Thank you. Ladies and gentlemen, We will now begin the question and answer Your first question comes from the line of Ed Norsini, with investor. Your line is now open.

Speaker 3

Craig, I haven't talked to you in a while. I'm on the call and I was looking at the 10 ks and that was published in February of this year, February 28. Your inventory at that level Today, it's $62,000,000 So it went up $3,000,000 from the last Quarter. It seems to me that inventory is going in the wrong direction.

Speaker 2

Listen. Just to clarify, because I think you've got some numbers that are different. If you look at our press release, our inventory at the end of February of this listen. If you add both the current and the long term inventory together was $63,800,000 And at the end of May, It's $62,300,000 so we dropped about $1,500,000 this quarter. And just I just wanted to clarify that before Okay.

Speaker 2

We have dropped inventory, million in the half.

Speaker 3

Okay. Well, Dan, my point is and Craig Also in that 10 ks 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, selling the Hilton complex or sell Cain Miller or maybe sell $30,000,000 worth of this inventory back to us

Speaker 2

for into or another distributor.

Speaker 3

Do you have any plans to get some massive amount of cash in to pay off these debts? I'm worried about it.

Speaker 2

Yes. Well, you kind of hit a bunch of points there. I was trying to keep track I could respond. But first of all

Speaker 3

Okay.

Speaker 2

Yes, inventory levels, I've said all along that we will continue to and potentially the number of new titles that we're ordering. So we're being very aggressive on reducing our purchases, Very aggressive, historically aggressively low. So, as we sell inventory, it will turn into cash and we'll pay the bank back. Another point you made is that we owe the bank a lot of money. Yes, we do.

Speaker 2

We have renewal coming up next month and there's no indication whatsoever that we will not be able to renew successfully with them. And that's for our working capital line. And another point she made is, do we have any plans to sell our assets? I we have engaged with a firm to look into the market for a building of our size and the market is very good. We could turn the building around and sell it within 60 to 90 days.

Speaker 2

So we know that's available to us. I want to keep that in my back pocket as a last the same resort. We have plans for this property once we get sales back up. So I don't want to get rid of that property just yet. Now If we need to, we can.

Speaker 2

So again, I just want to reiterate that we have a good relationship with the bank and there's I've had no indication that we're not going to be able to renew the line of credit. As far as the building debt, Healty pays their part. We pay a smaller portion of it. We've never defaulted about any payments. So again, they're not concerned about the building debt.

Speaker 2

They Just want us to work down the working capital line, which we're doing by selling inventory.

Speaker 3

Okay. That's helpful, Craig. My other main concern, for right now, in my mind, you have no concrete plans to sell $30,000,000 $40,000,000 worth of that inventory back to Usborne or another distributor. Because I've been look I'm looking Craig at to 2017 fiscal ending. We have approximately 25,000 consultants, which is probably what we have today, But you had $34,000,000 excuse me $34,000,000 in inventory.

Speaker 3

So it seems like to me you're like close to $30,000,000 over what you need based on 2017, okay?

Speaker 2

That's correct.

Speaker 3

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

Speaker 2

Yes. That's a good point. We are looking at to some mass inventory reductions. But whatever we do, we don't want to a listen. Damage our brand partners' ability to continue to sell inventory.

Speaker 2

As far as selling it back to Ed Warner 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 sales and things like that. So

Speaker 1

I'll also just add Ed that one of the things that we know that you look to us to do for the company 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 Paper Pie as well as with our retail division for the long term.

Speaker 2

Okay. And Ed, you've this is Dan. I'll kind of add another thought as You mentioned the 2017 period, if you recall during that time, we were also over inventoried. And the over inventory issue is we have excess quantities of our best selling items. Those are the titles that we ordered the most quantity of is the titles that are our best sellers.

Speaker 2

And so in 2017, what we did is just we worked through it. And through 20 2017 to 2018, we reduced our inventory from the high 40s down to about $30,000,000 reaching out about $18,000,000 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 as explained earlier. But the excess inventory is working down and it's in our best

Speaker 3

Okay. That's understood. My other question, if you don't mind, it's about your relationship with Usborne. I read in the 10 ks that you are in violation of the new distribution requirement. Is that correct?

Speaker 3

You're not buying enough minimum amounts from Usborne. So you're in violation and they according to the 10 ks, 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 say? Because you've been dealing with these people for decades.

Speaker 3

And also, they said that they're not they owe you $1,000,000 from last year and they're not paying. To me, it's like, woah, you've been dealing with these people for decades and they're fighting you about $1,000,000 discount rebate. To me, it's like, what, this is not right. So what do you say to that?

Speaker 2

Yes. We have been dealing with that one for decades. I've just taken over and been dealing with them myself for the last 2 years. And recently, Nicola's father, Peter Osborne, the founder of the company, passed away. So I'm dealing exclusively with Nicola at this point.

Speaker 2

There is no incentive for them to cancel the distribution agreement. That's not to say they won't, but They know that we just got to get this inventory situation back to a normal level and then we will get back to purchasing inventory at historic levels. So listen. They have no options to replace us. They're on the paper pie side.

Speaker 2

They're replacing us as a distributor for our retail division, but that's going to be taking years years for them to a listen to the inventory that's necessary to service the retail division. So I really don't feel like It's in their best interest. Again, we're preparing ourselves. We are trying to protect ourselves. Whatever kind of Cancellation of the distribution agreement gives us a sell off period.

Speaker 2

So We're just trying to get stronger financially by showing down inventory and that gives us a little bit more leverage with Esbourn. So listen. That's the approach we're taking.

Speaker 3

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

Speaker 2

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

Speaker 3

Okay. Nothing concrete there.

Speaker 2

No. It's a contentious Go ahead.

Speaker 3

Okay.

Speaker 2

So I

Speaker 3

was just wondering, there's nothing there's no definitive answer from the IRS on that?

Speaker 2

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

Speaker 3

great. Okay. Well, and Craig, I've been wanted to ask you this question. We're going to have to go back to the time Christmas of 2016, do you remember when you guys just moved into the Hilti complex and you bought a software package? You bought software package from a company in Florida and broke down.

Speaker 3

Actually, it was a classic nightmare, Okay. Your father and you had grandkids up there trying to get all the packages out and Customer service has gone crazy. Anyway, you paid about $1,000,000 for the software package, as I recall. Did you ever get your money back for that software package?

Speaker 2

No. No. Do you remember that? Of course, I've been with the company for 30 years. I remember that.

Speaker 2

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.

Speaker 3

Yes. Well, it almost bankrupt your company at the time, if I recall, because you were also in violation with the covenants with the bank. I think it was Midwest Bank at the time. So anyway, I kind of right now, I think you guys are in a pickle and we have to get this inventory or cut some cash up to get the bank because you're working on a waiver right now, it seems like from the 10 ks and how generous are they going to be with the waiver. I mean, they could shut you off August 9th, I think, and you might be out of business as a going concern.

Speaker 2

No. No, that's highly unlikely. All right. Thank you, Ed. Appreciate it.

Speaker 3

All right. Thank you.

Operator

Your next question comes from the line of Frank Goodell from Gene Goodell Associates. Your line is now open.

Speaker 4

Yes. Am I on?

Speaker 2

Yes. We can hear you.

Speaker 4

Yes. I had a couple of comments

Speaker 2

Off of what Ed had said,

Speaker 4

I noticed the Sales volumes are down quite a bit. Everything is 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.

Speaker 2

Well, we don't and this is Dan. Frank, we don't give guidance as far as revenue. Listen. Just to put that out there before turning the call back over to Craig. As a small reporting company, we just it's So it's been our past practice to just be conservative and not put our guidance.

Speaker 2

Craig, I'll let you take over from there. Yes. No, that's good. Thank you. Well, Things are looking up.

Speaker 2

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.

Speaker 2

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'd hoped. We will survive this tough period and increase sales.

Speaker 4

Second question I had, what are the insiders within EDUC doing as far as stock retention?

Speaker 2

I was going to say, so The insiders being the obviously the White family, the Board and Nobody has really been selling any shares. And then of course as Craig mentioned, Heather Craig and I continue to buy shares every quarter. And we've recently filed some Form 4s that reflect our activity for the Q1. Okay.

Speaker 4

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

Speaker 2

losses, I guess, you could say by having high salaries. Well, And I don't know how long ago you're mentioning, but Frank, the key thing that I mean, it's a great idea. It's something that Craig and I have talked about it in the past, but I just wanted before Craig give turn the call over to Craig, just want to make sure you're aware that It's not legal underneath the SEC rules for us to issue shares to management unless we've got shareholder approvals to do so. So we will to do that, we will have to file we would have to file a registration statement registering the shares and have a shareholder vote. So just on just given your current SEC guidance, Craig, I'll let you discuss the Yes.

Speaker 2

The only thing else I was going to add is that we do have short term and long term incentives. The long term incentives our shares. Now those were earned and the first tranche was awarded this past March after a 5 year vesting period. But we have other chunks of stock that our top 15 to 20 management and have earned over the past several years. They're still being vested and things like that.

Speaker 2

So we do have long term incentive plans in place. We have small cash bonuses with short term. They've been bigger in the past. We're doing very nominal Short term cash incentives. But yes, I like the thinking that we're doing some of that

Speaker 4

Part of where I'm going is you're highly incentivized to turn this company around rather than bailing when it gets tough and you are in a tough situation right now. So As a stockholder, I have a lot of patience if I have hope, but if you lose hope, then your patience goes away. So Sure. It's just a it's been a tough time for EDUC and my own stock account that I have with it. Luckily, I have

Speaker 2

a lot of other assets, but it's just

Speaker 4

a very worrisome thing when you see a company stock Go down as heavily as EDUC has done in the last 3 years. I'm sure I'm not telling you.

Speaker 2

I agree you don't. 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.

Speaker 2

And yes, ever since I took over, it's been a little bit of a a tough stretch with the pandemic and then 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. All right. That's all the

Speaker 4

comments I have. Thank you.

Speaker 2

Thank you, Frank. Thanks, Craig.

Operator

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

Speaker 2

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. Things We're seeing positive indicators.

Speaker 2

So hang in there. Have a great day. Thank you. Thank you, everyone.

Operator

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

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