Educational Development Corporation (NASDAQ: EDUC) Q1 2024 earnings call dated Jul. 13, 2023
Corporate Participants:
Jean Marie Young — Investor Relations
Craig White — President, Director and Chief Executive Officer
Dan O’Keefe — Chief Financial Officer and Secretary
Heather Cobb — Chief Sales and Marketing Officer
Analysts:
Ed Marcene — Private Investor — Analyst
Frank Goodell — — Analyst
Presentation:
Operator
Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation’s First Quarter Fiscal-Year 2024 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, the 13th of July 2023.
Before beginning the call, we’d 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 Mario from Three Part Advisors. Please go ahead.
Jean Marie Young — Investor Relations
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?
Craig White — President, Director & Chief Executive Officer
Thank you, Jean and welcome everyone to the call. I will start today’s call with some general comments in regard to the quarter. Then 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 fiscal 2024 outlet.
During the first quarter, our sales continued to be impacted by high inflation, which will likely face for the remainder of the year. As we have said on previous calls, our sales results were 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 100 [Phonetic] levels decreased again this quarter. We believe this is for a variety of reasons, like we mentioned, the economy, re-brand, 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 [Indecipherable] important partners to join PaperPie. I will let Heather talk further about that later in the call.
On a more positive note, our brand partners at leadership levels remained 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 number-one focus.
We will be looking at 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 up to higher levels.
Another positive from 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 that we have also picked-up some nice international orders as well. Our PaperPie division continues to drive the total sales for our company and aim the sales of SmartLab toys from this division are exceeding our original expectations.
During the quarter, our gross sales of SmartLab coy 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 have never seen before. So, we have 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.
Dan O’Keefe — Chief Financial Officer & Secretary
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 31st, 2022, compared to $62.3 million at May 31st, 2023. Our working capital line-of-credit was $11 million at the end of May 2023.
That concludes the financial update, and I will turn the call over to Heather Cobb, to talk about sales and marketing opportunities in further detail. Heather.
Heather Cobb — Chief Sales and Marketing Officer
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 change on outbound shipping to our customers, thus 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 to 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 introduced 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 to recruit our next brand partner. We’ve heard stories from all levels of our brand partners that they joined for the books, but then they turn their discount into our 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 then 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 special 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 am turning the call-back over to Craig now, for closing remarks. Craig?
Craig White — President, Director & Chief Executive Officer
Thank you both Heather, and Dan. As — as I’ve 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 declined and thus we are having to manage our costs. We are continuing to make operating adjustments each month-to reduce our costs, the single most significant cost-reduction this year will come from normalizing our inflated inventory levels.
As we reduced 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&L. This will be one of the most significant improvements to profitability in fiscal 2024. To normal levels we are executing a two-pronged approach. First and foremost, as Heather mentioned earlier, we are taking significant steps to energize our sales force. We expect to introduce new incentives and promotions, not only December 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’re printing and put increased focus on ordering more frequently. We expect this two-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. We have also reduced payroll and other operating costs and looked 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 past practice of 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 mentioned we just come off a couple of our largest opportunities to energize our sales force and make our PaperPie division is attractive as possible.
In June, we had our convention, where we had 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 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. So those things of 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 that’s the highest-level trip had roughly 40 people that with family members as such, we brought about 125 people and now we’re in Punta Cana, Dominican Republic, where we have roughly four extended people and that’s not all earners, but that’s including family members. So that’s the biggest recruiting factor for — one of the biggest recruiting factor for PaperPie is to see the amazing trips we take people to earn on. So anyway, we’re very, 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 of some recent activity, I will now turn the call-back over to the operator for question-and-answers.
Questions and Answers:
Operator
Thank you, ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Ed Marcene [Phonetic], Private Investor. Your line is now open.
Ed Marcene — Private Investor — Analyst
Craig, I haven’t talked 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 28th. Your inventory 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 going in a wrong direction. [Technical Issues]
Dan O’Keefe — Chief Financial Officer & Secretary
Yeah, this is Dan, 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 year was, if you add both the current and the long-term inventory together was $63,800,000 and at the end of May its $62,000,300 so we dropped about $1.5 million this quarter. And just I just wanted to clarify that before we have dropped the inventory and made it in the half.
Ed Marcene — Private Investor — Analyst
Okay, well, Dan my point is and Craig also in our 10-K that you released you’re having problems with the bank, they need their money. Is there any plans — you have any plans to sell any of your assets in bulk, like for example, sell on the Hilton complex or sell Kane Miller or maybe sell $30 million worth of this inventory back to Usborne to or another distributor. Do you have any plans to get a massive amount of cash into payoff these debts. I’m worried about it.
Dan O’Keefe — Chief Financial Officer & Secretary
Yeah, well, you could kind of had a bunch of points there. I was trying to keep track, so I could respond, but first of all,
Ed Marcene — Private Investor — Analyst
Okay.
Dan O’Keefe — Chief Financial Officer & Secretary
Yeah, inventory levels, and I’ve said all along that we will continue to order new titles. We have to do that, but what we said in the earlier in the call was that we were reducing the quantities and potentially the number of new titles that we are ordering. So, we’re being very aggressive on reducing our purchases, very aggressive. Historically, aggressively low. So, as we sell inventory alternating the cash, we’ll pay the bank debt.
Another point you made is that we owe the bank a lot of money. Yes, we do. We have renewal coming up next month and there is 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 you made is, do we have any plans to sell our assets. I — we have engaged with the 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. So, we know that’s available to us. I want to keep that my back pocket as a last resort. We have plans for this property and 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. So again, I just want to reiterate that we have a good relationship with the bank. And 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 and healthy [Phonetic] pays their part. We pay a smaller portion of it. We’ve never defaulted on any payments. So again, they’re not concerned about the building debt, they just want us to work down the working capital line, which we’re doing by selling inventory.
Ed Marcene — Private Investor — Analyst
Okay. That’s helpful, Craig. My other main concern for right now in my mind, you have no concrete plans to sell $30 million to $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 probably what we have today, but you had 34,000 — excuse me $34 million in inventory. So, it seems like to me you are like close to $30 million over what you need based on 2017. Okay. So —
Craig White — President, Director & Chief Executive Officer
That’s correct.
Ed Marcene — Private Investor — Analyst
Will 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.
Craig White — President, Director & Chief Executive Officer
Yeah, that’s a good point. We are looking at options to do some massive inventory reductions, but whatever we do, we don’t want to damage our brand partners’ ability to continue to sell inventory. As far as showing it back to I would wonder other distributors, that’s not an option there — they have no incentive to buyback 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.
Heather Cobb — Chief Sales and Marketing Officer
I’ll just add that one of the things that we know that you look to us and do for the company is to manage, not only the short-term challenges as well as success, 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 us 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.
Ed Marcene — Private Investor — Analyst
Okay.
Dan O’Keefe — Chief Financial Officer & Secretary
And Ed, you — I’ll — this is Dan, I’ll kind of add another thought, as well. You mentioned the 2017 period, during that time, we were also over inventoried. And you know that the over-inventory issue is we have excess quantities of our best-selling items. Those were the titles that we ordered the most quantity, obviously [Phonetic] the titles that are best sellers. And so, in 2017 we did, 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 explained earlier. But the excess inventory is working down and it’s in our best-selling items.
Ed Marcene — Private Investor — Analyst
Okay, that’s understood. My other question, if you don’t mind, it’s about your relationship with Usborne. I read in the 10-K that you are in violation of the new distribution requirement, is that correct?
Craig White — President, Director & Chief Executive Officer
Yeah.
Ed Marcene — Private Investor — Analyst
We’re not buying enough minimum amounts from Usborne, so you are in violation and they — according to the 10-K they can cut you off at any minute because you’re violating the contract. What do you say about that? What kind of shortages, can you say? Because you have been dealing with these people, for decades. And also, they said that — they’re not — they owe you $1 million from last year and not paying. To me that’s like, Hello, well you have been dealing with these people, for decades and they are fighting you about a $1 million discount rebate. To me it’s like, well, this is not right. So, what do you say to that?
Craig White — President, Director & Chief Executive Officer
Yeah, we have been dealing with that one for decades, I’ve just taken over and dealing with them myself for the last two years and recently Nicholas’s [Phonetic] father Peter who is one of the founder of the company, passed away. So, I am dealing exclusively with Nicholas [Phonetic] at this point. There is no incentive for them to cancel the distribution agreement, that’s not to say they want. 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, they have no options to replace us. They are on the PaperPie side. They’re replacing assets as a distributor for our retail division, but that’s going to be taken years and years for them to ramp-up 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 are preparing ourselves. We are trying to protect ourselves and whatever kind of cancellation in the distribution agreement gives us a sell-off period. So we’re just trying to get stronger financially by selling down inventory and that gives us a little bit more leverage with Usborne. So that’s the approach we’re taking.
Ed Marcene — Private Investor — Analyst
All right. Well, my other question, Dan, let’s say, what’s the status of the employee retention credit?
Dan O’Keefe — Chief Financial Officer & Secretary
Well, we filed for it. So…
Ed Marcene — Private Investor — Analyst
I know.
Dan O’Keefe — Chief Financial Officer & Secretary
So, we’re waiting on or waiting on the IRS to take action.
Ed Marcene — Private Investor — Analyst
Okay, nothing concrete there.
Dan O’Keefe — Chief Financial Officer & Secretary
No of importance [Phonetic].
Unidentified Participant — — Analyst
Okay, all right so I was just wondering if there’s nothing, there is no definitive answer from the IRS on that.
Dan O’Keefe — Chief Financial Officer & Secretary
Not yet.
Craig White — President, Director & Chief Executive Officer
We meet the requirements, so I would expect that we would get it at some level, which may if we get some cash from that would be outstanding. It’s not necessary or required for us to continue on with it should be great.
Ed Marcene — Private Investor — Analyst
Okay, well. And Craig, I’ve been wanted to ask you this question. We’re going to have to go bank in time if Christmas of 2016 you remember when you guys just moved into the healthy complex and you bought a software…
Craig White — President, Director & Chief Executive Officer
I do.
Ed Marcene — Private Investor — Analyst
You bought a software package from a company in Florida. And it broke down. 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 was gone crazy. Anyway, you paid about $1 million from the software packages as I recall. Did you ever get your money back for that software package?
Craig White — President, Director & Chief Executive Officer
No.
Ed Marcene — Private Investor — Analyst
Do you remember that?
Craig White — President, Director & Chief Executive Officer
Well of course, I’ve been with the company for 30 years. I remember that, of course I do. Both sides we are working in good faith, and we had just determined that it was not in our best interest to continue with them. So we — we severed the tie and we moved on. We developed all the software programs we needed in-house. And so that’s a distant — distant memory.
Ed Marcene — Private Investor — Analyst
Yes, well and almost bankrupt your company at the time. If I recall, because you were also in violation with covenants with the bank. I think it was Midwest Bank, the tie. So anyway, I kind of right now I think you guys are in a pickle and we have to get this inventory or have some tax up to get the bank because you’re working on a waiver, right now, it seems like from the 10-K 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. That’s a growing concern. So —
Craig White — President, Director & Chief Executive Officer
No-no, that’s highly unlikely. All right. Thank you, Ed. Appreciate it.
Ed Marcene — Private Investor — Analyst
All right. Thank you.
Operator
Your next question comes from the line of Frank Goodell from Gene Goodell Associates [Phonetic]. Your line is now open.
Frank Goodell — — Analyst
Yeah, so am I on?
Craig White — President, Director & Chief Executive Officer
Yes, we can hear you.
Frank Goodell — — Analyst
Yes, I had a couple of comments off of what Ed had said. I noticed the sales — sales volumes are down quite a bit. Everything is healed, of course, I’ve been in business for myself, many years, everything gets healed, if you can, increased sales. What’s the outlook for the next year or so realistically?
Dan O’Keefe — Chief Financial Officer & Secretary
Well, we don’t — and this is Dan. Frank. We don’t give guidance as far as revenue. Just to put that out there before I turn the call-back over to Craig. As a small reporting company, we just — it has been our past practice to just be conservative and not put our guidance. Craig, I’ll let you take-over from there.
Craig White — President, Director & Chief Executive Officer
Yeah, 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 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 taken a little longer than we’d hoped but we will survive this tough period and increased sales.
Frank Goodell — — Analyst
Second question. I had, what are the insiders within EDUC doing as far as stock retention?
Craig White — President, Director & Chief Executive Officer
You mean [Speech Overlap] were buying. I was going to say, so with the insiders being obviously the White [Phonetic] 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 first quarter.
Frank Goodell — — Analyst
Okay. To that point. One-way you obviously improved cash-flow 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 have worked for in the past, often did that called golden handcuffs whatever but they paid the shares when times are hard to reduce losses, I guess you could say, by having high salaries.
Dan O’Keefe — Chief Financial Officer & Secretary
I don’t know-how long you mentioned in but Frank, the key thing that. I mean, it’s a great idea, it’s something that Craig has — and I’ve talked about in the past, but I just want to — 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 and 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 given your current SEC guidance, Craig, I’ll let you discuss the thoughts on that.
Craig White — President, Director & Chief Executive Officer
Yeah, the only thing I was going to add is that we do have short-term and long-term incentives, the long-term incentives, are shares. Now those were earned and the first tranche was awarded this past March after a Five-Year vesting period. But we have other chunks of stock that our top 15 to 20 management have earned over the past several years, they are still being invested in, things like that so. We do have long-term incentive plans in place. We have small cash bonuses was short-term. They’ve been bigger in the past, we’re doing very nominal short-term cash incentives but yeah, I like your thinking but we’re already doing some of that.
Frank Goodell — — Analyst
Part of where I’m going is, you are 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 hope, if you lose hopes and your patience goes away, so.
Craig White — President, Director & Chief Executive Officer
Sure.
Frank Goodell — — Analyst
It’s just, it’s been a tough time for you see in my own stock account that they have with it. Luckily, I have a lot of other assets that. It’s just a very worrisome thing when you see a company stock go down as heavily as EDUC has done in the last three years. I’m sure, I’m not telling…
Craig White — President, Director & Chief Executive Officer
I agree with you.
Dan O’Keefe — Chief Financial Officer & Secretary
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 yeah, ever since I took over, has been a little bit of a tough, 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.
Frank Goodell — — Analyst
All right, that’s all the comments. I have. Thank you.
Craig White — President, Director & Chief Executive Officer
Thank you, Frank.
Dan O’Keefe — Chief Financial Officer & Secretary
Thanks Frank.
Operator
There are no further questions at this time. I will now hand over to Craig. Please continue.
Craig White — President, Director & Chief Executive Officer
Thanks everyone for joining us on the call today. We appreciate your continued support and look-forward to providing an additional update when we report quarter two in October. We know it’s been a tough time and we’re doing everything we can get this turned around things we are seeing positive indicators, so and hang in there. Have a great day. Thank you.
Dan O’Keefe — Chief Financial Officer & Secretary
Thank you, everyone.
Operator
[Operator Closing Remarks]