Educational Development Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 12, 2023

There are 5 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Welcome to the Equis General Development Corporation Second Quarter Fiscal Year 20 24 Earnings Conference Call. At this time, all lines are in a listen only mode. Fiscal Year. Following the presentation, we will conduct a question and answer session.

Operator

Please Press star 0 for the operator. This call is being recorded on Thursday, October 12, 2023. Fiscal. Before beginning the call, we would like to remind you that some of the statements made today will be forward looking and are projected under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed are implied to a variety of factors.

Operator

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 Hoefer, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Educational Development 2nd quarter earnings call. On the call with me today are Craig White, President and Chief Executive Officer Heather Koff, 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 Q2. Fiscal 2019.

Speaker 1

The release is available on the company's website at www.edcbpub.com. As the operator mentioned, today we will make forward looking statements and offer that you should look at the company's SEC filings for more details on those forward looking statements. Fiscal year. With that, I'd now like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Speaker 2

Thank you, Steven, and welcome everyone to the call. I will start today's call with some general comments regarding the quarter, then I will pass fiscal

Operator

year 2019. I'll turn the call over to Dan and Heather

Speaker 2

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. During the Q2, our sales continued to be impacted by high inflation, which directly impacts our active brand partners. As I have said before, this is our key indicator that reflects current sales levels and where we expect them to trend in the future. I am delighted to see that as expected our brand partner level stabilized during the Q2.

Speaker 2

The ripple effect of the brand rebrand process That we rolled out in January of this year has diminished in every active brand partners through the end of August that either joined as a Paper Pie brand partner or made a sale this calendar year as a paper pie brand partner. We expect this summer to be an inflection point for our brand partner headcount as we have already seen an increase in brand partner count starting in August. The sales in our publishing division were also lower this quarter due to the stoppage of selling Esbern products. Under our previously announced updated distribution agreement with this vendor, sales to retail customers are being supplied by another distributor. The decrease in SMIME sales was partially offset by strong orders of our King Miller books and from our Learning Wrap Ups and Smart Lab Toys product lines.

Speaker 2

We are excited about the continued growth opportunities of these product lines with our existing and new retail customers. We have also made several changes recently in the Paper Pie division that Heather will talk further about later in the call to not only make Brand Partners more successful, but also entice new brand partners to join Paper Pie. Brand partner success generates additional brand partners and that continues to be our number one focus. With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of the financials. Thank you, Craig.

Speaker 2

Fiscal Q2 results compared to the Q2 of last year. Net revenues of $10,600,000 a decrease of $8,800,000 45% compared to $19,400,000 Average active Paper Pie Brand Partners 3rd quarter totaled 18,100 compared to 26,800 in the 2nd quarter last year, A decrease of 8,700 or 33 percent. Earnings before income taxes totaled $1,500,000 an increase of $62,600,000 compared to a pre tax loss of $600,000 in the Q2 last year. After tax income totaled $1,100,000 compared to an after tax loss of $800,000 in the Q2 last year. Income per share for the quarter was $0.13 compared to a loss per share of $0.10 on a fully diluted basis.

Speaker 2

To update everyone on our inventory and working capital levels, net inventories decreased 5,700,000 from 67 point $6,000,000 at August 31, 2022 compared to $61,900,000 on August 31, 2023. Now for working capital update. Our borrowings on our working capital line of credit totaled $9,700,000 at the end of August. During the quarter, the company extended the working capital line of credit agreement and amended the company's credit agreement with our bank. Under the terms of the new agreement, the fixed charge covenant ratio was removed along with the debt acceleration With default resulting in the company reclassing our existing mortgage secured term loans back to long term debt.

Speaker 2

Under the terms of the new agreement, the line of credit includes monthly step downs from $10,500,000 at August 31, 2023 $4,000,000 at maturity on January 31, 2024. Also during August, our credit card processor That processes our payments from our customers began to hold a cash reserve. The reserve held at the end of August was $1,000,000 And is listed as restricted cash on the balance sheet. The cash reserve was increased to $1,500,000 in September and is scheduled to increase again to Approximately $2,000,000 in October. That concludes the financial update, and I'll now turn the call over to Heather Cobb

Speaker 3

partners. As an example, during June July, we offered bonus sales commission opportunities to our brand partners to help them spur sales. In August, we implemented a 30 day site wide sale on our e commerce site with products being offered at 10%, up 30% off with their customers. The promotions that we have offered are receiving positive feedback and were greatly appreciated during the summer months, Which are typically our softest selling month of the year. We continue to make strategic changes to adapt to this challenging period When families have limited disposable income by offering different types of promotions.

Speaker 3

Starting in September, We began offering $5 flat rate shipping on our e commerce orders with free shipping taking effect at $30 orders. This change in shipping charges has been well received from our customers and brand partners alike. An unexpected positive impact from this change was that our average order size of approximately $70 had remained unchanged. We have additional promotions and incentives to roll out in the coming months to assist brand partners as they build their business, especially during the fall selling season, which is typically our largest selling period of the year. Our retail sales team continues to focus on opening new accounts and selling to our established customers.

Speaker 3

As Craig stated earlier, The addition of the SmartLabs Toys line has provided some sales momentum for us alongside our Kane Miller and Learning Wrap Ups lines of products. While we have not previously had the opportunity to sell into foreign countries, we are doing so with both the Learning Wrap Ups and SmartLab Toys product lines, opening new doors to new customers. This concludes our sales and marketing update. I will turn the call back over to Craig for closing remarks. Craig?

Speaker 2

Thank you, both Heather and Dan. Now I would like to talk about some recent changes before opening the call up for questions. During the quarter, we received $3,800,000 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. While this cash infusion was very timely and positively impacted our quarter, the funds have been primarily absorbed with pay downs in our line of credit with our bank expense, which will improve our overall financial performance.

Speaker 2

To this end, we have recently listed and contracted for sale Our old building for $5,100,000 which is primarily used for excess inventory storage. The proceeds from this sale will be used to pay down our term loans with our bank. We have agreed to lease back the building for 3 years after which we plan to consolidate Our reduced inventory levels into our headquarters, further improving profitability. We are also continuing to turn inventory to cash, which will be most evidenced in this Q3, our strongest selling quarter of the year. Cash generated from the reduction in inventory will be used to meet the required step downs in our line of credit.

Speaker 2

I have had Questions recently and some of you on the call may have this question as to why don't we sell the Hilti building our current headquarters. That is absolutely an option. We're evaluating what that would look like, but we're evaluating other short term solutions in the meantime. During the quarter, we reduced costs from lower employee levels and other operating cost reductions and continue to look for every opportunity to improve bottom line performance. Now that we have provided a summary of some recent activity, I will now turn the call back over to the operator for questions and answers.

Operator

Fiscal. Your first question comes from the line of Edward Morsini. Your line is open. Edward Yersini. Your line is open.

Speaker 1

Okay. This question is for Dan. The last time we spoke, the company had a conflict with us for 1 about the discount of $1,000,000 Because you didn't send in, I believe, a letter of credit. Has that discount conflict been resolved? Or could you update me on that?

Speaker 2

Sure. It's unresolved. I was born in At the end of last year, at the end of December, beginning of January, Usborne disputed the rebate because we didn't give them the letter of credit. So at that point, we reversed all of the accrual on the financial of that rebate. And so we Took it off our financial statements, but we're still in a position where we're hoping for the best.

Speaker 1

Okay. Secondly, Craig, today your stock closed at $1.03 $1.03 I read somewhere that NASDAQ, if your stock falls below $1 for 28 days, The stock your company stock will be delisted. Can you give me any assurance that won't happen?

Speaker 2

Yes. All I can assure you is that we're exhausting all options to increase sales, reduce debt And try to return back to profitability. What happens with the stock price is more or less up to you all. And I'll also say that when that does happen to companies and their stock does go below the minimum limit orders, They typically will do a reverse stock split to bring it back above. So if that were to happen for an extended period of time, we wouldn't go off of NASDAQ and most probably do a shareholder action To reverse the stock split and reverse stock split and reduce the number of shares and increase the value

Speaker 1

That's something in your plan in your planning book?

Speaker 2

What companies do to maintain their listings on NASDAQ or New York Stock Exchange with their share price growth below the minimum investment requirement.

Speaker 1

I see. Okay. Well, that's a fear of any investor. If you'll be delisted from the NASDAQ, then You're not allowed you won't be allowed to trade or buy your segment company. Okay.

Speaker 1

That's it for me. Good luck with your and also That money you got from the government, is I read somewhere that they're auditing employment retention credits. Is that money free and clear? Or is that

Speaker 2

We're still be off, but we received the money and deposited in it. Unfortunately, the government's checks cleared the bank. So I think we've got it now.

Speaker 1

All right. That's great. Okay. That's it for me. Thanks.

Speaker 2

Thank you, Edward.

Operator

Thank you. Your next question comes from the line of Richard Guinee, Private Investor. Your line is open.

Speaker 1

Yes. Good afternoon, everybody. A couple of quick questions for you. The sale leaseback

Speaker 2

15? Yes, that's the plan. We have a few minor issues that we need to resolve, but there's I don't anticipate that would cause us to delay closing.

Speaker 1

Okay, great. And the Brand partner levels that started to decline in August, have those trends continued in September October?

Speaker 2

Well, it's not something we report. So August is a period that we're reporting. So we saw them stabilize over the summer, as Craig mentioned, and we saw a little uptick in August. So that's what we communicate Through our earnings calls.

Speaker 1

Right. But you can't discuss anything that's happened since?

Speaker 2

We typically don't give into monthly reporting of our active brand partner count. We're satisfied with the way it's trending.

Speaker 1

Okay, very good. That's all I've got. Thank you.

Operator

And your next question comes from the line of Randy Fried from RL Capital LLC. Your line is open.

Speaker 4

Hello. Can you hear me?

Speaker 2

Yes.

Speaker 4

Hi. I've got two questions. The first one is for Dan. Dan, I am somewhat familiar with employee retention credit because I'm a CPA also. I want to expand a little bit on that other gentleman's question.

Speaker 4

My question to you is,

Speaker 2

that was part of the

Speaker 4

CARES Act. We A lot of people have been applying for that. My question for you is, How confident I'm not sure who you consulted with and thereby got that $3,800,000 credit, but how Confident are you that you met all the criteria and that if you do in fact get audited that you're not going to be able to claw that back? Are you Super confident that you actually qualified for it? Or are you like hoping you don't get audited?

Speaker 4

That's my first question. Thank you.

Speaker 2

Nobody and I'll concur with you. I don't think we want to be audited either. Nobody wants to be audited, but we did use a nationally Tier 1 Consulting firm to help us with our application process and documentation process. They've processed, I believe, one of their advertisements is they are the largest processor of Not only employment retention credits, but also other credits. We use the same firm to do our research and development tax credit that we file for annually as well.

Speaker 2

But they're a very large nationally recognized Firm that does this. Okay.

Speaker 4

Thank you for that. My next question is for All three of you, but any of you can answer. There's a little website I checked that shows about open market purchases or sales Company shares by the officers. And I haven't seen anything really on there for any of you 3. Have any of you 3 Any shares in the open market recently?

Speaker 4

I'm not talking about the shares you get through that plan, which is a little confusing. I'm not sure if they're sort of Free, maybe they are free. But just in the open market, have any of these 3 buy any shares? And do you have any plans to do so?

Speaker 2

Yes. So we filed Form 4s, I believe, last week, identifying the shares that we've acquired in the last quarter. We buy these shares with payroll withholdings. So they're bought in the open market with our personal people dollars.

Speaker 1

Okay. So

Speaker 4

you're all 3 are doing that, buying a few shares through payroll to phone. I haven't looked at that site for a couple of weeks, but Is that where those few shares come from that are sort of showing up every once in a while on that site?

Speaker 2

Yes. They were filing all

Speaker 4

3 through payroll withholding.

Speaker 2

Yes. And it's through our 401 plan. We have our stock as an investment option in our 401 plan. And so when we have payroll, we have our payroll holdings Go into our 401 plan and our company stock is an investment option and then our 401 firm goes out to the market Every payroll period and buys those shares for us.

Speaker 4

In your 401 plans, it's not in your like Personal account. You're not using some of your own money that's not going into the 401 plans for open market purchases right now.

Speaker 2

Let me be real clear, Randy. We are taking our payroll dollars that we're payroll that we get paid with instead of Taking that cash and putting it in our bank account, we're taking that cash and investing it in company stock. So we are buying shares. Yes, we are buying shares with our personal cash. Fiscal Year.

Speaker 2

And

Operator

there are no further questions at this time. I would like to turn it back to Craig Warren for closing remarks.

Speaker 2

Thanks everyone for joining us on the call today. We appreciate your continued support and look forward to providing you additional update in January of 2024. Have a great day.

Operator

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

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Key Takeaways

  • Net revenues declined 45% year-over-year to $10.6 million, driven by a 33% drop in active Paper Pie brand partners to 18,100, although partner counts stabilized and began to tick up in August.
  • The company turned a profit with $1.1 million in net income (EPS $0.13) versus a $0.8 million loss a year ago, reflecting cost reductions and improved margins.
  • Liquidity was bolstered by applying a $3.8 million employee retention tax credit to pay down its credit line, amending its bank facility to remove covenants, and planning a $5.1 million sale-leaseback of its excess inventory building to retire term debt.
  • Publishing sales saw strength from Kane Miller titles, Learning Wrap Ups and the newly added SmartLab Toys line, including initial international orders in those categories.
  • To support its direct-sales channel, the company offered summer commission bonuses, sitewide 10–30% discounts and a $5 flat shipping rate (free over $30), which maintained average order size at about $70.
AI Generated. May Contain Errors.
Earnings Conference Call
Educational Development Q2 2024
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