Educational Development Q3 2024 Earnings Call Transcript

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January 11, 2024

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's Third Quarter Fiscal Year 20 24 Earnings Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. Please Press Star 0 for the operator. This call is being recorded on Thursday, January 11, 2024.

Operator

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

Speaker 1

with

Operator

the SEC for a more detailed discussion of the company's financial condition. I would now like to turn the conference over to Steven Huser, Investor Relations. Please go ahead.

Speaker 2

Thank you, Alan, and good afternoon, everyone. Q3 earnings call. On the call with me today are Craig Wright, President and Chief Executive Officer Heather Cobb, Chief Sales and Marketing Officer and Dan O'Keefe, Chief Financial Officer, Financial Officer. After the market closed this afternoon, the company issued a press release announcing its results Q3. The release is available on the company's website at www.edcpub.com.

Speaker 2

Call. Additionally, as the operator noted, today's conference call and prepared remarks are being recorded and there are forward looking statements. Call. With that, I would now like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Speaker 3

Thank you, Stephen. 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 Investor Relations Officer 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 Paper Pie division decreased approximately 30% from the Q3 last year, primarily due to the lower active brand partner levels.

Speaker 3

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 We continue to be excited about the demand for all of our products and especially when we look at the growth opportunities within SmartLap Toys where we have only introduced 25 initial products through the Q3. 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 Q3 operating profits, that were aligned with our goals to intentionally reduce our excess inventory levels and improve long term brand partner success.

Speaker 3

Brand Partners' success generates future Brand Partners' 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?

Speaker 4

Thank you, Craig. To our fiscal Q3 results compared to the Q3 last Net revenues for the Q3 totaled $16,900,000 a decrease of $13,400,000 or 44 percent Q3 totaled 16,400 compared to 27,100 in the Q3 last year, a decrease of 10,700 or 39%. Earnings before income taxes totaled $2,700,000 compared to a breakeven level of earnings before taxes in the Q3 last year. After tax income totaled $2,000,000 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 $6,300,000 from $64,300,000 at November 30, 2022 compared to $57,900,000 at November 30, 2023.

Speaker 4

Now for a working capital update. Our working capital line of credit Board of Directors Borrowed was $5,000,000 at the end of the quarter on November 30, 2023. During the quarter, the company met line of credit step down requirements from $13,500,000 in August to $5,000,000 in November as outlined in the company's credit agreement with our bank. Subsequent to the end of the quarter, the company executed the 4th amendment to its credit agreement with increased borrowing availability to $8,000,000 and enables us to purchase new inventory of $2,100,000 between December 1, 2023 and March 31, 2024. The line of credit maturity was also extended from January 31 to May 31, 2024, which is the expected sale period of our recently listed Hilti complex, which Craig will touch on briefly.

Speaker 4

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 Q3, the company switched our credit card processor from PayPal to Nexeo, 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 Kaugh to talk about sales and marketing opportunities in further detail. Heather?

Speaker 5

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 Q3, 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, This change in shipping charges has been well received from our customers and brand partners alike. On January 3rd this year, we celebrated the 1st anniversary history of the reveal of Paper Pie, marking the rebrand of our direct sales division.

Speaker 5

This milestone is important as it provides an opportunity for reflection, segment 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 are 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 Paper Pie. 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.

Speaker 5

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 Smart Lab 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 Smart Lab 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.

Speaker 5

Craig?

Speaker 3

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 Q2, we received $3,800,000 in funds from the employee retention credit. These funds were part of the government sponsored CARES Act offer to employers who maintain employees during COVID. During the Q3, we listed and sold our old headquarters building, 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.

Speaker 3

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 $40,000,000 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 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 expense 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 30, 2023, We have approximately $30,000,000 of excess inventory.

Speaker 3

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.

Speaker 3

Now that we have provided a summary of Some recent activity, I'll turn the call back over to the operator for question and answer. Operator?

Operator

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

Speaker 1

Thank you. Thanks for taking my questions. So it looks like your inventory just for the quarter was down about $4,000,000 So what was your cash flow from operations for the quarter, if you have that?

Speaker 4

Well, the cash flow from operations, I don't have that in front of me. It will be published We're publishing the Q later today at 4 o'clock. So, the overall profitability for the quarter was driven from the sale of our old headquarters building,

Speaker 1

Right. But I'm thinking if your inventory came down $400,000,000 that would have there might have been some positive cash flow from operations to offset the operating loss.

Speaker 4

With inventory dropping $4,000,000 and operational losses of $1,000,000 in cash flow from the inventory reduction, we would have generated $3,000,000 $4,000,000 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 $13,500,000 down to $5,000,000 at the end of November. Okay,

Speaker 1

great. And then you're launching your new e commerce platform later this month, and I mentioned there's other sort of CapEx items. What's kind of the CapEx that you're running at right now? I know it's been pretty low recently, but just thinking about sort of cash flow, What is your kind of ongoing CapEx looking like?

Speaker 4

Our ongoing CapEx is primarily tied to IT development of our internal systems. Our non IT CapEx is less than a couple of $100,000 a year. But our IT CapEx, we spent a significant amount on the last year, but that's been reduced significantly as we're now getting ready to launch our new e commerce platform. So we right now our CapEx, We don't have a budget for next year, but it will be greatly reduced from or we're expecting it to be greatly reduced from what our CapEx was this year.

Speaker 1

Okay, Great. And just sort of bigger picture, so your 3rd quarter net revenue was like $17,000,000 I know Q3 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 $40,000,000 of net revenue give or take. So if you stabilize That net revenue at the $40,000,000 level, you'll be doing something like, I don't know, dollars 27,000,000 $28,000,000 in gross profits depending A lot of different factors, of course. But are you confident that you can get to consistent sort of operating profitability at that level.

Speaker 1

If you like, I guess, just assume no growth, even with the increase The rent expense that you're going to have to take on going forward once you sell your building?

Speaker 3

Yes, we do feel confident that we can. We've reduced expenses a great deal just in the last 8 months. We anticipate That selling the building, the net from our lease payments and our interest expense will still be a positive. So that's the biggest expense. But I will also say in the last 6 months, we've had to do things kind of in a short term strategy to generate cash to pay back the bank.

Speaker 3

Some of those things were not as profitable as our historical levels. So we'll have to evaluate that going forward whether that will still remain to be necessary or we can kind of get back to normal operations. Now addressing the normalized $40,000,000 we're not happy with That level of sales and we're doing everything we can to increase sales. There's only so much we can do to cut costs. You know personnel is a big expense but we're kind of about as low as we're going to be.

Speaker 3

So there's not much more cutting that we can do. We need to increase sales at this

Speaker 1

fleet. Yes, 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 40,000,000 I mean is EDC able to get to operating profitability?

Speaker 3

Yes, we can.

Speaker 1

Okay. Okay, great. And then I know you mentioned and you've mentioned in the past reinstating your quarterly dividend is a pretty big priority for you and the Board. So I know even if you get to kind of You don't even have to get to like operating profitability or new GAAP profitability. If you're working down your inventory, you're going to be free cash flow positive.

Speaker 1

Would you consider starting up the dividend before you get to operating profitability if you can see sort of profitability on the horizon?

Speaker 3

That's a good question. There's 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.

Speaker 1

Okay. All right. That's helpful. And then just shifting gears a little bit. So I know a couple of months ago, John Clarico resigned from the Board.

Speaker 1

It looks like it was kind of abruptly director. I think you've been on the Board for almost 20 years. Since he was your Lead Independent Director and Chairman of all your committees. That's obviously a pretty big deal. Can you discuss it's been a couple of months now.

Speaker 1

Can you discuss the circumstances around that at all?

Speaker 3

Yes, sure. He is kind of somewhat personal. 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 disagreements.

Speaker 3

There was no fight in it in the circumstances around why he left. So it was just time for him.

Speaker 1

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

Speaker 3

Yes, that 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.

Speaker 4

Okay, great. 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 Greg mentioned, his age is not necessarily in NASDAQ Guidelines for an Ideal Board of Director. And his replacement In as the Audit Committee Chair, Brad Stutes is a financial expert, has a long history in public accounting and as a partner in public accounting.

Speaker 4

And so we're very happy with the replacement for the audit committee and and the addition of the new Board member last year.

Speaker 1

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

Speaker 3

Yes, good question. We have until our next Annual Shareholders Meeting which is in July. I've got some candidates that I'm going to start interviewing in the next Couple of weeks. Very solid candidates from the MLM industry. So we're very Feel very positive about our possibilities there.

Speaker 1

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 large shareholder in the company, doing like a take private transaction or something might be palatable. Is that something you guys have considered?

Speaker 4

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 From a management recommendation and or from an outside approach, we've not been approached by anybody nor have we made any recommendations to Board to go private.

Speaker 1

Okay. All right. Well, that's it for me. I'll

Operator

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

Speaker 2

Thank you. Greg, I just had

Speaker 4

a quick question regarding the status of the contractually required purchases from Osborne Brook.

Speaker 3

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,

Speaker 1

many, many, many

Speaker 3

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.

Speaker 2

Okay. So Nicola Isn't pushing back and making any demands at this point?

Speaker 3

Not at this point. She's yes, she understands the environment.

Operator

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

Speaker 6

Hi, Craig. Hello. Hi. I've just got a short question. Do you have Does the Board have some sort of valuation in mind for how much the business is worth just in terms of How they look at how you guys look at it, how you value the company, how you value the different parts of it, like Smart Lab toys, learning wrap ups, that sort of stuff.

Speaker 6

Do you have like a sort of figure that the Board thinks is a fair value for the company at the moment.

Speaker 4

Well, There's lots of ways to look at that. Certainly, the management team doesn't feel that the trading value is reflective of what Our real value is, we have a book value of $5 a share. So, I mean, And we have no goodwill on our books. And so I think that We're trying to get back to that level first. I mean the book value is all in inventory and buildings and the buildings are The carrying value of the buildings don't reflect the actual value because we're carrying the building at less than $20,000,000 and we're looking at selling it for 40,000,000

Speaker 6

Yes. And is there sort of like a net present value that you've got on that inventory? Because obviously there's $57,900,000 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.

Speaker 4

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 are typically about 25% of the retail value that we sell them for.

Speaker 3

Right.

Speaker 4

So we believe the inventory is definitely worth the carrying value of 57,000,000

Speaker 6

Yes. And in terms of just sort of like the learning wrap ups business, Smart Lab Toys, what's the sort of growth trajectory Within that, could that sort of be a separate business to the selling of the Osborne books, that sort of thing?

Speaker 4

Can you repeat that question one more time?

Speaker 6

The question is on whether learning wrap ups and Smart Lab toys is something that investors should treat separately To the other part of the business in selling Osborne products?

Speaker 3

No, It's just another product line or another couple of product lines that we sell. I mean the cost of goods between Usborne and some of our other books versus Learning Wrap Ups 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.

Speaker 3

We have a great release plan over the next 18 months. So we're excited about that, but they shouldn't be treated differently than anything else we sell.

Operator

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

Speaker 3

Thank you. So a little bit of late breaking news. No one asked me about it. I'm a little bit surprised. But above the dollar threshold and thus we expect to regain compliance.

Speaker 3

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. But anyway, thank you everyone for joining us on the call today. We appreciate continued support and look forward to providing an additional update in January of 2024. Thank you.

Speaker 3

Have a good day.

Operator

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

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Key Takeaways

  • Q3 net revenues of $16.9 million were down 44% year-over-year, but the company generated $2.7 million in earnings before tax and $2.0 million in net income (or $0.24 per share) compared to breakeven last year.
  • Inventories were intentionally reduced by $6.3 million to $57.9 million, aiding cash flow and supporting the strategic goal of improving long-term brand partner success.
  • Liquidity was bolstered by stepping down the line of credit from $13.5 million to $5 million, amending the facility to $8 million of availability through May 2024, and planning a $40 million sale-and-leaseback of the headquarters to pay down debt and cut interest expenses.
  • Growth initiatives include the rollout of the SmartLab Toys line (25 products so far) and a new mobile-friendly e-commerce platform for the Paper Pie division launching later this month to drive sales momentum.
  • Management remains focused on cost containment, regaining compliance with Nasdaq’s bid price rule, and aims to reinstate quarterly dividends once sustainable profitability is achieved.
AI Generated. May Contain Errors.
Earnings Conference Call
Educational Development Q3 2024
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