Educational Development Q1 2025 Earnings Call Transcript

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July 11, 2024

There are 7 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's First Quarter Fiscal Year 2025 Earnings Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, July 11, 2024. Before beginning the call, we would like to remind you that some of the statements made today will be forward looking and are protected under the Private Securities Litigation Reform Act of 1995.

Operator

Actual results may differ materially from those expressed or implied due to a variety of factors. We refer you to Educational Development Corporation's recent filings with the SEC for a more detailed discussion of the company's financial condition. I would now like to turn the conference over to John Beisler, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. With the Safe Harbor statement in red, I'll turn the call over to Craig White.

Speaker 2

Okay. Thank you. I want to introduce a couple of the people joining me on the call. We have myself Craig White, President and Chief Executive Officer Heather Copp, 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 Q3, which will be on our company's website at edcpub.com.

Speaker 2

Welcome everyone to the call. We appreciate your continued interest. I will start today's call with some general comments regarding the quarter. Then I will pass the call over to Dan and Heather to run through financials and provide an update on our sales and marketing. Finally, I will wrap up the call with an update on our progress of the sale leaseback of our headquarters, the Healthe complex, and provide some comments on strategy and fiscal 2025 outlook.

Speaker 2

Our Q1 as well as previous quarters of fiscal 2024 were driven by strategic decisions to prioritize cash flow over profitability. During the quarter, we ran several promotions to energize our current sales force and customers by offering discounts on our products, as well as the freight we charge on shipments. These decisions were necessary in these difficult economic times when high inflation is eating at the discretionary spending of our customers, coupled with our higher than normal inventory levels. We are continuing to evaluate and implement cost cutting measures as well as leverage IT to provide new tools to energize the field sales force as well as contribute to the bottom line. While I'm not pleased to report a loss, we are actively working on the long term strength of our business model.

Speaker 2

With that, I would like to turn the call over to Dan O'Keefe to provide a brief overview of the financials. Thank you, Craig. To our

Speaker 3

Q1 summary compared to the prior Q1, net revenues were $10,000,000 compared to $500,000 Our average active brand partners totaled 13,400 compared to 15,000 at the end of our last fiscal year. Loss before income taxes were $1,700,000 compared to a loss of $1,200,000 in the Q1 last year. Net loss totaled $1,300,000 compared to $900,000 and loss per share totaled $0.15 compared to a loss of $0.11 on a fully diluted basis. To update everyone on our inventory and working capital levels, net inventories decreased $2,900,000 from $55,600,000 at the end of February 28, 2024 to February 29, 2024 to 52,700,000 at May 31, 2024. Now for working capital update.

Speaker 3

Our working capital line of credit borrowed was 5 point $5,000,000 at the end of February 2024 $5,600,000 at the end of May 2024 with $1,400,000 of availability at the end of the Q1. That concludes the financial update. And I'll now turn the call over to Heather Cobb to talk about sales and marketing opportunities in further detail. Heather?

Speaker 4

Thanks, Dan. As Craig mentioned earlier, we continue to make strategic choices and changes to bring new initiatives for success to our Paper Pie brand partners. We had a May site wide sale promotion where we hosted an exciting week long site wide sale that seemed to capture the attention of our customers. It was definitely a hit. Our June convention, we hosted attendees here in Tulsa at the Cox Business Convention Center, during which we had over 50 presenters, including 3 of our Kane Miller authors and creators from both England and Australia, as well as keynote presentations on the science of hope and the importance of early literacy by our newest Board member, Doctor.

Speaker 4

Amy Emerson. Response to all that was presented was overwhelmingly positive and the excitement and energy that our brand partners left with was palpable. That was evidenced as we held our next promotion the week after we returned a one day account activation special offer. As a result of this, we saw over 3,700 new brand partners join us, keeping us around the 15,000 active brand partner count. We have already seen success from many of them who are sharing our mission and our products with their networks, bringing in new customers just in time to lead us into the fall selling season.

Speaker 4

This excitement is fueled by the introduction of new products, which we have been doing through the month of June and that will continue through this summer. Both our paper pie sales division and our retail division see an increase of activity around the launch of new titles. Our retail customers continue to delight in our offerings, finding new series to love for King Miller, educational manipulatives from learning wrap ups and steam based kits and products from SmartLap Toys. That concludes our sales and marketing update. I'll turn the call back over to Craig for closing remarks.

Speaker 4

Craig?

Speaker 2

Thank you both Heather and Dan. One of, if not the biggest event in fiscal 2025 is the anticipated sale and leaseback of our headquarters building, the Hilti complex. The proceeds from this sale will not only bring savings from reduced interest expense, but allow us to build a positive cash position as we continue to work down our excess inventory level, which was approximately $30,000,000 at year end. On June 6, we executed our sale leaseback agreement for the Hilti complex totaling $35,500,000 dollars The proceeds from the sale are expected to pay off our borrowings with the bank. With our new amendment, we will also have a line available to us post sale with our bank of $4,500,000 The building sale agreement calls for a 60 day due diligence period with an additional 30 days to close the transaction.

Speaker 2

So we expect the building sale will be complete by the end of 2nd fiscal quarter or the start of the 3rd fiscal quarter. Additionally, starting July 1, 2024, we have leased approximately half of our 220,000 square feet to a new tenant in a triple net lease structure. The initial term of the lease is for 5 years and includes a 5 year extension. This lease improves our monthly cash flow and further positions us to return to profitability. I want to reiterate that everything that we've done in the last 15 months are to meet the Bank's requirements, which we have done so.

Speaker 2

All of our efforts are beginning to come to fruition, and once they fully do, we will start to see the fruits of our effort from reduced interest expense, lease income, which reduces our lease commitment, our cost cutting and capitalizing on the goodwill received from charging us for our products and shipping. Our sales force is grateful and excited turning off convention, heading to incentive trip to Vienna next week and working toward next year's trip to Scotland. There are a lot of reasons to be positive as we head into our fall selling season. I want to thank all of our shareholders for their patience, our employees for their commitment to our mission, and our customers and brand partners for their loyalty during this difficult period. I'm confident in our collective ability to emerge stronger and more resilient than ever before.

Speaker 2

With that, I will hand it back over to the operator for questions and answers.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer The first question comes from Paul Carter of Capstone Asset Management. Your line is already open.

Speaker 5

Thank you. Good afternoon, everybody.

Speaker 2

Hi, Paul. Just to

Speaker 5

start, so the $10,000,000 of net revenue, how is that split between Paper Pie and your publishing division?

Speaker 3

About 85.15, Paul.

Speaker 2

Similar to pretty much every other quarter, yes.

Speaker 5

Okay, great. And then you added over 3,700 brand partners thus far, which is great. Was that just during the month of June or was that post convention up till today, I guess?

Speaker 4

No, that's a great question. That was just during the promo in the month of June.

Speaker 5

Okay, great. Excellent. And then so how confident are you I know this is a tough question to answer, but how confident are you at stabilizing your brand partner count at this 15,000 level? It sort of seems like it's up it's stabilizing somewhat. And I know the macro employment picture is getting slightly worse, which I think that might encourage more people to sign on as part time brand partners.

Speaker 5

But are you, I guess, getting incrementally more confident in stabilization?

Speaker 4

That's a great way to put it, Paul. Incrementally more confident is exactly what we should say. I think we'll put that on a T shirt. But yes, I think that as we see things start to stabilize in the market as a whole, it makes us more reassured that we are heading in the direction of what we want the future of our brand partner base to look like.

Speaker 5

Okay. All right. Thanks for that. And then just switching gears, talking about your building. So I guess is this new buyer, Rockford Holdings, is that associated with the same group of investors as the original ones that bowed out Blue Led Group or is it a different group?

Speaker 2

Yes. Thank you. It is associated with the prior group. There's brothers involved, one with each group, and so it was kind of a fairly seamless handoff from one group to the other. But yet, it is a new group, so they're still going through their due diligence.

Speaker 5

Okay. Because, yes, that's what I was just going to ask about is I know that I guess the first group would have done their due diligence, right? I think they had 60 days of due diligence. And just curious why the second group, if they're associated, if they also need that sort of 60 day window. Is there something that they didn't, I guess, learn in the 1st due diligence period?

Speaker 2

Well, I said they're closely related, but still it is yet a different group. 1 of the prints are from Blue Ridge maybe wasn't comfortable, but one was still very comfortable. So he handed it off to Rockford, which is actually a brother. So yes, we're confident. Nothing has changed.

Speaker 2

It's just a new group and they still need to go through their due diligence and have their own lending partner.

Speaker 5

Fair enough. And so assuming that gets done as you anticipate, including commission costs, what do you think the total cost of selling the building is going to be? I don't know what sort of typical commission is for a commercial building down there.

Speaker 3

Well, we think we'll net $34,500,000 after commissions and expenses. So that'll be sufficient

Speaker 2

to pay off our borrowings with our bank.

Speaker 5

That's great. Okay. And then so your revolver with the bank, I know it steps down after you sell the building, but it matures on October 4th. I know you're going to be hopefully generating some pretty good free cash flow. Do you intend on operating without a line of credit after October 4th or are you looking for a different banking relationship?

Speaker 3

That's a complex question. We are the good news is that when I said the $34,500,000 will pay off the bank that includes paying off the letter of credit. So, the bank is offering us a $4,500,000 letter of credit post sale, which is a very positive thing. We're still evaluating what the right financing solution is and we have several different options. So, we but the good news is that BOK has offered us an operating line post close that will allow us to operate.

Speaker 3

We've got some vendors that we need to catch up that we've kind of delayed a little bit. And so, we'll have availability of $4,500,000 to fund operations going into the fall, which you know

Speaker 2

is our busy season, which

Speaker 3

if we're turning a lot of inventory into cash during that period, hopefully we'll be without a line by the end of the fall.

Speaker 5

Okay, great. And I suspect you don't want to count your chickens before they've hatched, but it looks like you'll end up having a book value per share somewhere in the neighborhood of like $6 to $7 once the building is sold and the bank is paid off. I know and you'll be generating significant free cash flow as you kind of work through your inventory. You did reference dividends in your press release, but why have you thought or has the Board thought about like maybe buying a big chunk of stock back through a Dutch auction tender offer or something which would boost the value of each remaining share pretty meaningfully, even if you buy back stock at a premium to what the stock price is right now?

Speaker 2

Yes, we have just like we've said in past quarters, we have all those tools at our disposal, whether it's while we're reducing debt by this transaction, but stock buyback, dividends, yes, we have options. We haven't, like you said, we're not counting any chickens before they patch. So that will be remains to be seen which direction we go. Okay. And then just lastly,

Speaker 5

curious just curiosity more than anything. The undeveloped land that you're retaining, do you have any sort of long term plan for that? Or is it just you're going to hold on to that for the foreseeable future and it's just sort of an option for somewhere down the road?

Speaker 2

Yes. So, bringing tenant, they're moving into space that was not part of our operations, but we still have needs for storage. And I hate to use land just for storage, but that's a possibility. Or once we get this thing right sized again and get going again, maybe it's further operations.

Speaker 5

Okay. So it sounds like you don't have plans to liquidate that at any point in the foreseeable future. That is more yes. Okay. Okay, great.

Speaker 5

Well, listen, that's it for me. Thank you very much for taking my questions.

Operator

Thanks, Paul. Thanks, Paul. Your next question comes from Frank Haire, Private Investor. Please go ahead.

Speaker 6

Hi, everybody. My question is, I have got kind of 2 questions, maybe 3. When the promotion that increased the brand partners was announced as a result of that, did the partners were they added through people recruiting to their downside, existing partners recruiting people or are they fresh with no upside person?

Speaker 4

That's a great question, Frank. We actually we don't do any direct recruiting. We count on our brand partners to spread the word, spread our mission and make that opportunity available. We did see some come in initially without somebody that they were wanting to sign up under as a sponsor. But as is part of our protocol, we automatically assign those to a sponsor just because that's how our structure works.

Speaker 6

Okay. If I would summarize that I would maybe conclude that your promotion was inspiring to the existing brand partners and then went out and got some new folks.

Speaker 4

That's absolutely correct. Perfect.

Speaker 5

Okay.

Speaker 6

The previous caller had mentioned buying back shares of stock or dividends and I've been a shareholder for quite a while and I did appreciate the dividends as very attractive. I guess I'm wondering what does your banker think about starting to buy back stock or pay dividends at this point in time?

Speaker 2

Well, yes, we didn't commit to doing it at this point in time. They would not yet be in favor of that. It's just once we are out of debt with our current lender and potentially moving to a different lender or whatever our future may be, then we would look at it. It's not going to be before we execute this sale transaction.

Speaker 6

Okay. One more is that if I took my notes correctly, you have you think you have $30,000,000 of excess inventory?

Speaker 2

Unfortunately, yes.

Speaker 6

Okay. Any great idea on how to get rid of that? You haven't thought of?

Speaker 2

Well, yes, there's been a lot of people that try to advise us. Now, it's very delicate. We don't want to do anything that would damage our current business model. So we're using tactics like discounting and things like that. And we've done on decreased sales, we've still moved a lot of inventory.

Speaker 2

So it's working well. We're staying within the confines of our the restrictions put on us by the bank within our line of credit. So everything we're doing so far is working. But yes, we're going to get into the fall, which is normally at a higher selling time, so that should reduce inventory. But like we've said before, this is all good inventory.

Speaker 2

It's not it doesn't need to be written off or written down or anything like that. It's still very, very salable product. So we're just going to turn it into cash and get stronger.

Operator

There are no further questions at this time. I would hand over the call to Craig White for closing comments. Please go ahead.

Speaker 2

Thanks everyone for joining us on our call today. Just as a heads up, because of the timing of the 4th July holiday, we will be filing our 10 Q on Monday. So again, appreciate your continued support and look forward to providing you additional update in October. Thank you.

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

  • The company reported a $1.3 million net loss (or $0.15 per share) in Q1, up from a $0.9 million loss ($0.11 per share) a year ago, driven by aggressive promotional discounts to boost cash flow.
  • Net inventory declined by $2.9 million to $52.7 million, but management still cites approximately $30 million of excess inventory that is tying up working capital.
  • Executed a $35.5 million sale-leaseback of its headquarters with closing expected by Q3, which will eliminate existing bank debt and improve liquidity.
  • Signed a new triple-net lease on half of its 220,000 sq ft headquarters for 5 years (plus a 5-year extension), securing stable lease income and enhancing monthly cash flow.
  • Sales and marketing promotions, including a week-long site-wide sale and post-convention activation, added over 3,700 new brand partners, stabilizing the active partner count around 15,000.
AI Generated. May Contain Errors.
Earnings Conference Call
Educational Development Q1 2025
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