Educational Development Corporation (EDUC) Q2 2024 Earnings Conference Call Transcript

Educational Development Corporation (NASDAQ:EDUC) Q2 2024 Earnings Conference Call October 12, 2023 4:30 PM ET

Company Participants

Steven Hooser - IR

Craig White - President and CEO

Dan O’Keefe - CFO

Heather Cobb - Chief Sales & Marketing Officer

Conference Call Participants

Randy Freed - R L Capital LLC

Operator

Good afternoon, ladies and gentlemen. Welcome to the Educational Development Corporation Second Quarter Fiscal Year 2024, Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, October 12, 2023.

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 use 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 Hooser, Investor Relations. Please go ahead.

Steven Hooser

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's second quarter earnings call.

On the call with me 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 close this afternoon, the company issued a press release announcing its results for the fiscal second quarter. The release is available on the company's website at www.edcpub.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.

With that, I'd now like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?

Craig White

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 the call over to Dan and Heather 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 second quarter, 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 levels stabilized during the second quarter.

The ripple effect of the rebrand process that we rolled out in January of this year has diminished, and every active brand partners through the end of August has either joined as a PaperPie brand partner or made a sale this calendar year as a PaperPie brand partner. We expect this summer to be an inflection point for our brand partner head count 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 Usborne products. Under our previously announced updated distribution agreement with this vendor, sales to retail customers are being supplied by another distributor. The decrease in Usborne sales was partially offset by strong orders of our Kane Miller books and from our Learning Wrap-Ups and Smart Lab Toys product lines. 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 PaperPie division that Heather will talk further about later in the call, to not only make our brand partners more successful, but also entice new brand partners to join PaperPie. Brand partner success generates additional brand partners, 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 the financials.

Dan O’Keefe

Thank you, Craig. Our fiscal second quarter results compared to the second quarter of last year. Net revenues of $10.6 million, a decrease of $8.8 million or 45% compared to $19.4 million. Average active PaperPie brand partners for the quarter totaled 18,100 compared to 26,800 in the second quarter last year, a decrease of 8,700 or 33%.

Earnings before income taxes totaled $1.5 million, an increase of $2.6 million compared to a pretax loss of $600,000 in the second quarter last year. After tax income totaled $1.1 million compared to an after tax loss of $800,000 in the second quarter 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. To update everyone on our inventory and working capital levels, net inventories decreased $5.7 million from $67.6 million at August 31, 2022, compared to $61.9 million on August 31, 2023.

Now for our working capital update. Our borrowings on our working capital line of credit totaled $9.7 million 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 banks. 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 re-classing our existing mortgage secured term loans back to long-term debt. Under the terms of the new agreement, the line of credit includes monthly step-downs from $10.5 million at August 31, 2023, to $4 million 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 million and is listed as restricted cash on our balance sheet. The cash reserve was increased to $1.5 million in September and is scheduled to increase again to approximately $2 million in October.

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?

Heather Cobb

Thank you, Dan. As Craig mentioned earlier, we continue to make changes to bring new success to our brand partners. As an example, during June and 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 to 30% off for 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.

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 has 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 this 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. 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 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 Smart Lab Toy 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?

Craig White

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 $3.8 million 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 paydowns in our line of credit with our bank and cash reserves held by our credit card processor.

Our primary focus continues to be paying down our debt and reducing our interest expense, which will improve our overall financial performance. To this end, we have recently listed and contracted for sale our old building for $5.1 million, 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 three years, after which we plan to consolidate our reduced inventory levels into our headquarters, further improving profitability.

We are also continuing to turn inventory into cash, which will be most evidenced in this third quarter, 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. I have had questions recently and some of you on the call may add 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 we continue to look for every opportunity to improve bottom line performance. We will continue on this path until we reach profitability. 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.

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.

Question-and-Answer Session

Operator

Thank you, Craig. Ladies and gentlemen, our Q&A session is now open. [Operator Instructions] Your first question comes from the line of Edward Norcini [ph]. Your line is open. Edward Norcini, your line is open.

Unidentified Analyst

Okay. This question is for Dan. How are you? Last time we spoke, the company had a conflict with Usborne about the discount of $1 million because you didn't send them, I believe, a letter of credit. Has that discount conflict been resolved, or can you update me on that?

Dan O’Keefe

Sure. It's unresolved. Usborne 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.

Unidentified Analyst

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

Craig White

Can I? [Multiple Speakers].

Unidentified Analyst

Yeah.

Craig White

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.

Dan O’Keefe

Yeah. Ed, I'll also say that when that does happen to companies and their stock does go below the minimum limit for the -- 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. We would most probably do a shareholder action to reverse the stock split and do reverse stock split and reduce number of shares and increase the value, and continue trading on NASDAQ.

Unidentified Analyst

That's something in your planning book?

Dan O’Keefe

In the company -- a reverse stock. What companies do to maintain their listings on NASDAQ or New York Stock Exchange if their share price goes below the minimum business level?

Unidentified Analyst

I see. Okay. Well, that's a fear of any investor if you'd be delisted from the NASDAQ, then you're not allowed -- we won't be allowed to trade or buy or sell your company. Okay. That's it for me. Good luck, what you're -- and also that that money you got from the government. I read somewhere that they are auditing employment retention credits. Is that money free and clear? Or is that up in the air?

Dan O’Keefe

We'll still be audited, but we received the money and deposited in that. Fortunately, the government's checks cleared the bank. So I think we've got it now.

Unidentified Analyst

That's great. Okay, that's it for me. Thanks.

Dan O’Keefe

Thank you, Edward.

Operator

Thank you. Your next question comes from the line of Richard Denis [ph], Private Investor. Your line is open.

Unidentified Analyst

Yeah. Good afternoon, everybody. A couple of quick questions for you. The sale leaseback of the warehouse facility, is that still scheduled to close in October?

Craig White

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.

Unidentified Analyst

Okay. Great. And the brand partner levels that started to climb in August, have those trends continued in September and October?

Dan O’Keefe

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.

Unidentified Analyst

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

Dan O’Keefe

We typically don't get into monthly reporting of our active brand partner count, no. We're satisfied with the way it's trending.

Unidentified Analyst

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

Operator

And your next question comes from the line of Randy Freed from R L Capital, LLC. Your line is open.

Randy Freed

Hello, can you hear me?

Dan O’Keefe

Yes. Yes, Randy.

Randy Freed

Hi. I got two questions. The first one is for Dan. And I am somewhat familiar with the employee retention credit because I'm a CPA also. So I want to expand a little bit on that other gentleman's question. My question to you is, that was part of The CARES Act. We know 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 $3.8 million credit. But how confident are you that you met all the criteria and that if you do, in fact, get audited that they'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? That's my first question Thank you.

Dan O’Keefe

Well, nobody -- and I'll concur with you. I don't think we want to be audited there. 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 they're -- 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. But they are a very large nationally recognized firm that does this.

Randy Freed

Okay. 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 check that shows about open market purchases or sales of company shares by the officers. And I haven't seen anything really on there for any of you three. Have any of you three bought any shares in the open market recently. 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 if any of these three buy any shares and do you have any plans to do so?

Dan O’Keefe

Yeah. 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 dollars.

Randy Freed

Okay. So you're all three are you're doing that buying a few shares through payroll withholdings. 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, all three through payroll withholding?

Dan O’Keefe

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

Randy Freed

It's in your 401(k) 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(k) plan for open market purchases right now?

Dan O’Keefe

Yeah. Let me be real clear, Randy. We are taking our payroll dollars that were -- 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.

Randy Freed

Got you. Okay. Thank you very much.

Dan O’Keefe

Thank you.

Operator

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

Craig White

Thanks, everyone for joining us on our call today. We appreciate your continued support and look forward to providing an 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.