Q3 2024 Educational Development Corp Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the educational Development Corporation third quarter fiscal year 2024 earnings call.
This time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance.
Please press star zero for the operator.
This call is being recorded on Thursday January 11th of 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 1095.
Actual results may differ materially from those expressed or implied due to a variety of factors.
We refer you to educational development corporations 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 Alan and good afternoon, everyone. Thank you for joining us today for educational Development Corporation third quarter earnings call.
Steven Hooser: 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.
After the market closed this afternoon the company issued a press release announcing its results for the fiscal third quarter. The release is available on the company's website at Www Dot EDC pub dot com. Additionally, as the operator noted today's conference call and prepared remarks are being recorded and there are.
Steven Hooser: Forward looking statements.
Steven Hooser: I would now like to turn the call over to Craig White, the company's President and Chief Executive Officer, Greg.
Craig White: Thank you Steven and welcome everyone to the call.
Craig White: I will start today's call with some general comments regarding the quarter, then I will pass the call over to Dan Heather to run through the financials and provide an update on sales and marketing.
Dan Heather: Finally, I will wrap up the call with some comments on strategy in fiscal 2020 for outlook.
Dan Heather: We are encouraged as we have seen our active brand partner count stabilize this summer and remain at consistent levels through our fiscal third quarter, which is traditionally our largest sales quarter of the year.
Dan Heather: During the third quarter, our sales within our paper Pie Division decreased approximately 30% from third quarter last year, primarily due to a lower active brand partner levels.
Dan Heather: Sales in our publishing division were also lower this quarter due to the stoppage of selling <unk> products. As a reminder, this was in part due to our new distribution agreement with <unk> publishing that we entered into may of last year How's.
Dan Heather: However, the decrease in <unk> sales were partially offset by a strong orders for our new product lines Smart lab toys.
Dan Heather: Along with increased sales of Kane Miller books. Good morning wrap ups products, we continue to be excited about the demand for all of our products and especially when we look at the growth opportunities within Smart lab toys, where we have only introduced 25 initial products through the third quarter.
Dan Heather: 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.
Dan Heather: These changes impacted our third quarter operating profits, but we're aligned with our goals to intentionally reduce our excess inventory levels and improve long term brand partner success.
<unk> partner success generates future brand partner's success and that continues to be our number one focus.
Dan Heather: With that I will now turn the call over to Dan or keep to provide a brief overview of our financials. Thank you Craig.
Dan: Through our fiscal third quarter results compared to the third quarter last year net revenues for the third quarter totaled $16 9 million, a decrease of $13 4 million or <unk>, 44% compared to $30 3 million in the third quarter last year.
Dan: Average active brand pipe paper Pie brand partners for this quarter totaled 16400 compared to $21 27100 in the third quarter last year, a decrease of 10739%.
Dan: Earnings before income taxes totaled $2 7 million compared to a breakeven level of earnings before taxes in the third quarter last year.
Dan: After tax income totaled $2 million compared to breakeven last year.
Dan: <unk> per share for the quarter totaled 24.
Dan: To update everyone on our inventory and working capital levels net inventories decreased $6 3 million from $64 3 million at November 30 of 2022 compared to $57 9 million at November 32023.
Dan: Now for a working capital update.
Dan: Our working capital line of credit borrowed was $5 million at the end of the quarter.
Dan: On November 32023 during the quarter. The company met our line of credit stepped down requirements from $13 5 million in August to $5 million in November as outlined in the company's credit agreement with our bank.
Dan: Subsequent to the end of the quarter. The company executed the fourth amendment to its credit agreement with increased borrowing availability to $8 million and enables us to purchase new inventory of $2 1 million between December one 2023 and March 31 2024.
Dan: 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 Hilton T complex, which Craig will touch on briefly.
Dan: The proceeds from the sale of the Hilton complex will be used to pay down the line of credit and term loans with our banks.
Dan: Also during the third quarter the company switched our credit card processor from Paypal to Nexium, which released a majority of the increased reserves of cash held during the quarter.
Speaker Change: 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.
Thank you Dan.
Heather Cobb: Greg mentioned earlier, we continue to make changes to bring new success to our brand partners. As an example, during the third quarter, we ran several promotions, including site wide sales and 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.
Heather Cobb: In addition, as Craig mentioned in September we began offering $5 flat rate shipping on our e-commerce orders with free shipping taking effect at $30.
Heather Cobb: This change in shipping charges has been well received from our customers and brand partners alike.
Heather Cobb: On January 3rd at this year, we celebrated the first anniversary of the reveal of paper Pi, marking the rebrand of our direct sales divisions. This milestone is important as it provides an opportunity for reflection assessment and celebration and marks the completion of the introduction of this new brand not just the outward mark.
Heather Cobb: Like our name colors and logo, but also more intrinsically our mission of gathering forget 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 the three brands.
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.
Our retail sales team continues to focus on opening new accounts and selling to our established customers.
Heather Cobb: 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.
Heather Cobb: We are continuing to introduce new smart lab toys in fiscal 2025, which we expect will continue to have a positive impact on our sales within this division.
Heather Cobb: This concludes our sales and marketing update I will turn the call back over to Craig for closing remarks, Greg.
Craig: Thank you, both Heather and DN now I'd like to talk about some recent changes before opening the call up for questions. During the second 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-19.
During the third quarter, we lifted and sold our old headquarters building, which is primarily used for warehousing for $5 1 million.
Craig: The funds received from the sale were used to pay down our term loans with our bank paying.
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.
Craig: To continue this focus of improving our financial profile. We have recently listed our current headquarters consisting of approximately 402000 square feet of office and warehouse space for $40 million.
Craig: The proceeds from this sale are expected to pay all of our line of credit and term loans with our bank as.
As part of the listing we have agreed to lease back the property to continue our normal business operations. The terminal leaseback will be contingent on the offers received and are proposing a leaseback period of approximately seven years.
Craig: We believe selling this building and executing a lease back you assume the best interest of our long term shareholders and strategic.
Craig: <unk> direction.
Craig: Repaying our bank debts, and removing future interest expense is the fastest path to restoring our long history of profitability.
Craig: We also expect to generate a significant amount of cash from reducing our excess inventory levels as of November 32023, we have approximately $30 million of excess inventory selling this inventory through our existing sales channels, we will have a significant impact on our overall liquidity and profitability.
Craig: During the quarter. We also continued our focus on reducing costs, while there's no magic wand to cut our way to profitability. We look for every opportunity and are laser focused on improving our bottom line results.
Craig: 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.
Craig: Now that we are providing a summary of some recent activity I'll turn the call back over to the operator for question and answers.
Craig: Operator.
Operator: Thank you ladies and gentlemen, we will now begin the question and answer session.
Operator: You have a question. Please press star one on your Touchtone phone.
Here are three tonne prompt acknowledging your request and your questions will be pulled in the order of the <unk>.
Operator: If you have if you would like to withdraw from the question queue. Please press star two.
Operator: If you are using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
Speaker Change: Your first question comes from Paul Carter of Capstone asset management.
Paul Carter: Your line is already open.
Paul Carter: Thank you thanks for taking my questions.
It looks like your inventory just for the quarter was down about $4 million.
Paul Carter: So what was your cash flow from operations for the quarter, if you have that.
Speaker Change: Well the.
Speaker Change: Cash flow from operations.
Speaker Change: Don't have that in front of me it'll be published.
Speaker Change: We're publishing the Q later today.
Speaker Change: Today at four o'clock.
Speaker Change: So.
The overall.
Speaker Change: Profitability for the quarter was driven from the sale of our old headquarters building.
Speaker Change: Which generated a gain of approximately $4 million.
So from an operational viewpoint.
Speaker Change: We were not profitable for the quarter.
Speaker Change: But at a profitability before tax line, we were profitable.
Right, but I'm thinking if your inventory came down $4 million.
Speaker Change: There might have been some positive cash from operations to offset the operating loss.
Speaker Change: With inventory dropping $4 million in operational losses of $1 million in cash flow from the inventory reduction we would've generated.
Speaker Change: Three or $4 million of cash flow that was you all used to pay down the line of credit.
Speaker Change: As I mentioned in the call Paul.
Speaker Change: We reduced our line of credit with our bank.
Paul Carter: 13, a half million down to $5 million at the end of November.
Paul Carter: Okay.
Speaker Change: Great and then <unk>.
Speaker Change: You're launching your new E Commerce platform later this month.
Speaker Change: And I imagine there is other sort of capex items.
Speaker Change: What's kind of the Capex that you are 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 Change: Our ongoing Capex is primarily tied to.
Speaker Change: Development of our internal systems are not.
Speaker Change: <unk> Capex is less than a couple of hundred thousand dollars a year.
Speaker Change: But our capex.
Speaker Change: Spent.
Speaker Change: A significant amount over the last year, but thats been reduced significantly as we're now getting ready to launch our new E Commerce platform.
Speaker Change: So we right now our capex.
Speaker Change: We don't have a budget for next year, but it will be greatly reduced from where we were expecting it to be greatly reduced from water Capex was this year.
Speaker Change: Okay.
Speaker Change: Great.
Speaker Change: Just sort of bigger picture. So your third quarter net revenue was like $17 million.
Speaker Change: Third quarter is a good quarter for you typically so seasonally adjusted it means that right now you are running that.
Speaker Change: Annual kind of run rate of somewhere in the neighborhood of like $40 million of net revenue give or take.
Speaker Change: So if you stabilize that net revenue.
Speaker Change: The $40 million level, you'll be doing something like I don't know 2720 $8 million in gross profits depending on.
Speaker Change: A lot of different factors of course, but are you confident that you can get to consistent.
Speaker Change: Sort of operating profitability at that level, if you like.
Speaker Change: I guess, just assume no growth even with the increase in the rent expense that youre going to have to take on going forward. Once that once you sell your building.
Speaker Change: Yes, we do feel confident that we can.
Speaker Change: We've reduced expenses a great deal just from the last eight months.
Speaker Change: We anticipate that.
Speaker Change: Selling the building.
Speaker Change: The net from our.
Lease payments from our interest expense will still be a positive.
Speaker Change: So that's the biggest expense, but I will also say in the last six months, we've had to do things.
Speaker Change: Kind of in a short term strategy.
Speaker Change: To generate cash to pay back the bank.
Speaker Change: Some of those things were not as profitable as our historical levels. So.
Speaker Change: We'll have to evaluate that going forward, whether that will still remain.
Speaker Change: To be necessary or we can trying to get back to normal operations.
Speaker Change: Now addressing the normalized 40 millions, we're not happy with that level of sales and we're doing everything we can to increase sales and there's only so much we can do to cut costs.
Speaker Change: Yes.
Speaker Change: Personnel was a big expense, but we're kind of about as low as we're going to be.
Speaker Change: So there is not much more cutting that we can do we need to increase sales at this point.
Speaker Change: Yes, I guess that was sort of the gist of my question is I mean, I know you want to.
Speaker Change: Increased sales, but the <unk>.
Speaker Change: Western is do you need to.
<unk>.
Speaker Change: If you don't just because of macro issues or whatever.
Kids are on their computer is rather than looking at books or what have you if that just sort of stabilizes at $40 million.
Speaker Change: I mean as EDC.
To get to operating profitability.
Yes, we can.
Speaker Change: Okay.
Speaker Change: Okay great.
Speaker Change: And then I know you mentioned and you've mentioned in the past reinstating your quarterly dividend. This is it.
Speaker Change: Pretty big priority for you and the board.
So I know.
Speaker Change: Even if you get too.
Speaker Change: Kind of.
Speaker Change: You don't even have to get to like operating profitability or GAAP profitability of if youre working down your inventory you are going to be free cash flow positive would you consider starting up the dividend before you get to operating profitability. If you can see sort of profitability on the horizon.
Speaker Change: That's a good question.
Speaker Change: There is some.
Theres some hurdles in the way right now.
Speaker Change: I would say anything is possible, but we would definitely want to be confident that profitability is on the horizon before we reinstated.
Speaker Change: Yes.
So.
I don't anticipate it this quarter or maybe even next quarter, but it's something we're always looking at.
Speaker Change: Okay, Alright thats helpful.
And then just shifting gears a little bit so.
Speaker Change: I know a couple of months ago.
John Caracole resigned from the board it looks like it was kind of abruptly after I think had been on the board for almost 20 years.
Speaker Change: Cynthia as 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 can you discuss the circumstances around that.
At all.
Speaker Change: Yes, yes sure.
Speaker Change: Well.
Speaker Change: Kind of.
Speaker Change: So more personal he had some health issues back in the summer in knees is 82 years old He was just a <unk>.
Speaker Change: Looking to spin time, his time and other ways. There was no disagreements there is no.
Speaker Change:
There is no fight.
Speaker Change: In the circumstances around why he left so it was just it was just time for him.
Speaker Change: Okay, because it just I mean, the timing of that was right sort of.
Speaker Change: Pretty closely aligned to the decision to.
Speaker Change: To sell the healthy headquarters and I was wondering if that had anything to do with it.
Speaker Change: Yes.
Speaker Change: For he had no discrepancies or disagreements with management that was just a coincidence. He did not disagree with our decision to sell the buildings.
Speaker Change: Totally agree okay great.
Speaker Change: It was a unanimous vote on the consent list the building for sale.
Speaker Change: So he agreed to that before he resigned from the board.
Speaker Change: And I will say further that.
Speaker Change: I've mentioned.
Speaker Change: His age is not necessarily in NASDAQ guidelines for an ideal board of director.
Speaker Change: And his replacement.
Speaker Change: In this the audit Committee chair.
Students as a financial expert has a long history is.
Speaker Change: In public accounting and as a partner in public accounting and so we were.
Speaker Change: We're very happy with the replacement for the Audit Committee and the addition of the New Board member last year.
Speaker Change: Okay, So I know youre.
Speaker Change: Youre not onside with NASDAQ right now you need to add another independent director where are you in the process of that.
Yes, good question and we have until our next.
Speaker Change: Annual shareholders meeting, which is in July.
Speaker Change: Got some candidates.
Speaker Change: Going to start interviewing in the next couple of weeks I'm very solid candidates from the MLM industry. So.
Speaker Change: We're very feel very positive about our possibilities there.
Okay, and then just sort of last question really big picture, but.
I mean, obviously youre a publicly traded company public.
Speaker Change: Company costs are.
Speaker Change: Extremely high I would think relative to kind of the size of your company.
Speaker Change: Have you thought of any.
Speaker Change: Either sort of no longer being public or doing a going dark.
Transaction to.
Speaker Change: Just kind of reduce costs.
Speaker Change: I sort of wonder from a from an investor point.
Speaker Change: Point of view like doing it going dark transaction, probably wouldn't hurt you at this point and Conversely bean.
<unk> large large shareholder in the company.
Doing like.
Speaker Change: Take private transaction or something might might be palatable is that something you guys have considered.
Not anything that we've discussed would rank order or made any kind of management recommendations in that direction.
What the future holds as what the future holds right.
But.
Speaker Change: From a from a management recommendation.
Speaker Change: Outside.
Speaker Change: Approach, we have not been approached by anybody nor have we made any recommendations to.
Speaker Change: Our board to go private.
Speaker Change: Okay, Alright, well that's it for me.
Speaker Change: So far over to others. So thank you very much thank.
Speaker Change: Thank you Paul Thanks, Paul have you backed by the way.
Yes. Thanks.
Speaker Change: Your next question comes from Philip Smith private Investor Your line is already open.
Philip Smith: Thank you Greg I just had a quick question regarding the status of the contractually required purchases from US born book.
Good question.
Philip Smith: We have not met the contractual agreement but.
Philip Smith: They have not they have not given us any indication that theyre going to take any action. They understand where we are what the environment holds.
Philip Smith: Many many many publishers.
In this space are kind of facing the same thing so theyre not pressing right now for that so.
Philip Smith: I don't anticipate that's going to be a concern.
Philip Smith: Short term future.
Okay. So nicola.
Philip Smith: Isn't pushing back and making any demands at this point.
Philip Smith: Not at this point she is yes, she understands the environment.
Speaker Change: Okay. Thank you very much.
Speaker Change: Phil.
Speaker Change: Your next question comes from Daniel Boston Private Investor Your line is already open.
Daniel Boston: Hi, Craig.
Hello.
Daniel Boston: Hi, I've just got a short question do you have does the board have some sort of valuation in mind.
Daniel Boston: The business as well just in terms of.
Daniel Boston: How they look at how you guys look at that how you value. The company, how you value the different parts of that Smart lab toys learning ramp ups that sort of stuff do you have like a sort of figure that the board thinks is a fair value for the company at the moment.
Well the.
There's lots of ways to look at that.
Daniel Boston: Certainly the.
Daniel Boston: The management team doesn't feel that the trading value is reflective of what our real value is.
Daniel Boston: We have a book value of <unk>.
Daniel Boston: $5 a share.
Daniel Boston: So I mean.
Daniel Boston: And we have no goodwill on our books.
Daniel Boston: So you know.
Daniel Boston: I think that.
Daniel Boston: We're trying to get back to.
That level first.
Daniel Boston: I mean, the book value is.
All in inventory.
Daniel Boston: And buildings and the buildings are built.
Daniel Boston: Carrying value of the buildings don't reflect the actual value because we're carrying in the building.
Less than $20 million and we're looking at selling it for $40 million.
Daniel Boston: Yes.
Daniel Boston: The.
It is like a net present value that you've got.
Daniel Boston: Inventory because obviously those.
Daniel Boston: $57 $9 million on the books, but after all those sort of costs and everything do you have like a sort of net present value of that inventory is sort of what's in today's money.
Daniel Boston: We believe it's worth.
Daniel Boston: The carrying value for sure because otherwise we'd have to write it down.
Daniel Boston: So our carrying value of our books are typically about 25%.
Daniel Boston: Of the retail value that we sell them for.
Daniel Boston: Right.
Daniel Boston: So we believe the inventory is definitely worth the carrying value of $57 million.
Speaker Change: Yes, and in terms of just sort of like the learning wrap helps business smaller toys.
Speaker Change: What's the sort of growth trajectory within that could that sort of a separate business to the to the <unk>.
Speaker Change: I was born books that sort of thing.
Speaker Change: Can you.
Speaker Change: Repeat that question one more time.
Speaker Change: The question is on whether learning wrap ups and smaller toys is something that investors should treat separately.
Speaker Change: The other part of the business and so I think that was borne products.
Speaker Change: No. Its just another product line or another couple of product lines that we sell I mean, the cost of goods between US born in some of our other books versus learning wrap ups and smart lab is different.
Speaker Change: But.
Theyre not significantly different smart lab.
Speaker Change: Focused a few times in this presentation just because it's new we're very excited sales are going very well.
Speaker Change: We have a great release plan over the next 18 months. So we're excited about that but.
Speaker Change: They shouldnt be treated differently than anything else we sell.
Speaker Change: Okay. Thank you.
Speaker Change: Right.
Speaker Change: Thank you.
Speaker Change: There are no further questions at this time.
Speaker Change: I would hand over the call to Craig White. Please proceed.
Craig White: Thank you.
Craig White: So a little bit of late breaking news no. One asked me about them a little bit surprised that.
Craig White: While we don't have final confirmation from NASDAQ itself.
Craig White: Today does mark the 10th day above a dollar threshold unless we expect to regain compliance so.
Craig White: We don't anticipate that that's something that we will have to worry about again in the near future. So.
Craig White: That's a good a good piece of news there.
Speaker Change: Anyway. Thank you everyone for joining us on the call today. We appreciate your continued support and look forward to providing an additional update in January of 2024. Thank you.
Speaker Change: Good day.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Okay.