Educational Development - Q1 2025

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the Educational Development Corporation's Q1 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. 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, 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. 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.

John Beisler (Investor Relations)

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

Craig White (President and CEO)

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 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 Q3, which will be on our company's website at edcpub.com. 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 the 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 Hilti Complex, and provide some comments on strategy and fiscal 2025 outlook. Our Q1, as well as previous quarters of fiscal 2024, were driven by strategic decisions for 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. With that, I would like to turn the call over to Dan O'Keefe to provide a brief overview of the financials.

Dan O'Keefe (CFO)

Thank you, Craig. To our Q1 summary, compared to the prior Q1, net revenues were $10 million, compared to $14.5 million. 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 $1.7 million, compared to a loss of $1.2 million in the Q1 last year. Net loss totaled $1.3 million, compared to $0.9 million, 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 $2.9 million from $55.6 million at the end of February 28, 2024 to February 29, 2024, to $52.7 million at May 31, 2024.

Now for working capital update. Our working capital line of credit borrowed was $5.5 million at the end of February 2024 and $5.6 million at the end of May 2024, with $1.4 million of availability at the end of the Q1. That concludes the financial update. I'll now turn the call over to Heather Cobb to talk about sales and marketing opportunities in further detail. Heather?

Heather Cobb (Chief Sales and Marketing Officer)

Thanks, Dan. As Craig mentioned earlier, we continue to make strategic choices and changes to bring new initiatives for success to our PaperPie brand partners. We had a May site-wide sale promotion, where we hosted an exciting week-long sale, 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, Dr. 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 for 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. 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 the summer.

Both our PaperPie 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 from Kane Miller, educational manipulatives from Learning Wrap-ups and STEAM-based kits and products from SmartLab Toys. That concludes our sales and marketing update. I'll turn the call back over to Craig for closing remarks. Craig?

Craig White (President and CEO)

Thank you both, Heather and Dan. One of, if not the biggest event in fiscal 2025, is the anticipated sale and lease, 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, build positive cash position as we continue to work down our excess inventory level, which was approximately $30 million at year-end. On June 6, we executed our sale leaseback agreement for the Hilti Complex, totaling $35.5 million. 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 $4.5 million. The building sale agreement calls for a 60-day due diligence period, with an additional 30 days to close the transaction.

So we expect the building sale will be complete by the end of second fiscal quarter or the start of the third fiscal quarter. Additionally, starting July 1, 2024, we have leased approximately half of our 220,000 sq ft 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.

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 less for our products and shipping. Our sales force is grateful and excited coming 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.

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

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Our first question comes from Paul Carter of Capstone Asset Management. Your line is already open.

Paul Carter (Portfolio Manager)

Thank you. Good afternoon, everybody.

Heather Cobb (Chief Sales and Marketing Officer)

Hi, Paul.

Paul Carter (Portfolio Manager)

Just to start, so the $10 million of net revenue, how is that split between PaperPie and your publishing division?

Craig White (President and CEO)

About 85/15, Paul.

Paul Carter (Portfolio Manager)

Okay.

Craig White (President and CEO)

Similar to pretty much every other quarter. Yeah.

Paul Carter (Portfolio Manager)

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

Heather Cobb (Chief Sales and Marketing Officer)

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

Paul Carter (Portfolio Manager)

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 at, you know, 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, as part-time brand partners. But are you, I guess, getting incrementally more confident in stabilization?

Heather Cobb (Chief Sales and Marketing Officer)

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, you know, I think that, I think that as we see things, you know, start to stabilize in the market as a whole, it makes us more reassured that we are heading in the direction of, you know, what we want the future of our brand partner base to look like.

Paul Carter (Portfolio Manager)

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

Craig White (President and CEO)

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

Paul Carter (Portfolio Manager)

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

Dan O'Keefe (CFO)

Well, I said they're, they're closely related, but still it is yet a different group. One of the principals from Blue Ledge, maybe wasn't comfortable, but one was still very comfortable, so he handed it off to, Rockford, which is actually a brother. So, yeah, we're confident nothing has changed. It's just a new group, and they still need to go through their due diligence and have their own lending partner.

Paul Carter (Portfolio Manager)

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, is going to be? I, I don't know what sort of typical commission is, for a commercial building down there.

Dan O'Keefe (CFO)

Well, we think we'll net, you know, $34.5 million after commissions and expenses, so that'll be sufficient to pay off our loans with our bank.

Paul Carter (Portfolio Manager)

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 fourth. I know you're gonna be, hopefully generating some pretty good free cash flow. Do you intend on operating without a line of credit after October fourth, or are you looking for a different, banking relationship?

Dan O'Keefe (CFO)

That's a complex question. The good news is that when I said the $34.5 million will pay off the bank, that includes paying off the letter of credit.

Paul Carter (Portfolio Manager)

Yeah.

Dan O'Keefe (CFO)

So the bank is offering us a $4.5 million letter of credit post-sale, which is a very positive thing. You know, we're still evaluating, you know, what the right financing solution is, and we have several different options. But the good news is that BOK has offered us an operating line post-close that will allow us to operate. You know, we've got some vendors that we need to catch up, that we've kind of delayed a little bit. And so, you know, we'll have availability of $4.5 million to, you know, fund operations going into the fall, which, you know, is our busy season, which.

Paul Carter (Portfolio Manager)

Yeah

Dan O'Keefe (CFO)

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

Paul Carter (Portfolio Manager)

Okay, great. And I suspect you don't wanna 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-$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, you know, through a Dutch auction tender offer or something, which would boost the value of each remaining share pretty meaningfully, like, even if you buy back stock at, you know, a premium to what the stock price is right now?

Dan O'Keefe (CFO)

Yeah, we have, just like we've said in past quarters, we have all those tools at our disposal, whether it's... Well, we're reducing debt by, you know, this transaction, but stock buyback, dividends, yeah, we have options. We haven't, like you said, we're not counting any chickens before they've hatched, so, that will be, remains to be seen, which direction we go.

Paul Carter (Portfolio Manager)

Okay. And then, just lastly, 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 gonna hold on to that for the foreseeable future, and it's just sort of an option for somewhere down the road?

Dan O'Keefe (CFO)

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

Paul Carter (Portfolio Manager)

Okay. So it sounds like you don't have plans to liquidate that at any point in

Dan O'Keefe (CFO)

Not yet

Paul Carter (Portfolio Manager)

The foreseeable future. That's more... Yeah.

Dan O'Keefe (CFO)

Okay. Okay, great. Well, listen, that's, that's it for me.

Paul Carter (Portfolio Manager)

Thank you very much for, for taking my questions.

Heather Cobb (Chief Sales and Marketing Officer)

Thanks, Paul.

Dan O'Keefe (CFO)

Thanks, Paul.

Operator (participant)

Ladies and gentlemen, as a reminder, if you have a question, please press star one. Your next question comes from Frank Hyer, private investor. Please go ahead.

Frank Hyer (Director of Projects)

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

Heather Cobb (Chief Sales and Marketing Officer)

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.

Frank Hyer (Director of Projects)

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

Heather Cobb (Chief Sales and Marketing Officer)

That's absolutely correct.

Frank Hyer (Director of Projects)

Perfect. Okay, 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, what is your-- what does your banker think about starting to buy back stock or pay dividends at this point in time?

Craig White (President and CEO)

Well, yeah, 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 gonna be before we execute this sale transaction.

Frank Hyer (Director of Projects)

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

Craig White (President and CEO)

Unfortunately, yes.

Frank Hyer (Director of Projects)

Oh, okay. Any, any great idea on how to get rid of that? Do you have a thought of?

Craig White (President and CEO)

Well, yeah. There's been a lot of people that try to advise us. Now, it's very delicate. We don't wanna do anything that would damage our current business model. So we're, you know, using tactics like discounting and things like that. And we've done, you know, on decreased sales, we've still moved a lot of inventory, so it's working well. We're staying within the confines of our, you know, the restrictions put on us by the bank within our line of credit. So everything we're doing so far is working. But yeah, we're gonna 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. 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 gonna turn it into cash and get more, get stronger.

Frank Hyer (Director of Projects)

Sounds great. Thank you, folks. Keep up the good work.

Craig White (President and CEO)

All right.

Heather Cobb (Chief Sales and Marketing Officer)

Thanks, Frank.

Operator (participant)

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

Craig White (President and CEO)

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

Operator (participant)

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