Educational Development Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, three months ended May 31, 2023; comparisons are with the three months ended May 31, 2022. The company sells children’s books, educational products and toys through PaperPie and Publishing. Results are unaudited and the company notes that sales are seasonal.
Financial performance
| Metric | Quarter ended May 31, 2023 | Prior-year quarter |
|---|---|---|
| Net revenues | $14.5 million | $23.2 million |
| Gross margin | $9.4 million; 64.5% of revenue | $15.3 million; 66.1% |
| Operating expenses | $10.2 million | $15.0 million |
| Interest expense | $0.7 million | $0.4 million |
| Net earnings (loss) | $(0.9) million; $(0.11) per share | $0.2 million; $0.03 per share |
| Operating cash flow | $1.2 million | $(2.2) million |
Revenue fell about 37% year over year. PaperPie revenue declined 37% to $12.6 million, with average active brand partners down 28% to 23,200. Publishing revenue fell 39% to $1.9 million, primarily reflecting the phaseout of Usborne retail distribution. PaperPie and Publishing segment operating income was $1.7 million and $0.5 million, respectively, compared with $3.3 million and $0.7 million. Lower expenses partly offset weaker sales; higher interest costs contributed to the net loss.
Cash increased to $0.9 million from $0.7 million at February 28, 2023. At May 31, current assets were $60.7 million and current liabilities were $53.9 million. Inventory was $62.3 million, including $6.0 million classified as long-term. Debt comprised $34.7 million of term loans and $11.0 million drawn on the revolving line; the term loans were classified as current because a future covenant default was expected. Revolver availability was approximately $3.0 million under the then-current $14.0 million commitment.
Material changes and management commentary
- PaperPie performance was affected by inflation, fewer active brand partners, the PaperPie rebrand and higher discounts and shipping promotions. Management expects rebranding disruption to ease after the summer; it expects inflationary pressure to continue through fiscal 2024.
- Publishing sales were affected by the end of Usborne retail distribution, which continued temporarily through April 30, 2023. The company still distributes Usborne products through PaperPie.
- Usborne represented approximately 51% of PaperPie gross sales and 67% of Publishing gross sales in the quarter. The company did not meet the distribution agreement’s minimum purchase requirements, provide the required letter of credit, or make certain payments on time. Usborne had not notified the company of termination as of the filing. The company is disputing Usborne’s refusal to pay a $1.0 million volume rebate and has not recognized it.
- Operating cash flow benefited principally from lower inventory and higher accounts payable, deferred revenue and collections; it was partly offset by lower accrued liabilities. Capital expenditures were $0.3 million, primarily software upgrades. Financing cash use included $0.6 million of treasury-stock purchases and $0.45 million of term-debt payments, partly offset by $0.3 million of net revolver borrowings.
Debt, liquidity, outlook and risks
The company breached its minimum fixed-charge-ratio covenant at February 28, 2023, received a lender waiver, and was not required to test the ratio at May 31. Management said it does not expect to meet the amended covenant during fiscal 2024; a future default could allow the lender to accelerate the term loans. The revolving facility matured August 9, 2023, and its commitment was scheduled to decline to $13.5 million on July 15, 2023. These conditions raised substantial doubt about the company’s ability to continue as a going concern.
Management planned to obtain a new financing agreement by August 9, 2023, reduce excess inventory and borrowing costs, rebuild the PaperPie partner base, reduce expenses and receive a contingent Employee Retention Credit. Management believed these plans were probable and expected sufficient liquidity for the next twelve months, but acknowledged that lender relief or refinancing was not assured. On June 6, 2023, the company entered an interest-rate swap covering part of the floating-rate term loan, effectively fixing the covered rate at 6.48% through May 2025, subject to changing notional amounts.
Other disclosed risks include dependence on Usborne as a major supplier, long inventory lead times and inventory exposure, changing consumer demand and sales channels, access to financing, and debt covenants. The filing provides no formal revenue or earnings guidance.
Investor facts to verify
- Whether the company secured financing or lender waivers before the August 9, 2023 revolver maturity, and the resulting covenant and acceleration risk.
- Whether PaperPie partner counts and sales improved as management expected, and whether discounts and margins stabilized.
- Whether the Usborne distribution agreement remained in force, whether required purchasing and payment terms were met, and the outcome of the disputed $1.0 million rebate.
- Progress in reducing inventory and debt, and whether the contingent Employee Retention Credit was received.
- The effects of the interest-rate swap and the lower revolving commitment on borrowing costs and available liquidity.