Educational Development Corporation (NASDAQ: EDUC) — FY2023 Form 10-K
Reporting period: Fiscal year ended February 28, 2023; comparisons are with the year ended February 28, 2022. The company sells children’s books, educational toys and learning products through PaperPie direct sales and its Publishing division.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net revenue | $87.8 million | $142.2 million |
| Gross margin | $56.1 million; 63.9% of revenue | $97.9 million; 68.9% of revenue |
| Operating expenses | $58.7 million | $87.7 million |
| Net earnings (loss) | $(2.5) million; $(0.31) per diluted share | $8.3 million; $0.98 per diluted share |
| Cash from operating activities | $58,500 | $(21.1) million |
| Cash and cash equivalents at year-end | $0.7 million | $0.4 million |
| Total debt at year-end | $45.7 million | $42.7 million |
Revenue fell 38.3% year over year. PaperPie revenue declined 42.2% to $74.5 million; Publishing revenue was essentially flat at $13.3 million. PaperPie generated 85% of FY2023 revenue, compared with 91% in FY2022. Gross margin contracted, reflecting greater discounts, less favorable order mix, higher inbound ocean freight and lower purchasing-volume rebates. Interest expense increased to $2.2 million from $0.9 million.
At February 28, 2023, current assets were $63.6 million and current liabilities were $54.1 million, including $59.1 million of current inventory. The revolving credit balance was $10.6 million, with approximately $4.4 million available under the $15 million facility at year-end. Term debt was $35.1 million; substantially all was classified as current because management expected a future covenant default. Operating cash flow was only slightly positive and benefited substantially from a $9.1 million inventory reduction, partly offset by an $8.5 million decrease in accounts payable.
Changes from the prior year
- PaperPie’s average active Brand Partners fell to 28,000 from 44,900; year-end active partners were 24,600 versus 36,100.
- Net loss replaced prior-year net income of $8.3 million. The fourth quarter alone recorded a $1.9 million net loss.
- The company refinanced with Bank of Oklahoma (BOKF) in August 2022, repaying approximately $45.0 million to MidFirst Bank and entering into new term loans and a revolving facility.
- The company acquired the SmartLab Toys product line and continued development of its customer portal and e-commerce platform, expected to launch in FY2024.
Outlook, risks and unusual items
- Going concern and debt covenants: The company disclosed substantial doubt about its ability to continue as a going concern. It violated the minimum fixed-charge coverage covenant at year-end and received a waiver. Management said it did not expect to meet the covenant in FY2024; a further default could permit the lender to accelerate term-loan maturities. Management planned to obtain new financing by August 9, 2023, but stated there was no guarantee its plans would succeed.
- Subsequent credit amendment: On May 10, 2023, BOKF waived the February 2023 covenant default, raised the revolving-loan rate to Term SOFR plus 3.5%, imposed inventory-purchase limits, and reduced the revolving commitment to $14 million, with a further reduction to $13.5 million scheduled for July 15, 2023.
- Usborne concentration: Usborne is a major supplier. The company did not meet minimum purchase requirements or provide a required letter of credit under its new agreement, and certain payments were not timely. Usborne had not given notice of termination, but could do so. Usborne products represented $23.2 million, or 83.1%, of Publishing gross sales. Retail distribution rights were due to transition to a different distributor, with the transition extended until that supplier could begin distribution in 2023.
- Sales and operating risks: Management cited fewer Brand Partners, post-pandemic changes in home-learning demand, uncertainty from the Usborne agreement, the PaperPie rebrand, and inflationary pressure on customers’ disposable income. It expected inflation-related sales impacts to continue and planned to reduce excess inventory.
- Employee Retention Credit: The company filed claims in April 2023 for approximately $3.6 million of credits related to 2021 wages. It did not recognize the amount in the financial statements because realization remained uncertain.
Important facts for investors to verify
- Whether the company secured replacement or amended financing before the revolving facility’s August 9, 2023 maturity, and whether it avoided further covenant defaults or acceleration.
- Actual liquidity, borrowing availability and inventory-purchase restrictions under the amended BOKF agreement.
- Whether the Usborne agreement remained in force, whether minimum purchase and payment terms were met, and how the retail distribution transition affected revenue.
- Whether PaperPie active-partner levels and sales stabilized after the rebrand, and whether inventory reductions generated sustainable cash flow.
- Whether the approximately $3.6 million Employee Retention Credit claim was approved and received; it was not recorded as income at the filing date.