Educational Development Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended November 30, 2022. The company sells children’s books, educational products and toys through its UBAM direct-sales consultant network and its Publishing segment. Results are unaudited and subject to seasonal variation.
Financial results
| Metric | Three months ended Nov. 30, 2022 | Prior-year quarter | Nine months ended Nov. 30, 2022 | Prior-year period |
|---|---|---|---|---|
| Net revenue | $30.3 million | $45.1 million | $72.8 million | $118.9 million |
| Gross margin | $19.2 million (63.5% of revenue) | $31.2 million (69.2%) | $47.0 million (64.5%) | $82.5 million (69.4%) |
| Net earnings (loss) | $900 | $2.6 million | $(585,200) | $8.0 million |
| Basic/diluted EPS | $0.00 / $0.00 | $0.33 / $0.31 | $(0.07) / $(0.07) | $0.99 / $0.94 |
| Operating cash flow | Not presented quarterly | $703,700 | $(7.4) million |
- Balance sheet and liquidity: At November 30, cash was $654,900, current assets $68.9 million, current liabilities $21.5 million, and shareholders’ equity $46.9 million. Current assets included $61.0 million of inventory. Cash increased $293,700 from February 28.
- Debt: Debt totaled about $44.5 million, comprising $35.6 million of term loans and $9.0 million drawn on the revolving line. The company reported approximately $6.0 million of remaining availability under its $15 million line. Nine-month interest expense was $1.5 million, versus $609,800.
- Cash flow: Operating cash inflow included an $9.0 million inventory reduction, partly offset by an $8.5 million decline in accounts payable. Investing used $1.2 million, mainly for capital expenditures. Financing provided $835,200, reflecting new term borrowing and repayments of term debt and the line of credit.
Changes and operating drivers
- Revenue fell 32.9% in the quarter and 38.7% over nine months. The decline was concentrated in UBAM: segment revenue fell 38.4% in the quarter and 43.4% over nine months. Average active consultants fell 34.7% and 39.3%, respectively, as consultants returned to full-time work and families returned to classrooms. Management also cited inflation-related pressure on customers’ disposable income and uncertainty related to the Usborne distribution agreement.
- UBAM gross margin as a percentage of segment revenue was 67.1% in the quarter versus 71.1%; over nine months it was 68.0% versus 71.6%. Management attributed the decline to discounts, higher inbound ocean freight, and reduced purchasing-volume discounts and rebates.
- Publishing revenue grew 29.7% in the quarter and 9.6% over nine months, partly due to retail customers placing orders ahead of the distributor transition. Nine-month segment operating income fell to $2.8 million from $3.0 million.
- Despite lower operating expenses, reduced sales and gross margin, together with higher interest costs, brought the quarter to near break-even and the nine-month period to a net loss. Nine-month interest expense rose with borrowings and floating rates.
Outlook, risks and notable items
- Management expected operating cash flow to be positive as inventory levels normalize, with cash used to replenish inventory and repay debt. It said excess cash could be distributed to shareholders following a return to profitability; the filing provides no quantified earnings or revenue guidance.
- Usborne products represented 85.6% of Publishing products sold in the quarter and 89.2% over nine months. Under the new agreement, the company’s retail distribution rights were to end November 15, 2022; at Usborne’s request, the transition was extended to January 31, 2023. The company retains its direct-sales distribution role, but the agreement includes minimum purchase and payment conditions that could lead to termination.
- A $900,000 Usborne purchase-volume rebate earned in fiscal 2022 was disputed. The company reversed the recorded rebate because realization was uncertain.
- The August 2022 BOKF credit agreement replaced the MidFirst facility. Term loans mature August 9, 2027; the revolving line matures August 9, 2023. At November 30, effective rates were 4.26% fixed, 5.48% on the floating term loan, and 6.23% on the line. The agreement includes a minimum fixed-charge ratio and limits additional debt. A December 22 amendment clarified the ratio calculation and imposed restrictions on acquisitions and cash dividends.
- Inventory concentration, long supplier lead times, inventory obsolescence, consultant recruitment and retention, inflation, financing availability, and execution of the Usborne transition are important risks. The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective.
- The company announced a rebrand of UBAM as PaperPie in December 2022, completed in January 2023.
Important facts for investors to verify
- Whether the Usborne transition was completed as planned and how the loss of retail distribution rights affects sales, inventory, and the rebate dispute.
- Whether consultant numbers and UBAM revenue stabilize, and whether management’s expected inventory normalization and positive operating cash flow materialize.
- Available borrowing capacity, compliance with the fixed-charge covenant, and refinancing or renewal of the revolving line before its August 2023 maturity.
- Inventory valuation and sell-through, including the $1.0 million total valuation allowance and $3.3 million net noncurrent inventory balance.
- Whether and when the company returns to profitability; the filing gives no quantified guidance and makes future shareholder distributions conditional on profitability and credit-agreement restrictions.