EDC(EDUC) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) This section presents the unaudited condensed financial statements for the quarterly period ended August 31, 2023, highlighting revenue decline, a shift to net profit due to a tax credit, and significant debt structure changes Condensed Balance Sheet Highlights (Unaudited) | Account | August 31, 2023 | February 28, 2023 | | :--- | :--- | :--- | | Total Assets | $98,961,000 | $99,936,800 | | Total current assets | $59,905,600 | $63,551,600 | | Inventories – net (Current) | $53,682,200 | $59,086,500 | | Total Liabilities | $53,877,300 | $54,705,000 | | Line of credit | $9,723,100 | $10,634,500 | | Current maturities of term debt | $1,800,000 | $34,894,900 | | Long-term debt – net | $32,217,300 | - | | Total Shareholders' Equity | $45,083,700 | $45,231,800 | Condensed Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Aug 31, 2023 | Three Months Ended Aug 31, 2022 | Six Months Ended Aug 31, 2023 | Six Months Ended Aug 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $10,593,100 | $19,418,300 | $25,117,100 | $42,579,200 | | Gross Margin | $6,908,800 | $12,478,600 | $16,282,400 | $27,787,900 | | Earnings (Loss) Before Income Taxes | $1,452,900 | $(1,105,600) | $252,300 | $(820,400) | | Net Earnings (Loss) | $1,061,700 | $(801,900) | $188,900 | $(586,100) | | Basic and Diluted EPS | $0.13 | $(0.10) | $0.02 | $(0.07) | Condensed Statements of Cash Flows Highlights (Unaudited, Six Months Ended) | Cash Flow Activity | August 31, 2023 | August 31, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $4,715,400 | $(3,628,900) | | Net cash used in investing activities | $(470,500) | $(254,000) | | Net cash provided by (used in) financing activities | $(2,375,300) | $4,354,200 | Note 6 – Debt The Third Amendment to the credit agreement significantly altered debt terms, including a reduced revolving commitment and increased borrowing rates, raising substantial doubt about the company's going concern ability - The Third Amendment to the credit agreement, executed on August 9, 2023, extended the Revolving Loan maturity to January 31, 2024, and introduced a stepdown in the Revolving Commitment from $13.5 million to $4.0 million by January 2024[53] - The amendment increased the borrowing rate on the Revolving Loan to 30-Day Term SOFR Rate + 4.50% (9.81% at Aug 31, 2023) and restricts the company from entering into new purchase orders[53] - The short-term duration of the Revolving Loan and uncertainty in meeting stepdown requirements raise substantial doubt about the Company's ability to continue as a going concern; management's plan involves selling its Hilti Complex to pay off debt if covenants are violated[56] Note 8 – Business Concentration The company faces termination risk from its key supplier Usborne due to unmet purchase requirements, significantly impacting the Publishing division's sales - The company did not meet minimum purchase volumes for the fiscal period ending January 31, 2023, under its agreement with Usborne, giving Usborne the right to terminate the agreement; as of the report date, no termination notice had been received[61] Usborne Product Sales and Purchases | Metric | Three Months Ended Aug 31, 2023 | Three Months Ended Aug 31, 2022 | Six Months Ended Aug 31, 2023 | Six Months Ended Aug 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Gross Sales of Usborne Products | $6,227,900 | $18,677,100 | $17,330,200 | $38,919,800 | | Usborne Purchases as % of Total | 21.9% | 38.1% | 25.8% | 52.3% | Note 13 – Business Segments Both PaperPie and Publishing segments experienced significant year-over-year revenue declines and reduced earnings for the three and six-month periods ended August 31, 2023 Net Revenues by Segment (Six Months Ended August 31) | Segment | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | PaperPie | $21,917,200 | $35,949,000 | -39.0% | | Publishing | $3,199,900 | $6,630,200 | -51.7% | | Total | $25,117,100 | $42,579,200 | -41.0% | Earnings (Loss) Before Income Taxes by Segment (Six Months Ended August 31) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | PaperPie | $2,022,900 | $5,029,200 | | Publishing | $896,600 | $1,565,600 | | Other | $(2,667,200) | $(7,415,200) | | Total | $252,300 | $(820,400) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the significant revenue decline to reduced brand partners, inflation, rebranding disruption, and cessation of product distribution, with liquidity constrained by new debt covenants and going concern doubts - PaperPie net revenues decreased 41.5% in Q2 2024, primarily due to a 32.5% decrease in the average number of active brand partners (from 26,800 to 18,100), record inflation impacting consumer disposable income, and disruption from the division's rebranding[101] - Publishing division's net revenues decreased 62.9% in Q2 2024, mainly due to the stoppage of Usborne product distribution to retail accounts as per the new distribution agreement[113] - Other income increased by $3.9 million in Q2 2024, primarily due to the receipt of a $3.8 million Employee Retention Credit (ERC) under the CARES Act[93][59] - The company's liquidity is constrained; the short-term duration of its revolving loan, strict stepdown requirements, and uncertainty of renewal raise substantial doubt about its ability to continue as a going concern; management's plan to alleviate this involves selling excess inventory and, if necessary, selling its main 'Hilti Complex' property to repay debt[136] Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this section is not applicable for this reporting period - Not applicable[151] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of August 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[153] - There have been no changes in the company's internal control over financial reporting during the second quarter that have materially affected, or are reasonably likely to materially affect, internal controls[154] PART II. OTHER INFORMATION Legal Proceedings The company reports that there are no legal proceedings to disclose for this period - Not applicable[156] Risk Factors As a smaller reporting company, Educational Development Corporation is not required to provide this information in its Form 10-Q - Not required by smaller reporting company[157] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased during the three-month period ending August 31, 2023, with 376,393 shares remaining available under the current repurchase plan - No shares were purchased by the company during the three months ended August 31, 2023[158] - As of August 31, 2023, there were 376,393 shares that may yet be repurchased under the publicly announced plan from February 4, 2019[158] Defaults Upon Senior Securities The company reports that there were no defaults upon senior securities during the period - Not applicable[159] Mine Safety Disclosures The company reports that there are no mine safety disclosures - None[160] Other Information The company reports that there is no other information to disclose - None[161] Exhibits This section lists key agreements and certifications filed as exhibits, including the Usborne Distribution Agreement, Credit Agreement amendments, and Sarbanes-Oxley Act certifications - Lists key agreements filed as exhibits, including the Usborne Distribution Agreement (10.1), the Credit Agreement with BOKF, NA (10.2), and its First, Second, and Third Amendments (10.3, 10.4, 10.5)[163] - Includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[163]