Good afternoon, ladies and gentlemen. Welcome to the Educational Development Corporation second quarter fiscal year 2024 earnings conference call. At this time, all lines are in a 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, October 12, 2023. 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 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 Steven Hooser, Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Educational Development Corporation's second quarter earnings call. On the call with me today are 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 fiscal second quarter. The release is available on the company's website at www.edcpub.com. As the operator mentioned, today, we will make forward-looking statements and also that you should look at the company's SEC filings for more details on those forward-looking statements. With that, I'd now like to turn the call over to Craig White, the company's President and Chief Executive Officer. Craig?
Thank you, Steven, and welcome everyone to the call. 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 sales and marketing. Finally, I will wrap up the call with some comments on strategy and fiscal 2024 outlook. During the second quarter, our sales continued to be impacted by high inflation, which directly impacts our active brand partners. As I have said before, this is our key indicator that reflects current sales levels and where we expect them to trend in the future. I am delighted to see that, as expected, our brand partner levels stabilized during the second quarter.
The ripple effect of the brand rebrand process that we rolled out in January of this year has diminished, and every active brand partner through the end of August has either joined as a PaperPie brand partner or made a sale this calendar year as a PaperPie brand partner. We expect this summer to be an inflection point for our brand partner headcount, as we have already seen an increase in brand partner counts starting in August. The sales in our publishing division were also lower this quarter due to the stoppage of selling S1 products. Under our previously announced updated distribution agreement with this vendor, sales to retail customers are being supplied by another distributor. The decrease in S1 sales was partially offset by strong orders of our Kane Miller books and from our Learning Wrap-Ups and SmartLab Toys product lines.
We are excited about the continued growth opportunities of these product lines with our existing and new retail customers. We have also made several changes recently in the PaperPie division, that Heather will talk further about later in the call, to not only make our brand partners more successful, but also entice new brand partners to join PaperPie. Brand partner success generates additional brand partners, and that continues to be our number one focus. With that, I'll now turn the call over to Dan O'Keefe to provide a brief overview of the financials.
Thank you, Craig. Our fiscal second quarter results compared to the second quarter of last year: net revenues of $10.6 million, a decrease of $8.8 million, or 45%, compared to $19.4 million.
Average active PaperPie brand partners for the quarter totaled 18,100, compared to 26,800 in the second quarter last year, a decrease of 8,700, or 33%. Earnings before income taxes totaled $1.5 million, an increase of $2.6 million, compared to a pre-tax loss of $600,000 in the second quarter last year. After-tax income totaled $1.1 million, compared to an after-tax loss of $800,000 in the second quarter last year. Income per share for the quarter was $0.13, compared to a loss per share of $0.10 on a fully diluted basis. To update everyone on our inventory and working capital levels, net inventories decreased $5.7 million from $67.6 million at August 31, 2022, compared to $61.9 million on August 31, 2023.
Now for a working capital update. Our borrowings on our working capital line of credit totaled $9.7 million at the end of August. During the quarter, the company extended the working capital line of credit agreement and amended the company's credit agreement with our bank. Under the terms of the new agreement, the fixed charge covenant ratio was removed, along with the debt acceleration with default, resulting in the company reclassing our existing mortgage secured term loans back to long-term debt. Under the terms of the new agreement, the line of credit includes monthly step downs from $10.5 million at August 31, 2023, to $4 million at maturity on January 31, 2024. Also, during August, our credit card processor, that processes our payments from our customers, began to hold a cash reserve.
The reserve held at the end of August was $1 million and is listed as restricted cash on the balance sheet. The cash reserve was increased to $1.5 million in September and is scheduled to increase again to approximately $2 million in October. That concludes the financial update, and I'll now turn the call over to Heather Cobb to talk about sales and marketing opportunities in further detail. Heather?
Thank you, Dan. As Craig mentioned earlier, we continue to make changes to bring new success to our brand partners. As an example, during June and July, we offered bonus sales commission opportunities to our brand partners to help them spur sales. In August, we implemented a 30-day sitewide sale on our e-commerce site, with products being offered at 10%, up to 30% off for their customers. The promotions that we have offered are receiving positive feedback and were greatly appreciated during the summer months, which are typically our softest selling months of the year. We continue to make strategic changes to adapt to this challenging period when families have limited disposable income by offering differing types of promotions. Starting in September, we began offering $5 flat rate shipping on our e-commerce orders, with free shipping taking effect at $30 orders.
This change in shipping charges has been well received from our customers and brand partners alike. An unexpected positive impact from this change was that our average order size of approximately $70 had remained unchanged. We have additional promotions and incentives to roll out in the coming months to assist brand partners as they build their business, especially during the fall selling season, which is typically our largest selling period of the year. Our retail sales team continues to focus on opening new accounts and selling to our established customers. As Craig stated earlier, the addition of the SmartLab Toys line has provided some sales momentum for us, alongside our Kane Miller and Learning Wrap-Ups lines of products.
While we have not previously had the opportunity to sell into foreign countries, we are doing so with both the Learning Wrap-Ups and SmartLab Toys product lines, opening new doors to new customers. This concludes our sales and marketing update. I will turn the call back over to Craig for closing remarks. Craig?
Thank you both, Heather and Dan. Now, I would like to talk about some recent changes before opening the call up for questions. During the quarter, we received $3.8 million in funds from the Employee Retention Credit. These funds were part of the government-sponsored CARES Act, offered to employers who maintained employees during COVID. While this cash infusion was very timely and positively impacted our quarter, the funds have been primarily absorbed with pay downs in our line of credit with our bank and cash reserves held by our credit card processor. Our primary focus continues to be paying down our debts and reducing our interest expense, which will improve our overall financial performance. To this end, we have recently listed and contracted for sale our old building for $5.1 million, which is primarily used for excess inventory storage.
The proceeds from this sale will be used to pay down our term loans with our bank. We have agreed to lease back the building for three years, after which we plan to consolidate our reduced inventory levels into our headquarters, further improving profitability. We are also continuing to turn inventory to cash, which will be most evidenced in this third quarter, our strongest selling quarter of the year. Cash generated from the reduction in inventory will be used to meet the required step downs in our line of credit. I have had questions recently, and some of you on the call may have this question as to why, why don't we sell the Hilti building, our current headquarters? We're, that is absolutely an option. We're evaluating what that would look like, but we're evaluating other short-term solutions in the meantime.
During the quarter, we reduced costs from lower employee levels and other operating cost reductions and continue to look for every opportunity to improve bottom-line performance. We will continue on this path until we reach profitability. Once we return to profitability, we plan to reinstate our past practice of paying quarterly dividends to our shareholders. This has been and continues to be a top priority for myself and our shareholders. Now that we have provided a summary of some recent activity, I will now turn the call back over to the operator for questions and answers.
Thank you, Craig. Ladies and gentlemen, our Q&A session is now open. To ask a question, please press star followed by the number one on your telephone keypad. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your question, you may press star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for our first question. Your first question comes from the line of Edward Norcini. Your line is open. Edward Norcini, your line is open.
Okay, this question is for Dan. So how are you? The last time we spoke, the company had a conflict with Usborne about the discount of $1 million, because you didn't send them, I believe, a letter of credit. Has that discount conflict been resolved, or can you update me on that?
Sure. It's unresolved. Usborne at the end of last year, at the end of December, beginning of January, disputed the rebate because we didn't give them the letter of credit. So at that point, we reversed all of the accrual on the financial of that rebate, and so we took it off our financial statements. But we're still in a position where we're, you know, hoping for the best.
Okay. Secondly, Craig, today your stock closed at $1.03. I read somewhere that NASDAQ, if your stock falls below $1 for 28 days, the stock, your company's stock will be delisted. Can you give me any assurance that won't happen?
Can I?
Yeah. I mean, if you—all I can assure. Yeah.
All I can assure you is that we're exhausting all options to increase sales, reduce debt, and try to return back to profitability. What happens with the stock price is, you know, more or less up to you all. Yeah. And I'll also say that when that does happen to companies, and their stock does go below the minimum limit for their-
That's right.
They typically will do a reverse stock split to bring it back above. So you know, if that were to happen for an extended period of time, we wouldn't, you know, go off of NASDAQ. We would most probably do a shareholder action to, you know, to reverse the stock split and do a reverse stock split and reduce the number of shares and increase the value, and continue trading on NASDAQ.
Yeah, that's something in your plan, in your planning book?
It's something the stock-
Yeah.
It's a reverse stock split. It's what companies do to maintain their listings on NASDAQ or New York Stock Exchange, if their share price goes below the minimum listing requirement.
I see. Okay, well, that's a, that's a, that's a fear of, any investor. If you need to delist from the NASDAQ, then you're not allowed—you won't be allowed to trade or buy or sell your company. Okay, that's it for me. Good luck with your... Is that—Also, that money you got from the government, is, I read somewhere that they're auditing Employee Retention Credits. Is that money free and clear, or is that up in the air?
We are-
Yeah.
We're still to be audited, but we received the money and deposited it, and then fortunately, the government checks cleared the bank. So I think, I think we've got it now.
All right, that's great. Okay, that's it for me. Thanks.
Thank you, Edward.
Thank you. Your next question comes from the line of Richard Deniz, private investor. Your line is open.
Yeah, good afternoon, everybody. A couple quick questions for you. The sale-leaseback of the warehouse facility, is that still scheduled to close in October?
Yes, that's the plan. We have a few minor issues that we need to resolve, but I don't anticipate that would cause us to delay closing.
Okay, great. And the brand partner levels that started to climb in August, have those trends continued in September and October?
Well, it's not something we report. So August is a period that we're reporting. So we saw them stabilize over the summer, as Craig mentioned, and we saw a little uptick in August. So that's what we communicate through our earnings calls.
Right, but you can't discuss anything that's happened since?
We typically don't get into monthly reporting of our active brand partner count. No. We're satisfied with the way it's trending.
Okay, very good. That's all that I've got. Thank you.
Your next question comes from the line of Randy Freed from RL Capital LLC. Your line is open.
Hello, can you hear me?
Yes. Yes, Randy.
Hi, I've got two questions. The first one's for Dan. Dan, I am somewhat familiar with the Employee Retention Credit because I'm a CPA also. So I want to expand a little bit on that other gentleman's question. My question to you is, we know, you know, that was part of the CARES Act, and we know, you know, a lot of people have been applying for that. My question for you is, how confident... I, I'm not sure who you, you consulted with and, whereby you got that $3.8 million credit, but how confident are you that you met all the criteria and that if you do in fact get audited, that they're not going to be able to claw that back?
Are you super confident that you actually qualified for it, or are you, like, hoping you don't get audited? That's my first question. Thank you.
Nobody, and I'll, I'll concur with you. I don't think we want to be audited either. Nobody wants to be audited. We did use a nationally tier one consulting firm to help us with our application process and documentation process. They processed, I believe their, one of their advertisements is they are the largest processor of, you know, not only employment retention credits, but also other credits. We use the same firm to do our research and development tax credit that we file for annually as well. They're a very large, nationally recognized firm that does this.
Okay. Thank you for that. My next question is for all three of you, but any of you can answer. There's a little website I checked that shows about open market purchases or sales of company shares by the officers. I haven't seen anything really on there for any of you three. Have any of you three bought any shares in the open market recently? I'm not talking about the shares you get through that plan, which is a little confusing. I'm not sure if they're sort of free. Maybe they are free, but just in the open market, have any of you three bought any shares, and do you have any plans to do so?
Yeah, so we filed Form 4s, I believe last week, identifying the shares that we've acquired in the last quarter. We buy these shares with payroll withholdings, so they're bought in the open market with our-
Okay.
-personal dollars.
Okay, so you're all three are doing that, but buying a few shares through payroll withholding. I haven't looked at that site for a couple weeks, but is that where those few shares come from that are sort of showing up every once in a while on that site?
Yeah, we filed-
All three through payroll withholding.
Yes, and it's through our 401(k) plan. We have our stock as an investment option in our 401(k) plan. And so when, you know, when we have payroll, we have our payroll withholdings that go into our 401(k) plan, and our company stock is an investment option, and then our 401 firm goes out to the market, you know, every payroll period and buys those shares for us.
It's in your 401(k) plan, it's not in your, like, personal account. You're not using some of your own money that's not going into the 401(k) plan for open market purchases right now?
Yeah. Let me, let me be real clear, Randy. We are taking our payroll dollars that we're... You know, payroll that we get paid with. Instead of, you know, taking that cash and putting it in our bank account, we're taking that cash and investing it in company stock. So we're buying shares. Yes, we are buying shares with our personal cash.
Got you. Okay, thank you very much.
Thank you.
There are no further questions at this time. I would like to turn it back to Craig White for closing remarks.
Thanks, everyone, for joining us on the call today. We appreciate your continued support and look forward to providing an additional update in January of 2024. Have a great day.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating, you may now disconnect.