Educational Development Corporation (EDUC)

[value1008]

Item 1.01 Entry into a Material Definitive Agreement
On February 7 2017, Educational Development Corporation (“the Company”) and MidFirst Bank (“the Lender”) entered into a Fourth Amendment Loan Agreement. This amendment granted a waiver related to the “Debt to Worth Ratio” of our Loan Agreement with which we were in violation of at the time our financial statements dated November 30, 2016 were filed. In addition, the agreement deleted the “Debt to Worth Ratio” provision and substituted a new covenant “Minimum Tangible Net Worth” calculation, along with a modification in the “Funded Debt to EBITDA Ratio” to an "Adjusted Debt to EBITDA Ratio”. Management believes these changes in covenants have a favorable impact on covenant compliance and management does not expect to be out of compliance in the foreseeable future. Finally, the amendment suspends dividends and stock buybacks.

The Company has experienced extraordinary growth the past two years. Net revenues in Fiscal Year 2015 were $33 million, Fiscal Year 2016 $64 million, and Fiscal Year ending February 2017 projected to reach $109 million. This growth has required the Company to invest in additional inventory, warehouse fulfillment equipment and software upgrades. Management believes it is in the best interest of the shareholders to suspend the dividend and focus all resources and cash requirements toward financing future growth.

[Uglytuco]

New filing - Waiver received, terms of debt changed to a more favorable measure, dividends suspended. All good news.


https://www.sec.gov/Archives/edgar/data/31667/000118518517000372/0001185185-17-000372-index.htm

[Uglytuco]

I guess it is.

[wadirum1]

Maybe today is the day we leave the 7s behind. Go EDUC!!

[Uglytuco]

Not surprised. It should have gone right back up after the 8K was published announcing that they have no plan to increase shares.

[Uglytuco]

That's a big bid.

[wadirum1]

$EDUC continues to gather steam.

Chart showing a ADX-PPO Pincher is forming:

[wadirum1]

Good question. But I don't have an answer.

Nice to see $7.75 printing.

Evidently there isn't much for sale at these prices. Demand hasn't been huge, but supply is very thin.

[value1008]

Does anyone here know if or how the currency exchange rate affects EDUC-- i'm thinking of the USD - British pound exchange rate.

[wadirum1]

My guess is that they do in fact suspend the dividend. The company needs capital to grow in order to keep up with the demand for their products.

And my guess about why he started doing conference calls is that he wants to get the stock price up toward $20 so that he can issue those million shares he wants to issue.

He holds 800,000 shares, so I believe him when he says he isn't going to issue shares down at these prices. But I also believe that he wants to grow the business. He cut an amazing deal on getting the new warehouse (with a tenant paying the mortgage). But he was quite clear in the CC about needing more capital to really grow as fast as possible.

[value1008]

And while i'm thinking of EDUC, can anyone tell me why it took so many years for the CEO to finally hold an earnings call? I'm not being negative, just curious..... I'm also wondering why the CFO was not also on the call.

[value1008]

The one concern i have that keeps me from going all in here is if they suspend the dividend... so as to get back to being a growth company that can handle its tremendous growth.

[wadirum1]

Indeed, you might need to get busy if you want $7s.

[value1008]

Wadirum, thanks for your follow-up with Maj on EDUC. Hey, if you inspired him with some of EDUC's forward prospects, he might get his wealthy subscribers to get back into this one.

Then there will be little hope of my picking up more shares of this one down in the $6s.

[wadirum1]

Btw, does anyone know if Maj Soueidan and his rigorous GeoInvesting team are still in EDUC (they were as of last Aug. 2016) or have they sold out? (One needs to be a paid subscriber to see their research).

I checked in with Soueidan via twitter and had a productive exchange. My guess is that they did in fact get cold feet after the conference call over the compliance issue and over reduced margins.

He missed the part of the CC, however, that dealt with how the compliance issue was already resolved. Perhaps their move was hasty? And perhaps their move opened up a buying opportunity?

Time will tell.

[Uglytuco]

P/S ratio based on current forecast - 0.27. P/E ration currently 14, but it's due to growth expenses during the past year. In the coming year, it will look almost as attractive as the P/S.

[Uglytuco]

Yup. It was a great buy back in the 9s and a steal down here in the 7s. Looks like it's bottomed out between 7 and 7.25. I've been trading this one for close to a year and a half. When selling stops, it has the tendency to go up $1 or more very quickly. And if a one of the current funds or a new institution decides to buy in or increase shares, they can buy up to double digits feeling confident that it's a great investment at those prices. EDUC will have a reliable inventory management / order processing system soon, and having a tenant that's paying their entire mortgage is a unique advantage.

[Uglytuco]

Correct Value. The key is that the market is there. This market is huge. EDUC is a tiny player that knows how to do it well. Don't know what the fraction of one percent market share is that they have, but it's very easy to grow market share from a fraction of a percent versus holding onto a large percent.

They need to iron out the wrinkles. Can and will are different.

[wadirum1]

We would like to have 8%, 9%, 10% pretax, we're not happy right now. But we feel like things that we have implemented that the profitability will come back. The improved margins and the efficiencies we think will restore our growth, our profitability so that the profits grow with sales. And that has been our challenge.

So, good point. I guess my 7% (which was lower than their target) was a pretax number. So, the P/E ratios are crazy low, but not insanely low.

[value1008]

Were those 7% margins after tax?

[wadirum1]

I agree that $300M seems like a stretch. Even if the demand is there, it would be hard for any company to ramp that quickly.

But even if they only do HALF that, but get back to 7 percent margins, we have 0.07*150M = $10.5M. Divide by 4M shares and we get about $2.50 per share or a P/E of 3.

A P/E of 3 is absurdly low. And I'm using numbers below their worst-case scenarios.

If we want to let our imaginations run, then try 10 percent margins on 300M in revs... Earnings would be larger than current market cap. I remember when I was buying FRPT at less than the cash they had on hand. Those sorts of cases do indeed occur from time to time. But even at a forward P/E of 3, this is a screaming bargain.

[value1008]

p.s.-- over at Stocktwits, i notice that a tweet from late Jan. by Addessiap (who posted in a comment thread at the SeekingAlpha article on EDUC in late August that he had visited headquarters and talked closely with mgmt), gave some estimates for FY 2018 (beginning March 1 2017):

Based on mgmt guidance of $150M for FY 2018 Addessiap sees after-tax net profit margin of 5.5%, so net earnings of $8.25M and EPS of $2.06 based on (what co. recently reported as) 4.085M fully diluted shares.

2.06 in EPS would not be shabby at all. Assuming they're still growing, depending on overall stockmarket conditions at the time, surely that would merit a P/E of 12-15. Do the math on EDUC's s/price.....

[value1008]

Just to nuance one of your points, Uglytuco-- you expressed it as " the sales team thinks they will do $300M" (emphasis added). Actually, here's the quote from the conf. call:

"The field people, this is not my forecast, but I am telling you the people in the field think that we can do $300 million this year. Did you hear that? I didn't forecast that, that is a forward-looking statement, and if you talk to people in the field that is what they expect this year because the market is there. There seems to be the insatiable appetite for the products and almost never ending supply of people who want to join and sell them."

Obviously, EDUC can and will do $300M in revenues in FY 2018 only if they can logistically supply all the books on time and pay all the sales reps.

Yes, it's a "nice problem to have"-- all that growth-- but it's still a problem for the bottom line if logistics are still a problem.

Btw, does anyone know if Maj Soueidan and his rigorous GeoInvesting team are still in EDUC (they were as of last Aug. 2016) or have they sold out? (One needs to be a paid subscriber to see their research).

[wadirum1]

And once a stock starts going down, people naturally wait on the sidelines to see how cheaply they can get shares. And others sell to protect capital.

That dynamic reverses once a stock starts going up.

[Uglytuco]

Termendous growth in EDUC. On the investor call they projected $200M revenue for the coming year, and they always overachieve. They said they recently had their annual sales meeting, and the sales team thinks they will do $300M. I think this stock has been down for the last 6 months for 3 reasons:

1. Growing pains - They've had some difficulty keeping up with the growth - moving to a new facility, updating systems, etc. I've heard a question about the debt from their mortgage. They've made it very clear that their lease tenant's payment covers the entire mortgage payment for them. How much better could it be?
2. Profit margin - I think there's been concern that the earnings have not been increasing at the same rate as the revenue. This, however, is due to all the growth in the past year and things they've had to upgrade. They will benefit from this point on from all the efficiencies they've gained from these investments.
3. The stock is not well known. It's typically had low trading. Those familiar with the company have their money in it. We need new people to recognize what a steal it is and get the trade volume up.

[wadirum1]

Ugly just said it better than I.

Here's a link to a PDF of the 3rd quarter filing: http://www.otcmarkets.com/edgar/GetFilingPdf?FilingID=11794774

The long-term loan got classified as current because of a loan covenant that was violated when they had to book so much deferred revenue (which also had to be placed on the list of current liabilities). This is described in the 10-Q:

At November 30, 2016, we were in violation of the debt to worth ratio covenant for which we have not yet received a waiver from the Bank. Accordingly, the
related long-term debt has been classified as current. The debt to worth ratio requires the following: (1) For quarters ending August 31, 2016 and November
30, 2016: 3.50:1.00. (2) For quarters ending February 28, 2017, May 31, 2017, August 31, 2017, and November 30, 2017: 3.25:1:00. (3) Quarters thereafter:
3.00:1.00.

Now that this surge in holiday buying has been shipped, the revenue is no longer deferred, so that will be removed from liabilities. And this will bring them back to being in compliance on debt to equity, so that the loan will go back to being long-term on their balance sheet.

Here are some other relevant parts from my reading of the conference call transcript:

But I will tell you that we have improved that significantly. What this caused was an item on the balance sheet called deferred revenue. What deferred revenue is, our orders from the UBAM division come in prepaid. They are paid when they submit the order. They submit the money with them. Well, when you can't ship them at the end of November 30th, even though the order is in hand and paid for you cannot count it as revenue, it is called deferred revenue. And we had $8 million in deferred revenue.

So, today, I will tell you that every order that we have in this building has been shipped as of yesterday with the exception of any possible problem orders through customer service or some other unique situation. But other than that we are totally caught up, which means deferred revenue is gone. So that issue on the balance sheet of deferred revenue, which causes other compliance issues, is gone.

And I would also like to address an issue we had in the financial statements in November as of November 30. We had two issues which caused a delay. One we were out of compliance with the bank covenants in debt to equity. And that is because debt to equity we have a ratio in there and we were out of compliance. However, I would mention that if you look at our statement, in the debt to equity ratio, which we were about 3.75%, and I think we had to be at 3.5, something like that.

There is $8 million in our debt which is deferred revenue, if you take that out you reduce your, if you don't have deferred revenue, which we don't have anymore because all the orders were shipped, our ratio comes down to about 3.25%, which --. Now there are other issues involved with that, but that is one reality that by not having deferred revenue in there helps our debt to equity ratio.

Another item I might point out is our, the equity that is shown on the balance sheet is 14.5 million. There is also nearly 11 million of treasury stock. Now, the net or actually equity is 25 million less the 11 million treasury stock, which could be considered an asset because that stock could be sold to provide equity capital, which we talked to you about doing that in certain instances to increase our equity base. So we think that debt to equity out of compliance will be taken care of now. We think it will be in compliance but I don't have any assurance of that. But that is what we think.

http://seekingalpha.com/article/4040766-educational-development-corps-educ-ceo-randall-white-q3-2016-results-earnings-call-transcript?part=single

[Uglytuco]

That's actually long term debt that was converted temporarily to short term. They violated a covenant with the bank, because they had to increase inventory so much to deliver orders. That will switch back to longterm, and they will likely increase their revolving credit line.

[Schneidku40]

So if they aren't going to issue more shares, I guess they'll need to take on a new loan to cover the old loan maturing this quarter ($21m).

[wadirum1]

I suspect that as EDUC starts moving up into the 8s, people who have been trying to time their entry will want to jump on board for the ride to $20. Nobody wants to pay low $7s if they could have paid low $6s or lower still. But the same is true as a stock like this starts moving up.

I REALLY appreciate you helping me get into this at what appears to have maybe been exactly the right time!

[Uglytuco]

Looks like you picked the right time.

[wadirum1]

Added another 400 shares at $7.20.

And then someone dumped 11K shares at $7.10... And the response to THAT dump was that someone increased the bid.

This stock trades oddly.

[Uglytuco]

Great summary.

[wadirum1]

I figured that since some of us are just discovering this opportunity, I would put some EDUC links and info into a sticky:


A) Most recent conference call transcript (a MUST READ for anyone thinking about investing): Q3 2016 Conf Call


B) 8-K clarifying the company will NOT be issuing shares down here:

On January 27, 2017, during an investor conference call held to discuss the financial results of Educational Development Corporation (the “Company”) for the quarter ended November 30, 2016, the Company provided remarks that referred to our capital structure. To clarify these statements, the Company has no plans to issue additional capital at this time.

On February 1, 2017, the Company repaid the previously disclosed advance from its President and Chief Executive Officer. link to 8-K

C) Based on CEO forward-looking remarks, if EDUC gets control of its explosive growth and can get back to 9 percent margins and hits $150M in revenues, that would be $13.5M net. Since EDUC has about 4M shares, that would be $3 per share in earnings, for a forward P/E of just over 2. Okay...maybe they don't reach those targets. But even if their margins are only half the target, they are still sitting at a P/E under 5.

D) One-year chart (should update automatically):

[Uglytuco]

Agreed. People are aware of the 8K and hope to continue to get cheap shares before it heads back up.

[wadirum1]

Interesting how someone waited until the last 2 seconds of trading to sell a bunch of shares.

They could have sold them at higher prices throughout the day, but instead they wanted to get $7.10 and they wanted to trade in the last 2 seconds.

Interesting.

Maybe I'll get my wish of buying some more even cheaper?

[Uglytuco]

Buy in now. It's ridiculously low only because investors thought the company was going to release shares. Their results continue to grow by leaps and bounds, and they released an 8K communicating that they have no intention to release shares.

[wadirum1]

LOL!

[Uglytuco]

Now we have as many posts in 2017 as we had in the entire previous 3 years.

[Uglytuco]

Buy it now. It should not have declined and will be back in double digits within the next 3 months. Maybe even the next 3 weeks.

[Uglytuco]

So the market cap is $28M, and their tenant just increased their asset value by an amount equivalent to 15% of their market cap. That doesn't even take into account their actual business that's growing by leaps and bounds.

[Uglytuco]

They have a tenant whose lease pays the entire mortgage on the property, and that tenant just made $3-4M improvements on the facility that's owned by EDUC. Money in the bank.

[Uglytuco]

You're right. It's even more undervalued now. People just don't know it's out there. Easy double with the growth they've got going.

[Uglytuco]

A little volume and it will go back quickly to the 9s.

[Uglytuco]

Only 4M shares, and that's the way it's been for a long time. No dilution. Sell one of your pennies and buy a huge growth stock that's not a scam.

[Uglytuco]

I've got 1,400 shares. Financial results are incredible. Only down because shareholders thought they were going to release shares. The company filed an 8K stating that they don't intend to. It's worth at least 2X the current price right now, and could be worth a lot more if they continue their expected growth.

[wadirum1]

Added another small block at $7.20.

[wadirum1]

Sheesh! So if EDUC gets back to 9% EBITDA on $130M in revenue, that's going to be more than $2/share in earnings. That's a forward P/E of less that 4.

I think I might buy some more shares.

[wadirum1]

Enjoying reading the transcript from recent earnings call:

http://seekingalpha.com/article/4040766-educational-development-corps-educ-ceo-randall-white-q3-2016-results-earnings-call-transcript?part=single

[wadirum1]

If you liked EDUC at $9.75, do you love it at $7.35?

[wadirum1]

I took a starter position today at $7.50. Good news after the bell on Friday.