Good day, ladies and gentlemen, and welcome to the Educational Development Corporation third quarter results call. My name is Jonathan, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. For opening remarks and introductions, I'd like to turn the call over to Randall White, President and CEO of Educational Development Corporation. Please go ahead, sir.

Okay, thank you. This is the first time I've done this, I'll hope it goes well. Welcome to our first quarterly shareholders' call. I think I'll start off by giving you the structure of the Company. This is a publicly traded Company. We were original members of -- original forming members of NASDAQ when NASDAQ was formed. We have 2 divisions in the Company. We have a direct selling division called Usborne Books & More where we have the independent consultants selling to -- directly to the marketplace. We have a retail division where we sell to retail stores, toy stores, bookstores, museum stores, etc. We have around 5,000 stores that we currently sell to, Barnes & Noble being our largest single customer. The products that we sell primarily come from Usborne Publishing in England. We've been together since 1978, I think the original contract -- pretty unusual for 2 people -- 2 companies to stay together that long. Just returned from England, we had a nice visit with Peter Usborne. So they supply the bulk of our products. And about 8 years ago, we bought a company, Kane Miller, which is primarily fiction -- nonfiction titles that's -- was the supplemental to the Usborne line. So to give you a little idea about the products, imagine the most beautiful color illustrated book you've ever seen and then imagine if there are no words on the page. So what Usborne does is create the products and the first print run, maybe they'll do a 50,000-copy print run with no words on the page. Then they'll -- they've already taken our order for maybe 15,000, they'll run it back through the press and overprint 15,000 words in English. They then can run other copies. They have the ability to print in…

[Operator Instructions] And our first question comes from the line of Jeff [indiscernible] from -- he's a private investor.

I guess, some questions about your latest quarter. In the other income line, you reported about $0.5 million, and I know most of that is your lease income from Hilti. But it's usually about $320,000 a quarter. So what is the difference between what you reported, the $0.5 million, and the monies you receive from Hilti, about $180,000?

Well, we did receive some other income from other sources that fall through the bottom line. It was just some royalties on things from -- through the Kane Miller side of the business.

Okay, are you saying those are onetime items?

Those are onetime items, yes. However, we hope that continues.

Okay. And then you mentioned in your 10-Q about a $350,000 advance that you had to make to the company, I guess, due to some cash flow challenges, and that amount was supposed to be paid back by the end of January. Is that still the case?

That is still the case. I was discussing this with Peter Usborne last week, or this week actually. I told him, I said, this company has come full circle because when I became CEO in 1986, we had a cash flow problem and we couldn't meet payroll. And on Friday afternoon, I called everybody together, which is 22 people, and we didn't have enough money to pay them. But we got money in on Monday and it all worked out. And here we are 35 years later, it came down to a specific payroll that was underfunded, and so I personally loaned the company the money. And I have reasonable assurance that they're going to pay me back one of these days, I hope they will. Jeff, I believe in the place. I mortgaged my house when I first got this company, I'll do it again. There's no problem in me being all in. I'm all in. If you ever -- if you had breakfast this morning and you had bacon and eggs, well, that chicken was involved, that pig was committed. Well, I'm the big fat pig. I'm all in, brother.

Yes, yes, we know your ownership, there's no question. So yes, I was just concerned about the company's, I guess, liquidity and making sure it had the ability to pay you back and that things were going to improve.

Well, I appreciate your concern.

Okay. A few more questions, if you don't mind. Can you comment on the January sales trends a bit? I know we're not done with year-over-year. Have you still got the growth like you were commenting on before?

Yes. You want me to give you inside information here on the conference call? My goodness. Well, okay, here's the deal. This is public information now. I'm going to put it out there. In January, we had the largest month in our history, $14 million -- I mean December, excuse me, December, I'm sorry, December. However, I will tell you that some of that was carryover from November. Now January, you want to know about January, also? We're currently up about 87%. So the same number of days last year compared to the same number of days this year, we have revenue of, I'm looking, $4.7 million. In the same number of days last year in January, we had $2.7 million. So is the trend continuing? Yes. And I'll tell you, if you talk to our field salespeople, they are so excited about the fact that we have caught up on shipping and that people who have been sitting on the sidelines and said, "I'm not going to order anything till they get that straightened out." And by the way, that includes our retail stores. It may take a little bit longer for them, but we have every hope that we will get the retail stores business back and the customers. And so that's where the growth is coming from in the future. And if you talk to them, they will tell you it's going to come back stronger than ever if we can maintain our timely shipping like we are currently.

Right, yes, that's the best news I heard on the call, is the fact that your backlog was gone. I know you've been working so hard for many months on that. So that's great to hear. So being out of compliance, I know you're trying to get back into compliance with the banks. What about the dividend? Do you feel like it's still safe?

Well, I'll tell you, Jeff, when you have a cash flow problem, certain things have to go. I cannot tell you what I'm going to do with the dividend, but I'm trying to change our capital structure because the last person who wants to stop the dividend is me because I get most of it. So I can't tell you what's going to happen to the dividend. I can't tell you what's going to happen with the capital structure, but I promise you, I'm working diligently on that program to get my money back from the company and the dividend.

Yes, yes. I guess is it fair to say that the dividend is still on your long-term plans even if short term, you have to potentially cut it.

Absolutely. However, people will tell you, if you have a growth company like this and we can restore profitability, dividends become secondary to growth. But again, for the people on the call, I've talked to Jeff before, we've been through this. For many years, we had no debt and we had cash. And so you could buy stock back or you could pay dividends. We paid dividends. And I think that's part of our long-term idea of how to run the company.

Yes, okay. Last question, I promise. The direct selling opportunity you talked about -- yes.

They're either going to have to keep the dividends or raise my salary.

Yes, well, yes. All right, last question. The direct selling software that you were talking about that you reverted back, and I know you mentioned it in your 10-Q, you potentially might have to impair that. Are you saying now that you're at that point because you've reverted back? Or is it still under determination?

We haven't made the final determination, but we are rolling back some of it. But I'll tell you, that impairment, I don't know if anybody knows me very well, but I don't give up money that easily. I paid a lot of money for something that didn't work, so the final chapter hasn't been written on that. I may have to -- had a little meeting with [ Reverend Randall ] on this, but their software did not work and it caused us significant loss of revenue and consultants and customers. And so that story is not over.

[Operator Instructions] Our next question comes from the line of [ Jim Wesfel ] from [ LBFC ].

Just as a technical matter in the accounting. When you talk about the deferred revenue going away, is that going away to equity? Or is the offset there that the inventories are declining and it's kind of on a dollar-for-dollar basis?

Well, it goes through the system. You get an order for $100, and in that is inventory. There's hopefully profit. There's payment to the sales reps. There's shipping so it flows through the whole system. What happened is the order was paid for, for $100, we couldn't ship it. So it goes to deferred. The entry is debit cash, credit deferred income. I know you appreciate me being a little accountant here, but that's basically the way it happens. So then when you reverse that, it just flows through all the accounts that would happen if we had shipped it.

Okay. So there's roughly $10 million of deferred revenue at the end of -- at November 30 and there's $34 million of inventory. Are you shipping...

Yes, okay. It's $8 million and so roughly $2 million of that would be reduction of inventory, approximately. We're about 20 -- somewhere around 24% cost of goods. So if you have $8 million, that's roughly $2 million of inventory, without any being added that same period of time.

Okay. I'm just looking at the November 30 balance sheet. It was $9.557 million of deferred revenue. But...

I'm sorry, I'm looking at old stuff. You're right, sorry, yes. So now that goes up to...

$2.5 million.

Yes, yes, you're right.

Okay. And then is cash going down as well then if you incurred the cost of shipping it? I guess the question I have is, what's kind of happening to the rest of the balance sheet here as the deferred revenue goes away? Because it seems you're kind of -- you're pulling additional cash out of the business if that happens or you're pulling some other account out of the business, the inventory and -- a combination of the inventory and cash.

Well, you're getting a little complicated here because I'll tell you, we got so far behind in orders to the field that normally, previously when an order came in, we paid the commission when it was shipped. When we got 3, 4 weeks behind, the sales consultant says, "That dog doesn't hunt, brother. I want my money." Okay, so we started paying weekly commissions on receipt of order. So when that cash come in, we paid the commission on it and that was again a reconciling -- it just became a nightmare to try to reconcile all these things because you have -- with the direct sales, you have levels of payout. And so it's not a simple answer, but I will tell you that everything -- when the order came in, things got paid. The shipping was paid at that time. The consultants were paid, and so it affected all those accounts as it would had we shipped it. But the main question is, yes, inventory would be reduced by about $2.5 million plus what we brought in that same month.

Okay. So if it's $9.6 million and inventory is being reduced by $2.5 million and some of piece of it is going to profit, right, I mean, can you just give me some rough figures in terms of -- is the cash going out by $7.1 million? Or is it going out by $3.5 million and the equity's going up by 3.5 million?

Well, we didn't make $3.5 million on that, if that's what you're...

No, I didn't think so, but...

No, no. That month was, again, very inefficient, guys. We threw everything we had at it to get it out the door to try to mitigate customer service issues because it was a nightmare. And so the profitability increase is going to come in, I hope, future periods including this December, January and February. I must tell you, we're working on that. We just tried to get everything shipped we could because of so many service failures.

Okay. But it sounds to me like the cash is going to have to be lower than what's in your previous balance sheet or the debt's going to have to be higher to accommodate this reduction in deferred revenue then.

Well, yes and no. We do get orders in every day with cash.

Okay. Because you're getting more in. Yes, I understand that. That's right, okay. Just in and of itself, if you weren't getting the new orders in, yes, that's a nice business that you're getting the cash upfront on it. Okay, I understand that.

And that's continuing. Over the weekend, we got 10,000 orders, and those orders are, again, increasing daily. From last Monday to 2 weeks ago Monday. They're up about 80%. So yes, and that's more cash that comes in, but we have bills to pay. We have to pay for inventory and UPS and salaries and so normal stuff. But we didn't stop. The business has continued to grow at an exponential rate.

Okay. Just one final question then. Do you have a good idea of where the inventory sits once it gets out of your system? In other words, is there any concern that the reps or the retailers are holding a lot more inventory and they've kind of bought into this stuff but they're not necessarily selling it and there's the possibility of a slowdown going -- that a lot of the recent growth has been as a result of them building inventory?

Okay. There's 2 pieces in this business. I can assure you, the retail stores aren't building inventory. That would be a crime because we couldn't ship it to them, because they've got kind of a second shift in this. And as far as the individuals in the field, this is not a multilevel scam, let me tell you. Let me tell you one thing why we're different from any other company. We will provide inventory to consultants in the field because they go in and compete with Scholastic for book fairs and you cannot have $500 worth of inventory and think you're going to replace a $15,000 Scholastic book fair. We have a program that's called consignment. We don't charge the consultants. But if they have enough credit, we will give them inventory on consignment. They don't pay for it till they sell it. So are they building up inventory? No, no. There's nobody buying inventory that will come back or is in their hands. No, they were crying about where could they get more. We have absolutely 0 problem with a multilevel pushing inventory on the consultants, 0.

Our next question comes from the line of Paul Carter with Adaptable Capital Management.

I apologize, I got disconnected there for a little bit so I apologize if a couple of my questions here are repeats. So first of all, on your guidance, Randall, you adjusted your revenue outlook for fiscal '17 but were silent on the $1 to $1.10 EPS guidance. Do you still expect that? Or if not, what's your expectation at this point?

Well, I got a little silent on it because you guys were pretty nasty if I miss a little bit. I'm doing the best I can. When I gave that guidance at one time when we were going to do around $125 million to $150 million, we would have if we could have shipped it. The issues with the software caused us so many issues I can't tell you. And literally, there was $150 million of revenue could we have handled it, all right. Well then because of the software issues and the backup in shipments, we threw all kinds of -- everything we could to get it out the door. We were very inefficient and so our earnings estimates that were valid, we used to make 8%, 9% pretax. Well, we didn't this fall and -- because of all the technology and what we're implementing, but we expect that to continue or to come back in the fiscal year we're heading into. Sorry about that. I'm not trying to tout the stock. I'm not trying to puff anybody up. I'm just telling you that's what we used to do. This fall was a nightmare. We had 90,000 orders, really, so we did the best and we weren't as profitable. But go forward, we think we will.

Okay. And then -- so your operating and selling expenses, they've been hovering around 30% of gross sales for the last year, which is obviously more than 1,000 basis points higher than they were a couple of years ago. And I understand, obviously, that's because your growth has caused some inefficiencies and warehousing cost, et cetera. I know you don't present like adjusted income or EBITDA, but how much of that $10 million of operating and selling expenses this quarter would you consider like either onetime in nature, or if not onetime, at least kind of unusually high that you'll be able to work down in the near term?

Well, I do. For example, we doubled -- tripled customer service because everybody's calling in, where's my order? Well, they don't have to call about that anymore because they're all shipped. There's inefficiencies everywhere, and for lack of training, we shipped it to the wrong people. I have no idea how we put something in a box and ship it to the wrong person. I work that line and say "how could that even happen?" I don't know, but we had 8,000 customer service orders in November that we had to ship. If you want to do a little math on that, what if there's $40 in there? That's $320,000. I certainly hope that doesn't -- that is not going to continue or there'll be somebody else here or maybe me because you can't -- that's way too much service failure. So that's one thing. The payroll, the overtime, going through temporary personnel agencies, which has about a 20% markup in it. Yes, those things are now under control. Again, warehouse management, training. Yes, we definitely expect that to come down. And that's -- that and then the reduction in the cost of our goods will make a significant difference in the upcoming year.

Our next question comes from the line of Tony Chiarenza from Key Equity Investors.

My question is on capital structure. You mentioned about raising equity. Now to me, it doesn't make much sense given how low the stock is to kind of be selling stock at $8 or something like that. Is it something you're thinking about? Are there other ways that we could do this?

Tony, I totally agree with you. It's dilutive. But if you've got a $7 million cap on your bank loan and you're going to go from $110 million to maybe $200 million, you know you're going to do what you got to do. I don't have the answers all here, but equity is one of them. I do not want -- my plan was if the profits had been comparable to the revenue and we have the stock at $15 to $18, it was $17 a year ago. At $17, you put out 1 million shares from 4 million and get it up to 5 million, that's not dilutive at all. And that's what I had in mind. $8, I'm not crazy about that. I agree with you, but we -- a growing company cannot be totally funded on bank debt. And it's -- we have $34 million. I think the whole next year, we won't increase as much as we did this year. I can't see our inventory growing more than $15 million because what happens is when you get to a certain volume, you can reduce the amount of the orders. So instead of -- if your orders double from 40 to 80, well you do 40 twice. And then you get terms. So we can control inventory. We talked about that fairly extensively this week with our major supplier. How? We can control these inventory costs, which is cash. And that's a major part of our program going forward.

So there might be a way with the existing cash flow to kind of, as you're saying, make do with what you have now?

Well, no. I don't -- $7 million bank loan is not going to do it. I will tell you that I kind of -- we grew so fast that I found out that our suppliers in Kane Miller had very onerous terms because we grew so fast and these are foreign publishers. They don't know us and the terms that they gave us were very onerous. And when I discovered that, I called them us and said, "How are you doing? How do you like our business?" And they like it, and I said, "Well, here's the new deal. We have to have vetting because our major supplier, Usborne, gives us very favorable terms." Of course, they've known them 35 years, too. So the other companies said, "Well, okay. It's up to you, pal. I'm not buying more books from you unless we get terms. I can't do this anymore." And that was just in July. So that's had an immediate impact, but there's still significant amount of that in our inventory. So that will help us on a go-forward basis as we get better and better terms from the suppliers, non-Usborne. They've already given us terms, which are more than generous, and the other publishers have to match that or we'll go someplace else because I promise you, we have no problem in attracting products to date. People come to us every day, please sell my products. Okay, well I'm not paying COD. So we expect that to impact cash and inventory levels also.

Our next question comes from the line of [ Fred Orr ], private investor.

Randall, I fully sympathize with your operational issues. No small company could have coped with what happened to you operationally, so I'm sure you'll get it worked out sooner or later. However, you made a big mistake, in my opinion, in putting, based on your description in the call today, now $33 million worth of illiquid real estate on your balance sheet. I think addressing that issue before you address expanding the equity in the company should be your top priority. I think you should reverse the decision you and the board made to buy all that real estate. I think it should be sold and leased back. And I think the fact that stock is down from $17 to $8, well, yes, it's partially due to the operational issues. A very big chunk of it is due to the market simply displacing debt for equity value in the marketplace. You still have an enterprise value of $14 to $15 a share, but a big chunk of it is debt. And I think nobody has invested in your company to have you reinvest in real estate. They invested in your company based on the excellence of your operation.

Calm down. I got it. I got it. I don't agree with you, and I'll tell you why, because Hilti pays the debt.

It doesn't matter. That's a minor income statement benefit. That's a very small income statement benefit.

The mortgage on this property is backed by a 15-year lease, by a AAA company. And so that's our decision and I don't agree. So best of luck to you, pal.

Okay. Well, that's where your liquidity can come from if you need it other than an equity offering.

I don't -- Fred, I mean, we've been friends for a long time. I don't -- maybe we ought to get on a phone call, you and me. Believe me, I appreciate your input because we go back a long ways. And that's something I think why don't we talk on the phone because I don't -- when you buy a building, the building has increased because they spent money on it and they pay the lease. So anyway, let's just plan to talk next week.

Our next question comes from the line of [ Marty Marks ], private investor.

Randall, [ Marty Marks ], private investor here. Real proud of how you guys have handled the struggle with both the inventory stuff and also some of the back office stuff that your consultant base has to deal with. The real backbone of the company, you know this, is your sales force and your consultant force. Your ladies are awesome. They believe in you. They love you. Kind of tell us your vision for the future as you kind of recover from some of these struggles, stuff you're doing to kind of rebuild confidence for them because at the end of the day, them selling books is what's going to make the company make money, to make us investors get our dividend and that kind of stuff. So talk about what you guys are doing for the future with them?

Well, I'll tell you, we recently had a meeting about 2 weeks ago with our top leaders in Dallas. We had 135 of the top people in the organization. And I was warned that they will make a big piñata out of me and beat me up really bad. And I was surprised because I laid out our plans, what we're doing and what we had in store for the future. And I thought the meeting went very well, and they're all on board, I think, what I heard. And that is -- the growth is coming, [ Marty ]. The field people -- this is not my forecast, but I'm 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's a forward-looking statement. And if you talk to people in the field, that's what they expect this year because the market is there. There seems to be an insatiable appetite for the products and almost never ending supply of people who want to join and sell them. So they -- once I explained to them what we're trying to do and the fact that we have gotten all the back order shipped, shipping improved and working on efficiencies, I think they're on board and they feel like the second wave of growth will be bigger. So I certainly value them. They are the lifeblood of this place. They're out selling the product. It seems like the hardest thing for most companies is to generate revenue. Well, that's not our hardest problem. Our problem is shipping it. So that's something that we feel like we ought to be able to handled operationally. The sales are the hardest part. People in Oklahoma right now would die to have 100% growth rate because we got -- we're in an oil patch here and there's companies about dying down here. And so here we are, having this explosive growth. But anyway, I hope that we've explained the program to them and they're onboard and this growth is going to continue.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to you for any further remarks.

Okay. Well, if anybody is still here, guys, we have a very unique company here, I get that, and explosive growth, 100% growth from a sleepy little company of $35 million to 100 -- to $300 million. So we have unique challenges here. We have heavy products. We ship books. We have competition in the direct selling industry that put their product in an envelope. We have 2,000 items. There's no other direct selling company that has 2,000 items. We are very unique, and to handle this growth, because of the increase in cash utilized for inventory, is a challenge. But I hope I cleared up questions. And by the way, if anybody have later, I'm sure my e-mail's posted. You e-mail me. I'll try to answer those. But I appreciate people being on the call and listening to me. I'm happy anybody even thinks about us. But I appreciate your call. This is a great company. I've always said it's a great company to work for and a great company to own. Thanks for your attention.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.