Ladies and gentlemen, thank you for standing by. And welcome to the Educational Development Second Quarter Fiscal Year 2020 Conference Call.At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]I would now like to hand the conference to your speaker today, Mr. Randall White, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Welcome to all you on the phone here those have an interest in Educational Development Corporation. We have an interesting quarter and what I'm going to do actually introduce Heather Cobb, our Chief Sales and Marketing officer, she's on the call. Craig White, Chief Operating Officer and Dan O'Keefe, our CFO. So we have, if you have questions for any of them specifically you're welcome to do that also.So we have the full crew here at your disposal to ask any question you like. And with that while you're thinking about that, I want to turn it over to Dan to actually talk about our earnings release.

Thank you, Randall. For an earnings update, net revenues for the second quarter of fiscal 2020 were approximately $24.4 million, down $0.3 million or 1% from $24.7 million reported in the second quarter of fiscal 2019. Earnings before income taxes totaled approximately $1.4 million, a decrease of $0.6 million or 30% from approximately $2 million in the second quarter of fiscal 2019.Pretax profit as percentage and net revenues were 5.6% in the second quarter of fiscal 2020 as compared with 8.1% reported in the second quarter of fiscal 2019. Net earnings in the second quarter of fiscal 2020 totaled approximately $1 million, a decrease of $0.5 million or 33% from approximately $1.5 million in the second quarter of fiscal 2019. Earnings per share on a fully diluted basis decreased $0.06 a share or 33% from $0.18 a share reported in the second quarter of fiscal 2019 to $0.12 reported in the second quarter of fiscal 2020. This concludes earnings results and all pass the call back to Randall.

Okay. Thanks, Dan. Well, I think if you follow the stock very much you know that the second quarter is historically the lowest net revenue quarter of the year for the UBAM division. And actually our second quarter started a little slower than last year. However, in anticipation to that or trying to overcome that in July, we have a 30 anniversary special. We've actually been in the direct selling business for over 30 years recognized by the Direct Selling Association which is one for last few years one of the 100 top direct selling companies in the world, very proud of that because it has come under some fire in the past.So in July we thought we have done a really nice July 30th anniversary recruiting special. We brought in over 10,000 new sales consultants in July. Coming in July takes sometimes while you started, sometimes not. Sometime you hit the ground running. But it -- this increased in July caused August net revenues to be up over 8% of August a year ago, very nice to see an uptick after a couple of months of not, we like up better and we expect this growth to continue in the during fall selling season.We're very optimistic about what's happening there. Our published division sales which our sales retail stores, toy stores, book stores, they increased just under 4% over last year's quarter two net earnings. And it's primarily due to the distribution we have. And we have some excellent projections we think can happen in that division. That we just have to place more emphasis on that. We do have a new person heading that division in this past eight, nine months. And we're very enthused about the progress he is making. It's an interesting concept. We have outside sales reps and we have inside sales reps on the phone.And concept of it is the outside reps go into a store and present our products. The problem is you've given a whole lot of territory with the [Diana Clark], and so we supplement that with people here on the phone and the idea is that the sales rep can go into a store in Florida and get our products in the store and then we can supplement because they can only get in there once or twice a year with the territory they have.Then we supplement it from our inside sales reps. So we are very excited about our new personnel that vision that's working together with both of them to increase sales and we're optimistic about that. The reasons this another operations update is we're excited about it and I might like to someone besides me talk a little bit about it, that's little closely to the ground on this. So I want to bring in Craig White, who is our Chief Operating Officer and talk about some of the updates that we're doing that we think will have an impact on future growth. Craig?

Thank you, Randall. And our IT department has been responsible for two major projects this year. The first of which is our Consultant Back Office which is where the sales people can log in and get a 360-degree view of their business, be it sales, recruiting, basically anything about their business. And so this major upgrade that we're working on. Number one brings a mobile-friendly, mobile responsive component to the back office, so that they can conduct their business away from home. But secondly, and one of the big things in the industry as far as IT is concerned is kind of what we say is the gamification of their business.So we'll be rolling out notifications on different things that are milestones and keystones in their business. So that's another exciting part to the back-office. The second major project is our e-commerce site and the main thing that we're doing for it is getting it to a version that is more mobile responsive and mobile-friendly. And most people that look at our statistics would say that our conversion rate of customers to completing orders is pretty high already. We hope with it going to a mobile responsive, mobile friendly type environment that we increase our conversion rate even further.So it also has other features like more social media interactions and things like that. So we're very excited about those two projects. And on a third note, we've recently entered into a partnership with PayPal to become our merchant service. And PayPal brings a lot of exciting technology possibilities. So we're very excited to move forward with them and all those things those that will bring. And I'd next like to pass off to Heather Cobb, our Chief Sales and Marketing Officer.

So between sales and the operations update that Craig just provided, I just wanted to add that all of these operations update and upgrades that we're doing are really at the end of the day providing more options and a better experience for the end user. So for the back office when the end user is our consultant and that it will be a better user experience for our e-commerce site, and when it comes to the customer having the different options that PayPal provides, having it be mobile-friendly, different things like that all will and be on that focus that we're looking for which is to improve that user experience.

Okay. Well, let me add one note to that. We have a pretty good report by field salesforce and one night, Saturday night about 2:30 in the morning like my phone dings and wakes me up and it says, seriously Randall I've got to get up and go downstairs to place an order. And our point was with PayPal you can do it on the phone. So we believe that this is going to be good for us for this to happen, a new way that way it was. Our second quarter is typically the softest revenue quarter as I mentioned before and consequently because it's and it's because of UBAM is our slowest quarter. Some schools are out and such expenses have a bigger impact on the bottom line in that quarter.Profitability decline in quarter for the previous year, a couple of reasons. We are on accrual accounting here in case anybody was wondering, but still the size we're getting, things happen to us that we try to anticipate and a couple of them are we have big events we spend a lot of money on as an example, we provide incentive travel for our field salesforce. If they jump and run fast they can win a contest. We never know who's going to take them because we do the very best we can to make the destination they want to go to but we now have 35,000 thereabouts by the way, don't write that down because it changes every hour.But approximately 35,000 and we never know what they want to go to Dominic Republic or relax in cruise. Well, we thought Dominican Republic would be nice place that we all turn up, we offer an alternative if a person, we figure about $2,200 per trip. And again give…

Joel, we are ready to turn the call over for questions from anybody that's on the call that would like to ask a question.

[Operator Instructions]Our first question comes from Mike Hughes, SGF Capital. Your line is now open.

Good afternoon. Thanks for taking my questions. First one, in the current quarter the November quarter and then the sub quarter also were there any one time benefits in last year's expense structure that we should think about when we're kind of putting our models together like you experienced in the current quarter that made to compare difficult?

You're talking about the quarter coming up which would be September, October, November?

Correct.

So, yes. This is Dan, Mike, and probably yes. I'm not sure off [cup]. We haven't really announced anything. I know we had some benefit in the fourth quarter of last year with a rebate from one of our large suppliers that gave us, it was I think $400,000 recognized in the fourth quarter. But I don't think we had any adjustments in the third quarter that were usual.

Okay and how should we think about incremental operating margins meaning for each incremental dollar in revenue how much should fall to the bottom line prior to taxes?

Well, the problem with incremental profit is the UBAM is reported with the major portion of their expense is below the line in sales and commission. And so you've got as opposed to the retail division, it's recorded as a discount above the line. We record gross sales for a $10 book the average discount for store is 50%. So we show a gross sale of $10 which we don't get. We get the $5 after discount and then cost of goods. In the UBAM division, we actually get the $10 for the book. And then we have expenses after that. So when you talk about incremental profit, the fastest-growing and largest division is UBAM, where the bigger portion of their expenses is below the line.So it's not a dollar to dollar. It can look like that UBAM is not profitable but it's exactly the same model on a $10 book. We did not -- yes, go ahead sorry.

Right. So for example, I think you're answering a different question for me which I appreciate. But let's say the UBAM's quarterly revenue number was $10 million last year. I know it wasn't but just for this example $10 million, let's say it went to $15 million this year, so incrementally there would be $5 million in additional revenue. How much of that would drive to the operating income line that's the question in the UBAM business.

Okay, all right. You go back that model again that you know about a $10 book at retail shows up in the financial statements as $10 gross sale. Then you drop down to the bottom line and basically the model is this. 25% cost of goods; 25% for this company to operate and 50% marketing cost. Whether it is a discount to retail store or the economic model of UBAM. So the answer I think you're looking for is in a sale of a $10 book, we roughly have about 25 or $2.50 for us to run this business, pay the employees, have probably left over to pay the shareholders. So incremental revenue in UBAM is more of a 25% contribution as opposed to publishing which is a 50. Does that confuse you?

No. I think I follow that. I appreciate that. And then the consultant count at the end of August, I think you put in the press release was 35,000. Did you say on today's call that that's the number currently as of today also?

No. I didn't say that. I said I hate to use that word because that number because it changes hourly. We know when someone signs up. We don't know when they stop because they don't call and tell us I stopped. You look back and over six months ago, well I guess they're gone and we revised that number periodically to be accurate. And I've said this many times and it's not -- I am not trying to fool anybody, it's again we know exact that you signed up, but if you look back in six months and so many things, we take them off the active count, and it may look like something that's what it is. People at the 10,000, I'm going to put Craig on the spot here. We had 10,000 people in July. How many of them have sold in July, August or September?

Well, I haven't looked at that since last week, but I think it have enough. Yes, it's in the neighborhood of 7,000 having sold something and those 7,000 have sold roughly $6 million.

Okay so 7,000 so $6 million, 3,000 sold nothing. But also remember of the 10,000 recruits in July back by August they recruited another 1,000 people. So that number keeps -- that's the way the business works. You have people coming and going. I've heard in an industry you've got a third coming and third going and third here. So we constantly have to keep new people because people look at this and go, oh my gosh, it's get rich quick. No, it's not. No ,it's not. You have to work. There's no free lunch here. And some people do and they get that kit, they're so excited to get started and they just don't quite ever get started. But that's okay because we don't lose any money on the kit.And if we put 3,000 kits out there and they never sell anything, they've got a really nice box of books and someone comes, oh my gosh, these are nice books. So we don't feel like we're losing any money on the 3,000 because it's 6,000 or 7,000 buy $6 million. I hope that helps you a little bit.

Right. I understand. Two more questions for you. You referenced I guess you imply the month of August revenue was up 8% year-over-year at least in the UBAM division. And then you go on to say that that growth continued into the fall selling season. I assume you're referring to the month of September.

Well, we were here for the whole month of September I'll tell you that.

Right but in the press --

Well, here's an old woman over here. Don't be given any-- don't be giving out our future stuff. Well, I'm telling you what I said was we expected to continue into the fall selling season. And I wouldn't say that it was down.

Okay. Is there any reason to believe that the early part of the quarter was an easier comparison? Meaning it gets more challenging as we move into later October, November, so the growth might not continue.

No. We monitor this on a daily even hourly basis. We can tell you by the middle of month generally how that month is going to come out. And you're comparing the same number of days hopefully in the month of November as you did last November, October. October, so no it's a direct comparison and we monitor it basically hourly.

Okay, last question for you. I think a few quarters ago Facebook made some changes that made it a little bit more challenging to hold. I think you refer to it as online house parties. Have your consultant at this point assimilated to that change? And more importantly, do you expect any additional changes or anything on the horizon with Facebook?

Great question, Mike. This is Heather. I addressed this briefly in, I believe it was the last call as well. And Facebook being what it is, it's hard to say whether we can anticipate anymore changes or not. I would say if you were hedging your bet, the answer is probably going to be yes. They're changing things all the time. I will tell you that the joy of our consultant base and especially our leader base is that they've faced these challenges before. And while that first one we felt a little harder, it took a little bit longer to overcome. They are quite creative when it comes to coming up with workable solutions for any of the changes that they may see on Facebook or any other platform as that may be.And so while I'm saying, yes, we do anticipate that Facebook will be changing something at some point. I will also say that I don't know that the impact will be dramatic because our field salesforce is so good at overcoming those challenges.

It is a constant challenge.

Okay. Thank you very much. I appreciate your time.

Let me -- I'm going to tell something else, you didn't ask this. Our controller here in the company has been with us about year and half two years, probably year and half two years, very straightforward honest accountant and he decided he wanted to know more about direct selling because you hear a lot of negative stuff. So he talked to his wife into signing up as a consultant. I'm not sure I even knew about the time and she was very interesting. She experienced the very same thing that other people feel too. After a couple of weeks she said, I don't know if I can do this. I don't like to call my friends. I'm not a sales person.And he is -- keep give it a shot, come on, don't give up so easy and I'm paraphrasing here. The truth is somewhere in here and so she stayed with it and he encouraged her to find out how the business works from the inside of the company, which I thought, was pretty insightful because I didn't encourage him to do that. Well, at the end of the year she walked across the stage as one of the top sales leaders in the country with over 30,000.And so I'm thinking if an accountant's wife can sell that, gosh, just do the math on 30,000 times, 30,000 what is a lot. Just on a personal note about one of our team members and staff that has his wife join to investigate the company, if you want to call it that and see how it worked from the inside, very proud of that because she had great results. But also I bought the book from her. Okay, next question? You have any more, mike?

I don't. I appreciate your time. Thank you.

Our next question comes from Edward Northern with a Private Investor. Your line is now open.

Randall, I have a general question with all this talk about that tariff. I understand the books are made in England. Is there any additional costs involved with that a new tariff on the EU?

Well, we're in, you may know if you keep track as we do, we monitor daily basically through our publisher in California, Kane Miller, because we do most of our own printing there. So we're monitoring it and this tariffs that they are saving [Indiscernible] right now.

So to kind of elaborate a little bit, Edward where we are at right now, we've been-- our products codes have been exempt from the tariff initially through the first couple of phases. But right now we're set for tariffs to start in mid-December and we have approved for a few weeks for people that have orders that are in production and things like that. But we were set for tariffs back in the first or in June as well and then we got it a reprieve kind of at the last minute. So we're set for tariffs on products coming from China and a bulk of our products is produced in China about 70% of them.We're set for those tariffs to come into play in December. Now having said that, Edward, we do have some mitigating factors. We do carry a large amount of inventory on hand. And this is probably going to be one of the few times that anybody says, well, it's great that you've got almost the equivalent of a whole year supply of inventory on hand. But that is -- it's a function of our business. It takes sometimes six to eight months between the times you order a product and the time that you receive it in your warehouse and can actually sell it. So because of that lead time, we do have to carry a large amount of inventory and because of that large amount of inventory we will have somewhat of a strategic buffer until the industry can react to it. And, of course, we will react to it similar to what the industry will do.

So what he's also saying is that not only will affect us but it will affect everybody's competitor. So whatever tariff we're going to have they are going to have too and we probably like you said we probably better off it because we've got a substantial inventory because we've been able to forecast our sales and have a proper amount of inventory, more so because of UBAM Business, because you've got to be in stock for that business. If you order some products from Indianapolis and it's prepaid and we don't have the book, it's a mess to get that money back to them.So we may have a lot of inventory but at least our business model. So that's where you'll see how that all works out, but that's a good question.

I have another question also. Dan, could you give me an estimate of your capital expenditures for upcoming fiscal year?

We don't really project or announce capital expenditures. What we can tell we go through a process with our board where we put together our forecast for each year and including our capital expenditures. We've had some significant capital expenditures in the past as we've been upgrading our warehouse operation system. But with our latest upgrades, we're not forecasting any significant capital additions in the warehouse. And our IT projects, while we really have a confidence in the impact it will have with the sales and with our salesforce, it's not very significant when it comes to the capital expenditure.

We're kind of pretty much a low CapEx company. The warehouse I said, the CapEx, like you said for products and from software upgrades there may be some costs and these new things we're doing here. But traditionally we're a very low CapEx company to run our business.

I see. And I do have one more question for you, Randall. Are there any plans, do you have any plans in the future with the older building?

Yes. Glad you asked that because I was just over there today. What we've done is we've leased entire front third of that building out who have renovated it and man it looks a whole lot better when we were over there. Although, I did complain that they tore my office out, but we've leased every bit of space that's available and what we didn't lease is what we are using for inventory. We're using that building and but the front half the office space has been leased out to people who've done a very nice job of refurbishing it and much better than when we were in it. So that's -- we're bringing in, what will be our annualized revenue on that?

That's $140,000 annualized.

We will annualize around $140,000 of revenue on a go-forward basis. Sorry, we didn't do that center, it just didn't seem when we were going like crazy [Indiscernible] that's what we were concerned about and let me slow down and gave a chance but let's do some of that building and we have and so that's we think that's about $150,000 of additional revenue, we find some place to work.

That's great, thanks.End of Q&A

Okay. All right. We told you everything you possibly want to know today. Is that true? No more questions. Guys, thank you very much. I feel very bullish. I feel very strong about where we are today. I think we've got a good management team here. And I think our prospects are good. We've had part of our issue is when the industry itself has been attacked very significantly. But I tell you I can assure you guys it has nothing to do with this and while it's called serious reverberations around that direct selling industry, it has nothing whatsoever to do with our business model.So with that, I wish you a Happy Thanksgiving. And thanks for being on the call.

And Joel, I will turn the call over to you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.