Thank you for joining us for the Educational Development Corporation Third Quarter Fiscal 2020 Investor Conference Call. I will now turn it over to your speaker today, Mr. Randall White, President and Chief Executive Officer. Please proceed.

Thank you, Angela. Welcome to the third quarter investor call. Along with me today on the call are Heather Cobb, Chief Sales and Marketing Officer; Craig White, Chief Operating Officer; and Dan O'Keefe, Chief Financial Officer. So with that, I want to pass first off to Dan, so he can talk about the financial results for the third quarter, and then I'll come back and have a few more comments about the results. Dan?

Thank you, Randall. Net revenues for the third quarter of fiscal 2020 were approximately $40.8 million, an increase of $0.3 million or 1% from approximately $40.5 million reported in the third quarter of fiscal 2019. Earnings before income taxes for the third quarter totaled approximately $3.8 million, which was consistent with the earnings before income taxes of $3.8 million that we reported in the third quarter last year. Pretax profit as a percentage of net revenue was also consistent between the common third quarters, coming in at approximately 9.4% for the quarter. Net earnings in the third quarter of fiscal 2020 totaled approximately $2.7 million compared with approximately $2.8 million in the third quarter of fiscal 2019. Earnings per share on a fully diluted basis decreased $0.01 a share, from $0.34 a share reported in the third quarter of fiscal 2019 to $0.33 per share reported in this third quarter of fiscal 2020. This concludes the earnings results, and I'll pass the call back over to Randall.

Okay. Dan, thank you. I'll give you guys a few comments here on the operations and what's happened. The business is seasonal, as you probably know, and the third quarter is our largest volume quarter of the year. So it's significant to not have an increase in the largest quarter. Also, the previous two quarters were down a bit. So to be up in our largest quarter is significant to me. The UBAM division reported a 2% growth over the third quarter last year, with the growth primarily coming from new sales associates that signed on. We ran a special in the second quarter for our 30th anniversary and brought in 10,000 new consultants, and they're likely the primary reason why we grew a little bit, but there are always things that we're not sure about. As we reported in the last quarter's earnings, we expect these new consultants to contribute to our growth, and that expectation did become a reality. We also have some nice expectations going forward. If you have a question about it, we can talk. The Publishing Division is down a little bit, primarily due to one seasonal promotion we did with a very large vendor. These promotions are sporadic and occur mostly at their discretion, not necessarily due to our sales force. They come and go. I wouldn't think too much about that. Those generally end up even by year-end. So with that, I'm sure you must have some questions about what we're doing here, and I'll be happy to now answer your questions. So Angela, please turn their sound back on.

The Publishing Division has seen a slight decline, mainly because of a seasonal promotion we held with a large vendor. These promotions are infrequent and happen mostly at the vendor's discretion, rather than through our sales efforts. They are temporary and I wouldn't worry too much about it. Generally, things balance out by the end of the year. Now, I'm sure you have questions about our activities here, and I'm happy to address them. Angela, please turn the sound back on for the participants.

I'm just going to say, a 45-second explanation answered every question anybody has. Okay. Is that one? Yes. Okay. There you go, Paul.

I wanted to ask you about your inventory. It looks like the purchases are down pretty materially in the quarter related to Usborne. Could you just talk a little bit about how inventory management has gone and maybe any benefits you've seen over the last two years here?

Well, inventory management over the last two years, a lot of things come into play. We were growing at a high rate, and we had about a 6 to 7 month lead time on inventory, so we had to guess. We were kind of blind because we knew what we've done, but didn't know for sure where we were going. So we had a buildup in inventory, and then the sales didn't meet our projections. So we had a period of reducing our inventory. It's a battle every day to try to keep inventory to meet the demand. It's especially important in a company like this because the bulk of our sales are prepaid. And when people pay you before you send them the product, we need to have the product available. It’s very difficult to get the money back to them due to the way our organization is set up in a multi-level organization. So yes, we're on it because that's confidential cash flow.

I was just going to add to that, Randall, that in the third quarter, Paul, we started off this fiscal year kind of at a high inventory level for a couple of reasons. One is, we started off the year in March with new Spanish titles, which was a block of about $2.5 million in new inventory. So that increased our inventory. We hadn't been selling it before then. Now we were at a point where that's more of a staple of our inventory, and we've been able to work down some of that beginning inventory. Last year, at this time, we acquired a little more inventory from Usborne because we were looking at a volume rebate they gave us at the end of last year. We bought a little more towards the end of the year because we were close to hitting a rebate threshold that had a good return on it. So we were a little heavy on inventory in March of the beginning of this year, and now we're at a low point because after the third quarter, which is our busiest season during the year, typically, inventory is at its lowest point in our four-quarter cycle.

Yes. Inventory is a real challenge in this industry because of the large difference in volumes quarter-by-quarter. Also, you're guessing; if it's a new title, we're guessing how it will sell. We have 2,000 titles, and there's a lot of variability. You hope you guess right most of the time, so the fact that we've reduced inventory suggests we're guessing right most of the time.

Yes. So I guess, a follow-up question would be, to be specific, you bought about half of the amount of books from UBAM as you did last year this time. Should that have any implications for how you’re thinking about future growth? And maybe any commentary on future growth that you're willing to share?

Yes. So you're looking at just the purchases for the quarter, right, that we disclosed in the 10-Q? Yes. That's really just a function of last year; we bought more associated with the rebate we were pursuing. And the Spanish titles too. Now that's more of our consistent inventory, so we don’t have to buy as much. If you look back at our same third quarter from a year ago and look at the purchases of the third quarter of fiscal 2018, you'll see it was more in line with what we did last quarter.

The sales breakdown between Usborne and Kane Miller is still approximately 35:65, so inventory should follow that fairly consistently because we did buy Spanish titles from the Kane Miller side as well as Usborne. So the inventory should follow pretty much that model as Kane Miller is increasing faster than Usborne.

Great job on the inventory management. Randall, do you have any additional thoughts on the outlook for 2020 and 2021? Do you have any comments on growth expectations?

Everybody in here has got a big stick. Every time I start to talk about next year, they want to knock me out. But I'm always optimistic. I've been here a long time, and I will tell you, I feel very optimistic right now. We just returned from a meeting this past weekend with 130 of our top leaders around the country who paid their way to be there, by the way, so they wanted to be there. We're announcing a lot of new innovations, not just for us, in technology that we think will really help the growth of the company. People now, especially younger individuals, are very impatient with technology. They want to take that phone, punch a button, and have a drone deliver to their front door in about 10 minutes. What we're announcing is a new back office system, and we're also announcing an entirely new e-commerce site that will be fully mobile compliant. All these things will have an effect on sales. We started taking PayPal a few months ago. These are significant changes, and we think they will allow us to compete better in the marketplace. We're not saying we're the best in the world, but you can now pretty much operate your business from your mobile phone. The new people appreciate that. It’s a very strong feature, and if they don’t have it, they will simply go elsewhere. We're pretty excited about that and the impact it will have on 2020.

And our next question comes from Mike Schellinger with MicroCapClub.

In Q2, you had that rather large increase of 10,000 sales consultants. I was wondering if you could give us some information on how the onboarding of them is going. And maybe historically, how you see the onboarding process go? And how it’s the same or different with the large number that you brought on in Q2?

I’ll address it, and then Heather can add more. We hope the onboarding goes quickly. During the meeting we had this past weekend, a speaker shared how efficient their onboarding is. She mentioned that they sign up on Wednesday, and by the following Wednesday, they are ready for their first online event, or even sooner. It’s impressive to see how skilled our salespeople are with internet trade. The onboarding process moves pretty fast. Heather, would you like to share more since you have closer insight?

Sure. I think that overall, the onboarding process looks the same regardless of whether we bring in 10 consultants or 10,000. We certainly run numbers to see what their sales look like within their first few months. The percentages tend to fall through approximately the same. So we didn’t see any difference with this large influx of 10,000 that we had come in over the summer.

We do monitor them. There's not a lot of change likely over the years to the onboarding given the desire for immediate engagement. Everyone wants them to get started in the very first week because if they don’t start quickly, they likely won’t get started at all. We have incentives in place—every company does—to motivate them to really embrace the process; the highest peak of enthusiasm is when they sign up, akin to purchasing a new car. The excitement is palpable. If we can get them to have an event and achieve success, the rate of retention significantly increases.

And we have another question from the line.

My question relates to school sales. I just saw an article from Scholastic that they purchased Mrs. Nelson's Book Fair, which I know nothing about, but I'm wondering, did they purchase from you guys? Or are your book fairs completely representative-based?

We are not involved with any other book fair company. We run our own. We have a consultant base and believe we are well positioned in the book fair market. We have a new person—she's not new, but she's been here about a year—who has settled in really well, having come from Barnes & Noble. We think the book fair market is huge. We can compete better than any other book fair because we have a consultant on-site, likely in the same town. They run the book fair themselves, while Scholastic just drops off bins of books, and the teachers have to handle the logistics. We handle the entire process, which the teachers appreciate. We feel very competitive with Scholastic and are optimistic about the year. We've had some noteworthy orders come in recently from our marketing efforts. The fact that we’re on-site, managing the book fair, and handling everything for the teacher leads to their satisfaction, and I think you'll see an increase in that division this year.

Okay. Can I ask another question now?

Sure.

Last year, you had a large shareholder holding a position in the company. Is that position unwound? Or do they still hold quite a few shares?

We were notified in December that they were going to dispose of their shares. They are in the process of that, as you might have noticed. There are many ideas about how to proceed with that because it represents a large number of shares in a company that is thinly traded. They want to sell but also maximize the share price, so they don’t want to drive it down. We’re in a cash position where we're buying back shares at about 3% a quarter. Dan?

Yes. We bought back 80,000 shares last quarter.

We bought back 80,000 shares last quarter. We have positive cash flow, so we have the option of paying out a dividend or buying shares back. Those would be our primary choices aside from giving me a bonus. I think each option is beneficial. Some investors love a dividend, and share buybacks increase shareholder value. We are well-positioned to continue the dividend and buy back shares. We will work with the overhang from the large shareholder; we have navigated this before. We go to conferences where we present our company, and we were in Chicago some time ago, but there were no shares available. Presenting without shares isn’t an effective strategy. We have good solutions and may want to buy them out. We will handle this without negatively impacting the market.

And we have no further questions in queue.

Okay. In our marketing program, Heather has named it the year to rise. We’ve had great years of substantial sales increases, followed by a couple of flat years. We believe good things are coming, and we can now enter 2020 as the year to rise. We’re very optimistic about that. We've even dubbed it the roaring '20s. This company has tremendous potential. Like any company, we face challenges, but overall, we have the best products in the world and the best sales force. I’m confident there are no hurdles we can't overcome. Thank you, everyone, for attending, and I look forward to our next call.

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