Educational Development Corp (EDUC) 2017 Q3 法說會逐字稿

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 would 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 have done this, I hope it goes well.

Welcome to our first quarterly shareholders call.

I think I will start off by giving you the structure of the Company.

This is a publicly traded Company; we were original members of -- original forming members in NASDAQ when NASDAQ was formed.

We have two divisions in the Company; we have a direct selling division called Usborne Books & More where we have independent consultants selling 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 have been together since 1978; I think the original contract -- pretty unusual for two people -- two companies to stay together that long.

Just returned from England, a nice visit with Peter Usborne.

So they supply the bulk of our products.

And then about eight years ago we bought a company, Kane Miller, which is primarily fiction -- nonfiction titles that would be supplemental to the Usborne line.

So to give you a little idea about the products, imagine the most beautiful color illustrated book you have ever seen and then imagine there are no words on the page.

So what Usborne does is create the products and the first print run, maybe they will do a 50,000 copy print run with no words on the page.

Then they will -- they have 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 over 100 languages.

It is a very unique concept that Usborne has created, which allows us to spread the cost of color production over a much larger print run which allows us to have less -- more of a practical, cheaper, less expensive products.

Certainly not cheaper -- the best in the world.

Usborne has also been named the Publisher of the Year and Children's Publisher of the Year in England.

So we feel like we have the absolute best products in the world at our disposal with a long-standing contract.

Eight years ago we bought Kane Miller, it is a small company and has since moved -- it has grown significantly since we bought them and now represent about 28% of our sales volume.

Our Company is -- I have to say is completely different from two years ago.

I have been here 35 years and I think I am a 34-year overnight success here.

From two years ago the sales growth has been spectacular.

We recorded $35 million in sales two years ago, the past year $65 million, this year we will finish up around $110 million.

And the growth continues.

I am not going to throw out any large numbers here that will make everybody nervous.

But the growth is continuing at least on that pace if not better.

The growth -- the primary growth is coming from the UBAM division, it is a direct selling organization with independent reps all over the country.

A year ago we had 7,000 reps, and now we have around 28,000.

This growth has presented significant challenges.

Over two years ago we began to see this sales growth and we realized we needed a new software platform to handle this growth in the direct sales division.

And we reviewed -- did an extensive search of companies and reviewed several vendors who supply the direct selling industry.

The decision was made to go with a veteran company in the industry that was ranked in the top five of software suppliers in the direct selling industry.

While they have a basic package, many modifications were necessary to meet the unique nature of our needs.

For example, we have five distinct marketing programs in our division.

You can have a home party with them; you can have a Facebook party, which is kind of a virtual home party on the Internet; we also school book fairs; we have a reading and (inaudible) program and a fundraising program -- each with a different compensation for the reps.

Now software has never really fulfilled the promised results that they promised us since -- as being implemented on September 1. And to give them a little credit, no other direct selling company in the industry has five distinct markets that they try to hit.

So it was very difficult for them and unfortunately it didn't work and we had a real struggle computing the income for our sales reps.

And when you can't pay people right not very much good happen after that.

So we have struggled for quite some time in implementing the program as it should have been.

So the decision was made just recently -- very recently.

We keep thinking it is going to work.

We keep thinking because the -- they're trying -- they tried.

And everything we send them they fix.

But more keep cropping up and so we had no choice but to roll back to our old system.

Now you think: Well, why could you roll back to that?

Well, the software worked but it was on -- when we decided to roll back we had to significantly enhance what we do here, and I am already getting out of my element here, but we had to add new servers and capacity.

We have, what would you say, overage capacity that was at a separate location, that location has now been transferred across the street from us.

Not that that really matters, but we feel like that we now have the capacity to handle the revenue that is coming in and all aspects of it.

We will enhance our original software significantly when we do this rollback.

Failure of this program though was really instrumental in significant problems for us in the fall.

In customer service we had many issues because of the program.

Honestly we lost several consultants and customers and team leaders over the issues that we faced.

But in spite of that, we still experienced explosive growth.

I don't know -- we tried to kill them but they wouldn't allow it.

We certainly don't take that for granted, but the issues were insurmountable.

Just to give you an example how much this Company has changed.

Two years ago if we come in on Monday and had 1,500 orders we go, wow, what are we going to do with 1,500 orders.

Well, this fall when we announced that December 5 would be about the last time you could place an order for us and get it to us by Christmas -- and get it to the customer by Christmas, we got 90,000 orders.

So at that time we had over 110,000 orders to fill and here it is December 1, and our capacity at that time was around 8,500 to 9,000 orders.

Well, we did everything we could, including myself and the grandkids, all the family; everybody pitched in.

I think I was here 50 straight days trying to get these things out the door.

Finally got down to over-nighting them to get -- for customer service.

And after 9,000 on the Tuesday before Christmas UPS said that is it, no more from you guys.

So we just had to accept the fact that we had failures in our service and do the best to move ahead.

I answer a lot of customer service calls and I got the most irate ones.

And I kind of like that because when you have someone who calls customer service and waits on hold for two hours and wants to talk to somebody and they get me, that is a terrific call because what they are telling you is they are so angry they can't get our products.

That is really something that I think that we can deal with and generally I can talk them down off the wall before I got off the phone.

But we had significant failures in customer service.

But again, it hasn't [competed] our growth at all.

It did cause additional expense, additional labor.

I was looking at our payroll records that every week -- every two-week period we would have 500 hours of overtime, none of which helped our profitability, as you might imagine.

We added -- we quadrupled our customer service just to answer the calls about where is my order.

You know, people are kind of the spoiled today; they want to punch a button and have a drone deliver it on their door in about 30 minutes.

Well, that wasn't us.

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 30 -- 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.

The explosive growth caused a significant shift in everything we do in this Company -- everything.

A year ago we -- well, two years ago we started planning on this.

And so a year ago we completed the purchase of a new building, it is called the Hilti complex.

It is amazing complex, 40 acres with a little over 400,000 square foot building.

Hilti Corporation sold it to us and then they leased back their office space, around 185,000 square feet, which left us somewhere around 215,000 for offices and warehouse.

And we just moved from 103,000 square feet, so it more than doubled our capacity and facility.

We thought, boy, that is quite a big jump here and that should take care of us for a long time.

We really didn't even -- and so we intended to sell the building we were in, had an offer for it for $3 million.

But by the time we really got operationally here we realized we need that building too.

So we kept it, which gives us now 300 and somewhere around -- 325,000 square feet of space.

The old building is about 12 blocks from here so it is not terrible.

But it would be much better if it was on the same site.

Now the nice part about the Hilti building is, when they leased it back -- we bought the building for around $23.5 million, paid about $5 million down, only borrowed $18.4 million at that time.

Their lease back for 15 years was about equal to our mortgage payments.

So basically we moved into this building at almost a breakeven in cash flow because their lease payments equaled our mortgage.

When we then put a mortgage on our building previously we held it made our payments a little bit higher.

But still it is quite an interesting situation to buy a building and have the owners pay for it.

And since the time that we have moved in Hilti Corporation has remodeled their offices, and I don't mean remodeled, they took it down to the bare studs in the walls and no ceilings, they replaced -- completely renovated three stories, spent over $6 million.

So I told the building manager the other day, I said, did you get approval for these leasehold improvements?

And he just kind of smiled.

And I told him, I said you made it so nice I think I need to raise your rent.

But here is a company that has now added basically $6 million to I guess the valuation of the building.

It certainly didn't hurt it any.

During the past year the growth has just been staggering for us and a lot of people think, well, why didn't you plan for it?

Well we did -- we thought we did.

And every time we thought we were on top of it, it just kept being more and more orders come in.

And during that period of time we realized that we needed everything new in the Company.

When you go from $35 million to over $100 million you need new software.

So we undertook the installation of four distinct separate software programs, pretty ambitious I am sure.

I am not -- but we had to, we had to.

What they were were the software for the Books & More to handle the growth -- hasn't worked out.

We installed a picking system in the warehouse called pick-to-light, it is an electronic system that cuts down on errors and improves the efficiency where a person now -- you scan an order, a light lights up under the book to be shipped, it tells you how many.

So that is a separate software system.

We put in a complete warehouse management system.

When you go from where you are shipping 7 million books to 20 million in one year you have to have a lot more technology.

And then we also installed a new financial software, we outgrew the one we had.

So now we have got four major programs that we are trying to implement and coordinate with each other and it has been challenging.

But we have -- so far we are moving ahead with it and feel like we are headed in the right direction in all these situations.

The warehouse is -- has significant enhancements and we use UPS primarily for our distribution.

And they have been an incredible supportive partner to the Company.

There is someone here from UPS every week.

And in the fall they sent their two top system engineers, I don't know what they call themselves, but it is their top people who come in and evaluate the efficiency at an operation.

And they spent the entire week here and UPS told me they normally charge, they would have charged $50,000 for that week, but they comped that to us because it was so involved.

We are at the largest shipper in Oklahoma.

So I do pay them a lot of money, but they have a very vested interest in our Company.

That technology is being implemented daily.

I was in London last week and I got a call and implemented some new techniques about just the way we ship the product, pack them.

So it is a constant battle to keep up with the latest technology, but we do have a lot of help from industry experts as well as UPS to provide us the proper equipment that we think can handle the growth that is coming.

We also have new warehouse management.

I know people think, my gosh, why don't you bring somebody in?

Well, we did and basically revamped the warehouse management.

We are very happy with them now.

We have implemented new training.

You might be surprised, it doesn't seem very hard to pick a book off a shelf and put it in the box, but this is Oklahoma.

So I don't know if I need to tell you more about that.

Oh, so, we have implemented training and also in the training is to talk to them about the culture of the Company.

We try to let the people in the warehouse, yes, maybe they think they are just warehouse workers.

But we are involved in a wonderful Company here that improved literacy in the nation.

We have the best -- finest children's books in the world and getting these and the hands of children is our mission.

And when you get the people in the warehouse to understand that, understand if they ship it wrong to the wrong person that it is causing the Company a problem and with our profitability.

So we are really pleased with the fact that they are listening and think, wow, we didn't even know where these books went.

So that has been a really nice enhancement just in the last three weeks because when it slowed down a little bit right after Christmas we were able to do some training with all the employees.

And we feel like that is providing significant operating improvement in efficiencies.

And again, we are putting in new technology.

We found a way to cut out a few people technology wise, picking, checking, packing, and we tested it last week and it worked.

And so it has involved the sort of an iPad type device with a scanner.

So the packer will scan each book barcode, so you know you have the right order.

And then they scan the barcode again, it prints out the label, they put it on that ship it.

So it seems to be significantly improvement over what we were doing.

And so since they decided that that worked UPS is now providing us with 20 stations equipped with that equipment.

So very happy with that, they have been such a help as well as other industry experts.

A little bit about our financial structure.

We have a building mortgage that I mentioned we paid $23.5 million to Hilti for the building, except we didn't -- we used some of our own cash flow.

And then we have a $3 million building.

The current balance that we have in debt right now for the mortgage is under $21 million.

So if you think that the $6 million upgrades, we have approximately $30 million worth of value here with a mortgage under $21 million.

We also have $34 million in inventory, which is up from $17 million a year ago.

You might think why do you need that much inventory?

Well, you have about a four-month lead time.

If you actually run out of a book before you notice it, which is not going to happen because we have fairly sophisticated programs to forecast the needs in inventory.

But as best as it is, it is still a process.

If you can imagine driving down a mountain road at night in the rain with no lights looking out the back window because you don't know where you are going but you know where you have been.

So that is what we deal with in trying to forecast inventory, but we have done a fairly good job.

We have $34 million of that and about $4 million in receivables.

Now the problem is we are currently capped at $7 million in working capital.

So we have had to generate the cash for this and it has been somewhat restrictive.

So looking out ahead we must improve our capital structure and we are currently looking at a secondary stock offering to boost capital.

You really can't grow -- you really can't fund a growing Company like this on bank debt.

And I understand that, the bank understands it, I have never talked to a bank that is different.

I know most of you probably realize banks like a loan on receivables and not inventory, I get that.

They wouldn't know what to do with 20 million books if they had to deal with it, and I get that.

So we are looking at a long range how to improve capital structure and [someone] has got to [come up with] some equity, so we are looking at that.

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.

Another one was the weakness in controls.

And the weakness in controls came about from being flooded with orders and deferred revenue and then trying to reconcile that with the cash that came in and -- with the new software.

I take responsibility for it.

Yes, it was a nightmare trying to process all those orders.

We got them done.

We still are having some issues from the software Company in the direct sales to the new financial software.

And there are still some reconciling items that are occurring now that we think will not happen when we roll back to our own system.

So we are not totally out of the woods yet on the weakness in controls; debt to equity we will see.

The outlook, I guess you guys want to know where we are going.

We are one of the fastest growing companies in the industry.

We have talked to people in the publishing industry who said, my goodness, what are you guys doing.

And also in the direct selling industry.

I will tell you that our operating margins are being increased, by the way, because all of our major suppliers, the publishers and other suppliers that supply things like boxes, all the prices are going down with volume.

And Usborne Publishing has been very helpful and supportive in the prices they charge us as well as other companies that supply us products who give us significant reductions for volume.

So the explosive growth is continuing and the challenges we face include improving operating efficiencies which is happening as we speak and the new training and the new technology we feel like will get us back to levels of operations about a year ago.

In October a year ago October we -- this growth was just beginning to happen and I think we had about a 9% pretax for that -- for October.

And so that is what we shoot for in a growing Company like this.

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 with that I think I have told you everything you would ever want to know about this Company.

I am glad -- I wish I could tell if any of you guys were still awake out there on this call.

But if you are I am certainly welcome to answer any questions that I possibly did not cover.

(Operator Instructions).

[Jeff Bronstill], private investor.

I have some questions about your latest quarter.

In the other income line you reported about $0.5 million.

And I know most of that is it your lease income from Hilti.

But it is 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 to the bottom line.

It was just some royalties on things from -- through the Kane Miller side of the business.

Okay.

You think those are one-time items?

Those are one-time items, yes.

Okay, okay.

However, we hope they continue.

Okay, okay.

All right.

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 are going to pay me back one of these days -- I hope they will.

Okay, but I mean --.

I believe, Jeff, Jeff, I believe in the place, hey --.

Oh, I know.

I mortgaged my house when I got this Company, I will do it again.

There is no problem in me being all in, I am all in.

If you had breakfast this morning and you had bacon and eggs, well, that chicken was involved, that pig was committed.

So I am the big fat pig.

I am all in, brother.

Yes.

Yes, we know your ownership, there is 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.

Yes, okay.

A few more questions if you don't mind.

Can you comment on the January sales trends a bit?

I know we are not done with year-over-year.

You've still got the growth like you were commenting on before?

Jeff, you want me to give you inside information here on a conference call?

My goodness.

Well, okay, here is the deal.

This is public information now, I am going to put it out there.

In January we had the largest month in our history, $14 million --.

December.

I mean December, excuse me.

December, I am sorry, December.

Right.

However, I will tell you that some of that was carryover from November.

Sure.

Now January, you want to know about January also?

Sure.

We are 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 am looking, $4.7 million, and the same number of days last year in January we had $2.7 million.

So is the trend continuing?

Yes.

And I will tell you, if you talk to our field salespeople they are so excited about the fact that we have caught up on shipping.

And there are people who've been sitting on the sidelines and said I am not going to order anything until 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 is where the growth is coming from in the future.

And if you talk to them they will tell you it is going to come back stronger than ever if we can maintain our timely shipping like we are currently.

Right.

Yes, that is the best news I heard on the call was the fact that your backlog was gone.

I know you have been working so hard for many months on that.

But that is great to hear.

So being out of compliance, I know you are trying to get back into compliance with the banks.

What about the dividend?

Do you feel like it is still safe?

Well, I tell you, Jeff, when you have a cash flow problem certain things have to go.

I cannot tell you what I am going to do with the dividend.

But I am trying to change our capital structure because the last person who wants to stop the dividend is me because I get most of it.

Yes.

So, I can't tell you what is going to happen with the dividend.

I can't tell you what is going to happen with the capital structure.

But promise you I am working diligently on that program to get my money back from the Company and a dividend.

Yes.

Yes, well I guess is it fair to say that a dividend is still in 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 people on the call -- I have 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 is part of our long-term idea of how to run the Company.

Yes.

Okay, last question I promise.

The direct selling (multiple speakers).

Jeff, hey, Jeff?

Yes.

They are 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 are talking about you reverted back.

I know you mentioned in your 10-Q you potentially might have to impair that.

Are you saying now that you are at that point because you reverted back or is this still under determination?

We haven't made the final determination but we are rolling back some of it.

But I will 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 have a little meeting with [Weber Manville] 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.

Okay.

Very good.

Well thanks, Randall.

Good luck to all you guys.

And we will look forward to following you.

Hey, thanks.

(Operator Instructions).

[Jim Westfall], [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 is 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 is hopefully profit, there is payment to the sales reps, there is shipping.

So it flows through the whole system.

What happens is the order was paid for for the $100, we couldn't ship it.

So it goes to deferred -- the entry is debit to cash, credit, deferred income.

I know you appreciate me being an old account here, but that is basically the way it happens.

So then when you reverse that it just flows through all the accounts that would happen if we would have shipped it.

Okay, so there is roughly $10 million of deferred revenue at the end of -- at November 30 and there is $34 million of inventory.

Are you [shifting] --?

Yes, okay.

It is $8 million.

And so roughly $2 million of that would be reduction of inventory approximately.

Because we are about a 20% -- somewhere around 24% cost of goods.

So if you have $8 million that is roughly $2 million of inventory without any being added in that same period of time.

Okay.

I am just looking at the November 30 balance sheet, it was $9.557 million of deferred revenue.

But --.

Oh, I am sorry.

I am looking at old stuff.

You are right, sorry.

Yes.

So now that goes up to --.

$2.5 million.

Yes, yes, you are right.

Okay.

And then is cash going down as well then if you incur the cost of shipping it?

Because the question I have is is what is kind of happening to the rest of the balance sheet here as the deferred revenue goes away?

Because it seems you are kind of -- you are pulling additional cash out of the business if that happens.

Or you are pulling some other account out of the business, the inventory and a combination of the inventory and cash.

Well, you are getting a little complicated here because I will 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 three or four weeks behind the sales consultant say, that dog doesn't hunt, brother.

I want my money.

Okay, so we started paying weekly commissions on receipt of the order.

So when the 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 is 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 is $9.6 billion and inventory is being reduced by $2.5 million and some piece of it is going to profit, right, can you just give me some rough figures in terms of is the cash going out by $7.1 million or is it going up by $3.5 million and the equity is going up by $3.5 million?

Well, we didn't make $2.5 million on that if that is what you are --.

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

No, no.

That month was again very inefficient.

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 December, January and February.

I am just telling you we are working on that.

We just try 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 is in your previous balance sheet or the debt is 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 are getting more in.

Yes, I understand that, that is right.

Okay, just, in and of itself if you weren't getting the new orders in?

Yes.

Yes.

And that is a nice business that you are getting the cash upfront on it.

Okay, understand that.

And that is continuing.

Over the weekend we got 10,000 orders.

And those orders are, again, increasing daily from last Monday -- two weeks ago Monday they are up about 80%.

So, yes, and that is 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, we [didn't] continue 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 it 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 are not necessarily selling it?

There is the possibility of a slowdown going that a lot of the recent growth has been as a result of them building inventory?

Okay.

There is two pieces of this business.

I can assure you the retail stores aren't billing inventory.

That would be a crime because we couldn't ship it to them because they have 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 we are 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 are going to replace a $15,000 Scholastic book fair.

We have a program that is 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 until they sell it.

So are they building up inventory?

No.

No.

There is nobody buying inventory that will come back or is in their hands.

No, they were crying about where could they get more.

We had absolutely zero problem with a multi-level pushing inventory on the consultants, zero.

Paul Carter, 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 2017, but were silent on the $1 to $1.10 EPS guidance.

Do you still expect that or, if not, what is your expectation at this point?

Well, I got a little silent on it because you guys are 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 back up 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 of the technology and what we were implementing.

But we expect that to continue or to come back in the fiscal year we are heading into.

Sorry about that.

I am not trying to tout the stock, I am not trying to puff anybody up.

I am just telling you that is what we used to do.

This fall was a nightmare.

When you get 90,000 orders -- really?

So we did the best and we (inaudible) as possible.

But go forward we think we will.

Okay.

And then -- so your operating and selling expenses, they have 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 years ago.

And I understand obviously that is because your growth has caused some inefficiencies and warehousing cost, etc.

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 one time in nature?

Or if not one time, at least kind of unusually high that you will be able to work down in the near-term?

Well, I do.

For example we doubled -- tripled customer service because everybody is calling in, where is my order?

Well, you don't have to call that anymore because they are all shipped.

There is inefficiencies everywhere.

And for lack of training we shipped 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 see how can 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 it was $40 in there?

That is $320,000.

I certainly hope that doesn't -- that is not going to continue or there will be somebody else here, maybe me, because you can't -- that is way too much service failure.

So, that is one thing.

The payroll, the overtime, going through temporary personal 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 and then the reduction in the cost of our goods will make a significant difference in the upcoming year.

Tony Chiarenza, 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 are thinking about?

Is there other ways that we could do this?

Tony, I totally agree with you.

It is 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 are going to do what you've 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 had 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 up to 5 million, that is not dilutive at all.

And that is what I had in mind.

$8, I am not crazy about that.

I agree with you, but a growing Company cannot be totally funded on bank debt.

And it is -- if 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 up to a certain volume you can reduce the amount of the orders.

So instead of if your orders double from 40 to 80 or 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 is a major part of our program going forward.

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

Well, no.

I don't -- a $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 up and said, how are you doing?

How do you like that business?

And they like it.

And I said, well, here is the new deal, we have to have (inaudible) because our major supplier, Usborne, gives us very favorable terms.

Of course they have known 35 years too.

But -- so the other companies said, well; I said, okay, it is up to you, pal.

I am not buying any more books from you unless we get terms.

I can't do this anymore.

And that was just in July.

That so that has had an immediate impact, but there is still a 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 have already given us terms which are more than generous.

And the other publishers have to match that or we will go someplace else.

Because I promise you, we have no problem in attracting products today.

People come to us every day, please sell my products.

Okay, well I am not paying COD.

So we expect that to impact cash and inventory levels also.

[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 am sure you will get it worked out sooner or later.

However, you made a big mistake in my opinion in putting by -- 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 a 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 the stock is down from $17 to $8, well, yes, it is 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 have invested in your Company based on --

Hey, Fred.

-- the excellence of your operations.

Whoa, time out.

Yes, sir.

Hey, [calm down], time out, I got it, I got it.

I don't agree with you and I will tell you why.

Because Hilti pays the debt.

It doesn't matter.

That is a minor income statement benefit.

It is 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 is our decision and I don't agree.

So best of luck to you, pal.

Okay.

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

Fred, we have been pals 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 is 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 plan to talk next week.

[Marty Marks], private investor.

Hey, 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 are doing to kind of rebuild confidence for them.

But at the end of the day, them selling books is what is going to make the Company make money to make us investors get our dividends and that kind of stuff.

So talk about what you guys are doing for the future with that.

Well, I'll tell you, we recently had a meeting about two weeks ago with our top leaders in Dallas; we had 135 of the top people in the organization.

And I was warned that they were going to make a big pinata out of me and beat me up really bad.

And I was surprised because I laid out our plans, what we are doing and what we had in store for the future and I thought the meeting went very well.

And they are all on board, I think -- what I heard.

And that is to the growth is coming, Marty.

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.

So, once I explained to them and what we are trying to do and the fact that we have got all the back orders shipped, shipping improved and working on efficiencies I think they are 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 are out selling the product.

It seems like the hardest thing for most companies is to generate revenue.

Well, that is not our hardest problem, our problem is shipping it.

So that is something that we feel like ought to be able to be handled operationally.

The sales are the hardest part.

People in Oklahoma right now would die to have a 100% growth rate because we have got -- we are in an oil patch here and there is companies about dying down here.

And so here we are having this explosive growth.

But anyway, I hope that we have explained the program to them and they are on board and this growth is going to continue.

Thank you.

And this does conclude the question-and-answer session of today's program.

I would like to hand the program back to you for any further remarks.

Okay, well, if there is anybody 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 million to $200 million.

So we have unique challenges here.

We have heavy product, we ship books, we have competition in the direct selling industry that put their product in an envelope.

We have 2,000 items, there is no other direct selling company that has 2000 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 have cleared up questions.

And, by the way, anybody have [later], I'm sure my email is posted.

If you email me I will try to answer those.

But I appreciate people being on the call and listening to me, I am happy anybody even thinks about us.

But appreciate your call.

This is a great Company, I have always said it is 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.