Correspondence 0001185185-24-000872 from EDUCATIONAL DEVELOPMENT CORP (EDUC)
EDUCATIONAL DEVELOPMENT CORP
Date: Sept. 6, 2024 · CIK: 0000031667 · Accession: 0001185185-24-000872
AI Filing Summary & Sentiment
File numbers found in text: 000-04957
Referenced dates: August 22, 2024
Letter
Re: Educational Development Corporation
edc20240906_corresp.htm
Division of Corporation Finance
Office of Trade and Services
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attention: Blaise Rhodes and/or Rufus Decker
Form 10-K for Fiscal Year Ended February 29, 2024
File No. 000-04957
To the addressees set forth above:
This letter is in response to the comment letter dated August 22, 2024 (the “Comment Letter”), from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) regarding the above-referenced Form 10-K (the “Form 10-K”) for the year ended February 29, 2024, filed on May 21, 2024. For your convenience, we have set forth each comment of the Staff from the Comment Letter in italics below and provided our response below each comment. Unless otherwise indicated, capitalized terms used herein have the meanings assigned to them in the Form 10-K.
Form 10-K for Fiscal Year Ended February 29, 2024
Financial Statements
Report of Independent Registered Public Accounting Firm, page 26
1. Please make arrangements for your auditors to revise their audit report to reference the standards of the Public Company Accounting Oversight Board (United States), rather than just their auditing standards. Refer to PCAOB Auditing Standard 3101 and Rule 1-02(d) of Regulation S-X.
Response:
We appreciate your guidance on this matter. In response to your request, we have instructed our auditors to revise their audit report to explicitly reference the standards of the Public Company Accounting Oversight Board (United States), as required. Specifically, the revised audit report will now state that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). We will file a 10-K/A (Amendment No. 1) with the revised audit report and provide an explanatory note for the reason of the amendment upon the conclusion of the other comments provided in the Comment Letter.
Statements of Operations, page 29
2. Please tell us how your presentation of gross sales excluding the impact of discounts and allowances complies with ASC 606. Also, tell us how you determined that excluding the impact of discounts and allowances does not substitute individually tailored revenue recognition and measurement methods for those of GAAP. Alternatively, remove your presentations of gross sales here and elsewhere throughout your filings and tell us what the revised net line item will be titled. In doing so, please use a more descriptive title than net sales, because you already have a net revenues line item that would be confusingly similar. Refer to Question 100.04 of our Non-GAAP Financial Measures Compliance and Disclosure Interpretations.
Response:
The Company respectfully acknowledges the Staff’s comment and the Company expects it is in compliance with ASC 606 for the following reasons:
EDC is a publisher and distributor of children’s books. The Company operates with two separate sales channels (segments):
1.
Direct Sales Division – “Paper Pie,” through which sales are primarily made direct to consumers and
2.
Publishing Division, “Publishing,” through which sales are made to retail customers that resell our books through bookstores, toy-gift-novelty stores, and other retail outlets.
Overall, the Company offers discounts on its products through both divisions. Allowances for returns are only associated with the Publishing Division and are not material to the financial statements.
The PaperPie Division constitutes the majority of our sales (over 80%). Sales within the PaperPie division are generated by third party consultants called Brand Partners. Brand Partners receive sales orders using various contact points including online parties, social media interaction, school and library contacts and in-person events, The PaperPie Division has several customer types including:
1.
Customers – The majority of PaperPie sales orders come from customers attending online or home “parties.” Customers typically select products recommended by their Host or Brand Partner and pay the “gross sales” price for the product. In accordance with ASC 606-10-32-28 the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expect to be entitled in exchange for transferring the promised goods to the customer. The price of the majority of our products is printed on product and this is the price the typical customer pays and we receive for the product. As sales to Customers are the largest type of transaction, we have consistently reported these sales as gross sales.
2.
Hosts – These customers receive discounted products based on the volume of sales generated from customers that attend their online/home parties.
3.
Brand Partners – Orders from Brand Partners also typically have discounts based on the various sales order types (i.e. Schools and Library orders receive “50% discounted books” for the number of books purchased by the School or Library which are donated as part of our literacy advancement initiative).
In accordance with 606-10-32-31 the transaction price should be allocated to each performance obligation based on the relative stand alone selling price of the goods being provided to the customer.
Orders to Host and Brand Partners receive additional products at free or reduced prices. The gross sale represents the retail value of the books. The discount represents the reduction in the charge on the distinct good. We allocate the discount on the each sales order in accordance with 606-10-32-31 to each individual product on the sales order that receives a discount.
Our Cost of Sales (price we pay for the book) is approximately 25% of the gross/retail price of our products. Our average book retail price is $10.00 and the average cost of sales on the book is $2.50. By presenting gross sales, discounts, and freight revenue as separate lines on the financial statements, it allows the financial statement reader to better identify the impact of different sales order types between the various PaperPie customers and the impact of freight revenues charged on these orders.
If the Company were to only present Net Revenues (combining discounts with gross revenues), the Cost of Sales as a percentage of Net Revenues would fluctuate significantly between periods. This would make the overall presentation of the financial statements more difficult to understand.
Discounts within the PaperPie division fluctuate between periods due to the order type mix between periods and various sales promotions offered to customers. Presenting Gross Sales separate from Discounts allows the reader to see these differences between financial periods and allows the Company to explain the reasons for the fluctuations in discounts as a percentage of gross sales.
Sales made through the Publishing Division represent a smaller percentage of overall sales (less than 15%). Sales made to retailers are typically at a 50% discount with no freight charge on most retail orders. We allocate the discount on the each sales order in accordance with 606-10-31-31 to each individual product on the sales order that receives a discount. We also report Gross sales and discounts separately in this division to be consistent in our reporting and so the two segments can be effectively combined.
In addition, the cost of sales within the Publishing Division represents approximately 25% of gross sales, which is consistent between the two divisions.
We believe this approach does not alter the fundamental principles of revenue recognition under GAAP, is within ASC 606 and enhances the transparency of our financial reporting.
3. Product inventory quantities in excess of what you expect to be sold with the normal operation cycle, based on 2 1/2 years of anticipated sales, are included in non-current inventory. You also disclose on page 8 that during fiscal 2023 and 2024 you did not meet minimum purchase volumes with Usborne, where significant portions of your inventory are concentrated, and Usborne has the right to terminate your agreement with them. Please provide a thorough analysis of the appropriateness of the carrying amounts of your non-current and current inventories. In doing so, demonstrate that no additional inventory write-downs were necessary as of February 29, 2024 and May 31, 2024. Refer to ASC 330-10-35 and ASC 420-10-S99-3
Response:
EDC includes the following guidance to support the Company’s explanation for not writing down it’s Usborne inventory as of February 29, 2024 and May 31, 2024 per ASC 330-10-35;
Per ASC 330-10-35 Inventory measured using any method other than LIFO or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) shall be measured at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. That loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price levels, or other causes.
EDC publishes or distributes approximately 2,000 different titles of children’s books. The majority of titles that EDC offers to customers and retailers do not change from year to year. EDC has historically only introduced approximately 10% new titles in their catalog each year and put out of print “OP” 10% per year. When titles do not meet a minimum annual sell through rate, they are put on an OP status and are not reprinted/reordered. EDC continues to sell these titles until the remaining inventory stock is sold, after which the titles are removed from the Company’s online (PaperPie) and retail catalog (Publishing) offering.
Further, the book publishing industry offers excess or undesirable/obsolete titles through a “remainder market” to discounted retail outlets. The remainder market offers books at deep discounts, typically below cost. EDC has historically not participated in the remainder market and has no plans to participate in the remainder market in the future. Due to EDC’s unique business model, historical write offs/write downs of inventory have been associated with storage damages and undesirable obsolete titles, which have been minimal.
In accordance with the guidance of ASC 330, the Company performs a quarterly evaluation of its exposure to inventory write-down. We have evaluated the inventory on a “title by title basis” for exposure damage, topical exposure and limited sales exposure and have adjusted the reserve to match what management expects to write off in the future. In the context of books and toys, topical obsolescence exposure refers to the risk that the content, themes, or features of a book or toy may become outdated or irrelevant over time due to changes in societal norms, cultural values, or technological advancements.
EDC’s exposure to Usborne Publishing Titles:
EDC has a long history of selling titles created by Usborne Publishing Limited (Usborne), a U.K. based publisher. Usborne publishes approximately 2,400 titles worldwide and distributes them through various channels including small retail, large discount retail, direct sales and online resellers. Usborne currently curates approximately 2,500 titles. EDC has historically carried approximately 1,300 Usborne titles in their online (PaperPie) and retail catalog (Publishing).
From 1988 to 2022, EDC was the exclusive co-publisher and distributor of Usborne titles to the US market. In May 2022, EDC entered into a new distribution agreement with Usborne. Under the new distribution agreement EDC retains the exclusive rights to sell Usborne titles through the Company’s direct sales channel (PaperPie) and Usborne regained the distribution rights to sell directly to retail, discount retail and online channels. The new distribution agreement structure is similar to how Usborne operates in other markets around the world.
In addition, the new distribution agreement requires EDC to meet certain annual minimum purchase requirements and letter of credit requirements. While EDC did not meet these requirements as of February 29, 2024 and May 31, 2024, it has maintained ongoing communication with Usborne and expects the exclusive direct sales distribution relationship for the U.S. market to continue. EDC has historically been Usborne’s largest single customer, as the U.S. market is the largest market in the world for children’s books.
Should Usborne terminate the current distribution agreement due to EDC’s failure to meet the requirements outlined in the agreement, EDC will be allowed to sell through their remaining inventory for an agreed upon period, but not less than twelve months following the termination date.
EDC maintained approximately $27.6 million of Usborne inventory at May 31, 2024. Of that inventory, approximately $21.2 million is in excess of 12 months’ supply.
EDC considered the following issues in determining the appropriateness of the reserve for obsolescence and its decision to not write down Usborne inventory in accordance with the guidance of ASC 330-10-35:
●
EDC has historically been Usborne’s largest single customer as the U.S. market is the largest children’s book market in the world.
●
EDC’s PaperPie division, which maintains the exclusive rights to distribute Usborne products within the U.S. under the new distribution agreement, contributes over 85% of EDC’s net revenues. As such, EDC expects it will remain one of Usborne’s largest customers, if not the largest customer.
●
EDC, under the PaperPie division, continues to have the rights to sell all Usborne titles in inventory.
●
EDC continues to sell Usborne inventory at or above its carrying value on an ongoing basis.
●
EDC has received no notification from Usborne that they intend to terminate the distribution agreement.
●
EDC has maintained ongoing dialogue with Usborne, and Usborne executives have verbally supported EDC’s plans for continued operations and a return to historical purchasing volumes.
●
Usborne has only begun offering a limited selection of titles in the U.S. market through small retail, large discount retail and online resellers (less than 500 titles) as it will take time for Usborne to penetrate their retail, large retail and online reseller channels in the U.S. market.
●
Usborne has no history of participating in the remainder market in the U.S.
●
EDC continuously monitors (through its network of PaperPie Brand Partners) the retail and online reseller offerings distributed directly by Usborne, and there have been no reported discount selling of Usborne products at prices below EDC’s cost basis.
EDC includes the following guidance to support the Company’s explanation for not writing down its Usborne inventory as of February 29, 2024 and May 31, 2024 per ASC 420-10-S99-3;
Per ASC 420-10-S99-3 The following is the text of SEC Observer Comment: Classification of Inventory Markdowns and Other Costs Associated with Restructuring. Subtopic 420-10 states that costs associated with exit or disposal activities that do not involve a discontinued operation should be included in income from continuing operations before taxes. If a subtotal such as "income from operations" is presented, that Subtopic indicates that subtotal should include the amounts of exit or disposal costs. However, the guidance does not address where within income from continuing operations or income from operations inventory markdowns associated with an exit or restructuring activity. The SEC staff recognizes that there may be circumstances in which it can be asserted that inventory
Show Raw Text
CORRESP 1 filename1.htm edc20240906_corresp.htm Division of Corporation Finance Office of Trade and Services U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Attention: Blaise Rhodes and/or Rufus Decker Re: Educational Development Corporation Form 10-K for Fiscal Year Ended February 29, 2024 File No. 000-04957 To the addressees set forth above: This letter is in response to the comment letter dated August 22, 2024 (the “Comment Letter”), from the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) regarding the above-referenced Form 10-K (the “Form 10-K”) for the year ended February 29, 2024, filed on May 21, 2024. For your convenience, we have set forth each comment of the Staff from the Comment Letter in italics below and provided our response below each comment. Unless otherwise indicated, capitalized terms used herein have the meanings assigned to them in the Form 10-K. Form 10-K for Fiscal Year Ended February 29, 2024 Financial Statements Report of Independent Registered Public Accounting Firm, page 26 1. Please make arrangements for your auditors to revise their audit report to reference the standards of the Public Company Accounting Oversight Board (United States), rather than just their auditing standards. Refer to PCAOB Auditing Standard 3101 and Rule 1-02(d) of Regulation S-X. Response: We appreciate your guidance on this matter. In response to your request, we have instructed our auditors to revise their audit report to explicitly reference the standards of the Public Company Accounting Oversight Board (United States), as required. Specifically, the revised audit report will now state that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). We will file a 10-K/A (Amendment No. 1) with the revised audit report and provide an explanatory note for the reason of the amendment upon the conclusion of the other comments provided in the Comment Letter. Statements of Operations, page 29 2. Please tell us how your presentation of gross sales excluding the impact of discounts and allowances complies with ASC 606. Also, tell us how you determined that excluding the impact of discounts and allowances does not substitute individually tailored revenue recognition and measurement methods for those of GAAP. Alternatively, remove your presentations of gross sales here and elsewhere throughout your filings and tell us what the revised net line item will be titled. In doing so, please use a more descriptive title than net sales, because you already have a net revenues line item that would be confusingly similar. Refer to Question 100.04 of our Non-GAAP Financial Measures Compliance and Disclosure Interpretations. Response: The Company respectfully acknowledges the Staff’s comment and the Company expects it is in compliance with ASC 606 for the following reasons: EDC is a publisher and distributor of children’s books. The Company operates with two separate sales channels (segments): 1. Direct Sales Division – “Paper Pie,” through which sales are primarily made direct to consumers and 2. Publishing Division, “Publishing,” through which sales are made to retail customers that resell our books through bookstores, toy-gift-novelty stores, and other retail outlets. Overall, the Company offers discounts on its products through both divisions. Allowances for returns are only associated with the Publishing Division and are not material to the financial statements. The PaperPie Division constitutes the majority of our sales (over 80%). Sales within the PaperPie division are generated by third party consultants called Brand Partners. Brand Partners receive sales orders using various contact points including online parties, social media interaction, school and library contacts and in-person events, The PaperPie Division has several customer types including: 1. Customers – The majority of PaperPie sales orders come from customers attending online or home “parties.” Customers typically select products recommended by their Host or Brand Partner and pay the “gross sales” price for the product. In accordance with ASC 606-10-32-28 the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expect to be entitled in exchange for transferring the promised goods to the customer. The price of the majority of our products is printed on product and this is the price the typical customer pays and we receive for the product. As sales to Customers are the largest type of transaction, we have consistently reported these sales as gross sales. 2. Hosts – These customers receive discounted products based on the volume of sales generated from customers that attend their online/home parties. 3. Brand Partners – Orders from Brand Partners also typically have discounts based on the various sales order types (i.e. Schools and Library orders receive “50% discounted books” for the number of books purchased by the School or Library which are donated as part of our literacy advancement initiative). In accordance with 606-10-32-31 the transaction price should be allocated to each performance obligation based on the relative stand alone selling price of the goods being provided to the customer. Orders to Host and Brand Partners receive additional products at free or reduced prices. The gross sale represents the retail value of the books. The discount represents the reduction in the charge on the distinct good. We allocate the discount on the each sales order in accordance with 606-10-32-31 to each individual product on the sales order that receives a discount. Our Cost of Sales (price we pay for the book) is approximately 25% of the gross/retail price of our products. Our average book retail price is $10.00 and the average cost of sales on the book is $2.50. By presenting gross sales, discounts, and freight revenue as separate lines on the financial statements, it allows the financial statement reader to better identify the impact of different sales order types between the various PaperPie customers and the impact of freight revenues charged on these orders. If the Company were to only present Net Revenues (combining discounts with gross revenues), the Cost of Sales as a percentage of Net Revenues would fluctuate significantly between periods. This would make the overall presentation of the financial statements more difficult to understand. Discounts within the PaperPie division fluctuate between periods due to the order type mix between periods and various sales promotions offered to customers. Presenting Gross Sales separate from Discounts allows the reader to see these differences between financial periods and allows the Company to explain the reasons for the fluctuations in discounts as a percentage of gross sales. Sales made through the Publishing Division represent a smaller percentage of overall sales (less than 15%). Sales made to retailers are typically at a 50% discount with no freight charge on most retail orders. We allocate the discount on the each sales order in accordance with 606-10-31-31 to each individual product on the sales order that receives a discount. We also report Gross sales and discounts separately in this division to be consistent in our reporting and so the two segments can be effectively combined. In addition, the cost of sales within the Publishing Division represents approximately 25% of gross sales, which is consistent between the two divisions. We believe this approach does not alter the fundamental principles of revenue recognition under GAAP, is within ASC 606 and enhances the transparency of our financial reporting. 3. Product inventory quantities in excess of what you expect to be sold with the normal operation cycle, based on 2 1/2 years of anticipated sales, are included in non-current inventory. You also disclose on page 8 that during fiscal 2023 and 2024 you did not meet minimum purchase volumes with Usborne, where significant portions of your inventory are concentrated, and Usborne has the right to terminate your agreement with them. Please provide a thorough analysis of the appropriateness of the carrying amounts of your non-current and current inventories. In doing so, demonstrate that no additional inventory write-downs were necessary as of February 29, 2024 and May 31, 2024. Refer to ASC 330-10-35 and ASC 420-10-S99-3 Response: EDC includes the following guidance to support the Company’s explanation for not writing down it’s Usborne inventory as of February 29, 2024 and May 31, 2024 per ASC 330-10-35; Per ASC 330-10-35 Inventory measured using any method other than LIFO or the retail inventory method (for example, inventory measured using first-in, first-out (FIFO) or average cost) shall be measured at the lower of cost and net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. That loss may be required, for example, due to damage, physical deterioration, obsolescence, changes in price levels, or other causes. EDC publishes or distributes approximately 2,000 different titles of children’s books. The majority of titles that EDC offers to customers and retailers do not change from year to year. EDC has historically only introduced approximately 10% new titles in their catalog each year and put out of print “OP” 10% per year. When titles do not meet a minimum annual sell through rate, they are put on an OP status and are not reprinted/reordered. EDC continues to sell these titles until the remaining inventory stock is sold, after which the titles are removed from the Company’s online (PaperPie) and retail catalog (Publishing) offering. Further, the book publishing industry offers excess or undesirable/obsolete titles through a “remainder market” to discounted retail outlets. The remainder market offers books at deep discounts, typically below cost. EDC has historically not participated in the remainder market and has no plans to participate in the remainder market in the future. Due to EDC’s unique business model, historical write offs/write downs of inventory have been associated with storage damages and undesirable obsolete titles, which have been minimal. In accordance with the guidance of ASC 330, the Company performs a quarterly evaluation of its exposure to inventory write-down. We have evaluated the inventory on a “title by title basis” for exposure damage, topical exposure and limited sales exposure and have adjusted the reserve to match what management expects to write off in the future. In the context of books and toys, topical obsolescence exposure refers to the risk that the content, themes, or features of a book or toy may become outdated or irrelevant over time due to changes in societal norms, cultural values, or technological advancements. EDC’s exposure to Usborne Publishing Titles: EDC has a long history of selling titles created by Usborne Publishing Limited (Usborne), a U.K. based publisher. Usborne publishes approximately 2,400 titles worldwide and distributes them through various channels including small retail, large discount retail, direct sales and online resellers. Usborne currently curates approximately 2,500 titles. EDC has historically carried approximately 1,300 Usborne titles in their online (PaperPie) and retail catalog (Publishing). From 1988 to 2022, EDC was the exclusive co-publisher and distributor of Usborne titles to the US market. In May 2022, EDC entered into a new distribution agreement with Usborne. Under the new distribution agreement EDC retains the exclusive rights to sell Usborne titles through the Company’s direct sales channel (PaperPie) and Usborne regained the distribution rights to sell directly to retail, discount retail and online channels. The new distribution agreement structure is similar to how Usborne operates in other markets around the world. In addition, the new distribution agreement requires EDC to meet certain annual minimum purchase requirements and letter of credit requirements. While EDC did not meet these requirements as of February 29, 2024 and May 31, 2024, it has maintained ongoing communication with Usborne and expects the exclusive direct sales distribution relationship for the U.S. market to continue. EDC has historically been Usborne’s largest single customer, as the U.S. market is the largest market in the world for children’s books. Should Usborne terminate the current distribution agreement due to EDC’s failure to meet the requirements outlined in the agreement, EDC will be allowed to sell through their remaining inventory for an agreed upon period, but not less than twelve months following the termination date. EDC maintained approximately $27.6 million of Usborne inventory at May 31, 2024. Of that inventory, approximately $21.2 million is in excess of 12 months’ supply. EDC considered the following issues in determining the appropriateness of the reserve for obsolescence and its decision to not write down Usborne inventory in accordance with the guidance of ASC 330-10-35: ● EDC has historically been Usborne’s largest single customer as the U.S. market is the largest children’s book market in the world. ● EDC’s PaperPie division, which maintains the exclusive rights to distribute Usborne products within the U.S. under the new distribution agreement, contributes over 85% of EDC’s net revenues. As such, EDC expects it will remain one of Usborne’s largest customers, if not the largest customer. ● EDC, under the PaperPie division, continues to have the rights to sell all Usborne titles in inventory. ● EDC continues to sell Usborne inventory at or above its carrying value on an ongoing basis. ● EDC has received no notification from Usborne that they intend to terminate the distribution agreement. ● EDC has maintained ongoing dialogue with Usborne, and Usborne executives have verbally supported EDC’s plans for continued operations and a return to historical purchasing volumes. ● Usborne has only begun offering a limited selection of titles in the U.S. market through small retail, large discount retail and online resellers (less than 500 titles) as it will take time for Usborne to penetrate their retail, large retail and online reseller channels in the U.S. market. ● Usborne has no history of participating in the remainder market in the U.S. ● EDC continuously monitors (through its network of PaperPie Brand Partners) the retail and online reseller offerings distributed directly by Usborne, and there have been no reported discount selling of Usborne products at prices below EDC’s cost basis. EDC includes the following guidance to support the Company’s explanation for not writing down its Usborne inventory as of February 29, 2024 and May 31, 2024 per ASC 420-10-S99-3; Per ASC 420-10-S99-3 The following is the text of SEC Observer Comment: Classification of Inventory Markdowns and Other Costs Associated with Restructuring. Subtopic 420-10 states that costs associated with exit or disposal activities that do not involve a discontinued operation should be included in income from continuing operations before taxes. If a subtotal such as "income from operations" is presented, that Subtopic indicates that subtotal should include the amounts of exit or disposal costs. However, the guidance does not address where within income from continuing operations or income from operations inventory markdowns associated with an exit or restructuring activity. The SEC staff recognizes that there may be circumstances in which it can be asserted that inventory