EDUC Educational Development Corporation

NOTES TO FINANCIAL STATEMENTS

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The financial statements of the Educational Development Corporation Employee 401(k) Plan (the “Plan”) are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Plan Year

The Plan’s year (“Plan Year”) is the same as Educational Development Corporation’s (the “Company” or “Employer”) fiscal year, which begins March 1st and ends February 28th (29th).

Investment Valuation and Income Recognition

Investments held by a defined contribution plan are required to be reported at fair value (see Note 5). Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Mutual funds and Company common stock held by the Plan are valued at quoted market prices. The collective trust fund held by the Plan is valued at the net asset value (“NAV”) which is based on the fair value of the underlying net assets. Plan management determines the Plan's valuation policies utilizing information provided by ADP Retirement Services (“ADP”) and their trustees, State Street Bank & Trust Company and Reliance Trust Company.

Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the transaction date opening price or ex-dividend date. Net appreciation (depreciation) in fair value of investments includes the Plan’s gains and losses on investments bought, sold and held during the year.

Notes Receivable from Participants

The Plan document does not permit notes receivable from participants.

Payment of Benefits

Distributions are recorded when paid. There were no benefits requested before year-end that were not paid.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the basic financial statements and related notes to financial statements. Actual results could differ from those estimates.

Risk and Uncertainties

The Plan invests in various investment securities which are exposed to various risks such as interest rate, market, and credit risk. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participant account balances and the amounts reported in the statements of net assets available for benefits.

The fair value of the Company common stock accounted for 70% and 84% of the statements of net assets available for benefits for the years ended February 28, 2022 and 2021, respectively. The Company common stock is thinly traded and the stock price has a history of being volatile. Share prices have increased and decreased significantly based on large share purchases and sales as well as on reported earnings performance and future growth expectations. Thus, the fair value at the time of sale or purchase may be affected by the number of shares sold or bought, and other market conditions.

NOTE 2—GENERAL DESCRIPTION AND OPERATION OF THE PLAN

General

The following description of the Plan provides only general information. Participants should refer to the Plan for a more complete description of the Plan’s provisions. The Plan is a defined contribution plan, established for the benefit of the Company’s employees and is subject to the provisions of ERISA.

Eligibility

Employees become eligible to participate in the Plan after completing six months of service, as defined, and having reached the age of 21. Entry dates to the Plan are the first day of the first month of the Plan Year, or the first day of the seventh month of the Plan Year, after the eligibility requirements have been satisfied.

Vesting

Participants are vested immediately in their own contributions plus earnings thereon. Employer contributions vest after the participant has completed three years of continuous service with the Company. Participants automatically become 100% vested upon normal retirement (attainment of age 65), disability or death.

Contributions

Participants may elect to contribute a percentage of their pre-tax or post-tax compensation, subject to certain limitations under the Internal Revenue Code (“IRC”). In addition, the Plan permits catch-up contributions by participants who have attained age 50. Participants may also contribute amounts representing distributions from other qualified plans. Participants may elect to have their contributions invested in any of the investment options available under the Plan, including Company common stock.

The Employer, at its discretion, makes matching contributions to the Plan and has the ability to decide each year how much to make as a matching contribution. The matching contribution is determined as a percentage of salary deferrals the participating employees make during the Plan Year. For the 2022 Plan Year, the Employer made matching contributions equal to 50% of the first 15% of eligible compensation contributed by the participants through elective deferrals to the Plan. Employer matching contributions are based on the participants’ annual Plan compensation.

Investment Options

Both the Employer and participant contributions are directed solely through each participants election into investment alternatives offered by the Plan. The Plan’s investment alternatives as of February 28, 2022 include twenty mutual funds, eleven target date funds, one collective trust fund and the option to purchase Company common stock. In 2002, the Company registered with the Securities and Exchange Commission up to 1,000,000 shares of Company common stock to be sold to participants in the Plan. In May of 2019, the Company registered with the Securities and Exchange Commission an additional 200,000 shares of Company common stock to be sold to participants in the Plan. Participants may transfer amounts attributable to participant or Employer contributions from one investment alternative to another on a daily basis, subject to compliance with applicable trading policies of the Plan.

Participant Accounts

Each participant's account is credited with the participant's contributions, Employer discretionary matching contributions and Plan earnings. The Company pays for the administration costs of the Plan and participants are only charged fees if they elect to use third party investment advisory services and individual services such as withdrawals and distributions. Participant accounts are charged directly for such services when used.

Distributions

Participants may take in-service distributions of vested amounts from their accounts if they:

Hardship distributions are permitted under the Plan.

Participants are eligible to receive distributions of vested amounts in a lump-sum payment upon retirement, death or other termination of employment.

All distributions are valued at the current trading price of the investment at the time of distribution. Any non-vested Employer contributions are forfeited and applied to reduce future Employer contributions. As of February 28, 2022 and February 28, 2021, the Plan had forfeitures of $19 and $941, respectively.

Expenses

Expenses of administering the Plan are paid by the Company. The payment of expenses associated with annual participant testing, annual tax form preparation, audit and regulatory filing costs are also paid by the Company and excluded from these financial statements. The Company does not expect reimbursement from the Plan for these expenses. Certain administrative functions and co-fiduciary functions are performed by officers and employees of the Company. No officer or employee receives compensation from the Plan for these services. Expenses related to the asset management of the investment funds, recordkeeping and the independent fiduciary are paid by the Company.

Termination Provisions

The Company anticipates and believes that the Plan will continue without interruption but reserves the right to discontinue the Plan. In the event of termination, the obligation of the Company to make further contributions ceases. All participants’ accounts would then be fully vested with respect to Company contributions.

Subsequent Events

None

NOTE 3—RELATED PARTY AND PARTIES-IN-INTEREST TRANSACTIONS

ADP is the administrator and record keeper for the Plan and provides other plan related services such as required testing for compliance and annual tax return preparation. State Street Bank & Trust Company is the Plan trustee and maintains and manages the investment balances of the participants. Reliance Trust Company also maintains and manages certain investments of the Plan.

The Plan investment options include the Company’s common stock. During the fiscal year ended February 28, 2022, the price per share of Company common stock on the NASDAQ exchange ranged from $7.06 to $19.12. The closing price per share of Company common stock was $7.88 at February 28, 2022 and $15.61 at February 28, 2021.

These transactions qualify as party-in-interest transactions.

NOTE 4—TAX STATUS OF PLAN

The Company adopted a prototype non-standardized profit sharing plan (the “Prototype Plan”) sponsored by the Plan’s administrator ADP. The Internal Revenue Service (“IRS”) has determined and informed the Prototype Plan sponsor by a favorable opinion letter dated July 16, 2014, that the Prototype Plan is designed in accordance with applicable sections of the IRC. The Prototype Plan's opinion letter is being relied upon by the Plan. Although the Plan has been amended since receiving the opinion letter, the Plan administrator and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC and therefore believe that the Plan is qualified, and the related trust is tax-exempt.

U.S. GAAP requires the Plan administrator to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) for any uncertain position that more likely than not would not be sustained upon examination by the IRS. The Company has analyzed the tax positions taken by the Plan and has concluded that as of February 28, 2022, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements.

NOTE 5—FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described as follows:

The Plan’s assets measured at fair value on a recurring basis are as follows:

The following is a description of the valuation methodologies used for assets measured at fair value. There have been no significant changes in the methodologies used at February 28, 2022 and 2021.

Company common stock: Valued at the closing price reported on the exchange on which the individual securities are traded.

Mutual funds: Valued at the daily closing price as reported by the fund. Mutual funds held by the Plan are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.

Collective trust fund: Stated at fair value as determined by the issuer of the collective trust fund based on the fair market value of the underlying investments, which is valued at the NAV of units of the collective trust fund. The NAV is used as a practical expedient to estimate fair value. This practical expedient would not be used if it is determined to be probable that the fund will sell the investment for an amount different from the reported NAV. Participant transactions (purchases and sales) may occur daily. 

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

NOTE 6—PROHIBITED TRANSACTIONS

During the 2019, 2018 and 2017 Plan Years, the Company inadvertently failed to deposit $72,407, $34,288, and $30,129, respectively, of participant contributions within the required timeframe as stated by the Department of Labor (“DOL”). The DOL considers late deposits to be nonexempt prohibited transactions. The Company elected to participate in the Voluntary Fiduciary Correction Program (“VFCP”) to correct this matter. On July 20, 2021 payments totaling $1,539 for missed interest income were made to the affected participants by the Company. These interest income payments were calculated, using the VFCP recommended model published by the IRS, for the periods that the participants funds remained uninvested.