NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2018 and 2017
Note 1. Organization and Basis of Presentation
EACO Corporation (“EACO”), incorporated in Florida in
September 1985, is a holding company, primarily comprised of its wholly-owned subsidiary, Bisco Industries, Inc. (“Bisco”)
and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited. Substantially all of EACO’s operations are
conducted through Bisco and Bisco Industries Limited. Bisco was incorporated in Illinois in 1974 and is a distributor of electronic
components and fasteners with 48 sales offices and seven distribution centers located throughout the United States and Canada.
Bisco supplies parts used in the manufacture of products in a broad range of industries, including the aerospace, circuit board,
communication, computer, fabrication, instrumentation, industrial equipment and marine industries.
Note 2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates
include allowance for doubtful trade accounts receivable, slow moving and obsolete inventory reserves, recoverability of the carrying
value and estimated useful lives of long-lived assets, and the valuation allowance against deferred tax assets. Actual
results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements for all periods presented
include the accounts of EACO, Bisco and Bisco Industries Limited (which are collectively referred to herein as the “Company”,
“we”, “us” and “our”). All significant intercompany transactions and balances have been eliminated
in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are carried at original invoice amount,
less an estimate for an allowance for doubtful accounts. Management determines the allowance for doubtful accounts by identifying
probable credit losses in the Company’s accounts receivable and reviewing historical data to estimate the collectability
on items not yet specifically identified as problem accounts. Trade accounts receivable are written off when deemed uncollectible.
Recoveries of trade accounts receivable previously written off are recorded when received. A trade account receivable is considered
past due if any portion of the receivable balance is outstanding for more than 30 days. The Company does not charge interest on
past due balances. The allowance for doubtful accounts was approximately $111,000 at August 31, 2018 and 2017.
Inventories
Inventories consist primarily of electronic fasteners and components,
and are stated at the lower of cost or estimated net realizable value. Cost is determined using the average cost method. Inventories
are presented net of a reserve for slow moving or obsolete items of approximately $1,376,000 and $1,220,000 at August 31, 2018
and 2017, respectively. The reserve is based upon management’s review of inventories on-hand over their expected future utilization
and length of time held by the Company.
Property, Equipment, and Leasehold Improvements
Property, equipment, and leasehold improvements are stated at cost
net of accumulated depreciation and amortization. Depreciation and amortization expense is determined using the straight-line method
over the estimated useful lives of the assets. Depreciation on buildings is thirty five years and five
to
seven years for furniture, fixtures and equipment
. Leasehold improvements are amortized over the estimated useful life
of the asset or the remaining lease term, whichever is less. Maintenance and repairs are charged to expense as incurred. Renewals
and improvements of a major nature are capitalized. At the time of retirement or disposition of the asset, the cost and accumulated
depreciation or amortization are removed from the accounts and any gains or losses are reflected in earnings.
Impairment of Long Lived Assets
The Company’s policy is to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For
the purpose of the impairment review, assets are tested on an individual basis. The recoverability of the assets is
measured by a comparison of the carrying value of each asset to the future net undiscounted cash flows expected to be generated
by such assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount by
which the carrying value of the assets exceeds their estimated fair value.
Marketable Trading Securities
The Company invests in marketable trading securities, which include
long and short positions in equity securities. Short positions represent securities sold, but not yet purchased. Short sales result
in obligations to purchase securities at a later date and are separately presented as a liability in the Company’s consolidated
balance sheets. As of August 31, 2018 and 2017, the Company’s total obligation for securities sold, but not yet purchased
was approximately $933,000 and $707,000, respectively. Restricted cash to collateralize the Company’s obligation for short
sales was $933,000 and $707,000 at August 31, 2018 and 2017, respectively.
These securities are stated at fair value, which is determined using
the quoted closing prices at each reporting date. Realized gains and losses on investment transactions are recognized as incurred
in the consolidated statements of operations. Net unrealized gains and losses are reported in the statements of operations and
represent the change in the market value of investment holdings during the period. See Note 10.
Revenue Recognition
Management generally recognizes revenue at the time of product shipment,
as the Company’s shipping terms are substantially FOB shipping point. Revenue is considered to be realized or realizable
and earned when there is persuasive evidence of a sales arrangement in the form of an executed contract or purchase order, the
product has been shipped, the sales price is fixed or determinable, and collectability is reasonably assured.
Income Taxes
Deferred taxes on income result from temporary differences between
the reporting of income for financial statement and tax reporting purposes. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some or all of the deferred tax asset will not be realized. In making
such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred
tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.
We provide tax contingencies, if any, for federal, state, local
and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development
of these reserves requires judgments about tax issues, potential outcomes and timing. Although the outcome of these tax audits
is uncertain, in management’s opinion adequate provisions for income taxes have been made for potential liabilities emanating
from these reviews. If actual outcomes differ materially from these estimates, they could have a material impact on our results
of operations.
Freight and Shipping/Handling
Shipping and handling expenses are included in cost of revenues,
and were approximately $3,293,000 and $2,760,000 for the years ended August 31, 2018 and 2017, respectively.
Advertising Costs
Advertising costs are expensed as incurred. For fiscal 2018 and
fiscal 2017, the Company spent approximately $403,000 and $243,000 on advertising, respectively.
Liabilities of Discontinued Operations
Prior to June 2005, EACO self-insured workers’ compensation
claims losses up to certain limits. The liability for workers’ compensation represents an estimate of the present
value of the ultimate cost of uninsured losses which are unpaid as of the balance sheet dates. The Company pursues recovery
of certain claims from an insurance carrier. Recoveries, if any, are recognized when realization is reasonably assured.
The outstanding liability for worker’s compensation at year end is not significant and is included in accrued expenses and
other current liabilities at August 31, 2018 and 2017.
Operating Leases
Certain Company leases for its sales offices and distribution centers
provide for minimum annual payments that adjust over the life of the lease. The aggregate minimum annual payments are expensed
on the straight-line basis over the minimum lease term. The Company recognizes a deferred rent liability for rent escalations when
the amount of straight-line rent exceeds the lease payments, and reduces the deferred rent liability when the lease payments exceed
the straight-line rent expense.
Earnings Per Common Share
Basic earnings per common share for the
years ended August 31, 2018 and 2017 were computed based on the weighted average number of common shares outstanding. Diluted
earnings per share for those periods have been computed based on the weighted average number of common shares outstanding, giving
effect to all potentially dilutive common shares that were outstanding during the respective periods. Potentially dilutive common
shares represent 40,000 common shares issuable upon conversion of 36,000 shares of Series A convertible preferred stock, which
were outstanding at August 31, 2018 and 2017. Such securities are excluded from the weighted average shares outstanding used to
calculate diluted earnings per common share for the years ended August 31, 2018 and 2017 as their inclusion would be anti-dilutive
since the conversion price was greater than the average market price of the Company’s common stock during these periods.
Foreign Currency Translation and Transactions
Assets and liabilities recorded in functional currencies other than the U.S. dollar (Canadian dollars
for Bisco’s Canadian subsidiary) are translated into U.S. dollars at the period-end rate of exchange. The exchange rate for
Canadian dollars at August 31, 2018 and 2017 was $0.77 and $0.82, respectively. The resulting balance sheet translation adjustments
are charged or credited directly to accumulated other comprehensive income or loss. Revenue and expenses are transacted at the
average exchange rates for the years ended August 31, 2018 and 2017. The average exchange rates for the years ended August 31,
2018 and 2017 were $0.79 and $0.76 respectively. The percentage of total assets held outside the United States, in Canada, was
4% as of August 31, 2018 and 2017. All foreign sales excluding Canadian sales, are denominated in U.S. dollars and, therefore,
are not subject to foreign currency risk exposure.
Concentrations
Financial instruments that subject the Company to credit risk include
cash balances in excess of federal depository insurance limits and accounts receivable. Cash accounts maintained by the Company
at U.S. and Canadian financial institutions are insured by the Federal Deposit Insurance Corporation and Canadian Deposit Insurance
Corporation, respectively. A significant portion of the Company’s cash was held by its Canadian subsidiary. The Company has
not experienced any losses in such accounts.
Net sales to customers outside the United States and related trade
accounts receivable were approximately 9% and 11% respectively at August 31, 2018, and 9% for both at August 31, 2017. No single
customer accounted for more than 10% of total revenues for either of the years ended August 31, 2018 or 2017.
The following table presents our sales within geographic regions
as a percentage of net revenue, which is based on the “bill-to” location of our customers:
|
|
Years Ended August 31,
|
|
|
|
2018
|
|
|
2017
|
|
U.S.
|
|
|
91
|
%
|
|
|
91
|
%
|
Canada
|
|
|
4
|
%
|
|
|
4
|
%
|
Other
|
|
|
5
|
%
|
|
|
5
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
Estimated Fair Value of Financial Instruments and Certain Nonfinancial
Assets and Liabilities
The Company’s financial instruments other than its marketable
securities include cash and cash equivalents, trade accounts receivable, prepaid expenses, security deposits, trade accounts payable,
line of credit, accrued expenses and long-term debt. Management believes that the fair value of these financial instruments approximate
their carrying amounts based on current market indicators, such as prevailing interest rates. The Company’s marketable securities
are measured at fair value on a recurring basis. See Note 10.
During the years ended August 31, 2018 and 2017, the Company did
not have any nonfinancial assets or liabilities that were measured at estimated fair value on a recurring or nonrecurring basis.
Significant Recent Accounting Pronouncements
In July 2015, the FASB issued ASU 2015-11 “Simplifying the
Measurement of Inventory”. The guidance is part of the “Simplification Initiative” to identify and re-evaluate
areas where the generally accepted accounting principles may be complex and cumbersome to apply. The guidance will require that
inventory be stated at the lower of cost and net realizable value as opposed to the lower of cost or market. Net realizable value
is the estimated selling price for the inventory less completion, disposal and transportation costs. The guidance becomes effective
for fiscal years beginning after December 15, 2016. The guidance became effective for the Company beginning September 1, 2017 and
did not have a material impact on our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers (Topic 606) as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively
“new revenue standard”). The core principle of the ASU, among other changes, is that an entity should recognize revenue
when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. The Company has elected the modified retrospective method and will adopt
the new revenue guidance effective September 1, 2018, with an immaterial impact to the opening retained earnings.
We have completed our contracts assessment under the new revenue recognition standard and determined that
our current revenue recognition accounting is consistent with the new standard, whereby revenue is recognized primarily on the
date products are shipped to, or picked up by, the customer. The ASU requires expanded qualitative and quantitative disclosures
about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, significant judgments
and accounting policy. Adoption of the new standard will not have an ongoing material impact on the Company's consolidated financial
statements.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet
Classification of Deferred Taxes”. The guidance requires that all deferred tax assets and liabilities, along with any related
valuation allowance, be classified as noncurrent on the balance sheet. The guidance becomes effective for annual reporting periods
beginning after December 15, 2016 with early adoption permitted. The Company adopted this guidance to the August 31, 2017 consolidated
balance sheet.
In February 2016, the FASB issued ASU 2016-02, “Leases”,
which will require a lessee to recognize assets and liabilities with lease terms of more than 12 months. Both capital and operating
leases will need to be recognized on the balance sheet. The guidance is effective for annual reporting periods beginning after
December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating
this statement and its impact on its results of operations or financial position.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments
– Credit Losses”, which will require the measurement of all expected credit losses for financial assets held at the
reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective
for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently
evaluating this statement and its impact on its results of operations or financial position.
In November 2016, the FASB issued ASU 2016-18, “Statement
of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task Force.” This standard requires restricted cash
and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under a retrospective transition
approach. The guidance will become effective for fiscal years beginning after December 15, 2017 and interim periods within those
fiscal years with early adoption permitted. The Company has elected to adopt the new cash flow guidance effective September 1,
2018, with an immaterial impact to the statements of cash flows.
Note 3. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are summarized as
follows:
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery and equipment
|
|
$
|
7,903,000
|
|
|
$
|
7,154,000
|
|
Furniture and fixtures
|
|
|
1,013,000
|
|
|
|
898,000
|
|
Vehicles
|
|
|
155,000
|
|
|
|
155,000
|
|
Leasehold improvements
|
|
|
2,495,000
|
|
|
|
1,756,000
|
|
Land
|
|
|
1,717,000
|
|
|
|
1,717,000
|
|
Building
|
|
|
5,490,000
|
|
|
|
5,490,000
|
|
|
|
|
18,773,000
|
|
|
|
17,170,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(8,926,000
|
)
|
|
|
(7,914,000
|
)
|
|
|
$
|
9,847,000
|
|
|
$
|
9,256,000
|
|
On May 19, 2017, the Company purchased the Lakeview Property from
the Glen F. Ceiley and Barbara A. Ceiley Revocable Trust (the “Trust”), which is the grantor trust of Glen Ceiley,
the Company’s Chief Executive Officer, Chairman of the Board and majority shareholder. The total purchase price of the Lakeview
Property was $7,200,000, which was the market price at the time of purchase supported by an independent appraiser. The purchase
of the property was financed through borrowings on the line of credit of $1,800,000 and a term loan with Community Bank, N.A. (“Community
Bank”). See Note 4.
For the years ended August 31, 2018 and 2017, depreciation and amortization
expense was $1,009,000 and $785,000, respectively.
Note 4. Long-Term Debt
The Company currently has a $10,000,000 line of credit agreement
with the Bank. This line of credit was originally held with Community Bank, N.A. (the “Bank”), which Bank was recently
acquired by CVB Financial Corp., the parent company of Citizens Business Bank. On July 24, 2018, the Company entered into a Change
in Terms Agreement dated July 12, 2018 with the Bank (the “Amendment”). The Amendment modifies the Company’s
$10,000,000 line of credit between the Company and the Bank to: (i) extend the expiration date of the line of credit under the
agreement from March 1, 2019 to August 20, 2020; (ii) reduce the default variable interest index rate by .500% (Wall Street Journal
Prime Rate less .500%); and (iii) add the following two other interest rate options that the Company may select (subject to the
requirements in the Amendment and provided that the Company is not in default under the line of credit agreement): (A) One Hundred
Eighty (180) day Libor Rate plus a margin of 1.550%; or (B) the One (1) Year Libor plus a margin of 1.550%, as more fully described
in the Amendment. The line of credit agreement contains financial and other covenants that have not been modified by the Amendment.
Borrowings under this agreement bear interest at the bank’s reference rate (4.50% at August 31, 2018 and 4.25% at August
31, 2017). Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The amounts outstanding
under this line of credit as of August 31, 2018 and 2017 were $3,113,000 and $6,967,000, respectively. The line of credit agreement
contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of August 31,
2018 and 2017, the Company was in compliance with all such covenants.
On May 15, 2017, the Company entered into a $5,400,000 loan agreement
with Community Bank. The proceeds of the loan were used to purchase the building that houses the Company’s corporate headquarters
and distribution center located in Anaheim, California. This loan is payable in 35 regular monthly payments of $27,142 and one
irregular last payment of $5,001,607 due on the maturity of the loan on May 16, 2020. The loan is secured by a deed of trust
to the Lakeview Property and bears interest at the bank’s reference rate (1.79% at May 31, 2017) plus 1.70%. At August 31,
2018, the outstanding balance of this loan was $5,237,000. EACO has entered into a commercial guaranty agreement, pursuant to which
EACO is the guarantor for the $5,400,000 loan. The Company’s future principal loan payments for the Fiscal years ending August
31, 2019 and August 31, 2020 are approximately $146,000 and $5,091,000, respectively.
EACO has also entered into a business loan agreement (and
related $100,000 promissory note) with the Bank in order to obtain a $100,000 letter of credit as security for the
Company’s worker’s compensation requirements.
Note 5. Shareholders’ Equity
Earnings Per Common Share (“EPS”)
The following is a reconciliation of the numerators and denominators
used in the basic and diluted computations of earnings per common share:
|
|
Years Ended August 31,
|
|
(In thousands, except per share information)
|
|
2018
|
|
|
2017
|
|
EPS – basic and diluted:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,949
|
|
|
$
|
4,051
|
|
Less: cumulative preferred stock dividend
|
|
|
(76
|
)
|
|
|
(76
|
)
|
Net income attributable to common shareholders for basic and diluted EPS computation
|
|
|
6,873
|
|
|
|
3,975
|
|
Weighted average common shares outstanding for basic and diluted EPS computation
|
|
|
4,861,590
|
|
|
|
4,861,590
|
|
Earnings per common share – basic and diluted
|
|
$
|
1.41
|
|
|
$
|
0.82
|
|
For the years ended August 31, 2018 and 2017, 40,000 potential common
shares (issuable upon conversion of 36,000 shares of the Company’s Series A cumulative convertible preferred stock) have
been excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive since the
conversion price was greater than the average market price of the common stock.
Preferred Stock
The Company’s Board of Directors is authorized to establish
the various rights and preferences for the Company's preferred stock, including voting, conversion, dividend and liquidation rights
and preferences, at the time shares of preferred stock are issued. In September 2004, the Company sold 36,000 shares of its Series
A cumulative convertible preferred stock (the “Preferred Stock”) to the Company’s CEO, with an 8.5% dividend
rate at a price of $25 per share for a total cash purchase price of $900,000. The holders of the Preferred Stock have
the right at any time to convert the Preferred Stock and accrued but unpaid dividends into shares of the Company’s common
stock at the conversion price of $22.50 per share. In the event of a liquidation or dissolution of the Company, the
holder of the Preferred Stock is entitled to be paid out of the assets of the Company available for distribution to shareholders
at $25.00 per share plus all unpaid dividends before any payments are made to the holders of common stock.
Note 6. Profit Sharing Plan
The Company has a defined contribution 401(k) profit sharing plan
(“401(k) plan”) for all eligible employees. Employees are eligible to contribute to the 401(k) plan after six months
of employment. Under this plan, employees may contribute up to 15% of their compensation. The Company has the discretion to match
50% of the employee contributions up to 4% of employees’ compensation. The Company’s contributions are subject to a
five-year vesting period beginning the second year of service. The Company’s contribution expense was approximately $282,000
and $236,000 for the years ended August 31, 2018 and 2017, respectively.
Note 7. Income Taxes
The following summarizes the Company’s provision for income
taxes on income from operations:
|
|
Years Ended August 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
2,249,000
|
|
|
$
|
2,142,000
|
|
State
|
|
|
660,000
|
|
|
|
119,000
|
|
Foreign
|
|
|
(35,000
|
)
|
|
|
(32,000
|
)
|
|
|
|
2,874,000
|
|
|
|
2,229,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
401,000
|
|
|
|
(88,000
|
)
|
State
|
|
|
(82,000
|
)
|
|
|
32,000
|
|
Foreign
|
|
|
(22,000
|
)
|
|
|
118,000
|
|
|
|
|
297,000
|
|
|
|
62,000
|
|
Total
|
|
$
|
3,171,000
|
|
|
$
|
2,291,000
|
|
Income taxes for the years ended August 31, 2018 and 2017 differ
from the amounts computed by applying the federal blended and statutory corporate rates of 25.4% for 2018 and 34% for 2017 to the
pre-tax income from continuing operations. The differences are reconciled as follows:
|
|
Years Ended August 31,
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
Expected income tax benefit at statutory rate
|
|
$
|
2,601,000
|
|
|
$
|
2,112,000
|
|
Increase (decrease) in taxes due to:
|
|
|
|
|
|
|
|
|
State tax, net of federal benefit
|
|
|
546,000
|
|
|
|
297,000
|
|
Permanent differences
|
|
|
28,000
|
|
|
|
25,000
|
|
Change in deferred tax asset valuation allowance
|
|
|
1,000
|
|
|
|
(4,000
|
)
|
Other, net
|
|
|
(5,000
|
)
|
|
|
(139,000
|
)
|
Income tax expense
|
|
$
|
3,171,000
|
|
|
$
|
2,291,000
|
|
The components of deferred taxes at August 31, 2018 and 2017 are
summarized below:
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
508,000
|
|
|
$
|
508,000
|
|
Allowance for doubtful accounts
|
|
|
(5,000
|
)
|
|
|
3,000
|
|
Accrued expenses
|
|
|
209,000
|
|
|
|
395,000
|
|
Accrued workers’ compensation
|
|
|
7,000
|
|
|
|
18,000
|
|
Inventory reserves
|
|
|
708,000
|
|
|
|
936,000
|
|
Unrealized losses on investment
|
|
|
(7,000
|
)
|
|
|
(223,000
|
)
|
Excess of tax over book depreciation
|
|
|
(235,000
|
)
|
|
|
(113,000
|
)
|
Other
|
|
|
26,500
|
|
|
|
43,000
|
|
Total deferred tax assets
|
|
|
1,211,500
|
|
|
|
1,567,000
|
|
Valuation allowance
|
|
|
(509,000
|
)
|
|
|
(508,000
|
)
|
Total deferred tax assets
|
|
$
|
702,500
|
|
|
$
|
1,059,000
|
|
The Company records net deferred tax assets to the extent management
believes these assets will more likely than not be realized. In making such determination, the Company considers all
available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income
(if any), tax planning strategies and recent financial performance.
In 2010, management concluded that certain deferred tax assets would
be realized, primarily the pre-merger net operating loss carryforwards (“NOLs”) of the Company. Management reviewed
the positive and negative evidence available at August 31, 2017 and 2018 and determined that EACO’s state net operating losses
did not meet the more likely than not threshold required to be recognized. As such, a valuation allowance was retained on these
deferred tax assets.
Management considered the forecast of pre-tax income and strong
history of pre-tax earnings and taxable income, and determined that a valuation allowance was not necessary for EACO’s remaining
deferred tax assets.
The Company follows ASC 740 “Income Taxes” formerly
FASB Interpretation No. 48, an interpretation of FASB Statement No. 109 (“ASC 740”). ASC 740 clarifies the accounting
for uncertainty in income taxes recognized in a company’s financial statements. ASC 740 prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in
the tax return. The Company did not recognize any additional liability for unrecognized tax benefit as a result of the implementation.
The Company has no liability for unrecognized tax benefit related to tax positions for either the August 31, 2018 year end or the
August 31, 2017 year end.
The Company will recognize interest and penalty related to unrecognized
tax benefits and penalties as income tax expense. As of August 31, 2018, the Company has not recognized liabilities for penalty
and interest as the Company does not have any liability for unrecognized tax benefits.
The Tax Cuts and Jobs Act (the “Jobs Act”) was enacted
on December 22, 2017. The Jobs Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time
transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign
sourced earnings. We have completed our accounting for the tax effects of enactment of the Jobs Act and have determined no additional
tax liability due to offsetting foreign tax credits. For the federal corporate rate differential, we recognized an amount of $184,000,
which is included as a component of income tax expense from continuing operations. The Company is subject to taxation in the US,
Canada and various states. The Company’s tax years for 2013, 2014, 2015 and 2016 are subject to examination by the taxing
authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing
authorities for years before 2012.
The Internal Revenue Service is currently examining the Company’s
federal tax return for the year ended August 31, 2016. The Company does not expect the examination to be completed within the next
couple of months. Therefore, the Company does not anticipate any significant changes to its taxable income.
Note 8. Commitments and Contingencies
Legal Matters
From time to time, we may be subject to legal
proceedings and claims which arise in the normal course of our business. Any such matters and disputes could be costly and time
consuming, subject us to damages or equitable remedies, and divert our management and key personnel from our business operations.
We currently are not a party to any material legal proceedings, the adverse outcome of which, in management’s opinion, individually
or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial position or cash
flows.
Operating Lease Obligations
The Company leases its facilities and automobiles under operating
lease agreements (three leased facilities are leased from the Trust, which is beneficially owned by the Company’s Chief Executive
Officer, Chairman of the Board and majority shareholder – see Note 9), which expire on various dates through September 2022
and require minimum rental payments ranging from $1,000 to $32,000 per month. Certain of the leases contain options for renewal
under varying terms.
Minimum future rental payments under operating leases are as follows:
Years Ending August 31:
|
|
|
|
2019
|
|
$
|
1,756,000
|
|
2020
|
|
|
1,363,000
|
|
2021
|
|
|
903,000
|
|
2022
|
|
|
653,000
|
|
2023
|
|
|
526,000
|
|
Thereafter
|
|
|
1,221,000
|
|
|
|
$
|
6,422,000
|
|
Rental expense for all operating leases for the years ended August
31, 2018 and 2017 was approximately $2,024,000 and $2,202,000, respectively.
Note 9. Related Party Transactions
On November 21, 2017, the Company entered into a Commercial and
Industrial Lease Agreement (the “Lease”) with the Trust, which is the grantor trust of Glen Ceiley, our Chief Executive
Officer, Chairman of the Board and the Company’s majority shareholder, for the lease of a facility in Glendale Heights, Illinois.
The Company relocated its Chicago sales office and distribution center to this facility in December 2017. The Lease is a ten year
lease with an initial monthly rental rate of $22,600, which is subject to annual rent increases of approximately 2.5% as set forth
in the Lease. The foregoing description of the Lease does not purport to be complete and is qualified in the entirety by reference
to the Lease as filed as Exhibit 10.33 hereto and incorporated herein by reference.
The Company leases buildings under operating lease agreements with
the Trust, which is a grantor trust of Glen Ceiley, the Company’s Chief Executive Officer, Chairman of the Board and majority
shareholder. During fiscal 2018 and fiscal 2017, the Company incurred approximately $271,000 and $492,000, respectively,
of rental expense related to these leases.
Within the next two years, the Company plans to relocate its corporate
headquarters and Anaheim distribution center to an 80,000 square foot facility in Anaheim, California that is owned by the Trust.
The Company plans to enter into a new lease with the Trust in the near future concerning such facility.
Note 10. Fair Value of Financial Instruments
Management estimates the fair value of its
assets or liabilities measured at fair value based on the three levels of the fair-value hierarchy are described as follows:
Level 1: Quoted prices (unadjusted) in
active markets for identical assets and liabilities. For the Company, Level 1 inputs include marketable securities and liabilities
for short sales of trading securities that are actively traded.
Level 2: Inputs other than Level 1 are observable,
either directly or indirectly. The Company does not hold any Level 2 financial instruments.
Level 3: Unobservable inputs. The Company does
not hold any Level 3 financial instruments.
Marketable Trading Securities
–
The Company holds marketable trading securities, which include long and short positions that are all publicly traded securities
with quoted prices in active markets. These securities are stated at fair value, which is determined using the quoted closing
prices at each reporting date. Short positions represent securities sold, but not yet purchased. Short sales result in obligations
to purchase securities at a later date and are separately presented as a liability in the Company’s consolidated balance
sheets. The fair value of the marketable trading securities and short positions are considered to be Level 1 measurements.
The following table sets forth by level, within the fair value hierarchy,
certain assets at estimated fair value as of August 31, 2018 and 2017:
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
August 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
2,846,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,846,000
|
|
Liability for short sales of trading securities
|
|
|
(933,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(933,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
1,596,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,596,000
|
|
Liability for short sales of trading securities
|
|
|
(707,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(707,000
|
)
|
Note 11. Subsequent Events
Management has evaluated events subsequent to August 31, 2018, through
the date that these consolidated financial statements are being filed with the Securities and Exchange Commission, for transactions
and other events which may require adjustment of and/or disclosure in such financial statements.