Item 1. Financial Statements
EACO Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except for share and per
share information)
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
52,559
|
|
|
$
|
45,041
|
|
|
$
|
103,345
|
|
|
$
|
87,212
|
|
Cost of revenues
|
|
|
38,047
|
|
|
|
32,592
|
|
|
|
74,724
|
|
|
|
62,584
|
|
Gross margin
|
|
|
14,512
|
|
|
|
12,449
|
|
|
|
28,621
|
|
|
|
24,628
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
11,720
|
|
|
|
10,477
|
|
|
|
23,210
|
|
|
|
20,817
|
|
Income from operations
|
|
|
2,792
|
|
|
|
1,972
|
|
|
|
5,411
|
|
|
|
3,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on trading securities
|
|
|
(126
|
)
|
|
|
48
|
|
|
|
102
|
|
|
|
251
|
|
Interest and other (expense)
|
|
|
(125
|
)
|
|
|
(130
|
)
|
|
|
(202
|
)
|
|
|
(231
|
)
|
Total other (expense) income
|
|
|
(251
|
)
|
|
|
(82
|
)
|
|
|
(100
|
)
|
|
|
20
|
|
Income before income taxes
|
|
|
2,541
|
|
|
|
1,890
|
|
|
|
5,311
|
|
|
|
3,831
|
|
Provision for income taxes
|
|
|
580
|
|
|
|
571
|
|
|
|
1,425
|
|
|
|
1,317
|
|
Net income
|
|
|
1,961
|
|
|
|
1,319
|
|
|
|
3,886
|
|
|
|
2,514
|
|
Cumulative preferred stock dividend
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(38
|
)
|
|
|
(38
|
)
|
Net income attributable to common shareholders
|
|
$
|
1,942
|
|
|
$
|
1,300
|
|
|
$
|
3,848
|
|
|
$
|
2,476
|
|
Basic and diluted earnings per share:
|
|
$
|
0.40
|
|
|
$
|
0.27
|
|
|
$
|
0.79
|
|
|
$
|
0.51
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
4,861,590
|
|
|
|
4,861,590
|
|
|
|
4,861,590
|
|
|
|
4,861,590
|
|
See accompanying notes to unaudited condensed
consolidated financial statements.
EACO Corporation and Subsidiaries
Consolidated Statements of Comprehensive
Income
(in thousands)
(Unaudited)
|
|
Three Months Ended
February 28,
|
|
|
Six Months Ended
February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net income
|
|
$
|
1,961
|
|
|
$
|
1,319
|
|
|
$
|
3,886
|
|
|
$
|
2,514
|
|
Other comprehensive (loss) gain, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign translation (loss) gain
|
|
|
119
|
|
|
|
(81
|
)
|
|
|
277
|
|
|
|
67
|
|
Total comprehensive income
|
|
$
|
2,080
|
|
|
$
|
1,238
|
|
|
$
|
4,163
|
|
|
$
|
2,581
|
|
See accompanying notes to unaudited condensed
consolidated financial statements.
EACO Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share information)
(Unaudited)
|
|
February 28,
|
|
|
August 31,
|
|
|
|
2019
|
|
|
2018*
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,982
|
|
|
$
|
2,705
|
|
Restricted cash, current
|
|
|
818
|
|
|
|
933
|
|
Trade accounts receivable, net
|
|
|
28,148
|
|
|
|
26,277
|
|
Inventory, net
|
|
|
35,457
|
|
|
|
30,531
|
|
Marketable securities, trading
|
|
|
1,877
|
|
|
|
2,846
|
|
Prepaid expenses and other current assets
|
|
|
2,216
|
|
|
|
1,590
|
|
Total current assets
|
|
|
72,498
|
|
|
|
64,882
|
|
Non-current Assets:
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
|
9,674
|
|
|
|
9,847
|
|
Other assets
|
|
|
1,468
|
|
|
|
1,570
|
|
Total assets
|
|
$
|
83,640
|
|
|
$
|
76,299
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
20,341
|
|
|
$
|
17,678
|
|
Accrued expenses and other current liabilities
|
|
|
3,599
|
|
|
|
7,452
|
|
Liability for short sales of trading securities
|
|
|
818
|
|
|
|
933
|
|
Current portion of long-term debt
|
|
|
148
|
|
|
|
146
|
|
Total current liabilities
|
|
|
24,906
|
|
|
|
26,209
|
|
Non-current Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
12,723
|
|
|
|
8,204
|
|
Total liabilities
|
|
|
37,629
|
|
|
|
34,413
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.01 par value per share; 10,000,000 shares authorized; 36,000 shares outstanding (liquidation value $900)
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.01 par value per share; 8,000,000 shares authorized; 4,861,590 shares outstanding
|
|
|
49
|
|
|
|
49
|
|
Additional paid-in capital
|
|
|
12,378
|
|
|
|
12,378
|
|
Accumulated other comprehensive income
|
|
|
1,205
|
|
|
|
928
|
|
Retained earnings
|
|
|
32,378
|
|
|
|
28,530
|
|
Total shareholders’ equity
|
|
|
46,011
|
|
|
|
41,886
|
|
Total liabilities and shareholders’ equity
|
|
$
|
83,640
|
|
|
$
|
76,299
|
|
|
*
|
Derived from the Company’s audited financial statements
included in its Form 10-K for the year ended August 31, 2018 as filed with the U. S. Securities and Exchange Commission on November
28, 2018.
|
See accompanying notes to unaudited condensed
consolidated financial statements.
EACO Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders’
Equity
(in thousands, except share information)
(Unaudited)
|
|
Convertible
|
|
|
|
|
|
Additional
|
|
|
Accumulated
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2018 *
|
|
|
36,000
|
|
|
$
|
1
|
|
|
|
4,861,590
|
|
|
$
|
49
|
|
|
$
|
12,378
|
|
|
$
|
928
|
|
|
$
|
28,530
|
|
|
$
|
41,886
|
|
Preferred dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Foreign translation gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
158
|
|
|
|
—
|
|
|
|
158
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,925
|
|
|
|
1,925
|
|
Balance, November 30, 2018
|
|
|
36,000
|
|
|
$
|
1
|
|
|
|
4,861,590
|
|
|
$
|
49
|
|
|
$
|
12,378
|
|
|
$
|
1,086
|
|
|
$
|
30,436
|
|
|
$
|
43,950
|
|
Preferred dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Foreign translation gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
119
|
|
|
|
—
|
|
|
|
119
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,961
|
|
|
|
1,961
|
|
Balance, February 28, 2019
|
|
|
36,000
|
|
|
$
|
1
|
|
|
|
4,861,590
|
|
|
$
|
49
|
|
|
$
|
12,378
|
|
|
$
|
1,205
|
|
|
$
|
32,378
|
|
|
$
|
46,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2017 *
|
|
|
36,000
|
|
|
$
|
1
|
|
|
|
4,861,590
|
|
|
$
|
49
|
|
|
$
|
12,378
|
|
|
$
|
747
|
|
|
$
|
21,657
|
|
|
$
|
34,832
|
|
Preferred dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Foreign translation gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
148
|
|
|
|
—
|
|
|
|
148
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,195
|
|
|
|
1,195
|
|
Balance, November 30, 2017
|
|
|
36,000
|
|
|
$
|
1
|
|
|
|
4,861,590
|
|
|
$
|
49
|
|
|
$
|
12,378
|
|
|
$
|
895
|
|
|
$
|
22,833
|
|
|
$
|
36,156
|
|
Preferred dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Foreign translation gain
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(81
|
)
|
|
|
—
|
|
|
|
(81
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,319
|
|
|
|
1,319
|
|
Balance, February 28, 2018
|
|
|
36,000
|
|
|
$
|
1
|
|
|
|
4,861,590
|
|
|
$
|
49
|
|
|
$
|
12,378
|
|
|
$
|
814
|
|
|
$
|
24,133
|
|
|
$
|
37,375
|
|
|
*
|
Derived from the Company’s audited financial statements
included in its Form 10-K for the year ended August 31, 2018 and 2017 as filed with the U. S. Securities and Exchange Commission
on November 28, 2018 and 2017, respectively.
|
See accompanying notes to unaudited condensed
consolidated financial statements.
EACO Corporation and Subsidiaries
Condensed Consolidated Statements of Cash
Flows
(in thousands)
(Unaudited)
|
|
Six Months Ended
|
|
|
|
February 28,
|
|
|
|
2019
|
|
|
2018
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,886
|
|
|
$
|
2,514
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
503
|
|
|
|
498
|
|
Bad debt expense
|
|
|
18
|
|
|
|
44
|
|
Change in inventory reserve
|
|
|
107
|
|
|
|
123
|
|
Net (gain) on trading securities
|
|
|
(102
|
)
|
|
|
(251
|
)
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(1,889
|
)
|
|
|
(3,188
|
)
|
Inventory
|
|
|
(5,033
|
)
|
|
|
(1,760
|
)
|
Prepaid expenses and other assets
|
|
|
(524
|
)
|
|
|
(1,030
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
|
2,206
|
|
|
|
2,515
|
|
Accrued expenses and other current liabilities
|
|
|
(3,853
|
)
|
|
|
(1,161
|
)
|
Net cash used in operating activities
|
|
|
(4,681
|
)
|
|
|
(1,696
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and leasehold improvements
|
|
|
(330
|
)
|
|
|
(1,214
|
)
|
Sale (purchase) of marketable securities, trading
|
|
|
1,071
|
|
|
|
(338
|
)
|
Net change in securities sold short
|
|
|
(115
|
)
|
|
|
(90
|
)
|
Net cash provided by (used in) investing activities
|
|
|
626
|
|
|
|
(1,642
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
4,593
|
|
|
|
1,525
|
|
Preferred dividend
|
|
|
(38
|
)
|
|
|
(38
|
)
|
Bank overdraft
|
|
|
457
|
|
|
|
1,145
|
|
Payments on long-term debt
|
|
|
(72
|
)
|
|
|
(35
|
)
|
Net cash provided by financing activities
|
|
|
4,940
|
|
|
|
2,597
|
|
Effect of foreign currency exchange rate changes on cash and cash equivalents
|
|
|
277
|
|
|
|
67
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
|
|
1,162
|
|
|
|
(674
|
)
|
Cash, cash equivalents, and restricted cash - beginning of period
|
|
|
3,638
|
|
|
|
4,577
|
|
Cash, cash equivalents, and restricted cash - end of period
|
|
$
|
4,800
|
|
|
$
|
3,903
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
201
|
|
|
$
|
243
|
|
Cash paid for income taxes
|
|
$
|
3,059
|
|
|
$
|
2,241
|
|
See accompanying notes to unaudited condensed
consolidated financial statements.
EACO CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
February 28, 2019
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”).
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 and Significant
Recent Accounting Pronouncements
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 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.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company in conformity with GAAP for interim financial information and the rules and regulations
of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments
considered necessary in order to make the financial statements not misleading have been included.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations
for presentation of interim financial information. Therefore, the condensed consolidated interim financial statements should be
read in conjunction with the Company’s Annual Report on Form 10-K for the year ended August 31, 2018 (“fiscal
2018”). The condensed consolidated balance sheet as of August 31, 2018 and related disclosures were derived from the Company’s
audited consolidated financial statements as of August 31, 2018. Operating results for the three and six months ended February
28, 2019 are not necessarily indicative of the results that may be expected for future quarterly periods or the entire fiscal year.
Principles of Consolidation
The consolidated financial statements for all periods presented
include the accounts of EACO, its wholly-owned subsidiary, Bisco, and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries
Limited (all of 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, Net
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 if past due more than 30 days. The Company does not charge interest
on past due balances. The allowance for doubtful accounts was $111,000 at February 28, 2019 and August 31, 2018.
Inventories, Net
Inventory consists primarily of electronic fasteners and components,
and is 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 $1,483,000 and $1,376,000 at February 28, 2019 and August 31,
2018, 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.
Short Sales of Trading Securities
Securities sold short represent transactions in which the Company
sells a security borrowed from the broker, which the Company is obligated to purchase and deliver back to the broker. The initial
value of the underlying borrowed security is recorded as a liability, and is adjusted to market value at each reporting period,
with unrealized appreciation or depreciation being recorded for the change in value of the open short position. The Company records
a realized gain or loss when the short position is closed. By entering into short sales, the Company bears the market risk of an
unfavorable increase in the price of the security sold short in excess of the proceeds received. The market value of open short
positions is separately presented as a liability in the consolidated balance sheets.
The Company is required to establish a margin account with the
lending broker equal to the market value of open short positions. As the use of such funds is restricted while the short sale is
outstanding, the balance of this account is classified as restricted cash, current in the consolidated balance sheets. The restricted
cash related to securities sold short was $818,000 and $933,000 at February 28, 2019 and August 31, 2018, respectively.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of the
impairment review, assets are measured by comparing the carrying amount to future net cash flows. If assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their
estimated fair values.
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, but not limited to, 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 and estimates regarding tax issues, potential outcomes and timing. Actual results could
differ from those estimates.
Revenue Recognition
We derive our revenue primarily from
product sales. We determine revenue recognition through the following steps: (1) identification of the contract with a customer;
(2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of
the transaction price to the performance obligations in the contract; (5) recognition of revenue when, or as, we satisfy a performance
obligation.
The Company's performance obligations
consist solely of product shipped to customers. Revenue from product sales is recognized upon transfer of control of promised
products to customers in an amount that reflects the consideration we expect to receive in exchange for these products. Revenue
is recognized net of returns and any taxes collected from customers. We offer industry standard contractual terms in our
purchase orders.
Earnings Per Common Share
Basic earnings per common share for
the three and six months ended February 28, 2019 and 2018 were computed based on the weighted average number of common shares outstanding
during each respective period. 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 (See Note 4).
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. Revenue and expenses are translated at the weighted-average exchange rates for the quarters ended February 28,
2019 and 2018. The resulting translation adjustments are charged or credited directly to accumulated other comprehensive income
or loss. The average exchange rates of Canadian dollars to U.S. dollars for the six months ended February 28, 2019 and 2018 were
$0.75 and $0.79, respectively. The average exchange rates of Canadian dollars to U.S. dollars for the six months ended February
28, 2018 2017 were $0.76 and $0.80, respectively.
Concentrations
Net sales to customers outside the United States were approximately
9% of revenues for each of the six months ended February 28, 2019 and 2018, and related accounts receivable were approximately
13% and 11% of total accounts receivable for each period at February 28, 2019 and 2018, respectively.
No single customer accounted for more than 10% of revenues and
accounts receivable for the three and six months ended February 28, 2019 or 2018.
Significant Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers” to supersede
the previous revenue recognition guidance under current GAAP. This guidance presents steps for comprehensive revenue recognition
that requires an entity to recognize revenue to depict the transfer of 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 adopted
the guidance beginning in fiscal 2019 using the modified retrospective approach. The adoption of this guidance did not have a significant
impact on our consolidated financial statements.
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. This 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 the Company’s results of operations and 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. This 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 the Company’s results of operations
and 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 became effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal
years with early adoption permitted. The Company has adopted the guidance of this standard effective September 1, 2018 for fiscal
year ending August 31, 2019.
Note 3. Debt
The Company currently has a $10,000,000 line of credit agreement
with Citizens Business Bank (the “Bank”). This line of credit was originally held with Community Bank, N.A., 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. The amounts outstanding under this line of credit as of February 28, 2019 is are currently under the default
variable interest index rate, which bear interest at the bank’s reference rate, which is the Prime Rate (5.50% at February
28, 2019 and 5.00% at August 31, 2018) less .500%. 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 February 28, 2019 and August 31, 2018 were $7,680,000
and $3,113,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the
maintenance of certain financial ratios. As of February 28, 2019 and August 31, 2018, the Company was in compliance with all such
covenants.
On May 15, 2017, the Company entered into a $5,400,000 loan
agreement with the 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 (“Lakeview Property”). This loan is payable in
35 regular monthly payments of $27,142 and one last payment of $5,001,607 due on the maturity date of the loan on May 16, 2020.
The loan is secured by a deed of trust to the Lakeview Property and bears a variable interest rate that is 1.70% plus one year
LIBOR, which is periodically reset based on one year LIBOR no more than once in any 12 month period at the election of the bank.
At February 28, 2019 and August 31, 2018, the one year LIBOR was 2.7%. At February 28, 2019 and August 31, 2018, the outstanding
balance of this loan was $5,191,000 and $5,237,000, respectively. The Company’s future principal loan payments for the Fiscal
years ending August 31, 2019 and August 31, 2020 are approximately $74,000 and $5,117,000, respectively.
Note 4. Earnings per Share
The following is a reconciliation of the numerators and denominators
of the basic and diluted computations for earnings per common share (in thousands, except per share data):
|
|
Three Months Ended
February 28,
|
|
|
Six Months Ended
February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,961
|
|
|
$
|
1,319
|
|
|
$
|
3,886
|
|
|
$
|
2,514
|
|
Less: accrued preferred stock dividends
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(38
|
)
|
|
|
(38
|
)
|
Net income available for common shareholders
|
|
$
|
1,942
|
|
|
$
|
1,300
|
|
|
$
|
3,848
|
|
|
$
|
2,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – basic and diluted
|
|
$
|
0.40
|
|
|
$
|
0.27
|
|
|
$
|
0.79
|
|
|
$
|
0.51
|
|
For the three and six months ended February 28, 2019 and 2018,
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.
Note 5. Related Party Transactions
The Company leases its Chicago area sales office and distribution
center located in Glendale Heights, Illinois under an operating lease agreement (the “Lease”) from a grantor trust
(the “Trust”) that is beneficially owned by the Company’s majority shareholder, who is also the Company’s
Chairman and CEO. 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. During the three months ended February 28, 2019 and 2018, the Company
incurred approximately $68,000 and $45,000 of expense related to this lease.
Within the next 10 months, 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 6. Income Taxes
The Company accounts for income taxes under the asset and liability
method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for
deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered,
and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more
likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that other than
deferred tax assets associated with certain state net operating losses and capital losses, net deferred tax assets will more likely
than not be utilized. Therefore, a valuation allowance totaling $498,000 has been established against only those assets related
to state net operating losses and capital losses.
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 previously 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 for the year ended
August 31, 2018, we recognized an amount of $184,000, which was included as a component of income tax expense from continuing operations.
The Company is subject to taxation in the US, Canada and various states. We have elected to account for Global Intangible Low-Taxed
Income (GILTI) in the year the tax is incurred.
During the three and six months ended February 28, 2019, the
Company recorded an income tax provision of $580,000 and $1,425,000, respectively resulting in an effective tax rate of 22.8% and
26.8%, respectively. For the three and six months ended February 28, 2018, the Company recorded income tax provision of $571,000
and $1,317,000, respectively, resulting in an effective tax rate of 30.2% and 34.4%, respectively. The current period effective
tax rate differs from the current statutory rate of 21% primarily due to the state tax rates and valuation allowances against certain
deferred tax assets and permanent book tax differences.
Accounting for uncertainty in income taxes prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return and provides guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. For the three and six months ended February 28, 2019, the Company did not have a liability
for any unrecognized tax benefit. The Company has elected to classify interest and penalties as a component of its income tax provision.
For the three and six months ended February 28, 2019, the Company did not have a liability for penalties or interest. The Company
does not expect any changes to its unrecognized tax benefit for the next six months that would materially impact its consolidated
financial statements.
The Company’s tax years for 2014, 2015, 2016, and 2017
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 2014.
Note 7. Commitments and Contingencies
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 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.
Note 8. Subsequent Events
Management has evaluated events subsequent to February 28, 2019,
through the date that these unaudited condensed consolidated financial statements are being filed with the SEC, for transactions
and other events which may require adjustment of and/or disclosure in such financial statements.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Cautionary Statements
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). Such statements can be identified by the use of terminology such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “forecast,” “intend,”
“may,” “plan,” “possible,” “project,” “should,” “will”
and similar words or expressions. These forward-looking statements include, but are not limited to, statements regarding our anticipated
revenue, expenses, profits and capital needs. These statements are based on our current expectations, estimates, projections, and
the impact of certain accounting pronouncements, and are subject to a number of risks and uncertainties that could cause our actual
results to differ materially from those projected or estimated, including but not limited to adverse economic conditions, competitive
pressures, unexpected costs and losses from operations or investments, increases in costs and overhead, our ability to maintain
an effective system of internal controls over financial reporting, potential losses from trading in securities, our ability to
retain key personnel and good relationships with suppliers, the willingness of lenders to extend financing commitments and the
availability of capital resources, and the other risks set forth in “Risk Factors” in Part II, Item 1A of this report
or identified from time to time in our other filings with the SEC and in public announcements. You should not place undue reliance
on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise or update publicly
any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events. The inclusion of forward looking statements in this Quarterly Report should not be regarded
as a representation by management or any other person that the objectives or plans of the Company will be achieved.
Overview
The condensed consolidated financial statements comprise the
accounts of EACO and its wholly-owned subsidiary, Bisco and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited.
EACO is a holding company primarily comprised of its wholly-owned
subsidiary, Bisco. Bisco 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.
Revenues derived from the Bisco and its subsidiary represent
100% of our total revenues and are expected to continue to represent all of the Company’s total revenues for the foreseeable
future.
Critical Accounting Policies
The Company's
discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
Within the context of these critical accounting policies, the
Company is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts
being reported.
In May 2014, the
FASB issued ASU 2014-09, Revenue from Contracts with Customers, issued as a new Topic, ASC Topic 606 ("ASU 2014-09").
The new revenue recognition standard provides a step analysis of transactions to determine when and how revenue is recognized.
The premise of the standard is that a Company should recognize revenue to depict the transfer of 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 adopted the guidance beginning in fiscal 2019 using the modified retrospective approach. The adoption of
this guidance did not have a significant impact on our consolidated financial statements.
In February 2016,
the FASB issued ASU 2016-02, "Leases (Topic 842)," which will require lessees to recognize almost all leases
on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model,
requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar
to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model,
but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for
fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating
the potential impact this standard will have on its condensed consolidated financial statements and related disclosures.
Management does
not believe any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect
on the Company's present or future condensed consolidated financial statements.
There have been no changes to the Company’s critical accounting
policies for the three and six months ended February 28, 2019, except for the adoption of ASC 606 referenced above. Please see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s
Annual Report on Form 10-K for the year ended August 31, 2018 as filed with the SEC on November 28, 2018.
Results of Operations
Comparison of the Three Months Ended
February 28, 2019 and 2018
Revenues and Gross Profit ($ in
thousands)
|
|
Three Months Ended
February 28,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
52,559
|
|
|
$
|
45,041
|
|
|
$
|
7,518
|
|
|
|
16.7
|
%
|
Cost of revenues
|
|
|
38,047
|
|
|
|
32,592
|
|
|
|
5,455
|
|
|
|
16.7
|
%
|
Gross margin
|
|
$
|
14,512
|
|
|
$
|
12,449
|
|
|
$
|
2,063
|
|
|
|
16.6
|
%
|
Percent of revenues
|
|
|
27.6
|
%
|
|
|
27.6
|
%
|
|
|
|
|
|
|
-
|
%
|
Revenues consist primarily of sales
of component parts and fasteners, but also include, to a lesser extent, kitting charges and special order fees, as well as freight
charged to customers. The increase in revenues in the three months ended February 28, 2019 (“Q2 2019”) as compared
to the three months ended February 28, 2018 (“Q2 2018”) was largely due to a higher volume of product sales, increased
sales department headcount over prior year quarter, and increased productivity from the Company’s employees. Revenues have
also increased due to the Company continuing to focus on relationship building programs with current and potential customers and
vendors, which resulted in additional new authorized distributorships in the current period. The gross margins remained consistent
at 27.6% for both Q2 2019 and Q2 2018.
Selling, General and Administrative
Expenses ($ in thousands)
|
|
Three Months Ended
February 28,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
Selling, general and administrative expenses
|
|
$
|
11,720
|
|
|
$
|
10,477
|
|
|
$
|
1,243
|
|
|
|
11.9
|
%
|
Percent of revenues
|
|
|
22.3
|
%
|
|
|
23.3
|
%
|
|
|
|
|
|
|
(1.0
|
)%
|
Selling, general and administrative
expense (“SG&A”) consists primarily of payroll and related expenses for the Company’s sales and administrative
staff, professional fees including accounting, legal and technology costs and expenses, and sales and marketing costs. SG&A
in Q2 2019 increased from Q2 2018 largely due to an increase in employee headcount, annual raises, and to a lesser extent, due
to rent escalation in leased properties, increases in IT consulting fees, and depreciation expense. SG&A as a percent of revenue
in Q2 2019 decreased from Q2 2018 primarily due to the Company being able to increase sales with current and new customers at a
rate greater than SG&A expenses increased.
Other (Expense) Income, Net ($ in
thousands)
|
|
Three Months Ended
February 28,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain on trading securities
|
|
$
|
(126
|
)
|
|
$
|
48
|
|
|
$
|
(174
|
)
|
|
|
(362.5
|
)%
|
Interest and other (expense), net
|
|
|
(125
|
)
|
|
|
(130
|
)
|
|
|
5
|
|
|
|
3.8
|
%
|
Other (expense) income, net
|
|
$
|
(251
|
)
|
|
$
|
(82
|
)
|
|
$
|
(169
|
)
|
|
|
(206.1
|
)%
|
Percent of revenues
|
|
|
0.5
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
Other (expense) income, net primarily
consists of income or losses on trading in short-term marketable equity securities of publicly-held corporations and interest related
to the Company’s debt obligations. The Company’s strategy consists of both long and short positions, as well as utilizing
options designed to improve returns. During Q2 2019, the Company recognized a net loss of $126,000 as compared to a net gain of
$48,000 in Q2 2018 in net realized and unrealized gains. The decrease in trading securities in Q2 2019 was primarily due to timing
of sales and purchases and general market climate of short and long positions during the period.
Interest and other expense decreased
in Q2 2019 compared to Q2 2018 due to an overall decrease in the Company’s line of credit balance with the Bank during the
period.
Income Tax Provision ($ in thousands)
|
|
Three Months Ended
February 28,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
580
|
|
|
$
|
571
|
|
|
$
|
9
|
|
|
|
1.6
|
%
|
Percent of pre-tax income
|
|
|
22.8
|
%
|
|
|
30.2
|
%
|
|
|
|
|
|
|
(7.4
|
)%
|
The provision for income taxes increased
by $9,000 in Q2 2019 over the prior year period. This increase was primarily due to higher taxable income in the current quarter
as compared to the prior year period. The percent of pre-tax income decreased from 30.2% at Q2 2018 to 22.8% for Q2 2019. The decrease
in the rate was primarily due to the Tax Cut and Jobs Act becoming effective as of January 1, 2018, during the prior year period,
which enacted significant changes to U.S. tax and related laws. Some of the provisions of the new tax law affecting corporations
include, but are not limited to, a reduction of the federal corporate income tax rate from 35% to 21%, limiting the interest expense
deduction, expensing of cost of acquired qualified property and eliminating the domestic production activities deduction. See Note
6.
Comparison of the Six Months Ended
February 28, 2019 and 2018
Revenues and Gross Profit ($ in
thousands)
|
|
Six Months Ended
February 28,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
103,345
|
|
|
$
|
87,212
|
|
|
$
|
16,133
|
|
|
|
18.5
|
%
|
Cost of revenues
|
|
|
74,724
|
|
|
|
62,584
|
|
|
|
12,140
|
|
|
|
19.4
|
%
|
Gross margin
|
|
$
|
28,621
|
|
|
$
|
24,628
|
|
|
$
|
3,993
|
|
|
|
16.2
|
%
|
Percent of revenues
|
|
|
27.7
|
%
|
|
|
28.2
|
%
|
|
|
|
|
|
|
(0.5
|
)%
|
The increase in revenues in the six
months ended February 28, 2019 as compared to the six months ended February 28, 2018 was largely due to increased unit sales in
the current period compared to the prior year period, resulting from the Company focusing on improving and expanding its supply
chain team, which has enabled the Company to effectively target and purchase inventory with higher turnover rates. Further, the
increase was due to a higher volume of product sales, and increased sales department headcount over the prior year period. Revenues
have also increased due to the Company continuing to focus on relationship building programs with current and potential customers
and vendors.
The gross margin as a percent of revenue
remained relatively consistent with the prior year period, decreasing slightly by 0.5%. The decrease in gross margins in the six
months ended February 28, 2019 as compared to the six months ended February 28, 2018 is primarily due to the mix of products sold
in each respective period.
Selling, General and Administrative
Expenses ($ in thousands)
|
|
Six Months Ended
February 28,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
23,210
|
|
|
$
|
20,817
|
|
|
$
|
2,393
|
|
|
|
11.5
|
%
|
Percent of revenues
|
|
|
22.5
|
%
|
|
|
23.9
|
%
|
|
|
|
|
|
|
(1.4
|
)%
|
SG&A in the six months ended February
28, 2019 increased from the prior year period largely due to an increase in annual employee wage raises and bonuses, increase in
employee headcount, and to a lesser extent, due to larger leased properties which had rent escalations. SG&A as a percent of
revenue in Q2 2019 decreased from Q2 2018 primarily due to the Company being able to increase sales with current and new customers
at a rate greater than SG&A expenses increased.
Other Income (Expense), Net ($ in
thousands)
|
|
Six Months Ended
February 28,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on trading securities
|
|
$
|
102
|
|
|
$
|
251
|
|
|
$
|
(149
|
)
|
|
|
(59.4
|
)%
|
Interest expense, net
|
|
|
(202
|
)
|
|
|
(231
|
)
|
|
|
29
|
|
|
|
12.6
|
%
|
Other income, net
|
|
$
|
(100
|
)
|
|
$
|
20
|
|
|
$
|
(120
|
)
|
|
|
(600.0
|
)%
|
Percent of revenues
|
|
|
-%
|
|
|
|
-%
|
|
|
|
|
|
|
|
|
|
During the six months ended February 28, 2019, the Company recognized
a net gain of $102,000 as compared to a net gain of $251,000 in the six months ended February 28, 2018 in net realized and unrealized
gains. The increase in trading securities for the current six month period was primarily due to timing of sales and purchases and
general market climate of short and long positions during the period.
Interest and other expense decreased in the six months ended
February 28, 2019 compared to the prior year period due to an overall lower balance in the Company’s line of credit with
the Bank in the current period when compared to the prior year period.
Income Tax Provision ($ in thousands)
|
|
Six Months Ended
February 28,
|
|
|
$
|
|
|
%
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
1,425
|
|
|
$
|
1,317
|
|
|
$
|
108
|
|
|
|
8.2
|
%
|
Percent of pre-tax income
|
|
|
26.8
|
%
|
|
|
34.4
|
%
|
|
|
|
|
|
|
(7.6
|
)%
|
The provision for income taxes increased by $108,000 in the
six month period ended February 28, 2019 over the prior year period. This was primarily the result of higher taxable net income
in the current period as compared to the prior year period. The percent of pre-tax income decreased from 34.4% to 26.8% when comparing
the six months ended February 28, 2018 to February 28, 2019. The decrease in the rate was primarily due to the Tax Cut and Jobs
Act becoming effective as of January 1, 2018, during the prior year period, which enacted significant changes to U.S. tax and related
laws. Further, the decrease in the rate is due to an increase in deferred tax assets and permanent deductible expense items during
the six months ended February 28, 2019.
Liquidity and Capital Resources
The Company has historically been funded
from positive cash flow generated from its operations. As of February 28, 2019 and August 31, 2018, the Company held approximately
$3,982,000 and $2,705,000 of unrestricted cash and cash equivalents, respectively.
In addition, the Company currently has a $10,000,000 line of
credit agreement with 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 amounts outstanding under this line of credit as of February
28, 2019 is currently all under the default variable interest index rate. 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, which is the Prime Rate (5.50% at February 28, 2019 and 5.00% at August 31, 2018) less .500%. 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 February 28, 2019
and 2018 were $7,680,000 and $8,485,000, respectively. The line of credit agreement contains certain nonfinancial and financial
covenants, including the maintenance of certain financial ratios. As of February 28, 2019 and August 31, 2018, the Company was
in compliance with all such covenants.
On May 15, 2017, the Company entered into a $5,400,000 loan
agreement with the Bank. The proceeds of the loan were used to purchase the Lakeview Property located in Anaheim, California Lakeview
Property. This loan is payable in 35 regular monthly payments of $27,142 and one last payment of $5,001,607 due on the maturity
date of the loan on May 16, 2020. The loan is secured by a deed of trust to the Lakeview Property and bears a variable interest
rate that is 1.70% plus one year LIBOR, which is periodically reset based on one year LIBOR no more than once in any 12 month period
at the election of the bank. At February 28, 2019 and August 31, 2018, the one year LIBOR was 2.7%. At February 28, 2019, the outstanding
balance of this loan was $5,191,000.
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.
The Company plans to move its corporate
headquarters within the next 12 months to a significantly larger facility owned by the Trust in Anaheim, California. In preparation
for this move, the Company expects to incur higher capital expenses during the next years for capital costs for tenant improvements
to modify this facility to meet the Company’s requirements.
The Company also held $1,877,000 and $2,846,000
of marketable securities at February 28, 2019 and August 31, 2018, respectively, which could be liquidated, if necessary.
Cash Flows from Operating Activities
Cash used in operating activities was
$1,696,000 for the six months ended February 28, 2018 as compared with cash used in operations of $4,681,000 for the six months
ended February 28, 2019. The increase in current period cash used by operating activities was primarily due to the increase in
trade accounts receivable, inventory, and prepaid expenses and other current assets in the current period, which was largely related
to an increase in becoming an authorized product lines distributor through various vendors and increased revenues in the six months
ended February 28, 2019. This was partially offset by an increase in net income and accrued expenses in the current period. The
prior year cash used in operating activities was primarily due to an increase in accounts receivables, inventory, and expenses
and other current assets.
Cash Flows from Investing Activities
Cash used in investing activities was
$1,642,000 for the six months ended February 28, 2018 as compared with cash provided in such activities of $626,000 for the six
months ended February 28, 2019. The increase in cash flow from investing activities in the current year period compared to the
prior year period was primarily due to
the Company’s sale of marketable securities
of $1,071,000 and decreased spending
on equipment and leasehold improvements
in the
six months ending February 28, 2019. The prior year cash used in investing activities was primarily due to the Company’s purchases
in Q1 2018 of equipment and leasehold improvements and marketable securities.
Cash Flows from Financing Activities
Cash provided by financing activities
for the six months ended February 28, 2018 was $2,597,000 as compared with cash provided of $4,940,000 for the six months ended
February 28, 2019. The increase in cash provided by financing activities comparing the current period to the prior year period
is primarily due to larger borrowing of $4,593,000 on the Company’s line of credit, partially offset by a lower bank overdraft
for the current year period. The increase in borrowing on the line of credit in current period was primarily due to an increase
in purchasing of inventory. Cash provided by financing activities in the prior year period is primarily due to borrowings of $1,525,000
on the Company’s revolving line of credit and a change in bank overdraft of $1,145,000 due to timing of when purchases were
paid.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements
that are reasonably likely to have a material current or future effect on the Company’s financial position, revenues, results
of operations, liquidity or capital expenditures.
Contractual Financial Obligations
In addition to using cash flow from operations,
the Company finances its operations through borrowings under its line of credit. These financial obligations are recorded
in accordance with accounting rules applicable to the underlying transactions, with the result being that amounts owed under debt
agreements and capital leases are recorded as liabilities on the consolidated balance sheets while lease obligations recorded as
operating leases are disclosed in the notes to the consolidated financial statements and management’s discussion and analysis
of financial condition and results of operations in the Company’s annual report on Form 10-K for the year ended August 31,
2018 as filed with the SEC on November 28, 2018.
Within the next 10 months, 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 has not executed a lease for such facility, however, but plans to enter into a new lease with the Trust
in the near future.