See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
May 31, 2020
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 49 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, recoverability of the carrying value and
estimated useful lives of long-lived assets, and the valuation allowance against deferred tax assets, if any. 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, 2019 (“fiscal
2019”). The condensed consolidated balance sheet as of August 31, 2019 and related disclosures were derived from the Company’s
audited consolidated financial statements as of August 31, 2019. Operating results for the three and nine months ended May
31, 2020 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 $169,000 at May 31, 2020 and August 31, 2019.
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 reduced by a provision for slow moving and obsolete items of $1,656,000 and $1,527,000 at May 31, 2020 and August 31, 2019,
respectively. The provision is based upon management’s review of inventories on-hand, 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 $69,000 and $655,000 at May 31, 2020 and August 31, 2019, 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 for tax contingencies, from 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; and (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 presented as net sales and recognized upon
the 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 expected 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 nine months ended May 31, 2020 and 2019 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 three and nine months ended
May 31, 2020 and 2019. The resulting translation adjustments are charged or credited directly to accumulated other comprehensive
income or loss. The average exchange rate of Canadian dollars to U.S. dollars for the nine months ended May 31, 2020 and 2019 was
$0.74 and $0.75, respectively.
Concentrations
Net sales to customers outside the United States were approximately
9% of revenues for each of the nine months ended May 31, 2020 and 2019, and related accounts receivable were approximately 11%
and 12% of total accounts receivable for May 31, 2020 and August 31, 2019, respectively.
No single customer accounted for more than 10% of revenues and
accounts receivable for the nine months ended May 31, 2020 and 2019.
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 (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 new revenue standard, 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 adopted the new revenue guidance effective September 1, 2018, using the modified
retrospective method with no impact to opening retained earnings.
In February 2016, the FASB issued ASU 2016-02, "Leases
(Topic 842)," which requires 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 is based on criteria that are largely similar to those applied in previous lease accounting, but without
explicit bright lines. Lessor accounting is similar to the previous 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, 2019, including
interim periods within those fiscal years. The Company adopted ASU 2016-02 on September 1, 2019 and applied the package of practical
expedients included therein, as well as utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the
adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods
prior to September 1, 2019 remained unchanged and in accordance with Leases (Topic 840). As of May 31, 2020, the Company has right
of use assets of approximately $12.4 million and lease liabilities of approximately $12.6 million recorded in the consolidated
balance sheet.
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. In November
2019, the FASB deferred the effective dates of the new credit losses standard for all entities except SEC filers that are not smaller
reporting companies to fiscal year beginning after December 15, 2022, including interim periods within those fiscal years. The
Company is currently evaluating this statement and its impact on its 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 elected to adopt the new cash flow guidance effective September 1, 2018, with
an immaterial impact to the statements of cash flows.
Note 3. Debt
The Company currently has a $15,000,000 line of credit agreement
with Citizen’s Business Bank (the “Bank”). On December 4, 2019, the Company entered into a Change in Terms Agreement
dated November 27, 2019 with the Bank (the “Amendment”), which modified the Company’s $10,000,000 line of credit
between the Company and the Bank to increase the maximum amount that may be borrowed thereunder from $10.0 million to $15.0 million.
In addition, the Amendment removed the Company’s interest rate options but provided that in no event would such interest
rate be less than 3.5% per annum. The expiration date of the line of credit under the line of credit agreement is July 5, 2021.
The amounts outstanding under this line of credit as of May 31, 2020 and August 31, 2019 are currently all under the default variable
interest index rate of 3.5% and 4.75%, respectively. 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 May 31, 2020 and August 31, 2019 were $7,033,000 and
$5,772,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance
of certain financial ratios. As of May 31, 2020 and August 31, 2019, the Company was in compliance with all such covenants.
In September 2019, Bisco entered into Commercial Lease Agreement
(the “Hunter Lease”) with the Glen F. Ceiley and Barbara A. Ceiley Revocable Trust (the “Trust”), which
is the grantor trust of Glen Ceiley, our Chief Executive Officer, Chairman of the Board and the Company’s majority shareholder.
Under the Hunter Lease, Bisco has leased from the Trust approximately 80,000 square feet of office and warehouse space located
at 5037 and 5065 East Hunter Avenue, Anaheim, California (the “Hunter Property”), which serves as the Company’s
new corporate headquarters. The Hunter Lease has a term that expires on August 31, 2029. The Company also entered into a new Loan
Agreement with the Bank to borrow up to $5,000,000 (the “Construction Loan”) for the primary purpose of financing tenant
improvements at the Hunter Property. The Construction Loan is a line of credit evidenced by a Promissory Note in the principal
amount of up to $5,000,000 with a maturity date of May 15, 2027. The terms of the Construction Loan provide that the Company may
only request advances through July 15, 2020, and thereafter, the Construction Loan will convert to a term loan. Interest on the
Construction Loan is payable monthly, subject to a variable interest rate based on the Bank’s internal prime rate, but in
no event would such interest rate be less than 3.5% per annum or the maximum interest rate permitted under law (3.5% and 5.25%
at May 31, 2020 and August 31, 2019, respectively). Concurrent with the execution of this Construction Loan, Bisco entered into
a commercial security agreement, dated July 12, 2019, with the Bank, pursuant to which Bisco granted the Bank a security interest
in substantially all of Bisco’s personal property to secure Bisco’s obligations under the Construction Loan. The outstanding
balance of the Construction Loan at May 31, 2020 and August 31, 2019 was $5,027,000 and $342,000, respectively.
On May 15, 2017, the Company entered into a $5,400,000 loan
agreement with the Bank (the “Lakeview Loan”). The proceeds of the loan were used to purchase the building that housed
the Company’s then corporate headquarters and distribution center located in Anaheim, California (the “Lakeview Property”).
In September 2019, Bisco entered into a Purchase Agreement to sell the Lakeview Property for a cash sale price of $7,075,000, which
closed escrow on November 19, 2019. Upon the closing of escrow, Bisco used the proceeds from the sale to repay all of the outstanding
principal and accrued interest on the Lakeview Loan. No amounts were outstanding on the Lakeview Loan at May 31, 2020. As of August
31, 2019, the Company owed $5,484,000. The Company leased back the building from the buyer until mid-March, when the Company’s
corporate headquarters was moved to the Hunter Property.
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
May 31,
|
|
|
Nine Months Ended
May 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,755
|
|
|
$
|
2,944
|
|
|
$
|
6,270
|
|
|
$
|
6,830
|
|
Less: accrued preferred stock dividends
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Net income available for common shareholders
|
|
$
|
1,736
|
|
|
$
|
2,925
|
|
|
$
|
6,213
|
|
|
$
|
6,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – basic and diluted
|
|
$
|
0.36
|
|
|
$
|
0.60
|
|
|
$
|
1.28
|
|
|
$
|
1.39
|
|
For the three and nine months ended May 31, 2020 and 2019, 40,000
potential common shares (issuable upon conversion of 36,000 shares of the Company’s Series A Cumulative Convertible Preferred
Stock) have been included in the computation of diluted earnings per share, which had no effect on basic earnings per share.
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 “Glendale Lease”) from the Trust,
which is beneficially owned by the Company’s majority shareholder, who is also the Company’s Chairman and CEO. The
Glendale 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 Glendale Lease. During the three months ended May 31, 2020 and 2019, the Company incurred
expense related to the Glendale Lease of approximately $71,000 and $68,000, respectively. During the nine months ended May 31,
2020 and 2019, the Company incurred expense related to the Glendale Lease of approximately $213,000 and $206,000, respectively.
On July 26, 2019, the Company entered into the Hunter Lease
with the Trust, for the lease of the Hunter Property, which houses the Company’s new corporate headquarters. The Company
completed its move to the new headquarters located at the Hunter Property in March 2020. The term of the Hunter Lease commenced
on September 2, 2019 and ends on August 31, 2029 with an initial monthly rental rate of $66,300, which is subject to annual rent
increases of approximately 2.5% as set forth in the Hunter 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 10.14 in its Form 10-K for the year ended
August 31, 2019 as filed with the SEC on November 27, 2019. During the three months ended May 31, 2020 and 2019, the Company incurred
expense related to the Hunter Lease of approximately $199,000 and $0, respectively. During the nine months ended May 31, 2020 and
2019, the Company incurred expense related to the Hunter Lease of approximately $597,000 and $0, respectively.
Note 6. Income Taxes
The Tax Cuts and Jobs Act (the “Jobs Act”) was enacted
on December 22, 2017. The Jobs Act reduced the US federal corporate tax rate from 35% to 21%, required companies to pay a one-time
transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created 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. The Company is subject to taxation in the US, Canada and various
states. We have elected to account for Global Intangible Low-Taxed Income in the year the tax is incurred.
On March 27, 2020, President Trump signed into law the Coronavirus
Aid, Relief and Economic Security Act (“CARES Act”). Intended to provide economic relief to those impacted by the coronavirus
(COVID-19) pandemic, the CARES Act includes provisions, among others, addressing the carryback of net operating losses for specific
periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility
of net interest expenses, and technical amendments for qualified improvement property (“QIP”). Additionally, the CARES
Act, in efforts to enhance business’ liquidity, provides for refundable employee retention tax credits and the deferral of
the employer-paid portion of social security taxes.
As a result of the technical amendments made by the CARES Act
to QIP, we are evaluating the potential effects, if any, of leasehold improvements incurred this year. Further, we are continuing
to examine additional impacts that the CARES Act may have on our U.S. business, and other operations impacted by COVID-19. The
effects and ultimate results of our evaluation, if any, could result in temporary book-to-tax timing differences (i.e., no effective
tax rate impact) for income tax purposes.
During the three and nine months ended May 31, 2020, the Company
recorded an income tax provision of $683,000 and $2,693,000, respectively, resulting in an effective tax rate of 28.0% and 30.0%,
respectively. For the three and nine months ended May 31, 2019, the Company recorded an income tax provision of $1,113,000 and
$2,538,000, respectively, resulting in an effective tax rate of 27.4% and 27.1%, respectively. The current period effective
tax rate differs from the 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 nine months ended May 31, 2020, 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 nine months ended May 31, 2020, 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 three months that would materially impact its consolidated
financial statements.
The Company’s tax years for 2015, 2016, 2017 and 2018
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 2015.
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.
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 8. Subsequent Events
Management has evaluated events subsequent to May 31, 2020,
through the date that these unaudited condensed consolidated financial statements are filed with the SEC, for transactions and
other events which may require adjustment of and/or disclosure in such financial statements.
With respect to the ongoing and evolving coronavirus (COVID-19)
outbreak, which was designated as a pandemic by the World Health Organization on March 11, 2020, the outbreak has caused substantial
disruption in international and U.S. economies and markets. The outbreak has had, and may continue to have, an adverse impact on
the Company, as well as the industries that the Company serves, such as the aerospace, electronic parts, and industrial equipment
industries. If repercussions of the outbreak are prolonged, it could have a significant adverse impact to the underlying industries
of some of the Company’s customers. To date, the Company has not incurred any significant disruptions to its business activities
or supply chain, but has been required to limit the operations of our sales offices. Management cannot, at this point, estimate
ultimate losses related to the COVID-19 outbreak, if any, and accordingly no adjustments were reflected in the accompanying financial
statements related to this matter.