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, 2021
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
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, provision for 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, 2020 (“fiscal 2020”). The condensed
consolidated balance sheet as of August 31, 2020 and related disclosures were derived from the Company’s audited consolidated
financial statements as of August 31, 2020. Operating results for the three and nine months ended May 31, 2021 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.
Immaterial Correction
As of August 31, 2020, the Company identified an immaterial correction
within the consolidated balance sheet. Year-end accumulated amortization was incorrectly included in the adoption date opening balances
of operating lease right-of-use assets and operating lease liabilities, which caused the balances to be understated as of August 31,
2020. SEC Staff Accounting Bulletin: No. 99 – Materiality and No. 108 – Financial Statement Misstatement was used
to evaluate the impact of the misstatement. Management concluded that this misstatement had no material impact on the accompanying consolidated
financial statements and therefore the misstatement was corrected in the accompanying consolidated balance sheet as of August 31,
2020.
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 $153,000 and $174,000 at May 31, 2021 and August 31, 2020, respectively.
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 $1,784,000 and $1,764,000 at May 31, 2021 and August 31, 2020,
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 appreciation or
depreciation being recorded for the change in value of the short position. 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 zero and $2,916,000 at May 31, 2021 and August 31, 2020, 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, 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; and (5) recognition of revenue when, or as, we satisfy a performance obligation.
Substantially all of the Company’s revenues
are derived from sales of electronic components and fasteners, for which the only performance obligation is the shipment of products ordered
by customers. Revenues are recognized at a point in time upon transfer of control, which typically occurs when product is shipped from
the Company’s distribution center. Revenue is recognized net of expected returns and any taxes collected from customers. We offer
industry standard contractual terms in our sales orders.
Earnings Per Common Share
Basic earnings per common share for the three
and nine months ended May 31, 2021 and 2020, 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
5).
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, 2021 and 2020.
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 both of the three and nine months ended May 31, 2021 and 2020 was $0.78 and
$0.74, respectively.
Concentrations
Net sales to customers outside the United States were approximately
11% and 9% of revenues for the nine months ended May 31, 2021 and 2020, respectively, and related accounts receivable were approximately
15% and 11% of total accounts receivable for May 31, 2021 and 2020. Sales to customers in Canada accounted for approximately 31%
and 34% of such international sales for the nine months ended May 31, 2021 and 2020, respectively. Sales to customers located within
Asia accounted for approximately 45% and 43% of such international sales for the nine months ended May 31, 2021 and 2020, respectively.
No single customer accounted for more than 10% of revenues and accounts
receivable for the nine months ended May 31, 2021 and 2020.
Reclassifications
As of August 31, 2020, we reclassified certain long-term liabilities
to short-term liabilities in order to conform to current period presentation.
Significant Recent Accounting Pronouncements
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 is largely similar to those applied in 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, 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.
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 or financial position.
Note 3. Accrued Liabilities
The
Company’s accrued liabilities as of May 31, 2021 and August 31, 2020 are summarized as follows (in
thousands):
|
|
May 31,
2021
|
|
|
August 31,
2020
|
|
Accrued expenses and other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued accounts payable
|
|
$
|
1,562
|
|
|
$
|
1,515
|
|
Accrued compensation and payroll
|
|
|
2,448
|
|
|
|
2,892
|
|
Accrued taxes
|
|
|
1,331
|
|
|
|
2,225
|
|
Total Accrued expenses and other current liabilities
|
|
$
|
5,341
|
|
|
$
|
6,632
|
|
Note 4. Debt
The Company currently has a $15,000,000 line of credit agreement with
Citizens Business Bank (the “Bank”). On December 4, 2019, the Company entered into an 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, 2021 and August 31, 2020 are currently all under the default
variable interest index rate of 3.5%. 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, 2021 and August 31, 2020 were zero and $5,100,000, respectively.
The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios.
As of May 31, 2021 and August 31, 2020, the Company was in compliance with all such covenants.
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 its new corporate headquarters located at 5065 East Hunter Avenue in Anaheim, California
(the “Hunter Property”). The Construction Loan was 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 provided that the Company could only
request advances through July 15, 2020, and thereafter, the Construction Loan converted to a term loan with a fixed rate of 4.6%,
which is entitled to a .25% rate discount if a demand deposit account is held with the Bank. On July 15, 2020, the amount drawn on
the Construction Loan was converted to a term loan in the amount of $4,807,000. Interest on the Construction Loan is payable monthly (4.35%
per annum at both May 31, 2021 and August 31, 2020). 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, 2021 and August 31, 2020 was $4,725,000 and $4,807,000, 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. 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,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
(In thousands, except share and per share amounts) EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,080
|
|
|
$
|
1,755
|
|
|
$
|
5,325
|
|
|
$
|
6,270
|
|
Less:accrued preferred stock dividends
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Net
income available for common shareholders
|
|
$
|
3,061
|
|
|
$
|
1,736
|
|
|
$
|
5,268
|
|
|
$
|
6,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share– basic and diluted
|
|
$
|
0.63
|
|
|
$
|
0.36
|
|
|
$
|
1.08
|
|
|
$
|
1.28
|
|
For the three and nine months ended May 31, 2021 and 2020, 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 6. 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 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
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 nine months ended May 31, 2021 and 2020, the Company incurred expense
related to the Glendale Lease of approximately $218,000 and $213,000, respectively.
On
July 26, 2019, the Company entered into a Commercial Lease Agreement with the Trust (the “Hunter Lease”), 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. During the nine months ended May 31, 2021 and 2020, the Company incurred expense related to the
Hunter Lease of approximately $612,000 and $597,000, respectively.
Note 7. Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security
Act (“the CARES Act”) was signed into law. 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.
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, 2021, the Company recorded an income tax provision of $1,121,000 and $1,943,000, respectively,
resulting in an effective tax rate of 26.7%. The current period effective tax rate differs from the statutory rate of 21% primarily
due to the state tax rates 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, 2021,
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, 2021, 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 2017, 2018 2019, and 2020 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 2016.
The Internal Revenue Service concluded the examination for the Company's
federal tax return for the year ending on August 31, 2016 and issued a no change report for the August 31, 2016 federal tax
return dated February 13, 2019.
Note 8. 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.
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 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. 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.
Note 9. Subsequent Events
Management has evaluated events subsequent to May 31, 2021, 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.