10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2020, or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File No. 000-14311

EACO CORPORATION

(Exact name of registrant as specified in its charter)

Florida	59-2597349
(State of Incorporation)	(I.R.S. Employer Identification No.)

5065 East Hunter Ave

Anaheim, California  92807

(Address of Principal Executive Offices)

(714) 876-2490

(Registrant’s Telephone No.)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “emerging growth company”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  ¨	Non-accelerated filer  x
Smaller reporting company x	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes ¨ No x

As of April 3, 2020, 4,861,590 shares of the registrant’s common stock were outstanding.

PART I

FINANCIAL INFORMATION

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 29,			February 28,			February 29,			February 28,
	2020			2019			2020			2019
Net sales	$	56,828		$	52,559		$	112,868		$	103,345
Cost of sales		41,029			38,047			81,173			74,724
Gross margin		15,799			14,512			31,695			28,621
Operating expenses:
Selling, general and administrative expenses		12,673			11,720			25,275			23,210
Income from operations		3,126			2,792			6,420			5,411
Other income (expense):
Net gain (loss) on trading securities		471			(126	)		391			102
Loss on sale of property		–			–			(102	)		–
Interest and other (expense)		(65	)		(125	)		(184	)		(202	)
Other income (expense), net		406			(251	)		105			(100	)
Income before income taxes		3,532			2,541			6,525			5,311
Provision for income taxes		934			580			2,010			1,425
Net income		2,598			1,961			4,515			3,886
Cumulative preferred stock dividend		(19	)		(19	)		(38	)		(38	)
Net income attributable to common shareholders	$	2,579		$	1,942		$	4,477		$	3,848
Basic and diluted earnings per share:	$	0.53		$	0.40		$	0.92		$	0.79
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.

2 

EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

	Three Months Ended					Six Months Ended
	February 29,			February 28,		February 29,			February 28,
	2020			2019		2020			2019
Net income	$	2,598		$	1,961	$	4,515		$	3,886
Other comprehensive (loss) gain, net of tax:  Foreign translation (loss) gain		(37	)		119		(249	)		277
Total comprehensive income	$	2,561		$	2,080	$	4,266		$	4,163

See accompanying notes to unaudited condensed consolidated financial statements.

3 

EACO Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(Unaudited)

	February 29,		August 31,
	2020		2019*
ASSETS
Current Assets:
Cash and cash equivalents	$	5,900	$	4,692
Restricted cash		2,386		655
Trade accounts receivable, net		30,710		31,655
Inventory, net		40,043		37,259
Marketable securities, trading		894		1,873
Prepaid expenses and other current assets		5,097		4,234
Total current assets		85,030		80,368
Property, equipment and leasehold improvements:
Held for use, net		7,480		3,717
Held for sale, net		–		6,855
Total property, equipment and leasehold improvements, net		7,480		10,572
Other assets:
Operating lease right-of-use assets		13,003		–
Other assets, net		2,101		1,938
Total assets	$	107,614	$	92,878
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Trade accounts payable	$	18,625	$	21,138
Accrued expenses and other current liabilities		5,052		8,297
Liability for short sales of trading securities		2,386		655
Current portion of operating lease liabilities		2,464		–
Current portion of long-term debt		–		5,484
Total current liabilities		28,527		35,574
Non-current Liabilities:
Long-term debt		13,007		6,114
Operating lease liabilities		10,662		–
Total liabilities		52,196		41,688
Commitments and Contingencies
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		627		876
Retained earnings		42,363		37,886
Total shareholders’ equity		55,418		51,190
Total liabilities and shareholders’ equity	$	107,614	$	92,878

* Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2019 as filed with the U. S. Securities and Exchange Commission on November 27, 2019.

See accompanying notes to unaudited condensed consolidated financial statements.

4 

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, 2019 *		36,000		1		4,861,590	$	49	$	12,378	$	876		$	37,886		$	51,190
Preferred dividends		—		—		—		—		—		—			(19	)		(19	)
Foreign translation loss		—		—		—		—		—		(212	)		—			(212	)
Net income		—		—		—		—		—		—			1,917			1,917
Balance, November 30, 2019		36,000		1		4,861,590	$	49	$	12,378	$	664		$	39,784		$	52,876
Preferred dividends		—		—		—		—		—		—			(19	)		(19	)
Foreign translation loss		—		—		—		—		—		(37	)		—			(37	)
Net income		—		—		—		—		—		—			2,598			2,598
Balance, February 29, 2020		36,000		1		4,861,590	$	49	$	12,378	$	627		$	42,363		$	55,418
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

* Derived from the Company’s audited financial statements included in its Form 10-K for the years ended August 31, 2018 and 2019 as filed with the U. S. Securities and Exchange Commission on November 28, 2018 and November 27, 2019, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

5 

EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Six Months Ended
	February 29, 2020			February 28, 2019
Operating activities:
Net income	$	4,515		$	3,886
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		506			503
Bad debt expense		14			18
Change in inventory provision		68			107
Loss on sale of real property		102			–
Net gain on trading securities		(391	)		(102	)
(Increase) decrease in:
Trade accounts receivable		931			(1,889	)
Inventory		(2,852	)		(5,033	)
Prepaid expenses and other assets		(1,026	)		(524	)
Increase (decrease) in:
Trade accounts payable		(2,243	)		2,206
Accrued expenses and other current liabilities		(3,245	)		(3,853	)
Net cash used in operating activities		(3,621	)		(4,681	)
Investing activities:
Purchase of property, equipment, and leasehold improvements		(4,591	)		(330	)
Proceeds from sale of real property		7,075			–
Net sales of marketable securities, trading		1,370			1,071
Net change in liabilities for short sales of trading securities		1,731			(115	)
Net cash provided by investing activities		5,585			626
Financing activities:
Borrowings on revolving credit facility, net		3,192			4,593
Borrowings on construction loan		3,342			—
Repayments on long-term debt		(5,125	)		(72	)
Preferred stock dividend		(38	)		(38	)
Bank overdraft		(147	)		457
Net cash provided by financing activities		1,224			4,940
Effect of foreign currency exchange rate changes on cash and cash equivalents		(249	)		277
Net increase in cash, cash equivalents, and restricted cash		2,939			1,162
Cash, cash equivalents, and restricted cash - beginning of period		5,347			3,638
Cash, cash equivalents, and restricted cash - end of period	$	8,286		$	4,800
Supplemental disclosures of cash flow information:
Cash paid for interest	$	17		$	201
Cash paid for income taxes	$	3,395		$	3,059

See accompanying notes to unaudited condensed consolidated financial statements.

6 

EACO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 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 six months ended February 29, 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.

7 

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 February 29, 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 $1,595,000 and $1,527,000 at February 29, 2020 and August 31, 2019, respectively. The provision 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 $2,386,000 and $655,000 at February 29, 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 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.

8 

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 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 six months ended February 29, 2020 and February 28, 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 six months ended February 29, 2020 and February 28, 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 six months ended February 29, 2020 and February 28, 2019 was $0.76 for both periods.

Concentrations

Net sales to customers outside the United States were approximately 9% of revenues for each of the six months ended February 29, 2020 and February 28, 2019, and related accounts receivable were approximately 12% of total accounts receivable for both February 29, 2020 and August 31, 2019.

No single customer accounted for more than 10% of revenues and accounts receivable for the six months ended February 29, 2020 or February 28, 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 the 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 February 29, 2020, the Company has right of use assets of approximately $13.0 million and lease liabilities of approximately $13.1 million recorded in the consolidated balance sheet.

9 

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 will become 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 interest rate provisions under the line of credit were modified so that in no event would such interest rate be less than 3.5% per annum or the maximum interest rate permitted under law. The expiration date of the line of credit under the line of credit agreement is July 5, 2021. The line of credit has a variable interest rate option 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): to (A) The default variable interest index rate, which is Citizens Business Bank Prime Rate of Interest, which is the prime rate (4.75% and 5.25% at February 29, 2020 and August 31, 2019, respectively) less 0.500%; or (B) One Hundred Eighty (180) day Libor Rate plus a margin of 1.550%; and (v) replace the preferred rate of interest with a discounted rate. The amounts outstanding under this line of credit as of February 29, 2020 and August 31, 2019 are currently all under the default variable interest index rate of 4.25% 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 February 29, 2020 and August 31, 2019 were $9,213,000 and $6,114,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of February 29, 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 this Commercial Lease Agreement, 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, and 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 million (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 variable interest rate based on the Bank’s internal prime rate (4.75% and 5.25% at February 29, 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 Loan Agreement. The outstanding balance of the Construction Loan at February 29, 2020 and August 31, 2019 was $3,794,000 and $342,000, respectively.

10 

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 houses 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 February 29, 2020. 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						Six Months Ended
	February 29, 2020			February 28, 2019			February 29, 2020			February 28, 2019
(In thousands, except share and per share amounts)
EPS:
Net income	$	2,598		$	1,961		$	4,515		$	3,886
Less:  accrued preferred stock dividends		(19	)		(19	)		(38	)		(38	)
Net income available for common   shareholders	$	2,579		$	1,942		$	4,477		$	3,848
Earnings per common share  – basic and diluted	$	0.53		$	0.40		$	0.92		$	0.79

For the three and six months ended February 29, 2020 and February 28, 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 to 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 February 29, 2020 and February 28, 2019, the Company incurred expense related to the Glendale Lease of approximately $71,000 and $70,000, respectively. During the six months ended February 29, 2020 and February 28, 2019, the Company incurred expense related to the Glendale Lease of approximately $142,000 and $138,000, respectively.

On July 26, 2019, the Company entered into the Hunter Lease with the Trust, for the lease of the Hunter Property, which house 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 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 February 29, 2020 and February 28, 2019, the Company incurred expense related to the Hunter Lease of approximately $199,000 and none, respectively. During the six months ended February 29, 2020 and February 28, 2019, the Company incurred expense related to the Hunter Lease of approximately $398,000 and none, respectively.

11 

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 (“GILTI”) in the year the tax is incurred.

During the three and six months ended February 29, 2020, the Company recorded an income tax provision of $934,000 and $2,010,000, respectively, resulting in an effective tax rate of 26.4% and 30.8%, respectively. For 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.  The current period effective tax rate differs from the statutory rate of 21% due to state income tax and permanent book to tax basis adjustments related to transfer pricing and meals that were recognized during Q2 2019, which reduced the percent of pre-tax income during that period.

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 29, 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 six months ended February 29, 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 February 29, 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 may have an adverse impact on the industries the Company serves, such as the aerospace, electronic parts, and industrial equipment industry. 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.

The Company completed its move of the corporate headquarters from the Lakeview Property to the Hunter Property on March 13, 2020, which is a significantly larger facility with approximately 80,000 square feet of office and warehouse space.

12 

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 (the “Act”), 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. Except as required by law, 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 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.

Revenues derived from 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 GAAP. 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.

13 

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 the 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 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, 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 remains unchanged and in accordance with Leases (Topic 840). As of February 29, 2020, the Company has right of use assets of approximately $13.0 million (net of the reversal of the current deferred rent liability) and lease liabilities of approximately $13.1 million recorded in the consolidated balance sheet.

There have been no changes to the Company’s critical accounting policies for the six months ended February 29, 2020, except for the adoption of ASU 2016-02 referenced above. For additional information regarding our critical accounting policies, 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, 2019 as filed with the SEC on November 27, 2019.

Results of Operations

Comparison of the Three Months Ended February 29, 2020 and February 28, 2019

Net Sales and Gross Profit ($ in thousands)

	Three Months Ended
	February 29, 2020			February 28, 2019			$ Change		% Change
Net sales	$	56,828		$	52,559		$	4,269		8.1	%
Cost of sales		41,029			38,047			2,982		7.8	%
Gross profit	$	15,799		$	14,512		$	1,287		8.9	%
Gross profit as a percent of revenues		27.8	%		27.6	%				0.2	%

Net sales 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 29, 2020 (“Q2 2020”) as compared to the three months ended February 28, 2019 (“Q2 2019”) was largely due to a higher volume of product sales, increased sales department headcount over prior year quarter, increased sales related to new inventory items, 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 fiscal year.

14 

The gross margins in Q2 2020 remained relatively consistent with prior year quarter, increasing by 0.2% as a percentage of revenues when compared to Q2 2019. This increase was primarily due to the mix of products sold and larger discounts on purchased inventory for large dollar volume orders and discount terms in Q2 2020 compared to Q2 2019.

Selling, General and Administrative Expenses ($ in thousands)

	Three Months Ended
	February 29, 2020			February 28, 2019			$ Change		% Change
Selling, general and administrative expenses	$	12,673		$	11,720		$	953		8.1	%
Percent of net sales		22.3	%		22.3	%				–

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 2020 increased from Q2 2019 largely due to an increase in employee headcount, annual raises, and increases in rent in leased offices. SG&A as a percent of revenue in Q2 2020 remained consistent with Q2 2019 at 22.3%, primarily due to the Company being able to increase sales with current and new customers without having to incur additional significant SG&A expenses.

Other Income (Expense), Net ($ in thousands)

	Three Months Ended
	February 29, 2020			February 28, 2019			$ Change		% Change
Other income (expense):
Net gain (loss) on trading securities	$	471		$	(126	)	$	597		473.8	%
Interest and other (expense), net		(65	)		(125	)		60		48.0	%
Other income (expense), net	$	406		$	(251	)	$	657		261.8	%
Percent of net sales		0.7	%		(0.5	)%				1.2	%

Other income (expense), net, primarily consists of income or loss on trading in short-term marketable equity securities of publicly-held corporations and interest related to the Company’s debt obligations. The Company’s investment strategy consists of both long and short positions, as well as utilizing options designed to improve returns. During Q2 2020, the Company recognized a net gain on trading securities of $471,000 as compared to a net loss of $126,000 in Q2 2019 in net realized and unrealized gains. The increase in trading securities in Q2 2020 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), net, decreased in Q2 2020 compared to Q2 2019 due to the sale of the Lakeview Property and extinguishment of the outstanding principal and accrued interest on the Lakeview Loan during November 2019. Further, interest expense on the Construction Loan for the Hunter Property is capitalized as part of the leasehold improvements during the period it is under construction.

15 

Income Tax Provision ($ in thousands)

	Three Months Ended
	February 29, 2020			February 28, 2019			$ Change		% Change
Income tax provision	$	934		$	580		$	354		61.0	%
Percent of pre-tax income		26.4	%		22.8	%				3.6	%

The provision for income taxes increased by $354,000 in Q2 2020 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 income tax provision as a percent of pre-tax income increased from 22.8% at Q2 2019 to 26.4% at Q2 2020 primarily due to permanent book to tax adjustments related to transfer pricing and meals that were recognized during Q2 2019, which reduced the percent of pre-tax income during that period.

Comparison of the Six Months Ended February 29, 2020 and February 28, 2019

Net Sales and Gross Profit ($ in thousands)

	Six Months Ended
	February 29, 2020			February 28, 2019			$ Change		% Change
Revenues	$	112,868		$	103,345		$	9,523		9.2	%
Cost of revenues		81,173			74,724			6,449		8.6	%
Gross margin	$	31,695		$	28,621		$	3,074		10.7	%
Percent of revenues		28.1	%		27.7	%				0.4	%

The increase in revenues in the six months ended February 29, 2020 as compared to the six months ended February 28, 2019 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, which resulted in additional new authorized distributorships in the current fiscal year.

The gross margins during the six months ended February 29, 2020 increased by 0.4% as a percentage of revenues when compared to the prior year period. This increase was primarily due to the mix of products sold and larger discounts on purchased inventory for large dollar volume orders and discounted terms during the six months ended February 29, 2020 compared to the prior year period.

Selling, General and Administrative Expenses ($ in thousands)

	Six Months Ended
	February 29, 2020			February 28, 2019			$ Change		% Change
Selling, general and administrative expenses	$	25,275		$	23,210		$	2,065		8.9	%
Percent of net sales		22.4	%		22.5	%				(0.1	)%

SG&A in the six months ended February 29, 2020 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 during the six month period ended February 29, 2020 decreased slightly from the prior year period primarily due to the Company being able to increase sales with current and new customers at a rate greater than SG&A expenses increased.

16 

Other Income (Expense), Net ($ in thousands)

	Six Months Ended
	February 29, 2020			February 28, 2019			$ Change			% Change
Other income (expense):
Net gain on trading securities	$	391		$	102		$	289			283.3	%
Loss on sale of real property		(102	)		–			(102	)		(100.0	)%
Interest and other expense, net		(184	)		(202	)		18			8.9	%
Other income (expense), net	$	105		$	(100	)	$	205			205.0	%
Percent of net sales		0.1	%		(0.1	)%					0.2	%

During the six months ended February 29, 2020, the Company recognized a net gain of $391,000 as compared to a net gain of $102,000 in the six months ended February 28, 2019 in net realized and unrealized gains on trading securities. The increase in gain on 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.

During November 2019, the Company sold the Lakeview Property for a cash purchase price of $7,075,000, realizing a total loss of $102,000 from the sale in the three months ending November 30, 2019 (“Q1 2020”).

Interest and other expense, net, decreased in the six months ended February 29, 2020 compared to the prior year period due to the sale of the Lakeview Property and extinguishment of the outstanding principal and accrued interest on the Lakeview Loan during November 2019.

Income Tax Provision ($ in thousands)

	Six Months Ended
	February 29, 2020			February 28, 2019			$ Change		% Change
Income tax provision	$	2,010		$	1,425		$	585		41.1	%
Percent of pre-tax income		30.8	%		26.8	%				4.0	%

The provision for income taxes increased by $585,000 in the six month period ended February 29, 2020 over the prior year period. The percent of pre-tax income increased from 26.8% to 30.8% when comparing the six months ended February 28, 2019 to February 29, 2020. The increase in the provision for income taxes in dollars and as a percent of pre-tax income in the six months ended February 29, 2020 was primarily due to a discrete tax item due to certain deferred tax assets and permanent books to tax differences related to prior periods that was reconciled and recorded in Q1 2020 for approximately $277,000. The increase in taxes was also due to higher taxable income in the current quarter as compared to the prior year period.

Liquidity and Capital Resources

As of February 29, 2020 and February 28, 2019, the Company held approximately $8,286,000 and $4,800,000 of unrestricted cash and cash equivalents, respectively. The Company also held $894,000 and $1,873,000 of marketable securities at February 29, 2020 and August 31, 2019, respectively, which could be liquidated, if necessary.

The Company currently has a $15,000,000 line of credit agreement with the Bank. On December 4, 2019, the Company entered into the Amendment, which modified the Company’s line of credit with the Bank to increase the maximum amount that may be borrowed there under from $10.0 million to $15.0 million. In addition, the interest rate provisions under the line of credit were modified so that in no event would such interest rate be less than 3.5% per annum or the maximum interest rate permitted under law. The expiration date of the line of credit under the agreement is July 5, 2021. The line of credit has a variable interest rate option 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): to (A) The default variable interest index rate, which is Citizens Business Bank Prime Rate of Interest, which is the prime rate (4.75% at February 29, 2020 and 5.25% at August 31, 2019) less 0.500%; or (B) One Hundred Eighty (180) day Libor Rate plus a margin of 1.550%; and (v) replace the preferred rate of interest with a discounted rate. The amounts outstanding under this line of credit as of February 29, 2020 and August 31, 2019 are currently all under the default variable interest index rate of 4.25% and 4.75%, respectively. Borrowings are secured by substantially all of the assets of the Company and its subsidiary. The amounts outstanding under this line of credit as of February 29, 2020 and August 31, 2019 were $9,214,000 and $6,114,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of February 29, 2020 and August 31, 2019, the Company was in compliance with all such covenants.

17 

On July 12, 2019, the Company also entered into 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 Note 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 variable interest rate based on the Bank’s internal prime rate (4.75% and 5.25% at February 29, 2020 and August 31, 2019, respectively). The balance of the Construction Loan at February 29, 2020 and August 31, 2019 was $3,794,000 and $342,000 respectively.

On May 15, 2017, the Company entered into the Lakeview Loan, the proceeds of the loan were used to purchase the building that housed the Company’s previous corporate headquarters and distribution center located in Anaheim, California. In September 2019, Bisco sold the Lakeview Property for a cash sale price of $7,075,000, which closed on November 19, 2019. Upon the closing, 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 February 29, 2020. The Company leased back the building from the buyer until mid-March, when the Company’s new corporate headquarters was moved to the Hunter Property.

On May 15, 2017, the Company entered into the Lakeview Loan, the proceeds of which were used to purchase the Lakeview Property located in Anaheim, California. 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 on November 19, 2019. Upon the closing, 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 February 29, 2020. The Company leased back the building from the buyer until mid-March, when the Company’s new corporate headquarters was moved to the Hunter Property.

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.

Cash Flows from Operating Activities

Cash used in operating activities was $3,621,000 for the six months ended February 29, 2020 as compared with cash used in operations of $4,681,000 for the six months ended February 28, 2019. The decrease in current period cash used by operating activities was primarily due to higher income and a decrease in purchased inventory for the six months ended February 29, 2020 when compared to the prior year period due to timing of stocking product lines. This was also adversely impacted to some extent by a decrease in trade accounts payable in the current period due to less inventory purchased and timing of payments. The prior period cash used in operating activities was primarily due to an increase in inventory and accrued expense.

Cash Flows from Investing Activities

Cash provided by investing activities was $5,585,000 for the six months ended February 29, 2020 as compared with cash provided in investing 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 proceeds from the sale of the Lakeview Property in November 2019 for $7,075,000 and a net increase in securities sold short in the six months ending February 29, 2020. This was partially offset by purchase of equipment and construction of leasehold improvements in the current period for $4,591,000 for the new corporate headquarters. The prior year cash provided by investing activities was primarily due to the Company’s net increase in marketable securities for the six months ending February 29, 2020.

18 

Cash Flows from Financing Activities

Cash provided by financing activities for the six months ended February 29, 2020 was $1,224,000 as compared with cash provided by financing activities of $4,940,000 for the six months ended February 28, 2019. The cash provided by financing activities for the current period is primarily due to cash borrowings from the revolving line of credit and the Construction Loan for the Hunter Property. This was adversely effected by the repayment of the entire Lakeview Property mortgage loan in November 2019, when the property was sold. Cash provided by financing activities in the prior year period is primarily due to borrowings of $4,593,000 on the Company’s revolving line of credit.

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 generated 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, 2019 as filed with the SEC on November 27, 2019.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

Item 4.  Controls and Procedures

Evaluation of disclosure controls and procedures. As required by Rule 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, who also serves as the Company’s principal financial officer.  Based upon that evaluation, the Company’s Chief Executive Officer has concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered in this report.

Changes in internal control over financial reporting.  There have been no changes in internal control over financial reporting during the fiscal quarter covered by this report that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

19 

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

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.

Item 1A.  Risk Factors

Our business is subject to a number of risks, some of which are discussed below. The risk factors discussed in this section should be considered together with information included elsewhere in this Quarterly Report on Form 10-Q and should not be considered the only risks to which the Company is exposed. If any of the risks actually occur, our business, financial condition, or results of operations could be seriously harmed. In that event, the market price for shares of our common stock may decline, and you could lose all or part of your investment.

Our business and results of operations may be adversely impacted as a result of the recent COVID-19 outbreak.

On March 11, 2020, the World Health Organization designated the coronavirus (COVID-19) as a pandemic. While the Company has not incurred any significant disruptions to its business activities or supply chain to date, the Company has had to temporarily close its 49 sales offices to the public, and has experienced temporary closures of certain offices from time to time to keep our employees safe. We have also shifted more than half of our sales force to remote operations and have implemented changes our warehouse and distribution operations to ensure social distancing. As a result, we may experience delays in our responses to our customers and possible delays in shipments of our products, which could harm our customer relations and adversely impact our sales. In addition, certain of our customers have closed or reduced their operations during this pandemic, and government restrictions could also further restrict our business and result in supply chain interruptions in the future. While our sales continue to remain strong, we cannot predict how long the pandemic will last and the impact of such pandemic on our financial condition and results of operations.

Changes and uncertainties in the economy have harmed and could continue to harm our operating results.

As a result of the continuing economic uncertainties, our operating results, and the economic strength of our customers and suppliers, are increasingly difficult to predict. Sales of our products are affected by many factors, including, among others, general economic conditions, interest rates, inflation, liquidity in the credit markets, unemployment trends, shipping costs, geopolitical events, and other factors. Although we sell our products to customers in a broad range of industries, if economic conditions significantly weaken on a global scale it may cause some of our customers to experience a slowdown, from time to time, which may in turn have an adverse effect on our sales and operating results. Changes and uncertainties in the economy also increase the risk of uncollectible accounts receivable. The pricing we receive from suppliers may also be impacted by general economic conditions. Continued and future changes and uncertainties in the economic climate in the United States and elsewhere could have a similar negative impact on the rate and amounts of purchases by our current and potential customers, create price inflation for our products, or otherwise have a negative impact on our expenses, gross margins and revenues, and could hinder our growth.

20 

The Company’s Chairman and CEO holds almost all of our voting stock and can control the election of directors and significant corporate actions.

Glen Ceiley, our Chairman and CEO, beneficially owns or controls approximately 97% of our outstanding voting stock. As such, Mr. Ceiley is able to exert significant influence over the outcome of almost all corporate matters, including the election of the Board of Directors and significant corporate transactions requiring a stockholder vote, such as a merger or a sale of the Company or our assets. This concentration of ownership and influence in management and board decision-making could also harm the price of our common stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our common stock (whether by making a tender offer or otherwise) or otherwise attempting to obtain control of the Company.

We generally do not have long-term supply agreements or guaranteed price or delivery arrangements with the majority of our suppliers.

In most cases, we have no guaranteed price or delivery arrangements with our suppliers. Consequently, we may experience inventory shortages on certain products. Furthermore, our industry occasionally experiences significant product supply shortages and customer order backlogs due to the inability of certain manufacturers to supply products as needed. We cannot assure you that our suppliers will maintain an adequate supply of products to fulfill our orders on a timely basis, at a recoverable cost, or at all, or that we will be able to obtain particular products on favorable terms or at all. Additionally, we cannot assure you that product lines currently offered by suppliers will continue to be available to us. A decline in the supply or continued availability of the products of our suppliers, or a significant increase in the price of those products, could reduce our sales, harm our reputation and negatively affect our operating results.

Our supply agreements are generally terminable at the suppliers’ discretion.

Substantially all of the agreements we have with our suppliers, including our authorized distributor agreements, are terminable with little or no notice and without any penalty. Suppliers that currently sell their products through us could decide to sell, or increase their sales of, their products directly or through other distributors or channels. Any termination, interruption or adverse modification of our relationship with a key supplier or a significant number of other suppliers would likely adversely affect our operating income, cash flow and future prospects.

We generally do not have long-term sales contracts with our customers.

Most of our sales are made on a purchase order basis, rather than through long-term sales contracts. As such, our customers typically do not have any obligation to purchase any products from us. A variety of conditions, both specific to each customer and generally affecting each customer’s industry, may cause customers to reduce, cancel or delay orders that were either previously made or anticipated. In addition, customers may go bankrupt or fail, or default on their payments. Significant or numerous cancellations, reductions, delays in orders by customers, losses of customers, and/or customer defaults on payment could materially adversely affect our business and revenues.

If we fail to maintain an effective system of internal controls over financial reporting or experience material weaknesses in our system of internal controls, we may not be able to report our financial results accurately or timely or detect fraud, which could have a material adverse effect on the market price of our common stock and our business.

We have from time to time had material weaknesses in our internal controls over financial reporting due to a variety of issues, including without limitation, significant deficiencies in the process related to the preparation of our financial statements, segregation of duties, sufficient control in the area of financial reporting oversight and review, and appropriate personnel to ensure the complete and proper application of GAAP as it relates to certain routine accounting transactions. Although we believe we have addressed these material weaknesses, we may experience material weaknesses or significant deficiencies in the future and may fail to maintain a system of internal control over financial reporting that complies with the reporting requirements applicable to public companies in the United States. Our failure to address any deficiencies or weaknesses in our internal control over financial reporting or to properly maintain an effective system of internal control over financial reporting could impact our ability to prevent fraud or to issue our financial statements in a timely manner that presents fairly, in accordance with GAAP, our financial condition and results of operations. The existence of any such deficiencies and/or weaknesses, even if cured, may also lead to the loss of investor confidence in the reliability of our financial statements, could harm our business and negatively impact the trading price of our common stock. Such deficiencies or material weaknesses may also subject us to lawsuits, investigations and other penalties.

21 

We have incurred significant losses in the past from trading in securities, and we may incur such losses in the future, which may also cause us to be in violation of covenants under our loan agreement.

Bisco has historically supplemented its capital resources in part from cash generated by trading in marketable domestic equity securities. Bisco’s investment strategy includes taking both long and short positions, as well as utilizing options to maximize returns. This strategy can lead, and has led, to significant losses from time to time based on market conditions and trends, as well as the performance of the specific companies in which we invest. We may incur losses in future periods from such trading activities, which could materially and adversely affect our liquidity and financial condition.

In addition, unanticipated losses from our trading activities may cause Bisco to be in violation of certain covenants under its line of credit agreement with Citizen’s Business Bank, located in Anaheim, CA. The agreement is secured by substantially all of Bisco’s assets. The loan agreement contains covenants which require that, on a quarterly basis, Bisco’s losses from trading in securities not exceed its pre-tax operating income. We cannot assure you that unanticipated losses from our trading activities will not cause us to violate our covenants in the future or that the Bank will grant a waiver for any such default or that it will not exercise its remedies, which could include the refusal to allow additional borrowings under the line of credit or the acceleration of the obligation’s maturity date and foreclosure on Bisco’s assets, with respect to any such noncompliance, which could have a material adverse effect on our business and operations.

The unauthorized access to, or theft or destruction of, customer or employee personal, financial or other data or of our proprietary or confidential information that is stored in our information systems or by third parties on our behalf could impact our reputation and brand and expose us to potential liability and loss of revenues.

The protection of customer, employee and company data is critical to us. We are subject to laws relating to information security, privacy, cashless payments, consumer credit and fraud. Additionally, an increasing number of government and industry groups have established laws and standards for the protection of personal information. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Compliance with these requirements may result in cost increases due to necessary system changes and the development of new administrative processes. If we fail to comply with laws and regulations regarding privacy and security, we could be subject to significant fines, and become subject to investigations, litigation and the disruption of our operations.

In the ordinary course of business, we receive and maintain credit card and other personal information from our customers, employees and vendors. Customers and employees have a high expectation that we will adequately protect their personal information, and certain states including California, have mandated additional compliance requirements, which could result in additional expenses for the Company in the near future. Third parties may have the technology or know-how to breach the security of this customer information, and our security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. A number of retailers have experienced security breaches in which credit and debit card information may have been stolen. While we have not experienced a cyber attack, we are in the process of working with a third party vendor to assist us in safeguarding our systems and protecting the personal information of our customers, employees and vendors. We are still at an early stage in this analysis and may not be able to adequately address or remedy the potential harm, which could result in the assessment against us for large remedial costs and other penalties, and could damage our reputation and adversely impact our customers.

We rely heavily on our internal information systems, which, if not properly functioning, could materially and adversely affect our business.

Our information systems have been in place for many years, and are subject to system failures as well as problems caused by human error, which could have a material adverse effect on our business. Many of our systems consist of a number of legacy or internally developed applications, which can be more difficult to upgrade to commercially available software. It may be time consuming and costly for us to retrieve data that is necessary for management to evaluate our systems of control and information flow. In the future, management may decide to convert our information systems to a single enterprise solution. Such a conversion, while it would enhance the accessibility and reliability of our data, could be expensive and would not be without risk of data loss, delay or business interruption. Maintaining and operating these systems requires continuous investments. Failure of any of these internal information systems or material difficulties in upgrading these information systems could have material adverse effects on our business and our timely compliance with our reporting obligations.

22 

We may not be able to attract and retain key personnel.

Our future performance will depend to a significant extent upon the efforts and abilities of certain key management and other personnel, including Glen Ceiley, our Chairman and CEO, as well as other executive officers and senior management. The loss of service of one or more of our key management members could have a material adverse effect on our business.

The competitive pressures we face could have a material adverse effect on our business.

The market for our products and services is very competitive. We compete for customers with other distributors, who sell similar or sometimes identical products, as well as with many of our suppliers. A failure to maintain and enhance our competitive position could adversely affect our business and prospects. Furthermore, our efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability. Some of our competitors may have greater financial, personnel, capacity and other resources or a more extensive customer base than we do.

Our strategy of expanding into new geographic areas could be costly and may not expand our revenues.

One of our primary growth strategies is to grow our business through the opening of sales offices in new geographic markets. This strategy requires continued investment, both financially, as well as management’s efforts to get the new offices operational. Based on our analysis of demographics in the United States, Canada and Mexico, we currently estimate there is potential market opportunity in North America to support additional sales offices. We cannot guarantee that our estimates are accurate or that we will open enough offices to capitalize on the full market opportunity or that any new offices will be successful or profitable in the near future, or at all. In addition, a particular local market’s ability to support a sales office may change due to competition or local economic conditions.

We may be unable to meet our goals regarding new office openings.

Our growth, in part, is primarily dependent on our ability to attract new customers. Historically, our most effective way to attract new customers has been opening new sales offices in additional geographic regions or new markets. We currently have 49 sales offices throughout the U.S., and plan to continue to expand our geographic footprint, even outside the U.S. in the near further. During fiscal 2020, the Company relocated some existing locations to larger office locations within its original region and expanded sales and operating headcount. Given the recent economic uncertainty, we may not be able to open or grow new offices at our projected or desired rates or hire the qualified sales personnel necessary to make such new offices successful. Failure to do so could negatively impact our long-term growth and market share.

Opening sales offices in new markets presents increased risks that may prevent us from being profitable in these new locations, and/or may adversely affect our operating results.

Our new sales offices do not typically achieve operating results comparable to our existing offices until after several years of operation. The added expenses relating to payroll, occupancy, and transportation costs can impact our ability to generate earnings. Offices in new geographic areas face additional challenges to achieving profitability, and we cannot guarantee how long it will take new offices to become profitable, or that such offices will ever become profitable. In new markets, we have less familiarity with local customer preferences and customers in these markets are less familiar with our name and capabilities. Entry into new markets may also bring us into competition with new, unfamiliar competitors. These challenges associated with opening new offices in new markets may have an adverse effect on our business and operating results.

23 

We rely on third party suppliers for most of our products, and may not be able to identify and procure relevant new products and products lines that satisfy our customers’ needs on favorable terms and prices, or at all.

We currently rely on a large number of third party suppliers for most of our products. Since we do not manufacture our products, we rely on these suppliers to provide quality products that are in demand by our customers. Our success depends in part on our ability to develop product expertise and continue to identify and provide future high quality products and product lines that complement our existing products and product lines and that respond to our customers’ needs. We may not be able to compete effectively unless we can continue to offer a broad range of high quality, reliable products that address the trends in the markets in which we compete.

Our ability to successfully attract and retain qualified sales personnel is uncertain.

Our success depends in large part on our ability to attract, motivate, and retain a sufficient number of qualified sales employees, who understand and appreciate our strategy and culture and are able to adequately represent us to our customers. Qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some areas, and the turnover rate in the industry is high. If we are unable to hire and retain personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and product knowledge, our sales could be materially adversely affected. Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees. An inability to recruit and retain a sufficient number of qualified individuals in the future may also delay the planned openings of new offices. Any such delays, material increases in existing employee turnover rates, or increases in labor costs, could have a material adverse effect on our business, financial condition or operating results.

Increases in the costs of energy, shipping and raw materials used in our products could impact our cost of goods and distribution and occupancy expenses, which would result in lower operating margins.

Costs of raw materials used in our products and energy costs have been rising during the last several years, which has resulted in increased production costs for our suppliers. These suppliers typically look to pass their increased costs along to us through price increases. The shipping costs for our products have risen as well and may continue to rise. While we typically try to pass increased supplier prices and shipping costs through to our customers or to modify our activities to mitigate the impact, we may not be successful. Failure to fully pass these increased prices and costs through to our customers or to modify our activities to mitigate the impact would have an adverse effect on our operating margins and could make our products less competitive, either of which could adversely impact our margins and results of operations.

We may not have adequate or cost-effective liquidity or capital resources.

Our ability to satisfy our cash needs depends on our ability to generate cash from operations and to access our line of credit and the capital markets, which are subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. The total outstanding on our line of credit as of February 29, 2020 was approximately $9.2 million, which line of credit is secured by substantially all of Bisco’s assets. Further, the Company recently entered into a construction loan agreement with the Bank to borrow up to $5 million for the primary purpose of financing tenant improvements on the new corporate headquarters. As of February 29, 2020, the total outstanding on the Construction Loan was approximately $3.8 million. See Note 4 for further explanation. Our ability to continue to secure financing is subject to our satisfaction of certain covenants contained in such agreements. As such, we may need to pursue additional debt or equity financing, which funding may not be available on acceptable or favorable terms, on a timely basis or at all. The securities that might be issued in any future equity financing may have rights, preferences, and privileges that are senior to our common stock. Our failure to obtain such funding could adversely impact our ability to execute our business plan and our financial condition and results of operations.

24 

Sales of our common stock by Glen Ceiley could cause the price of our common stock to decline.

There is currently no established trading market for our common stock, and the daily volume of any stock sales has generally been low. As of February 29, 2020, the number of shares held by non-affiliates of Mr. Ceiley was less than 160,000 shares. If Mr. Ceiley sells or seeks to sell a substantial number of his shares of our common stock in the future, the market price of our common stock could decline. The perception among investors that these sales may occur could produce the same effect. Due to the limited available public float, certain investors may not be able or willing to invest in the Company’s securities, which could also impact the market price of our common stock.

Inclement weather and other disruptions to the transportation network could impact our distribution system.

Our ability to provide efficient shipment of products to our customers is an integral component of our overall business strategy. Disruptions at distribution centers or shipping ports have in the past, and may in the future, affect our ability to both maintain core products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect our relationship with our customers, reputation, and our results of operations. In addition, severe weather conditions could adversely impact demand for our products in particularly hard hit regions.

Our advertising and marketing efforts may be costly and may not achieve desired results.

We expect to continue to incur substantial expense in connection with our advertising and marketing efforts. Postage represents a significant advertising expense for us because we generally mail fliers to current and potential customers through the U.S. Postal Service. Any future increases in postal rates will increase our mailing expenses and could have a material adverse effect on our business, financial condition and results of operations. For Q2 2020 and Q2 2019, we spent $93,000 and $97,000 on advertising, respectively.

We are exposed to foreign currency exchange rate risk, and changes in foreign exchange rates could increase our costs to procure products and impact our foreign sales.

Because the functional currency related to our Canadian operations and certain of our foreign vendor purchases is the applicable local currency, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. Fluctuations in the relative strength of foreign economies and their related currencies could adversely impact our ability to procure products overseas at competitive prices and our foreign sales. Historically, our primary exchange rate exposure has been with the Canadian dollar.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     Mine Safety Disclosures

Not applicable.

Item 5.    Other Information

On March 15, 2020, Jay Conzen, a director of the Company passed away. Mr. Conzen had been a valued member of the Company’s Board of Directors since 1998 and also served as the Chairman of the Audit Committee of the Board of Directors. The Company plans to fill this vacancy but has just recently commenced the search process in this regard. As such, there currently remains a vacancy on the Board of Directors. The remaining Audit Committee members and a majority of the Board members continue to qualify as independent directors under both the OTCQB’s rules and under SEC Rule 10A-3.

25 

Item 6.    Exhibits

The following exhibits are filed as part of this Quarterly report on Form 10-Q.

No.	Exhibit
31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

26 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EACO CORPORATION
	(Registrant)
Date: April 13, 2020	/s/ Glen Ceiley
	Glen Ceiley
	Chief Executive Officer
	(Principal Executive Officer & Principal Financial Officer)
	/s/ Michael Narikawa
	Michael Narikawa
	Controller
	(Principal Accounting Officer)

27 

EXHIBIT INDEX

No.	Exhibit
31.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

28 

EX-31.1

Exhibit 31.1

Certification

  I, Glen Ceiley, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of EACO Corporation (the “registrant”).

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.   I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: April 13, 2020	/S/ GLEN CEILEY
	Glen Ceiley
	Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer and Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

(PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the accompanying Quarterly Report on Form 10-Q of EACO Corporation (the “Company”) on Form 10-Q for the quarter ended February 29, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Glen Ceiley, the Chief Executive Officer and Chief Financial Officer of the Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: April 13, 2020	/S/ GLEN CEILEY
	Glen Ceiley
	Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer and Principal Financial Officer)

XML

Related Party Transactions (Details) - USD ($)		3 Months Ended		6 Months Ended
	Jul. 26, 2019	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019
Related Party Transaction [Line Items]
Operating Leases Term				10 years
Operating Leases, Rent Expense, Minimum Rentals				$ 22,600
Operating Leases of Lessee, Contingent Rentals, Basis Spread on Variable Rate		2.50%		2.50%
Operating Lease, Expense		$ 199,000	$ 0	$ 398,000	$ 0
Related Party [Member]
Related Party Transaction [Line Items]
Operating Leases, Rent Expense		$ 71,000	$ 70,000	$ 142,000	$ 138,000
Initial monthly rental rate	$ 66,300
Percentage of annual rent increases	2.50%

XML

Document And Entity Information - shares	6 Months Ended
	Feb. 29, 2020	Apr. 03, 2020
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Feb. 29, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q2
Entity Registrant Name	EACO CORP
Entity Central Index Key	0000784539
Current Fiscal Year End Date	--08-31
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		4,861,590
Entity Shell Company	false
Entity Small Business	true
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Emerging Growth Company	false

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Feb. 29, 2020	Aug. 31, 2019
Condensed Consolidated Balance Sheets
Convertible preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Convertible preferred stock, shares authorized	10,000,000	10,000,000
Convertible preferred stock, shares outstanding	36,000	36,000
Convertible preferred stock, liquidation value (in dollars)	$ 900	$ 900
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized	8,000,000	8,000,000
Common stock, shares outstanding	4,861,590	4,861,590

XML

Significant Accounting Policies and Significant Recent Accounting Pronouncements

6 Months Ended

Feb. 29, 2020

Significant Accounting Policies and Significant Recent Accounting Pronouncements

Significant Accounting Policies and Significant Recent Accounting Pronouncements

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 six months ended February 29, 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 February 29, 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 $1,595,000 and $1,527,000 at February 29, 2020 and August 31, 2019, respectively. The provision 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 $2,386,000 and $655,000 at February 29, 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 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 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 six months ended February 29, 2020 and February 28, 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 six months ended February 29, 2020 and February 28, 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 six months ended February 29, 2020 and February 28, 2019 was $0.76 for both periods.

Concentrations

Net sales to customers outside the United States were approximately 9% of revenues for each of the six months ended February 29, 2020 and February 28, 2019, and related accounts receivable were approximately 12% of total accounts receivable  for both February 29, 2020 and August 31, 2019.

No single customer accounted for more than 10% of revenues and accounts receivable for the six months ended February 29, 2020 or February 28, 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 the 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 February 29, 2020, the Company has right of use assets of approximately $13.0 million and lease liabilities of approximately $13.1 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 will become 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.

XML

Significant Accounting Policies and Significant Recent Accounting Pronouncements (Details) - USD ($)	6 Months Ended		12 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Aug. 31, 2019
Significant Accounting Policies [Line Items]
Allowance for Doubtful Accounts Receivable	$ 169,000		$ 169,000
Inventory Valuation Reserves	1,595,000		1,527,000
Restricted Cash and Cash Equivalents, Current	$ 2,386,000		$ 655,000	[1]
Exchange Rate On Foreign Currency Translation And Transactions	$ 0.76	$ 0.76
Percentage of Revenue Per Entity, Maximum	10.00%	10.00%
Operating Lease, Right-of-Use Asset	$ 13,003,000
Accounting Standards Update 2016-02 [Member]
Significant Accounting Policies [Line Items]
Operating Lease, Right-of-Use Asset	13,000,000
Operating Lease, Liability	$ 13,100,000
Sales Revenue, Net [Member]
Significant Accounting Policies [Line Items]
Concentration Risk, Percentage	9.00%	9.00%
Accounts Receivable [Member]
Significant Accounting Policies [Line Items]
Concentration Risk, Percentage	12.00%		12.00%

[1] Derived from the Company’s audited financial statements included in its Form 10K for the year ended August 31, 2019 as filed with the U. S. Securities and Exchange Commission on November 27, 2019.

XML

Subsequent Events

6 Months Ended

Feb. 29, 2020

Subsequent Events

Subsequent Events

Note 8.    Subsequent Events

Management has evaluated events subsequent to February 29, 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 may have an adverse impact on the industries the Company serves, such as the aerospace, electronic parts, and industrial equipment industry.  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.

The Company completed its move of the corporate headquarters from the Lakeview Property to the Hunter Property on March 13, 2020, which is la significantly larger facility with approximately 80,000 square feet of office and warehouse space.

XML

Earnings per Share

6 Months Ended

Feb. 29, 2020

Earnings per Share

Earnings per Share

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				Six Months Ended
	February 29,		February 28,		February 29,		February 28,
	2020		2019		2020		2019
(In thousands, except share and per share amounts)
EPS:
Net income	$	2,598	$	1,961	$	4,515	$	3,886
Less:  accrued preferred stock dividends		(19)		(19)		(38)		(38)
Net income available for common   shareholders	$	2,579	$	1,942	$	4,477	$	3,848
Earnings per common share  – basic and diluted	$	0.53	$	0.40	$	0.92	$	0.79

For the three and six months ended February 29, 2020 and February 28, 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 to basic earnings per share.

XML

Commitments and Contingencies

6 Months Ended

Feb. 29, 2020

Commitments and Contingencies

Commitments and Contingencies

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.

XML

Debt

6 Months Ended

Feb. 29, 2020

Debt

Debt

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 interest rate provisions under the line of credit were modified so that in no event would such interest rate be less than 3.5% per annum or the maximum interest rate permitted under law.  The expiration date of the line of credit under the line of credit agreement is July 5, 2021. The line of credit has a variable interest rate option 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): to (A) The default variable interest index rate, which is Citizens Business Bank Prime Rate of Interest, which is the prime rate (4.75% and 5.25% at February 29, 2020 and August 31, 2019, respectively) less 0.500%;  or (B) One Hundred Eighty (180) day Libor Rate plus a margin of 1.550%; and (v) replace the preferred rate of interest with a discounted rate. The amounts outstanding under this line of credit as of February 29, 2020 and August 31, 2019 are currently all under the default variable interest index rate of 4.25% 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 February 29, 2020 and August 31, 2019 were $9,213,000 and $6,114,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of February 29, 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 this Commercial Lease Agreement, 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, and 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 million (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 variable interest rate based on the Bank’s internal prime rate (4.75% and 5.25% at February 29, 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 Loan Agreement. The outstanding balance of the Construction Loan at February 29, 2020 and August 31, 2019 was $3,794,000 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 houses 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 February 29, 2020. The Company leased back the building from the buyer until mid-March, when the Company’s corporate headquarters was moved to the Hunter Property.

XML

Organization and Basis of Presentation (Details)	Feb. 29, 2020 facility
Organization and Basis of Presentation
Sales offices	49
Distribution centers	7

XML

Subsequent Events (Details)	Mar. 13, 2020 ft²
Subsequent Event [Member] | Lakeview Property [Member]
Subsequent Event [Line Items]
Number of square feet in the Hunter Property	80,000

XML

Earnings per Share - Additional Information (Details) - shares	3 Months Ended	6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	40,000	40,000
Series A Cumulative Convertible Preferred Stock [Member]
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Convertible Preferred Stock, Shares Issued upon Conversion	36,000	36,000

XML

Organization and Basis of Presentation

6 Months Ended

Feb. 29, 2020

Organization and Basis of Presentation

Organization and Basis of Presentation

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.

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands		Feb. 29, 2020	Aug. 31, 2019
Current Assets:
Cash and cash equivalents		$ 5,900	$ 4,692	[1]
Restricted cash		2,386	655	[1]
Trade accounts receivable, net		30,710	31,655	[1]
Inventory, net		40,043	37,259	[1]
Marketable securities, trading		894	1,873	[1]
Prepaid expenses and other current assets		5,097	4,234	[1]
Total current assets		85,030	80,368	[1]
Property, equipment and leasehold improvements:
Held for use, net		7,480	3,717	[1]
Held for sale, net	[1]		6,855
Total property, equipment and leasehold improvements, net		7,480	10,572	[1]
Other assets :
Operating lease right-of-use assets		13,003
Other assets, net		2,101	1,938	[1]
Total assets		107,614	92,878	[1]
Current Liabilities:
Trade accounts payable		18,625	21,138	[1]
Accrued expenses and other current liabilities		5,052	8,297	[1]
Liability for short sales of trading securities		2,386	655	[1]
Current portion of operating lease liabilities		2,464
Current portion of long-term debt	[1]		5,484
Total current liabilities		28,527	35,574	[1]
Non-current Liabilities:
Long-term debt		13,007	6,114	[1]
Operating lease liabilities		10,662
Total liabilities		52,196	41,688	[1]
Commitments and Contingencies				[1]
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	[1]
Common stock, $0.01 par value per share; 8,000,000 shares authorized; 4,861,590 shares outstanding		49	49	[1]
Additional paid-in capital		12,378	12,378	[1]
Accumulated other comprehensive income		627	876	[1]
Retained earnings		42,363	37,886	[1]
Total shareholders' equity		55,418	51,190	[1],[2]
Total liabilities and shareholders' equity		$ 107,614	$ 92,878	[1]

[1] Derived from the Company’s audited financial statements included in its Form 10K for the year ended August 31, 2019 as filed with the U. S. Securities and Exchange Commission on November 27, 2019.

[2] Derived from the Company’s audited financial statements included in its Form 10K for the years ended August 31, 2018 and 2019 as filed with the U. S. Securities and Exchange Commission on November 28, 2018 and November 27, 2019, respectively.

XML

Significant Accounting Policies and Significant Recent Accounting Pronouncements (Policies)

6 Months Ended

Feb. 29, 2020

Significant Accounting Policies and Significant Recent Accounting Pronouncements

Use of Estimates

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

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 six months ended February 29, 2020 are not necessarily indicative of the results that may be expected for future quarterly periods or the entire fiscal year.

Principles of Consolidation

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

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, 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 February 29, 2020 and August 31, 2019.

Inventories, Net

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 $1,595,000 and $1,527,000 at February 29, 2020 and August 31, 2019, respectively. The provision 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

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 $2,386,000 and $655,000 at February 29, 2020 and August 31, 2019, respectively.

Long-Lived Assets

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

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

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 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

Earnings Per Common Share

Basic earnings per common share for the three and six months ended February 29, 2020 and February 28, 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

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 six months ended February 29, 2020 and February 28, 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 six months ended February 29, 2020 and February 28, 2019 was $0.76 for both periods.

Concentrations

Concentrations

Net sales to customers outside the United States were approximately 9% of revenues for each of the six months ended February 29, 2020 and February 28, 2019, and related accounts receivable were approximately 12% of total accounts receivable  for both February 29, 2020 and August 31, 2019.

No single customer accounted for more than 10% of revenues and accounts receivable for the six months ended February 29, 2020 or February 28, 2019.

Significant Recent Accounting Pronouncements

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 the 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 February 29, 2020, the Company has right of use assets of approximately $13.0 million and lease liabilities of approximately $13.1 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 will become 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.

XML

Related Party Transactions

6 Months Ended

Feb. 29, 2020

Related Party Transactions

Related Party Transactions

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 February 29, 2020 and February 28, 2019, the Company incurred expense related to the Glendale Lease of approximately $71,000 and $70,000, respectively. During the six months ended February 29, 2020 and February 28, 2019, the Company incurred expense related to the Glendale Lease of approximately $142,000 and $138,000, respectively.

On July 26, 2019, the Company entered into the Hunter Lease with the Trust, for the lease of the Hunter Property, which house 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 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 February 29, 2020 and February 28, 2019, the Company incurred expense related to the Hunter Lease of approximately $199,000 and none, respectively. During the six months ended February 29, 2020 and February 28, 2019, the Company incurred expense related to the Hunter Lease of approximately $398,000 and none, respectively.

XML

Income Taxes (Details) - USD ($)	3 Months Ended		6 Months Ended		12 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019	Aug. 31, 2019
Income Taxes
Effective Income Tax Rate Reconciliation, Percent			21.00%		35.00%
Tax Cuts and Jobs Act, Transition Tax for Accumulated Foreign Earnings, Liability	$ 0		$ 0
Income Tax Expense (Benefit)	$ 934,000	$ 580,000	$ 2,010,000	$ 1,425,000
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	26.40%	22.80%	30.80%	26.80%

XML

Debt (Details)		1 Months Ended	6 Months Ended
	May 15, 2017 USD ($)	Sep. 30, 2019 USD ($) ft²	Feb. 29, 2020 USD ($)	Aug. 31, 2019 USD ($)
Line of Credit Facility, Current Borrowing Capacity			$ 15,000,000
Line of Credit Facility, Remaining Borrowing Capacity			$ 10,000,000
Line of Credit Facility, Expiration Date			Jul. 05, 2021
Debt Instrument, Description of Variable Rate Basis			(A) The default variable interest index rate, which is Citizens Business Bank Prime Rate of Interest, which is the prime rate (4.75% and 5.25% at February 29, 2020 and August 31, 2019, respectively) less 0.500%
Default Variable Interest Rate			(B) One Hundred Eighty (180) day Libor Rate plus a margin of 1.550%
Line of Credit Facility, Interest Rate Description			The amounts outstanding under this line of credit as of February 29, 2020 and August 31, 2019 are currently all under the default variable interest index rate of 4.25% and 4.75%, respectively.
Percentage of Default Variable Interest			4.25%	4.75%
Long-term Line of Credit			$ 9,213,000	$ 6,114,000
Operating Lease Office Space | ft²		80,000
Debt Instrument, Maturity Date		May 15, 2027
Construction Loan			3,794,000	$ 342,000
Proceeds from Sale of Property, Plant, and Equipment		$ 7,075,000	7,075,000
Financial Guarantee [Member]
Proceeds from Issuance of Long-term Debt	$ 5,400,000
Construction Loan Payable [Member]
Line of Credit Facility, Maximum Borrowing Capacity		5,000,000
Long-term Line of Credit		$ 5,000,000
Minimum [Member]
Line of Credit Facility, Maximum Borrowing Capacity			$ 10,000,000
Debt Instrument, Basis Spread on Variable Rate			3.50%
Maximum [Member]
Line of Credit Facility, Maximum Borrowing Capacity			$ 15,000,000
Prime Rate [Member]
Long-term Debt, Percentage Bearing Variable Interest, Percentage Rate			4.75%	5.25%
Percentage of Default Variable Interest			4.75%	5.25%
One Hundred Eighty Day London Interbank Offered Rate (LIBOR) [Member]
Long-term Debt, Percentage Bearing Variable Interest, Percentage Rate			1.55%

XML

Condensed Consolidated Statements of Income - USD ($)	3 Months Ended		6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019
Condensed Consolidated Statements of Income
Net sales	$ 56,828,000	$ 52,559,000	$ 112,868,000	$ 103,345,000
Cost of sales	41,029,000	38,047,000	81,173,000	74,724,000
Gross margin	15,799,000	14,512,000	31,695,000	28,621,000
Operating expenses:
Selling, general and administrative expenses	12,673,000	11,720,000	25,275,000	23,210,000
Income from operations	3,126,000	2,792,000	6,420,000	5,411,000
Other income (expense):
Net gain (loss) on trading securities	471,000	(126,000)	391,000	102,000
Loss on sale of property			(102,000)
Interest and other (expense)	(65,000)	(125,000)	(184,000)	(202,000)
Other income(expense), net	406,000	(251,000)	105,000	(100,000)
Income before income taxes	3,532,000	2,541,000	6,525,000	5,311,000
Provision for income taxes	934,000	580,000	2,010,000	1,425,000
Net income	2,598,000	1,961,000	4,515,000	3,886,000
Cumulative preferred stock dividend	(19,000)	(19,000)	(38,000)	(38,000)
Net income attributable to common shareholders	$ 2,579,000	$ 1,942,000	$ 4,477,000	$ 3,848,000
Basic and diluted earnings per common share:	$ 0.53	$ 0.40	$ 0.92	$ 0.79
Basic and diluted weighted average common shares outstanding	4,861,590	4,861,590	4,861,590	4,861,590

XML

Condensed Consolidated Statement of Shareholders' Equity - USD ($) $ in Thousands		Convertible Preferred Stock	Common Stock	Additional Paid-in Capital	Accumulated Other Comprehensive Income	Accumulated Earnings	Total
Balance at Aug. 31, 2018	[1]	$ 1	$ 49	$ 12,378	$ 928	$ 28,530	$ 41,886
Balance (in Shares) at Aug. 31, 2018	[1]	36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation gain (loss)					158		158
Net income						1,925	1,925
Balance at Nov. 30, 2018		$ 1	$ 49	12,378	1,086	30,436	43,950
Balance (in Shares) at Nov. 30, 2018		36,000	4,861,590
Balance at Aug. 31, 2018	[1]	$ 1	$ 49	12,378	928	28,530	41,886
Balance (in Shares) at Aug. 31, 2018	[1]	36,000	4,861,590
Foreign translation gain (loss)							277
Net income							3,886
Balance at Feb. 28, 2019		$ 1	$ 49	12,378	1,205	32,378	46,011
Balance (in Shares) at Feb. 28, 2019		36,000	4,861,590
Balance at Nov. 30, 2018		$ 1	$ 49	12,378	1,086	30,436	43,950
Balance (in Shares) at Nov. 30, 2018		36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation gain (loss)					119		119
Net income						1,961	1,961
Balance at Feb. 28, 2019		$ 1	$ 49	12,378	1,205	32,378	46,011
Balance (in Shares) at Feb. 28, 2019		36,000	4,861,590
Balance at Aug. 31, 2019	[1]	$ 1	$ 49	12,378	876	37,886	51,190	[2]
Balance (in Shares) at Aug. 31, 2019	[1]	36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation gain (loss)					(212)		(212)
Net income						1,917	1,917
Balance at Nov. 30, 2019		$ 1	$ 49	12,378	664	39,784	52,876
Balance (in Shares) at Nov. 30, 2019		36,000	4,861,590
Balance at Aug. 31, 2019	[1]	$ 1	$ 49	12,378	876	37,886	51,190	[2]
Balance (in Shares) at Aug. 31, 2019	[1]	36,000	4,861,590
Foreign translation gain (loss)							(249)
Net income							4,515
Balance at Feb. 29, 2020		$ 1	$ 49	12,378	627	42,363	55,418
Balance (in Shares) at Feb. 29, 2020		36,000	4,861,590
Balance at Nov. 30, 2019		$ 1	$ 49	12,378	664	39,784	52,876
Balance (in Shares) at Nov. 30, 2019		36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation gain (loss)					(37)		(37)
Net income						2,598	2,598
Balance at Feb. 29, 2020		$ 1	$ 49	$ 12,378	$ 627	$ 42,363	$ 55,418
Balance (in Shares) at Feb. 29, 2020		36,000	4,861,590

[1] Derived from the Company’s audited financial statements included in its Form 10K for the years ended August 31, 2018 and 2019 as filed with the U. S. Securities and Exchange Commission on November 28, 2018 and November 27, 2019, respectively.

[2] Derived from the Company’s audited financial statements included in its Form 10K for the year ended August 31, 2019 as filed with the U. S. Securities and Exchange Commission on November 27, 2019.

XML

Commitments and Contingencies (Details) - USD ($)	Feb. 29, 2020	Aug. 31, 2019
Long-term Line of Credit	$ 9,213,000	$ 6,114,000
Community Bank [Member]
Long-term Line of Credit	100,000
Letter of Credit [Member]
Notes Payable, Noncurrent	$ 100,000

XML

Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended				6 Months Ended
	Feb. 29, 2020	Nov. 30, 2019	Feb. 28, 2019	Nov. 30, 2018	Feb. 29, 2020	Feb. 28, 2019
EPS:
Net income	$ 2,598	$ 1,917	$ 1,961	$ 1,925	$ 4,515	$ 3,886
Less: accrued preferred stock dividends	(19)		(19)		(38)	(38)
Net income attributable to common shareholders	$ 2,579		$ 1,942		$ 4,477	$ 3,848
Earnings per common share - basic and diluted	$ 0.53		$ 0.40		$ 0.92	$ 0.79

XML

Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019	Feb. 29, 2020	Feb. 28, 2019
Condensed Consolidated Statements of Comprehensive Income
Net income	$ 2,598	$ 1,961	$ 4,515	$ 3,886
Other comprehensive (loss) gain, net of tax:
Foreign translation (loss) gain	(37)	119	(249)	277
Total comprehensive income	$ 2,561	$ 2,080	$ 4,266	$ 4,163

XML

Condensed Consolidated Statements of Cash Flows - USD ($)	6 Months Ended
	Feb. 29, 2020	Feb. 28, 2019
Operating activities:
Net income	$ 4,515,000	$ 3,886,000
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	506,000	503,000
Bad debt expense	14,000	18,000
Change in inventory provision	68,000	107,000
Loss on sale of real property	102,000
Net gain on trading securities	(391,000)	(102,000)
(Increase) decrease in:
Trade accounts receivable	931,000	(1,889,000)
Inventory	(2,852,000)	(5,033,000)
Prepaid expenses and other assets	(1,026,000)	(524,000)
Increase (decrease) in:
Trade accounts payable	(2,243,000)	2,206,000
Accrued expenses and other current liabilities	(3,245,000)	(3,853,000)
Net cash used in operating activities	(3,621,000)	(4,681,000)
Investing activities:
Purchase of property, equipment, and leasehold improvements	(4,591,000)	(330,000)
Proceeds from sale of real property	7,075,000
Net sales of marketable securities, trading	1,370,000	1,071,000
Net change in liabilities for short sales of trading securities	1,731,000	(115,000)
Net cash provided by investing activities	5,585,000	626,000
Financing activities:
Borrowings on revolving credit facility, net	3,192,000	4,593,000
Borrowings on construction loan	3,342,000
Repayments on long-term debt	(5,125,000)	(72,000)
Preferred stock dividend	(38,000)	(38,000)
Bank overdraft	(147,000)	457,000
Net cash provided by financing activities	1,224,000	4,940,000
Effect of foreign currency exchange rate changes on cash and cash equivalents	(249,000)	277,000
Net increase in cash, cash equivalents, and restricted cash	2,939,000	1,162,000
Cash, cash equivalents, and restricted cash - beginning of period	5,347,000	3,638,000
Cash, cash equivalents, and restricted cash - end of period	8,286,000	4,800,000
Supplemental disclosures of cash flow information:
Cash paid for interest	178,000	201,000
Cash paid for income taxes	$ 3,395,000	$ 3,059,000

XML

Earnings per Share (Tables)

6 Months Ended

Feb. 29, 2020

Earnings per Share

Schedule of 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				Six Months Ended
	February 29,		February 28,		February 29,		February 28,
	2020		2019		2020		2019
(In thousands, except share and per share amounts)
EPS:
Net income	$	2,598	$	1,961	$	4,515	$	3,886
Less:  accrued preferred stock dividends		(19)		(19)		(38)		(38)
Net income available for common   shareholders	$	2,579	$	1,942	$	4,477	$	3,848
Earnings per common share  – basic and diluted	$	0.53	$	0.40	$	0.92	$	0.79

XML

Income Taxes

6 Months Ended

Feb. 29, 2020

Income Taxes

Income Taxes

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 (“GILTI”) in the year the tax is incurred.

During the three and six months ended February 29, 2020, the Company recorded an income tax provision of $934,000 and $2,010,000, respectively, resulting in an effective tax rate of 26.4% and 30.8%, respectively. For 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. The current period effective tax rate differs from the statutory rate of 21% due to state income tax and permanent book to tax basis adjustments related to transfer pricing and meals that were recognized during Q2 2019, which reduced the percent of pre-tax income during that period.

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 29, 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 six months ended February 29, 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.