10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 31, 2023, or

☐ 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 or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5065 East Hunter Avenue

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 ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant 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 such files).

Yes ☒   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	☒
Smaller reporting company	☒	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 ☒

As of July 7, 2023, 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				Nine Months Ended
	May 31,				May 31,
	2023		2022		2023		2022
Net sales	$	80,249	$	77,797	$	233,493	$	208,206
Cost of sales		57,008		56,207		166,325		150,313
Gross margin		23,241		21,590		67,168		57,893
Operating expenses:
Selling, general and administrative expenses		16,277		14,547		47,568		36,881
Income from operations		6,964		7,043		19,600		21,012
Other income (expense):
Net gain on trading securities		163		213		784		135
Interest and other (expense)		(36)		(48)		(38)		(153)
Other income (expense), net		127		165		746		(18)
Income before income taxes		7,091		7,208		20,346		20,994
Provision for income taxes		1,772		1,878		5,216		5,471
Net income		5,319		5,330		15,130		15,523
Cumulative preferred stock dividend		(19)		(19)		(57)		(57)
Net income attributable to common shareholders	$	5,300	$	5,311	$	15,073	$	15,466
Basic and diluted earnings per common share:	$	1.09	$	1.09	$	3.10	$	3.18
Basic and diluted weighted average common shares outstanding		4,861,590		4,861,590		4,861,590		4,861,590
Diluted weighted average common shares outstanding		4,901,590		4,901,590		4,901,590		4,901,590

See accompanying notes to unaudited condensed consolidated financial statements.

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EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

	Three Months Ended				Nine Months Ended
	May 31,				May 31,
	2023		2022		2023		2022
Net income	$	5,319	$	5,330	$	15,130	$	15,523
Other comprehensive gain (loss), net of tax:
Foreign translation gain (loss)		(50)		(43)		(135)		(498)
Total comprehensive income	$	5,269	$	5,287	$	14,995	$	15,025

See accompanying notes to unaudited condensed consolidated financial statements.

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EACO Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(Unaudited)

	May 31,		August 31,
	2023		2022*
ASSETS
Current Assets:
Cash and cash equivalents	$	1,348	$	17,386
Restricted cash		10		10
Trade accounts receivable, net		40,523		44,637
Inventory, net		56,464		48,808
Marketable securities, trading		28,447		3,925
Prepaid expenses and other current assets		3,755		5,008
Total current assets		130,547		119,774
Non-current Assets:
Property, equipment and leasehold improvements, net		8,073		8,479
Operating lease right-of-use assets		10,390		10,389
Other assets, net		1,141		1,039
Total assets	$	150,151	$	139,681
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Trade accounts payable	$	19,768	$	21,762
Accrued expenses and other current liabilities		12,623		15,020
Current portion of operating lease liabilities		3,801		3,375
Current portion of long-term debt		120		119
Total current liabilities		36,312		40,276
Non-current Liabilities:
Long-term debt		4,377		4,465
Operating lease liabilities		6,776		7,192
Total liabilities		47,465		51,933
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		39		174
Retained earnings		90,219		75,146
Total shareholders’ equity		102,686		87,748
Total liabilities and shareholders’ equity	$	150,151	$	139,681

* Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2022 filed with the U.S. Securities and Exchange Commission on November 4, 2022.

See accompanying notes to unaudited condensed consolidated financial statements.

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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
For the three and nine months ended May 31, 2023
Balance, August 31, 2022 *	36,000	$	1	4,861,590	$	49	$	12,378	$	174	$	75,146	$	87,748
Preferred dividends	—		—	—		—		—		—		(19)		(19)
Foreign translation loss	—		—	—		—		—		(86)		—		(86)
Net income	—		—	—		—		—		—		4,711		4,711
Balance, November 30, 2022	36,000	$	1	4,861,590	$	49	$	12,378	$	88	$	79,838	$	92,354
Preferred dividends	—		—	—		—		—		—		(19)		(19)
Foreign translation gain	—		—	—		—		—		1		—		1
Net income	—		—	—		—		—		—		5,100		5,100
Balance, February 28, 2023	36,000	$	1	4,861,590	$	49	$	12,378	$	89	$	84,919	$	97,436
Preferred dividends	—		—	—		—		—		—		(19)		(19)
Foreign translation loss	—		—	—		—		—		(50)		—		(50)
Net income	—		—	—		—		—		—		5,319		5,319
Balance, May 31, 2023	36,000	$	1	4,861,590	$	49	$	12,378	$	39	$	90,219	$	102,686
For the three and nine months ended May 31, 2022
Balance, August 31, 2021 *	36,000	$	1	4,861,590	$	49	$	12,378	$	780	$	53,914	$	67,122
Preferred dividends	—		—	—		—		—		—		(19)		(19)
Foreign translation loss	—		—	—		—		—		(480)		—		(480)
Net income	—		—	—		—		—		—		6,786		6,786
Balance, November 30, 2021	36,000	$	1	4,861,590	$	49	$	12,378	$	300	$	60,681	$	73,409
Preferred dividends	—		—	—		—		—		—		(19)		(19)
Foreign translation gain	—		—	—		—		—		25		—		25
Net income	—		—	—		—		—		—		3,407		3,407
Balance, February 28, 2022	36,000	$	1	4,861,590	$	49	$	12,378	$	325	$	64,069	$	76,822
Preferred dividends	—		—	—		—		—		—		(19)		(19)
Foreign translation loss	—		—	—		—		—		(43)		—		(43)
Net income	—		—	—		—		—		—		5,330		5,330
Balance, May 31, 2022	36,000	$	1	4,861,590	$	49	$	12,378	$	282	$	69,380	$	82,090

* Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2022 and 2021 as filed with the U.S. Securities and Exchange Commission on November 4, 2022 and July 6, 2022, respectively

See accompanying notes to unaudited condensed consolidated financial statements.

5

EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Nine Months Ended
	May 31,
	2023		2022
Operating activities:
Net income	$	15,130	$	15,523
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,052		1,122
Bad debt expense		201		54
Net unrealized gain on trading securities		(784)		(135)
Increase (decrease) in cash from changes in:
Trade accounts receivable		3,913		(8,843)
Inventory		(7,656)		(7,045)
Prepaid expenses and other assets		1,151		(462)
Operating lease right-of-use assets		(1)		416
Trade accounts payable		(1,885)		3,959
Accrued expenses and other current liabilities		(2,397)		230
Operating lease liabilities		10		(363)
Net cash provided by operating activities		8,734		4,456
Investing activities:
Purchase of property, equipment, and leasehold improvements		(646)		(827)
Net purchases of marketable securities, trading		(23,738)		(959)
Net cash used in investing activities		(24,384)		(1,786)
Financing activities:
Repayments on long-term debt		(87)		(87)
Preferred stock dividend		(57)		(57)
Net change in bank overdraft		(109)		(1,056)
Net cash (used in) financing activities		(253)		(1,200)
Effect of foreign currency exchange rate changes on cash and cash equivalents		(135)		(498)
Net (decrease) increase in cash, cash equivalents, and restricted cash		(16,038)		972
Cash, cash equivalents, and restricted cash - beginning of period		17,396		4,465
Cash, cash equivalents, and restricted cash - end of period	$	1,358	$	5,437
Supplemental disclosures of cash flow information:
Cash paid for interest	$	152	$	153
Cash paid for income taxes	$	7,217	$	3,979

See accompanying notes to unaudited condensed consolidated financial statements.

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EACO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2023

Note 1.    Organization and Basis of Presentation

EACO Corporation (“EACO”), incorporated in Florida in September 1985, is a holding company, primarily comprised of its wholly-owned subsidiary, Bisco Industries, Inc. (“Bisco”) and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited. Substantially all of EACO’s operations are conducted through Bisco and Bisco Industries Limited. Bisco was incorporated in Illinois in 1974 and is a distributor of electronic components and fasteners with 51 sales offices and seven distribution centers located throughout the United States and Canada. Bisco supplies parts used in the manufacture of products in a broad range of industries, including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment and marine industries.

Note 2.    Significant Accounting Policies and Significant Recent Accounting Pronouncements

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates include allowance for doubtful accounts receivable, provision for slow moving and obsolete inventory, recoverability of the carrying value and estimated useful lives of long-lived assets, and the valuation allowance against deferred tax assets, if any. Actual results could differ from those estimates.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in conformity with GAAP for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading have been included.

Certain information and note 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, 2022 (“fiscal 2022”). The condensed consolidated balance sheet as of August 31, 2022 and related disclosures were derived from the Company’s audited consolidated financial statements as of August 31, 2022. Operating results for the three and nine months ended May 31, 2023 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 $151,000 and $164,000 at May 31, 2023 and August 31, 2022, respectively.

Inventories, Net

Inventory consists primarily of electronic fasteners and components, and is stated at the lower of cost or estimated net realizable value. Cost is determined using the average cost method. Inventories are reduced by a provision for slow moving and obsolete items of $1,784,000 and $1,697,000 at May 31, 2023 and August 31, 2022, respectively. The provision is based upon management’s review of inventories on-hand, their expected future utilization and length of time held by the Company.

Marketable Trading Securities

The Company invests in marketable trading securities, which include long and short positions in equity securities. Short positions represent securities sold, but not yet purchased. Short sales result in obligations to purchase securities at a later date and are separately presented as a liability in the Company’s consolidated balance sheets. As of May 31, 2023 and August 31, 2022, the Company’s total obligation for securities sold, but not yet purchased was zero. Restricted cash to collateralize the Company’s obligations for short sales was zero at May 31, 2023 and August 31, 2022.

Securities are stated at fair value, which is determined using the quoted closing prices at each reporting date. Realized gains and losses on investment transactions are recognized as incurred in the consolidated statements of operations. Net unrealized gains and losses are reported in the statements of operations and represent the change in the market value of investment holdings during the period.

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, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.

We provide tax contingencies, if any, for federal, state, local and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes and timing. Although the outcome of these tax audits is uncertain, in management’s opinion adequate provisions for income taxes have been made for potential liabilities emanating from these reviews. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations.

Revenue Recognition

We derive our revenue primarily from product sales. We determine revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.

8

The Company’s performance obligations consist solely of product shipped to customers. Revenue from product sales is recognized upon transfer of control of promised products upon shipment to customers at a point in time in an amount that reflects the consideration we expect to receive in exchange for these products. Revenue is recognized net of returns and any taxes collected from customers. We offer industry standard contractual terms in our purchase orders.

Operating Leases

The Company determines if a contractual arrangement contains a lease, for accounting purposes, at contract inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, the current and long term portions of operating lease liabilities, in the accompanying consolidated balance sheets.

The ROU assets represent the Company’s right to control the use of a leased asset for the contractual term, and lease liabilities represent the related obligation to make lease payments arising from the contractual arrangement. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the contractual term. The operating lease ROU assets also include any prepaid lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the contractual term.

Many of the Company’s leases include both lease (such as fixed payment amounts including rent, taxes, and insurance costs) and non-lease components (such as common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases.

Many leases include one or more options to renew the contract. Therefore, renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain to be exercised. If there are extension options in the lease at inception, management evaluates the likelihood of renewing the lease and that analysis affects the determination of the lease term for calculating the lease liability.

Since most of the Company’s leases do not provide an implicit borrowing rate, as defined by GAAP, we use an incremental borrowing rate based on information available to us at the lease commencement date in order to determine the present value of the lease payments. The Company applies a portfolio approach for determining the incremental borrowing rate. As of May 31, 2023, the Company has right of use assets of approximately $10.4 million and lease liabilities of approximately $10.6 million recorded in the consolidated balance sheets.

Earnings Per Common Share

Basic earnings per common share for the three and nine months ended May 31, 2023 and 2022, were computed based on the weighted average number of common shares outstanding. Diluted earnings per share for those periods have been computed based on the weighted average number of common shares outstanding, giving effect to all potentially dilutive common shares that were outstanding during the respective periods. Potentially dilutive common shares represent 40,000 common shares issuable upon conversion of 36,000 shares of Series A convertible preferred stock, which were outstanding at May 31, 2023 and 2022. Such securities are excluded from the weighted average shares outstanding used to calculate diluted earnings per common share for the quarters ended May 31, 2023 and 2022 as their inclusion would be anti-dilutive since the conversion price was greater than the average market price of the Company’s common stock during these periods (See Note 5).

Foreign Currency Translation and Transactions

Assets and liabilities recorded in functional currencies other than the U.S. dollar (Canadian dollars for Bisco’s Canadian subsidiary) are translated into U.S. dollars at the period-end rate of exchange. The exchange rate for Canadian dollars on May 31, 2023 and 2022 was $0.74 and $0.79, respectively. The resulting balance sheet translation adjustments are charged or credited directly to accumulated other comprehensive income (loss). Revenue and expenses are transacted at the average exchange rates for the three months ended May 31, 2023 and 2022. The average exchange rates for the nine months ended May 31, 2023 and 2022 were $0.74 and $0.79, respectively. All foreign sales, excluding Canadian sales, are denominated in U.S. dollars and, therefore, are not subject to foreign currency risk exposure.

Concentrations

Net sales to customers outside the United States were approximately 10% and 12% of revenues for the nine months ended May 31, 2023 and 2022, respectively, and related accounts receivable were approximately 11% and 15% of total accounts receivable for May 31, 2023 and 2022, respectively. Sales to customers in Canada accounted for approximately 31% of such international sales for the

9

nine months ended May 31, 2023 and 2022. Sales to customers located within Asia accounted for approximately 45% and 47% of such international sales for the nine months ended May 31, 2023 and 2022, respectively.

No single customer accounted for more than 10% of revenues and accounts receivable for the three or nine months ended May 31, 2023 and 2022.

Significant Recent Accounting Pronouncements

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. 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 provisions of this standard will be first applied in our financial statements for the fiscal year beginning September 1, 2023. Management is currently evaluating this statement and its impact on its results of operations or financial position.

Note 3.    Accrued Liabilities

The Company’s accrued liabilities as of May 31, 2023 and August 31, 2022 are summarized as follows (in thousands):

	May 31,		August 31,
	2023		2022
Accrued expenses and other current liabilities
Accrued accounts payable	$	1,658	$	1,271
Accrued compensation and payroll		5,790		6,590
Accrued taxes		5,175		7,159
Total Accrued expenses and other current liabilities	$	12,623	$	15,020

Note 4.    Debt

The Company currently has a $15,000,000 line of credit agreement with Citizens Business Bank (“the Bank”). During Q1 2023, the Company entered into a Change in Terms Agreement dated November 5, 2022 with the Bank (the “Amendment”), which extended the maturity date of the line of credit from November 5, 2022 to July 5, 2024. The line of credit has a variable interest rate set at the bank prime index rate, but provided that in no event would such interest rate be less than 3.5% per annum. Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The amounts outstanding under this line of credit as of May 31, 2023 and August 31, 2022 were zero. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of May 31, 2023 and August 31, 2022, the Company was in compliance with all such covenants.

The Company also entered into a Loan Agreement with the Bank to borrow up to $5,000,000 (the “Construction Loan”) for the primary purpose of financing tenant improvements at its new corporate headquarters located at 5065 East Hunter Avenue in Anaheim, California (the “Hunter Property”). The Construction Loan was a line of credit evidenced by a Promissory Note in the principal amount of up to $5,000,000 with a maturity date of May 15, 2027. The terms of the Construction Loan provided that the Company could only request advances through July 15, 2020, and thereafter, the Construction Loan converted to a term loan with a fixed rate of 4.6%, which is entitled to a .25% rate discount if a demand deposit account is held with the Bank. On July 15, 2020, the amount drawn on the Construction Loan was converted to a term loan in the amount of $4,807,000. Interest on the Construction Loan is payable monthly (4.35% per annum at both May 31, 2023 and August 31, 2022). Concurrent with the execution of this Construction Loan, Bisco entered into a commercial security agreement, dated July 12, 2019, with the Bank, pursuant to which Bisco granted the Bank a security interest in substantially all of Bisco’s personal property to secure Bisco’s obligations under the Construction Loan. The outstanding balance of the Construction Loan at May 31, 2023 and August 31, 2022 was $4,497,000 and $4,584,000, respectively.

EACO has also entered into a business loan agreement (and related $100,000 promissory note) with the Bank in order to obtain a $100,000 letter of credit as security for the Company’s worker’s compensation requirements.

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Note 5.    Earnings per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted computations for earnings per common share (in thousands, except per share data):

	Three Months Ended				Nine Months Ended
	May 31,				May 31,
	2023		2022		2023		2022
(In thousands, except share and per share amounts)
EPS:
Net income	$	5,319	$	5,330	$	15,130	$	15,523
Less: accrued preferred stock dividends		(19)		(19)		(57)		(57)
Net income available for common shareholders	$	5,300	$	5,311	$	15,073	$	15,466
Earnings per common share – basic and diluted	$	1.09	$	1.09	$	3.10	$	3.18

For the three and nine months ended May 31, 2023 and 2022, 40,000 potential common shares (issuable upon conversion of 36,000 shares of the Company’s Series A cumulative convertible preferred stock) have been excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive since the conversion price was greater than the average market price of the common stock.

Note 6.    Related Party Transactions

The Company leases its Chicago area sales office and distribution center located in Glendale Heights, Illinois under an operating lease agreement (the “Glendale Lease”) from the Glen F. Ceiley and Barbara A.Ceiley Revocable Trust (the “Trust”), which is the grantor trust of Glen Ceiley, the Company’s Chief Executive Officer, Chairman of the Board, and majority shareholder. The Glendale Lease is a ten-year lease with an initial monthly rental rate of $22,600, which is subject to annual rent increases of approximately 2.5% as set forth in the Glendale Lease. During the nine months ended May 31, 2023 and 2022, the Company incurred expense related to the Glendale Lease of approximately $229,000 and $225,000, respectively.

On July 26, 2019, the Company entered into a Commercial Lease Agreement with the Trust (the “Hunter Lease”), for the lease of the Hunter Property, which houses the Company’s corporate headquarters. The term of the Hunter Lease commenced on September 2, 2019 and ends on August 31, 2029 with an initial monthly rental rate of $66,300, which is subject to annual rent increases of approximately 2.5% as set forth in the Hunter Lease. During the nine months ended May 31, 2023 and 2022, the Company incurred expense related to the Hunter Lease of approximately $643,000 and $627,000, respectively.

Note 7.    Income Taxes

During the three and nine months ended May 31, 2023, the Company recorded an income tax provision of $1,772,000 and $5,216,000, respectively, resulting in an effective tax rate of 25% and 25.6%, respectively. During the three and nine months ended May 31, 2022, the Company recorded an income tax provision of $1,878,000 and $5,471,000, respectively, resulting in an effective tax rate of 26.1%. The current period effective tax rate differs from the statutory rate of 21% primarily due to the state tax rates and permanent book tax differences.

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. For the three and nine months ended May 31, 2023, the Company did not have a liability for any unrecognized tax benefit. The Company has elected to classify interest and penalties as a component of its income tax provision. For the three and nine months ended May 31, 2023, 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 2019, 2020 and 2021 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 2018.

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Note 8.    Commitments and Contingencies

From time to time, the Company 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 the Company to damages or equitable remedies, and divert management and key personnel from core business operations. The Company is currently not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Note 9.    Subsequent Events

Management has evaluated events subsequent to May 31, 2023, 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.

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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, 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 51 sales offices and seven distribution centers located throughout the United States and Canada and 1 sales office located in Asia. 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.

Critical Accounting Policies and Estimates

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, management is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. There have been no changes to the Company’s critical accounting policies for the three months ended May 31, 2023.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Updated (“ASU”) 2014-09, Revenue from Contracts with Customers, issued as a new Topic, ASC Topic 606 (“ASU Top 606”). This revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The premise of the standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

We derive our revenue primarily from product sales. We determine revenue recognition in accordance with ASC Topic 606 through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.

The Company’s performance obligations consist solely of product shipped to customers. Revenue from product sales is recognized upon transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for these products. Revenue is recognized net of returns and any taxes collected from customers. We offer industry standard contractual terms in our purchase orders.

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Inventory

The Company’s inventory provisions are based upon management’s review of inventories on-hand over their expected future utilization and length of time held by the Company. The Company’s methodology for estimating these adjustments to the cost basis is evaluated for factors that could require changes to the cost basis including significant changes in product demand, market conditions, condition of the inventory or net realizable value. If business or economic conditions change, the Company’s estimates and assumptions may be adjusted as deemed appropriate.

Impairment of Long Lived Assets

Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of the impairment review, assets are tested on an individual basis. The recoverability of the assets is measured by a comparison of the carrying value of each asset to the future net undiscounted cash flows expected to be generated by such assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds their estimated fair value.

Deferred Tax Assets

A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit, or when future deductibility is uncertain. The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.

Results of Operations

Comparison of the Three Months Ended May 31, 2023 and 2022

Net Sales and Gross Profit ($ in thousands)

	Three Months Ended
	May 31,						$		%
	2023			2022			Change		Change
Net sales	$	80,249		$	77,797		$	2,452	3.2	%
Cost of sales		57,008			56,207			801	1.4	%
Gross margin	$	23,241		$	21,590		$	1,651	7.6	%
Gross margin as a percent of net sales		29.0	%		27.8	%			1.2	%

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 May 31, 2023 (“Q3 2023”) as compared to the three months ended May 31, 2022 (“Q3 2022”) was largely due to an increased sales headcount of 38 employees, increasing from 310 sales employees to 348 for Q3 2022 and Q3 2023, respectively. Our experience shows that increasing sales headcount leads to the addition of new customers and the ability to sell more products to existing customers. Revenues and gross profit for Q3 2023 have increased when compared to Q3 2022 primarily due to developing better relationships with vendors and customers and also higher inventory stock available and an increased demand for those products.

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Selling, General and Administrative Expenses ($ in thousands)

	Three Months Ended
	May 31,						$		%
	2023			2022			Change		Change
Selling, general and administrative expenses	$	16,277		$	14,547		$	1,730	11.9	%
Percent of net sales		20.3	%		18.7	%			1.6	%

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 Q3 2023 increased from Q3 2022 largely due to increased sales and administrative headcount, an increase from 506 at Q3 2022 to 557 at Q3 2023. Increase in SG&A is also due to an increased travel by sales employees for meetings and conferences, which had been curtailed in prior periods due to the Covid-19 pandemic. SG&A as a percent of revenue in Q3 2022 increased from Q3 2022 by 1.6%, primarily due to sharp increases in employee headcount and less productivity from newly hired employees.

Other (Expense), Net ($ in thousands)

	Three Months Ended
	May 31,						$		%
	2023			2022			Change		Change
Other income (expense):
Net gain on trading securities	$	163		$	213		$	(50)	(23.5)	%
Interest and other expense, net		(36)			(48)			12	25.0	%
Other income, net	$	127		$	165		$	(38)	(23.0)	%
Percent of net sales		0.2	%		0.2	%			—	%

Other (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 positions, as well as utilizing options designed to improve returns. During Q3 2023, the Company recognized a net gain on trading securities of $163,000 as compared to a net gain of $213,000 in Q3 2022. The net trading securities gain in Q3 2023 was primarily due cash dividends and timing of sales and general market climate for long positions during the period.

Interest and other (expense), net, decreased by $12,000 in Q3 2023 compared to Q3 2022, which was primarily due to interest income from our cash accounts offsetting some of the Company’s interest expense.

Income Tax Provision ($ in thousands)

	Three Months Ended
	May 31,						$		%
	2023			2022			Change		Change
Income tax provision	$	1,772		$	1,878		$	(106)	(5.6)	%
Percent of pre-tax income		25.0	%		26.1	%			(1.1)	%

The provision for income taxes decreased by $106,000 in Q3 2023 over the prior year period. This decrease was primarily due to higher SG&A expenses in the current period that reduced the income before taxes. The income tax provision as a percent of pre-tax income decreased from 26.1% at Q3 2022 to 25% at Q3 2023, which was primarily due to the state tax rate mix and permanent book tax differences.

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Comparison of the Nine Months Ended May 31, 2023 and 2022

Net Sales and Gross Profit ($ in thousands)

	Nine Months Ended
	May 31,						$		%
	2023			2022			Change		Change
Net sales	$	233,493		$	208,206		$	25,287	12.1	%
Cost of sales		166,325			150,313			16,012	10.7	%
Gross margin	$	67,168		$	57,893		$	9,275	16.0	%
Gross margin as a percent of Net sales		28.8	%		27.8	%			1.0	%

The increase in revenues and gross margins as a percent of revenues in the nine months ended May 31, 2023 as compared to the nine months ended May 31, 2022 was largely due to developing better relationships with vendors and customers and also higher inventory stock available and an increased demand for those products. n the current period.

Selling, General and Administrative Expenses ($ in thousands)

	Nine Months Ended
	May 31,						$		%
	2023			2022			Change		Change
Selling, general and administrative expenses	$	47,568		$	36,881		$	10,687	29.0	%
Percent of net sales		20.4	%		17.7	%			2.7	%

SG&A in the nine months ended May 31, 2023 increased from the same period in the prior year primarily due to a prior year decrease in payroll taxes as a result of federal tax credits related to the Employee Retention Credit (ERC) of $5.4 million recorded in the first quarter of fiscal year 2022. Further, the increase in the current period is due to a higher employee headcount. SG&A as a percent of revenue in the current period increased from the prior year period primarily due to the ERC offset in the prior year and higher payroll expenses in the current year.

Other (Expense), Net ($ in thousands)

	Nine Months Ended
	May 31,						$		%
	2023			2022			Change		Change
Other income (expense):
Net gain (loss) on trading securities	$	784		$	135		$	649	480.7	%
Interest and other expense, net		(38)			(153)			115	75.2	%
Other expense, net	$	746		$	(18)		$	764	4244.4	%
Percent of net sales		0.3	%		—	%			0.3	%

During the nine months ended May 31, 2023, the Company recognized a net gain on trading securities of $784,000 as compared to a net gain of $135,000 in the same period in the prior year. The net trading securities gain in Q3 2023 was primarily due to dividends earned and timing of sales of investments and general market climate for long positions during the period.

Interest and other (expense), net, decreased during the nine months ended May 31, 2023 compared to the same period in the prior year, which was primarily due to interest income earned during the period that partially offset the interest expense.

Income Tax Provision ($ in thousands)

	Nine Months Ended
	May 31,						$		%
	2023			2022			Change		Change
Income tax provision	$	5,216		$	5,471		$	255	4.7	%
Percent of pre-tax income		25.6	%		26.1	%			(0.5)	%

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The provision for income taxes decreased by $255,000 for the nine months ended May 31, 2023 when compared to the prior year period. This decrease was primarily due to lower income in the current period as compared to the prior year period.

The income tax provision as a percent of pre-tax income decreased from 26.1% for the nine months ended May 31, 2022 to 25.6% in the current year period, which was primarily due to the state tax rate mix and permanent book tax differences.

Liquidity and Capital Resources

As of May 31, 2023 and August 31, 2022, the Company held approximately $1,348,000 and $17,386,000 of unrestricted cash and cash equivalents, respectively. The Company also held $28,447,000 and $3,925,000 of marketable securities at May 31, 2023 and August 31, 2022, respectively, which could be liquidated, if necessary.

As of May 31, 2023, the Company had an available $15,000,000 line of credit with the Bank. The Company entered the Amendment, which extended the maturity date of the line of credit from November 5, 2022 to July 5, 2024. The line of credit has a variable interest rate set at the bank prime index rate, but provided that in no event would such interest rate be less than 3.5% per annum. Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of May 31, 2023 and August 31, 2022, the Company was in compliance with all such covenants. The outstanding balance of the line of credit at May 31, 2023 and August 31, 2022 was zero.

The Company 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 workers’ compensation requirements.

Cash Flows from Operating Activities

Cash provided by operating activities was $8,734,000 for the nine months ended May 31, 2023 as compared with cash provided by operating activities of $4,456,000 for the nine months ended May 31, 2022. The cash provided by operating activities in the current period was primarily due to net income of $15,130,000 and a decrease in trade accounts receivable, offset by increases in inventory of $7,656,000. The reduction in accounts receivable was primarily attributed to headcount added to the department and additional training and experience of the accounts receivable staff. The prior period cash provided by operating activities was primarily due to net income of $15,523,000 and increases in balances to trade accounts payable, offset by increases in both accounts receivable and inventory.

Cash Flows from Investing Activities

Cash used in investing activities was $24,384,000 for the nine months ended May 31, 2023 as compared with cash used in investing activities of $1,786,000 for the nine months ended May 31, 2022. Cash used in investing activities in the current period and prior year period was primarily due to the purchase of marketable securities.

Cash Flows from Financing Activities

Cash used in financing activities for the nine months ended May 31, 2023 was $253,000 as compared with cash used in financing activities of $1,200,000 for the nine months ended May 31, 2022. The cash used in financing activities for the current period and prior year period is primarily due to the change in bank overdraft in the period, which represents outstanding checks in excess of cash due to the nightly sweep feature of the cash account to the line of credit with the Bank.

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, operating leases, and finance leases are recorded as liabilities on the consolidated balance sheets in the Company’s Annual Report on Form 10-K for the year ended August 31, 2022 as filed with the SEC on November 4, 2022.

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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

Disclosure Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of May 31, 2023, pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of May 31, 2023 because of the material weakness in internal control over financial reporting discussed below.

Notwithstanding the material weakness in internal control over financial reporting described below, our management has concluded that our consolidated financial statements included in the Quarterly Report on Form 10-Q are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States of America.

Material Weakness

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management concluded that there was a material weakness in the Company’s internal control over financial reporting as of August 31, 2022, related to the Company’s internal controls over the financial statement closing process, including manual journal entries recorded in the preparation of the financial statements related to the Company’s lease accounts, and certain inventory and accrued liability accounts.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, and/or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Remediation Plan

We are in the process of developing a detailed plan for remediation of the material weakness, including developing and maintaining additional levels of review and approval. The Company has hired a 3^rd party accounting consultant to aid in implementing additional levels of review and approval. We will continue to assess the effectiveness of our remediation efforts in connection with our future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures.

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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.

Company and Operational Risks

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 from time to time. 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 or 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.

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.

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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 the nine months ended May 31, 2023 and May 31, 2022, we spent $289,000 and $145,000 on advertising, respectively.

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.

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. 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. We have experienced and may continue to experience sophisticated attempted cyber-attacks of our IT networks. Although none of these attempted cyber-attacks has had a material adverse impact on our operations or financial condition, we cannot guarantee that any such incidents will not have such an impact in the future. We have been 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.

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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.

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.

Expansion Risks

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, Mexico and countries within Asia, we currently estimate there is potential market opportunity in North America and Asia 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. During fiscal 2023, the Company relocated some existing locations to larger office locations within its original region. 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.

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

21

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.

Financial Risks

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 return. 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 the Bank. 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 on 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.

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 May 31, 2023 was zero, which line of credit is secured by substantially all of Bisco’s assets. Further, the Company entered into a new loan agreement with the Bank for approximately $4.7 million that financed the tenant improvements on the new corporate headquarters. 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 a result of the recent economic uncertainty due to the COVID pandemic, 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.

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.

Concentration of Ownership Risks

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 96% 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.

22

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 volume of any stock sales has generally been low. As of May 31, 2023, 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.

Due to the small amount of public float in our common stock, sales of our common stock by Glen Ceiley could cause the price of our common stock to decline, and the listing of shares of our common stock has been moved from the OTCQB to OTC Pink, which will further limit your ability to sell your shares.

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 May 31, 2023, 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. In addition, we were advised that if we do not increase the amount of $2.0 million freely tradeable public float to at least 5% of our outstanding capital stock we would be moved to the OTC Pink Open Market. During Q2 2021, the Company was downgraded from the QTCQB to the OTC Pink Open Market due to not having at least 5% public float.

General Risk Factors

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

As a result of the continuing economic uncertainties primarily caused by the impact of the COVID-19 pandemic, 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.

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.

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

None.

23

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 5.   Other Information

None.

Item 6.   Exhibits

See Exhibit Index below, which is incorporated by reference herein.

24

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: July 10, 2023	/s/ Glen Ceiley
	Glen Ceiley
	Chief Executive Officer
	(Principal Executive Officer & Principal Financial Officer)
	/s/ Michael Narikawa
	Michael Narikawa
	Controller
	(Principal Accounting Officer)

25

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

26

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: July 10, 2023	/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 May 31, 2023, 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: July 10, 2023	/S/ GLEN CEILEY
	Glen Ceiley
	Chief Executive Officer and Chief Financial Officer
	(Principal Executive Officer and Principal Financial Officer)

XML

Document And Entity Information - shares	9 Months Ended
	May 31, 2023	Jul. 07, 2023
Document And Entity Information
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	May 31, 2023
Document Transition Report	false
Entity File Number	000-14311
Entity Registrant Name	EACO CORP
Entity Incorporation, State or Country Code	FL
Entity Tax Identification Number	59-2597349
Entity Address, Address Line One	5065 East Hunter Avenue
Entity Address, City or Town	Anaheim
Entity Address, State or Province	CA
Entity Address, Postal Zip Code	92807
City Area Code	714
Local Phone Number	876-2490
Title of 12(g) Security	Common Stock, $0.01 Par Value
Trading Symbol	EACO
Entity Interactive Data Current	Yes
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		4,861,590
Entity Central Index Key	0000784539
Current Fiscal Year End Date	--08-31
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Condensed Consolidated Statements of Income - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2023	May 31, 2022	May 31, 2023	May 31, 2022
Condensed Consolidated Statements of Income
Net sales	$ 80,249,000	$ 77,797,000	$ 233,493,000	$ 208,206,000
Cost of sales	57,008,000	56,207,000	166,325,000	150,313,000
Gross margin	23,241,000	21,590,000	67,168,000	57,893,000
Operating expenses:
Selling, general and administrative expenses	16,277,000	14,547,000	47,568,000	36,881,000
Income from operations	6,964,000	7,043,000	19,600,000	21,012,000
Other income (expense):
Net gain on trading securities	163,000	213,000	784,000	135,000
Interest and other (expense)	(36,000)	(48,000)	(38,000)	(153,000)
Other income (expense), net	127,000	165,000	746,000	(18,000)
Income before income taxes	7,091,000	7,208,000	20,346,000	20,994,000
Provision for income taxes	1,772,000	1,878,000	5,216,000	5,471,000
Net income	5,319,000	5,330,000	15,130,000	15,523,000
Less: accrued preferred stock dividends	(19,000)	(19,000)	(57,000)	(57,000)
Net income attributable to common shareholders	$ 5,300,000	$ 5,311,000	$ 15,073,000	$ 15,466,000
Basic earnings per share	$ 1.09	$ 1.09	$ 3.10	$ 3.18
Diluted earnings per share	$ 1.09	$ 1.09	$ 3.10	$ 3.18
Basic and diluted weighted average common shares outstanding	4,861,590	4,861,590	4,861,590	4,861,590
Diluted weighted average common shares outstanding	4,901,590	4,901,590	4,901,590	4,901,590

XML

Condensed Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	May 31, 2023	May 31, 2022	May 31, 2023	May 31, 2022
Condensed Consolidated Statements of Comprehensive Income
Net income	$ 5,319	$ 5,330	$ 15,130	$ 15,523
Other comprehensive gain (loss), net of tax:
Foreign translation gain (loss)	(50)	(43)	(135)	(498)
Total comprehensive income	$ 5,269	$ 5,287	$ 14,995	$ 15,025

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	May 31, 2023	Aug. 31, 2022	[1]
Current Assets:
Cash and cash equivalents	$ 1,348	$ 17,386
Restricted cash	10	10
Trade accounts receivable, net	40,523	44,637
Inventory, net	56,464	48,808
Marketable securities, trading	28,447	3,925
Prepaid expenses and other current assets	3,755	5,008
Total current assets	130,547	119,774
Non-current Assets:
Property, equipment and leasehold improvements, net	8,073	8,479
Operating lease right-of-use assets	10,390	10,389
Other assets, net	1,141	1,039
Total assets	150,151	139,681
Current Liabilities:
Trade accounts payable	19,768	21,762
Accrued expenses and other current liabilities	12,623	15,020
Current portion of operating lease liabilities	3,801	3,375
Current portion of long-term debt	120	119
Total current liabilities	36,312	40,276
Non-current Liabilities:
Long-term debt	4,377	4,465
Operating lease liabilities	6,776	7,192
Total liabilities	47,465	51,933
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	39	174
Retained earnings	90,219	75,146
Total shareholders' equity	102,686	87,748	[2]
Total liabilities and shareholders' equity	$ 150,151	$ 139,681

[1] Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2022 filed with the U.S. Securities and Exchange Commission on November 4, 2022.

[2] Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2022 and 2021 as filed with the U.S. Securities and Exchange Commission on November 4, 2022 and July 6, 2022, respectively

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	May 31, 2023	Aug. 31, 2022
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

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 the beginning at Aug. 31, 2021	[1]	$ 1	$ 49	$ 12,378	$ 780	$ 53,914	$ 67,122
Balance at the beginning (in Shares) at Aug. 31, 2021	[1]	36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation loss					(480)		(480)
Net income						6,786	6,786
Balance at the end at Nov. 30, 2021		$ 1	$ 49	12,378	300	60,681	73,409
Balance at the end (in Shares) at Nov. 30, 2021		36,000	4,861,590
Balance at the beginning at Aug. 31, 2021	[1]	$ 1	$ 49	12,378	780	53,914	67,122
Balance at the beginning (in Shares) at Aug. 31, 2021	[1]	36,000	4,861,590
Foreign translation loss							(498)
Net income							15,523
Balance at the end at May. 31, 2022		$ 1	$ 49	12,378	282	69,380	82,090
Balance at the end (in Shares) at May. 31, 2022		36,000	4,861,590
Balance at the beginning at Nov. 30, 2021		$ 1	$ 49	12,378	300	60,681	73,409
Balance at the beginning (in Shares) at Nov. 30, 2021		36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation loss					25		25
Net income						3,407	3,407
Balance at the end at Feb. 28, 2022		$ 1	$ 49	12,378	325	64,069	76,822
Balance at the end (in Shares) at Feb. 28, 2022		36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation loss					(43)		(43)
Net income						5,330	5,330
Balance at the end at May. 31, 2022		$ 1	$ 49	12,378	282	69,380	82,090
Balance at the end (in Shares) at May. 31, 2022		36,000	4,861,590
Balance at the beginning at Aug. 31, 2022	[1]	$ 1	$ 49	12,378	174	75,146	87,748	[2]
Balance at the beginning (in Shares) at Aug. 31, 2022	[1]	36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation loss					(86)		(86)
Net income						4,711	4,711
Balance at the end at Nov. 30, 2022		$ 1	$ 49	12,378	88	79,838	92,354
Balance at the end (in Shares) at Nov. 30, 2022		36,000	4,861,590
Balance at the beginning at Aug. 31, 2022	[1]	$ 1	$ 49	12,378	174	75,146	87,748	[2]
Balance at the beginning (in Shares) at Aug. 31, 2022	[1]	36,000	4,861,590
Foreign translation loss							(135)
Net income							15,130
Balance at the end at May. 31, 2023		$ 1	$ 49	12,378	39	90,219	102,686
Balance at the end (in Shares) at May. 31, 2023		36,000	4,861,590
Balance at the beginning at Nov. 30, 2022		$ 1	$ 49	12,378	88	79,838	92,354
Balance at the beginning (in Shares) at Nov. 30, 2022		36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation loss					1		1
Net income						5,100	5,100
Balance at the end at Feb. 28, 2023		$ 1	$ 49	12,378	89	84,919	97,436
Balance at the end (in Shares) at Feb. 28, 2023		36,000	4,861,590
Preferred dividends						(19)	(19)
Foreign translation loss					(50)		(50)
Net income						5,319	5,319
Balance at the end at May. 31, 2023		$ 1	$ 49	$ 12,378	$ 39	$ 90,219	$ 102,686
Balance at the end (in Shares) at May. 31, 2023		36,000	4,861,590

[1] Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2022 and 2021 as filed with the U.S. Securities and Exchange Commission on November 4, 2022 and July 6, 2022, respectively

[2] Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2022 filed with the U.S. Securities and Exchange Commission on November 4, 2022.

XML

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	May 31, 2023	May 31, 2022
Operating activities:
Net income	$ 15,130	$ 15,523
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,052	1,122
Bad debt expense	201	54
Net unrealized gain on trading securities	(784)	(135)
Increase (decrease) in cash from changes in:
Trade accounts receivable	3,913	(8,843)
Inventory	(7,656)	(7,045)
Prepaid expenses and other assets	1,151	(462)
Operating lease right-of-use assets	(1)	416
Trade accounts payable	(1,885)	3,959
Accrued expenses and other current liabilities	(2,397)	230
Operating lease liabilities	10	(363)
Net cash provided by operating activities	8,734	4,456
Investing activities:
Purchase of property, equipment, and leasehold improvements	(646)	(827)
Net purchases of marketable securities, trading	(23,738)	(959)
Net cash used in investing activities	(24,384)	(1,786)
Financing activities:
Repayments on long-term debt	(87)	(87)
Preferred stock dividend	(57)	(57)
Net change in bank overdraft	(109)	(1,056)
Net cash (used in) financing activities	(253)	(1,200)
Effect of foreign currency exchange rate changes on cash and cash equivalents	(135)	(498)
Net (decrease) increase in cash, cash equivalents, and restricted cash	(16,038)	972
Cash, cash equivalents, and restricted cash - beginning of period	17,396	4,465
Cash, cash equivalents, and restricted cash - end of period	1,358	5,437
Supplemental disclosures of cash flow information:
Cash paid for interest	152	153
Cash paid for income taxes	$ 7,217	$ 3,979

XML

Organization and Basis of Presentation

9 Months Ended

May 31, 2023

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”) and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited. Substantially all of EACO’s operations are conducted through Bisco and Bisco Industries Limited. Bisco was incorporated in Illinois in 1974 and is a distributor of electronic components and fasteners with 51 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

Significant Accounting Policies and Significant Recent Accounting Pronouncements

9 Months Ended

May 31, 2023

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, provision for slow moving and obsolete inventory, recoverability of the carrying value and estimated useful lives of long-lived assets, and the valuation allowance against deferred tax assets, if any. Actual results could differ from those estimates.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in conformity with GAAP for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading have been included.

Certain information and note 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, 2022 (“fiscal 2022”). The condensed consolidated balance sheet as of August 31, 2022 and related disclosures were derived from the Company’s audited consolidated financial statements as of August 31, 2022. Operating results for the three and nine months ended May 31, 2023 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 $151,000 and $164,000 at May 31, 2023 and August 31, 2022, respectively.

Inventories, Net

Inventory consists primarily of electronic fasteners and components, and is stated at the lower of cost or estimated net realizable value. Cost is determined using the average cost method. Inventories are reduced by a provision for slow moving and obsolete items of $1,784,000 and $1,697,000 at May 31, 2023 and August 31, 2022, respectively. The provision is based upon management’s review of inventories on-hand, their expected future utilization and length of time held by the Company.

Marketable Trading Securities

The Company invests in marketable trading securities, which include long and short positions in equity securities. Short positions represent securities sold, but not yet purchased. Short sales result in obligations to purchase securities at a later date and are separately presented as a liability in the Company’s consolidated balance sheets. As of May 31, 2023 and August 31, 2022, the Company’s total obligation for securities sold, but not yet purchased was zero. Restricted cash to collateralize the Company’s obligations for short sales was zero at May 31, 2023 and August 31, 2022.

Securities are stated at fair value, which is determined using the quoted closing prices at each reporting date. Realized gains and losses on investment transactions are recognized as incurred in the consolidated statements of operations. Net unrealized gains and losses are reported in the statements of operations and represent the change in the market value of investment holdings during the period.

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, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.

We provide tax contingencies, if any, for federal, state, local and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes and timing. Although the outcome of these tax audits is uncertain, in management’s opinion adequate provisions for income taxes have been made for potential liabilities emanating from these reviews. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations.

Revenue Recognition

We derive our revenue primarily from product sales. We determine revenue recognition through the following steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.

The Company’s performance obligations consist solely of product shipped to customers. Revenue from product sales is recognized upon transfer of control of promised products upon shipment to customers at a point in time in an amount that reflects the consideration we expect to receive in exchange for these products. Revenue is recognized net of returns and any taxes collected from customers. We offer industry standard contractual terms in our purchase orders.

Operating Leases

The Company determines if a contractual arrangement contains a lease, for accounting purposes, at contract inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, the current and long term portions of operating lease liabilities, in the accompanying consolidated balance sheets.

The ROU assets represent the Company’s right to control the use of a leased asset for the contractual term, and lease liabilities represent the related obligation to make lease payments arising from the contractual arrangement. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the contractual term. The operating lease ROU assets also include any prepaid lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the contractual term.

Many of the Company’s leases include both lease (such as fixed payment amounts including rent, taxes, and insurance costs) and non-lease components (such as common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases.

Many leases include one or more options to renew the contract. Therefore, renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain to be exercised. If there are extension options in the lease at inception, management evaluates the likelihood of renewing the lease and that analysis affects the determination of the lease term for calculating the lease liability.

Since most of the Company’s leases do not provide an implicit borrowing rate, as defined by GAAP, we use an incremental borrowing rate based on information available to us at the lease commencement date in order to determine the present value of the lease payments. The Company applies a portfolio approach for determining the incremental borrowing rate. As of May 31, 2023, the Company has right of use assets of approximately $10.4 million and lease liabilities of approximately $10.6 million recorded in the consolidated balance sheets.

Earnings Per Common Share

Basic earnings per common share for the three and nine months ended May 31, 2023 and 2022, were computed based on the weighted average number of common shares outstanding. Diluted earnings per share for those periods have been computed based on the weighted average number of common shares outstanding, giving effect to all potentially dilutive common shares that were outstanding during the respective periods. Potentially dilutive common shares represent 40,000 common shares issuable upon conversion of 36,000 shares of Series A convertible preferred stock, which were outstanding at May 31, 2023 and 2022. Such securities are excluded from the weighted average shares outstanding used to calculate diluted earnings per common share for the quarters ended May 31, 2023 and 2022 as their inclusion would be anti-dilutive since the conversion price was greater than the average market price of the Company’s common stock during these periods (See Note 5).

Foreign Currency Translation and Transactions

Assets and liabilities recorded in functional currencies other than the U.S. dollar (Canadian dollars for Bisco’s Canadian subsidiary) are translated into U.S. dollars at the period-end rate of exchange. The exchange rate for Canadian dollars on May 31, 2023 and 2022 was $0.74 and $0.79, respectively. The resulting balance sheet translation adjustments are charged or credited directly to accumulated other comprehensive income (loss). Revenue and expenses are transacted at the average exchange rates for the three months ended May 31, 2023 and 2022. The average exchange rates for the nine months ended May 31, 2023 and 2022 were $0.74 and $0.79, respectively. All foreign sales, excluding Canadian sales, are denominated in U.S. dollars and, therefore, are not subject to foreign currency risk exposure.

Concentrations

Net sales to customers outside the United States were approximately 10% and 12% of revenues for the nine months ended May 31, 2023 and 2022, respectively, and related accounts receivable were approximately 11% and 15% of total accounts receivable for May 31, 2023 and 2022, respectively. Sales to customers in Canada accounted for approximately 31% of such international sales for the

nine months ended May 31, 2023 and 2022. Sales to customers located within Asia accounted for approximately 45% and 47% of such international sales for the nine months ended May 31, 2023 and 2022, respectively.

No single customer accounted for more than 10% of revenues and accounts receivable for the three or nine months ended May 31, 2023 and 2022.

Significant Recent Accounting Pronouncements

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. 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 provisions of this standard will be first applied in our financial statements for the fiscal year beginning September 1, 2023. Management is currently evaluating this statement and its impact on its results of operations or financial position.

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Accrued Liabilities

9 Months Ended

May 31, 2023

Accrued Liabilities

Accrued Liabilities

Note 3.    Accrued Liabilities

The Company’s accrued liabilities as of May 31, 2023 and August 31, 2022 are summarized as follows (in thousands):

	May 31,		August 31,
	2023		2022
Accrued expenses and other current liabilities
Accrued accounts payable	$	1,658	$	1,271
Accrued compensation and payroll		5,790		6,590
Accrued taxes		5,175		7,159
Total Accrued expenses and other current liabilities	$	12,623	$	15,020

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Debt

9 Months Ended

May 31, 2023

Debt

Debt

Note 4.    Debt

The Company currently has a $15,000,000 line of credit agreement with Citizens Business Bank (“the Bank”). During Q1 2023, the Company entered into a Change in Terms Agreement dated November 5, 2022 with the Bank (the “Amendment”), which extended the maturity date of the line of credit from November 5, 2022 to July 5, 2024. The line of credit has a variable interest rate set at the bank prime index rate, but provided that in no event would such interest rate be less than 3.5% per annum. Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The amounts outstanding under this line of credit as of May 31, 2023 and August 31, 2022 were zero. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of May 31, 2023 and August 31, 2022, the Company was in compliance with all such covenants.

The Company also entered into a Loan Agreement with the Bank to borrow up to $5,000,000 (the “Construction Loan”) for the primary purpose of financing tenant improvements at its new corporate headquarters located at 5065 East Hunter Avenue in Anaheim, California (the “Hunter Property”). The Construction Loan was a line of credit evidenced by a Promissory Note in the principal amount of up to $5,000,000 with a maturity date of May 15, 2027. The terms of the Construction Loan provided that the Company could only request advances through July 15, 2020, and thereafter, the Construction Loan converted to a term loan with a fixed rate of 4.6%, which is entitled to a .25% rate discount if a demand deposit account is held with the Bank. On July 15, 2020, the amount drawn on the Construction Loan was converted to a term loan in the amount of $4,807,000. Interest on the Construction Loan is payable monthly (4.35% per annum at both May 31, 2023 and August 31, 2022). Concurrent with the execution of this Construction Loan, Bisco entered into a commercial security agreement, dated July 12, 2019, with the Bank, pursuant to which Bisco granted the Bank a security interest in substantially all of Bisco’s personal property to secure Bisco’s obligations under the Construction Loan. The outstanding balance of the Construction Loan at May 31, 2023 and August 31, 2022 was $4,497,000 and $4,584,000, respectively.

EACO has also entered into a business loan agreement (and related $100,000 promissory note) with the Bank in order to obtain a $100,000 letter of credit as security for the Company’s worker’s compensation requirements.

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Earnings per Share

9 Months Ended

May 31, 2023

Earnings per Share

Earnings per Share

Note 5.    Earnings per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted computations for earnings per common share (in thousands, except per share data):

	Three Months Ended				Nine Months Ended
	May 31,				May 31,
	2023		2022		2023		2022
(In thousands, except share and per share amounts)
EPS:
Net income	$	5,319	$	5,330	$	15,130	$	15,523
Less: accrued preferred stock dividends		(19)		(19)		(57)		(57)
Net income available for common shareholders	$	5,300	$	5,311	$	15,073	$	15,466
Earnings per common share – basic and diluted	$	1.09	$	1.09	$	3.10	$	3.18

For the three and nine months ended May 31, 2023 and 2022, 40,000 potential common shares (issuable upon conversion of 36,000 shares of the Company’s Series A cumulative convertible preferred stock) have been excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive since the conversion price was greater than the average market price of the common stock.

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Related Party Transactions

9 Months Ended

May 31, 2023

Related Party Transactions

Related Party Transactions

Note 6.    Related Party Transactions

The Company leases its Chicago area sales office and distribution center located in Glendale Heights, Illinois under an operating lease agreement (the “Glendale Lease”) from the Glen F. Ceiley and Barbara A.Ceiley Revocable Trust (the “Trust”), which is the grantor trust of Glen Ceiley, the Company’s Chief Executive Officer, Chairman of the Board, and majority shareholder. The Glendale Lease is a ten-year lease with an initial monthly rental rate of $22,600, which is subject to annual rent increases of approximately 2.5% as set forth in the Glendale Lease. During the nine months ended May 31, 2023 and 2022, the Company incurred expense related to the Glendale Lease of approximately $229,000 and $225,000, respectively.

On July 26, 2019, the Company entered into a Commercial Lease Agreement with the Trust (the “Hunter Lease”), for the lease of the Hunter Property, which houses the Company’s corporate headquarters. The term of the Hunter Lease commenced on September 2, 2019 and ends on August 31, 2029 with an initial monthly rental rate of $66,300, which is subject to annual rent increases of approximately 2.5% as set forth in the Hunter Lease. During the nine months ended May 31, 2023 and 2022, the Company incurred expense related to the Hunter Lease of approximately $643,000 and $627,000, respectively.

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Income Taxes

9 Months Ended

May 31, 2023

Income Taxes

Income Taxes

Note 7.    Income Taxes

During the three and nine months ended May 31, 2023, the Company recorded an income tax provision of $1,772,000 and $5,216,000, respectively, resulting in an effective tax rate of 25% and 25.6%, respectively. During the three and nine months ended May 31, 2022, the Company recorded an income tax provision of $1,878,000 and $5,471,000, respectively, resulting in an effective tax rate of 26.1%. The current period effective tax rate differs from the statutory rate of 21% primarily due to the state tax rates and permanent book tax differences.

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. For the three and nine months ended May 31, 2023, the Company did not have a liability for any unrecognized tax benefit. The Company has elected to classify interest and penalties as a component of its income tax provision. For the three and nine months ended May 31, 2023, 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 2019, 2020 and 2021 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 2018.

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Commitments and Contingencies

9 Months Ended

May 31, 2023

Commitments and Contingencies

Commitments and Contingencies

Note 8.    Commitments and Contingencies

From time to time, the Company 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 the Company to damages or equitable remedies, and divert management and key personnel from core business operations. The Company is currently 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.

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Subsequent Events

9 Months Ended

May 31, 2023

Subsequent Events

Subsequent Events

Note 9.    Subsequent Events

Management has evaluated events subsequent to May 31, 2023, 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.

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Significant Accounting Policies and Significant Recent Accounting Pronouncements (Policies)

9 Months Ended

May 31, 2023

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, provision for slow moving and obsolete inventory, recoverability of the carrying value and estimated useful lives of long-lived assets, and the valuation allowance against deferred tax assets, if any. Actual results could differ from those estimates.

Basis of Presentation

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 note 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, 2022 (“fiscal 2022”). The condensed consolidated balance sheet as of August 31, 2022 and related disclosures were derived from the Company’s audited consolidated financial statements as of August 31, 2022. Operating results for the three and nine months ended May 31, 2023 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 $151,000 and $164,000 at May 31, 2023 and August 31, 2022, respectively.

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 $1,784,000 and $1,697,000 at May 31, 2023 and August 31, 2022, respectively. The provision is based upon management’s review of inventories on-hand, their expected future utilization and length of time held by the Company.

Marketable Trading Securities

Marketable Trading Securities

The Company invests in marketable trading securities, which include long and short positions in equity securities. Short positions represent securities sold, but not yet purchased. Short sales result in obligations to purchase securities at a later date and are separately presented as a liability in the Company’s consolidated balance sheets. As of May 31, 2023 and August 31, 2022, the Company’s total obligation for securities sold, but not yet purchased was zero. Restricted cash to collateralize the Company’s obligations for short sales was zero at May 31, 2023 and August 31, 2022.

Securities are stated at fair value, which is determined using the quoted closing prices at each reporting date. Realized gains and losses on investment transactions are recognized as incurred in the consolidated statements of operations. Net unrealized gains and losses are reported in the statements of operations and represent the change in the market value of investment holdings during the period.

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, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.

We provide tax contingencies, if any, for federal, state, local and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes and timing. Although the outcome of these tax audits is uncertain, in management’s opinion adequate provisions for income taxes have been made for potential liabilities emanating from these reviews. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations.

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; and (5) recognition of revenue when, or as, we satisfy a performance obligation.

The Company’s performance obligations consist solely of product shipped to customers. Revenue from product sales is recognized upon transfer of control of promised products upon shipment to customers at a point in time in an amount that reflects the consideration we expect to receive in exchange for these products. Revenue is recognized net of returns and any taxes collected from customers. We offer industry standard contractual terms in our purchase orders.

Operating Leases

Operating Leases

The Company determines if a contractual arrangement contains a lease, for accounting purposes, at contract inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, the current and long term portions of operating lease liabilities, in the accompanying consolidated balance sheets.

The ROU assets represent the Company’s right to control the use of a leased asset for the contractual term, and lease liabilities represent the related obligation to make lease payments arising from the contractual arrangement. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the contractual term. The operating lease ROU assets also include any prepaid lease payments made and exclude lease incentives. Lease expense is recognized on a straight-line basis over the contractual term.

Many of the Company’s leases include both lease (such as fixed payment amounts including rent, taxes, and insurance costs) and non-lease components (such as common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases.

Many leases include one or more options to renew the contract. Therefore, renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain to be exercised. If there are extension options in the lease at inception, management evaluates the likelihood of renewing the lease and that analysis affects the determination of the lease term for calculating the lease liability.

Since most of the Company’s leases do not provide an implicit borrowing rate, as defined by GAAP, we use an incremental borrowing rate based on information available to us at the lease commencement date in order to determine the present value of the lease payments. The Company applies a portfolio approach for determining the incremental borrowing rate. As of May 31, 2023, the Company has right of use assets of approximately $10.4 million and lease liabilities of approximately $10.6 million recorded in the consolidated balance sheets.

Earnings Per Common Share

Earnings Per Common Share

Basic earnings per common share for the three and nine months ended May 31, 2023 and 2022, were computed based on the weighted average number of common shares outstanding. Diluted earnings per share for those periods have been computed based on the weighted average number of common shares outstanding, giving effect to all potentially dilutive common shares that were outstanding during the respective periods. Potentially dilutive common shares represent 40,000 common shares issuable upon conversion of 36,000 shares of Series A convertible preferred stock, which were outstanding at May 31, 2023 and 2022. Such securities are excluded from the weighted average shares outstanding used to calculate diluted earnings per common share for the quarters ended May 31, 2023 and 2022 as their inclusion would be anti-dilutive since the conversion price was greater than the average market price of the Company’s common stock during these periods (See Note 5).

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. The exchange rate for Canadian dollars on May 31, 2023 and 2022 was $0.74 and $0.79, respectively. The resulting balance sheet translation adjustments are charged or credited directly to accumulated other comprehensive income (loss). Revenue and expenses are transacted at the average exchange rates for the three months ended May 31, 2023 and 2022. The average exchange rates for the nine months ended May 31, 2023 and 2022 were $0.74 and $0.79, respectively. All foreign sales, excluding Canadian sales, are denominated in U.S. dollars and, therefore, are not subject to foreign currency risk exposure.

Concentrations

Concentrations

Net sales to customers outside the United States were approximately 10% and 12% of revenues for the nine months ended May 31, 2023 and 2022, respectively, and related accounts receivable were approximately 11% and 15% of total accounts receivable for May 31, 2023 and 2022, respectively. Sales to customers in Canada accounted for approximately 31% of such international sales for the

nine months ended May 31, 2023 and 2022. Sales to customers located within Asia accounted for approximately 45% and 47% of such international sales for the nine months ended May 31, 2023 and 2022, respectively.

No single customer accounted for more than 10% of revenues and accounts receivable for the three or nine months ended May 31, 2023 and 2022.

Significant Recent Accounting Pronouncements

Significant Recent Accounting Pronouncements

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. 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 provisions of this standard will be first applied in our financial statements for the fiscal year beginning September 1, 2023. Management is currently evaluating this statement and its impact on its results of operations or financial position.

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Accrued Liabilities (Tables)

9 Months Ended

May 31, 2023

Accrued Liabilities

Schedule of accrued liabilities

The Company’s accrued liabilities as of May 31, 2023 and August 31, 2022 are summarized as follows (in thousands):

	May 31,		August 31,
	2023		2022
Accrued expenses and other current liabilities
Accrued accounts payable	$	1,658	$	1,271
Accrued compensation and payroll		5,790		6,590
Accrued taxes		5,175		7,159
Total Accrued expenses and other current liabilities	$	12,623	$	15,020

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Earnings per Share (Tables)

9 Months Ended

May 31, 2023

Earnings per Share

Schedule of reconciliation of the numerators and denominators of the basic and diluted computations for earnings per common share

	Three Months Ended				Nine Months Ended
	May 31,				May 31,
	2023		2022		2023		2022
(In thousands, except share and per share amounts)
EPS:
Net income	$	5,319	$	5,330	$	15,130	$	15,523
Less: accrued preferred stock dividends		(19)		(19)		(57)		(57)
Net income available for common shareholders	$	5,300	$	5,311	$	15,073	$	15,466
Earnings per common share – basic and diluted	$	1.09	$	1.09	$	3.10	$	3.18

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Organization and Basis of Presentation (Details)	May 31, 2023 facility
Organization and Basis of Presentation
Sales offices	51
Distribution centers	7

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Significant Accounting Policies and Significant Recent Accounting Pronouncements (Details) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2023	May 31, 2022	May 31, 2023	May 31, 2022	Aug. 31, 2022
Significant Accounting Policies and Significant Recent Accounting Pronouncements
Allowance for doubtful accounts	$ 151,000		$ 151,000		$ 164,000
Inventories	1,784,000		1,784,000		1,697,000
Fair value estimate not practicable securities sold not yet purchases	0		0		0
Company's obligations	0		0		0
Right of use assets	10,390,000		10,390,000		$ 10,389,000	[1]
Lease liabilities	$ 10,600,000		$ 10,600,000
Potentially dilutive common shares	40,000	40,000	40,000	40,000
Convertible preferred stock (in shares)	36,000	36,000	36,000	36,000
Exchange rate on foreign currency translation and transactions			$ 0.74	$ 0.79
Percentage of revenue per entity, Maximum	10.00%	10.00%	10.00%	10.00%
Canada
Significant Accounting Policies and Significant Recent Accounting Pronouncements
Exchange rate on foreign currency translation and transactions			$ 0.74	$ 0.79
Sales revenue, net | Customer concentration risk | Non-US
Significant Accounting Policies and Significant Recent Accounting Pronouncements
Percentage of concentrations risk			10.00%	12.00%
Sales revenue, net | Customer concentration risk | Canada
Significant Accounting Policies and Significant Recent Accounting Pronouncements
Percentage of concentrations risk			31.00%	31.00%
Sales revenue, net | Customer concentration risk | Asia
Significant Accounting Policies and Significant Recent Accounting Pronouncements
Percentage of concentrations risk			45.00%	47.00%
Accounts receivable | Customer concentration risk | Non-US
Significant Accounting Policies and Significant Recent Accounting Pronouncements
Percentage of concentrations risk			11.00%	15.00%

[1] Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2022 filed with the U.S. Securities and Exchange Commission on November 4, 2022.

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Accrued Liabilities (Details) - USD ($) $ in Thousands	May 31, 2023	Aug. 31, 2022
Accrued expenses and other current liabilities
Accrued accounts payable	$ 1,658	$ 1,271
Accrued compensation and payroll	5,790	6,590
Accrued taxes	5,175	7,159
Total Accrued expenses and other current liabilities	$ 12,623	$ 15,020

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Debt (Details) - USD ($)		9 Months Ended
	Jul. 15, 2020	May 31, 2023	Aug. 31, 2022
Debt
Line of credit facility, current borrowing capacity		$ 15,000,000
Construction loan		$ 4,497,000	$ 4,584,000
Prime Rate
Debt
Interest rate (in percentage)		3.50%
Maximum
Debt
Line of credit facility, maximum borrowing capacity		$ 0	$ 0
Construction loan payable
Debt
Debt Instrument maturity date		May 15, 2027
Amount drawn and converted	$ 4,807,000
Interest rate		4.35%	4.35%
Proceeds from issuance of long term debt		$ 5,000,000
Line of credit long term outstanding		5,000,000
Construction loan payable | Prime Rate
Debt
Fixed rate for conversion	4.60%
Debt discount (as a percent)	0.25%
Community Bank
Debt
Line of credit long term outstanding		100,000
Letter of credit
Debt
Notes payable, noncurrent		$ 100,000

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Earnings per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended						9 Months Ended
	May 31, 2023	Feb. 28, 2023	Nov. 30, 2022	May 31, 2022	Feb. 28, 2022	Nov. 30, 2021	May 31, 2023	May 31, 2022
EPS:
Net income	$ 5,319	$ 5,100	$ 4,711	$ 5,330	$ 3,407	$ 6,786	$ 15,130	$ 15,523
Less: accrued preferred stock dividends	(19)			(19)			(57)	(57)
Net income attributable to common shareholders	$ 5,300			$ 5,311			$ 15,073	$ 15,466
Earnings per common share - basic	$ 1.09			$ 1.09			$ 3.10	$ 3.18
Earnings per common share - diluted	$ 1.09			$ 1.09			$ 3.10	$ 3.18

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Earnings per Share - Additional information (Details) - shares	3 Months Ended		9 Months Ended
	May 31, 2023	May 31, 2022	May 31, 2023	May 31, 2022
Earnings per Share
Antidilutive potential common shares	40,000	40,000	40,000	40,000
Convertible preferred stock (in shares)	36,000	36,000	36,000	36,000
Series A cumulative convertible preferred stock
Earnings per Share
Convertible preferred stock (in shares)	36,000	36,000	36,000	36,000

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Related Party Transactions (Details) - USD ($)		9 Months Ended
	Jul. 26, 2019	May 31, 2023	May 31, 2022
Glendale Lease
Related Party Transactions
Lease term		10 years
Initial monthly rental		$ 22,600
Percentage of annual rent increase		2.50%
Hunter Lease
Related Party Transactions
Initial monthly rental	$ 66,300
Percentage of annual rent increase	2.50%
Operating lease expense		$ 643,000	$ 627,000
Related party | Glendale Lease
Related Party Transactions
Operating lease expense		$ 229,000	$ 225,000

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Income Taxes (Details) - USD ($)	3 Months Ended		9 Months Ended
	May 31, 2023	May 31, 2022	May 31, 2023	May 31, 2022
Income Taxes
Income tax provision	$ 1,772,000	$ 1,878,000	$ 5,216,000	$ 5,471,000
Effective tax rate	25.00%	26.10%	25.60%	26.10%
Statutory rate			21.00%
Unrecognized tax benefit	$ 0		$ 0
Liability for penalties and interest	$ 0		$ 0