Cautionary Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements can be identified by the use of terminology such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "project," "should," "will" and similar words or expressions. These forward-looking statements include, but are not limited to, statements regarding our anticipated revenue, expenses, profits and capital needs. These statements are based on our current expectations, estimates, projections, and the impact of certain accounting pronouncements, and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those projected or estimated, including, but not limited to the impact of Covid-19, adverse economic conditions, competitive pressures, unexpected costs and losses from operations or investments, increases in costs and overhead, our ability to maintain an effective system of internal controls over financial reporting, potential losses from trading in securities, our ability to retain key personnel and good relationships with suppliers, the willingness of lenders to extend financing commitments and the availability of capital resources, and the other risks set forth in "Risk Factors" in Part II, Item 1A of this report or identified from time to time in our other filings with the SEC and in public announcements. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of forward looking statements in this Quarterly Report should not be regarded as a representation by management or any other person that the objectives or plans of the Company will be achieved.





Overview

The condensed consolidated financial statements comprise the accounts of EACO and its wholly-owned subsidiary, Bisco, and Bisco's wholly-owned Canadian subsidiary, Bisco Industries Limited.

EACO is a holding company primarily comprised of its wholly-owned subsidiary, Bisco. Bisco is a distributor of electronic components and fasteners with 49 sales offices and seven distribution centers located throughout the United States and Canada. Bisco supplies parts used in the manufacture of products in a broad range of industries, including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment and marine industries.

Revenues derived from Bisco and its subsidiary represent 100% of our total revenues and are expected to continue to represent all of the Company's total revenues for the foreseeable future.





  13






Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

Within the context of these critical accounting policies, the Company is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.





Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updated ("ASU") 2014-09, Revenue from Contracts with Customers, issued as a new Topic, ASC Topic 606 ("ASU 2014-09"). The new revenue recognition standard provides a 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. The Company has adopted ASU 2014-09 beginning in fiscal 2019 (effective September 1, 2018) using the modified retrospective approach. The impact of adopting the standard on our consolidated financial statements and related disclosures was not material.

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 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.

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.





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.

There have been no changes to the Company's critical accounting policies for the three months ended November 30, 2020.





  14






Results of Operations

Comparison of the Three Months Ended November 30, 2020 and 2019

Net Sales and Gross Profit ($ in thousands)





                                          Three Months Ended
                                             November 30,              $            %
                                           2020          2019        Change      Change
Net sales                               $   53,403     $ 56,040     $ (2,637 )      (4.7 )%
Cost of sales                               38,951       40,144       (1,193 )      (3.0 )%
Gross margin                            $   14,452     $ 15,896     $ (1,444 )      (9.1 )%
Gross margin as a percent of revenues         27.0 %       28.4 %                   (1.4 )%

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 Company expanded its product offering during the prior fiscal year to include personal protection equipment ("PPE") including, among other things, masks, shields and sanitizing stations.

The decrease in revenues in the three months ended November 30, 2020 ("Q1 2021") as compared to the three months ended November 30, 2019 ("Q1 2020") was largely due to lower demand for product resulting from the global industry-wide slowdown due to the impact from the COVID-19 pandemic. While our sales continue to remain strong, we cannot predict how long the pandemic will last or the impact of such pandemic on our financial condition and results of operations.

The gross margins in Q1 2021 decreased by 1.4% as a percentage of revenues when compared to Q1 2020. This decrease was primarily due to a combination of product and customer mix, and overall declines in gross profit margin due to the global industry-wide slowdown and the impacts from the COVID-19 outbreak. The PPE products distributed by the Company typically carry lower margins, which also contributed to the decline in gross margins in the current periods.

Selling, General and Administrative Expenses ($ in thousands)





                                            Three Months Ended
                                               November 30,                 $               %
                                           2020            2019          Change          Change
Selling, general and administrative
expenses                                $    12,681     $   12,602     $        79             0.6 %
Percent of net sales                           23.7 %         22.5 %                           1.2 %

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 Q1 2021 increased from Q1 2020 largely due to an increase in employee headcount, and annual raises as well as increases in rent in leased offices primarily due to the move to the Hunter Property, which almost doubled the size of the Anaheim warehouse and distribution center. SG&A as a percent of revenue in Q1 2021 increased from Q1 2020 by 1.2%, primarily due to increases in the employee headcount, higher rent expense, and a decrease in Q1 2021 sales due to the COVID-19 pandemic.





  15

Other (Expense), Net ($ in thousands)





                                     Three Months Ended
                                        November 30,               $           %
                                     2020            2019       Change       Change

Other (expense): Net (loss) on trading securities $ (553 ) $ (80 ) $ (473 ) (591.3 )% Loss on sale of property

                   -          (102 )        102          100 %
Interest and other expense, net          (69 )        (119 )         50         42.0 %
Other (expense), net               $    (622 )      $ (301 )    $  (321 )     (106.6 )%
Percent of net sales                    (1.2 )%       (0.5 )%                   (0.7 )%

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 and short positions, as well as utilizing options designed to improve returns. During Q1 2021, the Company recognized a net loss on trading securities of $553,000 as compared to a net loss of $80,000 in Q1 2020. The increase in net trading securities losses in Q1 2021 was primarily due to timing of sales and purchases and general market climate for short and long positions during the period.

Interest and other (expense), net, decreased in Q1 2021 compared to Q1 2020, which was primarily due to lower variable rates on our loans and carrying a lower balance on our line of credit during Q1 2021 compared to Q1 2020.

Income Tax Provision ($ in thousands)





                              Three Months Ended
                                 November 30,              $           %
                              2020           2019       Change      Change

Income tax provision $ 298 $ 1,076 $ (778 ) (72.3 )% Percent of pre-tax income 25.9 % 36.0 %

                 (10.1 )%

The provision for income taxes decreased by $778,000 in Q1 2021 over the prior year period. This decrease was primarily due to lower taxable income in the current quarter as compared to the prior year period. The income tax provision as a percent of pre-tax income decreased from 36.0% at Q1 2020 to 25.9% at Q1 2021, which was primarily due to a discrete tax item resulting from certain deferred tax assets and permanent book to tax differences, related to prior periods that was reconciled and recorded in Q1 2020 for approximately $277,000.

Liquidity and Capital Resources

As of November 30, 2020 and August 31, 2020, the Company held approximately $6,665,000 and $6,079,000 of unrestricted cash and cash equivalents, respectively. The Company also held $791,000 and $1,368,000 of marketable securities at November 30, 2020 and August 31, 2020, respectively, which could be liquidated, if necessary.

The Company currently has a $15,000,000 line of credit agreement with the Bank. On December 4, 2019, the Company entered into a Change in Terms Agreement dated November 27, 2019 with the Bank (the "Amendment"), which modified the Company's $10,000,000 line of credit between the Company and the Bank to increase the maximum amount that may be borrowed thereunder from $10.0 million to $15.0 million. In addition, the Amendment removed the Company's interest rate options but provided that in no event would such interest rate be less than 3.5% per annum. The expiration date of the line of credit under the line of credit agreement is July 5, 2021. The Company intends to renew the line of credit beyond its maturity date. The amounts outstanding under this line of credit as of November 30, 2020 and August 31, 2020 are currently all under the default variable interest index rate of 3.5%. Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The amounts outstanding under this line of credit as of November 30, 2020 and August 31, 2020 were $2,939,000 and $5,100,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of November 30, 2020 and August 31, 2020, the Company was in compliance with all such covenants.





  16

In September 2019, Bisco entered into the Hunter Lease with the Trust, which is the grantor trust of Glen Ceiley, our Chief Executive Officer, Chairman of the Board and the Company's majority shareholder. Under the Hunter Lease, Bisco leased from the Trust the Hunter Property, which consists of approximately 80,000 square feet of office and warehouse space located at 5065 East Hunter Avenue, Anaheim, California, which serves as the Company's new corporate headquarters. The Hunter Lease has a term that expires on August 31, 2029.

The Company entered into a new Construction Loan with the Bank to borrow up to $5,000,000 for the primary purpose of financing tenant improvements at 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 provide that the Company may only request advances through July 15, 2020, and thereafter, the Construction Loan would convert to a term loan with a fixed rate of 4.6% and 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 and converted to a term loan was $4,807,000. Interest on the Construction Loan is payable monthly (4.35% at November 30, 2020 and August 31, 2020). Concurrent with the execution of this Construction Loan, Bisco entered into a commercial security agreement, dated July 12, 2019, with the Bank, pursuant to which Bisco granted the Bank a security interest in substantially all of Bisco's personal property to secure Bisco's obligations under the Construction Loan. The outstanding balance of the Construction Loan at November 30, 2020 and August 31, 2020 was $4,781,000 and $4,807,000, respectively.

On May 15, 2017, the Company entered into a $5,400,000 loan agreement with the Bank (the "Lakeview Loan"). The proceeds of the loan were used to purchase the building that housed the Company's then corporate headquarters and distribution center located in Anaheim, California (the "Lakeview Property"). In September 2019, Bisco entered into a Purchase Agreement to sell the Lakeview Property for a cash sale price of $7,075,000, which closed escrow on November 19, 2019. Upon the closing of escrow, Bisco used the proceeds from the sale to repay all of the outstanding principal and accrued interest on the Lakeview Loan. No amounts were outstanding on the Lakeview Loan at November 30, 2020.

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 workers' compensation requirements.

Cash Flows from Operating Activities

Cash provided by operating activities was $3,896,000 for the three months ended November 30, 2020 as compared with cash used in operations of $1,668,000 for the three months ended November 30, 2019. The increase in current period cash provided by operating activities was primarily due to a decrease in accounts receivable and prepaid asset balances related to the Company's lower sales volume for the three months ended November 30, 2020 when compared to the prior year period. The amount of inventory purchased was also lower in the current period, seeing an increase in inventory of $71,000 for the three months ended November 30, 2020 when compared to the prior year period increase of $2,472,000. This was also adversely impacted to some extent by a decrease in accrued expenses in the current period due to timing of payments. The prior period cash used in operating activities was primarily due to a decrease in the trade accounts payable and accrued expense balances and an increase in inventory.





  17

Cash Flows from Investing Activities

Cash provided by investing activities was $131,000 for the three months ended November 30, 2020 as compared with cash provided by investing activities of $8,237,000 for the three months ended November 30, 2019. Cash provided by investing activities in the three months ended November 30, 2020 was primarily due to the increase of liabilities for short sales of trading securities. The decrease in cash flow from investing activities in the current period compared to the prior year period was primarily due to the Company's proceeds from the sale of the Lakeview Property received last fiscal year in November 2019 for $7,075,000 and a net increase in sales of marketable securities and in liabilities of short sales of trading securities in the three months ending November 30, 2019.

Cash Flows from Financing Activities

Cash used in financing activities for the three months ended November 30, 2020 was $3,073,000 as compared with cash used in financing activities of $2,826,000 for the three months ended November 30, 2019. The cash used in financing activities for the current period is primarily due to payments in the current period to pay down our revolving line credit facility and an increase in the bank overdraft balance, 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. Cash provided by financing activities in the prior year period is primarily due to the repayment of the entire Lakeview Property mortgage loan in November 2019, when the property was sold, partially offset by borrowings on the Construction Loan of $1,701,000 related to the leasehold improvements of the new corporate headquarters.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on the Company's financial position, revenues, results of operations, liquidity or capital expenditures.

Contractual Financial Obligations

In addition to using cash flow generated from operations, the Company finances its operations through borrowings under its line of credit. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transactions, with the result being that amounts owed under debt agreements and capital leases are recorded as liabilities on the consolidated balance sheets while lease obligations recorded as operating leases are disclosed in the notes to the consolidated financial statements and management's discussion and analysis of financial condition and results of operations in the Company's annual report on Form 10-K for the year ended August 31, 2020 as filed with the SEC on November 30, 2020.

© Edgar Online, source Glimpses