NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2020 and 2019
Note 1. Organization and Basis of Presentation
EACO Corporation (“EACO”), incorporated in Florida
in September 1985, is a holding company, primarily comprised of its wholly-owned subsidiary, Bisco Industries, Inc. (“Bisco”)
and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited. Substantially all of EACO’s operations are
conducted through Bisco and Bisco Industries Limited. Bisco was incorporated in Illinois in 1974 and is a distributor of electronic
components and fasteners with 49 sales offices and seven distribution centers located throughout the United States and Canada.
Bisco supplies parts used in the manufacture of products in a broad range of industries, including the aerospace, circuit board,
communication, computer, fabrication, instrumentation, industrial equipment and marine industries.
Note 2. Significant Accounting
Policies
Principles of Consolidation
The consolidated financial statements for all periods presented
include the accounts of EACO, Bisco and Bisco Industries Limited (which are collectively referred to herein as the “Company”,
“we”, “us” and “our”). All significant intercompany transactions and balances have been eliminated
in consolidation.
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 trade accounts receivable, provisions 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. Actual
results could differ from those estimates.
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
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 for more than 30 days. The Company does not charge interest on
past due balances. The allowance for doubtful accounts was approximately $174,000 and $169,000 at August 31, 2020 and 2019,
respectively.
Inventories
Inventories consist primarily of electronic fasteners and components,
and are stated at the lower of cost or estimated net realizable value. Cost is determined using the average cost method. Inventories
are adjusted for slow moving or obsolete items approximating $1,764,000 and $1,290,000 at August 31, 2020 and 2019, respectively.
The adjustments to inventory costs are based upon management’s review of inventories on-hand over their expected future utilization
and length of time held by the Company.
Property, Equipment, and Leasehold Improvements
Property,
equipment, and leasehold improvements are stated at cost net of accumulated depreciation and amortization. Depreciation and amortization
expense is determined using the straight-line method over the estimated useful lives of the assets. The depreciable life
for buildings is thirty-five years and five to seven years for
furniture, fixtures and equipment. Leasehold improvements are amortized over the estimated useful life of the asset or the
remaining lease term, whichever is less. Maintenance and repairs are charged to expense as incurred. Renewals and improvements
of a major nature are capitalized. At the time of retirement or disposition of the asset, the cost and accumulated depreciation
or amortization are removed from the accounts and any gains or losses are reflected in earnings.
Impairment of Long Lived Assets
The Company’s policy is to review 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.
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 August 31, 2020 and 2019, the Company’s total obligation for securities sold, but
not yet purchased was approximately $2,916,000 and $655,000, respectively. Restricted cash to collateralize the Company’s
obligations for short sales was $2,916,000 and $655,000 at August 31, 2020 and 2019, respectively.
These 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. See Note 10.
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 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.
Freight revenue associated with product
sales are recognized at point of shipment and when the criteria discussed above have been met. Freight revenues have represented
less than 1% of total revenues for fiscal 2020 and fiscal 2019.
Income Taxes
Deferred taxes on income result from temporary differences between
the reporting of income for financial statement and tax reporting purposes. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some or all of the deferred tax asset will not be realized. In making
such determination, the Company considers all available positive and negative evidence, including 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.
Freight and Shipping/Handling
Shipping and handling expenses are included in cost of revenues
and were approximately $4,087,000 and $4,083,000 for the years ended August 31, 2020 and 2019, respectively.
Advertising Costs
Advertising
costs are expensed as incurred. For fiscal 2020 and fiscal 2019, the Company spent approximately $486,000 and $392,000,
respectively, on advertising.
Liabilities of Discontinued Operations
Prior to June 2005, EACO self-insured workers’ compensation
claims losses up to certain limits. The liability for workers’ compensation represents an estimate of the present
value of the ultimate cost of uninsured losses, which are unpaid as of the balance sheet dates. The Company pursues
recovery of certain claims from an insurance carrier. Recoveries, if any, are recognized when claims are approved. The
outstanding liability for workers’ compensation at year end is not significant and is included in accrued expenses and other
current liabilities at August 31, 2020 and 2019.
Operating Leases
For fiscal 2020, 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 portion of operating lease liabilities, and the 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 nonlease 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
nonlease components for all leases.
Many leases include one or more options to renew the contract.
The exercise of lease renewal options are typically at the Company’s discretion. 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. The Company
regularly evaluates the renewal options each reporting period and when they are reasonably certain to be exercised, we will include
the lease renewal period in our contractual term when estimating the ROU assets and related liabilities. Since most of the Company’s
leases do not provide an implicit 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.
Prior to fiscal 2020 and the adoption of ASC 842, the aggregate
minimum annual payments were expensed on the straight-line basis over the minimum lease term. The Company recognized a deferred
rent liability for rent escalations when the amount of straight-line rent exceeded the lease payments, and reduced the deferred
rent liability when the lease payments exceeded the straight-line rent expense.
Earnings Per Common Share
Basic earnings per common share for
the years ended August 31, 2020 and 2019 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 August 31, 2020 and 2019. Such securities are excluded from the weighted average shares outstanding
used to calculate diluted earnings per common share for the years ended August 31, 2020 and 2019 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.
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 at August 31, 2020 and 2019 was $0.74 and $0.75, 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 years ended August 31, 2020 and 2019. The average
exchange rates for the years ended August 31, 2020 and 2019 were $0.77 and $0.75, respectively. The percentage of total assets
held outside the United States, in Canada, was 4% as of August 31, 2020 and 2019. All foreign sales, excluding Canadian sales,
are denominated in U.S. dollars and, therefore, are not subject to foreign currency risk exposure.
Concentrations
Financial instruments that subject the Company to credit risk
include cash balances in excess of federal depository insurance limits and accounts receivable. Cash accounts maintained by the
Company at U.S. and Canadian financial institutions are insured by the Federal Deposit Insurance Corporation and Canadian Deposit
Insurance Corporation, respectively. A portion of the Company’s cash was held by its Canadian subsidiary. The Company has
not experienced any losses in such accounts.
Net sales to customers outside the United States and related
trade accounts receivable were both approximately 10% at August 31, 2020, and 9% and 12%, respectively at August 31,
2019. No single customer accounted for more than 10% of total revenues for either of the years ended August 31, 2020 or 2019.
The following table presents our sales within geographic regions
as a percentage of net revenue, which is based on the “bill-to” location of our customers:
|
|
Years Ended August 31,
|
|
|
|
2020
|
|
|
2019
|
|
U.S.
|
|
|
90.3
|
%
|
|
|
90.7
|
%
|
Asia
|
|
|
4.5
|
%
|
|
|
3.7
|
%
|
Canada
|
|
|
3.2
|
%
|
|
|
3.8
|
%
|
Other
|
|
|
2.0
|
%
|
|
|
1.8
|
%
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
Estimated Fair Value of Financial Instruments and Certain
Nonfinancial Assets and Liabilities
The Company’s financial instruments other than its marketable
securities include cash and cash equivalents, trade accounts receivable, prepaid expenses, security deposits, trade accounts payable,
line of credit, accrued expenses and long-term debt. Management believes that the fair value of these financial instruments approximate
their carrying amounts based on their relatively short-term nature and current market indicators, such as prevailing interest rates.
The Company’s marketable securities are measured at fair value on a recurring basis. See Note 10.
During the years ended August 31, 2020 and 2019, the Company
did not have any nonfinancial assets or liabilities that were measured at estimated fair value on a recurring or nonrecurring basis.
Significant Recent Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606) as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12
and 2016-20. The core principle of the ASU, among other changes, is that an entity should recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. The Company has elected the modified retrospective method and adopted the new revenue guidance effective
September 1, 2018, with no impact to the opening retained earnings.
In
February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which will require lessees to recognize almost
all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained
a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are
largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to
the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This
ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
The Company adopted ASU 2016-02 on September 1, 2019 and applied the package of practical expedients included therein, as
well as utilize the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the
beginning of the earliest period presented, the presentation of financial information for periods prior to September 1, 2019
will remain unchanged and in accordance with Leases (Topic 840). As of August 31, 2020, the Company
has right of use assets of approximately $11.5 million (net of the reversal of the current deferred rent liability) and lease liabilities
of approximately $11.6 million recorded in the consolidated balance sheet.
In June 2016, the FASB issued ASU 2016-13, “Financial
Instruments – Credit Losses”, which will require the measurement of all expected credit losses for financial assets
held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance
is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years.
In November 2019, the FASB deferred the effective dates of the new credit losses standard for all entities except SEC filers
that are not smaller reporting companies to fiscal year beginning after December 15, 2022, including interim periods within
those fiscal years. The Company is currently evaluating this statement and its impact on its results of operations or financial
position.
In November 2016, the FASB issued ASU 2016-18, “Statement
of Cash Flows - Restricted Cash a consensus of the FASB Emerging Issues Task Force.” This standard requires restricted cash
and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under a retrospective transition
approach. The guidance became effective for fiscal years beginning after December 15, 2017 and interim periods within those
fiscal years with early adoption permitted. The Company adopted the new cash flow guidance effective as of September 1, 2018,
which an immaterial impact to the statements of cash flows.
Note 3. Property, Equipment
and Leasehold Improvements
Property, equipment and leasehold improvements are summarized
as follows:
|
|
August 31,
|
|
|
|
2020
|
|
|
2019
|
|
Held for use:
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
9,950,000
|
|
|
$
|
8,739,000
|
|
Furniture and fixtures
|
|
|
2,517,000
|
|
|
|
1,112,000
|
|
Vehicles
|
|
|
155,000
|
|
|
|
155,000
|
|
Leasehold improvements
|
|
|
6,540,000
|
|
|
|
2,514,000
|
|
Land
|
|
|
—
|
|
|
|
—
|
|
Building
|
|
|
—
|
|
|
|
—
|
|
Construction in progress
|
|
|
79,000
|
|
|
|
820,000
|
|
Total held for use
|
|
|
19,241,000
|
|
|
|
13,340,000
|
|
Less: accumulated depreciation and amortization
|
|
|
(10,393,000
|
)
|
|
|
(9,623,000
|
)
|
Total property, equipment, and leasehold improvements held for use, net
|
|
|
8,848,000
|
|
|
|
3,717,000
|
|
Held for sale:
|
|
|
|
|
|
|
|
|
Land
|
|
|
––
|
|
|
|
1,716,000
|
|
Building
|
|
|
––
|
|
|
|
5,489,000
|
|
Total held for sale
|
|
|
––
|
|
|
|
7,205,000
|
|
Less: accumulated depreciation and amortization
|
|
|
––
|
|
|
|
(350,000
|
)
|
Total property, equipment, and leasehold improvements held for sale, net
|
|
|
––
|
|
|
|
6,855,000
|
|
Total property, equipment, and leasehold improvements, net
|
|
$
|
8,848,000
|
|
|
$
|
10,572,000
|
|
On May 19, 2017, the Company purchased its prior corporate
headquarters located at 1500 N. Lakeview Loop in Anaheim, California (the “Lakeview Property”) 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 total purchase price of the Lakeview Property was
$7,200,000, which was the market price at the time of purchase supported by an independent appraiser. In September 2019, Bisco
entered into a Purchase Agreement to sell the Lakeview Property to a third party 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 loan agreement with the Bank in the original principal amount of $5,400,000 that was used
to purchase the Lakeview Property (the “Lakeview Loan”). See Note 4.
In September 2019, Bisco entered into Commercial Lease
Agreement with the Trust (the “Hunter Lease”), pursuant to which Bisco leased from the Trust approximately 80,000 square
feet of office and warehouse space located at 5065 East Hunter Avenue in Anaheim, California (the “Hunter Property”).
During fiscal 2019, the Company started construction of leasehold improvements on the Hunter Property to house its new corporate
headquarters, which was financed by the Construction Loan from the Bank. See Note 4. As of August 31, 2020, only minor leasehold
improvements awaiting city permits for completion were in construction in progress. In March 2020, the Company completed the
move of its corporate headquarters to the Hunter Property.
For the years ended August 31, 2020 and 2019, depreciation
and amortization expense was $1,224,000 and $1,047,000, respectively.
Note
4. Debt
The Company currently has a $15,000,000 line of credit agreement
with the Bank. On December 4, 2019, the Company entered into the Amendment, which modified the Company’s $10,000,000
line of credit between the Company and the Bank to increase the maximum amount that may be borrowed thereunder from $10.0 million
to $15.0 million. In addition, the Amendment removed the Company’s interest rate options but provided that in no event would
such interest rate be less than 3.5% per annum. The expiration date of the line of credit under the line of credit agreement is
July 5, 2021. The amounts outstanding under this line of credit as of August 31, 2020 and August 31, 2019 are currently
all under the default variable interest index rate of 3.5% and 4.75%, respectively. Borrowings are secured by substantially all
of the assets of the Company and its subsidiaries. The amounts outstanding under this line of credit as of August 31, 2020
and August 31, 2019 were $5,100,000 and $5,772,000, respectively. The line of credit agreement contains certain nonfinancial
and financial covenants, including the maintenance of certain financial ratios. As of August 31, 2020 and August 31,
2019, the Company was in compliance with all such covenants.
The
Company also entered into the Construction Loan 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%, 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
and converted to a term loan was $4,807,000. Interest on the Construction Loan is payable monthly (4.35% and 4.50% at August 31,
2020 and August 31, 2019, respectively). Concurrent with the execution of this Construction Loan, Bisco entered into a commercial
security agreement, dated July 12, 2019, with the Bank, pursuant to which Bisco granted the Bank a security interest in substantially
all of Bisco’s personal property to secure Bisco’s obligations under the Construction Loan. The outstanding balance
of the Construction Loan at August 31, 2020 and August 31, 2019 was $4,807,000 and $342,000, respectively.
On May 15, 2017, the Company entered into the Lakeview
Loan. The proceeds of the loan were used to purchase the building that housed the Company’s then corporate headquarters and
distribution center at 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 August 31, 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 worker’s compensation requirements.
Note 5. Shareholders’ Equity
Earnings Per Common Share (“EPS”)
The following is a reconciliation of the numerators and denominators
used in the basic and diluted computations of earnings per common share:
|
|
Years Ended August 31,
|
|
(In thousands, except per share information)
|
|
2020
|
|
|
2019
|
|
EPS – basic and diluted:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,793
|
|
|
$
|
9,432
|
|
Less: cumulative preferred stock dividend
|
|
|
(76
|
)
|
|
|
(76
|
)
|
Net income attributable to common shareholders for basic and diluted EPS computation
|
|
|
7,717
|
|
|
|
9,356
|
|
Weighted average common shares outstanding for basic and diluted EPS computation
|
|
|
4,861,590
|
|
|
|
4,861,590
|
|
Earnings per common share – basic and diluted
|
|
$
|
1.59
|
|
|
$
|
1.92
|
|
For the years ended August 31, 2020 and 2019, 40,000 potential
common shares (issuable upon conversion of 36,000 shares of the Company’s Series A cumulative convertible preferred
stock) have been 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.
Preferred Stock
The Company’s Board of Directors is authorized to establish
the various rights and preferences for the Company's preferred stock, including voting, conversion, dividend and liquidation rights
and preferences, at the time shares of preferred stock are issued. In September 2004, the Company sold 36,000 shares of its
Series A cumulative convertible preferred stock (the “Preferred Stock”) to the Company’s CEO, with an 8.5%
dividend rate at a price of $25 per share for a total cash purchase price of $900,000. The holder of the Preferred Stock
has the right at any time to convert the Preferred Stock and accrued but unpaid dividends into shares of the Company’s common
stock at the conversion price of $22.50 per share. In the event of a liquidation or dissolution of the Company, the
holder of the Preferred Stock is entitled to be paid out of the assets of the Company available for distribution to shareholders
at $25.00 per share plus all unpaid dividends before any payments are made to the holders of common stock.
Note 6. Profit Sharing Plan
The Company has a defined contribution 401(k) profit sharing
plan (“401(k) plan”) for all eligible employees. Employees are eligible to contribute to the 401(k) plan
after six months of employment. Under the 401(k) plan, employees may contribute up to 15% of their compensation. The Company
has the discretion to match 50% of the employee contributions up to 4% of employees’ compensation. The Company’s contributions
are subject to a five-year vesting period beginning the second year of service. The Company’s contribution expense was approximately
$446,000 and $401,000 for the years ended August 31, 2020 and 2019, respectively.
Note 7. Income Taxes
The following summarizes the Company’s provision for income
taxes on income from operations:
|
|
Years Ended August 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,436,000
|
|
|
$
|
2,911,000
|
|
State
|
|
|
664,000
|
|
|
|
803,000
|
|
Foreign
|
|
|
129,000
|
|
|
|
271,000
|
|
|
|
|
2,229,000
|
|
|
|
3,985,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,423,000
|
|
|
|
(378,000
|
)
|
State
|
|
|
(478,000
|
)
|
|
|
(89,000
|
)
|
Foreign
|
|
|
––
|
|
|
|
22,000
|
|
|
|
|
945,000
|
|
|
|
(445,000
|
)
|
Total
|
|
$
|
3,174,000
|
|
|
$
|
3,540,000
|
|
Income taxes for the years ended August 31, 2020 and 2019
differ from the amounts computed by applying the federal blended and statutory corporate rates of 21% for both 2020 and 2019 to
the pre-tax income. The differences are reconciled as follows:
|
|
Years Ended August 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
|
|
Expected income tax provision at statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Increase (decrease) in taxes due to:
|
|
|
|
|
|
|
|
|
State tax, net of federal benefit
|
|
|
5.4
|
%
|
|
|
5.2
|
%
|
Permanent differences
|
|
|
0.3
|
%
|
|
|
0.3
|
%
|
Change in deferred tax asset valuation allowance
|
|
|
(3.8
|
)%
|
|
|
(0.7
|
)%
|
Prior year provisions and Payable True Up
|
|
|
6.4
|
%
|
|
|
1.0
|
%
|
Other, net
|
|
|
(0.5
|
)%
|
|
|
0.5
|
%
|
Income tax expense
|
|
|
28.9
|
%
|
|
|
27.3
|
%
|
The components of deferred taxes at August 31, 2020 and
2019 are summarized below:
|
|
August 31,
|
|
Deferred tax assets (liabilities):
|
|
2020
|
|
|
2019
|
|
Net operating loss
|
|
$
|
405,000
|
|
|
$
|
421,000
|
|
Allowance for doubtful accounts
|
|
|
1,000
|
|
|
|
3,000
|
|
Accrued expenses
|
|
|
262,000
|
|
|
|
270,000
|
|
Accrued workers’ compensation
|
|
|
(5,000
|
)
|
|
|
1,000
|
|
Inventory adjustments
|
|
|
944,000
|
|
|
|
887,000
|
|
Unrealized losses on investment
|
|
|
54,000
|
|
|
|
92,000
|
|
Excess of tax over book depreciation
|
|
|
(850,000
|
)
|
|
|
(206,000
|
)
|
Other
|
|
|
63,000
|
|
|
|
72,000
|
|
|
|
|
874,000
|
|
|
|
1,540,000
|
|
Valuation allowance
|
|
|
––
|
|
|
|
(421,000
|
)
|
Total deferred tax assets, net
|
|
$
|
874,000
|
|
|
$
|
1,119,000
|
|
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. Net deferred tax assets are included in other assets within
noncurrent assets in the accompanying consolidated balance sheets.
In 2010, management concluded that certain deferred tax assets
would not be realized, primarily the pre-merger net operating loss carryforwards (“NOLs”) of the Company. Management
reviewed the positive and negative evidence available at August 31, 2019 and determined that the capital losses, unrealized
losses and EACO’s stated net operating losses did not meet the more likely than not threshold required to be recognized.
As such, a valuation allowance was retained on these deferred tax assets. During the year ended August 31, 2020, the Company
exercised a tax planning strategy to support that such assets could be utilized and the valuation allowance was, accordingly, released.
On January 1, 2007, the Company adopted ASC 740 “Income
Taxes” formerly FASB Interpretation No. 48, an interpretation of FASB Statement No. 109 (“ASC 740”).
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. ASC 740
prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in the tax return. The Company did not recognize any additional liability for unrecognized tax benefit
as a result of the implementation. The Company had no liability for unrecognized tax benefit related to tax positions for either
fiscal 2020 or fiscal 2019.
The Company will recognize interest and penalty related to unrecognized
tax benefits and penalties as income tax expense. As of August 31, 2020, the Company has not recognized liabilities for penalty
and interest as the Company does not have any liability for unrecognized tax benefits.
The 2018 Tax Cuts and Jobs Act (TCJA) shifted the US international
tax regime from a worldwide system to a quasi-territorial system. Besides introducing a new federal corporate tax rate of 21%,
the TCJA imposed an income inclusion for federal income tax purposes under IRC Section 951A on net “intangible”
income derived from “specified foreign corporations”, also known as Global Intangible Low-Taxed Income “GILTI”.
Beginning for tax year 2018 until 2025, a deduction under IRC Section 250 is allowed for the lesser of 50% of the GILTI inclusion
or U.S. federal taxable income, whichever is less. This deduction effectively taxes GILTI inclusions at an effective tax rate 10.5%
for federal purposes, before claiming allowable indirect foreign tax credits against GILTI inclusions. GILTI inclusions generally
apply where “specified foreign corporation” income is taxed at an effective rate below 90% of the U.S. federal tax
rate (i.e., an 18.9% effective tax rate). After tax year 2025, the allowable deduction under IRC Section 250 will be reduced
to 37.5% of the GILTI inclusion after tax year 2025. For the tax year ended August 31, 2020 (i.e., tax year 2019), the Company’s
GILTI inclusion was calculated to be approximately $559,000; however, with the Section 250 deduction of about $280,000, and
$42,000 of allowable indirect foreign tax credit, the net effect of the GILTI was offset for the 2019 tax year. It should also
be noted that new high tax exception to GILTI was not considered since the IRS issued new regulations in late June 2019, which
were not finalized yet by August 2019. The Company is making an election to treat GILTI as period cost.
The TCJA provided for an additional deduction of 37.5% of U.S.
export sales under IRC Section 250, which is for Foreign-Derived Intangible Income (FDII). The deduction is only allowable
for U.S. C-Corporations and effectively taxes export sales at an effective rate of 13.125% from tax years 2018 through 2025. After
2025, the FDII deduction is reduced to 21.875%. For the tax year ended August 31, 2020, EACO’s FDII deduction was calculated
to be approximately $71,000 based on the Company’s direct export sales, which is a permanent deduction that reduces the current
year federal taxable income.
As of September 21, 2020, Treas. Reg. § 1.951A-7(b) is
in effect which allows taxpayers to apply the GILTI high tax exclusion to taxable years after December 31, 2017 and before
July 23, 2020 as long they are consistently applied according to the rules under IRC Section 954(b)(4) and
Treas. Reg. § 1.954-1(c)(3). For the FY 2019, we applied the high tax exception to GILTI consistent to these provisions, although
early, because of the prevailing view at the time that the GILTI high tax exception could be applied to tax year 2018 tax returns
once the regulations were finalized. For the FY 2020 provision and tax return, EACO will apply the high tax exception to GILTI
inclusion for the Canadian subsidiary.
On March 27, 2020, President Trump signed into law the Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act provides tax relief and tax incentives
to business, including provisions relating to net operating loss carryback, refundable payroll tax credits, OASDI payroll tax deferral,
alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax
depreciation methods for qualified improvement property. The Company has analyzed the impact of receiving financial, tax
benefits or other relief as a result of the CARES Act, under ASC 740, the effect of business interest deduction limit under Code
Sec.163(j) increase to 50 percent of the taxpayer’s adjusted taxable income for the 2019 tax year is recognized upon enactment.
The Company did not apply for SBA Paycheck Protection Program loan based on the advice of its legal counsel due to stable cash
flow and available cash from the Company’s line of credits.
Finally, it should also be noted that the provisions mentioned
above do not apply generally to state income taxation, only for federal income tax purposes.
The Company is subject to taxation in the US, Canada and various
states. The Company’s tax years for 2017, 2018 and 2019 are subject to examination by the taxing authorities. With few exceptions,
the Company is no longer subject to state, local or foreign examinations by taxing authorities for years before 2016.
The Internal Revenue Service concluded the examination for the
Company's federal tax return for the year ending in August 31, 2016 year. The Internal Revenue Service concluded and issued
a no change report for the August 31, 2016 federal tax return dated February 13, 2019. Accordingly, for federal returns,
the Company is generally not subject to examination for years 2016 and before.
Note 8. Commitments and Contingencies
Legal Matters
From time to time, we may be subject to
legal proceedings and claims that 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 material 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.
Operating Lease Obligations
The Company leases its facilities and automobiles under operating
lease agreements (three leased facilities are leased from the Trust, which is beneficially owned by the Company’s Chief Executive
Officer, Chairman of the Board and majority shareholder – see Note 9), which expire on various dates through September 2029
and require minimum rental payments ranging from $1,000 to $67,000 per month. Certain of the leases contain options for renewal
under varying terms.
Minimum future rental payments under operating leases are as
follows:
Years Ending August 31:
|
|
|
|
2021
|
|
|
2,845,000
|
|
2022
|
|
|
2,351,000
|
|
2023
|
|
|
2,024,000
|
|
2024
|
|
|
1,703,000
|
|
2025
|
|
|
1,335,000
|
|
Thereafter
|
|
|
4,527,000
|
|
|
|
$
|
14,785,000
|
|
Rental expense for all operating leases for the years ended
August 31, 2020 and 2019 was approximately $3,242,000 and $2,557,000, respectively.
Note 9. Related Party Transactions
On
November 21, 2017, the Company entered into the Chicago 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, for the lease of a facility in
Glendale Heights, Illinois. The Company relocated its Chicago sales office and distribution center to this facility in December 2017.
The Chicago 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 Chicago Lease. The foregoing description of the Chicago Lease does not purport to be
complete and is qualified in the entirety by reference to the Chicago Lease as filed as Exhibit 10.33 to the Company’s
Annual Report on Form 10-K for the year ended August 31, 2019 as filed with the SEC on November 27, 2019.
On
July 26, 2019, the Company entered into the Hunter Lease with the Trust, for the lease of the Hunter Property, which
houses the Company’s new corporate headquarters. The Company completed its move to the new headquarters located at the Hunter
Property in March 2020. The term of the Hunter Lease commenced on September 2, 2019 and ends on August 31, 2029
with an initial monthly rental rate of $66,300, which is subject to annual rent increases of approximately 2.5% as set forth in
the Hunter Lease. The foregoing description of the Lease does not purport to be complete and is qualified in the entirety by reference
to the lease as filed as Exhibit 10.1 in its Current Report on Form 8-K as filed with the SEC on August 1, 2019.
During fiscal 2020 and fiscal 2019, the Company paid approximately
$809,000 and $277,000, respectively, of rent related to all leases with the Trust.
Note 10. Fair Value of Financial Instruments
Management estimates the fair value of
its assets or liabilities measured at fair value based on the three levels of the fair-value hierarchy are described as follows:
Level 1: Quoted prices (unadjusted) in
active markets for identical assets and liabilities. For the Company, Level 1 inputs include marketable securities and liabilities
for short sales of trading securities that are actively traded.
Level 2: Inputs other than Level 1 are
observable, either directly or indirectly. The Company does not hold any Level 2 financial instruments.
Level 3: Unobservable inputs. The Company
does not hold any Level 3 financial instruments.
Marketable
Trading Securities – The Company holds marketable trading securities, which include long and short positions that
are all publicly traded securities with quoted prices in active markets. These securities are stated at fair value, which is determined
using the quoted closing prices at each reporting date. 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. The fair value of the marketable trading securities and short positions are considered to be Level
1 measurements.
The following table sets forth by level, within the fair value
hierarchy, certain assets at estimated fair value as of August 31, 2020 and 2019:
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
August 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
1,368,000
|
|
|
|
––
|
|
|
|
––
|
|
|
$
|
1,368,000
|
|
Liability for short sales of trading securities
|
|
|
(2,916,000
|
)
|
|
|
––
|
|
|
|
––
|
|
|
|
(2,916,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
1,873,000
|
|
|
|
––
|
|
|
|
––
|
|
|
$
|
1,873,000
|
|
Liability for short sales of trading securities
|
|
|
(655,000
|
)
|
|
|
––
|
|
|
|
––
|
|
|
|
(655,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11. Subsequent Events
Management has evaluated events subsequent to August 31,
2020, through the date that these consolidated financial statements are being filed with the Securities and Exchange Commission,
for transactions and other events that may require adjustment of and/or disclosure in such financial statements.