|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One) |
|
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended | |
OR | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number:
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
|
| |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻
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.
Indicate by check mark whether the registrant has submitted electronically, if any, 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).
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ◻
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ 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 has filed a report on and attestation to its management’s the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (based upon the closing sale price of the common stock on that date) was approximately $
DOCUMENTS INCORPORATED BY REFERENCE
No documents required to be listed hereunder are incorporated by reference in this Report on Form 10-K.
Forward-Looking Information
This report may contain forward-looking statements. 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, and the impact of COVID-19 and of our planned initiatives. Forward-looking statements are based on our current expectations, estimates and forecasts of future events and results and involve a number of risks and uncertainties that could cause actual results to differ materially including, among other things, the following: failure of facts to conform to management estimates and assumptions; economic conditions and uncertainties; competitive pressures; 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 relationships with suppliers; the willingness of Citizen’s Business Bank (the “Bank”) or other lenders to extend financing commitments and the availability of capital resources; and other risks identified from time to time in our reports and other documents filed with the Securities and Exchange Commission (the “SEC”), and in public announcements. It is not possible to foresee or identify all factors that could cause actual results to differ materially from those anticipated. As such, investors should not consider any of such factors to be an exhaustive statement of all risks or uncertainties.
No forward-looking statements can be guaranteed and actual results may vary materially. We undertake no obligation to update any forward-looking statement except as required by law, but investors are advised to consult any further disclosures by us in our filings with the SEC, especially on Forms 10-K, 10-Q and 8-K, in which we discuss in more detail various important factors that could cause actual results to differ from expected or historical results.
TABLE OF CONTENTS
PART I
Item 1. Business
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 is a distributor of electronic components and fasteners with 49 sales offices and seven distribution centers located throughout the United States and also in Ontario, 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.
Bisco commenced operations in Illinois in 1973 and was incorporated in 1974. Bisco’s principal executive offices are located at 5065 East Hunter Avenue, Anaheim, California 92807, which also serves as the principal executive offices of EACO. EACO’s website address is www.eacocorp.com and Bisco’s website address is www.biscoind.com. The inclusion of these website addresses in this annual report does not include, or incorporate by reference into this annual report, any information on or accessible through the websites.
EACO, Bisco and Bisco Industries Limited are collectively referred to herein as the “Company,” “we,” “us” and “our.”
Operations
Products and Services
Bisco stocks thousands of items from more than 260 manufacturers. Bisco’s products include electronic components such as spacers and standoffs, card guides and ejectors, component holders and fuses, circuit board connectors, and cable components, as well as a large variety of fasteners and hardware. The breadth of Bisco’s products and extensive inventory provide a one-stop shopping experience for many customers.
Bisco also provides customized services and solutions for a wide range of production needs, including special packaging, bin stocking, kitting and assembly, bar coding, electronic requisitioning, and integrated supply programs, among others.
Divisions
Bisco Industries
Bisco sells a broad spectrum of products that it offers to many markets, but primarily sells to original equipment manufacturers (“OEMs”). While historically, the substantial majority of Bisco’s revenues have been derived from the Bisco Industries division, Bisco has also established additional divisions that specialize in specific industries and products. Bisco believes that the focus by industry and/or product enhances Bisco’s ability to provide superior service and devise tailored solutions for its customers.
National-Precision
The National-Precision division primarily sells electronic hardware and commercial fasteners to OEMs in the aerospace, fabrication and industrial equipment industries. National-Precision seeks to be the leading global distributor of mil-spec and commercial fasteners, hardware and distribution services used in production.
Fast-Cor
The Fast-Cor division was established to be a distributor’s source for a broad range of components and fasteners. Fast-Cor has access to the entire inventory of products that Bisco offers but primarily focuses on selling to other distributors, not manufacturers.
Customers and Sales
Bisco’s customers operate in a wide variety of industries and range from large, global companies to small local businesses. Bisco strives to provide exceptional service to all customers, including smaller businesses, and continues to focus on growing its share of
1
that market. As of August 31, 2021, Bisco had more than 10,000 customers; however, no single customer accounted for more than 10% of Bisco’s revenues for the fiscal year ended August 31, 2021. For each of the fiscal years ended August 31, 2021 and 2020 (“fiscal 2021” and “fiscal 2020,” respectively), Bisco’s top 20 customers represented in the aggregate approximately 14% of Bisco’s revenues.
Bisco generally sells its products through its sales representatives in its 49 sales offices located in the United States and Canada. Customers can also place orders through Bisco’s website. Bisco currently maintains seven distribution centers located in Anaheim and San Jose, California; Dallas, Texas; Chicago, Illinois; Boston, Massachusetts; Atlanta, Georgia; and Toronto, Canada. Each of Bisco’s selling facilities and distribution centers are linked to Bisco’s central computer system, which provides Bisco’s management and salespersons with online, real-time data regarding inventory levels throughout Bisco and facilitates control of purchasing, shipping and billing. Bisco generally ships products to customers from one of its seven distribution centers, based on the geographic proximity to the customer and the location of the available ordered products.
Bisco sells its products primarily in the United States, Canada, and countries within Asia. Bisco’s international sales represented 10.7% and 9.7% of its sales in fiscal 2021 and fiscal 2020, respectively. Sales to customers in Canada accounted for approximately 30% and 33% of such international sales in fiscal 2021 and fiscal 2020, respectively. Sales to customers located within Asia accounted for approximately 48% and 46% of such international sales in fiscal 2021 and fiscal 2020, respectively.
Suppliers
As of August 31, 2021, Bisco offered products from over 260 manufacturers. The Company’s authorized distributor agreements with most manufacturers are typically cancelable by either party at any time or on short notice. While Bisco doesn’t manufacture its products, it does perform kitting and packaging of existing products for certain of its customers. Although Bisco sells more products of certain brands, Bisco believes that most of the products it sells are available from other sources at competitive prices. No single supplier accounted for more than 10% of Bisco’s purchases in fiscal 2021 or fiscal 2020.
Human Capital Resources
As of August 31, 2021, the Company had 484 full-time employees, which include 307 sales and marketing employees, 76 management, administrative and finance employees, 60 warehouse and fulfillment personnel and 41 supply chain management employees. None of our employees are subject to a collective bargaining agreement.
A key element of our business strategy is to expand our operations and revenues by opening additional sales offices in new geographic locations, and we plan to add additional sales personnel to support such new offices. During fiscal 2021, the Company did not open any new sales office locations, but has opened two new office locations subsequent to fiscal 2021. The Company believes it has been successful in attracting and retaining qualified sales personnel for these new positions. We continue to focus on employee development and training, and embrace diversity and inclusion. We believe an innovative workforce needs to be diverse and leverage the skills and perspectives of a wealth of backgrounds and experiences.
Compliance with Government Regulations
We are not aware of the need for any government approvals for our products. Because we use contract manufacturers, we believe that any laws regarding the manufacturing of the products we distribute will typically be the responsibility of our contract manufacturers. Prior to entering into any contracts with new manufacturers, we typically conduct diligence to determine that the manufacturer has satisfied all such requirements. We do not believe that we are subject to any state or federal environmental laws.
2
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 Annual Report on Form 10-K 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.
COVID-19 Risks
Our business and results of operations may be adversely impacted as a result of the recent COVID-19 outbreak.
On March 11, 2020, the World Health Organization designated the coronavirus (“COVID-19”) as a pandemic. The Company has incurred disruptions to its business activities and supply chain during this time. The Company has had to temporarily close its 49 sales offices to the public, and has experienced temporary closures of certain offices from time to time to keep our employees safe. We had also shifted more than half of our sales force to remote operations and have implemented changes our warehouse and distribution operations to protect our employees. As a result, this had a negative effect on our employee productivity due to remote work and prevented sales employees from visiting customer office locations, which is a main component to obtaining new and continued business for our sales team. The Company also incurred additional expenses related daily office sanitization and personal protective equipment (“PPE”) it provided for its employees, which include masks, sanitizer, and protective cubical walls. Expenses also related to obtained software and hardware for remote work were also incurred. We also may experience delays in our responses to our customers and possible delays in shipments of our products, which could harm our customer relations and adversely impact our sales. In addition, certain of our customers have closed or reduced their operations during this pandemic, and government restrictions could also further restrict our business and result in supply chain interruptions in the future. While our sales continue to remain strong, we cannot predict how long the pandemic will last or the impact of such pandemic on our financial condition and results of operations.
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,
3
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.
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 flyers 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 fiscal 2021 and fiscal 2020, we spent $415,000 and $486,000 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. We select technology vendors that have certified that they maintain required security levels that would prevent unauthorized breaches in the Company’s systems and data housed within the systems. We limit access to system data for the our technology vendors based upon the projects that they are working to complete. A number of retailers have experienced security breaches in which credit and debit card information may have been stolen. While we have not experienced a cyber attack, we are working with a third party vendor to assist us in safeguarding our systems and protecting the personal information of our customers, employees and vendors. Our analysis 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.
4
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.
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.
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 2021, the Company opened one new geographical sales location and 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.
5
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 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 Citizen’s Business Bank, located in Anaheim, CA. The agreement is secured by substantially all of Bisco’s assets. The loan agreement contains covenants which require that, on a quarterly basis, Bisco’s losses from trading in securities not exceed its pre-tax operating income. We cannot assure you that unanticipated losses from our trading activities will not cause us to violate our covenants in the future or that the bank will grant a waiver for any such default or that it will not exercise its remedies, which could include the refusal to allow additional borrowings 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.
6
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. As of August 31, 2021, there was zero outstanding on our line of credit, which line of credit is secured by substantially all of Bisco’s assets. Further, the Company has a loan agreement with the Bank for approximately $4.7 million that financed the tenant improvements on the new corporate headquarters. See Note 4 of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report 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.
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 August 31, 2021, 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.
7
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. 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 1B. Unresolved Staff Comments
None.
Item 2. Properties
We have 49 sales offices and seven distribution centers located throughout the United States and in Canada. In September 2019, Bisco entered into a Purchase Agreement to sell its previous headquarter located at 1500 North Lakeview Loop in Anaheim, California (“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 mortgage loan for the Lakeview Property. In September 2019, Bisco entered into Commercial Lease Agreement (the “Hunter Lease”) with the Glen F. Ceiley and Barbara A. Ceiley Revocable Trust (the “Trust”), which is the grantor trust of Glen Ceiley, our Chief Executive Officer, Chairman of the Board and majority shareholder (the “Trust”), and has a lease term that expires on August 31, 2029. Pursuant to the Hunter Lease, Bisco has leased from the Trust approximately 80,000 square feet of office and warehouse space located at 5065 East Hunter Avenue, Anaheim, California (the “Hunter Property”). The Company moved its corporate headquarters to the Hunter Property in March 2020. The initial base rent for the Hunter Lease is $66,300 per month, which increases by 2.5% annually over the term of the lease.
Bisco also leases its Chicago area sales office and distribution center located in Glendale Heights, Illinois under an operating lease agreement (the “Chicago Lease”) from the Trust, which has a term that expires in May 2029. The initial base rent for this lease is $22,600 per month, which increases by 2.5% annually over the term of the lease.
All of our other properties are leased, consisting of sales offices and warehouse space. Leases of sales offices generally have a lease term of three years and warehouse locations usually have a lease term of five to ten years. For additional information regarding our
8
obligations under property leases, see Note 8 of the Notes to Consolidated Financial Statements, included in Part II, Item 8 of this report.
Item 3. Legal Proceedings
From time to time, the Company may be named in claims arising in the ordinary course of business. Currently, we are not a party to any legal proceedings that, in the opinion of our management, would reasonably be expected to have a material adverse effect on our business or financial condition.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
The Company’s common stock is quoted on the OTCQB operated by the OTC Markets Group Inc., and previously on the OTC Bulletin Board, under the trading symbol “EACO”; however, the Company’s common stock typically has low trading volumes.
As of August 31, 2021, the Company had no equity compensation plans. The Company did not grant or issue any unregistered shares of common stock during the fiscal 2021. The Company did not repurchase any of its own common stock during fiscal 2021.
As of June 29, 2022, the Company had approximately 290 shareholders of record.
Dividend Policy
The Company has never paid cash dividends on its common stock and does not expect to pay any cash dividends on its common stock in the foreseeable future.
Item 6. Selected Financial Data
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 7. Management’s Discussion and Analysis of Financial Condition and Results Of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, Item 1A, “Risk Factors.”
Overview
EACO is a holding company primarily comprised of its wholly-owned subsidiary, Bisco, and includes Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited. 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.
9
Impact of COVID-19 on our Business
With respect to the ongoing and evolving coronavirus (COVID-19) outbreak, which was designated as a pandemic by the World Health Organization on March 11, 2020, the outbreak has caused substantial disruption in international and U.S. economies and markets. The outbreak has had, and may continue to have, an adverse impact on the Company, as well as the industries that the Company serves, such as the aerospace, electronic parts, and industrial equipment industries. The Company has had to temporarily close its 49 sales offices to the public, and has experienced temporary closures of certain offices from time to time to keep our employees safe. We had also temporarily shifted more than half of our sales force to remote operations and have implemented changes our warehouse and distribution operations to protect our employees. As a result, this had a negative effect on our employee productivity due to remote work and prevented sales employees from visiting customer office locations, which is a main component to obtaining new and continued business for our sales team. The Company also incurred additional expenses related daily office sanitization and personal protective equipment (“PPE”) it provided for its employees, which include masks, sanitizer, and protective cubical walls. Expenses also related to obtained software and hardware for remote work were also incurred. If repercussions of the outbreak are prolonged, it could have a significant adverse impact to the underlying industries of some of the Company’s customers. To date, the Company has has incurred disruptions to its business activities and supply chain. Management cannot, at this point, estimate ultimate losses related to the COVID-19 outbreak, if any, and accordingly no adjustments were reflected in the accompanying financial statements related to this matter.
Critical Accounting Policies and Estimates
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 obligation 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.
Inventory
The Company’s inventory provisions for obsolescence reserve 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 this reserve 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.
10
Results of Operations
Comparison of the Fiscal Years Ended August 31, 2021 and 2020
Revenues and Gross Margin (dollars in thousands)
Fiscal Years Ended August 31, | $ | % |
| |||||||||
| 2021 |
| 2020 |
| Change |
| Change |
| ||||
Revenues | $ | 237,962 | $ | 225,245 | $ | 12,717 | 5.6 | % | ||||
Cost of revenues |
| 177,177 |
| 163,868 | 13,309 | 8.1 | % | |||||
Gross margin | $ | 60,785 |
| 61,377 | $ | (592) | (1.0) | % | ||||
Percent of revenues |
| 25.5 | % |
| 27.2 | % |
|
| ||||
Revenues consist primarily of sales of component parts and fasteners, and also include, to a lesser extent, kitting charges and special order fees, as well as freight charged to customers. The increase in revenues in fiscal 2021 compared to fiscal 2020 was largely due to a higher volume of product sales, as well as increased productivity from the Company’s employees due to better training and management. Revenues have also increased due in part to an increased focus to sell to international customers. Sales to international customers has increased 1% as a percentage of revenues.
The gross margins in fiscal 2021 decreased by 1.0%, as a percentage of revenues, when compared to fiscal 2020. This decrease is primarily due to higher material expense and increased expenses related to warehouse and supply chain that are allocated to the cost of revenues. This decrease was also due in part to the overall declines in gross profit margin due to the global industry-wide shortages and the impacts from the COVID-19 pandemic.
Selling, General and Administrative Expense (dollars in thousands)
Fiscal Years Ended |
| |||||||||||
August 31, | $ | % |
| |||||||||
| 2021 |
| 2020 |
| Change |
| Change | |||||
Selling, general and administrative expenses | $ | 48,072 | $ | 50,936 | $ | (2,864) | (5.6) | % | ||||
Percent of revenues |
| 20.2 | % |
| 22.6 | % | (2.3) | % | ||||
Selling, general and administrative expense (“SGA”) consists primarily of payroll and related expenses for the sales and administrative staff, professional fees (including accounting, legal and technology costs and expenses), and advertising costs. SGA in fiscal 2021 decreased from fiscal 2020 largely due to a decrease in payroll taxes as a result of federal tax credits related to the Employee Retention Credit (ERC) of $5.4 million. Further, the decrease is also due to a decrease in the number of sales and administrative employees, from 525 employees in fiscal 2020 to 484 employees in fiscal 2021. Fiscal 2020 also had non-recurring expense incurred related to the relocation of the Company’s corporate headquarters to the Hunter Property. The decrease in SGA was partially offset due to annual raises and higher depreciation expense. SGA as a percent of revenue in fiscal 2021 decreased from fiscal 2020 primarily due to decreased employee headcount and higher sales growth due to the rebounding economy.
Other Income (Expense), Net (dollars in thousands)
| Fiscal Years Ended |
| ||||||||||
August 31, | $ | % |
| |||||||||
Other income (expense): |
| 2021 |
| 2020 |
| Change |
| Change |
| |||
Realized gain on sales of marketable trading securities | $ | (890) | $ | 620 | $ | (1,510) | (243.5) | % | ||||
Unrealized gain (loss) on marketable trading securities |
| 83 |
| 292 |
| (209) | (71.6) | % | ||||
Loss on Sale of Property |
|
| (130) |
| 130 | 100 | % | |||||
Interest and other (expense) |
| (226) |
| (256) |
| 30 | 13.3 | % | ||||
Other income (expense), net | $ | (1,033) | $ | 526 | $ | (1,559) | (296.4) | % | ||||
Other income (expense), net as a percent of revenues |
| (0.2) | % |
| 0.2 | % |
| |||||
Other income (expense) includes income or losses on investments in marketable equity securities of other publicly-held domestic corporations, interest income (expense), and other nonoperating activities. The Company’s investment strategy consists of both long and short positions. The Company experienced net realized and unrealized losses from trading securities of approximately $807,000
11
during fiscal 2021 compared to $912,000 net realized and unrealized gains during fiscal 2020. The trading securities losses in fiscal 2021 was primarily due to timing of sale of investments and general market climate of investment positions at year end.
During fiscal 2020, the Company sold the Lakeview Property for a cash purchase price of $7,075,000 in November 2019, realizing a total loss of $130,000 from the sale.
Interest and other expense decreased by $30,000, which was primarily due to reduced interest expense on a lower average balance held on our line of credit during fiscal 2021 compared to fiscal 2020.
Income Tax Provision (dollars in thousands)
Fiscal Years Ended |
|
| ||||||||||
August 31, | $ | % |
| |||||||||
| 2021 |
| 2020 |
| Change |
| Change |
| ||||
Provision for income taxes | $ | 3,293 | $ | 3,174 | $ | 119 | 3.7 | % | ||||
Percent of pre-tax income |
| 28.2 | % |
| 28.9 | % | (0.7) | % | ||||
The provision for income taxes increased by $119,000 in fiscal 2021 compared to fiscal 2020, which was primarily a result of higher tax income in fiscal 2021 as compared to fiscal 2020. The income tax provision as a percent of pre-tax income decreased by 0.7% in fiscal 2021 compared to fiscal 2020, which was primarily due to a discrete tax item recorded in the first quarter of fiscal 2020 resulting from certain deferred tax assets and permanent book to tax differences, related to prior periods for approximately $277,000.
Liquidity and Capital Resources
As of August 31, 2021 and 2020, the Company held approximately $4,455,000 and $6,079,000 of unrestricted cash and cash equivalents, respectively. The Company also held $3,741,000 and $1,368,000 of marketable securities at August 31, 2021 and August 31, 2020, respectively, which could be liquidated, if necessary.
The Company currently has a $15,000,000 line of credit agreement with Citizens Business Bank (“the Bank”). On December 4, 2019, the Company entered into 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 3.0% per annum. The expiration date of the line of credit under the line of credit agreement is July 5, 2022. The Company intends to renew the line of credit beyond maturity. The amounts outstanding under this line of credit as of August 31, 2021 and August 31, 2020 are currently all under the default variable interest index rate of 3.0% and 3.5%, 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, 2021 and August 31, 2020 were zero and $5,100,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of August 31, 2021 and August 31, 2020, the Company was in compliance with all such covenants.
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.
12
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 August 31, 2021 and 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 August 31, 2021 and August 31, 2020 was $4,698,000 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 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, 2021.
EACO has also entered into a business loan agreement (and related $100,000 promissory note) with the Bank that is renewed annually in order to obtain a $100,000 letter of credit as security for the Company’s workers’ compensation requirements.
Cash Flows from Operating Activities
During fiscal 2021, the Company provided $8,817,000 in net cash from its operating activities. The current period cash provided by operating activities was primarily due to net income of $8,387,000 and an increase in accrued expenses. This was partially offset by increases in trade accounts receivable and prepaid expenses. Increases in accrued expenses is primarily due to increases in accrued bonuses due to higher sales, margin borrowings of $848,000 on the brokerage account, and $520,000 of stale checks older than 3 years reclassed to accrued liability.
During fiscal 2020, the Company provided $2,783,000 in net cash from its operating activities. The current period cash provided by operating activities was primarily due to net income of $7,793,000, a decrease in trade accounts receivables, a reduction in purchased inventory due to lower sales at year end, and greater depreciation in the current period. This was partially offset by decreases in trade accounts payable and accrued expenses due to less inventory purchases and increased gains on trading securities not attributable to operations.
Cash Flows from Investing Activities
Cash used in investing activities was $7,042,000 for fiscal 2021. This was primarily due to the purchase of marketable securities and a decrease in liability of short sales, which is due to timing of investing activities.
Cash provided by investing activities was $4,048,000 for fiscal 2020. This was primarily due to proceeds of $7,075,000 from the sale of the Lakeview Property, sale of marketable securities, and increases in liability of short sales. Cash provided by investing activities was partially offset by fixed asset additions of $6,705,000 from tenant improvements and furniture and fixtures for the new corporate headquarters at the Hunter Property.
Cash Flows from Financing Activities
Cash used in financing activities for fiscal 2021 was $6,308,000, which was primarily due net payments of $5,100,000 in fiscal 2021 to pay down the line of credit with the Bank to a zero balance.
Cash used in financing activities for fiscal 2020 was $3,095,000, which was primarily due to payments of $5,125,000 for the repayment of the Lakeview Property mortgage and net payments of $1,014,000 in fiscal 2020 to repay a portion of the line of credit with the Bank.
13
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future effect on the consolidated 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 from banks. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transactions, with the result that debt agreements are recorded as liabilities in the accompanying consolidated balance sheets while obligations under operating leases are disclosed in the notes to the accompanying consolidated financial statements.
Item 7A. 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.
14
Item 8. Financial Statements and Supplementary Data
EACO CORPORATION
Index to Consolidated Financial Statements
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of EACO Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of EACO Corporation (the Company) as of August 31, 2021, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the year ended August 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2021, and the results of its operations and its cash flows for the year ended August 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involve especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Accounting for Employee Retention Credits (Note 7)
Critical Audit Matter Description
The Company applied for Employee Retention Credits (ERCs) as provided for by provision of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). ERCs related to eligible quarterly periods prior to August 31, 2021 aggregated $5,392,754 and were recorded as reductions of payroll taxes for the year ended August 31, 2021. As of August 31, 2021, $4,007,306 is reflected in prepaid expenses and other current assets, which is net of amounts received from the Internal Revenue Service (IRS) prior to August 31, 2021. Further payments were received from the IRS subsequent to August 31, 2021.
16
How the Critical Audit Matter was Addressed in the Audit
Our principal audit procedures related to the Company’s recording of the ERCs included the following:
| ● | We obtained an understanding of the provisions for the ERCs as afforded by the CARES Act and notices published by the IRS. |
| ● | We evaluated the qualifications of, and work performed by a specialist engaged by management to determine eligibility and perform the calculations supporting the ERCs. |
| ● | We evaluated management’s analyses of the underlying circumstances and data and, in our judgment, found the conclusions to be reasonable. |
/s/
We have served as the Company’s auditor since 2022.
July 01, 2022
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of EACO Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of EACO Corporation and its subsidiaries (the “Company”) as of August 31, 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2020, and the results of its operations and its cash flows for the year ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Baker Tilly US, LLP
We have served as the Company’s auditor since 2005.
Irvine, California
November 30, 2020
18
EACO Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share information)
August 31, | ||||||
|
| 2021 |
| 2020 | ||
ASSETS |
|
|
|
| ||
Current Assets: |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash |
| |
| | ||
Trade accounts receivable, net |
| |
| | ||
Inventory, net |
| |
| | ||
Marketable securities, trading |
| |
| | ||
Prepaid expenses and other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Property, equipment and leasehold improvements: |
| |
| | ||
Operating lease right-of-use assets | | | ||||
Other assets, net | | | ||||
Total assets | $ | | $ | | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
| ||||
Current Liabilities: |
|
| ||||
Trade accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities |
| |
| | ||
Liability for short sales of trading securities |
| — |
| | ||
Current portion of operating lease liabilities | | | ||||
Current portion of long-term debt |
| |
| | ||
Total current liabilities |
| |
| | ||
Non-current Liabilities: |
|
| ||||
Long-term debt |
| |
| | ||
Operating lease liabilities | | | ||||
Total liabilities |
| |
| | ||
Commitments and Contingencies (Notes 4, 6 and 8) | ||||||
Shareholders’ Equity: |
|
| ||||
Convertible preferred stock, $ |
| |
| | ||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated other comprehensive income |
| |
| | ||
Retained earnings |
| |
| | ||
Total shareholders’ equity |
| |
| | ||
Total liabilities and shareholders’ equity | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
19
EACO Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended | ||||||
August 31, | ||||||
|
| 2021 |
| 2020 | ||
Revenues | $ | | $ | | ||
Cost of revenues |
| |
| | ||
Gross margin |
| |
| | ||
Operating expenses: |
|
| ||||
Selling, general and administrative expenses |
| |
| | ||
Income from operations |
| |
| | ||
|
| |||||
Other income (expense): |
|
| ||||
Net (loss) gain on trading securities |
| ( |
| | ||
Loss on sale of property | — | ( | ||||
Interest and other expense |
| ( |
| ( | ||
Other (expense) income, net |
| ( |
| | ||
Income before income taxes |
| |
| | ||
Provision for income taxes |
| |
| | ||
Net income |
| |
| | ||
Cumulative preferred stock dividend |
| ( |
| ( | ||
Net income attributable to common shareholders | $ | | $ | | ||
Basic and diluted earnings per common share | | | ||||
Basic and diluted weighted average common shares outstanding |
| |
| | ||
See accompanying notes to consolidated financial statements.
20
EACO Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(in thousands)
Year Ended | ||||||
August 31, | ||||||
|
| 2021 |
| 2020 | ||
Net income | $ | | $ | | ||
Other comprehensive income, net of tax |
|
| ||||
Foreign currency translation loss |
| ( |
| ( | ||
Total comprehensive income | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
21
EACO Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity
For the Years Ended August 31, 2021 and 2020
(in thousands, except share information)
Accumulated | ||||||||||||||||||||||
Convertible | Additional | Other | Total | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Comprehensive | Retained | Shareholders’ | |||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income |
| Earnings |
| Equity | ||||||
| ||||||||||||||||||||||
Balance, August 31, 2019 |
| |
| $ | |
| |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Preferred dividends |
| |
| |
| |
| |
| |
|
| ( |
| ( | |||||||
Foreign translation loss |
| |
| |
| |
| |
| |
| ( |
|
| ( | |||||||
Net income |
| |
| |
| |
| |
| |
|
| |
| | |||||||
Balance, August 31, 2020 |
| | $ | |
| | $ | | $ | | $ | | $ | | $ | | ||||||
Preferred dividends |
| |
| |
| |
| |
| |
|
| ( |
| ( | |||||||
Foreign translation loss |
| |
| |
| |
| |
| |
| ( |
|
| ( | |||||||
Net income |
| |
| |
| |
| |
| |
|
| |
| | |||||||
Balance, August 31, 2021 |
| | $ | |
| | $ | | $ | | $ | | $ | | $ | | ||||||
See accompanying notes to consolidated financial statements
22
EACO Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year Ended August 31, | ||||||
|
| 2021 |
| 2020 | ||
Operating activities: |
|
|
|
| ||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
| ||||
Depreciation and amortization |
| |
| | ||
Bad debt expense |
| |
| | ||
Loss on sale of property | — | | ||||
Net loss (gain) on trading securities |
| |
| ( | ||
(Increase) decrease in cash from changes in: |
|
| ||||
Trade accounts receivable |
| ( |
| | ||
Inventory |
| ( |
| ( | ||
Prepaid expenses and other assets |
| ( |
| ( | ||
Operating lease right-of-use assets | | ( | ||||
Trade accounts payable |
| |
| ( | ||
Accrued expenses and other current liabilities |
| |
| ( | ||
Operating lease liabilities | ( | | ||||
Net cash provided by operating activities |
| |
| | ||
Investing activities: |
|
| ||||
Additions to property, equipment, and leasehold improvements |
| ( |
| ( | ||
Proceeds from sale of property | — | | ||||
Sale of marketable securities, trading | ( | | ||||
Net change in liabilities for short sales of trading securities |
| ( |
| | ||
Net cash (used in) provided by investing activities |
| ( |
| | ||
Financing activities: |
|
| ||||
Payments on revolving credit facility, net |
| ( |
| ( | ||
Borrowings on Construction Loan | | | ||||
Repayments on long-term debt |
| ( |
| ( | ||
Preferred stock dividend |
| ( |
| ( | ||
Bank overdraft |
| ( |
| ( | ||
Net cash (used in) financing activities |
| ( |
| ( | ||
Effect of foreign currency exchange rate changes on cash and cash equivalents |
| ( |
| ( | ||
Net (decrease) increase in cash, cash equivalents, and restricted cash |
| ( |
| | ||
Cash, cash equivalents, and restricted cash - beginning of period |
| |
| | ||
Cash, cash equivalents, and restricted cash - end of period | $ | | $ | | ||
Supplemental disclosures of cash flow information: |
|
| ||||
Cash paid for interest | $ | | $ | | ||
Cash paid for income taxes | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
23
EACO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2021 and 2020
Note 1. Organization and Basis of Presentation
EACO Corporation (“EACO”), incorporated in Florida in September 1985, is a holding company, primarily comprised of its wholly-owned subsidiary, Bisco Industries, Inc. (“Bisco”) 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
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 $
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 $
24
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 and to
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. There was no impairment as of August 31, 2021 and 2020.
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, 2021 and 2020, the Company’s total obligation for securities sold, but not yet purchased was approximately
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 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.
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
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.
25
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 $
Advertising Costs
Advertising costs are expensed as incurred. For fiscal 2021 and fiscal 2020, the Company spent approximately $
Operating Leases
Beginning in fiscal 2020, management 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 management’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. Management 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.
Revision of Prior Period Financial Statements
During the quarter ended November 30, 2020, in connection with preparing the interim financial information presented in the Quarterly Report on Form 10-Q for that period, prior period errors relating to recorded amounts of operating lease right-of-use assets and operating lease liabilities were identified which affected the annual period ended August 31, 2020. The Company has reflected the correction of these identified prior period errors in the accompanying August 31, 2020 consolidated balance sheet.
In evaluating whether the Company’s previously issued consolidated financial statements for the fiscal year ended August 31, 2020 were materially misstated, the Company considered the guidance in ASC Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1, Assessing Materiality, and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The Company concluded that these errors were not material, individually or in the aggregate, to the August 31, 2020 consolidated financial statements, and therefore, amendments of previously
26
filed reports was not required. As such, the revisions for these corrections are reflected herein and will be reflected in future filings containing such financial information, if any.
The effects of these prior period errors in the accompanying consolidated financials are as follows:
(dollars in thousands) | August 31, 2020 | |||||
As Previously | ||||||
| Reported |
| As Adjusted | |||
Operating lease right-of-use assets | $ | | $ | | ||
Current portion of operating lease liabilities |
| |
| | ||
Operating lease liabilities |
| |
| | ||
Earnings Per Common Share
Basic earnings per common share for the years ended August 31, 2021 and 2020 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
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, 2021 and 2020 was $
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 approximately
27
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, |
| ||||
|
| 2021 |
| 2020 |
|
U.S. |
| | % | | % |
Asia | | % | | % | |
Canada |
| | % | | % |
Other |
| | % | | % |
Total |
| | % | | % |
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, lease liabilities 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, 2021 and 2020, 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 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).
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. Management is currently evaluating this statement and its impact on its results of operations or financial position.
28
Note 3. Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are summarized as follows:
August 31, | ||||||
|
| 2021 |
| 2020 | ||
Machinery and equipment | $ | | $ | | ||
Furniture and fixtures |
| |
| | ||
Vehicles |
| |
| | ||
Leasehold improvements |
| |
| | ||
Construction in progress |
| |
| | ||
Total |
| |
| | ||
Less: accumulated depreciation and amortization | ( | ( | ||||
Total property, equipment, and leasehold improvements, net |
| |
| | ||
In September 2019, Bisco entered into Commercial Lease Agreement (the “Hunter Lease”) with the Glen F. Ceiley and Barbara A. Ceiley Revocable Trust (the “Trust”), pursuant to which Bisco leased from the Trust approximately
For the years ended August 31, 2021 and 2020, depreciation and amortization expense was $
Note 4. Debt
The Company currently has a $
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 $
EACO has also entered into a business loan agreement (and related $
29
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) |
| 2021 |
| 2020 | ||
EPS – basic and diluted: |
|
|
|
| ||
Net income | $ | | $ | | ||
Less: cumulative preferred stock dividend |
| ( |
| ( | ||
Net income attributable to common shareholders for basic and diluted EPS computation | $ | | $ | | ||
Weighted average common shares outstanding for basic and diluted EPS computation |
| |
| | ||
Earnings per common share – basic and diluted | | | ||||
For the years ended August 31, 2021 and 2020,
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
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
30
Note 7. Income Taxes
The following summarizes the Company’s provision for income taxes on income from operations:
Years Ended August 31, | ||||||
|
| 2021 |
| 2020 | ||
Current: |
|
|
|
| ||
Federal | $ | | $ | | ||
State |
| |
| | ||
Foreign |
| ( |
| | ||
| |
| | |||
Deferred: |
|
|
|
| ||
Federal |
| ( |
| | ||
State |
| — |
| ( | ||
Foreign |
| — |
| — | ||
| ( |
| | |||
Total | $ | | $ | | ||
Income taxes for the years ended August 31, 2021 and 2020 differ from the amounts computed by applying the federal blended and statutory corporate rates of 21% for both 2021 and 2020 to the pre-tax income. The differences are reconciled as follows:
Years Ended August 31, |
| ||||||
|
| 2021 |
| 2020 |
| ||
Current: |
|
|
|
| |||
Expected income tax provision at statutory rate | % | % | |||||
Increase (decrease) in taxes due to: |
|
| |||||
State tax, net of federal benefit |
| % |
| % | |||
Permanent differences |
| ( | % |
| % | ||
Change in deferred tax asset valuation allowance |
| — |
| ( | % | ||
Prior year provisions and Payable True Up | — | | % | ||||
Other, net |
| % |
| ( | % | ||
Income tax expense | % | % | |||||
The components of deferred taxes at August 31, 2021 and 2020 are summarized below:
August 31, | ||||||
Deferred tax assets (liabilities): |
| 2021 |
| 2020 | ||
Net operating loss | $ | | $ | | ||
Capital Loss | | — | ||||
Allowance for doubtful accounts |
| ( |
| | ||
Accrued expenses |
| |
| | ||
Accrued workers’ compensation |
| ( |
| ( | ||
Inventory adjustments |
| |
| | ||
Unrealized losses on investment |
| ( |
| | ||
Excess of tax over book depreciation |
| ( |
| ( | ||
ROU Asset | ( | — | ||||
ROU Liability | | — | ||||
Other |
| |
| | ||
| |
| | |||
Valuation allowance |
| –– |
| — | ||
Total deferred tax assets, net | $ | | | |||
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, management considers all available positive and negative evidence, including scheduled reversals of
31
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. No valuation allowance was recognized as of August 31, 2021 and August 31, 2020.
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
The Company will recognize interest and penalties related to unrecognized tax benefits as income tax expense. As of August 31, 2021, 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
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
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 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. The Company has taken advantage of the Employee Retention Credit (ERC), which is a refundable tax credit against certain employment taxes equal to
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 Internal Revenue Service concluded an examination for the Company’s federal tax return for the year ending August 31, 2016. The Internal Revenue Service concluded and issued a no change report for the August 31, 2016 federal tax return dated February 13, 2019. As of August 31, 2021, tax years 2018, 2019, and
32
2020 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 2017.
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 (two 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 and require minimum rental payments ranging from $
We determine if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset.
Right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement date. Certain of the leases contain extension options; however, the Company has not included such options as part of its right-of-use assets and lease liabilities because it does not expect to extend the leases. The Company measures and records a right-of-use asset and lease liability based on a discount rate equal to the Company’s estimated incremental borrowing rate for loans with similar collateral and duration.
We elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019, and therefore did not reassess (i) whether any expired or existing contracts are, or contain, leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases. We did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lease options to extend, or terminate, a lease, or to purchase the underlying asset. We have no land easements. For all asset classes, we elected to (i) not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less and (ii) not separate non-lease components from lease components, and we have accounted for combined lease and non-lease components as a single lease component.
Operating lease expense is comprised of the following:
(dollars in thousands)
| Year Ended August 31, | |||||
2021 |
| 2020 | ||||
Operating lease cost | $ | |
| $ | | |
Net operating lease cost | $ | |
| $ | | |
33
Minimum future rental payments under operating leases are as follows:
Years Ending August 31: |
| ||
2022 | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 | | ||
Thereafter |
| | |
$ | |
Rental expense for all operating leases for the years ended August 31, 2021 and 2020 was approximately $
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
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 Hunter Lease is a ten year triple net lease, which commenced on September 2, 2019 and ends on August 31, 2029 with an initial monthly rental rate of $
During fiscal 2021 and fiscal 2020, the Company paid approximately $
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.
34
The following table sets forth by level, within the fair value hierarchy, certain assets at estimated fair value as of August 31, 2021 and 2020:
| Quoted Prices in | Significant Other | Significant | |||||||||
Active Markets for | Observable | Unobservable | ||||||||||
Identical Assets | Inputs | Inputs | ||||||||||
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | |||||
August 31, 2021 |
|
|
|
|
|
|
|
| ||||
Marketable securities | $ | | | | $ | | ||||||
Liability for short sales of trading securities |
| |
| |
| |
| | ||||
August 31, 2020 |
|
|
|
|
|
| ||||||
Marketable securities | $ | | | | $ | | ||||||
Liability for short sales of trading securities |
| ( |
| |
| |
| ( | ||||
Note 11. Subsequent Events
Management has evaluated events subsequent to August 31, 2021, 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.
35
EXHIBIT INDEX
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On February 16, 2022, the Audit Committee (the “Audit Committee”) of the Board of Directors of EACO Corporation approved the engagement of Haskell White LLP (“Haskell”) to serve as the Company’s independent registered public accounting firm for the Company’s fiscal year ended August 31, 2021, effective as of February 17, 2022. Also on February 16, 2022, the Audit Committee dismissed Baker Tilly US, LLP (“Baker Tilly”) as the Company’s independent registered public accounting firm, effective as of February 17, 2022.
The report of Baker Tilly on the Company’s consolidated financial statements as of and for the fiscal year ended August 31, 2020 did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principle. Baker Tilly did not issue a report on the Company’s consolidated financial statements as of and for the fiscal year ended August 31, 2021.
During the two fiscal years ended August 31, 2021, and the subsequent interim period through February 17, 2022, there were no disagreements as described under Item 304(a)(1)(iv) of Regulation S-K with Baker Tilly on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Baker Tilly’s satisfaction, would have caused Baker Tilly to make reference to the subject matter thereof in connection with its reports on the financial statements of the Company for such years. In addition, during the two fiscal years ended August 31, 2021 and the subsequent interim period through February 17, 2022, there were no reportable events as described under Item 304(a)(1)(v) of Regulation S-K except the following events. As disclosed in Part I, Item 4 of the Company’s Form 10-Q for the quarters ended November 30, 2020 and May 31, 2021, the Company’s management determined that the Company’s internal controls over financial reporting were not effective as of the end of each respective period due to the following material weakness: the Company did not maintain effective controls over the financial statement closing process, including manual journal entries recorded in the preparation of the financial statements related to lease accounts, and certain inventory and accrued liability accounts. The Company’s controls do not include multiple required levels of review and approval for manual journal entries. This deficiency did not result in a material revision of any of the Company’s previously issued financial statements. However, if not addressed, the deficiency could result in material misstatement in the future. Accordingly, the management of the Company has determined that this control deficiency constitutes a material weakness. Baker Tilly also advised management of the need to significantly expand the scope of the Company’s audit to include additional analysis and testing of key reports generated by the Company’s IT system. Baker Tilly had not completed its expanded procedures prior to its dismissal.
During the two most recent fiscal years, and in the subsequent interim period through February 17, 2022, neither the Company nor anyone acting on its behalf has consulted with Haskell regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company’s financial statements, and either a written report was provided to the Company or oral advice was provided that Haskell concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. As required by Rule 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, who also serves as the Company’s principal financial officer. Based upon that evaluation, the Company’s Chief Executive Officer has concluded that the Company’s controls and procedures were not effective as of August 31, 2021, due to a material weakness 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.
36
(b) Management’s annual report on internal control over financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is intended 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.
The Company’s management, with the participation of its Chief Executive Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its report entitled “Internal Control-Integrated Framework (2013).” Based on that assessment under such criteria, management concluded that there was a material weakness in the Company’s internal control over financial reporting as of August 31, 2021, 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.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act. As such, this annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
(c) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the fourth quarter of the year ended August 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Set forth below is certain information, as of August 31, 2021, regarding our directors and executive officers, including information regarding the experience, qualifications, attributes or skills of each director that led the Board of Directors to conclude that such individual should serve on the Board.
Directors and Executive Officers
Directors
Each director serves a one-year term, or until such director’s successor has been elected and qualified.
Glen F. Ceiley, age 76, has served as EACO’s Chief Executive Officer and Chairman of the Board since 1999. Mr. Ceiley is also the Chief Executive Officer and Chairman of the Board of Bisco, and has held those positions since he founded Bisco in 1973. He also served as President of Bisco prior to June 2010. In addition, Mr. Ceiley is a former director of Data I/O Corporation, a publicly-held company that provides programming systems for electronic device manufacturers. Mr. Ceiley has served as a director of EACO since 1998. As the founder of Bisco with over 45 years of experience in that industry, Mr. Ceiley is uniquely qualified to provide insights into and guidance on the industry, and growth and development of the Company.
37
William L. Means, age 78, served as the Vice President of Information Technology of Bisco from 2001 until his retirement in June 2010. Prior to that, from 1997 to 2001, Mr. Means was Vice President of Corporate Development of Bisco. Mr. Means has served as a director of EACO since July 1999. He holds an M.B.A. degree from San Jose State University. Mr. Means provides extensive industry expertise to the Board, as well as a deep and broad understanding of the Company and its operations resulting from his years of service as an officer of Bisco.
Stephen Catanzaro, age 69, currently has an accounting and tax practice. Prior to that, Mr. Catanzaro served as the Chief Financial Officer of Allied Business Schools, Inc., a company that provides home study courses and distance education, from April 2004 until May 2018. He also served as the Chief Financial Officer of VM Restoration, Inc., a building restoration company, from September 2002 to February 2004, and the Chief Financial Officer of Bisco from September 1995 to March 2002. Mr. Catanzaro has served as a director of EACO since 1999. He holds a B.S. degree in Accounting from Lehman College of The City University of New York and an M.B.A. degree from Golden Gate University. Mr. Catanzaro offers to the Board valuable business and strategic insights obtained through his work in a variety of industries, as well as experience as a certified public accountant which is invaluable to his service in the Audit Committee. Mr. Catanzaro is serves as the Company’s interim audit committee chair due to the recent passing of the previous audit committee chair, Jay Conzen, on March 15, 2020.
Executive Officers
Each executive officer holds office at the discretion of the Company’s Board, or until the officer’s successor has been elected and qualified. See above for biographical information for Mr. Ceiley, our Chief Executive Officer and Chairman of the Board.
Donald S. Wagner, age 60, has served as the President of Bisco since June 2010 and as its Chief Operating Officer since November 2007. Prior to his promotion to President, Mr. Wagner also held the title of Executive Vice President of Bisco since November 2007. Mr. Wagner has worked at Bisco since 1994 in a number of other capacities, including as Vice President of Product Management. Prior to joining Bisco, Mr. Wagner worked in the defense division at Rockwell International. He holds a B.A. degree in Communications from California State University, Fullerton.
Michael Narikawa, age 41, has served as the Controller and the Principal Accounting Officer of EACO and Bisco since May 2014. Prior to his promotion as Controller, Mr. Narikawa served as Bisco’s Accounting Supervisor from February 2009 to April 2014. Prior to joining Bisco, he was a Senior Auditor at KPMG, LLP from June 2005 to December 2008. Mr. Narikawa has a B.S. degree in Business Administration with a concentration in Accountancy from California Polytechnic State University, San Luis Obispo.
Zach Ceiley, age 42, has served as the Executive Vice President of Bisco since December 2019. Prior to such promotion, Mr. Ceiley served as Vice President of Sales and Marketing of Bisco since September 2012 and was the Northern Regional Manager of Bisco from September 2010. Since he joined Bisco in February 2003, Mr. Ceiley has served the Company in a number of other capacities in the sales department, including as Cell Manager and Area Manager. Mr. Ceiley has a B.S. degree in Communications from the University of Colorado. Zach Ceiley is the son of Glen Ceiley, who is EACO’s Chairman of the Board, Chief Executive Officer and majority shareholder and Bisco’s Chief Executive Officer and Chairman of the Board.
CORPORATE GOVERNANCE
Code of Ethics
EACO has adopted a code of ethics applicable to its senior executive and financial officers. You may receive, without charge, a copy of the Financial Code of Ethical Conduct by contacting our Corporate Secretary, c/o Bisco Industries, Inc., at 5065 East Hunter Avenue, Anaheim, California 92807.
Concerns relating to accounting, internal controls or auditing matters should be brought to the attention of a member of our senior management or the Audit Committee as appropriate, and will be handled in accordance with the procedures established by the Audit Committee with respect to such matters.
38
Director Independence
EACO’s Board currently consists of the following directors: Stephen Catanzaro, Glen Ceiley, and William L. Means. The Board has determined that two of its three directors, Stephen Catanzaro and William L. Means, are independent as defined by the NASDAQ Stock Market’s Marketplace Rules. In addition to such rules, the Board considered transactions and relationships between each director (and his immediate family) and the Company to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent. As a result, the Board determined that Mr. Ceiley is not independent, as he is an executive officer of EACO and Bisco, a member of Bisco’s steering committee and the holder of a majority of the outstanding voting stock of the Company. Bisco’s steering committee handles the day to day operations of the Company, and Mr. Ceiley has been intimately involved with decision-making that directly affects the financial statements of the Company.
Board Structure
The Board does not have a policy regarding the separation of the roles of the Chief Executive Officer and Chairman of the Board as the Board believes it is in the best interest of the Company to make that determination based on the position and direction of the Company and the membership of the Board from time to time. Currently, Glen Ceiley, serves as the Chairman of the Board and CEO of both EACO and Bisco. The Board does not have a separate lead independent director, but the independent directors of the Company are actively involved in decision making by the Board. The Board has determined that the current structure is appropriate for the Company and enhances the Company’s ability to execute its business and strategic plans and makes the best use of the CEO’s knowledge of the Company and the industries that it serves, while maintaining strong independence over Board decisions and oversight through the involvement and participation of the independent directors.
Board Meetings and Committees
In accordance with the Bylaws of EACO, which empower the Board to appoint such committees as it deems necessary and appropriate, the Board has established an Audit Committee and an Executive Compensation Committee (the “Compensation Committee”). During the fiscal 2021, the Board of Directors and the various committees of the Board held the following number of meetings: Board of Directors – 4; Audit Committee – 4; and Compensation Committee. During fiscal 2021, no director attended fewer than 75% of the aggregate of the total number of meetings of the Board of Directors and the total number of meetings of any committees of the Board held while he was serving on the Board or such committee.
Audit Committee
The Audit Committee’s basic functions are to assist the Board in discharging its fiduciary responsibilities to the shareholders and the investment community in the preservation of the integrity of the financial information published by the Company, to maintain free and open means of communication between the Company’s directors, independent auditors and financial management, and to ensure the independence of the independent auditors. The Board has adopted a written charter for the Audit Committee, a copy of which was attached as Annex A to the Company’s proxy statement for the 2016 Annual Meeting of Shareholders, as filed with the SEC on April 12, 2016. The Audit Committee charter is not available on EACO’s website.
The members of the Audit Committee are Messrs. Catanzaro (Chairman) and Means. The Board has determined that each of Messrs. Catanzaro and Means is independent under the independence standards for audit committee members as set forth in the NASDAQ Stock Market’s Marketplace Rules and the applicable SEC rules. The Board has identified Mr. Catanzaro as the member of the Audit Committee who qualifies as an “audit committee financial expert” under applicable SEC rules and regulations governing the composition of the Audit Committee.
Compensation Committee
The Compensation Committee is generally responsible for establishing the salary and annual bonuses paid to executive officers of EACO and administering EACO’s equity incentive plans, if any, including granting stock options to officers and employees of EACO. The Compensation Committee has not adopted a formal charter. The current members of the Compensation Committee are Messrs. Glen Ceiley (Chairman) and William Means. The Board has determined that Mr. Means is independent under the independence standards for Compensation Committee members as set forth in the NASDAQ Stock Market’s Marketplace Rules. Mr. Ceiley is not an independent director.
39
Nomination of Directors
The Board does not have a Nominating Committee, but each director participates in the consideration of director nominees. Given the size and resources of EACO (and the large number of shares of common stock held by our majority shareholder), the Board believes that this approach is appropriate. The Board believes that having a separate committee would not enhance the nomination process. While the Board does not have a formal policy with regard to the consideration of diversity in identifying director nominees, it strives to nominate directors with a variety of complementary skills and backgrounds so that, as a group, the Board will possess the appropriate talent, skills, insight and expertise to oversee our business. These factors, and others as considered useful by the Board, are reviewed in the context of an assessment of the perceived needs of the Board at a particular point in time. As a result, the priorities and emphasis of the Board may change from time to time to take into account changes in business and other trends, and the portfolio of skills and experience of current and prospective directors. The Board periodically reviews the performance of each Board member and concludes whether or not the member should continue in their current capacity. EACO has not adopted a charter relating to the director nomination process, however, the Board will consider candidates for directors recommended by our shareholders who meet the eligibility requirements for submitting recommendations as set forth in EACO’s Bylaws. Eligible stockholders who seek to recommend a nominee must submit such recommendation in writing to the our Corporate Secretary (c/o Bisco Industries, Inc., at 5065 East Hunter Ave, Anaheim, California 92807), by the deadline for director nominations set forth in our last proxy statement, specifying the following information: (i) the name and address of the candidate; (ii) a brief biographical description, including the candidate’s occupation for at least five years; (iii) a statement of the qualifications of the candidate; and (iv) the additional information concerning the candidate and the shareholder proposing such candidate as required by EACO’s Bylaws. Such notice must be accompanied by a written consent of each candidate to being named as a nominee and to serve as a director if elected. Directors should possess qualities such as an understanding of the Company’s business and operations and corporate governance principles. In connection with its evaluation, the Board may request additional information from the candidate or the recommending shareholder, and may request an interview with the candidate. The Board has the discretion to decide which individuals to recommend for nomination as directors. No candidates for director nominations were submitted to the Corporate Secretary by any shareholder in connection with the election of directors at the Annual Meeting.
Risk Oversight
While our management has the primary responsibility for identifying and mitigating risks, the Board has the overall responsibility for the oversight of such risks, with a focus on the most significant risks facing the Company. The Board’s duties in this regard are supplemented by committees of the Board. In particular, the Audit Committee focuses on financial risk, including internal controls, and is responsible for discussing with management and our independent auditors policies with respect to risk assessment and risk management, including the process by which we undertake major financial and accounting decisions. Risks related to our compensation programs are reviewed by the Compensation Committee. In connection with its responsibilities relating to risk assessment, our full Board receives reports on risk management from senior officers of the Company, including the CEO of the Company, and from the Chairman of the Audit Committee, and periodically engages in discussions of the most significant risks that the Company is facing and how these risks are being managed. While the Company has not experienced any material cyber attack or breach, the Board is currently evaluating cyber security risks and has retained a third party consultant to assist it in this regard. Throughout the year, the Board will dedicate a portion of their meetings to review and discuss specific risk topics in greater detail.
Shareholder Communications
The Board has established a process by which shareholders may send written communications to the attention of the Board, any committee of the Board or any individual Board member, care of our Corporate Secretary. The name of any specific intended Board recipient should be noted in the communication. Our Corporate Secretary will be primarily responsible for collecting, organizing and monitoring communications from shareholders and, where appropriate depending on the facts and circumstances outlined in the communication, providing copies of such communications to the intended recipients. Communications will be forwarded to directors if they relate to appropriate and important substantive corporate or Board matters. Communications that are of a commercial or frivolous nature, or are offensive or otherwise inappropriate for the Board’s consideration will not be forwarded to the Board. Shareholders who wish to communicate with the Board can write to the Corporate Secretary at EACO Corporation, c/o Bisco Industries, Inc., at 5065 East Hunter Avenue, Anaheim, California 92807.
40
Item 11. Executive Compensation
The Compensation Committee is responsible for assisting with the establishment of the salary and annual bonuses paid to executive officers of EACO and administering EACO’s equity incentive plans, if any, including granting stock options to officers and employees of EACO. The Compensation Committee has not adopted a formal charter. The current members of the Compensation Committee are Messrs. Glen Ceiley and William Means.
The officers of EACO are Mr. Ceiley, the Company’s Chief Executive Officer and Chairman of the Board, and Mr. Michael Narikawa, the Company’s Controller and Principal Accounting Officer. Due to the nature of EACO’s operations and related consolidated financial results, no additional salary or other compensation for their service as officers of EACO was determined to be necessary, and no such compensation was provided to Mr. Ceiley or Mr. Narikawa during fiscal 2021 or fiscal 2020. However, both of them receive compensation from Bisco for their services provided to Bisco.
All compensation for the named executive officers for fiscal 2021 and fiscal 2020 was paid by Bisco. The compensation of named executive officers who serve as officers of Bisco are determined by Bisco’s Chairman of the Board, Glen Ceiley. Mr. Ceiley has received quarterly cash dividends in the amount of $19,125 on his shares of preferred stock of EACO.
Summary Compensation
The following table sets forth information regarding compensation earned from the Company (including from Bisco, our wholly-owned subsidiary) during fiscal 2021 and fiscal 2020 by (i) our Chief Executive Officer, and (ii) the two other most highly compensated executive officers who were employed by the Company (including Bisco) as of August 31, 2021 and whose total compensation exceeded $100,000 during that year. The officers listed below are collectively referred to as the “named executive officers” in this report.
| Fiscal |
|
|
| All Other |
| ||||||||
Name and Principal Position | Year | Salary | Bonus | Compensation | Total | |||||||||
Glen F. Ceiley |
| 2021 | $ | 224,000 | (1) | $ | 4,338 | $ | 3,847 | (2) | $ | 232,185 | ||
Chief Executive Officer and Chairman of the Board of EACO and Bisco |
| 2020 |
| 206,200 | (1) |
| 4,338 |
| 3,847 | (2) |
| 214,385 | ||
Donald S. Wagner |
| 2021 |
| 262,310 |
|
| 61,365 |
| 12,421 | (3) |
| 336,096 | ||
President and Chief Operating Officer of Bisco |
| 2020 |
| 250,535 |
|
| 41,126 |
| 12,034 | (3) |
| 303,695 | ||
Zachary Ceiley |
| 2021 |
| 191,607 |
|
| 56,726 |
| 11,522 | (3) |
| 259,855 | ||
Executive Vice President of Bisco |
| 2020 |
| 174,253 |
|
| 37,836 |
| 11,047 | (3) |
| 223,136 | ||
(1) | Includes $18,200 consulting fees payable to Glen Ceiley’s spouse, Barbara Ceiley, in each of fiscal 2021 and fiscal 2020. |
(2) | Consists of the Company’s matching contribution for Mr. G. Ceiley pursuant to the Company’s Section 401(k) plan. |
(3) | Includes (i) auto allowance of $6,696 payable to each of Messrs. Z. Ceiley and Wagner in fiscal 2021 and fiscal 2020; (ii) Section 401(k) matching contributions of $4,826 and $4,351 payable to Mr. Z. Ceiley in fiscal 2021 and fiscal 2020, respectively; and (iii) Section 401(k) matching contributions of $5,725 and $5,338 payable to Mr. Wagner in each of fiscal 2021 and fiscal 2020, respectively. |
Outstanding Equity Awards at Fiscal Year-End
The Company did not grant any equity awards during fiscal 2021 to any named executive officer, and no outstanding equity awards were held by the named executive officers at August 31, 2021.
Director Compensation
The Company pays $12,000 per year in cash to each director who is not employed by EACO or its subsidiary as compensation for their Board services. In addition, directors who do not receive a salary from EACO or its subsidiaries receive a fee of $600 for each Board meeting attended. The Chairman of the Audit Committee receives a fee of $800 per meeting attended. No additional fees are paid to directors for attendance at meetings of the Audit Committee or the Compensation Committee of the Board.
41
The following table sets forth the compensation of certain Company directors for the year ended August 31, 2021. (See the above “Summary Compensation” for information regarding Mr. Ceiley).
| Fees Earned or |
| ||||
Director | Paid in Cash | Total | ||||
Stephen Catanzaro | $ | 15,200 | $ | 15,200 | ||
William Means |
| 14,400 |
| 14,400 | ||
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The table below presents certain information regarding beneficial ownership of the Company’s common stock (the Company’s only voting security) as of May 6, 2022 (i) by each shareholder known to the Company to own more than five percent (5%) of the outstanding common stock, (ii) by each named executive officer and director of the Company, and (iii) by all directors and executive officers of the Company as a group. Under the rules of the SEC, the determinations of “beneficial ownership” of the Company’s common stock are based upon Rule 13d-3 under the Exchange Act. Under Rule 13d-3, shares will be deemed to be “beneficially owned” when a person has, either solely or with others, the power to vote or to direct the voting of shares and/or the power to dispose, or to direct the disposition of shares, or where a person has the right to acquire any such power within 60 days after the date such beneficial ownership is determined. Shares of the Company’s common stock that a beneficial owner has the right to acquire within 60 days are deemed to be outstanding for the purpose of computing the percentage ownership of such owner but are not deemed outstanding for the purpose of computing the percentage ownership of any other person.
Name and Address of |
| Shares of Common Stock |
| Percent of |
|
Beneficial Owner (1) | Beneficially Owned | Class(2) |
| ||
Stephen Catanzaro |
| — |
| — | |
Glen F. Ceiley(3) |
| 4,696,519 |
| 95.8 | % |
Jay Conzen |
| — |
| — | |
William L. Means |
| 322 |
| * | |
Donald Wagner |
| — |
| — | |
Zachary Ceiley |
| — |
| — | |
Michael Narikawa |
| — |
| — | |
All executive officers and directors as a group (7 persons)(3) |
| 4,696,841 |
| 95.8 | % |
* Less than 1%
(1) | The address for each person named in the table is c/o Bisco Industries, Inc., 5065 East Hunter Ave, Anaheim, California 92807. |
(2) | Based on 4,861,590 shares of common stock outstanding as of November 24, 2020. |
(3) | Includes (i) 4,656,519 shares of common stock held by the Trust; (ii) 40,000 shares of common stock issuable upon conversion of the 36,000 shares of Series A cumulative convertible preferred stock held by the Trust (assuming no accrued unpaid dividends). |
Item 13. Certain Relationships and Related Transactions and Director Independence
Certain Relationships and Related Transactions
Since September 1, 2018, except as described below or under Item 11 (Executive Compensation), there has not been, nor is there any proposed transaction, where we (or any of our subsidiaries) were or will be a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two fiscal years and in which any director, director nominee, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.
42
The Company leases the Glendale Heights Property and the Hunter Property under operating lease agreements with the Trust, which is a grantor trust of Glen Ceiley, the Company’s Chief Executive Officer, Chairman of the Board and majority shareholder. During fiscal 2021 and fiscal 2020, the Company paid approximately $1,106,000 and $809,000, respectively, of rent related to these leases.
On November 21, 2017, Bisco entered into the Chicago Lease with the Trust for the Glendale Heights Property, which consists of office and warehouse space in Glendale Heights, Illinois. The initial base monthly rent is $22,600, which is subject to a 2.5% annual increase.
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 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.
Item 14. Principal Accounting Services
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee is required to pre-approve all auditing services and permissible non-audit services, including related fees and terms, to be performed for the Company by its independent auditor, subject to the de minimus exceptions for non-audit services described under the Exchange Act, which are approved by the Audit Committee prior to the completion of the audit. The Audit Committee also considers whether the provision by its independent accounting firm of any non-audit related services is compatible with maintaining the independence of such firm. For fiscal 2021 and fiscal 2020, the Audit Committee pre-approved all services performed for the Company by the auditor.
Principal Accountant Fees
On February 16, 2022, the Audit Committee of the Company approved the engagement of Haskell to serve as the Company’s independent registered public accounting firm for the Company’s fiscal year ended August 31, 2021, effective as of February 17, 2022. On February 16, 2022, the Audit Committee dismissed Baker Tilly as the Company’s independent registered public accounting firm, effective as of February 17, 2022.
Baker Tilly served as the Company’s independent registered public accounting firm from November 1, 2020. Prior to that, Squar Milner served as the Company’s independent registered public accounting firm since fiscal year ended August 31, 2005. On November 1, 2020, the Company was notified that the audit practice of Squar Milner was combined with Baker Tilly in a transaction pursuant to which Squar Milner combined its operations with Baker Tilly and certain of the professional staff and partners of Squar Milner joined Baker Tilly either as employees or partners of Baker Tilly.
During fiscal 2021 and fiscal 2020, the Company paid Baker Tilly and Squar Milner the following amounts for the services set forth below:
Year Ended August 31, | ||||||
Fee Category |
| 2021 |
| 2020 | ||
Audit fees | $ | 117,300 | $ | 186,300 | ||
Audit related fees |
| — |
| — | ||
Tax fees |
| — |
| — | ||
All other fees |
| — |
| — | ||
Total fees | $ | 117,300 | $ | 186,300 | ||
During fiscal 2021, the Company did not pay Haskell any audit fees or any other fees.
43
Audit Fees
Audit fees consist of fees billed for professional services rendered in connection with the audit of the financial statements included in the Company’s annual reports on Form 10-K and for the reviews of the unaudited financial statements included in the Company’s quarterly reports on Form 10-Q for the quarters ended during the years ended August 31, 2021 and 2020 and for other regulatory filings for such fiscal years.
Audit-Related Fees
The Company was not billed for any audit-related fees by Baker Tilly or Haskell for the years ended August 31, 2021 and 2020. There were no other fees billed by Baker Tilly or Haskell during fiscal 2021 or fiscal 2020.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of this report:
1. Financial Statements.
Our consolidated financial statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of this report.
2. Financial Statement Schedules.
All financial schedules have been omitted because they are not required or are not applicable, or the required information is shown in our consolidated financial statements or notes thereto.
3. Exhibits.
EXHIBIT INDEX
Number |
| Exhibit |
|---|---|---|
3.1 | Articles of Incorporation of Family Steak Houses of Florida, Inc., as filed with the Florida Secretary of State on September 26, 1985. (Exhibit 3.01 to the Company’s Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) | |
3.2 | Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc., as filed with the Florida Secretary of State on March 26, 1986. (Exhibit 3.03 to the Company’s Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) | |
3.3 | Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc., as filed with the Florida Secretary of State on May 1, 1987. (Exhibit 3.04 to the Company’s Registration Statement on Form S-1, Registration No. 33-17620, is incorporated herein by reference.) | |
3.4 | ||
3.5 | ||
3.6 | ||
3.7 |
44
Number |
| Exhibit |
|---|---|---|
3.8 | ||
3.9 | ||
3.10 | ||
3.11 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 |
45
Number |
| Exhibit |
|---|---|---|
10.15 | ||
10.16 | ||
10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
21.1 | ||
31.1* | ||
32.1* | ||
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 |
* Filed herewith.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
July 1, 2022 | EACO Corporation |
/s/ Glen F. Ceiley | |
By: Glen F. Ceiley | |
Its: Chairman of the Board and Chief Executive Officer | |
(principal executive officer and principal financial officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated.
Signature |
| Title |
| Date |
/s/ Glen F. Ceiley | Chairman of the Board and Chief Executive Officer | 7/01/2022 | ||
Glen F. Ceiley | (principal executive officer and principal financial officer) | |||
/s/ Michael Narikawa | Controller (principal accounting officer) | 7/01/2022 | ||
Michael Narikawa | ||||
/s/ Steve Catanzaro | Director | 7/01/2022 | ||
Steve Catanzaro | ||||
/s/ William Means | Director | 7/01/2022 | ||
William Means |
47