10-Q 1 tv498392_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended May 31, 2018

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

For the transition period from _______ to _______

Commission File No. 000-14311

EACO CORPORATION

(Exact name of registrant as specified in its charter)

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

1500 NORTH LAKEVIEW LOOP

ANAHEIM, CALIFORNIA 92807

(Address of Principal Executive Offices)

(714) 876-2490

(Registrant’s Telephone No.)

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

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes x No ¨

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

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company x	Emerging growth company ¨

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

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

As of July 9, 2018, 4,861,590 shares of the registrant’s common stock were outstanding.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except for share and per share information)

(Unaudited)

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2018			2017			2018			2017
Revenues	$	51,723		$	40,282		$	138,935		$	114,773
Cost of revenues		36,647			28,759			99,231			82,123
Gross margin		15,076			11,523			39,704			32,650
Operating expenses:
Selling, general and administrative expenses		11,643			9,660			32,460			28,356
Income from operations		3,433			1,863			7,244			4,294

Other (expense) income:
Net (loss) gain on trading securities		(65	)		303			186			177
Interest and other income (expense)		(122	)		(40	)		(353	)		(76	)
Other (expense) income, net		(187	)		263			(167	)		101
Income before income taxes		3,246			2,126			7,077			4,395
Provision for income taxes		993			848			2,310			1,709
Net income		2,253			1,278			4,767			2,686
Cumulative preferred stock dividend		(19	)		(19	)		(57	)		(57	)
Net income attributable to common shareholders	$	2,234		$	1,259		$	4,710		$	2,629
Basic and diluted earnings per common share:	$	0.46		$	0.26		$	0.97		$	0.54
Basic and diluted weighted average common shares outstanding		4,861,590			4,861,590			4,861,590			4,861,590

See accompanying notes to unaudited condensed consolidated financial statements.

EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

	Three Months Ended May 31,				Nine Months Ended May 31,
	2018		2017		2018		2017
Net income	$	2,253	$	1,278	$	4,767	$	2,686
Other comprehensive gain (loss), net of tax:
Foreign translation gain (loss)		93		116		160		(3	)
Total comprehensive income	$	2,346	$	1,394	$	4,927	$	2,683

See accompanying notes to unaudited condensed consolidated financial statements.

EACO Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(Unaudited)

	May 31,		August 31,
	2018		2017*
ASSETS
Current Assets:
Cash and cash equivalents	$	2,977	$	3,870
Restricted cash, current		823		707
Trade accounts receivable, net		24,347		21,339
Inventory, net		29,471		26,487
Marketable securities, trading		2,678		1,596
Prepaid expenses and other current assets		1,858		452
Total current assets		62,154		54,451
Non-current Assets:
Property, equipment and leasehold improvements, net		9,927		9,256
Other assets		1,898		2,073
Total assets	$	73,979	$	65,780
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Trade accounts payable	$	16,614	$	13,364
Accrued expenses and other current liabilities		4,822		4,545
Liability for short sales of trading securities		823		707
Current portion of long-term debt		145		139
Total current liabilities		22,404		18,755
Non-current Liabilities:
Long-term debt		11,822		12,193
Other non-current liabilities		51		–
Total liabilities		34,277		30,948
Shareholders’ Equity:
Convertible preferred stock, $0.01 par value per share; 10,000,000 shares authorized; 36,000 shares outstanding (liquidation value $900)		1		1
Common stock, $0.01 par value per share; 8,000,000 shares authorized; 4,861,590 shares outstanding		49		49
Additional paid-in capital		12,378		12,378
Accumulated other comprehensive income		907		747
Retained earnings		26,367		21,657
Total shareholders’ equity		39,702		34,832
Total liabilities and shareholders’ equity	$	73,979	$	65,780

* Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2017 as filed with the U. S. Securities and Exchange Commission on November 22, 2017.

See accompanying notes to unaudited condensed consolidated financial statements.

EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

	Nine Months Ended
	May 31,
	2018			2017
Operating activities:
Net income	$	4,767		$	2,686
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		752			550
Bad debt expense		70			61
Change in inventory reserve		157			7
Net gain on trading securities		(186	)		(177	)
(Increase) decrease in:
Trade accounts receivable		(3,078	)		(413	)
Inventory		(3,141	)		(4,496	)
Prepaid expenses and other assets		(1,231	)		52
Increase (decrease) in:
Trade accounts payable		3,084			(981	)
Accrued expenses and other liabilities		328			(1,986	)
Net cash provided by (used in) operating activities		1,522			(4,697	)
Investing activities:
Purchase of property, equipment and leasehold improvements		(1,423	)		(8,306	)
(Purchase) sale of marketable securities, trading		(896	)		604
Net change in securities sold short		116			257
Change in restricted cash		(116	)		(257	)
Net cash used in investing activities		(2,319	)		(7,702	)
Financing activities:
(Payments) borrowings on revolving credit facility		(260	)		6,515
Preferred dividend		(57	)		(57	)
Bank overdraft		166			1,073
Borrowings of long-term debt		-			5,400
Payments on long-term debt		(105	)		-
Net cash (used in) provided by financing activities		(256	)		12,931
Effect of foreign currency exchange rate changes on cash and cash equivalents		160			(3	)
Net (decrease) increase in cash and cash equivalents		(893	)		529
Cash and cash equivalents - beginning of period		3,870			4,878
Cash and cash equivalents - end of period	$	2,977		$	5,407
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	2,241		$	2,833
Cash paid for interest	$	375		$	75

See accompanying notes to unaudited condensed consolidated financial statements.

EACO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2018

Note 1. Organization and Basis of Presentation

EACO Corporation (“EACO”), incorporated in Florida in September 1985, is a holding company primarily comprised of its wholly-owned subsidiary, Bisco Industries, Inc. (“Bisco”). Bisco was incorporated in Illinois in 1974 and is a distributor of electronic components and fasteners with 48 sales offices and seven distribution centers located throughout the United States and Canada. Bisco supplies parts used in the manufacture of products in a broad range of industries, including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment and marine industries.

Note 2. Significant Accounting Policies and Significant Recent Accounting Pronouncements

Use of Estimates

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

Basis of Presentation

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations for presentation of interim financial information. Therefore, the condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended August 31, 2017 (“fiscal 2017”). The condensed consolidated balance sheet as of August 31, 2017 and related disclosures were derived from the audited consolidated financial statements as of August 31, 2017. Operating results for the three and nine months ended May 31, 2018 are not necessarily indicative of the results that may be expected for future quarterly periods or the entire fiscal year.

Principles of Consolidation

The consolidated financial statements for all periods presented include the accounts of EACO, its wholly-owned subsidiary, Bisco, and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited (all of which are collectively referred to herein as the “Company”, “we”, “us” and “our”). All significant intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Trade Accounts Receivable, Net

Trade accounts receivable are carried at original invoice amount, less an estimate for an allowance for doubtful accounts. Management determines the allowance for doubtful accounts by identifying probable credit losses in the Company’s accounts receivable and reviewing historical data to estimate the collectability on items not yet specifically identified as problem accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received. A trade account receivable is considered past due if any portion of the receivable balance is outstanding if past due more than 30 days. The Company does not charge interest on past due balances. The allowance for doubtful accounts was $111,000 at May 31, 2018 and August 31, 2017.

Inventories, Net

Inventory consists primarily of electronic fasteners and components, and is stated at the lower of cost or estimated net realizable value. Cost is determined using the average cost method. Inventories are presented net of a reserve for slow moving or obsolete items of $1,377,000 and $1,220,000 at May 31, 2018 and August 31, 2017, respectively. The reserve is based upon management’s review of inventories on-hand over their expected future utilization and length of time held by the Company.

Securities Sold Short

Securities sold short represent transactions in which the Company sells a security borrowed from the broker, which it is obligated to purchase and deliver back to the broker. The initial value of the underlying security is recorded as a liability, and is adjusted to market value at each reporting period, with unrealized appreciation or depreciation being recorded for the change in value of the open short position. The Company records a realized gain or loss when the short position is closed. By entering into short sales, the Company bears the market risk of an unfavorable increase in the price of the security sold short in excess of the proceeds received. The market value of open short positions is separately presented as a liability in the consolidated balance sheets.

The Company is required to establish a margin account with the lending broker equal to the market value of open short positions. As the use of such funds is restricted while the short sale is outstanding, the balance of this account is classified as restricted cash, current in the consolidated balance sheets. The restricted cash related to securities sold short was $823,000 and $707,000 at May 31, 2018 and August 31, 2017, respectively.

Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of the impairment review, assets are measured by comparing the carrying amount to future net cash flows. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their estimated fair values.

Income Taxes

Deferred taxes on income result from temporary differences between the reporting of income for financial statement and tax reporting purposes. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or all of the deferred tax asset will not be realized. In making such determination, the Company considers all available positive and negative evidence, including, but not limited to, scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.

We provide tax contingencies, if any, for federal, state, local and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development of these reserves requires judgments and estimates regarding tax issues, potential outcomes and timing. Actual results could differ from those estimates.

Revenue Recognition

The Company generally recognizes revenue at the time of product shipment, as the Company’s shipping terms are generally FOB shipping point. Revenue is considered to be realized or realizable and earned when there is persuasive evidence of a sales arrangement in the form of an executed contract or purchase order, the product has been shipped, the sales price is fixed or determinable, and collectability is reasonably assured.

Earnings Per Common Share

Basic earnings per common share for the three and nine months ended May 31, 2018 and 2017 were computed based on the weighted average number of common shares outstanding during each respective period. Diluted earnings per share for those periods have been computed based on the weighted average number of common shares outstanding, giving effect to all potentially dilutive common shares that were outstanding during the respective periods (See Note 4).

Foreign Currency Translation and Transactions

Assets and liabilities recorded in functional currencies other than the U.S. dollar (Canadian dollars for Bisco’s Canadian subsidiary) are translated into U.S. dollars at the period-end rate of exchange (monetary items) or translated at historical rates (nonmonetary items). Revenue and expenses are translated at the weighted-average exchange rates for the periods ended May 31, 2018 and 2017. The resulting translation adjustments are charged or credited directly to accumulated other comprehensive income (loss). The average exchange rates for the quarters ended May 31, 2018 and 2017 were $0.78 and $0.74, respectively. The average exchange rates of Canadian dollars to U.S. dollars for the nine months ended May 31, 2018 and 2017 were $0.79 and $0.75, respectively.

Concentrations

Net sales to customers outside the United States were approximately 9% of revenues for each of the nine months ended May 31, 2018 and 2017, and related accounts receivable were approximately 11% of total accounts receivable for each period at May 31, 2018 and 2017.

No single customer accounted for more than 10% of revenues for the three and nine months ended May 31, 2018 or 2017.

Significant Recent Accounting Pronouncements

In August 2015, the Financial Accounting Standards Board (“FASB”) deferred the effective date of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. We will adopt this guidance during the first quarter of the fiscal year ending August 31, 2019 (“fiscal 2019”). The new guidance is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We have established a cross-functional team to assess the potential impact of the new revenue standard. The assessment process consists of reviewing its current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts and identifying appropriate changes to the business processes, systems and controls to support revenue recognition and disclosure requirements under the new standard. We are currently evaluating the potential impact on our business processes, systems, controls and our consolidated financial statements of the new revenue standard and do not anticipate significant changes to our statement of operations. Our assessment will be completed during fiscal 2019 at which time the method of adoption will be selected.

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory.” This guidance is part of the “Simplification Initiative” to identify and re-evaluate areas where the generally accepted accounting principles may be complex and cumbersome to apply. This guidance will require that inventory be stated at the lower of cost or net realizable value as opposed to the lower of cost or market. Net realizable value is the estimated selling price for the inventory less completion, disposal and transportation costs. This guidance became effective for fiscal years beginning after December 15, 2016. The Company adopted this statement on September 1, 2017, and its impact on the results of operations and financial position did not have a material impact on the Company’s results of operations or financial position.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” The guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. This guidance became effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. The Company adopted this statement on September 1, 2017, and is properly reported in the Company’s balance sheets.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which will require a lessee to recognize assets and liabilities with lease terms of more than 12 months. Both capital and operating leases will need to be recognized on the balance sheet. This guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating this statement and its impact on the Company’s results of operations or financial position.

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. This guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating this statement and its impact on the Company’s results of operations or financial position.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This standard requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under a retrospective transition approach. The guidance will become effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company is adopting the guidance of this standard effective September 1, 2018 for fiscal year ending August 31, 2019.

Note 3. Debt

The Company has a $10,000,000 line of credit agreement with Community Bank, N.A. Borrowings under this agreement bear interest at the bank’s reference rate (4.75% at May 31, 2018 and 4.25% at August 31, 2017). Borrowings are secured by substantially all assets of the Company and its subsidiaries. The credit agreement, expires in March 2019. The amounts outstanding under this line of credit as of May 31, 2018 and August 31, 2017 were $6,668,000 and $6,967,000, respectively. Availability under the line of credit was $3,332,000 and $3,033,000 at May 31, 2018 and August 31, 2017, respectively.

The line of credit agreement contains certain covenants, including the maintenance of certain financial ratios. As of May 31, 2018 and August 31, 2017, the Company was in compliance with all such financial covenants.

On May 15, 2017, the Company entered into a $5,400,000 loan agreement with Community Bank, N.A. The proceeds of the loan were used to purchase the building that houses the Company’s corporate headquarters and distribution center located in Anaheim, California (“Lakeview Property”). This loan is payable in 35 regular monthly payments of $27,142 and one last payment of $5,001,607 due on the maturity date of the loan on May 16, 2020. The loan is secured by a deed of trust to the Lakeview Property and bears a variable interest rate that is 1.70% plus one year LIBOR updated based on one year LIBOR, no more than once in any 12 month period. At May 31, 2018 and August 31, 2017, the one year LIBOR was 1.79%. At May 31, 2018, the outstanding balance of this loan was $5,261,000.

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

Note 4. Earnings per Share

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

	Three Months Ended May 31,						Nine Months Ended May 31,
	2018			2017			2018			2017
EPS:
Net income	$	2,253		$	1,278		$	4,767		$	2,686
Less: accrued preferred stock dividends		(19	)		(19	)		(57	)		(57	)
Net income available for common shareholders	$	2,234		$	1,259		$	4,710		$	2,629

Earnings per common share – basic and diluted	$	0.46		$	0.26		$	0.97		$	0.54

For the three and nine months ended May 31, 2018 and 2017, 40,000 potential common shares (issuable upon conversion of 36,000 shares of the Company’s Series A cumulative convertible preferred stock) have been excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive since the conversion price was greater than the average market price of the common stock.

Note 5. Related Party Transactions

The Company leases buildings under operating lease agreements from a grantor trust (the “Trust”) that is beneficially owned by the Company’s majority shareholder, who is also the Company’s Chairman and CEO. During the three months ended May 31, 2018 and 2017, the Company incurred approximately $68,000 and $120,000, respectively, of expense related to these leases.

On November 21, 2017, the Company entered into a Commercial and Industrial Lease Agreement (the “Lease”) with the Trust, 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 Lease is a ten year lease with an initial monthly rental rate of $22,600, which is subject to annual rent increases of approximately 2.5% as set forth in the Lease.

Within the next two years, the Company plans to relocate its corporate headquarters and Anaheim distribution center to an 80,000 square foot facility in Anaheim, California that is owned by the Trust. The Company plans to enter into a new lease with the Trust in the near future concerning such facility.

Note 6. Income Taxes

The Company accounts for income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered, and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that other than deferred tax assets associated with certain state net operating losses and capital losses, net deferred tax assets will more likely than not be utilized. Therefore, a valuation allowance has been established against only those assets related to state net operating losses and capital losses.

During the three and nine months ended May 31, 2018, the Company recorded an income tax provision of $993,000 and $2,310,000, resulting in an effective tax rate of 30.6% and 32.6%, respectively. For the three and nine months ended May 31, 2017, the Company recorded income tax provision of $848,000 and $1,709,000 , resulting in an effective tax rate of 39.9% and 38.9%, respectively. The current period effective tax rate differs from the current statutory rate of 21% primarily due to the three and nine months ended May 31, 2018 and 2017 extending into both calendar years 2017 and 2018, creating a blended tax rate. The difference in the effective tax rate is also attributed to the valuation allowance against certain deferred tax assets, state income tax expenses and permanent book to tax differences.

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

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118"), which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740. To the extent that a company's accounting for certain income tax effects of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. We recorded the effects of the Act using our best estimates and the information available to us through the date the financial statements were issued. However, our analysis is ongoing and as such, the income tax effects that we have recorded are provisional.

At May 31, 2018, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances. We have not been able to make a reasonable estimate for the one-time transition tax. and continue to account for those items based on our existing accounting under ASC 740, “Income Taxes”. For the items for which we were able to determine a reasonable estimate, we recognized a provisional amount of $141,591, which is included as a component of income tax expense from continuing operations.

Prior to the reporting period in which the Act was enacted, the Company did not recognize a deferred tax liability related to unremitted foreign earnings because it overcame the presumption of the repatriation of foreign earnings. Upon enactment, the Act imposes a tax on certain foreign earnings and profits at various tax rates. Based on the Company’s facts and circumstances, it was not able to determine a reasonable estimate of the tax liability for this item for the reporting period in which the Act was enacted by the time the financial statements for that reporting period were issued; that is, the Company did not have the necessary information available, prepared, or analyzed to develop a reasonable estimate of the tax liability for this item (or evaluate how the Act would impact the Company’s existing accounting position to indefinitely reinvest unremitted foreign earnings). As a result, the Company did not include a provisional amount for this item in its financial statements that were issued during the reporting period in which the Act was enacted, but would do so in its future financial statements issued for subsequent reporting periods, beginning with the first reporting period falling within the measurement period by which the necessary information became available, prepared, or analyzed in order to develop the reasonable estimate and ending with the first reporting period within the measurement period in which the Company was able to obtain, prepare, and analyze the necessary information to complete the accounting under ASC 740.

Note 7. Commitments and Contingencies

From time to time, we may be subject to legal proceedings and claims which arise in the normal course of our business. Any such matters and disputes could be costly and time consuming, subject us to damages or equitable remedies, and divert our management and key personnel from our business operations. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Note 8. Subsequent Events

Management has evaluated events subsequent to May 31, 2018 through the date that these unaudited condensed consolidated financial statements are being filed with the SEC, for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statements

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

Overview

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

EACO is a holding company primarily comprised of its wholly-owned subsidiary, Bisco. Bisco is a distributor of electronic components and fasteners with 48 sales offices and seven distribution centers located throughout the United States and Canada. Bisco supplies parts used in the manufacture of products in a broad range of industries, including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment and marine industries.

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

Critical Accounting Policies

There have been no changes to the Company’s critical accounting policies for the three months ended May 31, 2018. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended August 31, 2017 as filed with the SEC on November 22, 2017.

Results of Operations

Comparison of the Three Months Ended May 31, 2018 and 2017

Revenues and Gross Profit ($ in thousands)

	Three Months Ended May 31,
	2018			2017			$ Change		% Change
Revenues	$	51,723		$	40,282		$	11,441		28.4	%
Cost of revenues		36,647			28,759			7,888		27.4	%
Gross margin	$	15,076		$	11,523		$	3,553		30.8	%
Percent of revenues		29.1	%		28.6	%				0.5	%

Revenues consist primarily of sales of component parts and fasteners, but also include, to a lesser extent, kitting charges and special order fees, as well as freight charged to customers. The increase in revenues in the three months ended May 31, 2018 (“Q3 2018”), as compared to the three months ended May 31, 2017 (“Q3 2017”), was largely due to a higher volume of product sales, increased sales department headcount over prior year quarter, and increased productivity from the Company’s employees. Revenues have also increased due to the Company focusing on relationship building programs with current and potential customers and vendors.

The gross margins in Q3 2018 increased slightly by 0.5% when compared to Q3 2017. This increase was primarily due to mix of products sold in Q3 2018 compared to Q3 2017 and gaining favorable margins through our supply chain management. Increases in the margins are also due to the Company focusing on relationship building with key customers and vendors.

Selling, General and Administrative Expenses ($ in thousands)

	Three Months Ended May 31,
	2018			2017			$ Change		% Change
Selling, general and administrative expenses	$	11,643		$	9,660		$	1,983		20.5	%
Percent of revenues		22.5	%		24.0	%				(1.5	)%

Selling, general and administrative expense (“SG&A”) consists primarily of payroll and related expenses for the Company’s sales and administrative staff, professional fees, including accounting, legal and technology costs and expenses, and sales and marketing costs. SG&A in Q3 2018 increased from Q3 2017 largely due to an increase in employee headcount, annual raises, and to a lesser extent, due to rent escalation in leased properties, increases in IT consulting fees, and higher depreciation expense in the current quarter. SG&A as a percent of revenue in Q3 2018 decreased from Q3 2017 primarily due to the Company being able to increase sales with current and new customers without having to incur additional significant SG&A expenses.

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

	Three Months Ended May 31,						$			%
	2018			2017			Change			Change
Other (expense) income:
Net (loss) gain on trading securities	$	(65	)	$	303		$	(368	)		(121.5	)%
Interest (expense), net		(122	)		(40	)		(82	)		205.0	%
Other (expense) income, net	$	(187	)	$	263		$	(450	)		(171.1	)%
Total other income (expense), net as a percent of revenues		(0.4	)%		0.7	%

Other (expense) income, net primarily consists of income or losses on trading in short-term marketable equity securities of publicly-held corporations, interest related to the Company’s debt obligations, and gains and losses associated with sales of capital assets. The Company’s investment strategy consists of both long and short positions, as well as utilizing options designed to improve returns. During Q3 2018, the Company recognized a net loss of $65,000 as compared to a net gain of $303,000 in Q3 2017 in net realized and unrealized gains. The trading securities losses in Q3 2018 was primarily due to timing of sales and purchases and general market climate of short and long positions during the period.

Interest and other expense increased in Q3 2018 compared to Q3 2017 was primarily due to an increase in the Company’s line of credit balance with Community Bank, an increase in the bank reference rate, and an increase in long-term debt, which was primarily related to the Company’s $5.4 million term loan from Community Bank obtained in May 2017 in connection with the Company’s acquisition of the Lakeview Property.

Income Tax Provision ($ in thousands)

	Three Months Ended May 31,						$		%
	2018			2017			Change		Change
Income tax provision	$	993		$	848		$	145		17.1	%
Percent of pre-tax income		30.6	%		39.9	%				(9.3	)%

The provision for income taxes increased by $145,000 in Q3 2018 over the prior year period. This increase was primarily due to higher taxable income in the current quarter as compared to the prior year period. The percent of pre-tax income decreased from 39.9% at Q3 2017 to 30.6% for Q3 2018. The decrease in the rate was primarily due to the Tax Cut and Jobs Act effective as of January 1, 2018, which enacted significant changes to U.S. tax and related laws. Some of the provisions of the new tax law affecting corporations include, but are not limited to a reduction of the federal corporate income tax rate from 35% to 21%, limiting the interest expense deduction, expensing of cost of acquired qualified property and eliminating the domestic production activities deduction. See note 7.

Comparison of the Nine Months Ended May 31, 2018 and 2017

Revenues and Gross Profit ($ in thousands)

	Nine Months Ended May 31,
	2018			2017			$ Change		% Change
Revenues	$	138,935		$	114,773		$	24,162		21.1	%
Cost of revenues		99,231			82,123			17,108		20.8

Gross profit	$	39,704		$	32,650		$	7,054		21.6	%
Percent of revenues		28.6	%		28.4	%				0.2	%

The increase in revenues in the nine months ended May 31, 2018 as compared to the nine months ended May 31, 2017 was largely due to higher unit sales in the current period compared to the prior year period, resulting from the Company focusing on improving and expanding its supply chain team, which has enabled the Company to effectively target and purchase inventory with higher turnover rates. Further, the increase was due to a higher volume of product sales, and increased sales department headcount over the prior year period. Revenues have also increased due to the Company focusing on relationship building programs with current and potential customers and vendors and an increase in spending in the military and aerospace industry.

The gross margin as a percent of revenue remained relatively consistent with the prior year period, increasing slightly by 0.2%. The increase in gross margins in the nine months ended May 31, 2018 as compared to the nine months ended May 31, 2017 is primarily due to mix of products sold.

Selling, General and Administrative Expenses ($ in thousands)

	Nine Months Ended May 31,
	2018			2017			$ Change		% Change
Selling, general and administrative expenses	$	32,460		$	28,356		$	4,104		14.5	%
Percent of revenues		23.4	%		24.7	%				(1.3	)%

SG&A in the nine months ended May 31, 2018 increased from the prior year period largely due to an increase in annual employee wage raises, increase in employee headcount, and to a lesser extent, due to larger leased properties which had rent escalations. SG&A as a percent of revenue in Q3 2018 decreased from Q3 2017 primarily due to the Company being able to increase sales with current and new customers without having to incur additional significant SG&A expenses.

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

	Nine Months Ended May 31,
	2018			2017			$ Change			% Change
Other income (expense):
Net gain on trading securities	$	186		$	177		$	9			5.1	%
Interest (expense), net		(353	)		(76	)		(277	)		364.5	%

Other (expense) income, net	$	(167	)	$	101		$	(66	)		(65.3	)%
Other (expense) income, net as a percent of revenues		(0.1	)%		0.0	%					(0.1	)%

During the nine months ended May 31, 2018, the Company recognized a net gain of $186,000 as compared to a net gain of $177,000 in the nine months ended May 31, 2017 in net realized and unrealized gains. The increase in trading securities for the current nine month period was primarily due to timing of sales and purchases and general market climate of short and long positions during the year.

Interest and other expense increased in the nine months ended May 31, 2018 compared to the prior year period due to an increase in the Company’s line of credit balance with Community Bank, an increase to the bank reference rate for the line of credit, and an increase in long-term debt related to the Lakeview Property, which was not purchased until May of 2017.

Income Tax Provision ($ in thousands)

	Nine Months Ended May 31,
	2018			2017			$ Change		% Change
Income tax provision	$	2,310		$	1,709		$	601		35.2	%
Percent of pre-tax income		32.6	%		38.9	%				(6.3	)%

The provision for income taxes increased by $601,000 in the nine month period ended May 31, 2018 over the prior year period. This was primarily the result of higher taxable net income in the current period as compared to the prior year period, which was offset in part by a reduction in the corporate tax rate. The percent of pre-tax income decreased from 38.9% to 32.6% when comparing the nine months ended May 31, 2017 to May 31, 2018. The decrease in the rate was primarily due to the Tax Cut and Jobs Act effective as of January 1, 2018, which enacted significant changes to U.S. tax and related laws. Further, the decrease in the rate is due to an increase in deferred tax assets and permanent deductible expense items during the nine months ended May 31, 2018.

Liquidity and Capital Resources

The Company has historically been funded from positive cash flow from its operations, as well as from borrowings under the Company’s line of credit. As of May 31, 2018 and August 31, 2017, the Company had approximately $2,977,000 and $3,870,000 of cash and cash equivalents, respectively. The Company has a $10,000,000 line of credit agreement with Community Bank. Borrowings under this agreement bear interest at the bank’s reference rate (4.75% at May 31, 2018 and 4.25% at August 31, 2017). Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The line of credit agreement expires in March 2019. The amounts outstanding under this line of credit as of May 31, 2018 and August 31, 2017 were $6,668,000 and $6,967,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of May 31, 2018 and August 31, 2017, the Company was in compliance with all such covenants.

On May 15, 2017, the Company entered into a $5,400,000 loan agreement with Community Bank. The proceeds of the loan were used to purchase the Lakeview Property that houses the Company’s corporate headquarters and distribution center located in Anaheim, California. This loan is payable in 35 regular monthly payments of $27,142 and one irregular last payment of $5,001,607 due on the maturity date of the loan on May 16, 2020. The loan is secured by a deed of trust to the Lakeview Property and bears interest at one year LIBOR (1.79% at May 31, 2018) plus 1.70%. At May 31, 2018, the outstanding balance of this loan was $5,261,000. EACO has entered into a commercial guaranty agreement, pursuant to which EACO is the guarantor of both Bisco’s $10,000,000 line of credit and the $5,400,000 loan.

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

The Company also held $2,678,000 and $1,596,000 of marketable securities at May 31, 2018 and August 31, 2017, respectively, which could be sold, if needed.

Cash Flows from Operating Activities

Cash provided by operating activities was $1,522,000 for the nine months ended May 31, 2018 as compared with cash used in operations of $4,697,000 for the nine months ended May 31, 2017. The current period cash provided by operating activities was primarily due to the increase in both net income and trade accounts payable, which was largely related to increased revenues in the nine months ended May 31, 2018. This was partially offset by increases in trade accounts receivable, inventory, and prepaid inventory in the current period. The prior year cash used in operating activities was primarily due to the pay down of accrued expenses and an increase in inventories.

Cash Flows from Investing Activities

Cash used in investing activities was $2,319,000 for the nine months ended May 31, 2018 as compared with cash used in such activities of $7,702,000 for the nine months ended May 31, 2017. The decrease in cash used in investing activities in the current year period compared to the prior year period was primarily due to the Company purchasing the Lakeview Property during the nine months ending May 31, 2017.

Cash Flows from Financing Activities

Cash used by financing activities for the nine months ended May 31, 2018 was $256,000 as compared with cash provided by financing activities of $12,931,000 for the nine months ended May 31, 2017. The decrease in cash provided by financing activities in the current year period as compared to the prior year period is primarily due to larger borrowings of $6,515,000 on the Company’s line of credit and borrowings of long-term debt of $5,400,000 used to purchase the Lakeview Property during the period ended May 31, 2017.

Off-Balance Sheet Arrangements

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

Contractual Financial Obligations

In addition to using cash flow from operations, the Company finances its operations through borrowings under its line of credit. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transactions, with the result being that amounts owed under debt agreements and capital leases are recorded as liabilities on the accompanying consolidated balance sheets while lease obligations recorded as operating leases are disclosed in the notes to the consolidated financial statements and management’s discussion and analysis of financial condition and results of operations in the Company’s annual report on Form 10-K for the year ended August 31, 2017 as filed with the SEC on November 22, 2017.

Within the next two years, the Company plans to relocate its corporate headquarters and Anaheim distribution center to an 80,000 square foot facility in Anaheim, California that is owned by the Trust. The Company has not executed a lease for such facility, however p lans to enter into a new lease with the Trust in the near future.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

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

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

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Our business is subject to a number of risks, some of which are discussed below. Other risks are presented elsewhere in this report and in our other filings with the SEC, including our Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K . 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.

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

As a result of the continuing economic uncertainties, our operating results, and the economic strength of our customers and suppliers, are increasingly difficult to predict. Sales of our products are affected by many factors, including, among others, general economic conditions, interest rates, inflation, liquidity in the credit markets, unemployment trends, geopolitical events, and other factors. Although we sell our products to customers in a broad range of industries, any significant weakening of economic conditions on a global scale has in the past caused and may in the future cause some of our customers to experience a slowdown, which could adversely effect 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.

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

As of June 30, 2018, Glen Ceiley, our Chairman and CEO, beneficially owned or controled approximately 97.9% of our outstanding voting stock. As a result, Mr. Ceiley is able to exert significant influence over the outcome of almost all corporate matters, including significant corporate transactions requiring a stockholder vote, such as a merger or a sale of the Company or our assets. This concentration of ownership and influence in management and board decision-making could also harm the price of our common stock by, among other things, discouraging a potential acquirer from seeking to acquire shares of our common stock (whether by making a tender offer or otherwise) or otherwise attempting to obtain control of the Company.

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

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

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 supply agreements are generally terminable at the suppliers’ discretion.

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

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

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

If we fail to maintain an effective system of internal controls over financial reporting or experience additional 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, deficiencies in the process related to the preparation of our financial statements, segregation of duties, sufficient control in the area of financial reporting oversight and review, and appropriate personnel to ensure the complete and proper application of GAAP as it relates to certain routine accounting transactions. Although we believe we have addressed these material weaknesses, we may experience material weaknesses or significant deficiencies in the future and may fail to maintain a system of internal control over financial reporting that complies with the reporting requirements applicable to public companies in the United States. Our failure to address any deficiencies or weaknesses in our internal control over financial reporting or to properly maintain an effective system of internal control over financial reporting could impact our ability to prevent fraud or to issue our financial statements in a timely manner that presents fairly, in accordance with GAAP, our financial condition and results of operations. The existence of any such deficiencies and/or weaknesses, even if cured, may also lead to the loss of investor confidence in the reliability of our financial statements, could harm our business and negatively impact the trading price of our common stock. Such deficiencies or material weaknesses may also subject us to lawsuits, investigations and other penalties.

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 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 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 based on market conditions and trends. We may continue to 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 Community Bank. The agreement is secured by substantially all of Bisco’s assets and is guaranteed by EACO. 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.

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

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

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

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

Our strategy of expanding into new geographic areas could be costly.

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 and profitable. Based on our analysis of demographics in the United States, Canada and Mexico, we currently estimate there is potential market opportunity in North America to support additional sales offices. We cannot guarantee that our estimates are accurate or that we will open enough offices to capitalize on the full market opportunity or that any new offices will be successful or profitable in the near future, or at all. In addition, a particular local market’s ability to support a sales office may change because of a 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. Our current business strategy focuses on opening a specified number of new sales offices each year, and quickly growing each new sales office. Given the recent economic slowdown, we may not be able to open or grow new offices at our projected or desired rates or hire the qualified sales personnel necessary to make such new offices successful. Failure to do so could negatively impact our long-term growth and market share.

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

Our new sales offices do not typically achieve operating results comparable to our existing offices until after several years of operation. The added expenses relating to payroll, occupancy, and transportation costs can impact our ability to generate earnings. In addition, offices in new geographic areas face additional challenges to achieving profitability. 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.

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

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

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

Our ability to satisfy our cash needs depends on our ability to generate cash from operations and to access our line of credit and the capital markets, which are subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our cash and cash equivalents at May 31, 2018 was approximately $3.0 million. The total outstanding on our line of credit as of May 31, 2018 was approximately $6.7 million, which the line of credit is secured by substantially all of Bisco’s assets. Our ability to continue to draw on our line of credit is subject to our satisfaction of certain covenants contained in such agreement. As such, we may need to pursue additional debt or equity financing, which funding may not be available on acceptable terms, on a timely basis or at all. The securities to 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.

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

There is currently no established trading market for our common stock, and the volume of any stock sales has generally been low. As of May 31, 2018, the number of shares held by non-affiliates of Mr. Ceiley was less than 150,000 shares. If Mr. Ceiley or any other shareholder sells or seeks to sell a substantial number of his shares of our common stock in the future, the market price of our common stock could decline. The perception among investors that these sales may occur could produce the same effect. Due to the limited available public float, certain investors may not be able or willing to invest in the Company’s securities, which could also impact the market price of our common stock.

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

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

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

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

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

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

SIGNATURES

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

	EACO CORPORATION
	(Registrant)

Date: July 13, 2018	/s/ Glen Ceiley
	Glen Ceiley
	Chief Executive Officer
	(Principal Executive Officer & Principal Financial Officer)

	/s/ Michael Narikawa
	Michael Narikawa
	Controller
	(Principal Accounting Officer)

EXHIBIT INDEX

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