UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices)
(
(Registrant’s Telephone Number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
As of July 12, 2024,
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, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Net sales | $ | | $ | | $ | | $ | | ||||
Cost of sales |
| |
| |
| |
| | ||||
Gross margin |
| |
| |
| |
| | ||||
Operating expenses: |
|
|
|
|
|
| ||||||
Selling, general and administrative expenses |
| |
| |
| |
| | ||||
Impairment on termination of lease | – | – | | – | ||||||||
Income from operations |
| |
| |
| |
| | ||||
|
|
|
| |||||||||
Other income (expense): |
|
|
|
| ||||||||
Net (loss) gain on trading securities |
| ( |
| |
| ( |
| | ||||
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 earnings per share: | $ | | $ | | $ | | $ | | ||||
Diluted earnings per share: | $ | | $ | | $ | | $ | | ||||
Basic weighted average common shares outstanding |
| |
| |
| |
| | ||||
Diluted weighted average common shares outstanding | | | | | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
EACO Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
May 31, | May 31, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive gain (loss), net of tax: | ||||||||||||
Foreign translation gain (loss) | | ( | ( | ( | ||||||||
Total comprehensive income | $ | | $ | | $ | | $ | | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
EACO Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share information)
(Unaudited)
May 31, | August 31, | |||||
| 2024 |
| 2023* | |||
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, net | | | ||||
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 | | | ||||
Current portion of operating lease liabilities |
| |
| | ||
Current portion of long-term debt | | | ||||
Total current liabilities |
| |
| | ||
Long-term debt | | | ||||
Long-term operating lease liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and Contingencies |
|
| ||||
Shareholders’ Equity: |
| |||||
Convertible preferred stock, $ | | | ||||
Common stock, $ |
| |
| | ||
Additional paid-in capital | | | ||||
Accumulated other comprehensive (loss) income |
| ( |
| | ||
Retained earnings |
| |
| | ||
Total shareholders’ equity |
| |
| | ||
Total liabilities and shareholders’ equity | $ | | $ | | ||
* |
See accompanying notes to unaudited condensed consolidated financial statements.
4
EACO Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Equity
(in thousands, except share information)
(Unaudited)
Convertible | Additional | Accumulated Other | Total | |||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | Shareholders’ | |||||||||||||||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income |
| Earnings |
| Equity | |||||||
For the three and nine months ended May 31, 2024 | ||||||||||||||||||||||
Balance, August 31, 2023* |
| | $ | |
| | $ | | $ | | $ | | $ | | $ | | ||||||
Preferred dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Foreign translation loss |
| — |
| — |
| — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| | ||||||
Balance, November 30, 2023 | | $ | | | $ | | $ | | $ | ( | $ | | $ | | ||||||||
Preferred dividends | — | — | — | — | — | — | ( | ( | ||||||||||||||
Foreign translation gain | — | — | — | — | — | | — | | ||||||||||||||
Net income | — | — | — | — | — | — | | | ||||||||||||||
Balance, February 29, 2024 | | $ | | | $ | | $ | | $ | ( | $ | | $ | | ||||||||
Preferred dividends | — | — | — | — | — | — | ( | ( | ||||||||||||||
Foreign translation gain | — | — | — | — | — | | — | | ||||||||||||||
Net income | — | — | — | — | — | — | | | ||||||||||||||
Balance, May 31, 2024 | | $ | | | $ | | $ | | $ | ( | $ | | $ | | ||||||||
For the three and nine months ended May 31, 2023 | ||||||||||||||||||||||
Balance, August 31, 2022* |
| | $ | |
| | $ | | $ | | $ | | $ | | $ | | ||||||
Preferred dividends | — | — | — | — | — | — | ( | ( | ||||||||||||||
Foreign translation loss | — | — | — | — | — | ( | — | ( | ||||||||||||||
Net income | — | — | — | — | — | — | | | ||||||||||||||
Balance, November 30, 2022 | | $ | | | $ | | $ | | $ | | $ | | $ | | ||||||||
Preferred dividends | — | — | — | — | — | — | ( | ( | ||||||||||||||
Foreign translation gain |
| — | — |
| — | — | — | | — | | ||||||||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| — |
| |
| | ||||||
Balance, February 28, 2023 |
| | $ | |
| | $ | | $ | | $ | | $ | | $ | | ||||||
Preferred dividends |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| ( | ||||||
Foreign translation loss | — | — | — | — | — | ( | — | ( | ||||||||||||||
Net income | — | — | — | — | — | — | | | ||||||||||||||
Balance, May 31, 2023 | | $ | | | $ | | $ | | $ | | $ | | $ | | ||||||||
* | Derived from the Company’s audited financial statements included in its Form 10-K for the year ended August 31, 2023 and 2022 as filed with the U.S. Securities and Exchange Commission on November 22, 2023 and November 4, 2022, respectively |
See accompanying notes to unaudited condensed consolidated financial statements.
5
EACO Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended | ||||||
May 31, | ||||||
| 2024 |
| 2023 | |||
Operating activities: |
|
|
|
| ||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
| ||||
Depreciation and amortization |
| |
| | ||
Credit loss expense |
| |
| | ||
Deferred tax provision | | — | ||||
Net unrealized loss (gain) on trading securities |
| |
| ( | ||
Impairment on termination of lease | | — | ||||
Changes in current assets and liabilities: |
|
| ||||
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: |
|
| ||||
Purchase of property, equipment, and leasehold improvements | ( | ( | ||||
Net sales (purchases) of marketable securities, trading | | ( | ||||
Net cash used in investing activities | ( | ( | ||||
Financing activities: | ||||||
Repayments on long-term debt | ( | ( | ||||
Preferred stock dividend |
| ( |
| ( | ||
Net change in bank overdraft | | ( | ||||
Net cash provided by (used in) financing activities |
| |
| ( | ||
Effect of foreign currency exchange rate changes on cash and cash equivalents |
| ( |
| ( | ||
Net decrease 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 unaudited condensed consolidated financial statements.
6
EACO CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2024
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 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 credit losses, provision for slow moving and obsolete inventory, recoverability of the carrying value and estimated useful lives of long-lived assets, and the valuation allowance against deferred tax assets, if any. Actual results could differ from those estimates.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in conformity with GAAP for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments considered necessary in order to make the financial statements not misleading have been included.
Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations for presentation of interim financial information. Therefore, the condensed consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10 - K for the Company’s fiscal year ended August 31, 2023 (“fiscal 2023”). The condensed consolidated balance sheet as of August 31, 2023 and related disclosures were derived from the Company’s audited consolidated financial statements as of August 31, 2023. Operating results for the three and nine months ended May 31, 2024 are not necessarily indicative of the results that may be expected for future quarterly periods or the entire fiscal year.
Principles of Consolidation
The consolidated financial statements for all periods presented include the accounts of EACO, its wholly-owned subsidiary, Bisco, and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited (all of which are collectively referred to herein as the “Company”, “we”, “us” and “our”). All significant intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
7
Allowance for Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses”, which requires 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 Company has adopted this ASU as of August 31, 2023 and management has evaluated this statement and has determined that it did not have a material impact on the Company’s result of operations or financial position.
We maintain an allowance for credit losses for estimated losses on our trade receivable, resulting from the inability of our customers to make payments for products sold to such customers. The allowance for credit losses is based on a variety of factors, including credit reviews, historical experience, length of time since receivables were due, current economic trends and changes in customer payment behavior. We also record specific provisions for individual accounts when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial positions. The allowance for credit losses was $
Inventories, net
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 weighted average cost that approximates the first-in, first-out method. Inventories are adjusted for slow moving or obsolete items, which was approximately $
Marketable Securities, Trading
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.
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 consolidated statements of operations and represent the change in the market value of investment holdings during the period.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of the impairment review, assets are measured by comparing the carrying amount to future net cash flows. If assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds such asset’s estimated fair values.
On October 20, 2023, the Company completed the purchase of its corporate headquarters located at 5065 East Hunter Avenue in Anaheim, California (the “Hunter Property”) from the Glen F. Ceiley and Barbara A. Ceiley Revocable Trust (the “Trust”) for $
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.
8
The Company provides for tax contingencies, if any, for federal, state, local and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomes and timing. Although the outcome of these tax audits is uncertain, in management’s opinion, adequate provisions for income taxes have been made for potential liabilities emanating from these reviews. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations.
Revenue Recognition
The Company derives its revenue primarily from product sales. Revenue recognition is determined 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, performance obligations are satisfied.
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. The Company offers industry standard contractual terms in its purchase orders.
Operating Leases
The Company determines if a contractual arrangement contains a lease, for accounting purposes, at contract inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, the current 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 non-lease components (such as common-area or other maintenance costs) which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases.
Many leases include one or more options to renew the contract. Therefore, renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain to be exercised. The Company regularly evaluates the renewal options during each reporting period and when the renewal options are reasonably certain to be exercised, management 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. As of May 31, 2024, the Company has ROU assets of approximately $
Earnings Per Common Share
Basic earnings per common share for each of the three and nine months ended May 31, 2024 and 2023 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
9
Foreign Currency Translation and Transactions
Assets and liabilities recorded in functional currencies other than the U.S. dollar (specifically, Canadian dollars used to record the assets and liabilities for Bisco Industries limited) are translated into U.S. dollars at the period-end rate of exchange. The exchange rate for Canadian dollars to U.S. dollars on May 31, 2024 and 2023 was $
Concentrations
Net sales to customers outside the United States were approximately
No single customer accounted for more than 10% of revenues for either of the nine months ended May 31, 2024 and 2023. In addition, no single customer’s receivable balance accounted for more than 10% of the Company’s customer receivables as of either May 31, 2024 or August 31, 2023.
Note 3. Accrued Liabilities
The Company’s accrued liabilities as of May 31, 2024 and August 31, 2023 are summarized as follows (in thousands):
| May 31, |
| August 31, | |||
2024 | 2023 | |||||
Accrued expenses and other current liabilities: |
|
|
|
| ||
Accrued accounts payable | $ | | $ | | ||
Accrued compensation and payroll |
| |
| | ||
Accrued taxes |
| |
| | ||
Total Accrued expenses and other current liabilities | $ | | $ | | ||
Note 4. Debt
The Company has a $
The line of credit has a variable interest rate set at the bank prime index rate, but provided that in no event would such interest rate be less than
The Company also entered into a Loan Agreement with the Bank on July 12, 2019 to borrow up to $
10
Concurrent with the execution of the Construction Loan, Bisco entered into a commercial security agreement, dated July 12, 2019, with the Bank, pursuant to which Bisco granted the Bank a security interest in substantially all of Bisco’s personal property to secure Bisco’s obligations under the Construction Loan. The outstanding balance of the Construction Loan at May 31, 2024 and August 31, 2023 was $
Lastly, the Company entered into a business loan agreement (and related $
Note 5. Leases
The Company leases its facilities and automobiles under operating lease agreements (
On October 20, 2023, the Company closed escrow on the purchase of the Hunter Property, which was leased by the Company, from the Trust for a purchase price of $
Minimum future rental payments under operating leases are as follows:
Years Ending : |
|
| |
2024 (remaining three months) | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter |
| | |
Future minimum lease payments | $ | | |
Less interest |
| ( | |
Present value of minimum lease payments | $ | |
Operating lease costs under these leases were approximately $
Other information related to operating leases is as follows:
| May 31, |
| August 31, |
| |
2024 | 2023 |
| |||
Weighted average remaining lease terms | |||||
Incremental borrowing rate |
| | % | | % |
The discount rate used on the operating ROU assets represented the Company’s incremental borrowing rate at lease inception.
11
Note 6. Earnings per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted computations for earnings per common share (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||||||
May 31, | May 31, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
(In thousands, except share and per share amounts) | ||||||||||||
EPS: |
|
|
|
|
|
|
| |||||
Net income | $ | | $ | | $ | | $ | | ||||
Less: accrued preferred stock dividends |
| ( |
| ( |
| ( |
| ( | ||||
Net income available for common shareholders | $ | | $ | | $ | | $ | | ||||
Earnings per common share – basic | $ | | $ | | $ | | $ | | ||||
Earnings per common share – diluted | $ | | $ | | $ | | $ | | ||||
For each of the three and nine months ended May 31, 2024 and 2023,
Note 7. Related Party Transactions
The Company leases its Chicago area sales office and distribution center located in Glendale Heights, Illinois under an operating lease agreement (the “Glendale Lease”) from the Trust, which is the grantor trust of Glen Ceiley, the Company’s Chief Executive Officer, Chairman of the Board, and majority shareholder. The Glendale Lease is a
On July 26, 2019, the Company entered into a Commercial Lease Agreement with the Trust (the “Hunter Lease”), for the lease of the Hunter Property, which houses the Company’s corporate headquarters. The Company completed its move to the headquarters located at the Hunter Property in March 2020. The term of the Hunter Lease commenced on September 2, 2019 and ended on October 20, 2023, when the Company purchased the Hunter Property. The Hunter Lease had an initial monthly rental rate of $
On October 5, 2023, the Company entered into a Standard Purchase Agreement and Escrow Instructions (the “Purchase Agreement”) to purchase the Hunter Property for a purchase price of $
Note 8. Income Taxes
During the nine months ended May 31, 2024 and 2023, the Company recorded an income tax provision of $
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 each of the three and nine months ended May 31, 2024 and 2023, the Company did
The Company’s tax years for 2020 to 2023 are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by taxing authorities for years before 2019.
12
Note 9. Commitments and Contingencies
From time to time, the Company may be subject to legal proceedings and claims which arise in the normal course of our business. Any such matters and disputes could be costly and time consuming, subject the Company to damages or equitable remedies, and divert management and key personnel from core business operations.
In January 2023, a class action lawsuit was filed with the Los Angeles County Superior Court against Bisco, alleging wage and hour violations and related claims. The class action covers a class of former and current employees of Bisco who were employed between January 13, 2019 and the present time. In March 2023, Plaintiff filed a First Amended Complaint that added claims under the California Private Attorneys General Act (“PAGA”). Both parties requested to stay the litigation pending mediation, which mediation commenced in April 2024. As a result of the mediation, the parties agreed in principle to settle this matter. The Company is currently negotiating a settlement agreement and expects in the aggregate settlement amount to be $
Note 10. Subsequent Events
Management has evaluated events subsequent to May 31, 2024, through the date that these unaudited condensed consolidated financial statements are filed with the SEC, for transactions and other events which may require adjustment of and/or disclosure in such financial statements.
13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will” and similar words or expressions. These forward-looking statements include, but are not limited to, statements regarding our anticipated revenue, expenses, profits and capital needs. These statements are based on our current expectations, estimates, projections, and the impact of certain accounting pronouncements, and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those projected or estimated, including, but not limited to the impact of adverse economic conditions, competitive pressures, unexpected costs and losses from operations or investments, increases in costs and overhead, our ability to maintain an effective system of internal controls over financial reporting, potential losses from trading in securities, our ability to retain key personnel and good relationships with suppliers, the willingness of lenders to extend financing commitments and the availability of capital resources, and the other risks set forth in “Risk Factors” in Part II, Item 1A of this report or identified from time to time in our other filings with the SEC and in public announcements. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof or the date of any other filing with the SEC, as applicable. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of forward-looking statements in this Quarterly Report should not be regarded as a representation by management or any other person that the objectives or plans of the Company will be achieved.
Overview
The condensed consolidated financial statements comprise the accounts of EACO and its wholly-owned subsidiary, Bisco, and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited.
EACO is a holding company primarily comprised of its wholly-owned subsidiary, Bisco. Bisco is a distributor of electronic components and fasteners with 51 sales offices and seven distribution centers located throughout the United States and Canada and one sales office located in the Philippines. Bisco supplies parts used in the manufacture of products in a broad range of industries, including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment and marine industries.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
Within the context of these critical accounting policies, management is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. There have been no changes to the Company’s critical accounting policies for the three months ended May 31, 2024.
Revenue Recognition
The revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The premise of the standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
We derive our revenue primarily from product sales. We determine revenue recognition 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 products shipped to customers. Revenue from product sales is recognized upon transfer of control of promised products 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 generally offer industry standard contractual terms in our purchase orders.
14
Inventory
The Company’s inventory provisions are based upon management’s review of inventories on-hand over the inventory’s expected future utilization and length of time held by the Company. The Company’s methodology for estimating these adjustments to the cost basis is evaluated for factors that could require changes to the cost basis including significant changes in product demand, market conditions, condition of the inventory or net realizable value. If business or economic conditions change, management’s estimates and assumptions may be adjusted as deemed appropriate.
Impairment of Long-Lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of the impairment review, assets are tested on an individual basis. The recoverability of the assets is measured by a comparison of the carrying value of each asset to the future net undiscounted cash flows expected to be generated by such assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds such asset’s estimated fair value.
Upon completion of the Hunter Property purchase and the termination of the Hunter Lease, the Company recorded an asset impairment of $3.9 million, which was the carrying net book value of the previously recorded tenant improvements of the Hunter Property. See Note 2 of the Notes to Consolidated Financial Statements of this Report for further explanation.
Results of Operations
Comparison of the Three Months Ended May 31, 2024 and 2023
Net Sales and Gross Profit ($ in thousands)
Three Months Ended | ||||||||||||
| May 31, | $ | % | |||||||||
2024 |
| 2023 |
| Change |
| Change | ||||||
Net sales | $ | 96,121 | $ | 80,249 | $ | 15,872 | 19.8 | % | ||||
Cost of sales | 68,193 | 57,008 | 11,185 | 19.6 | % | |||||||
Gross profit | $ | 27,928 | $ | 23,241 | $ | 4,687 | 20.2 | % | ||||
Gross profit as a percent of net sales |
| 29.1 | % |
| 29.0 | % |
| 0.1 | % | |||
Net sales consist primarily of sales of component parts and fasteners, but also include, to a lesser extent, kitting charges and special-order fees, as well as freight charged to customers.
The increase in revenues in the three months ended May 31, 2024 (“Q3 2024”) as compared to the three months ended May 31, 2023 (“Q3 2023”) was largely due to an increased sales of our products as a result of the expansion of our sales force. We increased the number of sales personnel by 22 employees, increasing from 348 sales employees to 370 sales employees for Q3 2023 and Q3 2024, respectively. Our experience shows that increasing sales headcount leads to the addition of new customers and enables us to sell more products to existing customers. Revenues and gross profit for Q3 2024 have also increased when compared to Q3 2023 due to developing better relationships with vendors and customers and having higher inventory stock readily available.
Selling, General and Administrative Expenses ($ in thousands)
Three Months Ended | ||||||||||||
May 31, | $ | % | ||||||||||
| 2024 |
| 2023 |
| Change |
| Change | |||||
Selling, general and administrative expenses | $ | 26,314 | $ | 16,277 | $ | 10,037 | 61.7 | % | ||||
Percent of net sales |
| 27.4 | % |
| 20.3 | % |
| 7.1 | % | |||
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 2024 increased from Q3 2023 largely due to a legal expense accrual in the amount of approximately $7.2 million related to a pending class action lawsuit that the Company expects to settle. See Note 9 of the Notes to Consolidated Financial Statements of this Report for further explanation. SG&A also increased due to increased employee headcount, increasing from 557 employees at Q3 2023 to 584 employees at Q3 2024.
15
Other Income (Expense), Net ($ in thousands)
Three Months Ended | ||||||||||||
May 31, | $ | % | ||||||||||
| 2024 |
| 2023 |
| Change |
| Change |
| ||||
Other income (expense): |
|
|
|
|
| |||||||
Net gain (loss) on trading securities | $ | (24) | $ | 163 | $ | (187) | (114.7) | % | ||||
Interest and other income (expense), net | (44) | (36) | (8) | (22.2) | % | |||||||
Other income (expense), net | $ | (68) | $ | 127 | $ | (195) | (153.5) | % | ||||
Percent of net sales |
| 0.1 | % |
| 0.2 | % |
| (0.1) | % | |||
Other income (expense), net, primarily consists of income or loss on trading in short-term marketable equity securities of publicly-held corporations and interest related to the Company’s debt obligations. The Company’s investment strategy consists of both long and short positions, as well as utilizing options designed to improve returns. During Q3 2024, the Company recognized a net loss on trading securities of $24,000 as compared to a net gain of $163,000 in Q3 2023. The net trading securities loss in Q3 2024 and gain in Q3 2023 was primarily due to timing of sales and purchases and general market climate for short and long positions during the applicable period.
Interest and other income (expense), net, decreased in Q3 2024 compared to Q3 2023, which was primarily due to interest expense from borrowings on the line of credit being higher during Q3 2024 compared to Q3 2023.
Income Tax Provision ($ in thousands)
Three Months Ended | ||||||||||||
May 31, | $ | % | ||||||||||
2024 |
| 2023 |
| Change |
| Change |
| |||||
Income tax provision |
| $ | 362 |
| $ | 1,772 |
| $ | 1,410 |
| (79.6) | % |
Percent of pre-tax income |
| 23.4 | % |
| 25.0 | % |
| (1.6) | % | |||
The provision for income taxes decreased by $1,410,000 in Q3 2024 over the same prior year period. This decrease was primarily due to lower income in the current quarter as compared to the prior year period. The income tax provision as a percent of pre-tax income decreased from 25.0% at Q3 2023 to 23.4% at Q3 2024, which was primarily due to the state tax rate mix and permanent book tax differences.
Comparison of the Nine Months Ended May 31, 2024 and 2023
Net Sales and Gross Profit ($ in thousands)
Nine Months Ended | ||||||||||||
May 31, | ||||||||||||
| 2024 |
| 2023 |
| $ Change |
| % Change |
| ||||
Net Sales | $ | 259,711 | $ | 233,493 | $ | 26,218 | 11.2 | % | ||||
Cost of sales | 183,184 |
| 166,325 | 16,859 |
| 10.1 | % | |||||
Gross profit | $ | 76,527 | $ | 67,168 | $ | 9,359 |
| 13.9 | % | |||
Percent of net sales | 29.5 | % | 28.8 | % | 0.7 | % | ||||||
The increase in revenues and gross margins as a percent of revenues in the nine months ended May 31, 2024 as compared to the nine months ended May 31, 2023 was largely due to a larger amount of inventory available and increased sales employee headcount in the current period.
Selling, General and Administrative Expenses ($ in thousands)
Nine Months Ended |
| |||||||||||
| 2024 |
| 2023 |
| $ Change |
| % Change |
| ||||
Operating expense: |
|
|
|
| ||||||||
Selling, general and administrative expenses | $ | 61,129 | $ | 47,568 | $ | 13,561 |
| 28.5 | % | |||
Impairment on termination of lease |
| 3,906 |
| –– |
| 3,906 |
| 100.0 | % | |||
Operating expenses | $ | 65,035 | $ | 47,568 |
| 17,467 |
| 36.7 | % | |||
Percent of net sales |
| 25.0 | % |
| 20.4 | % |
| 4.6 | % | |||
16
SG&A in the nine months ended May 31, 2024 increased from the same period in the prior year primarily due to a legal expense accrual of approximately $7.2 million related to a pending class action lawsuit that the Company expects to settle. See Note 9 of the Notes to Consolidated Financial Statements of this Report for further explanation. SG&A also increased due to an increase in the number of sales and administrative employees, from 557 total employees in Q3 2023 to 584 employees in Q3 2024. During the first quarter of fiscal 2024, the Company recognized an impairment loss of $3.9 million due to the purchase of the Hunter Property and termination of the Hunter Lease. Operating expenses as a percent of revenue in the current period increased from the prior year period primarily due to the impairment loss, legal settlement accrual, and higher payroll expenses.
Other Income (Expense), Net ($ in thousands)
Nine Months Ended | ||||||||||||
May 31, | ||||||||||||
| 2024 |
| 2023 |
| $ Change |
| % Change |
| ||||
Other income (expense): | ||||||||||||
Net (loss) gain on trading securities | $ | (45) | $ | 784 | $ | (829) |
| (105.7) | % | |||
Interest and other (expense), net | (128) |
| (38) |
| (90) |
| (236.8) | % | ||||
Other income (expense), net | $ | (173) | $ | 746 | $ | (919) |
| (123.2) | % | |||
Percent of net sales | (0.1) | % |
| 0.3 | % |
| (0.4) | % | ||||
During the nine months ended May 31, 2024, the Company recognized a net loss on trading securities of $45,000 as compared to a net gain of $784,000 in the same period in the prior year. The net trading securities losses and gains, as applicable, in the nine months ended May 31, 2024 and 2023 were primarily due to timing of sales and purchases of investment securities and general market climate for long positions during the applicable period. Further, in the prior year period, there was a higher amount of cash invested than in the current period, which produced higher dividends in the prior period.
Interest and other income (expense), net, decreased during the nine months ended May 31, 2024 compared to the same period in the prior year, which was primarily due to interest expense from carrying a balance on the line of credit during a portion of the current period.
Income Tax Provision ($ in thousands)
Nine Months Ended | ||||||||||||
May 31, | ||||||||||||
| 2024 |
| 2023 |
| $ Change |
| % Change |
| ||||
Income tax provision | $ | 2,858 | $ | 5,216 | $ | (2,358) | (45.2) | % | ||||
Percent of pre-tax income | 25.2 | % | 25.6 | % | (0.4) | % | ||||||
The provision for income taxes decreased by $2,358,000 for the nine months ended May 31, 2024 when compared to the prior year period. This decrease was primarily due to lower taxable income in the current nine months period as compared to the prior year period.
Liquidity and Capital Resources
As of May 31, 2024 and August 31, 2023, the Company held approximately $737,000 and $8.6 million of unrestricted cash and cash equivalents, respectively. The Company also held $9.4 million and $27.2 million of marketable securities at May 31, 2024 and August 31, 2023, respectively, which could be liquidated, if necessary.
As of May 31, 2024, the Company had an available $20.0 million line of credit with the Bank. The Company entered into a Change in Terms Agreement dated April 12, 2024 with the Bank, which increased the principal loan amount under the line of credit to $20.0 million and extended the maturity date of the line of credit from July 5, 2024 to February 15, 2026. The line of credit has a variable interest rate set at the bank prime index rate, provided that in no event would such interest rate be less than 3.5% per annum. Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of each of May 31, 2024 and August 31, 2023, the Company was in compliance with all such covenants. The outstanding balance of the line of credit as of each of May 31, 2024 and August 31, 2023 was zero.
On October 5, 2023, Bisco entered into the Purchase Agreement with the Trust, which is beneficially owned and controlled by Mr. Glen F. Ceiley, the Company’s Chief Executive Officer, Chairman of the Board and a major stockholder. Pursuant to the Purchase Agreement, the Trust agreed to sell the Hunter Property to Bisco for a purchase price of $31.0 million in cash. The transaction closed on October 20, 2023.
17
In April 2024, the Company engaged in a mediation concerning a pending class action lawsuit and reached an agreement in principle to settle the lawsuit. The Company is currently negotiating a settlement agreement and expects the aggregate settlement amount to be approximately $7.5 million, which settlement agreement, when finalized, will be subject to court approval. The Company has accrued $7.2 million in the current quarter in anticipation of this settlement. The Company expects to use existing cash and cash equivalents, and cash generated from operations to fund this settlement after the legal proceedings are completed in early 2025. See Note 9 of the Notes to Consolidated Financial Statements of this Report for further information.
Cash Flows from Operating Activities
Cash provided by operating activities was $4.393 million for the nine months ended May 31, 2024 as compared with cash provided by operating activities of $8.734 million for the nine months ended May 31, 2023. Cash provided by operating activities in the current period was primarily due to net income earned in the period and an increase in trade accounts payable. Cash provided by operating activities was adversely impacted to some extent by an increase in inventory and an increase in trade accounts receivable at the nine months ended May 31, 2024 when compared to the prior year period. The prior period cash provided by operating activities was primarily due to the net income in that period and a decrease in trade accounts receivable.
Cash Flows from Investing Activities
Cash used in investing activities was $15.061 million for the nine months ended May 31, 2024 as compared with cash used in investing activities of $24.384 million for the nine months ended May 31, 2023. Cash used in investing activities in the current period is primarily due to the purchase of the Hunter Property in October 2023, partially offset by net sales of marketable securities. Prior period cash used in investing activities was primarily due to the purchase of marketable securities.
Cash Flows from Financing Activities
Cash provided by financing activities for the nine months ended May 31, 2024 was $2.915 million as compared with cash used in financing activities of $253,000 for the nine months ended May 31, 2023. The cash provided by financing activities for the current period is primarily due to the net increase in bank overdraft in the current period, which represents outstanding checks in excess of cash due to the nightly sweep feature of the cash account to the line of credit with the Bank. The cash used in financing activities for the prior period is primarily due to a decrease in the bank overdraft balance.
Contractual Financial Obligations
In addition to using cash flow generated from operations, the Company finances its operations through borrowings under its line of credit. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transactions, with the result being that amounts owed under debt agreements, operating leases, and finance leases are recorded as liabilities on the consolidated balance sheets in the Company’s Annual Report on Form 10-K for the year ended August 31, 2023 as filed with the SEC on November 22, 2023.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of May 31, 2024, pursuant to Exchange Act Rule 13a-15(b). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of May 31, 2024 because of the material weakness in internal control over financial reporting discussed below.
Notwithstanding the material weakness in internal control over financial reporting described below, our management has concluded that our consolidated financial statements included in the Quarterly Report on Form 10-Q were fairly stated in all material respects in accordance with GAAP.
18
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management concluded that there was a material weakness in the Company’s internal control over financial reporting as of August 31, 2023, related to the Company’s internal controls over the financial statement closing process, including manual journal entries recorded in the preparation of the financial statements related to the Company’s lease accounts, and certain inventory and accrued liability accounts.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, and/or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Remediation Plan
We are in the process of developing and implementing a detailed plan for remediation of the material weakness, including developing and maintaining additional levels of review and approval. The Company has hired a third-party accounting consultant and has recently hired an assistant controller to aid in implementing additional levels of review and approval. We will continue to assess the effectiveness of our remediation efforts in connection with our future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures.
Changes in Internal Control over Financial Reporting
Except as disclosed above, there were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the period ended May 31, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be subject to legal proceedings and claims which arise in the normal course of our business. Any such matters and disputes could be costly and time consuming, subject us to damages or equitable remedies, and divert our management and key personnel from our business operations. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial position or cash flows. Please see Note 9 of the Notes to Consolidated Financial Statements of this Report for disclosure regarding a lawsuit to which we have reached an agreement in principle to settle and are currently in the process of negotiating the settlement agreement for the same.
Item 1A. Risk Factors
Our business is subject to a number of risks, some of which are discussed below. The risk factors discussed in this section should be considered together with information included elsewhere in this Quarterly Report on Form 10-Q and should not be considered the only risks to which the Company is exposed. If any of the risks actually occur, our business, financial condition, or results of operations could be seriously harmed. In that event, the market price for shares of our common stock may decline, and you could lose all or part of your investment.
19
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 that we have with our suppliers, including our authorized distributor agreements, are terminable by our suppliers with little or no notice or penalty. Suppliers that currently sell their products through us could decide to sell, or increase their sales of, their products directly or through other distributors or channels. Any termination, interruption or adverse modification of our relationship with a key supplier or a significant number of other suppliers would likely adversely affect our operating income, cash flow and future prospects.
We generally do not have long-term sales contracts with our customers.
Most of our sales are made on a purchase order basis, rather than through long-term sales contracts. As such, our customers typically do not have any obligation to purchase any products from us. A variety of conditions, both specific to each customer and generally affecting each customer’s industry, may cause customers to reduce, cancel or delay orders that were either previously made or anticipated. In addition, customers may go bankrupt or fail, or default on their payments. Significant or numerous cancellations, reductions, delays in orders by customers, losses of customers, and/or customer defaults on payment could materially adversely affect our business and revenues.
We rely on third party suppliers for most of our products, and we 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.
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 of increased costs, 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 of increased costs 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
20
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 could 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 have in the past and may in the future experience security breaches in which credit and debit card and other personal information may be stolen, which could be costly and harm our reputation. 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. We are still at an early stage in this analysis and this 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.
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 and 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.
Disruptions to our information systems, including security breaches, losses of data or outages, and other security issues, have and could in the future adversely affect our operations.
We rely on information systems, some of which are managed by third parties, to store, process and transmit confidential information, including financial reporting, inventory management, procurement, invoicing and electronic communications, belonging to our customers, our suppliers, our employees and/or us. We monitor and mitigate our exposure to cybersecurity issues and modify our systems when warranted and we have implemented certain business continuity items including data backups at alternative sites. Nevertheless, these systems are vulnerable to, and at times have suffered from, among other things, damage from power loss, computer system and network failures, loss of telecommunication services, physical and electronic loss of data, terrorist attacks, computer viruses, cyberattacks and security breaches, ranging from uncoordinated individual attempts to gain unauthorized access to our IT systems to sophisticated and targeted measures. These include industrial espionage attacks, data theft, malware, phishing, ransomware attacks, or other cybersecurity threats or incidents. The increased use of mobile technologies and the internet of things can heighten these and other operational risks. If we, or the third parties who own and operate certain of our information systems, are unable to prevent such breaches, losses of data and outages, our operations could be disrupted. Also, the time and funds spent on monitoring and mitigating our exposure and responding to breaches, including the training of employees, the purchase of protective technologies and the hiring of additional employees and consultants to assist in these efforts could adversely affect our financial results. The increasing sophistication of cyberattacks requires us to continually evaluate the threat landscape and new technologies and processes intended to detect and prevent these attacks. There can be no assurance that the security measures and systems configurations we choose to implement will be sufficient to protect the data we manage. Any theft or misuse of information resulting from a security breach could result in, among other things, loss of significant and/or sensitive information, litigation by affected parties, financial obligations resulting from such theft or misuse, higher insurance premiums, governmental investigations, negative reactions from current and potential future customers (including potential negative financial ramifications under certain customer contract provisions) and poor publicity and any of these could adversely affect our financial results. In addition, we must comply with increasingly complex regulations intended to protect business and personal data in the U.S. and globally. In many cases, these laws apply not only to third-party transactions, but also restrict transfers of personal information among the Company and its international subsidiaries. Compliance with these regulations can be costly and any failure to comply could result in legal and reputational risks as well as penalties, fines and damages that could adversely affect our financial results.
21
We may not be able to attract and retain key personnel.
Our future performance will depend to a significant extent upon the efforts and abilities of certain key management and other personnel, including Glen Ceiley, our Chairman and CEO, as well as other executive officers and senior management. The loss of service of one or more of our key management members could have a material adverse effect on our business.
The competitive pressures we face could have a material adverse effect on our business.
The market for our products and services is very competitive. We compete for customers with other distributors, who sell similar or sometimes identical products, as well as with many of our suppliers. A failure to maintain and enhance our competitive position could adversely affect our business and prospects. Furthermore, our efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability. Some of our competitors may have greater financial, personnel, capacity and other resources or a more extensive customer base than we do.
Inclement weather and other disruptions to the transportation network could impact our distribution system.
Our ability to provide efficient shipment of products to our customers is an integral component of our overall business strategy. Disruptions at distribution centers or shipping ports have in the past, and may in the future, affect our ability to both maintain core products in inventory and deliver products to our customers on a timely basis, which may in turn adversely affect our relationship with our customers, our reputation, and our results of operations. In addition, severe weather conditions could adversely impact demand for our products in particularly hard hit regions.
Expansion Risks
Our strategy of expanding into new geographic areas could be costly and may not expand our revenues.
One of our primary growth strategies is to grow our business through the opening of sales offices in new geographic markets. This strategy requires continued investment, both financially, and through management’s efforts to make 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. Given the recent economic uncertainty, we may not be able to open or grow new offices at our projected or desired rates or hire the qualified sales personnel necessary to make such new offices successful. Failure to do so could negatively impact our long-term growth and market share.
Opening sales offices in new markets presents increased risks that may prevent us from being profitable in these new locations, and/or may adversely affect our operating results.
Our new sales offices do not typically achieve operating results comparable to our existing offices until after several years of operation. The added expenses relating to payroll, occupancy, and transportation costs can impact our ability to generate earnings from new sales offices. 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
22
by their enthusiasm for our culture and product knowledge, our sales could be materially adversely affected. Additionally, competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees. An inability to recruit and retain a sufficient number of qualified individuals in the future may also delay the planned openings of new offices. Any such delays, material increases in existing employee turnover rates, or increases in labor costs, could have a material adverse effect on our business, financial condition or operating results.
Financial Risks
We have incurred significant losses in the past from trading in securities, and we may incur such losses in the future, which may also cause us to be in violation of covenants under our loan agreement.
Bisco has historically supplemented its capital resources in part from cash generated by trading in marketable domestic equity securities. Bisco’s investment strategy includes taking both long and short positions, as well as utilizing options to maximize return. This strategy can lead, and has led, to significant losses from time to time based on market conditions and trends, as well as the performance of the specific companies in which we invest. We may incur losses in future periods from such trading activities, which could materially and adversely affect our liquidity and financial condition.
In addition, unanticipated losses from our trading activities may cause Bisco to be in violation of certain covenants under its line of credit agreement with the Bank. The line of credit agreement is secured by substantially all of Bisco’s assets. The line of credit 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 asset, with respect to any such noncompliance, which could have a material adverse effect on our business and operations.
We may not have adequate or cost-effective liquidity or capital resources.
We recently used $31.0 million of our cash to purchase the Hunter Property. Our ability to satisfy our cash needs depends on our ability to generate cash from operations and to access our line of credit and the capital markets, which are subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. The total amount outstanding on our line of credit as of May 31, 2024 was zero, which line of credit is secured by substantially all of Bisco’s assets. Further, the Company entered into a loan agreement with the Bank for approximately $4.7 million that financed the tenant improvements on the Hunter Property. See Note 4 of the Notes to Consolidated Financial Statements 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 inflation and high interest rates, 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,our financial condition and our 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 related foreign 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.
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 the Company’s internal controls over the financial statement closing process. Management concluded that there was a material weakness in the Company’s internal control over financial reporting as of August 31, 2023, 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. The Company is in the process of developing a detailed plan for remediation of the material weakness, including developing and maintaining additional levels of review and approval, but there is no guarantee that such efforts and measures will remediate the material weakness. Although we will continue to assess the effectiveness of our remediation efforts in connection with our future assessments of the effectiveness of internal control over financial reporting
23
and disclosure controls and procedures, 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.
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.
Due to the small amount of public float in our common stock, sales of our common stock by Glen Ceiley could cause the price of our common stock to decline.
There is currently no established trading market for our common stock, and the daily volume of any stock sales has generally been low. As of May 31, 2024, the number of shares held by non-affiliates of the Company 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.
General Risk Factors
Changes and uncertainties in the economy have harmed and could continue to harm our operating results.
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.
24
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
During the nine months ended June 30, 2024, no director or officer of the Company
Item 6. Exhibits
See Exhibit Index below, which is incorporated by reference herein.
EXHIBIT INDEX
No. |
| Exhibit |
10.1 | ||
10.2 | ||
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 |
25
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 15, 2024 | /s/ Glen Ceiley |
Glen Ceiley | |
Chief Executive Officer | |
(Principal Executive Officer & Principal Financial Officer) | |
/s/ Michael Narikawa | |
Michael Narikawa | |
Controller and Chief Financial Executive | |
(Principal Accounting Officer) |
26