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, 2019

ORFebruary 29, 2020, or

☐o 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)

1500 NORTH LAKEVIEW LOOP5065 East Hunter Ave

ANAHEIM, CALIFORNIAAnaheim, California  92807

(Address of principal executive offices)Principal Executive Offices)

(714) 876-2490

(Registrant’s telephone number)Telephone No.)

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value

(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.

Yes ☒ xNo ☐¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and 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 ☒No ☐xNo¨

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”, “emerging growth company”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 12, 2019,April 3, 2020, 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)

See accompanying notes to unaudited condensed consolidated financial statements.

EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

EACO Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share information)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

EACO Corporation and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Equity

(in thousands, except share information)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

EACO Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

EACO CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2019February 29, 2020

Note 1. Organization and Basis of Presentation

EACO Corporation (“EACO”), incorporated in Florida in September 1985, is a holding company primarily comprised of its wholly-owned subsidiary, Bisco Industries, Inc. (“Bisco”). Bisco was incorporated in Illinois in 1974 and is a distributor of electronic components and fasteners with 4849 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, and the valuation allowance against deferred tax assets.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 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, 20182019 (“fiscal 2018”2019”). The condensed consolidated balance sheet as of August 31, 20182019 and related disclosures were derived from the Company’s audited consolidated financial statements as of August 31, 2018.2019. Operating results for the three and ninesix months ended May 31, 2019February 29, 2020 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$169,000 at May 31, 2019February 29, 2020 and August 31, 2018.2019.

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 reduced by a reserveprovision for slow moving orand obsolete items of $1,492,000$1,595,000 and $1,376,000$1,527,000 at May 31, 2019February 29, 2020 and August 31, 2018,2019, respectively. The reserveprovision is based upon management’s review of inventories on-hand over their expected future utilization and length of time held by the Company.

Short Sales of Trading Securities

Securities sold short represent transactions in which the Company sells a security borrowed from the broker, which the Company is obligated to purchase and deliver back to the broker. The initial value of the underlying borrowed 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 $2,334,000$2,386,000 and $933,000$655,000 at May 31, 2019February 29, 2020 and August 31, 2018,2019, 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

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; (5) recognition of revenue when, or as, we satisfy a performance obligation.

The Company’sCompany's performance obligations consist solely of product shipped to customers.  Revenue from product sales is presented as net sales and recognized upon the transfer of control of promised products to customers in an amount that reflects the consideration we expect to receive in exchange for these products.  Revenue is recognized net of expected returns and any taxes collected from customers.  We offer industry standard contractual terms in our purchase orders.

Earnings Per Common Share

Basic earnings per common share for the three and ninesix months ended May 31,February 29, 2020 and February 28, 2019 and 2018 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. Revenue and expenses are translated at the weighted-average exchange rates for the quartersthree and six months ended May 31, 2019February 29, 2020 and 2018.February 28, 2019. The resulting translation adjustments are charged or credited directly to accumulated other comprehensive income or loss. The average exchange ratesrate of Canadian dollars to U.S. dollars for the quarter ended May 31, 2019 and 2018 were $0.75 and $0.78, respectively. The average exchange rates of Canadian dollars to U.S. dollars for the ninesix months ended May 31,February 29, 2020 and February 28, 2019 and 2018 were $0.75 and $0.79, respectively.was $0.76 for both periods.

Concentrations

Net sales to customers outside the United States were approximately 9% of revenues for each of the ninesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, and related accounts receivable were approximately 10% and 11%12% of total accounts receivable for each period at Mayboth February 29, 2020 and August 31, 2019 and 2018, respectively.2019.

No single customer accounted for more than 10% of revenues and accounts receivable for the three and ninesix months ended May 31, 2019February 29, 2020 or 2018.February 28, 2019.

Significant Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” to supersedeCustomers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively “new revenue standard”). The core principle of the previousnew revenue recognition guidance under current GAAP. This guidance presents steps for comprehensive revenue recognitionstandard, among other changes, is that requires an entity toshould recognize revenue to depict the transfer ofwhen it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the new revenue guidance beginning in the fiscal year ending August 31, 2019 (“fiscal 2019”)effective September 1, 2018, using the modified retrospective approach. The adoption of this guidance did not have a significantmethod with no impact on our consolidated financial statements.to the opening retained earnings.

In February 2016, the FASB issued ASU 2016-02, “Leases,”"Leases (Topic 842)," which will require a lesseerequires lessees to recognize assets and liabilities foralmost all leases with terms of more than 12 months. Both capitalon their balance sheet as a right-of-use asset and operatinga lease liability. For income statement purposes, the FASB retained a dual model, requiring leases will need to be recognizedclassified as either operating or finance. Classification is based on criteria that are largely similar to those applied in previous lease accounting, but without explicit bright lines. Lessor accounting is similar to the balance sheet.previous model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This guidanceASU is effective for annual reporting periods beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019.2019, including interim periods within those fiscal years. The Company is currently evaluating this statementadopted ASU 2016-02 on September 1, 2019 and its impact onapplied the Company’s resultspackage of operationspractical expedients included therein, as well as utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods prior to September 1, 2019 remained unchanged and financial position.in accordance with Leases (Topic 840). As of February 29, 2020, the Company has right of use assets of approximately $13.0 million and lease liabilities of approximately $13.1 million recorded in the consolidated balance sheet.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses,”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. ThisThe guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal yearsyears. In November 2019, the FASB deferred the effective dates of the new credit losses standard for all entities except SEC filers that are not smaller reporting companies to fiscal year beginning after December 15, 2020.2022, including interim periods within those fiscal years. The Company is currently evaluating this statement and its impact on the Company’sits results of operations and financial position.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash (aa consensus of the FASB Emerging Issues Task Force).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 becamewill become effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years with early adoption permitted. The Company has adoptedelected to adopt the new cash flow guidance of this standard effective September 1, 2018, for fiscal 2019.with an immaterial impact to the statements of cash flows.

Note 3. Debt

The Company currently has a $10,000,000$15,000,000 line of credit agreement with CitizensCitizen’s Business Bank (the “Bank”). This line of credit was originally held with Community Bank, N.A., which bank was recently acquired by CVB Financial Corp., the parent company of Citizens Business Bank. On July 24, 2018,December 4, 2019, the Company entered into a Change in Terms Agreement dated July 12, 2018November 27, 2019 with the Bank (the “Amendment”). The Amendment, which modified the Company’s $10,000,000 line of credit between the Company and the Bank to: (i) extendto increase the maximum amount that may be borrowed thereunder from $10.0 million to $15.0 million. In addition, the interest rate provisions under the line of credit were modified so that in no event would such interest rate be less than 3.5% per annum or the maximum interest rate permitted under law. The expiration date of the line of credit under the line of credit agreement from March 1, 2019 to August 20, 2020; (ii) reduce the defaultis July 5, 2021. The line of credit has a variable interest index rate by .500% (Wall Street Journal Prime Rate less .500%); and (iii) add the following two other interest rate optionsoption that the Company may select (subject to the requirements in the Amendment and provided that the Company is not in default under the line of credit agreement): to (A) The default variable interest index rate, which is Citizens Business Bank Prime Rate of Interest, which is the prime rate (4.75% and 5.25% at February 29, 2020 and August 31, 2019, respectively) less 0.500%; or (B) One Hundred Eighty (180) day Libor Rate plus a margin of 1.550%; or (B)and (v) replace the One (1) Year Libor pluspreferred rate of interest with a margin of 1.550%, as more fully described in the Amendment.discounted rate. The line of credit agreement contains financial and other covenants that have not been modified by the Amendment. Theamounts outstanding balance under this line of credit as of MayFebruary 29, 2020 and August 31, 2019 isare currently all under the default variable interest index rate which bears interest at the bank’s reference rate, which is the Prime Rate (5.50% at May 31, 2019of 4.25% and 5.00% at August 31, 2018) less .500%.4.75%, respectively. Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The amounts outstanding under this line of credit as of May 31, 2019February 29, 2020 and August 31, 20182019 were $6,872,000$9,213,000 and $3,113,000,$6,114,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of May 31, 2019February 29, 2020 and August 31, 2018,2019, the Company was in compliance with all such covenants.

In September 2019, Bisco entered into Commercial Lease Agreement (the “Hunter Lease”) with the Glen F. Ceiley and Barbara A. Ceiley Revocable Trust (the “Trust”), which is the grantor trust of Glen Ceiley, our Chief Executive Officer, Chairman of the Board and the Company’s majority shareholder. Under this Commercial Lease Agreement, Bisco has leased from the Trust approximately 80,000 square feet of office and warehouse space located at 5037 and 5065 East Hunter Avenue, Anaheim, California (the “Hunter Property”), which serves as the Company’s new corporate headquarters, and has a term that expires on August 31, 2029. The Company also entered into a new Loan Agreement with the Bank to borrow up to $5 million (the “Construction Loan”) for the primary purpose of financing tenant improvements at the Hunter Property. The Construction Loan is a line of credit evidenced by a Promissory Note in the principal amount of up to $5,000,000 with a maturity date of May 15, 2027. The terms of the Construction Loan provide that the Company may only request advances through July 15, 2020, and thereafter, the Construction Loan will convert to a term loan. Interest on the Construction Loan is payable monthly, subject to variable interest rate based on the Bank’s internal prime rate (4.75% and 5.25% at February 29, 2020 and August 31, 2019, respectively). Concurrent with the execution of this Construction Loan, Bisco entered into a commercial security agreement, dated July 12, 2019, with the Bank, pursuant to which Bisco granted the Bank a security interest in substantially all of Bisco’s personal property to secure Bisco’s obligations under the Loan Agreement. The outstanding balance of the Construction Loan at February 29, 2020 and August 31, 2019 was $3,794,000 and $342,000, respectively.

On May 15, 2017, the Company entered into a $5,400,000 loan agreement with the Bank.Bank (the “Lakeview Loan”). The proceeds of the loan were used to purchase the building that houses the Company’s then corporate headquarters and distribution center located in Anaheim, California (“Lakeview(the “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 byIn September 2019, Bisco entered into a deed of trustPurchase Agreement to sell the Lakeview Property and bearsfor a variable interest rate that is 1.70% plus one year LIBOR,cash sale price of $7,075,000, which is periodically reset basedclosed escrow on one year LIBOR no more than once in any 12 month period atNovember 19, 2019. Upon the electionclosing of escrow, Bisco used the proceeds from the sale to repay all of the bank. At May 31, 2019outstanding principal and August 31, 2018,accrued interest on the one year LIBORLakeview Loan. No amounts were outstanding on the Lakeview Loan at February 29, 2020. The Company leased back the building from the buyer until mid-March, when the Company’s corporate headquarters was 2.7% at May 31, 2019 and August 31, 2018 andmoved to the outstanding balance of this loan was $5,166,000 and $5,237,000, respectively. The Company’s future principal loan payments for the fiscal years ending August 31, 2019 and August 31, 2020 are approximately $49,000 and $5,117,000, respectively.Hunter Property.

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):

For the three and ninesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, 40,000 potential common shares (issuable upon conversion of 36,000 shares of the Company’s Series A Cumulative Convertible Preferred Stock) have been included in the computation of diluted earnings per share, which had no effect to basic earnings per share.

Note 5. 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 “Lease”“Glendale Lease”) from a grantor trust (the “Trust”) thatthe Trust, which is beneficially owned by the Company’s majority shareholder, who is also the Company’s Chairman and CEO. The Glendale 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 Glendale Lease. During the three months ended May 31,February 29, 2020 and February 28, 2019, and 2018, the Company incurred approximately $68,000 of expense related to this lease for both periods.the Glendale Lease of approximately $71,000 and $70,000, respectively. During the six months ended February 29, 2020 and February 28, 2019, the Company incurred expense related to the Glendale Lease of approximately $142,000 and $138,000, respectively.

Within the next seven months,On July 26, 2019, 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 byentered into the Trust. The Company plans to enter into a new leaseHunter Lease with the Trust, infor the near future concerning such facility. Tenant improvementslease of the Hunter Property, which house the Company’s new corporate headquarters. The Company completed its move to the new facility is scheduled to startheadquarters located at the Hunter Property in March 2020. The term of the Lease commenced on September 1, 2019 with a completion date of late December2, 2019 and a moveends on August 31, 2029 with an initial monthly rental rate of $66,300, which is subject to annual rent increases of approximately 2.5% as set forth in period during January 2020. Whereas the existing property has been listedHunter Lease. The foregoing description of the Lease does not purport to be complete and is qualified in the entirety by reference to the lease as filed as Exhibit 10.14 in its Form 10-K for sale,the year ended August 31, 2019 as filed with the SEC on November 27, 2019. During the three months ended February 29, 2020 and February 28, 2019, the Company does not intendincurred expense related to transfer the existing propertyHunter Lease of approximately $199,000 and none, respectively. During the six months ended February 29, 2020 and February 28, 2019, the Company incurred expense related to a buyer until it processes uncompleted customer orders at the existing facilityHunter Lease of approximately $398,000 and it completes the construction of tenant improvements at the new facility.none, respectively.

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 totaling $501,000 has been established against only those assets related to state net operating losses and capital losses.

The Tax Cuts and Jobs Act (the “Jobs Act”) was enacted on December 22, 2017. The Jobs Act reduced the US federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign sourced earnings. We previously completed our accounting for the tax effects of enactment of the Jobs Act and have determined no additional tax liability due to offsetting foreign tax credits. For the federal corporate rate differential for the year ended August 31, 2018, we recognized an amount of $184,000, which was included as a component of income tax expense from continuing operations. The Company is subject to taxation in the US, Canada and various states. We have elected to account for Global Intangible Low-Taxed Income (“GILTI”) in the year the tax is incurred.

During the three and ninesix months ended May 31,February 29, 2020, the Company recorded an income tax provision of $934,000 and $2,010,000, respectively, resulting in an effective tax rate of 26.4% and 30.8%, respectively. For the three and six months ended February 28, 2019, the Company recorded an income tax provision of $1,113,000$580,000 and $2,538,000,$1,425,000, respectively, resulting in an effective tax rate of 27.4%22.8% and 27.1%, respectively. For the three and nine months ended May 31, 2018, the Company recorded income tax provision of $993,000 and $2,310,000, respectively, resulting in an effective tax rate of 30.6% and 32.6%26.8%, respectively.  The current period effective tax rate differs from the current statutory rate of 21% primarily due to the state income tax rates and valuation allowances against certain deferred tax assets and permanent book to tax differences.basis adjustments related to transfer pricing and meals that were recognized during Q2 2019, which reduced the percent of pre-tax income during that period.

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 ninesix months ended May 31, 2019,February 29, 2020, 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 ninesix months ended May 31, 2019,February 29, 2020, 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 three months that would materially impact its consolidated financial statements.

The Company’s tax years for 2014, 2015, 2016, 2017 and 20172018 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 2014.2015.

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.

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

Note 8. Subsequent Events

Management has evaluated events subsequent to May 31, 2019,February 29, 2020, 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.

With respect to the ongoing and evolving coronavirus (COVID-19) outbreak, which was designated as a pandemic by the World Health Organization on March 11, 2020, the outbreak has caused substantial disruption in international and U.S. economies and markets. The outbreak may have an adverse impact on the industries the Company serves, such as the aerospace, electronic parts, and industrial equipment industry. If repercussions of the outbreak are prolonged, it could have a significant adverse impact to the underlying industries of some of the Company’s customers. To date, the Company has not incurred any significant disruptions to its business activities or supply chain, but has been required to limit the operations of our sales offices. Management cannot, at this point, estimate ultimate losses related to the COVID-19 outbreak, if any, and accordingly no adjustments were reflected in the accompanying financial statements related to this matter.

The Company completed its move of the corporate headquarters from the Lakeview Property to the Hunter Property on March 13, 2020, which is a significantly larger facility with approximately 80,000 square feet of office and warehouse space.

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 adverse economic conditions, competitive pressures, unexpected costs and losses from operations or investments, increases in costs and overhead, our ability to maintain an effective system of internal controls over financial reporting, potential losses from trading in securities, our ability to retain key personnel and good relationships with suppliers, the willingness of lenders to extend financing commitments and the availability of capital resources, and the other risks set forth in “Risk Factors” in Part II, Item 1A of this report or identified from time to time in our other filings with the SEC and in public announcements. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of forward looking statements in this Quarterly Report should not be regarded as a representation by management or any other person that the objectives or plans of the Company will be achieved.

Overview

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

EACO is a holding company primarily comprised of its wholly-owned subsidiary, Bisco. Bisco is a distributor of electronic components and fasteners with 4849 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

The Company’sCompany'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 accounting principles generally accepted in the United States of America.GAAP. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

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

In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2014-09, Revenue“Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued as a new Topic, ASC Topic 606 (“ASU 2014-09”ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively “new revenue standard”). The core principle of the new revenue recognition standard, provides a step analysis of transactions to determine when and how revenue is recognized. The premise of the standardamong other changes, is that a Companyan entity should recognize revenue to depict the transfer ofwhen it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the new revenue guidance beginning in fiscal 2019effective September 1, 2018, using the modified retrospective approach. The adoption of this guidance did not have a significantmethod with no impact on our consolidated financial statements.to the opening retained earnings.

In February 2016, the FASB issued ASU 2016-02, “Leases"Leases (Topic 842),”" which will requirerequires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will beis based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. This ASU is effective for annual reporting periodsfiscal years beginning after December 15, 2018,2019, including interim periods within those fiscal years. The Company is currently evaluatingadopted ASU 2016-02 on September 1, 2019 and applied the potential impact this standard will have on its condensedpackage of practical expedients included therein, as well as utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods prior to September 1, 2019 remains unchanged and in accordance with Leases (Topic 840). As of February 29, 2020, the Company has right of use assets of approximately $13.0 million (net of the reversal of the current deferred rent liability) and lease liabilities of approximately $13.1 million recorded in the consolidated financial statements and related disclosures.balance sheet.

Management does not believe any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company’s present or future condensed consolidated financial statements.

There have been no changes to the Company’s critical accounting policies for the three and ninesix months ended May 31, 2019,February 29, 2020, except for the adoption of ASC 606ASU 2016-02 referenced above. PleaseFor additional information regarding our critical accounting policies, 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, 20182019 as filed with the SEC on November 28, 2018.27, 2019.

Results of Operations

Comparison of the Three Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018

RevenuesNet Sales and Gross Profit ($ in thousands)

Revenues

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, 2019February 29, 2020 (“Q3 2019”Q2 2020”) as compared to the three months ended May 31, 2018February 28, 2019 (“Q3 2018”Q2 2019”) was largely due to a higher volume of product sales, increased sales department headcount over prior year quarter, increased productsales related to new inventory items, and increased productivity from the Company’s employees. Revenues have also increased due to the Company continuing to focus on relationship building programs with current and potential customers and vendors, which resulted in additional new authorized distributorships in the current fiscal year.

The gross margins in Q3 2019 decreasedQ2 2020 remained relatively consistent with prior year quarter, increasing by 1.2%0.2% as a percentage of revenues when compared to Q3 2018.Q2 2019. This decreaseincrease was primarily due to the mix of products sold and larger discounts on purchased inventory for large dollar volume orders and discount terms in Q3 2019Q2 2020 compared to Q3 2018. Decreases in the margins are also due to increased expenses related to warehouse and supply chain that are allocated to the cost of revenues.Q2 2019.

Selling, General and Administrative Expenses ($ in thousands)

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 2019Q2 2020 increased from Q3 2018Q2 2019 largely due to an increase in employee headcount, annual raises, higher sales bonuses related to higher sales, and to a lesser extent, due toincreases in rent escalation in leased properties, increases in IT consulting fees, and depreciation expense.offices. SG&A as a percent of revenue in Q3Q2 2020 remained consistent with Q2 2019 decreased from Q3 2018at 22.3%, primarily due to the Company being able to increase sales with current and new customers at a rate greater thanwithout having to incur additional significant SG&A expenses increased.expenses.

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

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 2019,Q2 2020, the Company recognized a net gain on trading securities of $413,000$471,000 as compared to a net loss of $65,000$126,000 in Q3 2018Q2 2019 in net realized and unrealized gains. The increase in trading securities in Q3 2019Q2 2020 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, net, decreased in Q3 2019Q2 2020 compared to Q3 2018Q2 2019 due to a higher balance heldthe sale of the Lakeview Property and extinguishment of the outstanding principal and accrued interest on the revolving lineLakeview Loan during November 2019. Further, interest expense on the Construction Loan for the Hunter Property is capitalized as part of creditthe leasehold improvements during the current period.Decreases in the margins were also due to increased expenses related to warehouse and supply chain that are allocated to the cost of revenues.period it is under construction.

Income Tax Provision ($ in thousands)

The provision for income taxes increased by $120,000$354,000 in Q3 2019Q2 2020 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 income tax provision as a percent of pre-tax income remained consistent with prior quarter, decreasingincreased from 30.6%22.8% at Q3 2018Q2 2019 to 27.4% for Q3 2019. The difference is26.4% at Q2 2020 primarily due to valuation allowances against certain deferred tax assets and permanent book to tax differences.adjustments related to transfer pricing and meals that were recognized during Q2 2019, which reduced the percent of pre-tax income during that period.

Comparison of the NineSix Months Ended May 31,February 29, 2020 and February 28, 2019 and 2018

RevenuesNet Sales and Gross Profit ($ in thousands)

The increase in revenues in the ninesix months ended May 31, 2019February 29, 2020 as compared to the ninesix months ended May 31, 2018February 28, 2019 was largely due to increased 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 continuing to focus on relationship building programs with current and potential customers and vendors.vendors, which resulted in additional new authorized distributorships in the current fiscal year.

The gross marginmargins during the six months ended February 29, 2020 increased by 0.4% as a percentpercentage of revenue remained relatively consistent withrevenues when compared to the prior year period, decreasing slightly by 0.8%. The decrease in gross margins in the nine months ended May 31, 2019 as compared to the nine months ended May 31, 2018period. This increase was primarily due to the mix of products sold in each respective period.Decreases inand larger discounts on purchased inventory for large dollar volume orders and discounted terms during the margins are also due to increased expenses related to warehouse and supply chain that are allocatedsix months ended February 29, 2020 compared to the cost of revenues.prior year period.

Selling, General and Administrative Expenses ($ in thousands)

SG&A in the ninesix months ended May 31, 2019February 29, 2020 increased from the prior year period largely due to an increase in annual employee wage raises increase inand bonuses, due to higher sales, 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 2019during the six month period ended February 29, 2020 decreased slightly from Q3 2018the prior year period primarily due to the Company being able to increase sales with current and new customers at a rate greater than SG&A expenses increased.

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

During the ninesix months ended May 31, 2019,February 29, 2020, the Company recognized a net gain on sale of trading securities of $515,000$391,000 as compared to a net gain of $186,000$102,000 in the ninesix months ended May 31, 2018February 28, 2019 in net realized and unrealized gains.gains on trading securities. The increase in gain on trading securities for the current ninesix month period was primarily due to timing of sales and purchases and general market climate of short and long positions during the period.

During November 2019, the Companysold the Lakeview Property for a cash purchase price of $7,075,000, realizing a total loss of $102,000 from the sale in the three months ending November 30, 2019 (“Q1 2020”).

Interest and other expense, net, decreased in the ninesix months ended May 31, 2019February 29, 2020 compared to the prior year period due to an overall lower balance in the Company’s linesale of credit with the Bank inLakeview Property and extinguishment of the current period when compared tooutstanding principal and accrued interest on the prior year period.

Lakeview Loan during November 2019.

Income Tax Provision ($ in thousands)

The provision for income taxes increased by $228,000$585,000 in the ninesix month period ended May 31, 2019February 29, 2020 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. The percent of pre-tax income decreasedincreased from 32.6%26.8% to 27.1%30.8% when comparing the ninesix months ended May 31, 2018February 28, 2019 to May 31, 2019.February 29, 2020. The decreaseincrease in the tax rateprovision for income taxes in dollars and as a percent of pre-tax income in the six months ended February 29, 2020 was primarily due to the Tax Cut and Jobs Act becoming effective as of January 1, 2018, during the prior year period, which enacted significant changes to U.S.a discrete tax and related laws. Further, the decrease in the rate isitem due to an increase incertain deferred tax assets and permanent deductible expense items duringbooks to tax differences related to prior periods that was reconciled and recorded in Q1 2020 for approximately $277,000. The increase in taxes was also due to higher taxable income in the nine months ended May 31, 2019.current quarter as compared to the prior year period.

Liquidity and Capital Resources

The Company has historically been funded from positive cash flow generated from its operations. As of May 31,February 29, 2020 and February 28, 2019, and August 31, 2018, the Company held approximately $5,582,000$8,286,000 and $2,705,000$4,800,000 of unrestricted cash and cash equivalents, respectively. The Company also held $894,000 and $1,873,000 of marketable securities at February 29, 2020 and August 31, 2019, respectively, which could be liquidated, if necessary.

In addition, theThe Company currently has a $10,000,000$15,000,000 line of credit agreement with the Bank. On July 24, 2018,December 4, 2019, the Company entered into a Change in Terms Agreement dated July 12, 2018the Amendment, which modified the Company’s line of credit with the Bank (the “Amendment”). The Amendment modifiesto increase the Company’s $10,000,000maximum amount that may be borrowed there under from $10.0 million to $15.0 million. In addition, the interest rate provisions under the line of credit betweenwere modified so that in no event would such interest rate be less than 3.5% per annum or the Company and the Bank to: (i) extend themaximum interest rate permitted under law. The expiration date of the line of credit under the agreement from March 1, 2019 to August 20, 2020; (ii) reduce the defaultis July 5, 2021. The line of credit has a variable interest index rate by .500% (Wall Street Journal Prime Rate less .500%); and (iii) add the following two other interest rate optionsoption that the Company may select (subject to the requirements in the Amendment and provided that the Company is not in default under the line of credit agreement): to (A) The default variable interest index rate, which is Citizens Business Bank Prime Rate of Interest, which is the prime rate (4.75% at February 29, 2020 and 5.25% at August 31, 2019) less 0.500%; or (B) One Hundred Eighty (180) day Libor Rate plus a margin of 1.550%; or (B)and (v) replace the One (1) Year Libor pluspreferred rate of interest with a margin of 1.550%, as more fully described in the Amendment.discounted rate. The amounts outstanding under this line of credit as of MayFebruary 29, 2020 and August 31, 2019 isare currently all under the default variable interest index rate. The linerate of credit agreement contains financial4.25% and other covenants that have not been modified by the Amendment. Borrowings under this agreement bear interest at the bank’s reference rate, which is the Prime Rate (5.50% at May 31, 2019 and 5.00% at August 31, 2018) less .500%.4.75%, respectively. Borrowings are secured by substantially all of the assets of the Company and its subsidiaries.subsidiary. The amounts outstanding under this line of credit as of MayFebruary 29, 2020 and August 31, 2019 were $9,214,000 and 2018 were $6,872,000 and $6,668,000,$6,114,000, respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As of May 31, 2019February 29, 2020 and August 31, 2018,2019, the Company was in compliance with all such covenants.

On July 12, 2019, the Company also entered into the Construction Loan for the primary purpose of financing tenant improvements at the Hunter Property. The Construction Loan is a line of credit evidenced by a Promissory Note in the principal amount of up to $5,000,000 with a maturity date of May 15, 2027. The terms of the Construction Note provide that the Company may only request advances through July 15, 2020, and thereafter, the Construction Loan will convert to a term loan. Interest on the Construction Loan is payable monthly, subject to variable interest rate based on the Bank’s internal prime rate (4.75% and 5.25% at February 29, 2020 and August 31, 2019, respectively). The balance of the Construction Loan at February 29, 2020 and August 31, 2019 was $3,794,000 and $342,000 respectively.

On May 15, 2017, the Company entered into a $5,400,000 loan agreement with the Bank. TheLakeview Loan, the proceeds of the loan were used to purchase the building that housed the Company’s previous corporate headquarters and distribution center located in Anaheim, California. In September 2019, Bisco sold the Lakeview Property for a cash sale price of $7,075,000, which closed on November 19, 2019. Upon the closing, Bisco used the proceeds from the sale to repay all of the outstanding principal and accrued interest on the Lakeview Loan. No amounts were outstanding on the Lakeview Loan at February 29, 2020. The Company leased back the building from the buyer until mid-March, when the Company’s new corporate headquarters was moved to the Hunter Property.

On May 15, 2017, the Company entered into the Lakeview Loan, the proceeds of which were used to purchase the Lakeview Property 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 byCalifornia. In September 2019, Bisco entered into a deed of trustPurchase Agreement to sell the Lakeview Property and bearsfor a variable interest rate that is 1.70% plus one year LIBOR,cash sale price of $7,075,000, which is periodically reset basedclosed on one year LIBOR no more than once in any 12 month period atNovember 19, 2019. Upon the electionclosing, Bisco used the proceeds from the sale to repay all of the Bank. At May 31, 2019outstanding principal and August 31, 2018,accrued interest on the one year LIBORLakeview Loan. No amounts were outstanding on the Lakeview Loan at February 29, 2020. The Company leased back the building from the buyer until mid-March, when the Company’s new corporate headquarters was 2.7%. At May 31, 2019,moved to the outstanding balance of this loan was $5,166,000.Hunter Property.

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

The Company plans to move its corporate headquarters within the next seven months to a significantly larger facility owned by the Trust in Anaheim, California. In preparation for this move, the Company expects to incur higher capital expenses during the next years for capital costs for tenant improvements to modify this facility to meet the Company’s requirements.

The Company also held $968,000 and $2,846,000 of marketable securities at May 31, 2019 and August 31, 2018, respectively, which could be liquidated, if necessary.

Cash Flows from Operating Activities

Cash provided byused in operating activities was $1,522,000$3,621,000 for the ninesix months ended May 31, 2018February 29, 2020 as compared with cash used in operations of $1,817,000$4,681,000 for the ninesix months ended May 31,February 28, 2019. The increasedecrease in current period cash used by operating activities was primarily due to higher income and a decrease in purchased inventory for the increase in trade accounts receivable, higher inventory to support higher sales, and prepaid expenses and other current assets in the current period, which was largely related to an increase in becoming an authorized product lines distributor through various vendors and increased revenues in the ninesix months ended May 31, 2019.February 29, 2020 when compared to the prior year period due to timing of stocking product lines. This was partially offsetalso adversely impacted to some extent by an increasea decrease in net income and trade accounts payable in the current period.period due to less inventory purchased and timing of payments. The prior yearperiod cash providedused in operating activities was primarily due to an increase in trade accounts payables.inventory and accrued expense.

Cash Flows from Investing Activities

Cash used inprovided by investing activities was $2,203,000$5,585,000 for the ninesix months ended May 31, 2018February 29, 2020 as compared with cash provided by suchin investing activities of $2,969,000$626,000 for the ninesix months ended May 31,February 28, 2019. The increase in cash flow from investing activities in the current year period compared to the prior year period was primarily due tothe Company’s proceeds from the sale of marketable securities of $2,393,000the Lakeview Property in November 2019 for $7,075,000 and a net increase in securities sold short in the ninesix months endingMay 31February 29, 2020, 2019.. This was partially offset by purchase of equipment and construction of leasehold improvements in the current period for $4,591,000 for the new corporate headquarters. The prior year cash used inprovided by investing activities was primarily due to the Company’s purchases ofnet increase in marketable securities infor the ninesix months endingMay 31,February 29, 20202018 of equipment and leasehold improvements and marketable securities..

Cash Flows from Financing Activities

Cash used inprovided by financing activities for the ninesix months ended May 31, 2018February 29, 2020 was $256,000$1,224,000 as compared with cash provided by financing activities of $3,164,000$4,940,000 for the ninesix months ended May 31,February 28, 2019. The increase in cash provided by financing activities comparingfor the current period to the prior year period is primarily due to larger borrowing of $3,797,000 oncash borrowings from the Company’srevolving line of credit partially offset by a lower bank overdraftand the Construction Loan for the current year period. The increaseHunter Property. This was adversely effected by the repayment of the entire Lakeview Property mortgage loan in borrowing onNovember 2019, when the line of credit in current periodproperty was primarily due to an increase in purchasing of inventory.sold. Cash usedprovided by financing activities in the prior year period is primarily due to paymentsborrowings of $260,000$4,593,000 on the Company’s revolving line of credit.

Off-Balance Sheet Arrangements

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

Contractual Financial Obligations

In addition to using cash flow generated from operations, the Company finances its operations through borrowings under its line of credit.  These financial obligations are recorded in accordance with accounting rules applicable to the underlying transactions, with the result being that amounts owed under debt agreements and capital leases are recorded as liabilities on the consolidated balance sheets while lease obligations recorded as operating leases are disclosed in the notes to the consolidated financial statements and management’s discussion and analysis of financial condition and results of operations in the Company’s annual report on Form 10-K for the year ended August 31, 20182019 as filed with the SEC on November 28, 2018.27, 2019.

Within the next 7 months, 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 anticipates it will incur additional capital expenditures of approximately $3,500,000 for tenant improvements related to the new headquarters between September 1, 2019 to December 2019. The Company has not executed a lease for such facility, however, but plans 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

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.

Item 1A.  Risk Factors

Our business is subject to a number of risks, some of which are discussed below. Other risks are presentedThe risk factors discussed in this section should be considered together with information included elsewhere in this report and in our other filings with the SEC, including our AnnualQuarterly Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K .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.

Our business and results of operations may be adversely impacted as a result of the recent COVID-19 outbreak.

On March 11, 2020, the World Health Organization designated the coronavirus (COVID-19) as a pandemic. While the Company has not incurred any significant disruptions to its business activities or supply chain to date, the Company has had to temporarily close its 49 sales offices to the public, and has experienced temporary closures of certain offices from time to time to keep our employees safe. We have also shifted more than half of our sales force to remote operations and have implemented changes our warehouse and distribution operations to ensure social distancing. As a result, we may experience delays in our responses to our customers and possible delays in shipments of our products, which could harm our customer relations and adversely impact our sales. In addition, certain of our customers have closed or reduced their operations during this pandemic, and government restrictions could also further restrict our business and result in supply chain interruptions in the future. While our sales continue to remain strong, we cannot predict how long the pandemic will last and the impact of such pandemic on our financial condition and results of operations.

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, shipping costs, geopolitical events, and other factors. Although we sell our products to customers in a broad range of industries, any significant weakening ofif economic conditions significantly weaken on a global scale has in the past caused, andit may in the future cause some of our customers to experience a slowdown, from time to time, which could adverselymay 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.

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 May 31, 2019, Glen Ceiley, our Chairman and CEO, beneficially ownedowns or controlledcontrols approximately 97% of our outstanding voting stock. As a result,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 the selection and election of our board and 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 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 or higher prices for inventory from time to time.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 on a timely basis 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 typicallygenerally terminable at the suppliers’ discretion.

Substantially all of ourthe agreements we have with our suppliers, including our authorized distributor agreements, are terminable by some suppliers 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, significant deficiencies in the process related to the preparation of our financial statements, segregation of duties, sufficient control in the area of financial reporting oversight and review, and appropriate personnel to ensure the complete and proper application of GAAP as it relates to certain routine accounting transactions. 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 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.returns. 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 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 the Bank.Citizen’s Business Bank, located in Anaheim, CA. The agreement is secured by substantially all of Bisco’s assets and is guaranteed by EACO.assets. The loan agreement contains covenants which require that, on a quarterly basis, Bisco’s losses from trading in securities not exceed its pre-tax operating income. We cannot assure you that unanticipated losses from our trading activities will not cause us to violate our covenants in the future or that the bankBank 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 onunder 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.information, and certain states including California, have mandated additional compliance requirements, which could result in additional expenses for the Company in the near future. 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 rely heavily on our internal information systems, which, if not properly functioning, could materially and adversely affect our business.

Our information systems have been in place for many years, and are subject to system failures as well as problems caused by human error, which could have a material adverse effect on our business. Many of our systems consist of a number of legacy or internally developed applications, which can be more difficult to upgrade to commercially available software. It may be time consuming and costly for us to retrieve data that is necessary for management to evaluate our systems of control and information flow. In the future, management may decide to convert our information systems to a single enterprise solution. Such a conversion, while it would enhance the accessibility and reliability of our data, could be expensive and would not be without risk of data loss, delay or business interruption. Maintaining and operating these systems requires continuous investments. Failure of any of these internal information systems or material difficulties in upgrading these information systems could have material adverse effects on our business and our timely compliance with our reporting obligations.

We may not be able to attract and retain key personnel.

Our future performance will depend to a significant extent upon the efforts and abilities of certain key management and other personnel, including Glen Ceiley, our Chairman and CEO, as well as other executive officers and senior management. The loss of service of one or more of our key management members could have a material adverse effect on our business.

The competitive pressures we face could have a material adverse effect on our business.

The market for our products and services is very competitive. We compete for customers with other distributors, who sell similar or somethingsometimes 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 and may not expand our revenues.

One of our primary growth strategies is to grow our business through the opening of sales offices in new geographic markets. This strategy requires continued investment, both financially, as well as management’s efforts to get the new offices operational and profitable.operational. 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 newWe currently have 49 sales offices each year,throughout the U.S., and quickly growing each newplan to continue to expand our geographic footprint, even outside the U.S. in the near further. During fiscal 2020, the Company relocated some existing locations to larger office locations within its original region and expanded sales office.and operating headcount. 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. In addition, officesOffices in new geographic areas face additional challenges to achieving profitability.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.

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 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, 2019 was approximately $5.6 million. The total outstanding on our line of credit as of May 31, 2019February 29, 2020 was approximately $6.8$9.2 million, which the line of credit is secured by substantially all of Bisco’s assets. Further, the Company recently entered into a construction loan agreement with the Bank to borrow up to $5 million for the primary purpose of financing tenant improvements on the new corporate headquarters. As of February 29, 2020, the total outstanding on the Construction Loan was approximately $3.8 million. See Note 4 for further explanation. Our ability to continue to draw on our line of creditsecure financing is subject to our satisfaction of certain covenants contained in such agreement.agreements. As such, we may need to pursue additional debt or equity financing, which funding may not be available on acceptable or favorable terms, on a timely basis or at all. The securities that might be issued in any future equity financing may have rights, preferences, and privileges that are senior to our common stock. Our failure to obtain such funding could adversely impact our ability to execute our business plan and our financial condition and results of operations.

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, 2019,February 29, 2020, the number of shares held by non-affiliates of Mr. Ceiley was less than 160,000 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 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.

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. For Q2 2020 and Q2 2019, we spent $93,000 and $97,000 on advertising, respectively.

We are exposed to foreign currency exchange rate risk, and changes in foreign exchange rates could increase our costs to procure products and impact our foreign sales.

Because the functional currency related to our Canadian operations and certain of our foreign vendor purchases is the applicable local currency, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. Fluctuations in the relative strength of foreign economies and their related currencies could adversely impact our ability to procure products overseas at competitive prices and our foreign sales. Historically, our primary exchange rate exposure has been with the Canadian dollar.

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.On March 15, 2020, Jay Conzen, a director of the Company passed away. Mr. Conzen had been a valued member of the Company’s Board of Directors since 1998 and also served as the Chairman of the Audit Committee of the Board of Directors. The Company plans to fill this vacancy but has just recently commenced the search process in this regard. As such, there currently remains a vacancy on the Board of Directors. The remaining Audit Committee members and a majority of the Board members continue to qualify as independent directors under both the OTCQB’s rules and under SEC Rule 10A-3.

Item 6.    Exhibits

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

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.

EXHIBIT INDEX