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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(MARK ONE)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ |
COMMISSION FILE NUMBER
| (Exact Name of Registrant as Specified in its Charter) |
| british columbia | NONE | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| (Address Of Principal Executive Offices) | (Zip Code) |
| (Registrant’s Telephone Number, Including Area Code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller Reporting Company | |
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value – common shares as of April 14, 2022.
Jewett-Cameron Trading Company Ltd.
Index to Form 10-Q
| PART I – FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 25 |
| Item 4. | Controls and Procedures | 26 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 27 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 27 |
| Item 3. | Defaults Upon Senior Securities | 27 |
| Item 4. | Mine Safety Disclosures | 27 |
| Item 5. | Other Information | 27 |
| Item 6. | Exhibits | 27 |
PART 1 – FINANCIAL INFORMATION
| Item 1. | Financial Statements |
JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
(Unaudited – Prepared by Management)
FEBRUARY 28, 2022
| 1 |
JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
February 28, 2022 | August 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance of $Nil (August 31,
2021 - $ | ||||||||
| Inventory, net of allowance of $ | ||||||||
| Prepaid expenses | ||||||||
| Prepaid income taxes | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net (note 4) | ||||||||
| Intangible assets, net (note 5) | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Bank indebtedness (note 7) | ||||||||
| Accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Deferred tax liability (note 6) | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Capital stock (note 9, 10) | ||||||||
| Authorized | ||||||||
| common shares, | ||||||||
| preferred shares, | ||||||||
| Issued | ||||||||
| common shares (August 31, 2021 –) | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
Three Month Periods at the end of February | Six Month Periods at the end of February | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| SALES | $ | $ | $ | $ | ||||||||||||
| COST OF SALES | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Wages and employee benefits | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||
| OTHER ITEMS | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Accrual for legal claim | ( | ) | ( | ) | ||||||||||||
| Total other items | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax (expense) recovery | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Basic earnings (loss) per common share | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Diluted earnings (loss) per common share | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
| Capital Stock | ||||||||||||||||||||
| Number of Shares | Amount | Additional paid-in capital | Retained earnings | Total | ||||||||||||||||
| August 31, 2020 | $ | $ | $ | $ | ||||||||||||||||
| Shares issued pursuant to compensation plans (note 11) | ||||||||||||||||||||
| Net income | — | |||||||||||||||||||
| February 28, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Net income | — | |||||||||||||||||||
| August 31, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Shares issued pursuant to compensation plans (note 11) | ||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| February 28, 2022 | $ | $ | $ | $ | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
Six Month Period at the end of February, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Items not involving an outlay of cash: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation expense | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Changes in non-cash working capital items: | ||||||||
| (Increase) decrease in accounts receivable | ( | ) | ||||||
| (Increase) in inventory | ( | ) | ( | ) | ||||
| (Increase) in prepaid expenses | ( | ) | ( | ) | ||||
| Increase (decrease) in accounts payable and accrued liabilities | ( | ) | ||||||
| (Increase) in prepaid income taxes | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property, plant and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from bank indebtedness | ||||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
Supplemental disclosure with respect to cash flows (Note 14)
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
February 28, 2022
(Unaudited)
| 1. | NATURE OF OPERATIONS |
Jewett-Cameron Trading Company Ltd. was
incorporated in British Columbia on
JC USA has the following wholly owned
subsidiaries incorporated under the laws of the State of Oregon:
In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. Government measures to limit the spread of COVID-19, including the closure of non-essential businesses, affected the Company’s operations including delays in inventory production and shipping, a change of product mix based on customer demand to fencing, pet and DIY products, an increase in demand from online sales channels, and costs associated with compliance with COVID-19 control protocols. The Company’s operations, including inventory production and sales, have been excluded from business restrictions within the jurisdictions that the Company operates. However, due to the rapid developments and uncertainty surrounding COVID-19, it is not possible to predict the impact that COVID-19 will have on the Company’s business, financial position, and operating results in the future. In addition, it is possible that estimates in the Company’s consolidated financial statements will change in the near term as a result of COVID-19 and the effect of any such changes could be material, which could result in, among other things valuation of inventory and collectability of accounts receivable. The Company continues to closely monitor the impact of the pandemic on all aspects of its business.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Generally accepted accounting principles
These consolidated financial statements have been prepared in conformity with generally accepted accounting principles of the United States of America.
Principles of consolidation
These consolidated financial statements include the accounts of the Company and its current wholly owned subsidiaries, JC USA, JCC, JCSC, and Greenwood, and its former wholly owned subsidiary MSI, all of which are incorporated under the laws of Oregon, U.S.A.
All inter-company balances and transactions have been eliminated upon consolidation.
| 6 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 2. | SIGNIFICANT ACCOUNTING POLICIES (cont’d…) |
Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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 period. Significant estimates incorporated into the Company’s consolidated financial statements include the estimated useful lives for depreciable and amortizable assets, the estimated allowances for doubtful accounts receivable and inventory obsolescence, possible product liability and possible product returns, and litigation contingencies and claims. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid
instruments with a maturity of three months or less at the time of issuance to be cash equivalents. At February 28, 2022, cash and cash
equivalents were $
Accounts receivable
Trade and other accounts receivable are reported at face value less any provisions for uncollectible accounts considered necessary. Accounts receivable primarily includes trade receivables from customers. The Company estimates doubtful accounts on an item-by-item basis and includes over aged accounts as part of allowance for doubtful accounts, which are generally ones that are ninety days or greater overdue.
The Company extends credit to domestic customers and offers discounts for early payment. When extension of credit is not advisable, the Company relies on either prepayment or a letter of credit.
Inventory
Inventory, which consists primarily of finished goods, is recorded at the lower of cost, based on the average cost method, and market. Market is defined as net realizable value. An allowance for potential non-saleable inventory due to excess stock or obsolescence is based upon a review of inventory components.
Property, plant and equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. The Company provides for depreciation over the estimated life of each asset on a straight-line basis over the following periods:
| Office equipment | |
| Warehouse equipment | |
| Buildings |
Intangibles
The Company’s intangible assets have a finite life and are recorded at cost. Amortization is calculated using the straight-line method over the remaining life of the asset. The intangible assets are reviewed annually for impairment.
| 7 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 2. | SIGNIFICANT ACCOUNTING POLICIES (cont’d…) |
Asset retirement obligations
The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and normal use of the long-lived assets. The Company also records a corresponding asset which is amortized over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time (accretion expense) and changes in the estimated future cash flows underlying the obligation (asset retirement cost). The Company does not have any significant asset retirement obligations.
Impairment of long-lived assets and long-lived assets to be disposed of
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. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such 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 the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount and the fair value less costs to sell.
Currency and foreign exchange
These financial statements are expressed in U.S. dollars as the Company's operations are primarily based in the United States.
The Company does not have non-monetary or monetary assets and liabilities that are in a currency other than the U.S. dollar. Any statement of operations transactions in a foreign currency are translated at rates that approximate those in effect at the time of translation. Gains and losses from translation of foreign currency transactions into U.S. dollars are included in current results of operations.
Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted earnings per common share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive common shares.
| 8 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 2. | SIGNIFICANT ACCOUNTING POLICIES (cont’d…) |
Earnings per share (cont’d…)
The (loss) earnings per share data for the three and six month periods ended February 28, 2022 and February 28, 2021 are as follows:
| Three Month Periods ended February 28, | Six Month Periods ended February 28, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Basic weighted average number of common shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Stock options | ||||||||||||||||
| Diluted weighted average number of common shares outstanding | ||||||||||||||||
The Company has no items of other comprehensive income in any year presented. Therefore, net income presented in the consolidated statements of operations equals comprehensive income.
All stock-based compensation is recognized as an expense in the financial statements and such costs are measured at the fair value of the award.
Financial instruments
The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate such values:
Cash - the carrying amount approximates fair value because the amounts consist of cash held at a bank and cash held in short term investment accounts.
Accounts receivable - the carrying amounts approximate fair value due to the short-term nature and historical collectability.
Accounts payable and accrued liabilities - the carrying amount approximates fair value due to the short-term nature of the obligations.
| 9 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 2. | SIGNIFICANT ACCOUNTING POLICIES (cont’d…) |
Financial instruments (cont’d…)
The estimated fair values of the Company's financial instruments as of February 28, 2022 and August 31, 2021 follows:
February 28, 2022 | August 31, 2021 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Accounts receivable, net of allowance | ||||||||||||||||
| Accounts payable and accrued liabilities | ||||||||||||||||
| Bank Indebtedness | ||||||||||||||||
The following table presents information about the assets that are measured at fair value on a recurring basis as of February 28, 2022 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and included situations where there is little, if any, market activity for the asset:
February 28, 2022 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
The fair values of cash are determined through market, observable and corroborated sources.
Income taxes
A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Shipping and handling costs
The Company incurs certain expenses related to preparing, packaging and shipping its products to its customers, mainly third-party transportation fees. All costs related to these activities are included as a component of cost of sales in the consolidated statements of operations. All costs billed to the customer are included as sales in the consolidated statements of operations.
| 10 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 2. | SIGNIFICANT ACCOUNTING POLICIES (cont’d…) |
Revenue recognition
The Company recognizes revenue from the sales of lumber, building supply products, industrial wood products, specialty metal products, and other specialty products, when the products are shipped, title passes, and the ultimate collection is reasonably assured. Revenue from the Company's seed operations is generated from seed processing, handling and storage services provided to seed growers, and by the sales of seed products. Revenue from the provision of these services and products is recognized when the services have been performed, products sold and collection of the amounts is reasonably assured.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The accounting standard changes the methodology for measuring credit losses on financial instruments and the timing when such losses are recorded. ASU No. 2016-14 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. The Company adopted this ASU on September 1, 2020. There was no material impact on the Company’s financial statements on adoption.
| 3. | INVENTORY |
A summary of inventory is as follows:
February 28, 2022 | August 31, 2021 | |||||||
| Wood products and metal products | $ | $ | ||||||
| Agricultural seed products | ||||||||
| Inventory Net | $ | $ | ||||||
| 11 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 4. | PROPERTY, PLANT AND EQUIPMENT |
A summary of property, plant, and equipment is as follows:
February 28, 2022 | August 31, 2021 | |||||||
| Office equipment | $ | $ | ||||||
| Warehouse equipment | ||||||||
| Buildings | ||||||||
| Land | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Net book value | $ | $ | ||||||
In the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future discounted cash flows is less than the carrying amount of the asset, an impairment loss will be recognized. Management's estimates of revenues, operating expenses, and operating capital are subject to certain risks and uncertainties which may affect the recoverability of the Company's investments in its assets. Although management has made its best estimate of these factors based on current conditions, it is possible that changes could occur which could adversely affect management's estimate of the net cash flow expected to be generated from its operations.
| 5. | INTANGIBLE ASSETS |
A summary of intangible assets is as follows:
February 28, 2022 | August 31 2021 | |||||||
| Intangible assets | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Net book value | $ | $ | ||||||
| 6. | DEFERRED INCOME TAXES |
Deferred income tax liability as of February
28, 2022 of $
| 7. | BANK INDEBTEDNESS |
Bank indebtedness
under the Company’s $
Bank indebtedness, when it exists, is
secured by an assignment of accounts receivable and inventory. Interest was calculated solely on the one-month LIBOR rate plus 175 basis
points. As of February 28, 2022, the interest rate was
| 12 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 8. | NOTES PAYABLE |
On May 4, 2020, the Company entered into loan agreements with U.S. Bank (the “Lender”) for two unsecured loans represented by promissory notes (the “Notes”). The loans were made pursuant to the Paycheck Protection Program (the “PPP”) as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”).
The
first loan was made to JCC for $
The Company has chosen to account for the loans under FASB ASC 470. Repayment amounts due within 1 year have been recorded as current liabilities, and the remaining amounts due in more than 1 year as long-term liabilities. If the Company is successful in receiving forgiveness for those portions of the loan used for qualifying expenses, those amounts will be recorded as a gain upon extinguishment.
During fiscal 2021 ended
August 31, 2021, the Company’s applications for loan forgiveness of both loans was approved by the SBA. The Company has recorded
a gain of extinguishment of debt of $
| 9. | CAPITAL STOCK |
Common Stock
Holders of common stock are entitled to one vote for each share held. There are no restrictions that limit the Company's ability to pay dividends on its common stock. The Company has not declared any dividends since incorporation.
| 10. | RESTRICTED SHARE PLAN |
The Company has a Restricted Share Plan (the “Plan”) as approved by shareholders on February 8, 2019. The Plan allows the Company to grant, from time to time, restricted shares as compensation to directors, officers, employees and consultants of the Company. The Restricted Shares are subject to restrictions, including the period under which the shares will be restricted (the “Restricted Period”) and subject to forfeiture which is determined by the Board at the time of the grant. The recipient of Restricted Shares is entitled to all of the rights of a shareholder, including the right to vote such shares and the right to receive any dividends, except that the shares granted under the Plan are nontransferable during the Restricted Period.
The maximum number of Common Shares
reserved for issuance under the Plan will not exceed 1% of the then issued and outstanding number of Common Shares at the time of the
grant. As of February 28, 2022, the maximum number of shares available to be issued under the Plan was
| 13 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 11. | PENSION AND PROFIT-SHARING PLANS |
The Company has a deferred compensation
401(k) plan for all employees with at least 6 months of service pending a monthly enrollment time. The plan allows for a non-elective
discretionary contribution plus matching employee contributions up to a specific limit. The percentages of contribution remain the discretion
of the Board and are reviewed with management annually. For the six month periods ended February 28, 2022 and 2021, the 401(k) compensation
expense was $
| 12. | SEGMENT INFORMATION |
The Company has three principal reportable segments. These reportable segments were determined based on the nature of the products offered. Reportable segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The following tables show the operations of the Company's reportable segments.
Following is a summary of segmented information for the six month periods ended February 28, 2022 and 2021.
| 2022 | 2021 | |||||||
| Sales to unaffiliated customers: | ||||||||
| Industrial wood products | $ | $ | ||||||
| Lawn, garden, pet and other | ||||||||
| Seed processing and sales | ||||||||
| $ | $ | |||||||
| (Loss) income before income taxes: | ||||||||
| Industrial wood products | $ | $ | ( | ) | ||||
| Lawn, garden, pet and other | ( | ) | ||||||
| Seed processing and sales | ( | ) | ||||||
| Corporate and administrative | ||||||||
| $ | ( | ) | $ | |||||
| Identifiable assets: | ||||||||
| Industrial wood products | $ | $ | ||||||
| Lawn, garden, pet and other | ||||||||
| Seed processing and sales | ||||||||
| Corporate and administrative | ||||||||
| $ | $ | |||||||
| Capital expenditures: | ||||||||
| Industrial wood products | $ | $ | ||||||
| Lawn, garden, pet and other | ||||||||
| Seed processing and sales | ||||||||
| Corporate and administrative | ||||||||
| $ | $ | |||||||
| Interest expense: | $ | $ | ||||||
| 14 |
JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 12. | SEGMENT INFORMATION (cont’d…) |
The following table lists sales made by the Company to customers which were in excess of 10% of total sales for the six months ended February 28, 2022 and 2021:
| 2022 | 2021 | ||||||||
| Sales | $ | $ | |||||||
The Company conducts business primarily in the United States, but also has limited amounts of sales in foreign countries. The following table lists sales by country for the six months ended February 28, 2022 and 2021:
| 2022 | 2021 | |||||||
| United States | $ | $ | ||||||
| Canada | ||||||||
| Europe | ||||||||
| Mexico/Latin America/Caribbean | ||||||||
| Asia/Pacific | ||||||||
All of the Company’s significant identifiable assets were located in the United States as of February 28, 2022 and 2021.
| 13. | RISKS |
Credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company places its cash with a high quality financial institution. The Company has concentrations of credit risk with respect to accounts receivable as large amounts of its accounts receivable are concentrated geographically in the United States amongst a small number of customers.
At February 28, 2022, three customers
accounted for accounts receivable greater than 10% of total accounts receivable at
Volume of business
The Company has concentrations in the
volume of purchases it conducts with its suppliers. For the six months ended February 28, 2022, there were two suppliers that each accounted
for 10% or greater of total purchases, and the aggregate purchases amounted to $
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JEWETT-CAMERON TRADING COMPANY LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in U.S. Dollars) February 28, 2022 (Unaudited)
|
| 14. | SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS |
Certain cash payments for the six months ended February 28, 2022 and 2021 are summarized as follows:
| 2022 | 2021 | |||||||
| Cash paid during the periods for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
There were no non-cash investing or financing activities during the periods presented.
| 17. | CONTINGENCY |
| a) | An association of District Attorneys in the State of California have contacted the Company in regards
to their ongoing investigation into the environmental labeling and marketing of dog waste bags. The District Attorneys claim that labelling
certain dog waste bags, including the Company’s, as biodegradable or compostable is misleading due to the lack of industrial composting
facilities that accept dog waste. The Company has accrued a charge in the current period of $ |
| b) | The Company is a named party in a Civil Action in Pennsylvania. The matter is an action seeking compensation for personal injuries and is based on theories of product liability as to the Company. The matter arises out of a dog allegedly escaping from a Jewett-Cameron kennel product and causing personal injuries to three individuals. The Company is currently one of three named Defendants. A trial date has not been set at this time. At the present time it is speculative to predict as to its outcome. It is the Company’s intention to vigorously defend the lawsuit. The Company’s applicable liability insurer is providing a defense covering the Company’s legal fees and costs. |
| c) | The Company has initiated arbitration against a former distributor asserting a breach of the distribution agreement and seeking damages. Arbitration is scheduled to commence in the first week of August 2022. While the company is robustly pursuing its rights and defending itself against claims, the arbitration and lawsuit are in their initial stages and therefore it is speculative to predict as to its outcome. |
| 18. | SUBSEQUENT EVENTS |
Due to the worldwide banking industry phasing out the use of LIBOR, the Company’s Bank Line of Credit agreement has been revised to change the calculation of the interest rate from the one-month LIBOR rate to the one-month Secured Overnight Financing Rate (SOFR). Beginning with the monthly interest payment due March 1, 2022, interest is calculated based on the one-month SOFR plus 157 basis points, which as of March 1, 2022 was 1.62% (0.05% + 1.57%).
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
These unaudited financial statements are those of the Company and its wholly owned subsidiaries. In the opinion of management, the accompanying consolidated financial statements of Jewett-Cameron Trading Company Ltd., contain all adjustments, consisting only of normal recurring adjustments, necessary to fairly state its financial position as of February 28, 2022 and August 31, 2021 and its results of operations and cash flows for the three and six month periods ended February 28, 2022 and 2021 in accordance with U.S. GAAP. Operating results for the three and six month periods ended February 28, 2022 is not necessarily indicative of the results that may be experienced for the fiscal year ending August 31, 2022. Overall, the operating results of JCC are seasonal with the first two quarters of the fiscal year historically being slower than the final two quarters of the fiscal year.
The Company’s operations are classified into three reportable operating segments and the parent corporate and administrative segment, which were determined based on the nature of the products offered along with the markets being served. The segments are as follows:
- Industrial wood products
- Lawn, garden, pet and other
- Seed processing and sales
- Corporate and administration
The industrial wood products segment reflects the business conducted by Greenwood Products, Inc. (Greenwood). Greenwood is a processor and distributor of industrial wood products. A major product category is treated plywood that is sold primarily to the transportation industry, including the municipal and mass transit transportation sectors.
The lawn, garden, pet and other segment reflects the business of Jewett-Cameron Company (JCC), which is a wholesaler of wood products and a manufacturer and distributor of specialty metal products. JCC operates out of a 5.6 acre owned facility located in North Plains, Oregon that includes offices, a warehouse, and a paved yard. This business is a wholesaler, and a manufacturer and distributor of products that include an array of pet enclosures, kennels, and pet welfare and comfort products, proprietary gate support systems, perimeter fencing, greenhouses, and fencing in-fill products made of wood, metal and composites. Examples of the Company’s brands include Lucky Dog®, for pet products; Adjust-A-Gate™, Fit-Right®, Perimeter Patrol®, and Infinity Euro Fence and Lifetime Post™ for gates and fencing; Early Start, Spring Gardner™, Greenline®, and Weatherguard for greenhouses. JCC uses contract manufacturers to manufacture these products. Some of the products that JCC distributes flow through the Company’s facility in North Plains, Oregon, and some are shipped direct to the customer from the manufacturer. Primary customers are home centers, eCommerce partners, on-line direct consumers as well as other retailers.
The seed processing and sales segment reflects the business of Jewett-Cameron Seed Company (JCSC). JCSC processes and distributes agricultural seed. Most of this segment’s sales come from selling seed to distributors with a lesser amount of sales derived from cleaning seed.
JC USA Inc. (“JC USA”) is the parent company for the wholly-owned subsidiaries as described above. JC USA provides professional and administrative services, including warehousing, accounting and credit services, to its subsidiary companies.
Tariffs
The Company’s metal products are manufactured in China and are imported into the United States. The Office of the United States Trade Representative (“USTR”) instituted new tariffs on the importation of a number of products into the United States from China effective September 24, 2018. These new tariffs are a response to what the USTR considers to be certain unfair trade practices by China. The tariffs began at 10%, and subsequently were increased to 25% as of May 10, 2019. A number of the Company’s products manufactured in China have been subject to duties of 25% when imported into the United States.
These new tariffs were temporarily reduced on many of the Company’s imported products in September 2019 under a deemed one-year exemption. The 25% tariff rate was restored on the Company’s products in September 2020 when the exemption expired.
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RESULTS OF OPERATIONS
The strong growth in sales recorded in Q1 of fiscal 2022 continued in the second quarter, with sales increasing by 34% over the second quarter of fiscal 2021, and by 30% over the first six months of fiscal 2022. However, continuing supply chain issues and other inflationary pressures, including higher raw material prices, contributed to significant increases in the cost of goods sold, which rose by 36% in the second quarter and by 39% for the six month period. These costs remain high entering into the 3rd quarter. Shipping costs, both from China and within the US, have continued to increase. Historically, the Company has contracted the majority of its anticipated ocean container volume in advance at fixed prices. Due to the uncertainty of shipping and container availability, ocean carriers are now entering into fewer advanced contracts which will require us to purchase a growing number of container space on the spot market, which could result in higher costs and longer delivery times. COVID related supply chain interruptions continue to occur within China, which are also contributing to higher costs and some inconsistent shipments. These supply chain issues have led management to investigate broader sourcing of certain products to mitigate risk going forward.
We have been working to reduce the impact from these higher costs and logistical issues as much as possible. We have intentionally continued to build inventory ahead of our traditionally busy Spring and Summer season. This will allow us to meet the anticipated inventory build from our retail customers during the 3rd quarter. It also allows us to receive certain high demand products ahead of already announced price increases from suppliers and shippers while mitigating the risks of shipping and supply chain disruptions and potential new COVID outbreaks. This has again resulted in higher than usual inventory levels at the end of the second quarter which required higher cash outlays primarily funded through our bank line of credit. As of February 28th, we have borrowed $9.5 million on our $10 million credit line. Our cash flow models anticipate the level of orders and timing of receipts will allow us to begin to repay the borrowing under the line in the third quarter.
Gross margins improved in the second quarter of 2022 compared to Q1. Management is monitoring our costs and optimizing our selling prices in line with rising costs. However, selling price increases for our products may continue to lag any future increases in our product and operating costs, which may further compress our margins. Our current financial results were negatively impacted by a $300,000 accrual for expected costs related to an offer to settle a case brought by an association of California District Attorneys. This case related to their ongoing investigation into the environmental labeling and marketing of dog waste bags. The District Attorneys claim that labeling certain dog waste bags, including the Company’s, as biodegradable or compostable is misleading due to the lack of industrial composting facilities that accept dog waste. A number of major retailers have already settled their portion of the case. We have accrued $300,000 for possible settlement costs. The Company has proactively solicited feedback from the District Attorneys regarding new packaging and marketing materials for our dog waste bags to help ensure legal compliance for future sales of our products within California.
The higher level of sales recorded in the first six months of 2022 reflects the success of our current sales and marketing strategy. We intend to continue to develop new products, particularly those that complement and expand our existing product lines, and we may also seek to acquire products that conform to this strategy. The launch of several important new products that were planned for calendar 2021, but were delayed due to the supply chain issues, are now planned to roll out in the second half of fiscal 2022.
We continue to strategically invest in our facilities, personnel, and equipment. The 4th phase of our capital improvement and expansion projects was completed in the second quarter of fiscal 2022. These projects have significantly increased and improved functionality of our office space. Our next expansion will be to renovate an existing warehouse building for both custom order fulfilment and to support our growing fence business. We are hiring new employees to fill important skilled specialty roles to improve our efficiency and expand customer engagement and service. New investments have been made in technology improvements, including Electronic Data Interchange (EDI) and customer order automation. The website continues to improve in line with our omnichannel commitment offering enhanced accessibility, functionality and modernized investor relations and contact sections. Additionally, we have implemented easier navigation of our increased product selection displayed with a more unified brand presentation within a new eCommerce interface.
The transition of our senior management roles as announced in May 2021 occurred on January 1, 2022. Charlie Hopewell has moved from the day-to-day operational role as CEO to his overall strategy positions as a Director and Board Chair. Chad Summers has been appointed as Chief Executive Officer of Jewett-Cameron in addition to his prior position as President, and Mitch Van Domelen, CPA, has been appointed as Chief Financial Officer.
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Chad Summers originally joined the Company in October 2019 and was appointed President in May 2021. His prior experience includes participation in start-up ventures in both product and service industries and has a strong background in leadership, consulting, and support. He co-owned and led an international lumber brokering business similar to Jewett-Cameron’s Greenwood division. This experience provided him the opportunity to oversee and actively manage suppliers in China and throughout SE Asia. He also built a successful consulting practice dedicated to growing manufacturers in association with a west coast regional accounting firm which allowed him the opportunity to establish a deep network of manufacturers, professional services and support connections regionally.
Mitch Van Domelen is a Certified Public Accountant who joined Jewett-Cameron in July 2017 as Controller. Mr. Van Domelen has extensive experience in finance and financial reporting for both public and private companies. Prior to joining Jewett-Cameron, he served as Controller for a national beverage brand where he managed the financial processes and full-cycle accounting for the company and its nine brewpub locations. From 2007 to 2012 he worked in public accounting at a large regional public accounting firm in Lake Oswego, Oregon, auditing both public and private companies. From 2005 to 2007, he served as a Sarbanes-Oxley (SOX) compliance consultant for SEC registrants in the Portland metro area, testing their compliance in both US and International regions. He holds a bachelor's degree in Business Administration from Southern Oregon University. He is a licensed CPA in the State of Oregon and is a member of the Oregon Society of CPA's.
In response to the COVID-19 pandemic, the State of Oregon originally lifted all of its mask and social distancing requirements in June 2021. However, as a response to the surge in COVID-19 infections, indoor masking requirements for businesses were reinstituted in August 2021 and remained in effect until the State of Oregon lifted the indoor masking mandate on March 11, 2022. The Company remains vigilant in regard to the COVID virus and its variants. It is critical to our continuing operations that we do all we can to protect and retain our workforce if and when they might experience exposure to the virus. If any employees working at headquarters or in the warehouse facilities contract the virus, the Company could be forced to curtail those operations, including product shipments, for the required period to thoroughly clean and sanitize the facility without human exposure, which could result in delayed or lost revenue, and increased costs. To date, we have not had any incidents of transmissions within the confines of our facilities due to our clear and consistent protocols during the restrictive period, as well as our employees’ remarkable support of our procedures which has been critical to our success in keeping our workplace safe and running. This has directly led to our ability to retain our workforce through these challenging times as well as create an environment in which people feel safe. The assistance of the PPP program provided us the ability to assist sound employee decisions when they either felt they had an external exposure or perhaps even tested positive due to such external exposure. The loans the Company received under the Paycheck Protection Program were essential in supporting the Company’s ability to operate without interruption during the crisis and retain 100% of its workforce. All of the borrowed funds were spent on qualifying employee payroll expenses, and the Company’s loans were fully forgiven by the SBA in April 2021.
The outlook for the remainder of fiscal 2022 remains uncertain. Although our sales trends entering the third quarter are encouraging, the ongoing supply chain, international shipping and logistic issues may continue to compromise our ability to receive inventory from China and fully fulfill our customers’ orders in a timely manner. We have deliberately increased our inventory levels to try to mitigate these risks and any additional risks from the worldwide emerging variants of COVID. Entering the 3rd quarter, we intentionally have more months of inventory on hand of our highest value products than in a typical year. Inflation, particularly in the form of higher raw material costs combined with higher shipping costs, is expected to remain an issue going forward. These costs may increase faster than we are able raise our selling prices to our customers, which would continue to pressure our margins for the remainder of the fiscal year.
Three Months Ended February 28, 2022 and 2021
For the three months ended February 28, 2022, sales were $14,060,751, which is an increase of $3,600,396, or 34%, from sales of $10,460,355 for the three months ended February 28, 2021.
Sales at JCC were $12,357,478 for the three months ended February 28, 2022 compared to sales of $8,893,322 for the three months ended February 28, 2021. This represents an increase of $3,464,156, or 39%. Consumer demand for fencing and pet products remains strong. Sales during the current quarter were also boosted by fulfilment of backorders originally caused by shipment delays in prior periods. At the end of the second quarter, backorders totaled $329,000. Margins have been compressed by higher raw material and shipping costs, but the Company has been able to successfully raise its selling prices and pass through some of these higher costs to its customers. Operating profit for the current quarter was $129,841 compared to an operating loss of ($53,164) for the quarter ended February 28, 2021. The operating results of JCC are historically seasonal with the first two quarters of the fiscal year being slower than the final two quarters of the fiscal year.
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Sales at Greenwood rose to $585,559 from sales of $520,593 for the three months ended February 28, 2021, which is an increase of $64,966, or 12%. Greenwood’s sales have been heavily impacted by the COVID-19 shutdowns, as many of their products are sold to municipalities and larger transit operators. For the three months ended February 28, 2022, Greenwood had an operating loss of ($26,003) compared to an operating loss of ($21,240) for the three months ended February 28, 2021.
Sales at JCSC were $1,117,714 compared to sales of $1,046,439 for the three months ended February 28, 2021, which was an increase of $71,275, or 7%. The historic heat wave across the Pacific Northwest during the summer of 2021 damaged many crops and reduced harvested yields which has decreased demand for the Company’s seed cleaning services. Operating loss at JCSC for the quarter ended February 28, 2022 was ($20,398) compared to an operating profit of $1,915 for the quarter ended February 28, 2021.
JC USA is a holding company for the wholly-owned operating subsidiaries, and thus the overall results of JC USA are eliminated on consolidation. For the quarter ended February 28, 2022, JC USA had an operating profit of $284,681 compared to an operating loss of ($8,370) for the quarter ended February 28, 2021. The results of JC USA are eliminated on consolidation.
Gross margin for the three months ended February 28, 2022 was 24.4% compared to 25.0% for the three months ended February 28, 2021. The decline was primarily due to higher sales of lower margin wood products and higher raw material and shipping costs in the current quarter.
Operating expenses increased by $52,749 to $2,727,487 compared to expenses of $2,674,738 for the three months ended February 28, 2021. Selling, General and Administrative Expenses declined to $684,116 from $895,974. Wages and Employee Benefits increased to $1,959,300 from $1,723,474 as the Company added additional staff to support its new sales and marketing initiatives and roll-out of new products. Depreciation and Amortization increased to $84,071 from $55,290. Other income in the current quarter was $2,000, and interest expense related to the Company’s Bank Line of Credit was $30,620. In the current quarter, the Company also accrued $300,000 for the settlement of claims brought by the Association of California District Attorneys regarding the labeling and marketing of the Company’s dog waste bags.
Income tax expense for the three month period ended February 28, 2022 was ($98,300) compared to a recovery of $6,998 for the quarter ended February 28, 2021. The Company estimates income tax expense for the quarter based on combined federal and state rates that are currently in effect.
Net profit for the quarter ended February 28, 2022 was $269,820, or $0.08 per basic and diluted share, compared to net loss of ($53,164), or ($0.02) per basic and diluted share, for the quarter ended February 28, 2021.
Six Months Ended February 28, 2022 and February 28, 2021
For the six months ended February 28, 2022 sales increased by $6,201,836, or 30%, to $26,978,475 from sales of $20,776,639 recorded in the six month period ended February 28, 2021.
Sales at JCC were $24,203,362 for the six months ended February 28, 2022 compared to sales of $17,822,958 for the six months ended February 28, 2021, which was an increase of $6,380,404, or 36%. The increase in sales is primarily due to higher demand for fencing and pet products. The Company has also successfully raised its selling prices on many products in the current period. Operating loss at JCC for the current six month period was ($569,856) compared to an operating profit of $487,741 for the six months ended February 28, 2021. Overall, the operating results of JCC are seasonal with the first two quarters of the fiscal year being much slower than the final two quarters of the fiscal year.
Sales at Greenwood were $1,119,670 for the six months ended February 28, 2022 compared to sales of $1,245,346 for the six months ended February 28, 2021. This represents a decrease of $125,676, or 10%. Greenwood’s sales have been heavily impacted by the COVID-19 shutdowns, as many of their products are sold to municipalities and larger transit operators. Greenwood is currently introducing new products to both existing and new customers. Management is also actively seeking new brokers to both open new sales channels and broaden its customer base, particularly in the housing and construction sectors. For the six months ended February 28, 2022, Greenwood had an operating profit of $43,956 compared to an operating loss of ($36,464) for the six months ended February 28, 2021.
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Sales at JCSC for the six months ended February 28, 2022 were $1,655,443 compared to sales of $1,708,335 for the six months ended February 28, 2021. This represents a decrease of $52,892, or 3%. Management continues to refocus JCSC to better provide local growers with cleaning, seed brokering and sales services. However, the historic heat wave across the Pacific Northwest during the summer of 2021 damaged many crops and reduced harvested yields, creating an industry-wide supply shortage. For the six months ended February 28, 2022, JCSC had an operating loss of ($121,748) compared to operating income of $51,405 for the six months ended February 28, 2021, as higher equipment and property maintenance expenses contributed to the operating loss in the current period.
JC USA, the holding company that provides professional and administrative services for the wholly-owned operating subsidiaries had operating income of $531,321 for the six months ended February 28, 2022 compared to income of $63,939 for the six months ended February 28, 2021. The results of JC USA are eliminated on consolidation.
Gross margin for the six month period ended February 28, 2022 was 21.8% compared to 26.8% for the six months ended February 28, 2021. The lower margin in the current period was primarily due to higher sales of lower margin wood products and higher raw material and shipping costs.
Operating expenses for the six months ended February 28, 2022 were $5,659,530 compared to $5,013,854 for the six month period ended February 28, 2021. Selling, General and Administrative Expenses increased to $1,672,403 from $1,590,603. Wages and Employee Benefits increased to $3,833,418 from $3,317,433 as the Company added additional staff. Depreciation and Amortization increased to $153,709 from $105,818 for the six months ended February 28, 2021. Other items in the current six month period include other income of $5,000 as a portion of the parking area at JCS was formerly rented to an unrelated company for $1,000 per month through January 2022. Interest expense on the Bank Line of Credit was $50,896. The Company also accrued $300,000 for the settlement of claims brought by the Association of California District Attorneys regarding the labeling and marketing of the Company’s dog waste bags.
Income tax expense for the six months ended February 28, 2022 was $4,985 compared to expense of $131,258 for the six months ended February 28, 2021. The Company estimates income tax expense for the period based on combined federal and state rates that are currently in effect.
Net loss for the six months ended February 28, 2022 was ($121,322), or ($0.03) per basic and diluted share, compared to net income of $435,363, or $0.12 per basic and diluted share, for the six months ended February 28, 2021.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 2022, the Company had working capital of $18,174,194 compared to working capital of $19,073,194 as of August 31, 2021, a decrease of $899,000. Cash and cash equivalents totaled $899,055, a decrease of $285,258 from cash of $1,184,313. Accounts receivable rose to $9,137,254 from $7,086,503 due to the seasonal cycle of sales to customers and the related timing of cash receipts. Inventory increased by $4,238,783 to $18,630,148 from $14,391,365 as additional inventory was stocked in preparation of the Company’s historically busier Spring and Summer seasons. Prepaid expenses, which is largely related to down payments for future inventory purchases, increased by $254,073. Prepaid income taxes rose to $258,205 from $252,958. Deferred tax liability increased slightly to $125,834 from $116,945.
Current liabilities increased to $13,239,100 from $6,147,765, with most of the increase due to the additional draw of $6,500,000 from the Company’s bank line of credit to $9,500,000 as of February 28, 2022 from $3,000,000 as of August 31, 2021. Accounts payable rose to $1,660,664 from $1,349,677, and accrued liabilities increased to $2,078,436 from $1,798,088, including the accrual of $300,000 in the current period for the anticipated settlement of claims related to the Company’s dog waste bag sales in California.
As of February 28, 2022, accounts receivable and inventory represented 88% of current assets and 77% of total assets. As of February 28, 2021, accounts receivable and inventory represented 76% of current assets and 65% of total assets. For the three months ended February 28, 2022, the accounts receivable collection period, or DSO, was 58 compared to 44 for the three months ended February 28, 2021. For the six month period ended February 28, 2022, the DSO was 61 compared to 44 for the six months ended February 28, 2021. Inventory turnover for the three months ended February 28, 2022 was 154 days compared to 112 days for the three months ended February 28, 2021. For the six months ended February 28, 2022, inventory turnover was 143 days compared to 115 days for the six months ended February 28, 2021.
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External sources of liquidity include a Line of Credit from U.S. Bank of $10,000,000. As of February 28, 2022, the Company had a borrowing balance of $9,500,000, leaving $500,000 available. Borrowing under the Line of Credit is secured by an assignment of accounts receivable and inventory. The interest rate is calculated solely on the one month LIBOR rate plus 175 basis points. As of February 28th, the one month LIBOR rate plus 175 basis points was 1.83% (0.08% + 1.75%). Due to the worldwide banking industry’s phasing out LIBOR, the interest rate computation formula has been changed as of March 1, 2022 from LIBOR to the one-month Secured Overnight Financing Rate (SOFR), plus 157 basis points. The new formula is not expected to result in any significant change to the interest rate, which as of March 1, 2022 was calculated as 1.62% (0.05% + 1.57%). The line of credit has certain financial covenants. The Company is in compliance with these covenants.
During the 3rd quarter of fiscal 2020, the Company applied for and received two loans under the Paycheck Protection Program (the “PPP”) as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”). The Company believed the PPP funds were necessary because the Company was quickly depleting its available cash in April due to inventory purchases to fulfil customer orders ahead of its busiest selling season, some delays in receiving inventory from China due to reduced availability of ocean shipping, and the danger of potential COVID-19 infections. If any of the Company’s employees on site were to contract the virus during this time, the Company would have been required to shut down the facility for a minimum of 14 days to clean and disinfect, and no product would be shipped to customers. Without the cash flow from product sales, the Company would have likely had to immediately layoff or furlough many of its employees, which would further delay the Company’s ability to recover after the shutdown. All of the proceeds from the PPP loans were used for employee payroll expenses.
The principal amount of the PPP loans was $680,707. They had a term of 2 years with a 1% annual interest rate. Payments were originally deferred for 6 months, after which the repayment of principal and interest is required to be made in equal monthly payments over 18 months beginning December 4, 2020. However, the SBA subsequently revised the due date to either the date that SBA remits the borrower’s loan forgiveness amount to the lender or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period. In April 2021, the SBA approved the Company’s application for forgiveness of the entire amount of both loans. For the year ended August 31, 2021, he Company recorded a one-time gain on the extinguishment of debt of $687,387 consisting of the principal of $680,707 and accrued interest of $6,680.
The Company has historically used a portion of its excess cash to repurchase and cancel common shares. No common shares were repurchased during the first six months of fiscal 2022 ended February 28, 2022. During the first quarter of fiscal 2022, the Company issued 3,681 common shares to officers, directors and employees as compensation under the Company’s Restricted Share Plan at a deemed price of $10.70 per share.
Current Working Capital Requirements
Based on the Company’s current working capital position, combined with the expected timing of accounts receivable and the Bank Line of Credit, the Company is expected to have sufficient liquidity available to meet the Company’s working capital requirements for the remainder of fiscal 2022.
OTHER MATTERS
Inflation
Inflation did not have a material impact during fiscal 2020. Beginning in fiscal 2021, a number of product costs increased substantially, including raw materials, energy, and transportation/logistical related costs.
These higher costs have negatively affected the Company’s gross margins in the shorter term. Typically, the Company passes cost increases on to the customer, and is currently raising its product prices as much as the market will bear. Retailers are currently more receptive to such increases than in the past due to a mutual understanding of the current inflationary environment and the objective reasons for such. Since the ability of the Company to pass through all of the current increase in its product costs to its customers are somewhat limited and occur after such costs are first incurred, management expects that its gross margins will remain under pressure for the remainder of fiscal 2022.
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Environmental, Social and Corporate Governance (ESG)
Jewett-Cameron endeavors to be a good steward and provide sustainable products with a positive impact. We strive to operate and grow in a way that honors our environment and relationships for the long term. This also aligns with one of our three value pillars: stewardship.
Environmental
For our products, the goal is that 90% of materials can be recycled. Our suppliers are audited to strict commercial and fair practice standards, including our own supplier qualifications regarding facilities, capacity, labor practices, and environmental awareness. Packaging is designed to maximize recyclability and re-use and minimize non-recycled materials, and all waste materials in our own facilities are segregated to maximize recycling. Our facilities have replaced high energy consumption infrastructure with energy efficient HVAC and lighting during our recent remodel.
Active products and designs utilize recycled content, plant-based material, or elimination of unnecessary components (such as a wasteful inner core for poop bag rolls) to enhance recycling and reduce greenhouse gas emissions in production. This includes the recently introduced dog waste bag which is a plant-based product that is less reliant on fossil fuels used in traditional plastic bags. We also dedicate a percentage of sales to organizations dedicated to improving the environment.
Social
Our social responsibilities include cultural standards of operations and values which we establish in conjunction with our employees. We regularly provide employees with a corporate engagement survey to benchmark their engagement, satisfaction, and ideas for change. We support educational programs that build the future workforce through active participation in regional and statewide organizations, including the CTE/STEM Employer Coalition and assisting teachers to connect traditional school subjects to practical job site applications. The Company also actively participates in the local community, supported by a Corporate Charitable Giving Charter. We are committed to devoting resources to enhance the accessibility of our corporate website and have upgraded the website to improve accessibility and operability for users, including persons with disabilities.
Governance
As a public company, our processes are outlined and governed by multiple regulations, including Sarbanes-Oxley. Our financial controls are mapped, executed, self-audited as well as regularly audited by outside experts as part of our annual process. We have established risk mitigations that allows for condensed reviews of risks and impacts with our systems in place. An IT Governance Committee aligns execution and security both for ourselves and also for parties with whom we communicate and do business.
Business Risks
This quarterly report includes “forward–looking statements” as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “anticipates,” or “hopeful,” or the negative of those terms or other comparable terminology, or by discussions of strategy, plans or intentions. For example, this section contains numerous forward-looking statements. All forward-looking statements in this report are made based on management’s current expectations and estimates, which involve risks and uncertainties, including those described in the following paragraphs.
Risks Related to Our Common Stock
We may decide to acquire assets or enter into business combinations, which could be paid for, either wholly or partially with our common stock and if we decide to do this our current shareholders would experience dilution in their percentage of ownership.
Our Articles of Incorporation give our Board of Directors the right to enter into any contract without the approval of our shareholders. Therefore, our management could decide to make an investment (buy shares, loan money, etc.) without shareholder approval. If we acquire an asset or enter into a business combination, this could include exchanging a large amount of our common stock, which could dilute the ownership interest of present stockholders.
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Future stock distributions could be structured in such a way as to be 1) diluting to our current shareholders or 2) could cause a change in control to new investors.
If we raise additional funds by selling more of our stock, the new stock may have rights, preferences or privileges senior to those of the rights of our existing stock. If common stock is issued in return for additional funds, the price per share could be lower than that paid by our current stockholders. The result of this would be a lessening of each present stockholder’s relative percentage interest in our company.
Our shareholders could experience significant dilution if we issue our authorized 10,000,000 preferred shares.
The Company’s common shares currently trade within the NASDAQ Capital Market in the United States. The average daily trading volume of our common stock on NASDAQ was 3,290 shares for the six months ended February 28, 2022. With this limited trading volume, investors could find it difficult to purchase or sell our common stock.
Risks Related to Our Business
A contagious disease outbreak, such as the recent COVID-19 pandemic emergency, could have an adverse effect on our operations and financial condition
Our business could be negatively affected by an outbreak of an infectious disease due to the consequences of the actions taken by companies and governments to contain and control the virus. These consequences include:
- The inability of our third-party manufacturers in China and elsewhere to manufacture or deliver products to us in a timely manner, if it all.
- Isolation requirements may prevent our employees from being able to report to work or being required to work from home or other off-site location which may prevent us from accomplishing certain functions, including receiving products from our suppliers and fulfilling orders for our customers, which may result in an inability to meet our obligations.
- Our new products may be delayed or require unexpected changes to be made to our new or existing products.
- The effect of the outbreak on the economy may be severe, including an economic downturn and decrease in employment levels which could result in a decrease in consumer demand for our products.
The financial impact of such an outbreak are outside our control and are not reasonable to estimate, but may be significant. The costs associated with any outbreak may have an adverse impact on our operations and financial condition and not be fully recoverable or adequately covered by insurance.
We could experience a decrease in the demand for our products resulting in lower sales volumes.
In the past, we have at times experienced decreasing products sales with certain customers. The reasons for this can be generally attributed to: increased competition; general economic conditions; demand for products; and consumer interest rates. If economic conditions deteriorate or if consumer preferences change, we could experience a significant decrease in profitability.
If our top customers were lost, we could experience lower sales volumes.
For the six months ended February 28, 2022, our top ten customers represented 79% of our total sales. We would experience a significant decrease in sales and profitability and would have to cut back our operations, if these customers were lost and could not be replaced. Our top ten customers are located in North America and are primarily in the retail home improvement and pet industries.
We could experience delays in the delivery of our products to our customers causing us to lose business.
We purchase our products from other vendors and a delay in shipment from these vendors to us could cause significant delays in our delivery to our customers. This could result in a decrease in sales orders to us and we would experience a loss in profitability.
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Governmental actions, such as tariffs, and/or foreign policy actions could adversely and unexpectedly impact our business.
Since the bulk of our products are supplied from other countries, political actions by either our trading country or our own domestic policy could impact both availability and cost of our products. Currently, we see this in regard to tariffs being levied on foreign sourced products entering into the United States, including from China. The continuing tariffs by the United States on certain Chinese goods include some of our products which we purchase from suppliers in China. The company has multiple options to assist in mitigating the cost impacts of these government actions. However, we cannot control the duration or depth of such actions which may increase our product costs which would reduce our margins and potentially decrease the competitiveness of our products. These actions could have a negative effect on our business, results of operations, or financial condition.
We could lose our credit agreement and could result in our not being able to pay our creditors.
We have a line of credit with U.S. Bank in the amount of $10,000,000, of which $500,000 is available. We are currently in compliance with the requirements of our existing line of credit. If we lost access to this credit it could become impossible to pay some of our creditors on a timely basis.
Our information technology systems are susceptible to certain risks, including cyber security breaches, which could adversely impact our operations and financial condition.
Our operations involve information technology systems that process, transmit and store information about our suppliers, customers, employees, and financial information. These systems face threats including telecommunication failures, natural disasters, and cyber security threats, including computer viruses, unauthorized access to our systems, and other security issues. While we have taken aggressive steps to implement security measures to protect our systems and initiated an ongoing training program to address many of the primary causes of cyber threat with all our employees, such threats change and morph almost daily. There is no guarantee our actions will secure our information systems against all threats and vulnerabilities. The compromise or failure of our information systems could have a negative effect on our business, results of operations, or financial condition.
If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could harm our business and we could be subject to regulatory scrutiny.
We have completed a management assessment of internal controls as prescribed by Section 404 of the Sarbanes-Oxley Act, which we were required to do in connection with our year ended August 31, 2021. Based on this process we did not identify any material weaknesses. Although we believe our internal controls are operating effectively, we cannot guarantee that in the future we will not identify any material weaknesses in connection with this ongoing process.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Interest Rate Risk
The Company does not have any derivative financial instruments as of February 28, 2022. However, the Company is exposed to interest rate risk.
The Company’s interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company’s cash.
The Company has a line of credit whose interest rate may fluctuate over time based on economic changes in the environment. The Company is subject to interest rate risk and could be subject to increased interest payments if market interest rates fluctuate. The Company does not expect any change in the interest rates to have a material adverse effect on the Company’s results from operations.
Foreign Currency Risk
The Company operates primarily in the United States. However, a relatively small amount of business is currently conducted in currencies other than U.S. dollars, and the Company may experience an increase in foreign exchange risk as they expand their international sales. Also, to the extent that the Company uses contract manufacturers in China, currency exchange rates can influence the Company’s purchasing costs.
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| Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Management of the Company, including the Company’s Principal Executive Officer and Principal Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Principal Executive and Principal Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II – OTHER INFORMATION
| Item 1. | Legal Proceedings |
The Company is a named party in a Civil Action in Pennsylvania. The matter is an action seeking compensation for personal injuries and is based on theories of product liability as to the Company. The matter arises out of a dog allegedly escaping from a Jewett-Cameron kennel product and causing personal injuries to three individuals. The Company is currently one of three named Defendants. A trial date has not been set at this time. At the present time it is speculative to predict as to its outcome. It is the Company’s intention to vigorously defend the lawsuit. The Company’s applicable liability insurer is providing a defense covering the Company’s legal fees and costs.
The Company has initiated arbitration against a former distributor asserting a breach of the distribution agreement and seeking damages. Arbitration is scheduled to commence in the first week of August 2022. While the company is robustly pursuing its rights and defending itself against claims, the arbitration and lawsuit are in their initial stages and therefore it is speculative to predict as to its outcome.
A consortium of California District Attorneys has contacted the Company in regard to possible liabilities related to environmental labeling of its plant-based Lucky Dog Poop Bags previously sold in the State of California. The Company has since modified its product marketing statements in response to their concerns, and during the period ended February 28, 2022, and has accrued $300,000 in anticipation of a settlement.
The Company does not know of any other material, active or pending legal proceedings against them; nor is the Company involved as a plaintiff in any other material proceeding or pending litigation. The Company knows of no other active or pending proceedings against anyone that might materially adversely affect an interest of the Company.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
---No Disclosure Required---
| Item 3. | Defaults Upon Senior Securities |
---No Disclosure Required---
| Item 4. | Mine Safety Disclosures |
---No Disclosure Required---
| Item 5. | Other Information |
---No Disclosure Required---
| Item 6. | Exhibits |
| 3.1 | Amended and Restated Articles of Incorporation of Jewett-Cameron Lumber Corporation |
| -= Filed as an exhibit to the 10-Q Quarterly Report filed on January 13, 2014 =- | |
| 3.2 | Articles of Incorporation of Jewett-Cameron Company. |
| -= Filed as an exhibit to the 10-Q Quarterly Report filed on January 13, 2014 =- | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act, Chad Summers |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act, Mitch Van Domelen |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act), Chad Summers |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act), Mitch Van Domelen |
| 101.INS | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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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.
Jewett-Cameron Trading Company Ltd.
(Registrant)
| Date: April 14, 2022 | /s/ “Chad Summers” | |
|
Chad Summers, President and Chief Executive Officer |
| Date: April 14, 2022 | /s/ “Mitch Van Domelen” | |
|
Mitch Van Domelen, Chief Financial Officer |