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 November 30, 2020 and August 31, 2020
and its results of operations and cash flows for the three month periods ended
November 30, 2020 and 2019 in accordance with U.S. GAAP. Operating results for
the three month period ended November 30, 2020 is not necessarily indicative of
the results that may be experienced for the fiscal year ending August 31, 2021.
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. Wood products are primarily fencing,
while metal products include pet enclosures and kennels, proprietary gate
support systems, perimeter fencing, greenhouses, canopies and umbrellas.
Examples of the Company's brands include Lucky Dog, Animal House and AKC (used
under license from the American Kennel Club) for pet enclosures and kennels;
Adjust-A-Gate, Fit-Right, LIFETIME POST™ and Perimeter Patrol for gates and
fencing; Early Start, Spring Gardner, and Weatherguard for greenhouses; and
TrueShade for patio umbrellas, furniture covers and canopies. JCC uses contract
manufacturers to make the specialty metal 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 and 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.
MSI is a former division of the Company that imported and distributed products
including pneumatic air tools, industrial clamps, and saw blades. These
products were primarily sold to wholesalers that in turn sold to contractors and
end users. This business operated from the same owned facilities as JCC. The
MSI division was permanently closed and all remaining inventory was liquidated
during fiscal 2020.
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.
- 21 -
RESULTS OF OPERATIONS
During the first quarter, sales and gross margins showed significant improvement
due to higher sales in both fencing and pet products, including new commitments
from customers in both segments. Although the COVID-19 pandemic continues to
fuel the popularity of both DIY home improvement and new pet adoptions, these
results also reflect the success of our current campaign to rebrand its products
to connect directly with the consumer across all retail and eCommerce platforms.
The intent is to make the consumer more aware of Jewett-Cameron with a
consistent look and statement of value, to drive more cross-over business to
each segment and product line, and increasing its product presence in more
channels. This focus involve social media, other online communications, and
omnichannel branding, both in the US and internationally. In particular, the new
compostable pet bag shows solid sales growth and interest from new sales channel
partners, including internationally. The Company remains committed to its
overall strategy and expects further progress in fiscal 2021 both in new sales
channels, product distribution, and end consumer connectivity.
We remain committed to grow our business by not only expanding our sales
channels and marketing, but also by developing new products. Besides its
internal new product development process, we may also seek to acquire products
that will provide complementary benefits to its existing products and product
lines. This commitment requires the continued investment in multiple areas to
achieve these goals, including our facilities, equipment, and personnel. The
installation of the Company's new Enterprise Resource Planning (ERP) software
system is scheduled for the 2nd quarter of fiscal 2021. Since this period is
typically one of the Company's slowest sales periods, it will limit possible
business disruptions. Other current capital projects include the renovation of
the former seed laboratory into a new Creative Center for new product
development. The first phase of the seed laboratory remodel was completed in
December 2020. Renovation of an existing portion of the warehouse into a
two-story office and gathering space began in November 2020 with occupancy
projected for May 2021.
The gains seen in the 1st quarter are encouraging, but due to the ongoing
COVID-19 situation both in the US and internationally, the outlook for the
remainder of fiscal 2021 is uncertain.
In response to the COVID-19 pandemic, the Company remains committed to the
strong protocols we have instituted within our facilities which are consistent
with the State of Oregon's requirements and CDC guidelines. This includes
appropriate social distancing and cleaning protocols. 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 would be forced to curtail those operations, including product
shipments, for the required period to thoroughly clean and sanitize the facility
without human exposure, which would result in delayed or lost revenue, and
increased costs. To date, we have not had any incidents of transmissions within
the Company. Although some of our employees have experienced outbreaks within
their families, our isolation safeguards, including paid quarantines, have meant
that employees respect and appreciate the protocols in place. 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 we expect to apply for relief from the
loans while continuing to maintain our workforce in full.
Three Months Ended November 30, 2020 and 2019
For the three months ended November 30, 2020, sales increased by $3,261,106, or
46%, to $10,316,284 from $7,055,178 for the three months ended November 30,
2019. Gross profit increased by $914,556, or 45%. Higher sales from Lawn,
Garden, and Pet products were primarily responsible for the higher sales. The
gross margin in Q1 2021 was improved by the Company's exit from the industrial
tools segment as the liquidation of remaining inventory in the comparable
quarter in the prior year resulted in higher costs and suppressed margins.
Sales at JCC were $8,929,636 for the three months ended November 30, 2020
compared to sales of $5,577,494 for the three months ended November 30, 2019,
which was an increase of $3,352,142, or 60%. The stronger fencing and pet
product sales that occurred beginning in the second half of fiscal 2020 as more
people stayed and worked from home continued into this first quarter of fiscal
2021. During the first quarter of 2019, several of the Company's largest
customers delayed their usual Q1 orders due to uncertainty over US tariffs on
Chinese manufactured goods. Operating income for JCC was $520,208 for the
quarter ended November 30, 2020 compared to an operating loss of ($77,696) for
the quarter ended November 30, 2019. 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.
- 22 -
Sales at Greenwood were $724,752 for the three months ended November 30, 2020
compared to sales of $784,868 for the three months ended November 30, 2019,
which was a decrease of $60,116, or 8%. Demand for Greenwood's products from
governments and transit operators remains weak due to the COVID-19 pandemic.
Greenwood is currently exploring several new product offerings, particularly in
the housing and construction sectors, which would open new sales channels and
broaden its customer base. For the quarter, Greenwood's operating loss was flat
at ($15,224) compared to the operating loss of ($15,618) in the three months
ended November 30, 2019.
Sales at JCSC were $661,896 for the three months ended November 30, 2020
compared to sales of $524,595 for the three months ended November 30, 2019,
which is an increase of $137,301, or 26%. Management's recent efforts to more
closely align with the needs of growers and focus on service has led to
significantly greater cleaning volumes during the first quarter compared to the
prior years. Operating income for JCSC for the quarter was flat at $49,490
compared to operating income of $49,703 for the quarter ended November 30, 2019.
The MSI-Pro division was wound up in fiscal 2020 as the Company exited the
industrial tools segment. During the quarter ended November 30, 2019, the
Company began liquidating the remaining inventory, which resulted in sales of
$168,221 and an operating loss of ($107,217).
JC USA is the holding company for the wholly-owned operating subsidiaries. For
the quarter ended November 30, 2020, JC USA had operating income of $72,309
compared to operating income of $151,569 for the quarter ended November 30,
2019. The decline in income is largely due to higher administrative costs of
additional personnel in the current quarter and the costs related to capital
improvements. The results of JC USA are eliminated on consolidation.
Gross margin for the three month period ended November 30, 2020 was 28.7%
compared to 29.0% for the three months ended November 30, 2019.
Operating expenses rose by $279,899 to $2,339,116 from $2,059,217 for the three
months ended November 30, 2020 as the Company added additional staff. Selling,
General and Administrative Expenses increased to $694,628 from $649,010, and
wages and employee benefits rose to $1,593,959 from $1,362,059. Depreciation and
Amortization increased to $50,529 from $48,148. Interest and other income
decreased to $3,000 from $11,614.
Income before income taxes was $626,783 for the quarter ended November 30, 2020
compared to $741 for the quarter ended November 30, 2019. The Company's income
tax expense in the current quarter was $138,256 compared to $7,362 for the three
months ended November 30, 2019. The Company estimates income tax expense for the
quarter based on combined federal and state rates that are currently in effect.
The net income for the quarter ended November 30, 2020 was $488,527, or $0.14
per share, compared to a net loss of ($6,621), or ($0.00) per share, for the
three months ended November 30, 2019.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2020, the Company had working capital of $17,055,817 compared
to working capital of $16,815,454 as of August 31, 2020, an increase of
$240,363. Cash and cash equivalents totaled $5,839,952, an increase of
$2,038,915 from cash of $3,801,037. Accounts receivable fell to $4,246,957 from
$6,274,426 due to the seasonal cycle of sales to customers and the related
timing of cash receipts. Inventory increased by $223,013 to $9,421,159. Prepaid
expenses, which is largely related to down payments for future inventory
purchases, decreased by $196,255. Income taxes payable increased to $219,636
from $40,596. Notes payable, which are the promissory notes PPP loans received
in the 3rd quarter, remained unchanged at $680,707. Deferred tax liability fell
to $56,168 from $96,952.
As of November 30, 2020, accounts receivable and inventory represented 67% of
current assets and 58% of total assets. As of November 30, 2019, accounts
receivable and inventory represented 49% of current assets and 43% of total
assets. For the three months ended November 30, 2020, the accounts receivable
collection period, or DSO, was unchanged at 37 days compared to 37 days for the
three months ended November 30, 2019. Inventory turnover to the three months
ended November 30, 2020 was 115 days compared to 124 days for the three months
ended November 30, 2019.
- 23 -
External sources of liquidity include a line of credit from U.S. Bank of
$3,000,000. As of November 30, 2020, the Company had no borrowing balance
leaving the entire amount 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 November 30, 2020, the one month LIBOR rate plus 175 basis points was 3.23%
(1.48% + 1.75%). With the expected phase-out of LIBOR, the Company expects the
calculated rate on the line of credit will be changed to another published
reference standard before the planned cessation of LIBOR quotations in 2021.
However, the Company does not anticipate this change will have any significant
effect on the terms and conditions, and ability to access, the line of credit,
or on its financial condition. 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 felt
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 be 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 totals $680,707. They have a term of 2
years with a 1% annual interest rate. There is no prepayment penalty. If
proceeds are used for qualifying expenses as defined by the CARES Act and the
modifying PPP Flexibility Act, including payroll costs, health care benefits,
rent and utilities, the Company can apply for forgiveness within 10 months of
the end of their "covered period" of 24 weeks from the date of the loan for all
or any portion of the promissory note used for such qualifying expenses. Once an
application for forgiveness is submitted, all repayments are deferred until the
lender receives a decision from the SBA, which can take as long as 150 days from
submission date.
Based on the Company's current working capital position, its policy of retaining
earnings, and the line of credit available, the Company has adequate working
capital to meet its needs for the remainder of the current fiscal year.
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 quarter
of fiscal 2021 ended November 30, 2020. Subsequent to the end of the quarter,
the Company issued 7,999 common shares to officers, directors and employees as
compensation under the Company's Restricted Share Plan at a deemed price of
$8.80 per share.
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," "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.
- 24 -
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 6,130 shares for the three months ended November 30, 2020. 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 three months ended November 30, 2020, our top ten customers represented
75% 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 in the U.S., Canada
and Mexico and are primarily in the retail home improvement industry.
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.
- 25 -
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 $3,000,000, of which
$3,000,000 is available. We are currently in compliance with the requirements
of our existing line of credit. If we lost 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, 2020. 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.
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