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, 2019 and August 31, 2019
and its results of operations and cash flows for the three month periods ended
November 30, 2019 and November 30, 2018 in accordance with U.S. GAAP. Operating
results for the three month period ended November 30, 2019 are not necessarily
indicative of the results that may be experienced for the fiscal year ending
August 31, 2020. 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, one discontinued segment (Industrial Tools) 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
·
Industrial tools
·
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.
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.
The industrial tools segment reflects the business of MSI-PRO (MSI). MSI imports
and distributes products including pneumatic air tools, industrial clamps, saw
blades, digital calipers, and laser guides. MSI brands include MSI-Pro,
Avenger, and ProMax. Effective September 1, 2019, the Company decided to exit
this segment and the remaining inventory is being liquidated.
JC USA Inc. ("JC USA") is the parent company for the four 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.
The company was notified in September 2019 that certain products that it had
imported would be excepted from tariff treatment moving forward. This exception
applies to many of the products the company imports from China.
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RESULTS OF OPERATIONS
During the period ended November 30, 2019, the Company experienced slower than
normal sales for the first quarter, which included several major accounts
postponing their expected purchases until later in the first quarter and into
the second quarter. The delay may be related to the timing of reduced tariffs on
many of the Company's products, as the Company received notice during the period
that due to one of the Company's suppliers appealing the classification of
certain products to the US Customs Service, a number of the Company's metal
products imported from China have now been reclassified. As a result, the
reclassified metal products are no longer be subject to the 25% tariffs on
imported Chinese goods, although some of the Company's imported products remain
under tariff. This reclassification will help the Company to remain competitive
in both the retail and eCommerce sectors going forward.
Management continued to add to the Company's infrastructure during the quarter.
The Company is now focusing on the promotion of the Jewett-Cameron brand for
both its individual brands in each segment and the Company's name overall. The
intent is to make the consumer more aware of Jewett-Cameron and drive more
cross-over business to each segment and product line. This focus involve social
media, other online communications, and omnichannel branding. The Company also
intends to broaden its product presence in more channels, including retailers
and e-commerce, both in the US and internationally. The addition of new
personnel and its new Enterprise Resource Planning (ERP) software system will
support these marketing and sales initiatives. A new Chief Revenue Officer has
been added to focus on integrating marketing strategy and sales, including the
introduction of new products, and opening and expanding sales channels. The new
position of VP Business Development was filled in October 2019. This key role
will focus on tangible ways to leverage current business assets and entities,
such as Greenwood's specialty lumber sales and lumber trading, and products and
product lines.
The new patented steel fence post, LIFETIME POST™ continues to position the
company firmly in the fencing market. The product was specifically designed to
complement Jewett Cameron's already long running, successful Adjust-A-Gate™
products, thus building a stronger branding in this market segment. The Company
has other products in development, primarily in the fencing and pet segments.
Management intends to continue to add new products through its internal
development process, but may also seek to acquire products that will provide
complementary benefits to its existing products and product lines.
As a result of a strategic review of the Company's secondary business operations
and assets initiated in fiscal 2019, management and the Board of Directors
decided to exit the industrial tools segment and close the MSI division. MSI has
recently been a very minor contributor to the Company's overall sales and has
been posting operating losses, Management believes there are greater
opportunities for growth in the three remaining operating segments, including
the seed division, where the Company will continue to focus on improving and
adding to its market share in sales and service. During the first quarter, the
Company began to liquidate the remaining MSI inventory. The Company recorded an
additional write-down of the remaining MSI inventory in the first quarter, and
now expects additional costs related to the liquidation and closure to be
incurred in the second quarter of fiscal 2020.
The Company has also continued to use its excess cash to repurchase and cancel
common shares. Subsequent to the end of the fiscal period, the Company
repurchased for cancelation a total of 490,120 common shares from two large
shareholders. 300,000 common shares were repurchased from Michael Nasser, the
Company's Co-Founder and current Corporate Secretary and Director, and 190,120
shares were repurchased from the Donald Boone Irrev Trust ("Boone Trust"), a
trust established by Company's other Co-Founder, and former CEO and Chairman,
Donald Boone. The Boone Trust received Mr. Boone's Jewett-Cameron common shares
upon his death in May 2019. Mr. Nasser sold his shares for estate planning
purposes, while the Boone Trust sold its shares to provide distributions to the
Trust's beneficiaries as required by Mr. Boone's will. By repurchasing such a
large number of shares privately instead of through the public marketplace, the
Company and the sellers were able to complete the transactions quickly at a
fixed price, which may have been difficult to complete in the public market due
to the prevailing low trading volume of the Company's shares on NASDAQ. The
shares were repurchased by the Company at a price of $7.89 per share, calculated
as the Volume Weighted Average Price (VWAP) of all the shares traded on NASDAQ
during the first quarter of fiscal 2020. The total cost of the share
repurchases was $3,867,047.
Three Months Ended November 30, 2019 and 2018
For the three months ended November 30, 2019, sales decreased by $2,010,922, or
22% to $7,055,178 from $9,066,100 for the three months ended November 30, 2018.
Gross profit decreased by $260,743, or 11%.
- 22 -
Sales at JCC were $5,577,494 for the three months ended November 30, 2019
compared to sales of $6,993,428 for the three months ended November 30, 2018,
which was a decrease of $1,415,934, or 20%. Several of the Company's largest
customers delayed their usual Q1 orders into later into the quarter or into the
second quarter. The delay may be related to the status of tariffs on the
Company's metal products, as during the period the Company was notified that
many of its metal products made in China have been reclassified and are no
longer subject to the new tariffs. Operating loss for JCC was ($77,696) for the
quarter ended November 30, 2019 compared to net income of $173,821 in the
quarter ended November 30, 2018. 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.
Sales at Greenwood were $784,868 for the three months ended November 30, 2019
compared to sales of $1,111,687 for the three months ended November 30, 2018,
which was a decrease of $326,819, or 29%. Management has worked to refine the
product mix by focusing on the most in demand products and redirecting sales
directly to end users. For the quarter, Greenwood had an operating loss of
($15,618) compared to a profit of $33,596 in the three months ended November 30,
2018.
Sales at JCSC were $524,595 for the three months ended November 30, 2019
compared to sales of $756,910 for the three months ended November 30, 2018. This
represents a decrease of $232,315, or 31%. A poor 2019 planting season across
much of the United States has reduced the demand for the Company's clover seed
as a cover crop during the fall and winter. Operating income for JCSC for the
quarter was $49,703 compared to income of $10,433 for the quarter ended November
30, 2018.
Sales at MSI were $168,221 for the quarter ended November 30, 2019 compared to
sales of $204,075 for the quarter ended November 30, 2018. Effective September
1, 2019, the Company decided to close the MSI division and exit the Industrial
Tools segment. During the quarter, the Company wrote-down a portion of the
carrying value of the remaining inventory and began liquidation sales, which
significantly reduced revenue. The operating loss for the quarter was ($107,217)
compared to an operating loss of ($3,737) for the three months ended November
30, 2018.
JC USA is the holding company for the wholly-owned operating subsidiaries. For
the quarter ended November 30, 2019, JC USA had operating income of $151,569
compared to operating income of $282,047 for the quarter ended November 30,
2018. The decline in income is largely due to higher administrative costs
related to additional personnel in the current quarter and the implementation of
a new software system. The results of JC USA are eliminated on consolidation.
Gross margin for the three month period ended November 30, 2019 was 29.0%
compared to 25.5% for the three months ended November 30, 2018. The current
margins were higher due to a more favorable product mix of higher metal product
sales and lower wood product sales.
Operating expenses rose by $229,140 to $2,059,217 from $1,830,077 for the three
months ended November 30, 2019 as the Company added additional staff and has
begun training to implementits new ERP software system. Selling, General and
Administrative Expenses increased to $649,010 from $556,148. Depreciation and
Amortization decreased to $48,148 from $50,870. Wages and Employee Benefits
increased to $1,362,059 from $1,223,059. Interest and other income decreased to
$11,614 from $17,151.
Income before income taxes was $741 for the quarter ended November 30, 2019
compared to $496,160 for the quarter ended November 30, 2018. The Company's
income tax expense in the current quarter was $7,362 compared to $146,466 for
the three months ended November 30, 2018. The Company estimates income tax
expense for the quarter based on combined federal and state rates that are
currently in effect. The net loss for the three months ended November 30, 2019
was ($6,621), or ($0.00) per share, compared to net income of $349,694, or $0.08
per share, for the three months ended November 30, 2018.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2019, the Company had working capital of $17,760,292 compared
to working capital of $17,761,616 as of August 31, 2019, a decrease of $1,324.
Cash and cash equivalents totaled $8,969,249, a decrease of $683,061 from cash
of $9,652,310. Accounts receivable fell to $2,164,026 from $2,835,952 due to the
seasonal cycle of sales to customers and the related timing of cash receipts.
Inventory increased by $902,321 to $7,280,126 as certain customers delayed their
usual purchases to the second quarter. Prepaid expenses, which is largely
related to down payments for future inventory purchases, increased by $175,276.
Note receivable fell to $997 from $1,197, and prepaid income taxes declined to
$201,956 from $223,420.
- 23 -
Accounts payable was $238,133, a decline of $171,894 due to the timing of
inventory purchases. Accrued liabilities declined by $125,836 to $1,186,744, and
deferred tax liability fell to $47,103 from $61,204.
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,
2019, the accounts receivable collection period, or DSO, was 28 days compared to
37 days for the three months ended November 30, 2018. Inventory turnover to the
three months ended November 30, 2019 was 124 days compared to 140 days for the
three months ended November 30, 2018.
External sources of liquidity include a line of credit from U.S. Bank of
$3,000,000. As of November 30, 2019, 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, 2019, the one month LIBOR rate plus 175 basis points was 3.44%
(1.69% + 1.75%). The line of credit has certain financial covenants. The
Company is in compliance with these covenants.
The Company has been utilizing its cash position by repurchasing common shares
in order to increase shareholder value. No common shares were repurchased in the
quarter ended November 30, 2019. Subsequent to the end of the period, the
Company privately repurchased for cancelation a total of 490,120 common shares
from two large shareholders, including a current officer and director of
Jewett-Cameron. The shares were repurchased by the Company at a price of $7.89
per share, calculated as the Volume Weighted Average Price (VWAP) of all the
shares traded on NASDAQ during the first quarter of fiscal 2020. The total cost
of the share repurchases was $3,867,047.
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 coming fiscal year.
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.
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 1,570 shares for the three months ended November 30, 2019. With this
limited trading volume, investors could find it difficult to purchase or sell
our common stock.
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Risks Related to Our Business
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, 2019, our top ten customers represented
74% 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.
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, 2019. 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.
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Item 3.
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