Jewett Cameron Trading Co Ltd 10-Q for FY2021 Q1
Jewett Cameron Trading Co Ltd (JCTC)
About this 10-Q
Jewett Cameron Trading Co Ltd filed this 10-Q on January 14, 2021, covering the quarter ended November 30, 2020 (FY2021 Q1).
Headline figures
Quarter ended November 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $10.32M
- up 46.2% from $7.06M a year earlier
- Net income
- $488.53K
- compared with a net loss of $6621 a year earlier
- Diluted EPS
- $0.14
- compared with $0.00 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2020
¨
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 000-19954
JEWETT-CAMERON TRADING COMPANY LTD. |
(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.) |
32275 N.W. Hillcrest, North Plains, Oregon |
| 97133 |
(Address Of Principal Executive Offices) |
| (Zip Code) |
(503) 647-0110 |
(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 |
Common Stock, no par value | JCTCF | NASDAQ Capital Market |
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. x Yes ¨ No
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 ¨ |
Non-accelerated filer ¨ | |
| Emerging growth company x |
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. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
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 – 3,489,161 common shares as of January 13, 2021.
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Jewett-Cameron Trading Company Ltd.
Index to Form 10-Q
PART I – FINANCIAL INFORMATION |
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Item 1. | Financial Statements | 3 |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 26 |
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Item 4. | Controls and Procedures | 27 |
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PART II – OTHER INFORMATION |
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Item 1. | Legal Proceedings | 27 |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 27 |
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Item 3. | Defaults Upon Senior Securities | 27 |
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Item 4. | Mine Safety Disclosures | 27 |
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Item 5. | Other Information | 27 |
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Item 6. | Exhibits | 27 |
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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)
NOVEMBER 30, 2020
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JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
| November 30, 2020 |
| August 31, 2020 | ||
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ASSETS |
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Current assets |
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Cash and cash equivalents | $ | 5,839,952 |
| $ | 3,801,037 |
Accounts receivable, net of allowance of $Nil (August 31, 2020 - $Nil) |
| 4,246,957 |
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| 6,274,426 |
Inventory, net of allowance of $65,000 (August 31, 2020 - $65,000) (note 3) |
| 9,421,159 |
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| 9,198,146 |
Prepaid expenses |
| 839,873 |
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| 1,036,128 |
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Total current assets |
| 20,347,941 |
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| 20,309,737 |
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Property, plant and equipment, net (note 4) |
| 3,101,343 |
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| 2,967,565 |
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Intangible assets, net (note 5) |
| 599 |
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| 659 |
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Total assets | $ | 23,449,883 |
| $ | 23,277,961 |
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- Continued –
The accompanying notes are an integral part of these consolidated financial statements.
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JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
| November 30, 2020 |
| August 31, 2020 | ||
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Continued |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities |
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Accounts payable | $ | 974,176 |
| $ | 1,095,061 |
Current portion of notes payable (note 8) |
| 415,988 |
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| 342,326 |
Income taxes payable |
| 219,636 |
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| 40,596 |
Accrued liabilities |
| 1,682,324 |
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| 2,016,300 |
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Total current liabilities |
| 3,292,124 |
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| 3,494,283 |
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Long-term liabilities |
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Notes payable (note 8) |
| 264,719 |
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| 338,381 |
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Deferred tax liability (note 6) |
| 56,168 |
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| 96,952 |
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Total liabilities |
| 3,613,011 |
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| 3,929,616 |
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Stockholders’ equity |
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Capital stock (note 9, 10) |
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Authorized |
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21,567,564 common shares, without par value |
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10,000,000 preferred shares, without par value |
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Issued |
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3,481,162 common shares (August 31, 2020 – 3,481,162) |
| 821,284 |
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| 821,284 |
Additional paid-in capital |
| 618,707 |
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| 618,707 |
Retained earnings |
| 18,396,881 |
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| 17,908,354 |
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Total stockholders’ equity |
| 19,836,872 |
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| 19,348,345 |
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Total liabilities and stockholders’ equity | $ | 23,449,883 |
| $ | 23,277,961 |
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Contingency (Note 17)
Subsequent events (Note 18)
The accompanying notes are an integral part of these consolidated financial statements.
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JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
| Three Months Ended November 30, 2020 |
| Three Months Ended November 30, 2019 | ||
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SALES | $ | 10,316,284 |
| $ | 7,055,178 |
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COST OF SALES |
| 7,353,385 |
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| 5,006,835 |
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GROSS PROFIT |
| 2,962,899 |
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| 2,048,343 |
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OPERATING EXPENSES |
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Selling, general and administrative expenses |
| 694,628 |
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| 649,010 |
Depreciation and amortization |
| 50,529 |
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| 48,148 |
Wages and employee benefits |
| 1,593,959 |
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| 1,362,059 |
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| 2,339,116 |
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| 2,059,217 |
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Income from operations |
| 623,783 |
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| (10,874) |
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OTHER ITEMS |
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Interest and other income |
| 3,000 |
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| 11,615 |
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Income before income taxes |
| 626,783 |
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| 741 |
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Income tax expense |
| (138,256) |
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| (7,362) |
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Net income (loss) | $ | 488,527 |
| $ | (6,621) |
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Basic earnings per common share | $ | 0.14 |
| $ | (0.00) |
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Diluted earnings per common share | $ | 0.14 |
| $ | (0.00) |
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Weighted average number of common shares outstanding: |
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Basic |
| 3,481,162 |
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| 3,971,282 |
Diluted |
| 3,481,162 |
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| 3,971,282 |
The accompanying notes are an integral part of these consolidated financial statements.
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JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
| Capital Stock |
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Number of Shares | Amount | Additional paid-in capital | Retained earnings | Total | |
August 31, 2019 | 3,971,282 | $ 936,903 | $ 618,707 | $ 18,875,256 | $ 20,430,866 |
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Net loss | - | - | - | (6,621) | (6,621) |
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November 30, 2019 | 3,971,282 | $ 936,903 | $ 618,707 | $ 18,868,635 | $ 20,424,245 |
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Shares repurchased and cancelled (note 10) | (490,120) | (115,619) | - | (3,751,427) | (3,867,046) |
Net income | - | - | - | 2,791,146 | 2,791,146 |
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August 31, 2020 | 3,481,162 | $ 821,284 | $ 618,707 | $ 17,908,354 | $ 19,348,345 |
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Net income | - | - | - | 488,527 | 488,527 |
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November 30, 2020 | 3,481,162 | $ 821,284 | $ 618,707 | $ 18,396,881 | $ 19,836,872 |
The accompanying notes are an integral part of these consolidated financial statements.
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JEWETT-CAMERON TRADING COMPANY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. Dollars)
(Prepared by Management)
(Unaudited)
| Three Months Ended November 30, 2020 |
| Three Months Ended November 30, 2019 | ||
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income (loss) | $ | 488,527 |
| $ | (6,621) |
Items not involving an outlay of cash: |
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Depreciation and amortization |
| 50,529 |
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| 48,148 |
Deferred income taxes |
| (40,784) |
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| (14,101) |
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Changes in non-cash working capital items: |
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Decrease in accounts receivable |
| 2,027,469 |
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| 671,926 |
(Increase) in inventory |
| (223,013) |
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| (902,321) |
Decrease in note receivable |
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| 200 |
Decrease (increase) in prepaid expenses |
| 196,255 |
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| (175,276) |
Decrease in accounts payable and accrued liabilities |
| (454,861) |
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| (297,730) |
Decrease in prepaid income taxes |
| - |
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| 21,464 |
Increase in income taxes payable |
| 179,040 |
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| - |
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Net cash provided by (used by) operating activities |
| 2,223,162 |
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| (654,311) |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of property, plant and equipment |
| (184,247) |
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| (28,750) |
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Net cash used in investing activities |
| (184,247) |
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| (28,750) |
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Net increase (decrease) in cash |
| 2,038,915 |
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| (683,061) |
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Cash, beginning of period |
| 3,801,037 |
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| 9,652,310 |
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Cash, end of period | $ | 5,839,952 |
| $ | 8,969,249 |
Supplemental disclosure with respect to cash flows (Note 16)
The accompanying notes are an integral part of these consolidated financial statements.
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JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(Unaudited)
1.
NATURE OF OPERATIONS
Jewett-Cameron Trading Company Ltd. was incorporated in British Columbia on July 8, 1987 as a holding company for Jewett-Cameron Lumber Corporation (“JCLC”), incorporated September 1953. Jewett-Cameron Trading Company, Ltd. acquired all the shares of JCLC through a stock-for-stock exchange on July 13, 1987, and at that time JCLC became a wholly owned subsidiary. Effective September 1, 2013, the Company reorganized certain of its subsidiaries. JCLC’s name was changed to JC USA Inc. (“JC USA”), and a new subsidiary, Jewett-Cameron Company (“JCC”), was incorporated.
JC USA has the following wholly owned subsidiaries incorporated under the laws of the State of Oregon: Jewett-Cameron Seed Company, (“JCSC”), incorporated October 2000, Greenwood Products, Inc. (“Greenwood”), incorporated February 2002, and Jewett-Cameron Company, incorporated September 2013. Former wholly owned subsidiary MSI-PRO was wound-up and dissolved in fiscal 2020. Jewett-Cameron Trading Company Ltd. and its subsidiaries (the “Company”) have no significant assets in Canada.
The Company, through its subsidiaries, operates out of facilities located in North Plains, Oregon. JCC’s business consists of the manufacturing and distribution of specialty metal products and wholesale distribution of wood products to home centers and other retailers located primarily in the United States. Greenwood is a processor and distributor of industrial wood and other specialty building products principally to customers in the marine and transportation industries in the United States. MSI is an importer and distributor of pneumatic air tools and industrial clamps in the United States. JCSC is a processor and distributor of agricultural seeds in the United States. JC USA provides professional and administrative services, including accounting and credit services, to its subsidiary companies.
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 COVID19 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 is closely monitoring 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 wholly owned subsidiaries, JC USA, JCC, MSI, JCSC, and Greenwood, all of which are incorporated under the laws of Oregon, U.S.A.
All inter-company balances and transactions have been eliminated upon consolidation.
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JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(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 November 30, 2020, cash and cash equivalents were $5,839,952 compared to $3,801,037 at August 31, 2020.
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 | 3-7 years |
| Warehouse equipment | 2-10 years |
| Buildings | 5-30 years |
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.
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JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(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.
Earnings per share
Basic earnings per common share is computed by dividing net income or loss 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.
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JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(Unaudited)
2.
SIGNIFICANT ACCOUNTING POLICIES (cont’d…)
Earnings per share (cont’d…)
The earnings per share data for the three month periods ended November 30, 2020 and 2019 are as follows:
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| Three Month Periods ended November 30, | ||||
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| 2020 |
| 2019 | ||
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| Net income (loss) | $ | 488,527 |
| $ | (6,621) |
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| Basic weighted average number of common shares outstanding |
| 3,481,162 |
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| 3,971,282 |
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| Effect of dilutive securities |
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| Stock options |
| - |
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| Diluted weighted average number of common shares outstanding |
| 3,481,162 |
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| 3,971,282 |
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.
Stock-based compensation
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.
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JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(Unaudited)
2.
SIGNIFICANT ACCOUNTING POLICIES (cont’d…)
Financial instruments (cont’d…)
The estimated fair values of the Company's financial instruments as of November 30, 2020 and August 31, 2020 follows:
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| November 30, 2020 |
| August 31, 2020 | ||
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| Carrying | Fair |
| Carrying | Fair |
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| Amount | Value |
| Amount | Value |
| Cash and cash equivalents | $ 5,839,952 | $ 5,839,952 |
| $ 3,801,037 | $ 3,801,037 |
| Accounts receivable, net of allowance | 4,246,957 | 4,246,957 |
| 6,274,426 | 6,274,426 |
| Notes Payable | 680,707 | 680,707 |
| 680,707 | 680,707 |
| Accounts payable and accrued liabilities | 2,656,500 | 2,656,500 |
| 3,111,361 | 3,111,361 |
The following table presents information about the assets that are measured at fair value on a recurring basis as of November 30, 2020 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:
|
|
| November 30, 2020 |
| Quoted Prices |
| Significant |
| Significant | ||||
| Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
| $ | 5,839,952 |
| $ | 5,839,952 |
| $ | — |
| $ | — |
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.
| - 13 - |
|
|
|
|
|
|
|
JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(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 and tools, 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 February 2016, Topic 842, Leases was issued to replace the leases requirements in Topic 840, Leases. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. Topic 842 will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods and is to be retrospectively applied. Earlier application is permitted. The Company adopted this ASU on September 1, 2019. There was no material impact on the Company’s financial statements on adoption.
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 is currently evaluating the impact of ASU No. 2016-13 on its financial position, results of operations and liquidity.
3.
INVENTORY
A summary of inventory is as follows:
|
| November 30, 2020 |
| August 31, 2020 | ||
|
|
|
|
|
|
|
| Wood products and metal products | $ | 8,873,627 |
| $ | 9,017,349 |
| Agricultural seed products |
| 547,532 |
|
| 180,797 |
|
|
|
|
|
|
|
|
| $ | 9,421,159 |
| $ | 9,198,146 |
| - 14 - |
|
|
|
|
|
|
|
JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(Unaudited)
4.
PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant, and equipment is as follows:
|
| November 30, 2020 |
| August 31, 2020 | ||
|
|
|
|
|
|
|
| Office equipment | $ | 687,446 |
| $ | 654,739 |
| Warehouse equipment |
| 1,311,298 |
|
| 1,293,331 |
| Buildings |
| 4,315,905 |
|
| 4,182,332 |
| Land |
| 559,065 |
|
| 559,065 |
|
|
| 6,873,714 |
|
| 6,689,467 |
|
|
|
|
|
|
|
| Accumulated depreciation |
| (3,772,371) |
|
| (3,721,902) |
|
|
|
|
|
|
|
| Net book value | $ | 3,101,343 |
| $ | 2,967,565 |
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:
|
| November 30, 2020 |
| August 31, 2020 | ||
|
|
|
|
|
|
|
| Intangible assets |
| 16,405 |
|
| 16,405 |
|
|
|
|
|
|
|
| Accumulated amortization |
| (15,806) |
|
| (15,746) |
|
|
|
|
|
|
|
| Net book value | $ | 599 |
| $ | 659 |
6.
DEFERRED INCOME TAXES
Deferred income tax liability as of November 30, 2020 of $56,168 (August 31, 2020 - $96,952) reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
7.
BANK INDEBTEDNESS
There was no bank indebtedness under the Company’s line-of-credit as of November 30, 2020 or August 31, 2020. At November 30, 2020, the line of credit borrowing limit was $3,000,000.
Bank indebtedness, when it exists, is secured by an assignment of accounts receivable and inventory. Interest is calculated solely on the one month LIBOR rate plus 175 basis points.
| - 15 - |
|
|
|
|
|
|
|
JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(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 $487,127 and the second loan was made to JC USA for $193,580. The total principal amount of the two notes is $680,707. They have a term of 2 years with a 1% annual interest rate. Payments are 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. There is no prepayment penalty. If proceeds are used for qualifying expenses as defined by the CARES Act, including payroll costs, health care benefits, rent and utilities, the Company can apply for forgiveness after 60 days of all or any portion of the promissory note used for such qualifying expenses. Although the Company believes it has used the entire proceeds for qualifying expenses, there is no assurance that the Company will obtain forgiveness of the loan. The terms of the promissory note, including eligibility and forgiveness, may be subject to additional requirements adopted by the SBA.
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.
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.
CANCELLATION OF CAPITAL STOCK
Treasury stock may be kept based on an acceptable inventory method such as the average cost basis. Upon disposition or cancellation, the treasury stock account is credited for an amount equal to the number of shares cancelled, multiplied by the cost per share and the difference is treated as additional paid-in-capital in excess of stated value.
During the 2nd quarter of fiscal 2020 ended February 29, 2020, the Company repurchased for cancelation a total of 490,120 common shares from two large shareholders, including an officer and director of the Company. The shares were repurchased privately 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 $3,867,046. The premium paid to acquire those shares over their per share book value in the amount of $3,751,427 was recorded as a decrease to retained earnings
| - 16 - |
|
|
|
|
|
|
|
JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(Unaudited)
11.
SHARE-BASED INCENTIVE PLANS
Stock Options
The Company formerly had a stock option program under which stock options to purchase securities from the Company could be granted to directors and employees of the Company on terms and conditions acceptable to the regulatory authorities of Canada, notably the Ontario Securities Commission and the British Columbia Securities Commission.
Under the stock option program, stock options for up to 10% of the number of issued and outstanding common shares could be granted from time to time, provided that stock options in favor of any one individual may not exceed 5% of the issued and outstanding common shares. No stock option granted under the stock option program is transferable by the optionee other than by will or the laws of descent and distribution, and each stock option is exercisable during the lifetime of the optionee only by such optionee. Generally, no option can be for a term of more than 10 years from the date of the grant.
The exercise price of all stock options, granted under the stock option program, must be at least equal to the fair market value (subject to regulated discounts) of such common shares on the date of grant. Options vested at the discretion of the Board of Directors.
During the year ended August 31, 2020, the Company’s Board of Directors approved the termination of the stock option program. The Company had no stock options outstanding as of November 30, 2020 and August 31, 2020.
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 November 30, 2020, the maximum number of shares available to be issued under the Plan was 39,712.
12.
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 periods ended November 30, 2020 and 2019 the 401(k) compensation expense was $133,102 and $119,568, respectively.
13.
DISCONTINUED OPERATIONS
Effective September 1, 2019, the Board of Directors decided to permanently close the MSI division and exit the industrial tools business. As of August 31, 2020, the remaining inventory has been liquidated, the division has been wound-up, and the subsidiary has been voluntarily dissolved. The operations and assets of MSI were significantly immaterial to the Company’s overall performance. As such, separate disclosure of MSI’s operations as discontinued operations within the Company’s statement of operations was not considered necessary.
| - 17 - |
|
|
|
|
|
|
|
JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(Unaudited)
14.
SEGMENT INFORMATION
The Company has four principal reportable segments. Three segments are continuing operations and one, Industrial Tools and Clamps, is considered as a discontinued operation. 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 three month periods ended November 30, 2020 and 2019.
|
| 2020 |
| 2019 | ||
|
|
|
|
|
|
|
| Sales to unaffiliated customers: |
|
|
|
|
|
| Industrial wood products | $ | 724,752 |
| $ | 784,868 |
| Lawn, garden, pet and other |
| 8,929,636 |
|
| 5,577,494 |
| Seed processing and sales |
| 661,896 |
|
| 524,595 |
| Industrial tools and clamps |
| - |
|
| 168,221 |
|
| $ | 10,316,284 |
| $ | 7,055,178 |
|
|
|
|
|
|
|
| Income (loss) before income taxes: |
|
|
|
|
|
| Industrial wood products | $ | (15,224) |
| $ | (15,618) |
| Lawn, garden, pet and other |
| 520,208 |
|
| (77,696) |
| Seed processing and sales |
| 49,490 |
|
| 49,703 |
| Industrial tools and clamps |
| - |
|
| (107,217) |
| Corporate and administrative |
| 72,309 |
|
| 151,569 |
|
| $ | 626,783 |
| $ | 741 |
|
|
|
|
|
|
|
| Identifiable assets: |
|
|
|
|
|
| Industrial wood products | $ | 701,391 |
| $ | 975,468 |
| Lawn, garden, pet and other |
| 12,969,525 |
|
| 7,988,756 |
| Seed processing and sales |
| 759,267 |
|
| 518,204 |
| Industrial tools and clamps |
| - |
|
| 119,228 |
| Corporate and administrative |
| 8,963,533 |
|
| 12,294,569 |
|
| $ | 23,393,716 |
| $ | 21,896,225 |
|
|
|
|
|
|
|
| Depreciation and amortization: |
|
|
|
|
|
| Industrial wood products | $ | - |
| $ | - |
| Lawn, garden, pet and other |
| 9,294 |
|
| 6,365 |
| Seed processing and sales |
| 1,587 |
|
| 1,587 |
| Industrial tools and clamps |
| - |
|
| 122 |
| Corporate and administrative |
| 39,648 |
|
| 40,074 |
|
| $ | 50,529 |
| $ | 48,148 |
| - 18 - |
|
|
|
|
|
|
|
JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(Unaudited)
14.
SEGMENT INFORMATION (cont’d…)
|
|
| 2020 |
|
| 2019 |
|
|
|
|
|
|
|
| Capital expenditures: |
|
|
|
|
|
| Industrial wood products | $ | - |
| $ | - |
| Lawn, garden, pet and other |
| - |
|
| - |
| Seed processing and sales |
| - |
|
| - |
| Industrial tools and clamps |
| - |
|
| - |
| Corporate and administrative |
| 184,247 |
|
| 28,750 |
|
| $ | 184,247 |
| $ | 28,750 |
|
|
|
|
|
|
|
| Interest expense: | $ | - |
| $ | - |
The following table lists sales made by the Company to customers which were in excess of 10% of total sales for the three months ended November 30, 2020 and 2019:
|
| 2020 |
| 2019 | ||
|
|
|
|
|
|
|
| Sales | $ | 4,898,298 |
| $ | 2,259,429 |
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 three months ended November 30, 2020 and 2019:
|
| 2020 |
| 2019 | ||
|
|
|
|
|
|
|
| United States | $ | 10,091,527 |
| $ | 6,816,250 |
| Canada |
| 202,611 |
|
| 150,486 |
| Europe |
| 11,058 |
|
| 1,818 |
| Mexico/Latin America/Caribbean |
| 4,633 |
|
| 61,109 |
| Asia/Pacific |
| 6,455 |
|
| 25,515 |
All of the Company’s significant identifiable assets were located in the United States as of November 30, 2020 and 2019.
15.
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 November 30, 2020, two customers accounted for accounts receivable greater than 10% of total accounts receivable at 55%. At November 30, 2019, three customers accounted for accounts receivable greater than 10% of total accounts receivable at 58%. The Company controls credit risk through credit approvals, credit limits, credit insurance and monitoring procedures. The Company performs credit evaluations of its commercial customers but generally does not require collateral to support accounts receivable.
| - 19 - |
|
|
|
|
|
|
|
JEWETT-CAMERON TRADING COMPANY LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
November 30, 2020
(Unaudited)
15.
RISKS (cont’d…)
Volume of business
The Company has concentrations in the volume of purchases it conducts with its suppliers. For the three months ended November 30, 2020, there were two suppliers that each accounted for 10% or greater of total purchases, and the aggregate purchases amounted to $4,082,187. For the three months ended November 30, 2019, there were two suppliers that each accounted for greater than 10% of total purchases, and the aggregate purchases amounted to $3,531,303.
16.
SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
Certain cash payments for the three months ended November 30, 2020 and 2019 are summarized as follows:
|
| 2020 |
| 2019 | ||
|
|
|
|
|
|
|
| Cash paid during the periods for: |
|
|
|
|
|
| Interest | $ | - |
| $ | - |
| Income taxes | $ | - |
| $ | - |
There were no non-cash investing or financing activities during the periods presented.
17.
CONTINGENCY
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 Jewett-Cameron. The matter arises out of a dog allegedly escaping from a Jewett-Cameron kennel product and causing personal injuries to three individuals. Jewett-Cameron is currently one of three named Defendants. As of this date, no formal responses have been made and no dates have been established governing the litigation proceedings. This matter is in its early stages making it speculative to predict as to its outcome. It is the Company’s intention to vigorously defend the lawsuit. Jewett- Cameron’s applicable liability insurer is providing a defense covering Jewett-Cameron’s legal fees and costs.
18.
SUBSEQUENT EVENTS
Subsequent to the end of the quarter, the Company issued 7,999 common shares to officers, directors, and employees under the Company’s Restricted Share Plan. The shares were issued at a deemed price of $8.80 per share at a total cost of $70,391.
| - 20 - |
|
|
|
|
|
|
|
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 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.
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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.
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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.
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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 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.
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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 $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.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company does not have any derivative financial instruments as of November 30, 2020. 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 and 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 Financial Officer has 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.
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 Jewett-Cameron. The matter arises out of a dog allegedly escaping from a Jewett-Cameron kennel product and causing personal injuries to three individuals. Jewett-Cameron is currently one of three named Defendants. As of this date, no formal responses have been made and no dates have been established governing the litigation proceedings. This matter is in its early stages making it speculative to predict as to its outcome. It is the Company’s intention to vigorously defend the lawsuit. Jewett Cameron’s applicable liability insurer is providing a defense covering Jewett-Cameron’s legal fees and costs.
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 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 and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act, Charles Hopewell32.1
Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act), Charles Hopewell
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101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
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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: January 14, 2021 |
| /s/ “Charles Hopewell” |
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| Charles Hopewell, President/CEO/CFO |
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CERTIFICATIONS
I, Charles Hopewell, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Jewett-Cameron Trading Company Ltd;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
January 14, 2021
By:
/s/ “Charles Hopewell”
Charles Hopewell,
Chief Executive Officer and President,
and Principal Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Jewett-Cameron Trading Company Ltd. (the “Company”) on Form 10-Q for the period ended November 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officer of the Company does hereby certify, to such officer’s knowledge, that, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: January 14, 2021 | Signed: /s/ “Charles Hopewell” |
| Charles Hopewell, Chief Executive Officer and President, and Principal Financial Officer |