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 May 31, 2022 and August 31, 2021 and
its results of operations and cash flows for the three and nine month periods
ended May 31, 2022 and 2021 in accordance with U.S. GAAP. Operating results for
the three and nine month periods ended May 31, 2022 is not necessarily
indicative of the results that may be experienced for the fiscal year ending
August 31, 2022. Overall, the operating results of JCC are seasonal with the
first two quarters of the fiscal year historically being slower than the final
two quarters of the fiscal year.
The Company's operations are classified into three reportable operating segments
and the parent corporate and administrative segment, which were determined based
on the nature of the products offered along with the markets being served. The
segments are as follows:
º Industrial wood products
º Lawn, garden, pet and other
º Seed processing and sales
º Corporate and administration
The industrial wood products segment reflects the business conducted by
Greenwood Products, Inc. (Greenwood). Greenwood is a processor and distributor
of industrial wood products. A major product category is treated plywood that is
sold primarily to the transportation industry, including the municipal and mass
transit transportation sectors.
The lawn, garden, pet and other segment reflects the business of Jewett-Cameron
Company (JCC), which is a wholesaler of wood products and a manufacturer and
distributor of specialty metal products. JCC operates out of a 5.6 acre owned
facility located in North Plains, Oregon that includes offices, a warehouse, and
a paved yard. This business is a wholesaler, and a manufacturer and distributor
of products that include an array of pet enclosures, kennels, and pet welfare
and comfort products, proprietary gate support systems, perimeter fencing,
greenhouses, and fencing in-fill products made of wood, metal and composites.
Examples of the Company's brands include Lucky Dog®, for pet products;
Adjust-A-Gate™, Fit-Right®, Perimeter Patrol®, and Infinity Euro Fence and
Lifetime Post™ for gates and fencing; Early Start, Spring Gardner™, Greenline®,
and Weatherguard for greenhouses. JCC uses contract manufacturers to manufacture
these products. Some of the products that JCC distributes flow through the
Company's facility in North Plains, Oregon, and some are shipped direct to the
customer from the manufacturer. Primary customers are home centers, eCommerce
partners, on-line direct consumers as well as other retailers.
The seed processing and sales segment reflects the business of Jewett-Cameron
Seed Company (JCSC). JCSC processes and distributes agricultural seed. Most of
this segment's sales come from selling seed to distributors with a lesser amount
of sales derived from cleaning seed.
JC USA Inc. ("JC USA") is the parent company for the wholly-owned subsidiaries
as described above. JC USA provides professional and administrative services,
including warehousing, accounting and credit services, to its subsidiary
companies.
Tariffs
The Company's metal products are manufactured in China and are imported into the
United States. The Office of the United States Trade Representative ("USTR")
instituted new tariffs on the importation of a number of products into the
United States from China effective September 24, 2018. These new tariffs are a
response to what the USTR considers to be certain unfair trade practices by
China. The tariffs began at 10%, and subsequently were increased to 25% as of
May 10, 2019. A number of the Company's products manufactured in China have been
subject to duties of 25% when imported into the United States.
These new tariffs were temporarily reduced on many of the Company's imported
products in September 2019 under a deemed one-year exemption. The 25% tariff
rate was restored on the Company's products in September 2020 when the exemption
expired.
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RESULTS OF OPERATIONS
Sales in the third quarter of fiscal 2022 declined 3% from the same quarter of
fiscal 2021, as sales at Greenwood fell by 11% and sales at JCS were down 40%.
Even with the slight decline in Q3, our strong sales growth in the first six
months of fiscal 2022 resulted in a 13% increase in sales for the current
nine-month period compared to the same period in fiscal 2021. Our margins
continue to be constrained by inflationary pressures, particularly higher raw
material and energy prices, and higher shipping rates, both internationally and
within the US. Gross margin slipped to 23.5% for the current nine months from
26.3% in the year-ago period.
Inflation is showing no signs of abating in the short-term. Near-record energy
prices are forcing logistical related costs upwards. Ocean container contracts
recently reset with higher prices in May and availability of spot containers
remains historically tight. COVID outbreaks and government mandated closures in
China continue to occur, which have led to supply disruptions and higher costs.
In response, we have been able to successfully raise our selling prices and pass
through some of these higher costs to our customers. However, the still rising
rate of inflation has resulted in many of our product's selling prices
continuing to lag product costs which will continue to restrain our margins in
the near-term.
We have continued our efforts to mitigate these effects from inflation and
supply chain disruptions as much as possible. Prior to the start of our fiscal
3rd quarter, which is the traditional start of our busy Spring and Summer
season, we made a decision to build our inventory, particularly in our highest
volume items. It allowed us to mitigate the risks of shipping and supply chain
disruptions and ship products from China ahead of already announced price
increases from both suppliers and shippers. This strategy was successful, as it
reduced some of our product costs while ensuring high product availability and
on-time fulfillment rates during our busy 3rd quarter. As we sell through our
busy season, our on-site inventory position has declined from $10.5 million in
February to $8.2 million in June.
Our inventory strategy did require higher cash outlays primarily funded through
our bank line of credit, which we have begun repaying as inventory is sold and
accounts receivable are collected. We have also signed new shipping contracts to
lock in as much ocean container capacity at fixed rates, while also modifying
our containerization of products to maximize the available space and minimize
the increased costs. These supply chain issues and higher shipping costs,
combined with tariff issues, have led management to investigate the broader
sourcing of our raw materials and certain finished products.
Our current financial results were negatively affected by the accrual in the
second quarter of $300,000 for anticipated costs related to an offer to settle a
case brought by an association of California District Attorneys. This case
related to their ongoing investigation into the environmental labeling and
marketing of dog waste bags. The District Attorneys claim that labeling certain
dog waste bags, including the Company's, as biodegradable or compostable were
misleading due to the lack of industrial composting facilities that accept dog
waste. A number of major retailers have already settled their portion of the
case. In June 2022, we agreed to settle for only the previously accrued $300,000
payment with no admission of guilt by the Company. In response to the case, we
have redesigned our packaging and marketing materials for the poop bags which
included feedback from the District Attorneys to help ensure legal compliance
for our future sales of the products within California. We have moved forward
with the lessons learned from the issue. Sales with the new packaging have
resumed throughout the US and are selling well through both retailers and online
which demonstrates the consumer's desire for these types of new products. In
June, we placed a new order with our bag supplier to restock our inventory.
The worldwide supply chain issues have slowed our planned introductions of
several new products, but we remain committed to either develop or acquire new
products, particularly those that complement and expand our existing product
lines. We also are strategically investing in our facilities, equipment, and
personnel. The renovation of an existing warehouse building for both custom
order fulfilment and to support our growing fence business is expected to be
completed during the 4th fiscal quarter. The website has been upgraded in line
with our omnichannel commitment offering enhanced accessibility, functionality
and modernized investor relations and contact sections. We have also implemented
easier navigation of our increased product selection displayed with a more
unified brand presentation within a new eCommerce interface.
In response to the COVID-19 pandemic, the State of Oregon originally lifted all
of its mask and social distancing requirements in June 2021. However, as a
response to the surge in COVID-19 infections, indoor masking requirements for
businesses were reinstituted in August 2021 and remained in effect until the
State of Oregon lifted the indoor masking mandate on March 11, 2022. The Company
remains vigilant in regard to the Coronavirus and its variants. To date, we have
not had any incidents of transmissions within the confines of our facilities due
to our clear and consistent protocols during the restrictive period, as well as
our employees' remarkable support of our procedures which has been critical to
our success in keeping our workplace safe and running. This has directly led to
our ability to retain our workforce through these challenging times as well as
create an environment in which people feel safe. The assistance of the PPP
program provided us the ability to assist sound employee decisions when they
either felt they had an external exposure or perhaps even tested positive due to
such external exposure. The loans the Company received under the Paycheck
Protection Program were essential in supporting the Company's ability to operate
without interruption during the crisis and retain 100% of its workforce. All of
the borrowed funds were spent on qualifying employee payroll expenses, and the
Company's loans were fully forgiven by the SBA in April 2021.
18
The outlook for the remainder of fiscal 2022 remains uncertain. Inflation,
particularly in the form of higher raw material costs combined with higher
shipping costs, is expected to remain an issue going forward. Although the
consumer sectors of home improvement and pet supplies in which the Company
operates are historically somewhat resistant to declines in consumer spending
resulting from inflation compared to many other sectors, they are certainly not
immune. The sudden increase in energy prices to near-record highs has severely
restrained consumers' available discretionary income. This has negatively
affected their willingness to spend money on non-critical items as reflected in
the recent significant decline in the US Index of Consumer Sentiment, which may
limit our ability to grow our sales in the near-term. These costs may also
increase faster than we are able raise our selling prices to our customers,
which would continue to pressure our margins for the remainder of the fiscal
year and into fiscal 2023.
Three Months Ended May 31, 2022 and May 31, 2021
For the three months ended May 31, 2022, sales totaled $20,922,190 compared to
sales of $21,619,952 for the three months ended May 31, 2021, which is a
decrease of $697,762, or 3%.
Sales at JCC for the current quarter were down 1% to $19,775,597 from sales of
$20,020,420 for the three months ended May 31, 2021. The historic volatility in
lumber prices has dampened consumer demand, and some poop bag sales were delayed
due to the switch to new product packaging required by the potential settlement
in California over the previous packaging. We have also replaced some of our
existing pet product lines with newer models, which resulted in some slower
sales in the quarter during the transition. Margins continue to be pressured by
higher raw material, energy and shipping costs. Operating profit for JCC in the
current quarter was $2,068,910 compared to income of $3,104,805 for the quarter
ended May 31, 2021.
Sales at Greenwood for the quarter were $570,592 compared to sales of $637,718
for the three months ended May 31, 2021, which was a decrease of $67,126, or
11%. Demand for Greenwood's products from governments and transit operators
remains weak due to the impacts of the COVID-19 pandemic as well as customer
production delays due to continued supply chain delivery issues.During the
current quarter, a new trader was hired to help grow sales and introduce new
products to new customers, including those in the housing and construction
sectors. For the three months ended May 31, 2022, Greenwood had an operating
loss of ($35,123) compared to an operating loss of ($9,794) for the three months
ended May 31, 2021.
Sales at JCSC were $576,001 compared to sales of $961,814 for the three months
ended May 31, 2021. This is a decrease of $385,813, or 40%. The historic heat
wave across the Pacific Northwest during the summer of 2021 damaged many crops
and reduced harvested yields which has decreased demand for the Company's seed
cleaning services. There has also been delays in shipping certain grass seed
orders to China due to their COVID related border shutdowns. For the quarter
ended May 31, 2022, JCSC had an operating loss of ($116,639) compared to
operating income of $42,934 for the quarter ended May 31, 2021.
JC USA is the holding company for the wholly-owned operating subsidiaries. For
the quarter ended May 31, 2022, JC USA had operating income of $55,428 compared
to operating income of $181,169 for the quarter ended May 31, 2021. The increase
in operating income is largely due to higher inventory levels in the current
quarter. The results of JC USA are eliminated on consolidation
Gross margin for the three months ended May 31, 2022 was 25.6% compared to 25.8%
for the three months ended May 31, 2021. Significant inflationary inputs,
particularly the higher costs for raw materials, energy and logistics, continue
to pressure our margins.
Operating expenses increased by $388,927 to $3,333,166 from $2,944,239 for the
three months ended May 31, 2021. Selling, General and Administrative rose to
$1,125,692 from $966,298 as new marketing and sales programs were conducted for
the Company's recently introduced products. Wages and Employee Benefits
increased to $2,124,183 from $1,908,588 as the Company increased its employee
headcount compared to the prior year's quarter. Depreciation rose to $83,291
from $69,353 as the Company added new facilities and equipment. Other income was
$903, and interest expense related to the amounts borrowed on its bank line of
credit were $47,973. In the comparable quarter of the prior year, the Company
recorded a one-time gain related to the forgiveness of its PPP debt of $687,387.
Income tax expense for the three months ended May 31, 2022 was $478,464 compared
to $904,638 for the three-month period ended May 31, 2021. The Company estimates
income tax expense for the quarter based on combined federal and state rates
that are currently in effect, and the increase in taxes is consistent with the
higher income for the current quarter.
19
Net income of the quarter ended May 31, 2022 was $1,494,111, or $0.43 per basic
and diluted share. Net income for the quarter ended May 31, 2021, including the
one-time gain on the extinguishment of its PPP debt of $687,387, was $2,414,477,
or $0.69 per basic and diluted share.
Nine Months Ended May 31, 2022 and May 31, 2021
For the nine months ended May 31, 2022, sales totaled $47,900,665 compared to
sales of $42,396,591 for the nine months ended May 31, 2021. This represents an
increase of $5,504,074, or 11%.
Sales at JCC were $43,978,959 for the nine months ended May 31, 2022 compared to
sales of $37,843,379 for the nine months ended May 31, 2021, which was an
increase of $6,135,580, or 16%. Consumer demand for fencing and pet products has
remained high, and the Company also successfully raised its selling prices on
many products in the current period. Operating income at JCC was $1,499,054
compared to income of $3,592,546 for the nine months ended May 31, 2021 as
higher costs, including for raw materials, energy and shipping, reduced our
margins in the current period. Overall, the operating results of JCC are
seasonal with the first two quarters of the fiscal year being much slower than
the final two quarters of the fiscal year.
Sales at Greenwood were $1,690,262 compared to sales of $1,883,064 for the nine
months ended May 31, 2021. This represents a decrease of $192,802, or 10%.
Greenwood's sales have been heavily impacted by COVID, as many of their products
are sold to companies providing transportation vehicles to municipalities and
larger transit operators. The overall demand for equipment replacement by those
municipalities is and remains significantly down from pre-COVID periods.
Greenwood is working to diversify its product mix and customer base. During the
third quarter, a new trader was hired and will work to introduce new products
and increase sales efforts in some new sectors, particularly to potential
customers in the housing and construction sectors. For the nine months ended May
31, 2022, Greenwood had an operating profit of $8,823 compared to an operating
loss of ($46,258) for the nine months ended May 31, 2021.
Sales at JCSC for the nine months ended May 31, 2022 were $2,231,444 compared to
sales of $2,670,149 for the nine months ended May 31, 2021, which was a decrease
of $438,705, or 16%. Although seed pricing is currently high, the extreme
temperatures in the Pacific Northwest that occurred during last year's growing
season resulted in lower harvested yields which reduced demand for JCSC's seed
cleaning services. Typically, seed cleaning volumes increase during the 4th and
1st fiscal quarters as harvest season begins in July. There has also been delays
in shipping certain grass seed orders to China during the current period due to
their COVID related border shutdowns. For the nine-month period ended May 31,
2022, JCSC had an operating loss of ($238,387) compared to operating income of
$94,339 for the nine months ended May 31, 2021.
JC USA, the holding company that provides professional and administrative
services for the wholly-owned operating subsidiaries had operating income of
$586,749 compared to income of $245,108 for the nine months ended May 31, 2021.
The increase is due to the higher inventory levels in the current period as JC
USA charges its subsidiaries for warehousing services. The results of JC USA are
eliminated on consolidation.
Gross margin for the nine-month period ended May 31, 2022 was 23.5% compared to
26.3% for the nine months ended May 31, 2021. Significantly higher costs for raw
materials, energy and both international and domestic shipping were incurred in
the current period. Although we have successfully raised prices where possible,
these price hikes are lagging the persistent increases in our product costs.
Operating expenses rose by $1,034,602 to $8,992,696 from operating expenses of
$7,958,094 for the nine months ended May 31, 2021. Selling, General and
Administrative expenses increased to $2,798,094 from $2,556,902 which is
commensurate with the higher level of sales in the current period. Wages and
Employee Benefits increased to $5,957,601 from $5,226,021, an increase of
$731,580, as the Company has hired additional personnel and increased wages in
response to the broad wage inflation being experienced by most industries
throughout the area and the United States as a whole. Depreciation and
amortization rose to $237,001 from $175,171.
Other items resulted in a loss of ($294,097) which includes the accrual of
$300,000 for the settlement of claims brought by the Association of California
District Attorneys regarding the labeling and marketing of the Company's dog
waste bags, and income of $5,000 as a portion of the parking area at JCS was
formerly rented to an unrelated company for $1,000 per month through January
2022. Interest expense related to the Company's bank line of credit was $94,868.
Other income in the prior nine-month period included a one-time gain on the
extinguishment of debt of $687,387 which is the principal and accrued interest
of the Company's two SBA PPP loans which were forgiven during the period.
20
Income tax expense in the current nine-month period was $483,449 compared to
$1,035,896 for the nine months ended May 31, 2021. The Company estimates income
tax expense for the period based on combined federal and state rates that are
currently in effect.
Net income for the nine months ended May 31, 2022 was $1,372,789, or $0.39 per
basic and diluted share. The net income for the nine months ended May 31, 2021,
including the one-time gain on the forgiveness of the Company's PPP loans of
$687,387, was $2,849,839, or $0.82 per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2022, the Company had working capital of $19,722,563 compared to
working capital of $19,073,194 as of August 31, 2021, an increase of $649,369.
Cash and cash equivalents totaled $2,130,450, an increase of $946,137 from cash
of $1,184,313. Accounts receivable rose to $8,271,856 from $7,086,503 due to the
seasonal cycle of sales to customers and the related timing of cash receipts.
Inventory increased by $5,507,438 to $19,898,803 from $14,391,365 as additional
inventory continues to be stocked in preparation of the Company's historically
busier Summer season and to alleviate supply chain disruptions. Prepaid
expenses, which is largely related to down payments for future inventory
purchases, decreased by $48,244. Prepaid income taxes fell to $3,876 from
$252,958. Deferred tax liability increased slightly to $128,497 from $116,945.
Current liabilities increased to $12,839,998 from $6,147,765, with most of the
increase due to the draw of an additional $6,000,000 from the Company's bank
line of credit to $9,000,000 as of May 31, 2022 from $3,000,000 as of August 31,
2021. Accounts payable rose to $1,794,717 from $1,349,677, and accrued
liabilities increased to $2,045,281 from $1,798,088, including the accrual of
$300,000 in the current period for the anticipated settlement of claims related
to the Company's dog waste bag sales in California. Subsequent to the end of the
period, the Company finalized the settlement which requires the Company to pay
the accrued $300,000 as a fine over a 4 month period with no admission of guilt
by the Company.
As of May 31, 2022, accounts receivable and inventory represented 87% of current
assets and 76% of total assets. As of May 31, 2021, accounts receivable and
inventory represented 80% of current assets and 69% of total assets. Our
accounts receivable balances have begun their usual seasonal decrease. Our
customers continue to pay on-time, with almost all of our outstanding
receivables classified as current. For the three months ended May 31, 2022, the
accounts receivable collection period, or DSO, was 37 compared to 47 for the
three months ended May 31, 2021. For the nine-month period ended May 31, 2022,
the DSO was 49 compared to 70 for the nine months ended May 31, 2021. Inventory
turnover for the three months ended May 31, 2022 was 112 days compared to 51
days for the three months ended May 31, 2021. For the nine months ended May 31,
2022, inventory turnover was 126 days compared to 75 days for the nine months
ended May 31, 2021.
External sources of liquidity include a Line of Credit from U.S. Bank of
$10,000,000. As of May 31, 2022, the Company had a borrowing balance of
$9,000,000, leaving $1,000,000 available. Subsequent to the end of the 3rd
fiscal quarter, we repaid an additional $1,000,000 against the Line of Credit,
taking the balance to $8,000,000 with $2,000,000 of borrowing available.
Borrowing under the Line of Credit is secured by an assignment of accounts
receivable and inventory. Interest was previously calculated solely on the
one-month LIBOR rate plus 175 basis points. Beginning with the monthly interest
payment due March 31, 2022, the Company's Bank Line of Credit agreement was
revised to change the calculation of the interest rate from the one-month LIBOR
rate to the one-month Secured Overnight Financing Rate (SOFR). Interest is now
calculated based on the one-month SOFR plus 157 basis points, which as of May
31, 2022 was 2.36% (0.79% + 1.57%). The line of credit has certain financial
covenants. The Company is in compliance with these covenants.
During the 3rd quarter of fiscal 2020, the Company applied for and received two
loans under the Paycheck Protection Program (the "PPP") as part of the
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")
administered by the U.S. Small Business Administration ("SBA"). The Company
believed the PPP funds were necessary because the Company was quickly depleting
its available cash in April due to inventory purchases to fulfil customer orders
ahead of its busiest selling season, some delays in receiving inventory from
China due to reduced availability of ocean shipping, and the danger of potential
COVID-19 infections. If any of the Company's employees on site were to contract
the virus during this time, the Company would have been required to shut down
the facility for a minimum of 14 days to clean and disinfect, and no product
would be shipped to customers. Without the cash flow from product sales, the
Company would have likely had to immediately layoff or furlough many of its
employees, which would further delay the Company's ability to recover after the
shutdown. All of the proceeds from the PPP loans were used for employee payroll
expenses.
21
The principal amount of the PPP loans was $680,707. They had a term of 2 years
with a 1% annual interest rate. Payments were originally deferred for 6 months,
after which the repayment of principal and interest is required to be made in
equal monthly payments over 18 months beginning December 4, 2020. However, the
SBA subsequently revised the due date to either the date that SBA remits the
borrower's loan forgiveness amount to the lender or, if the borrower does not
apply for loan forgiveness, 10 months after the end of the borrower's loan
forgiveness covered period. In April 2021, the SBA approved the Company's
application for forgiveness of the entire amount of both loans. For the year
ended August 31, 2021, he Company recorded a one-time gain on the extinguishment
of debt of $687,387 consisting of the principal of $680,707 and accrued interest
of $6,680.
The Company has historically used a portion of its excess cash to repurchase and
cancel common shares. No common shares were repurchased during the first nine
months of fiscal 2022 ended May 31, 2022. During the first quarter of fiscal
2022, the Company issued 3,681 common shares to officers, directors and
employees as compensation under the Company's Restricted Share Plan at a deemed
price of $10.70 per share.
Current Working Capital Requirements
Based on the Company's current working capital position, combined with the
expected timing of accounts receivable and the Bank Line of Credit, the Company
is expected to have sufficient liquidity available to meet the Company's working
capital requirements for the remainder of fiscal 2022.
OTHER MATTERS
Inflation
Inflation did not have a material impact during fiscal 2020. Beginning in fiscal
2021, a number of product costs increased substantially, including raw
materials, energy, and transportation/logistical related costs. These increases
have continued to rise at a faster pace during fiscal 2022, particularly in the
2nd and 3rdfiscal quarters.
These higher costs have negatively affected the Company's gross margins in the
shorter term. Typically, the Company passes cost increases on to the customer,
and is currently raising its product prices as much as the market will bear.
Retailers are currently more receptive to such increases than in the past due to
a mutual understanding of the current inflationary environment and the objective
reasons for such. Since the ability of the Company to pass through all of the
current increase in its product costs to its customers are somewhat limited and
occur after such costs are first incurred, management expects that its gross
margins will remain under pressure for the remainder of fiscal 2022. Management
is doing its best to mitigate inflation's effects by working with suppliers and
logistic partners to reduce costs as much as possible.
Environmental, Social and Corporate Governance (ESG)
Jewett-Cameron endeavors to be a good steward and provide sustainable products
with a positive impact. We strive to operate and grow in a way that honors our
environment and relationships for the long term. This also aligns with one of
our three value pillars: stewardship.
Environmental
For our products, the goal is that 90% of materials can be recycled. Our
suppliers are audited to strict commercial and fair practice standards,
including our own supplier qualifications regarding facilities, capacity, labor
practices, and environmental awareness. Packaging is designed to maximize
recyclability and re-use and minimize non-recycled materials, and all waste
materials in our own facilities are segregated to maximize recycling. Our
facilities have replaced high energy consumption infrastructure with energy
efficient HVAC and lighting during our recent remodel.
Active products and designs utilize recycled content, plant-based material, or
elimination of unnecessary components (such as a wasteful inner core for poop
bag rolls) to enhance recycling and reduce greenhouse gas emissions in
production. This includes the recently introduced dog waste bag which is a
plant-based product that is less reliant on fossil fuels used in traditional
plastic bags. We also dedicate a percentage of sales to organizations dedicated
to improving the environment.
22
Social
Our social responsibilities include cultural standards of operations and values
which we establish in conjunction with our employees. We regularly provide
employees with a corporate engagement survey to benchmark their engagement,
satisfaction, and ideas for change. We support educational programs that build
the future workforce through active participation in regional and statewide
organizations, including the CTE/STEM Employer Coalition and assisting teachers
to connect traditional school subjects to practical job site applications. The
Company also actively participates in the local community, supported by a
Corporate Charitable Giving Charter. We are committed to devoting resources to
enhance the accessibility of our corporate website and have upgraded the website
to improve accessibility and operability for users, including persons with
disabilities.
We have adopted a Trade Compliance Policy as part of our commitment to abide by
all applicable professional, ethical and legal standards of conduct, including
full compliance with U.S. laws and regulations that govern both domestic and
international trade transactions. A full copy of this Trade Compliance Policy
has been posted on our public website.
Governance
As a public company, our processes are outlined and governed by multiple
regulations, including Sarbanes-Oxley. Our financial controls are mapped,
executed, self-audited as well as regularly audited by outside experts as part
of our annual process. We have established risk mitigations that allows for
condensed reviews of risks and impacts with our systems in place. A Company IT
Governance team manages our cybersecurity framework and executes our programs
for both ourselves and also for parties with whom we communicate and do
business.
Uyghur Forced Labor Prevention Act
The Uyghur Forced Labor Prevention Act ("UFLPA") is a US Federal Law signed by
President Biden in December 2021 which became effective on June 21, 2022. As
enforced by U.S. Customs and Border Protection, the UFLPA prohibits any products
that are made, mined, or manufactured, in part or in full, in China's Xinjiang
Uyghur Autonomous Region to be imported into the United States, as they are
presumed to have been made with forced labor. Any imports of such goods will be
detained and seized by U.S. Customs unless the importer is able to prove that
these goods have not been made with forced labor. The Company has ensured that
each of its suppliers is in full compliance with the law and none of its
products fall under the prohibited goods clause.
Business Risks
This quarterly report includes "forward-looking statements" as that term is
defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "could," "should," "seeks,"
"approximately," "intends," "plans," "estimates," "anticipates," or "hopeful,"
or the negative of those terms or other comparable terminology, or by
discussions of strategy, plans or intentions. For example, this section contains
numerous forward-looking statements. All forward-looking statements in this
report are made based on management's current expectations and estimates, which
involve risks and uncertainties, including those described in the following
paragraphs.
Risks Related to Our Common Stock
We may decide to acquire assets or enter into business combinations, which could
be paid for, either wholly or partially with our common stock and if we decide
to do this our current shareholders would experience dilution in their
percentage of ownership.
Our Articles of Incorporation give our Board of Directors the right to enter
into any contract without the approval of our shareholders. Therefore, our
management could decide to make an investment (buy shares, loan money, etc.)
without shareholder approval. If we acquire an asset or enter into a business
combination, this could include exchanging a large amount of our common stock,
which could dilute the ownership interest of present stockholders.
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.
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The Company's common shares currently trade within the NASDAQ Capital Market in
the United States. The average daily trading volume of our common stock on
NASDAQ was 3,610 shares for the nine months ended May 31, 2022. With this
limited trading volume, investors could find it difficult to purchase or sell
our common stock.
Risks Related to Our Business
A contagious disease outbreak, such as the recent COVID-19 pandemic emergency,
could have an adverse effect on our operations and financial condition
Our business could be negatively affected by an outbreak of an infectious
disease due to the consequences of the actions taken by companies and
governments to contain and control the virus. These consequences include:
º 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.
º 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.
º Our new products may be delayed or require unexpected changes to be made to
our new or existing products.
º 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 nine months ended May 31, 2022, our top ten customers represented 83% of
our total sales. We would experience a significant decrease in sales and
profitability and would have to cut back our operations, if these customers were
lost and could not be replaced. Our top ten customers are located in North
America and are primarily in the retail home improvement and pet industries.
We could experience delays in the delivery of our products to our customers
causing us to lose business.
We purchase our products from other vendors and a delay in shipment from these
vendors to us could cause significant delays in our delivery to our customers.
This could result in a decrease in sales orders to us and we would experience a
loss in profitability.
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.
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We could lose our credit agreement and could result in our not being able to pay
our creditors.
We have a line of credit with U.S. Bank in the amount of $10,000,000, of which
$2,000,000 is currently available. We are currently in compliance with the
requirements of our existing line of credit. If we lost access to this credit it
could become impossible to pay some of our creditors on a timely basis.
Our information technology systems are susceptible to certain risks, including
cyber security breaches, which could adversely impact our operations and
financial condition.
Our operations involve information technology systems that process, transmit and
store information about our suppliers, customers, employees, and financial
information. These systems face threats including telecommunication failures,
natural disasters, and cyber security threats, including computer viruses,
unauthorized access to our systems, and other security issues. While we have
taken aggressive steps to implement security measures to protect our systems and
initiated an ongoing training program to address many of the primary causes of
cyber threat with all our employees, such threats change and morph almost daily.
There is no guarantee our actions will secure our information systems against
all threats and vulnerabilities. The compromise or failure of our information
systems could have a negative effect on our business, results of operations, or
financial condition.
If we fail to maintain an effective system of internal controls, we may not be
able to detect fraud or report our financial results accurately, which could
harm our business and we could be subject to regulatory scrutiny.
We have completed a management assessment of internal controls as prescribed by
Section 404 of the Sarbanes-Oxley Act, which we were required to do in
connection with our year ended August 31, 2021. Based on this process we did not
identify any material weaknesses. Although we believe our internal controls are
operating effectively, we cannot guarantee that in the future we will not
identify any material weaknesses in connection with this ongoing process.
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