These unaudited financial statements are those of the Company and its wholly
owned subsidiaries. In the opinion of management, the accompanying consolidated
financial statements of Jewett-Cameron Trading Company Ltd., contain all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly state its financial position as of February 28, 2023 and August 31, 2022
and its results of operations and cash flows for the three and six month periods
ended February 28, 2023 and 2022 in accordance with U.S. GAAP. Operating results
for the three and six month periods ended February 28, 2023 is not necessarily
indicative of the results that may be experienced for the fiscal year ending
August 31, 2023. Overall, the operating results of JCC are seasonal with the
first two quarters of the fiscal year historically being slower than the final
two quarters of the fiscal year.
The Company's operations are classified into three reportable operating segments
and the parent corporate and administrative segment, which were determined based
on the nature of the products offered along with the markets being served. The
segments are as follows:
· Industrial wood products
· Lawn, garden, pet and other
· Seed processing and sales
· Corporate and administration
The industrial wood products segment reflects the business conducted by
Greenwood Products, Inc. (Greenwood). Greenwood is a processor and distributor
of industrial wood products. A major product category is treated plywood that is
sold primarily to the transportation industry, including the municipal and mass
transit transportation sectors.
The lawn, garden, pet and other segment reflects the business of Jewett-Cameron
Company (JCC), which is a wholesaler of wood products and a manufacturer and
distributor of specialty metal products. JCC operates out of a 5.6 acre owned
facility located in North Plains, Oregon that includes offices, a warehouse, and
a paved yard. This business is a wholesaler, and a manufacturer and distributor
of products that include an array of pet enclosures, kennels, and pet welfare
and comfort products, proprietary gate support systems, perimeter fencing,
greenhouses, and fencing in-fill products made of wood, metal and composites.
Examples of the Company's brands include Lucky Dog®, for pet products;
Adjust-A-Gate™, Fit-Right®, Perimeter Patrol®, and 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 and some of its sustainable bag 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.
17
Results of Operations
Our results in the second quarter of fiscal 2023 were disappointing as we have
encountered multiple complications from the broader economic climate. Sales in
the second quarter of fiscal 2023 were 42% lower than the sales in the second
quarter of fiscal 2022, and sales for the current six-month period were down 23%
from the prior year's period. However, an important factor in the dip was due to
the continuing winter weather across much of the United States that caused many
of our usual customers to delay their initial Spring merchandise purchases.
The historically bad and unseasonal weather that much of the United States
experienced in January and February and extended into the first part of Spring
has compelled many of our customers, particularly retail hardware and Big Box
stores, to continue devoting inventory and floor space to cold weather products.
This pushed back their initial Spring and Summer ordering until the weather
improves. This has negatively affected our second quarter revenues and many of
the orders from these customers we historically have received and shipped at the
end of the period did not occur this year. Although these orders have now begun
to arrive and product is being shipped in the third quarter, our past experience
with other years where extended winter weather delayed initial seasonal orders
is that this is likely to result in a decline in overall sales due to the
shortened Spring and Summer sales season.
We recently signed a new sales agreement with one of our major lumber customers
that has been progressing well. The nature of this new agreement means we have
also changed how we recognize these sales which has caused a large amount of
sales that would have previously been recorded in the second fiscal quarter to
instead be pushed into the third quarter. Over the entire year, this new
arrangement should be positive for the Company as it provides us with more
regular and predictable fencing sales with this customer than we had previously.
We are also beginning to have discussions with the customer about extending the
agreement to more of their distribution centers that we are continuing to serve
under our prior sales agreements.
Sales of some of our pet products, particularly larger kennels and crates, were
down in the current six months. This was largely due to an issue with one
existing customer which restricted our sales to them in the period. The issue
has since been resolved and we are getting back on track to ramp up our sales to
this customer in the 3rd quarter of this fiscal year. We have also relaunched
our well-reviewed STAY™ Series kennels, which we anticipate will accelerate
sales in the second half. During the period a supplier experienced a
manufacturing issue with a different one of our pet products. They are
correcting this issue which will allow us to resume sales of this product.
We are continuing our efforts to improve operations at both Greenwood and JC
Seed. At Greenwood, our primary customers are in the transit sector which is an
area that continues to suffer post-COVID 19. We are actively seeking new traders
to both bring on new customers in other sectors, such as construction, as well
as take advantage of appealing new opportunities for our existing products, such
as fabricated panels. At JCSC, the poor weather has had an effect on both
pricing and demand for grass seed, which is one of their two largest products.
Our new MyEcoWorld® sustainable bag products will officially launch in the 3rd
quarter. Under our distribution agreement with SECOS Group of Australia,
Jewett-Cameron is the exclusive distributor of their MyEcoWorld® sustainable bag
products in the US and Canada. We have already begun to fulfill orders from
major distributors for grocery store placements for our first set of products to
launch. This new sustainable product line fits very well into our goal of
bringing premium and innovative products to the market. We are optimistic of the
potential of this new product line to grow into a significant segment of our
business over time as consumers are increasingly seeking more environmentally
friendly alternatives to conventional hydrocarbon derived plastic products. Our
success with our compostable poop bag since its launch several years ago
indicates these products are less seasonal and can provide positive
contributions to our historically lower revenue quarters.
In fiscal 2021, we filed for arbitration against one of our former distributors
asserting a breach of the distribution agreement. The arbitration hearing was
held in December 2022. In February 2023, the arbitrator issued its decision in
favor of the Company on all of our claims. We are seeking damages and our costs.
The monetary award is pending, and the amount of any recovery is currently
uncertain. Our costs to pursue this action have been sizeable, particularly
during the current six-month period. Regardless of the ultimate recovery in this
case, Jewett-Cameron will continue to vigorously defend its patents, trademarks
and contractual agreements.
18
Our inventory position at the end of the second quarter remains higher than our
historical position. During the period, our new fencing sales agreement with a
major customer required us to build up our initial cedar fencing position, but
this extra inventory is now being drawn down as our customer begins shipping
product to their stores for the Spring season. The company is well positioned to
fulfill both its current and its anticipated orders during the Spring and Summer
seasons. Our cash flow and working capital should improve in the second half of
the fiscal year as seasonal sales pick up while our inventory levels are
expected to be reduced by our year-end of August 31st.
Gross margin for the current six-month period was 23.1%. This is an improvement
over the 21.8% margin recorded in comparable prior year's period, and the 21.9%
margin we had for all of fiscal 2022. Both transportation and raw material costs
have been declining from the highs experienced in fiscal 2022. We are continuing
to work off our higher priced inventory acquired when freight costs were at
their highest. As this inventory is replaced, our costs of goods will decline.
Inflation is also beginning to moderate, which should further allow our selling
prices to catch up to our costs. This was a definite problem in 2022 as we were
unable to fully pass through our rapidly rising costs to our customers.
The COVID-19 pandemic massively altered markets worldwide and caused significant
distortions at every level, including significant shifts in buying patterns of
suppliers, retailers and customers. As a result, the buying patterns of our
customers have suddenly become very difficult to predict as they themselves are
struggling with the significantly changed buying practices of their consumer
customers. This has disrupted our forecasting and traditional year-over-year
comparisons and caused us to significantly revise our planning and sales models.
Our integrated ERP software which became operational in February 2021 is
providing us with a better understanding of these newly altered patterns which
we are using to better predict our optimal ordering and inventory requirements
in future periods.
Our management is continuing its focus on growing our core products and
strengthening our relationships with our customers and suppliers. The end of the
pandemic emergency has allowed us to resume our regular practice of meeting in
person with our customers and suppliers to jointly develop strategies to
navigate the difficult market conditions. We also continue to discuss
significant opportunities for both new and existing products. The significant
investments we made in our facilities, technologies, and specialty personnel
were essential in order to modernize Jewett-Cameron. They have significantly
improved our ability to manage our business and confront the rapidly changing
economic climate. This will ultimately result in a more focused and optimized
product line, more efficient shipping and receiving, and reducing our costs.
Post-pandemic economic conditions in the US have been challenging and are
expected to continue to be difficult during the second half of fiscal 2023.
Although the rate of inflationary growth has begun to slow, costs of food,
energy and housing currently remain much higher than the rates of recent years.
This is restricting consumers' discretionary income and willingness to spend on
consumer goods which is echoed by many national retailers in their own
statements and forecasts. This may restrain our ability to grow sales in the
near-term. Our management is actively addressing these issues, and we remain
optimistic about the Company's ability to successfully implement its strategy
going forward.
Three Months Ended February 28, 2023 and 2022
For the three months ended February 28, 2023, sales were $8,143,421, which was a
decrease of $5,917,330, or 42%, from sales of $14,060,751 for the three months
ended February 28, 2022.
Sales at JCC were $7,252,299 for the three months ended February 28, 2023
compared to sales of $12,357,478 for the three months ended February 28, 2022.
This represents a decrease of $5,105,179, or 41%. A primary reason for the
decline was the extremely cold and wet weather that persisted across all of the
United States during the quarter. This caused many of our customers, including
the big box retailers, to significantly delay their initial Spring orders as
they continued to focus on sales of winter related products to meet consumer
demand. Quarter-over-quarter comparisons were also negatively affected by our
recent switch to a new sales agreement for fencing for one of our major
customers. This changeover includes a change in the timing of when we recognize
revenue to this customer and was responsible for a major portion of the overall
decline in sales during the quarter. However, it is likely that many of those
sales which previously would have occurred in the second quarter will now be
recorded in third and fourth quarters as those stores receive the product in
their seasonal rotation of their in-store inventory to Spring and Summer
products, including fencing and related hardware. Operating loss for the current
quarter was ($1,415,462) compared to an operating profit of $129,841 for the
quarter ended February 28, 2022. The operating results of JCC are historically
seasonal with the first two quarters of the fiscal year being slower than the
final two quarters of the fiscal year.
19
Sales at Greenwood fell to $332,691 from sales of $585,559 for the three months
ended February 28, 2022, which is a decrease of $252,868, or 43%. Greenwood's
sales continue to be impacted by impacts of the COVID-19 shutdowns, as many of
their products are sold to municipalities and larger transit operators who are
experiencing lower ridership and demand for their services. Sales in the current
quarter were also negatively affected by weather related transportation issues,
as some shipments were delayed and will instead be recorded in the third fiscal
quarter. For the three months ended February 28, 2023, Greenwood had an
operating loss of ($61,221) compared to an operating loss of ($26,003) for the
three months ended February 28, 2022.
Sales at JCSC were $558,923 compared to sales of $1,117,714 for the three months
ended February 28, 2022, which was a decrease of $558,791, or 50%. The prolonged
winter weather in the second quarter suppressed demand and pricing for grass
seed, one of JCSC's largest products. Seed is a commodity, and there is little
to differentiate the Company's product from others in the marketplace. This
places the Company more at the mercy of outside factors, such as weather, grower
decisions, and economic cycles. Increased competition and pricing restraints are
currently limiting our ability to grow our sales. Operating profit at JCSC for
the quarter ended February 28, 2023 was $16,490 compared to an operating loss of
($20,398) for the quarter ended February 28, 2022.
JC USA is a holding company for the wholly-owned operating subsidiaries, and
thus the overall results of JC USA are eliminated on consolidation. For the
quarter ended February 28, 2023, JC USA had an operating profit of $135,578
compared to a profit of $284,681 for the quarter ended February 28, 2022. The
results of JC USA are eliminated on consolidation.
Gross margin for the three months ended February 28, 2023 was 23.6% compared to
24.4% for the three months ended February 28, 2022. The decline was primarily
due to higher raw material and shipping costs in the current quarter compared to
those prevailing in the prior-year's period.
Operating expenses increased by $403,140 to $3,130,627 compared to expenses of
$2,727,487 for the three months ended February 28, 2022. An important factor in
the increase was greater spending on Professional Fees, including attorney's
fees, related to the Company's ongoing arbitration action against a former
distributor which resulted in a decision in the Company's favor in February
2023. The higher Professional Fees are included in Selling, General and
Administrative Expenses, which increased to $1,096,090 from $684,116. Wages and
Employee Benefits declined slightly to $1,946,458 from $1,959,300. Depreciation
and Amortization increased to $88,079 from $84,071. There was no other income in
the current quarter. Interest expense related to the Company's Bank Line of
Credit was ($114,530) compared to ($30,620) as the increase in interest rates
has negatively affected the rate the Company pays on its borrowing.
Income tax recovery for the three-month period ended February 28, 2023 was
$352,577 compared to income tax expense of ($98,300). The Company estimates
income tax expense for the quarter based on combined federal and state rates
that are currently in effect.
Net loss for the quarter ended February 28, 2023 was ($972,038), or ($0.28) per
basic and diluted share, compared to a net profit of $269,820, or $0.08 per
basic and diluted share, for the quarter ended February 28, 2022.
Six Months Ended February 28, 2023 and February 28, 2022
For the six months ended February 28, 2023 sales decreased by $6,257,554, or
23%, to $20,720,921 from sales of $26,978,475 recorded in the six month period
ended February 28, 2022.
Sales at JCC were $18,871,381 for the six months ended February 28, 2023
compared to sales of $24,203,362 for the six months ended February 28, 2022,
which was a decrease of $5,331,981, or 22%. The prolonged cold and wet weather
which prevailed across the United States during the second quarter delayed many
customers from their usual pattern of ordering their warmer weather products for
the start of the Spring season. The switch to a new sales program for a large
fencing customer has also shifted the recognition of much of the sales to this
customer that historically occurred in the second quarter into the upcoming
third quarter. Sales during the current six months were also negatively affected
by our decision to liquidate certain inventory located in Europe, and some
outside issues with certain of our other products at both the supplier and
customer level which we believe will be fully resolved shortly. Operating loss
at JCC for the current six month period was ($1,572,114) compared to an
operating loss of ($569,856) for the six months ended February 28, 2022.
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.
20
Sales at Greenwood were $939,600 for the current six-month period compared to
sales of $1,119,670 for the six months ended February 28, 2022. This represents
a decrease of $180,070, or 16%. Many of Greenwood's largest customers are
transit operators who continue to be negatively affected by the COVID related
reduction in transit demand. In response, management is working to grow
Greenwood by recruiting new brokers to add new customers not only within the
transportation industry, but also those in other industries that Greenwood has
traditionally not targeted, such as the housing and construction sectors. For
the six months ended February 28, 2023, Greenwood had an operating loss of
($105,466) compared to an operating profit of $43,956 for the six months ended
February 28, 2022.
Sales at JCSC for the six months ended February 28, 2023 were $909,940 compared
to sales of $1,655,443 for the six months ended February 28, 2022. This
represents a decrease of $745,503, or 45%. Lower market prices for grass seed
and red clover, which are JCSC's two most prominent products, directly affected
revenue. Demand was also lower than usual during the second half of the period
due to the wet and cold weather which prevailed across the United States and
served to push back the traditional planting season for residential and
landscaping grass. For the six months ended February 28, 2023, JCSC had an
operating loss of ($11,329) compared to an operating loss of ($121,748) for the
six months ended February 28, 2022. The results in the prior period were
negatively affected by higher equipment and property maintenance expenses which
did not occur in the current period.
JC USA, the holding company that provides professional and administrative
services for the wholly-owned operating subsidiaries had operating income of
$270,944 for the six months ended February 28, 2023 compared to operating income
of $531,321 for the six months ended February 28, 2022. The results of JC USA
are eliminated on consolidation.
Gross margin for the six-month period ended February 28, 2023 was 23.1% compared
to 21.8%. The improved margin in the current period was largely due to
moderating raw material and transportation costs. The lower margin in the prior
period was primarily due to a less favorable sales mix of lower margin wood
products in conjunction with the higher raw material and shipping costs, both of
which rose rapidly in fiscal 2022.
Operating expenses for the six months ended February 28, 2023 rose to $5,997,125
from $5,659,530. Selling, General and Administrative Expenses increased to
$1,922,897 from $1,672,403. Higher spending on Professional Fees, including
attorney's fees related to the Company's recent arbitration victory against a
former distributor, was an important contributor to the increase. Wages and
Employee Benefits increased slightly to $3,874,613 from $3,833,418. Depreciation
and Amortization increased to $199,615 from $153,709 for the six months ended
February 28, 2022. Interest expense on the Bank Line of Credit was ($201,082)
compared to ($50,896) due to an increase in the amounts borrowed and higher
interest rates. The results in the prior year's six-month period was negatively
affected by the Company's 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.
Income tax recovery for the six months ended February 28, 2023 was $372,167
compared to an expense of $4,985 for the six months ended February 28, 2022. The
Company estimates income tax expense for the period based on combined federal
and state rates that are currently in effect.
Net loss for the six months ended February 28, 2023 was ($1,045,798), or ($0.30)
per basic and diluted share, compared to a net loss of ($121,322), or ($0.03)
per basic and diluted share, for the six months ended February 28, 2022.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 2023, the Company had working capital of $17,710,321 compared
to working capital of $19,207,874 as of August 31, 2022, a decrease of
$1,497,553.
Cash and cash equivalents totaled $268,389, a decrease of $216,074 from cash of
$484,463. The decrease was due to the timing of expenditures and collection of
accounts receivable, which fell to $4,261,256 from $7,191,646. Inventory
increased by $2,447,334 to $23,079,647 from $20,632,313. Prepaid expenses, which
is largely related to down payments for future inventory purchases, decreased by
$318,009 to $794,566. Prepaid income taxes declined to $208,138 from $208,963.
Current liabilities increased slightly to $10,901,675 from $10,422,086. The
Company drew an additional $1,500,000 against its line of credit during the
period which increased the amount borrowed to $8,500,000 from $7,000,000 as of
August 31, 2022. Accounts payable declined to $710,174 from $1,566,047 which is
directly related to the Company ordering less inventory during the current
period. Accrued liabilities declined to $1,691,501 from $1,856,039.
21
As of February 28, 2023, accounts receivable and inventory represented 96% of
current assets and 80% of total assets compared to 88% of current assets and 77%
of total assets as of February 28, 2022. For the three months ended February 28,
2023, the accounts receivable collection period, or DSO, was 47 compared to 58
for the three months ended February 28, 2022. For the six-month period ended
February 28, 2023, the DSO was 37 compared to 61 for the six months ended
February 28, 2022. Although the Company's level of non-current and past-due
invoices is not a significant percentage of its overall accounts receivable,
management made a concerted effort to collect on these invoices during the
current quarter which is primarily responsible for the decline in the DSO.
Inventory turnover for the three months ended February 28, 2023 was 326 days
compared to 154 days for the three months ended February 28, 2022. For the six
months ended February 28, 2022, inventory turnover was 248 days compared to 143
days for the six months ended February 28, 2022. The higher inventory turn in
the current periods reflects the higher levels of inventory currently on hand.
External sources of liquidity include a line of credit from U.S. Bank of
$10,000,000. As of February 28, 2023, the Company had a borrowing balance of
$8,500,000, leaving $1,500,000 available. Subsequent to the end of the period.
The Company drew an additional $1,000,000 under the line, leaving $500,000
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
February 28, 2023 was 6.12% (4.55% + 1.57%). The line of credit has certain
financial covenants. The Company is in compliance with these covenants.
The Company is currently in discussions with its lender U.S. Bank regarding the
possibility of either increasing its existing line of credit, or restructuring
the existing line into an asset based lending agreement. These changes would
potentially provide the Company with additional borrowing power and greater
financial flexibility, but would include new financial covenants which the
Company would be required to maintain. No agreement has been reached, and there
is no guarantee that there will be any change to the Company's borrowing
arrangements.
During the period, the Company issued 3,557 common shares to officers, directors
and employees as compensation under the Company's Restricted Share Plan at a
deemed average price of $6.55 per share for a total cost of $23,303.
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 2023.
OTHER MATTERS
Inflation
Historically, inflation has not been a significant issue for the Company.
However, beginning in fiscal 2021, a number of product costs increased
substantially, including raw materials, energy, and transportation/logistical
related costs.
These higher costs have negatively affected the Company's gross margins.
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 in fiscal 2023.
The increases in interest rates as a result of the higher level of inflation in
the US economy experienced beginning in calendar 2021 and throughout 2022 has
also had a negative effect on the Company's interest expense paid for its
borrowing under its Bank Line of Credit. The interest rate paid by the Company
has increased from 1.83% as of November 30, 2021 to 6.12% as of February 28,
2023.
22
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 metal 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 either recycled or non-petroleum-based
plastics to enhance recycling and composting. This includes the recently
introduced compostable dog waste bag made from corn starch and other natural,
renewable resources, that is less reliant on fossil fuels used in traditional
plastic bags. We also dedicate a percentage of sales to support environmental
cleanup efforts.
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.
Governance
As a public company, our processes are outlined and governed by multiple
regulations, including Sarbanes-Oxley. Our financial controls are mapped,
executed, self-audited as well as regularly audited by outside experts as part
of our annual process. We have established risk mitigations that allows for
condensed reviews of risks and impacts with our systems in place. An IT
Governance Committee aligns execution and security both for ourselves and also
for parties with whom we communicate and do business.
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.
23
Risks Related to Our Common Stock
We may decide to acquire assets or enter into business combinations, which could
be paid for, either wholly or partially with our common stock and if we decide
to do this our current shareholders would experience dilution in their
percentage of ownership.
Our Articles of Incorporation give our Board of Directors the right to enter
into any contract without the approval of our shareholders. Therefore, our
management could decide to make an investment (buy shares, loan money, etc.)
without shareholder approval. If we acquire an asset or enter into a business
combination, this could include exchanging a large amount of our common stock,
which could dilute the ownership interest of present stockholders.
Future stock distributions could be structured in such a way as to be 1)
diluting to our current shareholders or 2) could cause a change in control to
new investors.
If we raise additional funds by selling more of our stock, the new stock may
have rights, preferences or privileges senior to those of the rights of our
existing stock. If common stock is issued in return for additional funds, the
price per share could be lower than that paid by our current stockholders. The
result of this would be a lessening of each present stockholder's relative
percentage interest in our company.
Our shareholders could experience significant dilution if we issue our
authorized 10,000,000 preferred shares.
The Company's common shares currently trade within the NASDAQ Capital Market in
the United States. The average daily trading volume of our common stock on
NASDAQ was 4,650 shares for the six months ended February 28, 2023. With this
limited trading volume, investors could find it difficult to purchase or sell
our common stock.
Risks Related to Our Business
A contagious disease outbreak, such as the recent COVID-19 pandemic emergency,
could have an adverse effect on our operations and financial condition
Our business could be negatively affected by an outbreak of an infectious
disease due to the consequences of the actions taken by companies and
governments to contain and control the virus. These consequences include:
· The inability of our third-party manufacturers in China and elsewhere to
manufacture or deliver products to us in a timely manner, if it all.
· Isolation requirements may prevent our employees from being able to report to
work or being required to work from home or other off-site location which may
prevent us from accomplishing certain functions, including receiving products
from our suppliers and fulfilling orders for our customers, which may result in
an inability to meet our obligations.
· Our new products may be delayed or require unexpected changes to be made to our
new or existing products.
· The effect of the outbreak on the economy may be severe, including an economic
downturn and decrease in employment levels which could result in a decrease in
consumer demand for our products.
The financial impact of such an outbreak are outside our control and are not
reasonable to estimate, but may be significant. The costs associated with any
outbreak may have an adverse impact on our operations and financial condition
and not be fully recoverable or adequately covered by insurance.
We could experience a decrease in the demand for our products resulting in lower
sales volumes.
In the past, we have at times experienced decreasing products sales with certain
customers. The reasons for this can be generally attributed to: increased
competition; general economic conditions; demand for products; and consumer
interest rates. If economic conditions deteriorate or if consumer preferences
change, we could experience a significant decrease in profitability.
If our top customers were lost, we could experience lower sales volumes.
For the six months ended February 28, 2023, our top ten customers represented
86% 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.
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We could experience delays in the delivery of our products to our customers
causing us to lose business.
We purchase our products from other vendors and a delay in shipment from these
vendors to us could cause significant delays in our delivery to our customers.
This could result in a decrease in sales orders to us and we would experience a
loss in profitability.
Governmental actions, such as tariffs, and/or foreign policy actions could
adversely and unexpectedly impact our business.
Since the bulk of our products are supplied from other countries, political
actions by either our trading country or our own domestic policy could impact
both availability and cost of our products. Currently, we see this in regard to
tariffs being levied on foreign sourced products entering into the United
States, including from China. The continuing tariffs by the United States on
certain Chinese goods include some of our products which we purchase from
suppliers in China. The company has multiple options to assist in mitigating the
cost impacts of these government actions. However, we cannot control the
duration or depth of such actions which may increase our product costs which
would reduce our margins and potentially decrease the competitiveness of our
products. These actions could have a negative effect on our business, results of
operations, or financial condition.
We could lose our credit agreement and could result in our not being able to pay
our creditors.
We have a line of credit with U.S. Bank in the amount of $10,000,000, of which
$500,000 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, 2022. 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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