The Company's 2022 Annual Report to Stockholders on Form 10-K contains management's discussion and analysis of the Company's financial condition and results of operations as of and for the year ended April 30, 2022. The following discussion and analysis describes material changes in the Company's financial condition since April 30, 2022. The analysis of results of operations compares the three months ended July 31, 2022 with the comparable period of the prior year.

Results of Operations

Sales for the quarter were $50,123,000, an increase from sales of $39,493,000 in the comparable period of the prior year. Domestic sales for the quarter were $37,468,000, up 26.3% from sales of $29,663,000 in the comparable period of the prior year. The increase in Domestic sales was predominantly from higher input costs being rolled into product pricing. International sales for the quarter were $12,655,000, up 28.7% from sales of $9,830,000 in the comparable period of the prior year. International sales increased when compared to the prior year period due to the commencement of delivery of large projects booked in the prior fiscal year.

The Company's order backlog was $174.0 million at July 31, 2022, as compared to $120.6 million at July 31, 2021, and $173.9 million at April 30, 2022.

The gross profit margin for the three months ended July 31, 2022 was 12.4% of sales, as compared to 14.4% of sales in the comparable quarter of the prior year. The decrease in gross profit margin percentage for the three months ended July 31, 2022 is primarily due to nearly 25% of the current period's domestic segment revenue being attributable to direct orders that, in aggregate, were delivered at a loss for the Company. Most of these projects were tied to contracts that were executed prior to the broad-based inflation experienced over the last fiscal year.

Operating expenses for the three months ended July 31, 2022 were $6,592,000, or 13.2% of sales, as compared to $6,765,000, or 17.1% of sales, in the comparable period of the prior year. The decrease in operating expenses for the three months ended July 31, 2022 was primarily due to reductions in administrative wages, benefits, incentive and stock-based compensation of $630,000, and marketing expense of $128,000, partially offset by increases in consulting and professional fees of $198,000, corporate governance expenses of $25,000, and increases in international operating expenses of $368,000.

Interest expense, net was $384,000 for the three months ended July 31, 2022, as compared to $106,000 for the comparable period of the prior year. The changes in interest expense were primarily due to changes in the levels of bank borrowings and the Sale-Leaseback financing transaction.

The effective income tax rate for the three months ended July 31, 2022 was (111.5)% as compared to (23.8)% for the three months ended July 31, 2021. Income tax expense of $379,000 and $251,000 was recorded for the three months ended July 31, 2022 and 2021, respectively. The change in the effective tax rate for the three months ended July 31, 2022 reflects the impact of international operations which are taxed at different rates, combined with no U.S. tax benefit being recorded for the most recent quarter due to the Company's full valuation allowance position. See Note K , Income Taxes, of the Notes to Condensed Consolidated Financial Statements for additional information.

Non-controlling interests related to the Company's subsidiaries not 100% owned by the Company increased net loss by $28,000 for the three months ended July 31, 2022, compared to $38,000 for the comparable period of the prior year. The change in the net earnings attributable to the non-controlling interest in the current period was due to changes in earnings of the subsidiaries in the related period.

Net loss was $747,000, or $(0.27) per diluted share, for the three months ended July 31, 2022, compared to $1,345,000, or $(0.48) per diluted share, in the prior year period.

Liquidity and Capital Resources

Our principal sources of liquidity have historically been funds generated from operating activities. In addition, on March 24, 2022, we executed a Sale-Leaseback financing transaction with respect to our manufacturing and corporate facilities in Statesville, North Carolina to provide additional liquidity. See Note G , Sale-Leaseback Financing Transaction for more information. Additionally, certain machinery and equipment are financed by non-cancellable operating leases. The Company believes that these sources will be sufficient to support ongoing business requirements in the current fiscal year, including capital expenditures.

The Company had working capital of $48,266,000 at July 31, 2022, compared to $49,272,000 at April 30, 2022. The ratio of current assets to current liabilities was 2.0-to-1.0 at July 31, 2022, compared to 2.2-to-1.0 at April 30, 2022.


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As previously reported in the Company's 2022 Annual Report on Form 10-K , the Company was compliant at April 30, 2022 with all of the financial covenants under the revolving credit facility. On June 27, 2022, the Company terminated the Credit Agreement with Wells Fargo, National Bank. At the time of termination, there were no borrowings under the Credit Agreement, and the Company did not incur any material termination penalties as a result of the termination. For additional information concerning our credit facility, see

Note F , Long-Term Debt and Other Credit Arrangements.

The Company provided cash of $3,685,000 during the three months ended July 31, 2022, primarily from an increase in deferred revenue of $10.6 million partially offset by increases in inventory of $1.3 million, accounts payable and other accrued expenses of $2.1 million and other, net of $4.2 million. The increase in deferred revenue is primarily related to advance payments received for a large international order. During the three months ended July 31, 2022, the Company used net cash of $390,000 in investing activities, all of which was used for capital expenditures. The Company's financing activities provided cash of $11,670,000 during the three months ended July 31, 2022, primarily from proceeds of the sale-leaseback financing transaction that was previously recorded as a note receivable at April 30, 2022.

Outlook

The Company's ability to predict future demand for its products continues to be limited given its role as subcontractor or supplier to dealers for subcontractors. Demand for the Company's products is also dependent upon the number of laboratory construction projects planned and/or current progress in projects already under construction. The Company's earnings are also impacted by fluctuations in prevailing pricing for projects in the laboratory construction marketplace and increased costs of raw materials, including steel, wood, and epoxy resin, and whether the Company can increase product prices to customers in amounts that correspond to such increases without materially and adversely affecting sales. Additionally, since prices are normally quoted on a firm basis in the industry, the Company bears the burden of possible increases in labor and material costs between the quotation of an order and delivery of a product.

In the last quarter, the Company improved the quality of the order backlog by delivering a portion of the lower margin direct sales orders and replacing those orders in the backlog with higher margin product orders. This was accomplished while simultaneously recording a record high order backlog for the fourth time in the past five quarters. It is the Company's expectation that this dynamic will lead to margin expansion as it moves through the fiscal year.

Although factors such as broad-based inflation, concern about a possible recession, and an ongoing labor shortage continue to create economic uncertainty, the Company remains optimistic about the future based on the strength of the order backlog and the high level of activity in the marketplace.


Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Certain statements in this document constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). All statements other than statements of historical fact included in this Quarterly Report, including statements regarding the Company's future financial condition, results of operations, business operations and business prospects, are forward-looking statements. Words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "predict," "believe" and similar words, expressions and variations of these words and expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to known and unknown risks, uncertainties, assumptions, and other important factors that could significantly impact results or achievements expressed or implied by such forward-looking statements. Such factors, risks, uncertainties and assumptions include, but are not limited to: competitive and general economic conditions and the ongoing impact of the COVID-19 pandemic, including disruptions from government mandates, both domestically and internationally, as well as supplier constraints and other supply disruptions; changes in customer demands; technological changes in our operations or in our industry; dependence on customers' required delivery schedules; risks related to fluctuations in the Company's operating results from quarter to quarter; risks related to international operations, including foreign currency fluctuations; changes in the legal and regulatory environment; changes in raw materials and commodity costs; acts of terrorism, war, governmental action, natural disasters and other Force Majeure events; and the ultimate impact on the Company of the cyber attack suffered on November 5, 2021. The cautionary statements made pursuant to the Reform Act herein and elsewhere by us should not be construed as exhaustive. We cannot always predict what factors would cause actual results to differ materially from those indicated by the forward-looking statements. Over time, our actual results, performance, or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and harmful to our stockholders' interest. Many important factors that could cause such differences are described under the caption "Risk Factors" in Item 1A in the Company's 2022 Annual Report on Form 10-K, which you should review carefully. These forward-looking statements speak only as of the date of this document. The Company assumes no obligation, and expressly disclaims any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise.


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