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Item 2. Management’s Discussion and Analysis

2021-12-07 compared with 2021-06-08 · 127 added, 232 removed, 81 unchanged (82% of the section changed)

3 unchanged sentences

Our actual results may differ materially from the results discussed in the forward-looking statements.

Factors that might cause a difference include, but are not limited to, those discussed under “Forward-Looking Statements” and Item 1A, Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended January 31, 2021 and of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020.

Factors that might cause a difference include, but are not limited to, those discussed under “Forward-Looking Statements” and Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.

We develop, mine, manufacture and market sorbent products principally produced from clay minerals and, to a lesser extent, other clay-like sorbent materials.

6 unchanged sentences

While we saw changes to consumer purchasing patterns for certain products in response to the pandemic and certain increases in our costs arising out of the pandemic, its continued spread and accompanying effects, there has not, to date, been a significant impact to our business as a whole.

All of our facilities, with the exception of our subsidiary in China (which experienced certain disruptions in the first half of our fiscal year 2020 but has subsequently resumed operations), have continued to operate as essential businesses as permitted under exceptions in the applicable shelter-in-place mandates due to our inclusion in the Critical Manufacturing Sector as defined by the U.S.

All of our facilities, with the exception of our subsidiary in China (which experienced certain disruptions in the first half of our fiscal year 2020 but subsequently resumed operations), have continued to operate as essential businesses during the course of the pandemic as permitted under exceptions in the applicable shelter-in-place mandates due to our inclusion in the Critical Manufacturing Sector as defined by the U.S.

Department of Homeland Security and other functions defined as essential by government authorities.

1 unchanged sentence

We have adhered, and continue to adhere, to guidance from the U.S.

Centers for Disease Control and Prevention (“CDC”) and local health and governmental authorities with respect to social distancing, physical separation, and enhanced cleaning and sanitation programs at each of our facilities.

Centers for Disease Control and Prevention (“CDC”) and local health and governmental authorities with respect to social distancing, physical separation, and cleaning and sanitation programs at each of our facilities.

As a result, we have not experienced any shut downs due to workforce absences or illnesses.

As further discussed below, our consolidated net sales were flat during the third quarter of fiscal year 2021 and increased during the first nine months of fiscal year 2021 compared to the third quarter and first nine months of fiscal year 2020, respectively.

Despite the overall increase in net sales during the first nine months of fiscal year 2021, we have not experienced any significant issues collecting amounts due from customers to date.

However, parts of our business have been negatively impacted by the COVID-19 outbreak.

Net sales of our industrial and sports products declined during fiscal year 2020 as many businesses that typically use our products and sports fields shut down.

As certain areas are experiencing re-openings and reduced restrictions, we are starting to see a positive trend in that such businesses are increasingly re-opening, as are sports fields.

As discussed below in “Retail and Wholesale Products Group,” net sales of our industrial and sports products were higher in the third quarter of fiscal year 2021 than in the same period of fiscal year 2020, and sales of our industrial products were higher for the first nine months of fiscal year 2021 than the same period in fiscal year 2020.

In the long term, we foresee that our sports product sales will improve back to pre-pandemic volumes aided by the expected re-opening of baseball and softball at all levels in 2021 and 2022.

As discussed below in “Foreign Operations,” net sales for our industrial granules in the United Kingdom were lower due to restrictions imposed by the United Kingdom government on business operations in response to later waves of outbreaks of COVID-19.

In addition, while net sales of our fluids purification products were higher in the first nine months of fiscal year 2021 than the same period in fiscal year 2020, COVID-19 has negatively impacted the sales of these products.

Reduced travel and, to a lesser extent, our inability due to COVID-19 to participate in our customers' plant tests of our fluids purification products and the continued closures of schools and restaurants has continued to impede our sales.

Consolidated gross profit has not been significantly impacted by COVID-19.

We did experience some delays of incoming materials from several suppliers due to COVID-19 during the first nine months of fiscal 2021.

However, it did not impact our

ability to fulfill customer orders and we continue to monitor our suppliers.

In general, our suppliers have either remained open or we have found new suppliers.

While we have experienced a significant increase in transportation costs as discussed further below, we have continued to meet the increase in customer demand for our products.

In addition, we have been able to successfully navigate delays in overseas vessel deliveries of our products by increasing our safety stock as well as finding other providers.

We have incurred additional cleaning and sanitation costs to comply with the CDC guidelines, but these costs did not have a significant impact on our consolidated gross profit, and we have started to scale back these costs as more of our teammates become vaccinated.

In addition, we are still experiencing a decrease in travel costs as our employees have continued to travel at reduced levels during the ongoing pandemic.

As further discussed below, our consolidated net sales increased during the first three months of fiscal year 2022 compared to the first three months of fiscal year 2021.

Net sales of our industrial and sports products as well as certain of our fluids purification products have returned to pre-pandemic levels as many businesses and sports have re-opened and air travel has started to increase.

Despite the overall increase in net sales, we have not experienced any significant issues collecting amounts due from customers to date.

However, parts of our business continue to be negatively impacted by the COVID-19 outbreak.

Net sales for our industrial granules in the United Kingdom continue to be lower due to restrictions imposed by the United Kingdom government on business operations in response to later waves of outbreaks of COVID-19.

In addition, net sales of our animal health and nutrition products are lower partially due to a resurgence of COVID-19 in certain geographic areas.

As discussed below in "Consolidated Results," gross profit has declined in the first three months of fiscal year 2022 compared to the same period in fiscal year 2021 related to rising costs and supply chain disruptions.

We have faced longer lead times for some of our materials purchases but have been able to avoid significant out of stock issues.

Where possible, we have found other suppliers to meet the increase in customer demand for our products.

We are closely monitoring the continuation, resurgence in certain areas, and effects of the outbreak of COVID-19 on all aspects of our business, including how it has and may impact our suppliers and customers as well as the effects of the pandemic on economic conditions and the financial markets.

1 unchanged sentence

However, we have not experienced any significant interruptions, and we will continue to closely monitor our inventory levels to mitigate the risk of any potential supply interruptions or changes in customer demand.

It is possible that significant disruptions could occur if the pandemic continues to put pressure on transportation and shipping as a result of an imbalance of supply and demand or if there are continued increases in costs that we are unable to recover.

Subsequent to quarter end, we revised our shipping terms with one of our significant customers to provide that freight charges are the responsibility of, and to be paid directly by, such customer and such costs will no longer be included in the prices we charge such customer.

The impacts of COVID-19 and related economic conditions on our future results are uncertain at this time.

The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve (and in many cases, rapidly) and in ways that are difficult or impossible to anticipate.

It is possible that significant disruptions could occur if the pandemic and other factors such as labor shortages and other strains on the supply chain continue to put pressure on transportation and shipping as a result of an imbalance of supply and demand or if there are continued increases in costs that we are unable to recover.

impacts of COVID-19 and related economic conditions on our future results are uncertain at this time.

The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve (and in many cases, rapidly) in ways that are difficult or impossible to anticipate.

In addition, although COVID-19 did not materially impact our financial results to date and because it remains uncertain whether and how consumers will modify their purchasing habits in response to COVID-19 or during the period of "re-opening" as the pandemic abates in certain areas and continued or reduced government restrictions, these results may not be indicative of the impact that COVID-19 may have on our results for the remainder of fiscal year 2022.

The impacts of COVID-19 to our specific operating segments are discussed below.

NINE MONTHS ENDED APRIL 30, 2021 COMPARED TO

NINE MONTHS ENDED APRIL 30, 2020

THREE MONTHS ENDED OCTOBER 31, 2021 COMPARED TO

THREE MONTHS ENDED OCTOBER 31, 2020

CONSOLIDATED RESULTS

Consolidated net sales for the nine months ended April 30, 2021 were $226,852,000, a 4% increase compared to net sales of $218,383,000 for the nine months ended April 30, 2020.

Consolidated net sales for the three months ended October 31, 2021 were $82,460,000, an 8% increase compared to net sales of $76,097,000 for the three months ended October 31, 2020.

Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group.

In addition, we experienced a surge in demand for our products during the first three months of fiscal year 2022, which has led to an increase in our backlog of orders.

While the vast majority of this backlog is due to late customer pick-ups due to transportation issues as well as longer lead times for materials needed to fulfill the surge in orders, a portion of it relates to our own capacity constraints.

We have expanded our production shifts and increased production equipment to resolve these constraints in the coming months.

Segment results are discussed further below.

Consolidated gross profit for the first nine months of fiscal year 2021 was $54,999,000, or 24% of net sales, compared to $60,278,000, or 28% of net sales, for the first nine months of fiscal year 2020.

Higher freight, packaging, materials, natural gas, and non-fuel costs per manufactured ton drove the decrease in gross profit.

Freight costs per manufactured ton increased approximately 15% in the first nine months of fiscal year 2021 compared to the same period of fiscal year 2020 as the result of higher transportation rates due to a national driver shortage and tight trucking capacity in part caused by the continued return of non-essential businesses.

Consolidated gross profit for the first three months of fiscal year 2022 was $13,818,000, or 17% of net sales, compared to $18,780,000, or 25% of net sales, for the first three months of fiscal year 2021.

Higher freight, packaging, natural gas, and non-fuel costs per manufactured ton drove the decrease in gross profit.

Freight costs per manufactured ton, excluding the freight we no longer charge to a significant customer who now picks up its own purchases, increased approximately 37% in the first three months of fiscal year 2022 compared to the same period of fiscal year 2021.

The increase relates to higher transportation rates due to a national driver shortage and tight trucking capacity in part caused by the continued return of non-essential businesses.

Our overall freight costs also vary between periods depending on the mix of products sold and the geographic distribution of our customers.

Despite the tight trucking capacity, we have been able to continue to meet the increase in customer demand.

Packaging costs per manufactured ton for the first nine months of fiscal year 2021 were approximately 13% higher compared to the first nine months of fiscal year 2020 due to higher commodity costs, particularly as it relates to resin.

Packaging costs per manufactured ton for the first three months of fiscal year 2022 were approximately 44% higher compared to the first three months of fiscal year 2021 due to higher commodity costs, particularly as it relates to resin.

Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices.

Our materials costs per manufactured ton increased approximately 5% during the first nine months of fiscal year 2021 compared to fiscal year 2020.

The cost of natural gas per manufactured ton used to operate kilns that dry our clay was 3% higher in the first nine months of fiscal year 2021 compared to the first nine months of fiscal year 2020.

Non-fuel costs per manufactured ton also increased during the first nine months of fiscal year 2021 compared to fiscal year 2020.

While we have experienced an increase in costs due to the reasons mentioned above, we anticipate being able to recover some of these rising costs through price increases.

Total SG&A expenses of $43,647,000 for the first nine months of fiscal year 2021 were lower by $937,000 or 2% compared to $44,584,000 for the first nine months of fiscal year 2020.

The cost of natural gas per manufactured ton used to operate kilns that dry our clay was 97% higher in the first three months of fiscal year 2022 compared to the first three months of fiscal year 2021 due to higher natural gas prices which are being driven by demand surpassing available supply.

Non-fuel costs per manufactured ton also increased during the first three months of fiscal year 2022 compared to fiscal year 2021 by 15%.

The increase in non-fuel manufacturing costs relate to higher repairs, labor costs, and costs of purchased materials such as our additives and other ingredients.

While we have experienced an increase in costs due to the reasons mentioned above, we anticipate being able to recover some of these rising costs through price increases to our customers.

Total selling, general and administrative (“SG&A”) expenses of $13,373,000 for the first three months of fiscal year 2022 were lower by $230,000 or 2% compared to $13,603,000 for the first three months of fiscal year 2021.

SG&A expenses for the operating segments were lower for the first three months of fiscal year 2022 compared to the same period in the prior fiscal year partially offset by higher unallocated corporate expenses.

The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments.

The remaining unallocated corporate expenses include a lower estimated annual incentive bonus accrual for fiscal year 2021 compared to fiscal year 2020 and lower pension

costs offset by additional expense related to the increase in employer match for our 401(k) plan.

In addition, the second quarter of the prior fiscal year included a curtailment gain of $1,296,000 related to the freeze of our Supplemental Executive Retirement Plan, which has since been terminated.

Other income of $722,000 for the first nine months of fiscal year 2021 included approximately $800,000 related to a gain upon the annual actuarial valuation of our pension plan and less unfavorable exchange rate losses as compared to the same period in fiscal year 2020.

Consolidated net income before taxes for the first nine months of fiscal year 2021 was $12,074,000, a 22% decrease from net income before taxes of $15,432,000 for the first nine months of fiscal year 2020.

Results for the first nine months of fiscal year 2021 were driven by the factors discussed above.

Tax expense for the first nine months of fiscal year 2021 was $1,651,000 (an effective tax rate of 14%) compared to $2,573,000 (an effective tax rate of 17%) for the first nine months of fiscal year 2020.

The remaining unallocated corporate expenses include a variety of other costs, including slightly higher professional fees.

Other income of $265,000 for the first three months of fiscal year 2022 included less periodic benefit costs related to our pension plan and less unfavorable exchange rate losses compared to the same period in fiscal year 2021.

Consolidated net income before taxes for the first three months of fiscal year 2022 was $710,000, a 85% decrease from net income before taxes of $4,755,000 for the first three months of fiscal year 2021.

Results for the first three months of fiscal year 2022 were driven by the factors discussed above.

Tax expense for the first three months of fiscal year 2022 was $115,000 (an effective tax rate of 16%) compared to $806,000 (an effective tax rate of 17%) for the first three months of fiscal year 2021.

An estimated annual effective tax rate was used in both periods to determine the provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.

The decrease in the effective tax rate for the first nine months was primarily driven by lower expected annual taxable income as well as certain tax credits and deductions that are further discussed below in the “Results of Operations for the Three Months ended April 30, 2021.”

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the first nine months of fiscal year 2021 increased compared to the first nine months of fiscal year 2020.

Net sales were $80,098,000, an increase of $2,466,000, or 3%, from net sales of $77,632,000 for the first nine months of fiscal year 2020.

Net sales of our agricultural and horticultural chemical carrier products increased approximately $2,147,000 or 13% for the first nine months of fiscal year 2021 compared to the same period in fiscal year 2020.

The increase in net sales was attributable to an expected shift in timing of sales to one of our largest customers from the last three months of fiscal year 2020 to fiscal year 2021 due to that customer resuming its production schedule after it experienced various supplier delays due to COVID-19.

Additionally, agricultural sales increased due to a new business application of our Agsorb product to an existing customer, increased sales to existing customers in the first nine months of fiscal year 2021 and the addition of several smaller new customers.

Net sales of our fluids purification products increased approximately $435,000 or 1% compared to the first nine months of the prior fiscal year despite the negative impacts of COVID-19.

We experienced sales improvement primarily in Latin America and Europe for a variety of reasons, primarily due to either customer wins or increased sales to existing customers.

The increases in net sales to Latin America and Europe were partially offset by lower sales to North America and Asia.

Net sales to North America decreased due to customers still having unused product on hand following reduced operations as a result of COVID-19 shutdowns or restrictions, and companies pushing back plant tests which typically generates sales.

In addition, the oil quality in North America continues to be good, which has reduced the need for our clay products.

Reduced air travel due to COVID-19 has also negatively affected the sale of our jet fuel fluids purification products in both North America and Asia.

Sales to Asia also decreased in the first nine months of fiscal year 2021 compared to fiscal year 2020 due to price competition.

Net sales of our animal health and nutrition products were essentially flat during the first nine months of fiscal year 2021 compared to the first nine months of the prior year as the increases in net sales of our animal feed additives in China, Mexico and Asia offset the decreases in net sales in other countries.

See “Foreign Operations” below for a discussion of net sales in China and Mexico.

Net sales of our co-packaged coarse cat litter decreased approximately $200,000 or 2% during the first nine months of fiscal year 2021 compared to the same period in the prior fiscal year due to timing of consumer purchases.

Similar to our Retail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase in revenues during the first nine months of fiscal year 2020 as consumers were engaged in anticipatory purchasing (or “pantry loading”) due to COVID-19.

These businesses had more normalized revenues during the first nine months of fiscal year 2021.

SG&A expenses for the Business to Business Products Group increased approximately 6% or $457,000 for the first nine months of fiscal year 2021 compared to the same period of the prior fiscal year.

The increase in SG&A expenses correlates to the higher sales of our animal health products in fiscal year 2021 partially offset by lower travel costs and less bad debt expense.

In the first nine months of fiscal year 2021, we made a concentrated effort to invest in our animal health business through increased sales personnel, leadership, and marketing of our animal health products.

The Business to Business Products Group’s operating income for the first nine months of fiscal year 2021 was $23,005,000, a decrease of $1,041,000 or 4%, from operating income of $24,046,000 for the first nine months of fiscal year 2020.

Net sales of the Business to Business Products Group for the first three months of fiscal year 2022 increased compared to the first three months of fiscal year 2021.

Net sales were $28,929,000, an increase of $1,407,000, or 5%, from net sales of $27,522,000 for the first three months of fiscal year 2021.

Net sales of our fluids purification products increased approximately $1,864,000 or 15% compared to the first three months of the prior fiscal year.

We experienced sales improvement primarily to Latin America, North America and Asia.

The increases in net sales to these countries were partially offset by lower net sales to Europe.

The increase in net sales occurred for a variety of reasons, including customer wins, increased sales to existing customers, increase in air travel, price increases that were instituted to offset rising costs and in some cases, timing of net sales.

Net sales of our Ultra-Clear products rebounded to pre-pandemic levels as global air travel increased over the same period last year.

Net sales of bleaching clay to Europe decreased primarily as a function of timing and ocean freight shipping delays.

Similar to our Retail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase of 20% in net sales during the first three months of fiscal year 2022 compared to fiscal year 2021 primarily due to price increases and to some extent, an increase in volume.

The increase in net sales of our fluids purification and cat litter products were partly offset by a decrease in net sales of our agricultural and horticultural products and animal health products.

Net sales of our agricultural and horticultural chemical carrier products decreased approximately $779,000 or 11% for the first three months of fiscal year 2022 compared to the same period in fiscal year 2021.

The decrease in net sales relates primarily to timing.

Several of our customers that use our products in their end products experienced supply chain issues, which resulted in cancelled or delayed orders.

In addition, one of our largest customers shifted its purchases in the prior fiscal year 2020 to the first three months of fiscal year 2021.

Such a shift did not occur in the first three months of fiscal year 2022.

Net sales of our animal health and nutrition products decreased $438,000 or 11% during the first three months of fiscal year 2022 compared to the first three months of the prior year.

The decrease relates to timing of net sales, as ocean freight delays are negatively impacting our business.

COVID-19 also continues to challenge sales of our products as new waves of the coronavirus occur.

Additionally, the African Swine Fever is still affecting the swine market and ultimately, the net sales of our feed additives.

The swine population has been reduced, and demand and consumption are down, thereby causing a decrease in our net sales.

See “Foreign Operations” below for a discussion of net sales for our foreign operations that sell our animal health and nutrition products.

SG&A expenses for the Business to Business Products Group increased approximately 20% or $512,000 for the first three months of fiscal year 2022 compared to the same period of the prior fiscal year.

The increase in SG&A expenses relates primarily to personnel costs as we focus on investing in our animal health business through hiring sales personnel and leadership.

The Business to Business Products Group’s operating income for the first three months of fiscal year 2022 was $6,746,000, a decrease of $854,000 or 11%, from operating income of $7,600,000 for the first three months of fiscal year 2021.

The decrease in operating income was driven by higher freight, packaging, materials, natural gas and non-fuel costs per manufactured ton as discussed in “Consolidated Results” above as well as higher SG&A expenses.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the first nine months of fiscal year 2021 were $146,754,000, an increase of $6,003,000, or 4%, from net sales of $140,751,000 for the first nine months of fiscal year 2020 driven primarily by sales of cat litter and to some extent, our industrial and sports products.

Total cat litter net sales were approximately $5,800,000 or 5% higher compared to the first nine months of the prior fiscal year, with increased sales of both private label and branded scoopable litter as we gained business from both new customers and from new items sold to existing customers for both private label and branded scoopable litter.

In addition, the impact of COVID-19 on increased pet adoption continues to boost sales as well as the overall macro trend of increased spending on pets.

Also included in the Retail and Wholesale Products Group's results were increased sales of our industrial and sports products compared to the first nine months of fiscal year 2020.

Net sales of our industrial and sports products increased approximately $571,000 or 2% compared to the first nine months of fiscal year 2020, primarily driven by the re-opening of businesses and sports fields in the third quarter of fiscal year 2021.

Cat litter and industrial floor absorbent sales by our subsidiary in Canada further contributed to the net sales increase, as discussed in “Foreign Operations” below.

SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $169,000 or 1% during the first nine months of fiscal year 2021 compared to the first nine months of fiscal year 2020 primarily due to less travel costs and less bad debt expense offset by higher advertising costs.

We anticipate total advertising expense in fiscal year 2021 will be less than fiscal year 2020.

The Retail and Wholesale Products Group's operating income for the first nine months of fiscal year 2021 was $11,487,000, a decrease of $3,893,000, or 25%, from operating income of $15,380,000 for the first nine months of fiscal year 2020.

The decrease in operating income was driven by lower sales and the higher freight, packaging, materials, natural gas and non-fuel costs as discussed in “Consolidated Results” above.

FOREIGN OPERATIONS

Foreign operations include our subsidiaries in Canada and the United Kingdom, which are reported in the Retail and Wholesale Products Group, and our subsidiaries in China, Mexico and Indonesia, which are reported in the Business to Business Products Group.

Net sales by our foreign subsidiaries during the first nine months of fiscal year 2021 were $13,012,000, an increase of $2,026,000, or 18%, compared to net sales of $10,986,000 during the first nine months of fiscal year 2020.

All of our foreign operations, with the exception of the United Kingdom and Indonesia, experienced an increase in net sales during the first nine months of fiscal year 2021 compared to fiscal year 2020.

Cat litter sales for our Canada subsidiary increased by approximately $982,000 or 24% in the first nine months of fiscal year 2021 compared to the same period in the prior fiscal year due to new product sales;

higher sales to existing customers;

in-store promotions;

and pantry loading in eastern Canada due to a second wave of COVID-19 infections and lockdown restrictions during the first three months of fiscal year 2021.

In addition to increased sales of cat litter, sales of our industrial absorbent granules in Canada increased by approximately $464,000 or 31% during the first nine months of fiscal year 2021 compared to the same period in fiscal year 2020 as distributors were starting to fully reopen during the third quarter of fiscal year 2021.

However, some of the increase in industrial absorbent granules is attributable to the timing of purchases by our customers.

Sales of our animal health products by our foreign operations grew during the first nine months of fiscal year 2021 compared to the same period in fiscal year 2020, particularly in China and Mexico.

Net sales in China increased approximately $802,000 or 49% during the first nine months of fiscal year 2021 compared to the same period in fiscal year 2020.

Despite the continued impacts of the African Swine Fever to pork consumption, sales of our animal health products in China were higher during the first nine months of fiscal year 2021 compared to fiscal year 2020 due to a new contract with an existing customer;

increased sales to existing customers;

winning back several previous distributors and implementing a concentrated sales and marketing effort.

To some extent, the increase in net sales also relates to the economy starting to recover in China from the nine month period last year when the pandemic and lockdowns were already prevalent in China.

Sales of our animal health products in Mexico also increased during the first nine months of fiscal year 2021 compared to fiscal year 2020 due to several small customer wins as well as increased sales to existing customers.

Higher sales for these subsidiaries were partially offset by lower net sales for our subsidiary in the United Kingdom.

The effect of COVID-19 lockdowns and restrictions on the industry in Europe has, to some extent, reduced demand for our industrial floor granules and jet fuel purification products.

The discontinuation by a customer of a product that used our clay granules also contributed to the decrease in sales of our subsidiary in the United Kingdom.

Net sales by our foreign subsidiaries represented 6% and 5%, respectively, of our consolidated net sales during the first nine months of fiscal year 2021 and 2020.

Our foreign subsidiaries reported a net loss of $177,000 for the first nine months of fiscal year 2021, compared to a net loss of $200,000 for the first nine months of fiscal year 2020.

The net loss was primarily driven by our continued investment in our subsidiary in Indonesia and higher SG&A expenses to support increased sales for our subsidiary in Mexico.

The net loss was partially offset by higher net income from our subsidiary in China related to increased sales during the first nine months of fiscal year 2021 as described above.

Identifiable assets of our foreign subsidiaries as of April 30, 2021 were $12,881,000, compared to $11,286,000 as of April 30, 2020.

The increase was attributed primarily to working capital contributed to our subsidiary in Mexico during the third quarter of fiscal year 2020 that has not yet been fully used;

an increase in inventory for our subsidiaries in Canada and China in anticipation of meeting customer needs and thwarting any potential supply chain disruptions due to COVID-19 and to some extent, an increase in cash due to the increase in sales.

THREE MONTHS ENDED APRIL 30, 2021 COMPARED TO

THREE MONTHS ENDED APRIL 30, 2020

CONSOLIDATED RESULTS

Consolidated net sales for the three months ended April 30, 2021 were $76,255,000, essentially flat compared to net sales of $76,256,000 for the three months ended April 30, 2020.

Segment results are discussed below.

Consolidated gross profit for the three months ended April 30, 2021 was $16,523,000, or 22% of net sales, compared to $21,385,000, or 28% of net sales, for the third quarter of fiscal year 2020.

Higher freight, packaging, materials, natural gas, and non-fuel costs per manufactured ton drove the decrease in gross profit.

Freight costs per manufactured ton increased approximately 28% in the third quarter of fiscal year 2021 compared to the same period of fiscal year 2020 as the result of higher transportation rates due to a national driver shortage and tight trucking capacity in part caused by the continued return of non-essential businesses.

In addition, the increase in diesel fuel also contributed to higher freight costs.

Our overall freight costs also vary between periods depending on the mix of products sold and the geographic distribution of our customers.

Despite the tight trucking capacity, we have been able to continue to meet the increase in customer demand.

Packaging costs per manufactured ton were approximately 19% higher compared to the third quarter of the prior fiscal year, driven primarily by rising commodity prices, particularly as it relates to resin.

Many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices.

In addition, materials costs per manufactured ton were 9% higher in the third quarter of fiscal year 2021 than in fiscal year 2020.

The cost of natural gas used to operate kilns that dry our clay was approximately 11% higher per manufactured ton for the third quarter of fiscal year 2021 compared to the same period of fiscal year 2020 due to the increase in natural gas prices.

The increased gas prices in 2021 were driven, in part, by the limited supply created by record-low temperatures across the nation, which drove up demand and supply was further limited across the country due to natural gas pipelines and wellheads freezing in the South.

The limited supply coupled with high demand caused the increase in natural gas prices.

In addition, our non-fuel manufacturing costs per ton increased during the third quarter of fiscal year 2021 compared to the same period in fiscal year 2020.

While we have experienced an increase in costs due to the reasons mentioned above we anticipate being able to recover some of these rising costs through price increases.

Total SG&A expenses were $14,592,000 for the third quarter of fiscal year 2021, a 7% decrease compared to $15,685,000 for the third quarter of fiscal year 2020.

The discussion below describes the SG&A expenses allocated to the operating segments.

The remaining unallocated corporate expenses includes a lower estimated annual incentive bonus accrual for fiscal year 2021 compared to fiscal year 2020.

Other income of $231,000 for the third quarter of fiscal year 2021 primarily includes changes in our pension costs and less unfavorable exchange rate losses as compared to the same period in fiscal year 2020.

Consolidated net income before taxes for the third quarter of fiscal year 2021 was $2,162,000, compared to net income before taxes of $5,597,000 for the third quarter of fiscal year 2020.

Results for the third quarter of fiscal year 2021 were driven by the factors described above.

We had a tax benefit of $24,000 for the third quarter of fiscal year 2021, compared to tax expense $947,000 for the third quarter of fiscal year 2020, which resulted in an effective tax rate of (1)% and 17%, respectively.

We used an estimated annual effective tax rate (“ETR”) in determining our quarterly provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.

The reduction in the ETR in the third quarter of fiscal year 2021, compared to the same period in the prior fiscal quarter, reflects a decrease in our expected annual taxable income as well as certain employment related credits we were able to take advantage of.

In addition, we were also able to claim a tax deduction for foreign-derived income which further reduced the ETR.

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the third quarter of fiscal year 2021 were $26,293,000, a decrease of $390,000, or 1%, from net sales of $26,683,000 for the third quarter of fiscal year 2020.

While overall net sales declined slightly during the third quarter of fiscal year 2021, we did have an increase in net sales for our agricultural and horticultural products and our animal health products during the third quarter of fiscal 2021.

Net sales of our agricultural and horticultural chemical carrier products increased $410,000 or 7%, the majority of which relates to increased sales to existing customers and several smaller new customers.

Net sales of our animal health and nutrition products increased 3% or approximately $131,000 in the third quarter of fiscal 2021.

Net sales increased most notably in our Asia and Latin America markets for our animal feed additives.

Net sales increased in Asia primarily due to increased sales to one of our existing distributors as well as a new distributor.

Net sales in Latin America increased as a change in one of our distributors from the first quarter of fiscal year 2021 continues to generate higher sales and surpass the net sales made by the previous distributor in the third quarter of fiscal year 2020.

Net sales of our fluids purification products decreased approximately $366,000 or 3% for the third quarter of fiscal year 2021 compared to fiscal year 2020.

Sales in Europe, North America and Asia decreased for a variety of reasons as further discussed below.

However, we experienced sales improvement in Latin America in the third quarter of fiscal year 2021 compared to fiscal year 2020.

Net sales in Europe decreased during the third quarter of fiscal year 2021 compared to fiscal year 2020 primarily due to the timing of sales and the negative impact of COVID-19.

We experienced lower net sales to North America due to customers still having unused product on hand following reduced operations as a result of COVID-19 shutdowns or restrictions, and companies pushing back plant tests which typically generate sales.

In addition, the oil quality in North America continues to be good, which reduces the need for our clay products.

Reduced air travel due to COVID-19 has also negatively affected the sale of our jet fuel fluids purification products in both North America and Asia.

Sales in Latin America increased due to one of our existing customers opening a new facility and increasing its orders from us.

Net sales of our co-packaged coarse cat litter for the third quarter of fiscal year 2021 were approximately $565,000 or 15% lower compared to the third quarter of the prior fiscal year.

Similar to our Retail and Wholesale Products Group cat litter business discussed below, the third quarter of fiscal year 2020 experienced a significant increase in revenues as consumers were pantry loading due to COVID-19 and the third quarter of fiscal year 2021 has more normalized revenues.

SG&A expenses for the Business to Business Products Group were flat in the third quarter of fiscal year 2021 compared to the third quarter of fiscal year 2020.

We continued to invest in our animal health business which resulted in higher costs due to increased sales personnel, leadership, and marketing of our animal feed additives.

However, these investments were offset by lower travel and bad debt expenses.

The Business to Business Products Group’s operating income for the third quarter of fiscal year 2021 was $7,146,000, a decrease of $1,052,000, or 13%, from operating income of $8,198,000 in the third quarter of fiscal year 2020.

The decrease in operating income was driven by the increase in freight, packaging, materials, natural gas, and non-fuel manufacturing costs discussed in “Consolidated Results” above.

To some extent, product mix for our subsidiary in China also resulted in lower operating income during the first three months of fiscal year 2022.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the third quarter of fiscal year 2021 were $49,962,000, an increase of $389,000, or 1%, from net sales of $49,573,000 for the third quarter of fiscal year 2020.

The increase in net sales is driven by our industrial and sports products which increased approximately $1,611,000 or 20% during the third quarter of fiscal year 2021 compared to the same period in fiscal year 2020 due to the re-opening of many businesses and sports fields.

We anticipate this increase to continue as more businesses and sports fields re-open and resume operations at pre-COVID-19 levels.

Sales of our industrial products by our subsidiary in Canada also aided in the increase in net sales during the third quarter of fiscal year 2021 as further discussed in “Foreign Operations” below.

The increase in net sales for our industrial and sports products was somewhat offset by the decrease in net sales of our cat litter products.

While we continue to experience a positive impact from COVID-19 due to increased pet adoption continuing to boost sales as well as the overall macro trend of increased spending on pets, net sales decreased in the third quarter of fiscal year 2021 compared to the same period in the prior fiscal year.

Total cat litter net sales decreased 3%, or $1,099,000, compared to the third quarter of fiscal year 2020.

This decrease relates primarily to the timing of sales.

Many consumers in the third quarter of fiscal year 2020 were pantry loading cat litter and related products and we are now experiencing a return to more normalized cat litter sales as occurred in the third quarter of fiscal year 2021.

This decrease has impacted both our e-commerce sales and traditional channels across all product lines - branded, private label and accessories.

Despite the decrease in cat litter sales in the third quarter of fiscal year 2021, net sales are still higher than any other quarter prior to the World Health Organization declaring COVID-19 a pandemic in the third quarter of fiscal year 2020.

In addition, net sales of cat litter by our subsidiary in Canada continue to increase, mainly due to new customers and products, as further discussed in “Foreign Operations” below.

SG&A expenses for the Retail and Wholesale Products Group were lower in the third quarter of fiscal year 2021 than in fiscal year 2020 by 5% or $216,000, primarily due to less travel costs and less bad debt expense.

For the third quarter of fiscal year 2021, the Retail and Wholesale Products Group reported operating income of $2,898,000, a decrease of $3,514,000, compared to operating income of $6,412,000 for the third quarter of fiscal year 2020.

The decrease in operating income was driven by lower sales and the higher freight, packaging, materials, natural gas, and non-fuel manufacturing costs described above in “Consolidated Results”.

Net sales of the Retail and Wholesale Products Group for the first three months of fiscal year 2022 were $53,531,000, an increase of $4,956,000, or 10%, from net sales of $48,575,000 for the first three months of fiscal year 2021 driven by sales of both our cat litter and industrial and sports products.

Total cat litter net sales were approximately $3,101,000 or 8% higher compared to the first three months of the prior fiscal year primarily due to increased sales volume and somewhat due to price increases in an effort to keep pace with rising costs.

Net sales of branded scoopable litter, private label lightweight and heavyweight litter and accessories (liners) increased in the first three months of fiscal year 2022 as we gained business from new customers and sold new items to existing customers.

E-commerce sales continue to be very strong and the impact of COVID-19 on increased pet adoption continues to boost sales as well as the overall macro trend of increased spending on pets.

In addition, cat litter net sales increased despite revising our shipping terms with one of our significant customers in the fourth quarter of fiscal year 2021 to provide that freight charges are the responsibility of such customer and no longer included in the prices charged.

Also included in the Retail and Wholesale Products Group's results were increased sales of our industrial and sports products compared to the first three months of fiscal year 2021.

Net sales of our industrial and sports products increased approximately $1,858,000 or 26% compared to the first three months of fiscal year 2021, due to both an increase in volume due to the re-opening of businesses and sports fields as well as an increase in selling price per ton as we continue to try to keep pace with rising costs.

Cat litter sales by our subsidiary in Canada further contributed to the net sales increase, as discussed in “Foreign Operations” below.

SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $1,033,000 or 20% during the first three months of fiscal year 2022 compared to the first three months of fiscal year 2021 primarily due to lower advertising costs.

We anticipate total advertising expense in fiscal year 2022 will be essentially flat compared to fiscal year 2021.

The Retail and Wholesale Products Group's operating income for the first three months of fiscal year 2022 was $74,000, a decrease of $3,476,000, or 97.9%, from operating income of $3,550,000 for the first three months of fiscal year 2021.

The decrease in operating income was driven by higher freight, packaging, materials, natural gas and non-fuel costs as discussed in “Consolidated Results” above which outpaced the increase in net sales.

FOREIGN OPERATIONS

Net sales by our foreign subsidiaries during the third quarter of fiscal year 2021 were $4,174,000, a 9% increase compared to net sales of $3,832,000 in the third quarter of fiscal year 2020.

Cat litter sales for our Canada subsidiary increased by approximately $194,000 or 13% in the third quarter of fiscal year 2021 compared to the same period of fiscal year 2020 due to new product sales and higher sales to existing customers.

Moreover, the impact of COVID-19 on increased pet adoption continues to boost cat litter sales as well as the overall macro trend of increased spending on pets.

In addition to increased sales of cat litter, sales of our industrial absorbent granules in Canada increased by approximately $310,000 or 64% during the third quarter of fiscal year 2021 compared to the same period in fiscal year 2020 as distributors were starting to fully re-open after the COVID-19 shutdowns during the same period in fiscal year 2020.

The increase in sales of industrial absorbent granules is also due to the timing of consumer purchases.

Sales of our animal health products by our foreign operations were slightly lower during the third quarter of fiscal year 2021 compared to fiscal year 2020 primarily due to timing of sales for our subsidiary in China.

The Chinese New Year occurred in the third quarter of fiscal year 2021 whereas it occurred in the second quarter of fiscal year 2020.

Sales are typically lower in the month that the Chinese New Year occurs and, as a result, the third quarter fiscal year 2021 results were lower than in the same period of the prior fiscal year.

The increase in sales of our cat litter and industrial absorbent granules were somewhat offset by lower sales for our subsidiary in the United Kingdom.

The effect of COVID-19 lockdowns and restrictions on the industry in Europe has, to some extent, reduced demand for our industrial floor granules and jet fuel purification products.

The discontinuation by a customer of a product that used our granules also contributed to the decrease in sales of our subsidiary in the United Kingdom.

Our foreign subsidiaries' net sales represented approximately 5% of consolidated net sales during the third quarters of fiscal years 2021 and 2020.

Our foreign subsidiaries reported a net loss of $134,000 for the third quarter of fiscal year 2021 compared to a net loss of $31,000 for the third quarter of fiscal year 2020.

While our subsidiary in Canada had higher net sales in the third quarter of fiscal year 2021 than in fiscal year 2020, the increase in net sales was partially offset by higher SG&A expenses to support the overall growth in our foreign sales.

Net sales by our foreign subsidiaries during the first three months of fiscal year 2022 were $4,342,000, an increase of $206,000, or 5%, compared to net sales of $4,136,000 during the first three months of fiscal year 2021.

The net sales of our subsidiary in Canada increased by approximately $660,000 or 31% in the first three months of fiscal year 2022 compared to the same period of fiscal year 2021.

Cat litter sales for our subsidiary in Canada increased by approximately $730,000 or 48% in the first three months of fiscal year 2022 compared to the same period of fiscal year 2021 driven primarily by price increases instituted in an effort to keep pace with rising costs as well as an increase in volume by introducing new products and increased sales to existing customers.

Net sales of our industrial absorbent granules declined by approximately 11% or $69,000 in the first three months of fiscal year 2022 compared to the same period in the prior fiscal year.

Customers of our granule products struggled to source co-loaded items which, in turn, have caused a reduction in demand for our granule products.

The increase in net sales for our subsidiary in Canada was partially offset by decreases in net sales by our subsidiaries in China, Mexico and Indonesia.

Net sales of our subsidiary in China decreased in the first three months of fiscal year 2022 for a a variety of reasons, including African Swine Fever, the resurgence of COVID-19, timing as some customers made purchases in the prior fiscal year ahead of effective price increases and ocean freight delays.

Net sales of our subsidiary in Mexico declined slightly as the first three months of fiscal year 2021 included net sales of products that are no longer a part of our business strategy.

Net sales by our foreign subsidiaries represented 5% of our consolidated net sales during the first quarter of each of fiscal year 2022 and 2021.

Our foreign subsidiaries reported a net loss of $334,000 for the first three months of fiscal year 2022, compared to a net loss of $212,000 for the first three months of fiscal year 2021.

The net loss was primarily driven by higher SG&A expenses as well as unfavorable product mix by our subsidiary in China.

Rising shipping costs and the effect of COVID-19 lockdowns and restrictions have also negatively impacted our foreign operations.

Identifiable assets of our foreign subsidiaries as of October 31, 2021 were $12,231,000, compared to $11,991,000 as of October 31, 2020.

LIQUIDITY AND CAPITAL RESOURCES

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and, from time to time, business acquisitions.

During the first nine months of fiscal year 2021, we principally funded these requirements using cash from current operations as well as cash generated in the fourth quarter of fiscal year 2020 from borrowings and a one-time receipt of cash related to licensing of certain of our patents.

During the first three months of fiscal year 2022, we principally funded these requirements using cash from current operations as well as cash generated in the fourth quarter of fiscal year 2020 from borrowings and a one-time receipt of cash related to licensing of certain of our patents.

To date, COVID-19 has not had a significant impact on our operations as a whole, and we anticipate cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements.

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The following table sets forth certain elements of our unaudited Condensed Consolidated Statements of Cash Flows (in thousands):

For the Nine Months Ended April 30,

Net cash provided by operating activities $ 8,340 $ 22,269

For the Three Months Ended October 31,

Net cash used in operating activities $ (596) $ (3,435)

Net cash used in investing activities (6,736) (3,565)

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Net cash provided by operating activities

In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first nine months of fiscal years 2021 and 2020 were as follows:

Accounts receivable, less allowance for doubtful accounts, increased $3,971,000 in the first nine months of fiscal year 2021 compared to an increase of $6,592,000 in the first nine months of fiscal year 2020.

Lower sales in the third quarter of fiscal year 2021 compared to the third quarter of fiscal year 2020 drove the decrease in accounts receivable as of April 30, 2021.

In addition, during the first nine months of fiscal year 2021 our expected allowance for bad debts was reduced.

The variation in accounts receivable balances also reflects differences in the level and timing of collections as well as the payment terms provided to various customers.

Inventory decreased $524,000 in the first nine months of fiscal year 2021 compared to an increase of $72,000 in the first nine months of fiscal year 2020 due to a decrease in other inventory such as clay, additives, and fragrance as well as a decrease in our inventory obsolescence reserve.

Inventory increased $72,000 in the first nine months of fiscal year 2020 primarily due to the increase in our inventory obsolescence reserve.

Prepaid expenses increased $2,117,000 in the first nine months of fiscal year 2021 driven primarily by prepayment of income taxes and insurance offset by lower prepaid advertising costs.

Lower prepaid advertising costs offset by higher prepaid insurance and prepaid repairs drove the overall decrease of $120,000 during the first nine months of fiscal year 2020.

Other assets increased $1,066,000 in the first nine months of fiscal year 2021 compared to a decrease of $816,000 in the first nine months of fiscal year 2020.

The increase in other assets relates primarily to an increase in capitalized pre-production mining costs offset by amortization of our operating lease right-of-use lease assets.

Amortization of our operating lease right-of-use lease assets also drove the decrease in the first nine months of fiscal 2020.

Accounts payable, including income taxes payable, decreased $4,227,000 in the first nine months of fiscal year 2021 compared to an increase of $3,859,000 in the first nine months of fiscal year 2020.

Lower trade payables drove the decrease in accounts payable in the first nine months of fiscal year 2021 as well as income taxes payable being in a prepaid position versus a payable position at the end of the third quarter of fiscal year 2021.

In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first three months of fiscal years 2022 and 2021 were as follows:

Accounts receivable, less allowance for doubtful accounts, increased $2,161,000 in the first three months of fiscal year 2022 compared to an increase of $4,256,000 in the first three months of fiscal year 2021.

The change in accounts receivable was higher in fiscal year 2021 than fiscal year 2022 because net sales increased significantly between the fourth quarter of fiscal year 2020 and the first quarter of fiscal year 2021, thereby driving the accounts receivable balance up.

The difference in net sales between the fourth quarter of fiscal year 2021 and the first quarter of fiscal year 2022 was not as significant.

In addition, the variation in accounts receivable balances reflect differences in the level and timing of collections as well as the payment terms provided to various customers.

Inventory increased $5,084,000 in the first three months of fiscal year 2022 compared to a decrease of $462,000 in the first three months of fiscal year 2021.

Inventory increased in the first three months of fiscal year 2022 due to a combination of rising costs and building inventory levels for anticipated demand.

Inventory decreased in the first three months of fiscal year 2021 due to decreases in other inventory and finished goods.

Other inventory includes a variety of items including clay, additives, fragrances and other supplies.

Other inventory decreased due to increased demand during the first three months of fiscal year 2021.

Finished goods decreased during the first three months of fiscal year 2021 due to higher sales.

Other assets decreased $186,000 in the first three months of fiscal year 2022 compared to an increase of $985,000 in the first three months of fiscal year 2021.

The decrease in other assets in the first three months of fiscal year 2022 relates to capitalized pre-production costs being transferred to property, plant and equipment as the mines are now in production.

The increase in other assets in the first three months of fiscal year 2021 relates to an increase in capitalized pre-production mining costs.

Accounts payable increased $1,251,000 in the first three months of fiscal year 2022 compared to a decrease of $1,435,000 in the first three months of fiscal year 2021.

Trade and freight payables vary in both periods due to the timing of payments, fluctuations in the cost of goods and services we purchased, production volume levels and vendor payment terms.

Accrued expenses decreased $4,070,000 in the first nine months of fiscal year 2021 compared to an increase of $4,612,000 in the first nine months of fiscal year 2020 due to decreases in our accrued bonus, advertising, and real estate taxes offset by an increase in accrued freight and a reclassification of one of our accruals from long term to short term.

Accrued expenses increased $689,000 in the first three months of fiscal year 2022 compared to a decrease of $8,106,000 in the first three months of fiscal year 2021.

The payout of the prior fiscal year's discretionary incentive bonus reduced accrued salaries in both fiscal years, but to a greater extent in fiscal year 2021 as the accrual was higher in the prior fiscal year.

Accrued advertising decreased in the first nine months of fiscal year 2021 more than the same period of fiscal year 2020 due to timing of our advertising programs.

Accrued real estate taxes decreased based on lower real estate taxes for one of our facilities.

These decreases were partially offset by the reclassification of the current portion of the deferred employer payroll taxes under the CARES Act, which is due by the end of calendar year 2021, as further described in Note 1 of the Notes to the unaudited Condensed Financial Statements and an increase in accrued freight.

Accrued freight can vary with freight rates, timing of shipments, and production requirements.

The decrease in accrued bonus in the first three months of fiscal year 2022 was offset by an increase in accrued advertising, real estate taxes, professional fees and accrued utilities.

These accruals can vary based on timing.

In addition, accrued plant expenses can also fluctuate due to timing of payments, changes in the cost of goods and services we purchase, production volume levels and vendor payment terms.

As noted previously, accrued expenses were higher in the first nine months of fiscal year 2020 primarily due to a higher accrual for our discretionary incentive bonus.

Pension and postretirement benefits decreased $656,000 in the first nine months of fiscal year 2021 compared to a decrease of $5,482,000 in the first nine months of fiscal year 2020.

The liability decreased during the first nine months of fiscal year 2021

due to reduced service expense related to the Pension Plan which was frozen in fiscal year 2020.

The decrease in the first nine months of fiscal year 2020 relates to the curtailment of our Pension Plan during the second quarter of that fiscal year which reduced the pension benefit obligation.

Other liabilities decreased $330,000 in the first nine months of fiscal year 2021 compared to a decrease of $1,101,000 in the first nine months of fiscal year 2020.

The decrease in other liabilities for the first nine months of fiscal year 2021 relates to reclassifying the current portion of the deferral of employer taxes under the CARES Act to current liabilities.

The decrease in fiscal year 2020 for the same period is due to a reclassification of the deferred lease liability to operating lease liabilities.

Accrued expenses also decreased in the first three months of fiscal year 2021 due to a decrease in accrued advertising partially offset by an increase in accrued freight.

Other liabilities decreased $490,000 in the first three months of fiscal year 2022 compared to an increase of $1,135,000 in the first three months of fiscal year 2021.

The decrease in fiscal year 2022 relates primarily to a reduction in our operating lease liability.

The increase in other liabilities in fiscal year 2021 relates to the deferral of employer taxes under the CARES Act as further described in Note 1 of the Notes to unaudited Condensed Financial Statements.

Net cash used in investing activities

Cash used in investing activities of $10,753,000 in the first nine months of fiscal year 2021 were flat compared to cash used in investing activities of $10,758,000 in the first nine months of fiscal year 2020 driven by capital expenditures.

Cash used in investing activities of $6,736,000 in the first three months of fiscal year 2022 were higher compared to cash used in investing activities of $3,565,000 in the first three months of fiscal year 2021 driven by capital expenditures.

During the first three months of fiscal year 2022 we expanded our plant equipment and improved our facilities to support increased demand for our products as well as made improvements to our IT network.

Net cash used in financing activities

Cash used in financing activities of $8,324,000 in the first nine months of fiscal year 2021 was lower than cash used in financing activities of $12,852,000 in the first nine months of fiscal year 2020.

The first nine months of fiscal year 2020 included higher repurchases of stock than in the first nine months of fiscal year 2021.

In addition, the first nine months of fiscal year 2020 included the semi-annual payment on the then existing notes payable.

The remaining notes payable were paid in the fourth quarter of fiscal year 2020 and replaced by a new notes payable agreement as further described below.

No payments on the new notes payable agreement are yet due.

Total cash and investment balances held by our foreign subsidiaries of $4,032,000 as of April 30, 2021 were higher than the April 30, 2020 balances of $3,042,000.

Cash used in financing activities of $4,156,000 in the first three months of fiscal year 2022 was higher than cash used in financing activities of $2,781,000 in the first three months of fiscal year 2021.

The first three months of fiscal year 2022 included more repurchases of stock than in the first three months of fiscal year 2021.

Total cash and investment balances held by our foreign subsidiaries of $2,419,000 as of October 31, 2021 were lower than the October 31, 2020 balances of $3,054,000.

See further discussion in “Foreign Operations” above.

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The agreement terms also state that we may select a variable interest rate based on either the BMO Harris prime rate or a LIBOR-based rate, plus a margin that varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris.

As of April 30, 2021, the variable rates would have been 3.50% for the BMO Harris prime-based rate or 1.43% for the three-month LIBOR-based rate.

As of October 31, 2021, the variable rates would have been 3.50% for the BMO Harris prime-based rate or 1.38% for the three-month LIBOR-based rate.

The credit agreement contains restrictive covenants that, among other things and under various conditions, limit our ability to incur additional indebtedness or to dispose of assets.

The agreement also requires us to maintain a minimum fixed coverage ratio and a minimum consolidated net worth.

As of April 30, 2021 and 2020, we were in compliance with the covenants.

There were no borrowings during the first nine months of either fiscal year 2020 or 2021.

As of October 31, 2021 and 2020, we were in compliance with the covenants.

There were no borrowings during the first three months of either fiscal year 2021 or 2022.

On May 15, 2020, we entered into a new debt instrument pursuant to which, among other things, we issued $10,000,000 in aggregate principal amount of our 3.95% Series B Senior Notes due May 15, 2030 and entered into an amended note agreement that provides the Company with the ability to request, from time to time until May 15, 2023 (or such earlier date as provided for in the agreement), additional senior unsecured notes of the Company in an aggregate principal amount of up to $75,000,000 minus the aggregate principal amount of the notes then outstanding and the additional notes that have been accepted for purchase.

The issuance of such additional notes is at the discretion of the noteholders and purchasers and on an uncommitted basis.

As of April 30, 2021 outstanding notes payable were $9,871,000, net of $129,000 of unamortized debt issuance costs.

As of April 30, 2021, we had remaining authority to repurchase 816,863 shares of Common Stock under a repurchase plan approved by our Board of Directors (the “Board”).

As of October 31, 2021 outstanding notes payable were $8,884,000, net of $116,000 of unamortized debt issuance costs.

As of October 31, 2021, we had remaining authority to repurchase 750,345 shares of Common Stock under a repurchase plan approved by our Board of Directors (the “Board”).

Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions.

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We expect capital expenditures in fiscal year 2022 to be greater than in fiscal year 2021.

We do not believe that these increased expenditures will dramatically impact our cash position;

We do not believe that these increased capital expenditures will dramatically impact our cash position;

however our cash requirements are subject to change as business conditions warrant and opportunities arise.

Our anticipated advertising expense for fiscal year 2021 is expected to be lower as compared to fiscal year 2020.

Our anticipated advertising expense for fiscal year 2022 is expected to be essentially flat compared to fiscal year 2021.

Adjustments to advertising spending for the remainder of the fiscal year may occur due to any upcoming volatility in the economic environment.

We continually evaluate our liquidity position and anticipated cash needs, as well as the financing options available to obtain additional cash reserves.

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The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures.

In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements.

In preparing these financial statements, we have made our best estimates and judgments of certain amounts

included in the financial statements.

Estimates and assumptions are revised periodically.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis