What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-03-11 compared with 2021-12-07 · 220 added, 131 removed, 77 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 Annual Report on Form 10-K for the fiscal year ended July 31, 2021.

Factors that might cause a difference include, but are not limited to, those discussed under “Forward-Looking Statements” and Item 1A, Risk Factors of this Quarterly Report on Form 10-Q for the quarter ended January 31, 2022 and 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.

5 unchanged sentences

In late 2019 and early 2020, COVID-19 was first reported and then declared a pandemic by the World Health Organization, and continues to have a worldwide impact.

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 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.

3 unchanged sentences

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 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.

We have not experienced any shut downs due to workforce absences or illnesses.

As further discussed below, our consolidated net sales increased in the second quarter and in the first six months of fiscal year 2022 compared to the second quarter and first six months of fiscal year 2021.

Net sales of our industrial and sports products as well as most of our fluids purification products have mostly returned to pre-pandemic levels as many businesses and sports have re-opened and air travel has been increasing.

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.

However, parts of our business continue to be negatively impacted by the pandemic.

Net sales for our industrial granules in the United Kingdom have just recently started to increase in the second quarter of fiscal year 2022.

While we have had an overall increase in net sales of our fluids purification products, not all regions have resumed travel to the same extent as prior to the pandemic.

In addition, net sales of our animal health and nutrition products have been dampened due to COVID-19 and African swine fever in certain geographic areas.

We have also experienced an increase in backlog due, in part, to supply chain disruptions and availability of labor amidst unprecedented demand for our products.

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

We have faced longer lead times for some of our materials purchases, which have contributed to an increase in our backlog but have been able to avoid significant out of stock issues for most of our materials.

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.

In general, we have seen an increase in costs particularly as it relates to commodities as the economy continues to react to, and recover from, the pandemic and demand surpasses supply.

In addition, the cost of repair parts has increased but this has not caused any significant disruption to our business.

Further, we, along with some of our suppliers and toll processors, have experienced a shortage of production labor, which has been a contributing factor to our increase in backlog.

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

In general, we have seen an increase in costs, particularly as it relates to commodities as the economy continues to

react to, and recover from, the pandemic and demand surpasses supply.

In addition to rising commodity costs, several of our suppliers have started to pass along non-commodity price increases they have experienced in their own business.

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 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.

It is possible that significant disruptions could occur if the pandemic and other factors such as labor shortages, ongoing geopolitical tensions, and other strains on the supply chain continue to put pressure on production, 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.

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) 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.

In addition, although COVID-19 has not materially impacted our net sales to date, it remains uncertain whether and how consumers will modify their purchasing habits in response to the ongoing COVID-19 pandemic and/or the lifting or relaxing of mandates as the pandemic abates in certain areas and government restrictions are reduced and/or reimposed.

As a result, our results to date 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.

THREE MONTHS ENDED OCTOBER 31, 2021 COMPARED TO

THREE MONTHS ENDED OCTOBER 31, 2020

SIX MONTHS ENDED JANUARY 31, 2022 COMPARED TO

SIX MONTHS ENDED JANUARY 31, 2021

CONSOLIDATED RESULTS

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.

Consolidated net sales for the six months ended January 31, 2022 were $169,670,000, a 13% increase compared to net sales of $150,597,000 for the six months ended January 31, 2021.

Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group primarily due to an increase in sales volume and somewhat due to higher prices instituted to compensate for rising costs.

The increase in demand for our products during the first six months of fiscal year 2022 has led to an increase in our backlog of orders driven by late customer pick-ups and our own constraints related to production, capacity and transportation.

We have hired additional manufacturing personnel, expanded our production shifts and increased production equipment to aid in the resolution of these constraints in the coming months as well as increased our use of alternate modes of transportation.

We continue to analyze our constraints and implement strategies to meet the increase in customer demand.

Segment results are discussed further below.

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.

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.

Consolidated gross profit for the first six months of fiscal year 2022 was $29,404,000, or 17% of net sales, compared to $35,469,000, or 24%, of net sales, for the first six months of fiscal year 2021.

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

We continue to experience high freight costs both domestically and with respect to ocean freight.

Domestic freight costs per ton, excluding the freight we no longer charge to a significant customer who now picks up its own purchases, increased approximately 35% in the first six months of fiscal year 2022 compared to the same period of fiscal year 2021.

The increase relates to, in part, higher transportation rates due to a national driver shortage and tight trucking capacity.

The continued increase in cost of diesel fuel has also contributed to the higher transportation rates.

In addition, our overall freight costs can vary between periods depending on the mix of products sold and the geographic distribution of our customers.

Packaging costs per ton for the first six months of fiscal year 2022 were approximately 37% higher compared to the first six 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.

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 cost of natural gas per ton used to operate kilns that dry our clay was 93% higher in the first six months of fiscal year 2022 compared to the first six months of fiscal year 2021 due to higher natural gas prices, which are being driven by demand surpassing available supply.

Non-fuel manufacturing costs per ton also increased during the first six months of fiscal year 2022 compared to fiscal year 2021 by 14%.

The increase in non-fuel manufacturing costs relate to higher repairs, labor costs, and costs of purchased materials.

In addition to the above, during the first six months of fiscal year 2022, several suppliers started to pass along non-commodity price increases related to cost increases experienced in their own businesses and we expect such increases to persist.

While we have faced higher costs due to the reasons mentioned above, we continue to strive to restore our historical margins utilizing various strategies including reducing costs where possible, increasing sales volume, and implementing price increases.

Total selling, general and administrative (“SG&A”) expenses of $27,041,000 for the first six months of fiscal year 2022 were higher by $993,000, or 4%, compared to $26,048,000 for the first six months of fiscal year 2021.

SG&A expenses for the operating segments were essentially flat for the, first six months of fiscal year 2022 compared to the same period in the prior fiscal year and unallocated corporate expenses were higher by $953,000, or 8%.

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 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 increase in unallocated corporate expenses were driven by higher professional fees related to costs for various outside services related to growing business needs and strategic initiatives.

Other income of $717,000 for the first six months of fiscal year 2022 was higher than the same period in fiscal year 2021 by $226,000 and included less periodic benefit costs related to our pension plan and insurance recoveries related to our property, plant and equipment partially offset by higher interest expense and exchange rate losses.

Consolidated net income before taxes for the first six months of fiscal year 2022 was $3,080,000 compared to net income before taxes of $9,912,000 for the first six months of fiscal year 2021.

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

Tax expense for the first six months of fiscal year 2022 was $524,000 compared to $1,675,000 for the first six months of fiscal year 2021, which resulted in an effective tax rate of 17% in both periods.

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

BUSINESS TO BUSINESS PRODUCTS GROUP

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.

Net sales of the Business to Business Products Group for the first six months of fiscal year 2022 increased compared to the first six months of fiscal year 2021 for all our products.

Net sales were $61,553,000 for the first six months of fiscal year 2022, an increase of $7,748,000, or 14%, from net sales of $53,805,000 for the first six months of fiscal year 2021.

Net sales of our fluids purification products increased approximately $4,134,000, or 16%, compared to the first six months of the prior fiscal year.

We experienced sales improvement primarily in 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.

The increase in net sales occurred for a variety of reasons, including new 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 clay products rebounded as global air travel increased compared to 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.

Similar to our Retail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase of 23% in net sales during the first six months of fiscal year 2022 compared to fiscal year 2021 primarily due to price increases and to some extent, an increase in volume.

Net sales of our agricultural and horticultural chemical carrier products increased approximately $1,486,000, or 12%, for the first six months of fiscal year 2022 compared to the same period in fiscal year 2021 as a result of continued strong demand for these products as well as price increases.

Net sales of our animal health and nutrition products increased $413,000, or 5%, during the first six months of fiscal year 2022 compared to the first six months of the prior year.

The increase in net sales relates to several new customers, a new product line in North America, and in general, timing of when sales occur.

Despite the overall increase in net sales, the African swine fever and low pork prices are still affecting the swine market and ultimately, the net sales of our feed additives in some countries.

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

Ocean freight delays also continue to negatively impact our business.

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.

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.

SG&A expenses for the Business to Business Products Group increased approximately 19% or $1,081,000 for the first six months of fiscal year 2022 compared to the same period of the prior fiscal year.

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

The Business to Business Products Group’s operating income for the first six months of fiscal year 2022 was $14,336,000, a decrease of $377,000, or 3%, from operating income of $14,713,000 for the first six months of fiscal year 2021.

The decrease in operating income was driven by higher freight, packaging, natural gas, and non-fuel manufacturing costs per 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 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.

Net sales of the Retail and Wholesale Products Group for the first six months of fiscal year 2022 were $108,117,000, an increase of $11,325,000, or 12%, from net sales of $96,792,000 for the first six months of fiscal year 2021 driven by higher net sales of both our cat litter and industrial and sports products.

Total cat litter net sales were approximately $7,262,000, or 9%, higher compared to the first six months of the prior fiscal year primarily due to increased sales volume and somewhat due to price increases in response to rising costs.

Net sales of branded scoopable litter, private label lightweight and heavyweight litter, and accessories (liners) increased in the first six months of fiscal year 2022 as we gained business from new customers and existing customers either sold certain of our products for the first time or increased the volume of their purchases from us.

E-commerce sales were also higher during the first six months of fiscal year 2022 compared to fiscal year 2021.

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.

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

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

Net sales of our industrial and sports products increased approximately $3,968,000, or 28%, compared to the first six 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 respond to rising costs.

SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $1,074,000, or 12%, during the first six months of fiscal year 2022 compared to the first six months of fiscal year 2021 primarily due to lower advertising costs partially offset by compliance penalties caused by supply chain disruptions, travel expense and personnel costs.

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

The Retail and Wholesale Products Group's operating income for the first six months of fiscal year 2022 was $1,000,000, a decrease of $5,728,000, or 85%, from operating income of $6,728,000 for the first six months of fiscal year 2021.

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

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 six months of fiscal year 2022 were $9,626,000, an increase of $787,000, or 9%, compared to net sales of $8,839,000 during the first six months of fiscal year 2021.

Total net sales of our subsidiary in Canada during the first six months of fiscal year 2022 increased by $1,226,000, or 27%, compared to the same period in fiscal year 2021 driven by higher cat litter net sales.

The increase was mainly driven by a key customer carrying three of our products for the first time as well as price increases instituted in response to rising costs.

Net sales of our industrial absorbent granules were flat in the first six months of fiscal year 2022 compared to the first six months of fiscal year 2021.

Net sales of our subsidiary in the United Kingdom in the first six months of fiscal year 2022 increased by $95,000, or 10%, compared to net sales of the first six months of fiscal year 2021.

The increase related to timing of net sales and partly due to demand starting to slowly return post pandemic.

Net sales of our subsidiary in Mexico decreased during the first six months of fiscal year 2022 compared to the same period of fiscal year 2021 by $420,000, or 29%, as the first six months of fiscal year 2021 included net sales of products that are no longer part of our business strategy.

Net sales of our subsidiary in China decreased $129,000, or 7%, during the first six months of fiscal year 2022 compared to the first six months of fiscal year 2021.

The decrease relates primarily to the impact of the African swine fever, low pork prices, as well as timing of net sales due to ocean freight delays and because some customers made purchases in the prior fiscal year ahead of effective price increases.

Net sales by our foreign subsidiaries represented 6% of our consolidated net sales during the first quarter of fiscal years 2022 and 2021.

Our foreign subsidiaries reported a net loss of $812,000 for the first six months of fiscal year 2022, compared to a net loss of $42,000 for the first six months of fiscal year 2021.

The net loss in the first six months of fiscal year 2022 was primarily driven by lower net sales for our subsidiary in Mexico, higher cost of sales and higher SG&A expenses by our subsidiary in China due to increased sales personnel and marketing of our animal feed additives as we continue to invest in our animal health and nutrition products.

Identifiable assets of our foreign subsidiaries as of January 31, 2022 were $12,174,000, compared to $12,572,000 as of July 31, 2021.

THREE MONTHS ENDED JANUARY 31, 2022 COMPARED TO

THREE MONTHS ENDED JANUARY 31, 2021

CONSOLIDATED RESULTS

Consolidated net sales for the three months ended January 31, 2022 were $87,210,000, a 17% increase compared to net sales of $74,500,000 for the three months ended January 31, 2021.

The increase in demand for our products during the second quarter of fiscal year 2022 has continued to increase the backlog that arose in the first quarter of fiscal year 2022.

See discussion above in “Results from Operations - Six Months Ended January 31, 2022 compared to Six Months ended January 31, 2021” for more detail on backlog.

Segment results are discussed below.

Consolidated gross profit for the three months ended January 31, 2022 was $15,586,000, or 18% of net sales, compared to

$16,689,000, or 22%, of net sales, for the three months ended January 31, 2021.

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

We continue to experience high freight costs both domestically and with respect to ocean freight.

Domestic freight costs per ton, excluding the freight we no longer charge to a significant customer who now picks up its own purchases, increased approximately 31% in the second quarter of fiscal year 2022 compared to the same period of fiscal year 2021.

The increase relates, in part, to higher transportation rates due to a national driver shortage and tight trucking capacity.

The continued increase in cost of diesel fuel has also contributed to the higher transportation rates.

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

Packaging costs per ton for the second quarter of fiscal year 2022 were approximately 30% higher compared to the second quarter 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.

The cost of natural gas per ton used to operate kilns that dry our clay was 90% higher in the second quarter of fiscal year 2022 compared to the second quarter of fiscal year 2021 due to higher natural gas prices which are being driven by demand surpassing available supply.

Non-fuel manufacturing costs per ton also increased during the second quarter of fiscal year 2022 compared to fiscal year 2021 by 9%.

The increase in non-fuel manufacturing costs relate to higher repairs, labor costs and costs of purchased materials.

In addition to the above, during the second quarter of fiscal year 2022, several suppliers started to pass along non-commodity price increases related to cost increases experienced in their own businesses and we expect such increases to persist.

Total SG&A expenses of $13,668,000 for the second quarter of fiscal year 2022 were higher by $1,223,000, or 10%, compared to $12,445,000 for the second quarter of fiscal year 2021.

SG&A expenses for both the operating segments and unallocated corporate expenses contributed to the increase.

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

The increase in unallocated corporate expenses were driven by higher professional fees related to costs for various outside services related to growing business needs and strategic initiatives.

Other income of $452,000 for the second quarter of fiscal year 2022 was lower than the same period in fiscal year 2021 by $461,000 and included higher interest expense and exchange rate losses partially offset by insurance recoveries related to our property, plant and equipment .

Consolidated net income before taxes for the second quarter of fiscal year 2022 was $2,370,000, compared to net income before taxes of $5,157,000 for the second quarter of fiscal year 2021.

Results for the second quarter of fiscal year 2022 were driven by the factors described above.

Tax expense for the second quarter of fiscal year 2022 was $409,000 compared to tax expense $869,000 for the second quarter of fiscal year 2021, which resulted in an effective tax rate of 17% in both periods.

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

BUSINESS TO BUSINESS PRODUCTS GROUP

Net sales of the Business to Business Products Group for the second quarter of fiscal year 2022 increased compared to the second quarter of fiscal year 2021 for all our products.

Net sales were $32,624,000, an increase of $6,341,000, or 24%, from net sales of $26,283,000 for the second quarter of fiscal year 2021.

Net sales of our fluids purification products increased approximately $2,270,000, or 18%, in the second quarter of fiscal year 2022 compared to same period in fiscal year 2021.

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

Net sales of our agricultural and horticultural chemical carrier products increased approximately $2,265,000, or 45%, in the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021 driven by both volume and to some degree, price increases.

The increase in volume is attributable to continued strong demand for our products as well as a shift in timing of net sales from the first quarter to the second quarter of fiscal year 2022 as several of our customer delayed their orders due to their own supply chain issues.

In addition, one of our customers had partially shut down in the second quarter of fiscal year 2021 which reduced our net sales and then later resumed operations.

Similar to our Retail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase of $955,000, or 26%, in net sales during the second quarter of fiscal year 2022, compared to the same quarter in fiscal year 2021, primarily due to price increases and to some extent, an increase in volume.

Net sales of our animal health and nutrition products increased approximately $851,000, or 18%, in the second quarter of fiscal 2022 compared to the second quarter of fiscal year 2021.

The increase in net sales relates to several new customers, a new product line in North America, and in general, timing of when net sales occur.

Despite the overall increase in net sales, ocean freight delays continue to negatively impact our business.

African swine fever and low pork prices are still affecting the swine market and ultimately, the net sales of our feed additives in some countries.

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

However, net sales from our subsidiary in China increased during the second quarter of fiscal year 2022 compared to

fiscal year 2021 primarily due to a new customer.

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 $569,000, or 19%, in the second quarter of fiscal year 2022 compared to the second quarter of fiscal year 2021.

The Business to Business Products Group’s operating income for the second quarter of fiscal year 2022 was $7,590,000, an increase of $477,000, or 7%, from operating income of $7,113,000 in the second quarter of fiscal year 2021.

The increase in operating income was driven by the higher sales partially offset by higher SG&A expenses and an increase in freight, packaging, materials, natural gas, and non-fuel manufacturing costs discussed in “Consolidated Results” above.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the second quarter of fiscal year 2022 were $54,586,000, an increase of $6,369,000, or 13%, from net sales of $48,217,000 for the second quarter of fiscal year 2021 driven by net sales of both our cat litter and industrial and sports products.

Total cat litter net sales were approximately $4,161,000, or 10%, higher in the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021 due to increased sales volume and somewhat due to price increases in response to rising costs.

Net sales of branded scoopable litter, private label lightweight and heavyweight litter increased in the second quarter of fiscal year 2022 as existing customers either sold certain of our products for the first time or increased the volume of their purchases from us.

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 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.

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

E-commerce sales were flat during the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021.

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

Net sales of our industrial and sports products increased approximately $2,110,000, or 31%, in the second quarter of fiscal year 2022 compared to the second quarter 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 in response to rising costs.

SG&A expenses for the Retail and Wholesale Products Group were lower in the second quarter of fiscal year 2022 than in fiscal year 2021 by 1%, or $41,000, primarily due to lower advertising costs partially offset by compliance penalties caused by supply chain disruptions, travel expense and personnel costs.

For the second quarter of fiscal year 2022, the Retail and Wholesale Products Group reported operating income of $926,000, a decrease of $2,252,000, compared to operating income of $3,178,000 for the second quarter of fiscal year 2021.

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

FOREIGN OPERATIONS

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.

Net sales by our foreign subsidiaries during the second quarter of fiscal year 2022 were $5,283,000, a 12% increase compared to net sales of $4,703,000 in the second quarter of fiscal year 2021.

All of our foreign operations, with the exception of our subsidiary in Mexico, experienced an increase in net sales during the second quarter of fiscal year 2022 compared to fiscal year 2021.

Total net sales of our subsidiary in Canada during the second quarter of fiscal year 2022 increased by $566,000, or 24%, compared to the same period in fiscal year 2021 driven by cat litter net sales.

Cat litter net sales for our subsidiary in Canada increased by approximately $499,000, or 27%, in the second quarter of fiscal year 2022 compared to the same period of fiscal year 2021 due to increased sales to existing customers, a key customer carrying three of our products they had not previously purchased and, to some extent, price increases to keep pace with rising costs.

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

In addition to increased net sales of cat litter, net sales of our industrial absorbent granules in Canada increased by approximately $67,000, or 12%, during the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021.

Net sales of our absorbent granules by our subsidiary in the United Kingdom increased by $97,000 during the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021.

This increase related partly due to timing of net sales and partly due to demand starting to slowly return in the United Kingdom.

Net sales of our animal health and nutrition

products by our subsidiary in China increased moderately in the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021 by $130,000, or 12%.

The increase in net sales related primarily to a new customer.

Net sales by our subsidiary in Mexico decreased $298,000, or 39%, in the second quarter of fiscal year 2022 compared to the same period in fiscal year 2021 as the second quarter of fiscal year 2021 included net sales of products that are no longer part of our business strategy.

Our foreign subsidiaries' net sales represented approximately 6% of consolidated net sales during the second quarters of fiscal years 2022 and 2021.

Our foreign subsidiaries reported a net loss of $477,000 for the second quarter of fiscal year 2022 compared to net income of $170,000 for the second quarter of fiscal year 2021.

The net loss in the second quarter of fiscal year 2022 was primarily driven by lower net sales of our subsidiary in Mexico, higher cost of sales, and higher SG&A expenses incurred by our subsidiary in China due to increased sales personnel and marketing of our animal feed additives as we continue to invest in our animal health and nutrition products.

LIQUIDITY AND CAPITAL RESOURCES

1 unchanged sentence

funding working capital needs;

purchasing and upgrading equipment, facilities, information systems, and real estate;

purchasing and upgrading equipment, facilities (including significant renovations at one of our plants), information systems, and real estate;

supporting new product development;

4 unchanged sentences

and, from time to time, business acquisitions.

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.

During the first six months of fiscal year 2022, we principally funded these requirements using cash from current operations as well as cash generated in the second quarter of fiscal year 2022 from borrowings.

We currently anticipate cash flows from operations and our available sources of liquidity will be sufficient to meet our cash requirements.

In addition, we are actively monitoring the timing and collection of our accounts receivable.

1 unchanged sentence

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

For the Three Months Ended October 31,

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

For the Six Months Ended January 31,

Net cash provided by operating activities $ 61 $ 3,085

Net cash used in investing activities (10,574) (7,595)

Net cash used in financing activities (4,156) (2,781)

Net cash provided by (used in) financing activities 14,957 (5,795)

Effect of exchange rate changes on cash and cash equivalents (26) 123

Net decrease in cash and cash equivalents $ (11,536) $ (9,599)

Net increase (decrease) in cash and cash equivalents $ 4,418 $ (10,182)

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 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 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 six months of fiscal years 2022 and 2021 were as follows:

Accounts receivable, less allowance for doubtful accounts, increased $5,082,000 in the first six months of fiscal year 2022 compared to an increase of $3,836,000 in the first six months of fiscal year 2021.

The change in accounts receivable was higher in fiscal year 2022 than fiscal year 2021 because net sales increased significantly in the first six months of fiscal year 2022, thereby driving accounts receivable higher.

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.

Inventory increased $6,236,000 in the first six months of fiscal year 2022 compared to a decrease of $412,000 in the first six months of fiscal year 2021.

While inventory increased in both periods due to rising costs, costs rose much more significantly in the first six months of fiscal year 2022.

In addition, during the first six months of fiscal year 2022 we increased our inventory levels to accommodate increased demand and thwart potential supply chain disruptions.

The decrease in inventory in the first six months of fiscal year 2021 was due to increased demand which offset the higher packaging costs.

Prepaid expenses decreased $846,000 in the first six months of fiscal year 2022 due to lower prepaid advertising costs and insurance somewhat offset by higher prepaid repairs.

Prepaid expenses increased $760,000 in the first six months of fiscal year 2021 driven primarily by prepayment of income taxes.

This increase in fiscal year 2021 was offset by lower prepaid advertising costs and insurance.

Other assets decreased $634,000 in the first six months of fiscal year 2022 compared to an increase of $266,000 in the first six months of fiscal year 2021.

The decrease in other assets in the first six months of fiscal year 2022 related to capitalized pre-production costs being transferred to property, plant and equipment as the mines are now in production, partially offset by an increase in long-term royalties.

The increase in other assets in the first six months of fiscal year 2021 related primarily to an increase in capitalized pre-production mining costs offset by amortization of our operating lease right-of-use lease assets.

Accounts payable increased $1,326,000 in the first six months of fiscal year 2022 compared to a decrease of $3,901,000 in the first six months of fiscal year 2021.

Higher trade payables drove the increase in accounts payable in the first six months of fiscal year 2022.

Lower trade payables drove the decrease in accounts payable in the first six 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 second quarter 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 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.

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.

Accrued expenses decreased $1,595,000 in the first six months of fiscal year 2022 compared to a decrease of $5,201,000 in the first six months of fiscal year 2021.

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

In addition, the timing of real estate tax payments also reduced accrued expenses in the first six months of fiscal year 2022.

The decrease in accrued bonus and real estate taxes was partly offset by higher accrued utilities due to the rising cost of natural gas, higher accrued advertising due to the timing of our advertising programs, and additional accrued capital projects.

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.

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.

Accrued expenses decreased $5,201,000 in the first six months of fiscal year 2021 due to before-mentioned payout of discretionary incentive bonus, decreased accrued advertising and real estate taxes partially offset by the reclassification of the current portion of the deferred employer payroll taxes under the CARES Act which was paid at 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.

Net cash used in investing activities

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.

Cash used in investing activities of $10,574,000 in the first six months of fiscal year 2022 were higher compared to cash used in investing activities of $7,595,000 in the first six months of fiscal year 2021 driven by capital expenditures.

During the first six 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 $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.

Cash provided by financing activities of $14,957,000 in the first six months of fiscal year 2022 was higher than cash used in financing activities of $5,795,000 in the first six months of fiscal year 2021.

The first six months of fiscal year 2022 included the issuance of $25,000,000 of notes payable offset by higher repurchases of stock than in the first six months of fiscal year 2021.

Total cash and investment balances held by our foreign subsidiaries of $2,053,000 as of January 31, 2022 were lower than the January 31, 2021 balances of $3,411,000.

See further discussion in “Foreign Operations” above.

3 unchanged sentences

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 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.

As of January 31, 2022, the variable rates would have been 3.50% for the BMO Harris prime-based rate or 1.56% 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 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.

As of January 31, 2022 and 2021, we were in compliance with the covenants.

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

On May 15, 2020, we entered into a 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 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”).

Pursuant to the amended note agreement, on December 16, 2021, the Company issued $25,000,000 in aggregate principal amount of its 3.25% Series C Senior Notes due December 16, 2031.

As of January 31, 2021 outstanding notes payable were $33,778,000, net of $222,000 of unamortized debt issuance costs.

As of January 31, 2022, we had remaining authority to repurchase 637,109 shares of Common Stock and 273,100 shares of Class B 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.

1 unchanged sentence

We believe that cash flow from operations, availability under our revolving credit facility, current cash and investment balances and our ability to obtain other financing, if necessary, will provide adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities, deferred compensation payouts, dividend payments and debt service obligations for at least the next 12 months.

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

We expect capital expenditures in fiscal year 2022 to be greater than in fiscal year 2021, including capital expenditures to renovate one of our plants, estimated to be approximately $6,500,000.

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 2022 is expected to be essentially flat compared to fiscal year 2021.

Our anticipated advertising expense for fiscal year 2022 is expected to be lower 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.

6 unchanged sentences

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.

2 unchanged sentences

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