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Item 2. Management’s Discussion and Analysis

2022-12-06 compared with 2022-06-07 · 117 added, 262 removed, 51 unchanged (88% 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, 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.

Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, bleaching clay and fluid purification aids, cat litter, industrial and automotive floor absorbents and sports field products.

Our products are sold to two primary customer groups, including customers who resell our products as originally produced to the end consumer and those who use our products as part of their production process or use them as an ingredient in their final finished product.

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, 2022.

We develop, mine, manufacture and market sorbent products principally produced from clay minerals, primarily consisting of calcium bentonite, attapulgite and diatomaceous shale.

Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, cat litter, fluid purification and filtration bleaching clays, industrial and automotive floor absorbents and sports field products.

Our products are sold to two primary customer groups, including customers who resell our products as originally produced to the end consumer and other customers who use our products as part of their production process or use them as an ingredient in their final finished product.

We have two reportable operating segments based on the different characteristics of our two primary customer groups:

Retail and Wholesale Products Group and Business to Business Products Group, as described in Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements.

the Retail and Wholesale Products Group and the Business to Business Products Group, as described in Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements.

Each operating segment is discussed individually below.

RESULTS OF OPERATIONS

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.

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.

Our top priority has been, and continues to be, the safety and health of our employees, contractors, and customers.

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 cleaning and sanitation programs at each of our facilities.

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

As further discussed below, our consolidated net sales increased in the third quarter and in the first nine months of fiscal year 2022 compared to the third quarter and first nine 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 pandemic and varying recoveries from and resurgences of the pandemic in certain areas.

Net sales for our industrial granules in the United Kingdom have just recently started to increase in fiscal year 2022 as a result of the return of demand following the impact of the pandemic (and also certain timing impacts).

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 in certain geographic areas, particularly in China, which has continued to impose restrictions and quarantine requirements in response to COVID-19 outbreaks.

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

We have put in place measures to reduce the backlog that was generated during the first nine months of fiscal year 2022, including hiring additional labor, adding additional work shifts, improving operating productivity in our plants, upgrading our manufacturing facilities and equipment and increasing our overseas freight forwarders.

As discussed below in "Consolidated Results," gross profit has declined in both the third quarter and the first nine 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 we 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.

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

While we have experienced a shortage of production labor at certain times during the

first nine months of fiscal year 2022, which has been a contributing factor to our increase in backlog, we have been able to hire additional labor and reduce our backlog related to production constraints in the third quarter of fiscal year 2022.

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.

We have also seen costs increasing due to inflation.

In addition to rising commodity costs, several of our suppliers have passed 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, 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 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 and/or re-imposition of mandates as various geographies experience resurgences and abatement of the pandemic.

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.

NINE MONTHS ENDED APRIL 30, 2022 COMPARED TO

NINE MONTHS ENDED APRIL 30, 2021

Consolidated net sales and gross profits for the first quarter of fiscal 2023 across both the Retail and Wholesale Products Group and the Business to Business Products Group were up from the same period of fiscal year 2022.

Although expenses increased, consolidated net income for the three months ended October 31, 2022 was $5.2 million, compared to $0.6 million in the three months ended October 31, 2021.

Consolidated net sales increased approximately $16.0 million or 19% in the first quarter of fiscal year 2023 compared to first quarter of fiscal year 2022.

Consolidated income from operations in the first quarter of fiscal year 2023 increased by $6.1 million compared to the first quarter of fiscal year 2022.

This increase is driven by strategic pricing increases as well as growth in the demand for our products, as further discussed below.

Our Consolidated Balance Sheets as of October 31, 2022, and our Consolidated Statements of Cash Flows for the first quarter of fiscal year 2023 show a decrease in total cash and cash equivalents from fiscal year-end 2022 driven by higher inventories and capital expenditures on PP&E.

THREE MONTHS ENDED OCTOBER 31, 2022 COMPARED TO

THREE MONTHS ENDED OCTOBER 31, 2021

CONSOLIDATED RESULTS

Consolidated net sales for the nine months ended April 30, 2022 were $255,431,000, a 13% increase compared to net sales of $226,852,000 for the nine months ended April 30, 2021.

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

The increase in demand for our products during the first nine months of fiscal year 2022 has led to an increase in our backlog of orders.

We have hired additional manufacturing personnel, expanded our production shifts, increased production equipment and made various repairs to equipment in order to reduce our backlog as well as increase our use of alternate modes of transportation.

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

Consolidated net sales for the three months ended October 31, 2022 were $98.5 million, a 19% increase compared to net sales of $82.5 million for the three months ended October 31, 2021.

Net sales increased for both our Retail and Wholesale Products Group and Business to Business Products Group, primarily due to price increases implemented across both product groups.

In the first three months of fiscal year 2023, we have been able to reduce our backlog of orders.

The actions taken to increase personnel, expand our production shifts, increase production equipment, make various repairs to equipment, and utilize alternative modes of transportation have driven a reduction of our backlog by $1.1 million, a 17% decrease from July 31, 2022.

Furthermore, export tonnages shipped for the first three months of fiscal year 2023 exceeded all quarters in fiscal years 2022 and 2021.

We continue to implement strategies related to further reduce manufacturing and freight constraints in order to meet the increase in customer demand.

Segment results are discussed further below.

Consolidated gross profit for the first nine months of fiscal year 2022 was $45,034,000, or 18% of net sales, compared to $50,435,000, or 22%, of net sales, for the first nine 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 32% in the first nine 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.

Currently, availability of diesel fuel reserves in the United States is tight, which is driving the increase in cost.

Ocean freight costs have increased due to rising fuel costs and export fees.

Consolidated gross profit for the first three months of fiscal year 2023 was $22.3 million, or 23% of net sales, compared to $13.8 million, or 17%, of net sales, for the first three months of fiscal year 2022.

The increase is driven by higher selling prices, with multiple price increases across our businesses, which are beginning to offset the increases in costs of goods sold.

Costs of goods sold continued to rise, driven primarily by per ton increases in natural gas, non-fuel manufacturing and freight costs, offset by lower packaging costs.

The cost of natural gas per ton used to operate kilns that dry our clay was 97% higher in the first three months of fiscal year 2023 compared to first three months of fiscal year 2022.

There was also a 15% increase in per ton non-fuel manufacturing costs during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022, due to higher costs for labor, purchased materials, repairs, utilities, electricity, and diesel.

Domestic freight costs per ton increased approximately 21% in the first three months of fiscal year 2023 compared to the same period of fiscal year 2022.

Ocean freight costs have also increased due to rising fuel costs and export fees.

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 nine months of fiscal year 2022 were approximately 32% higher compared to the first nine months of fiscal year 2021 due to higher commodity costs, particularly as it relates to resin and pallet costs.

Packaging costs per ton decreased by approximately 8% in the first three months of fiscal year 2023 compared to the first three months of fiscal year 2023 due to lower commodity costs, particularly as it relates to resin and pallet costs.

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 100% higher in the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021 due to higher natural gas prices, which are being driven by demand surpassing available supply as well as the ongoing conflict between Russia and Ukraine.

Non-fuel manufacturing costs per ton also increased during the first nine months of fiscal year 2022 compared to fiscal year 2021 by 13%.

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

In addition to the above, during the first nine 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 $41,054,000 for the first nine months of fiscal year 2022 were higher by $1,971,000, or 5%, compared to $39,083,000 for the first nine months of fiscal year 2021.

SG&A expenses for the operating segments were essentially flat for the first nine months of fiscal year 2022 compared to the same period in the prior fiscal year and unallocated corporate expenses were higher by $1,656,000, or 9%.

Total selling, general and administrative (“SG&A”) expenses of $15.7 million for the first three months of fiscal year 2023 were higher by $2.4 million, or 18%, compared to $13.4 million for the first three months of fiscal year 2022.

Unallocated corporate expenses were higher by $1.9 million, or 30%, driven by higher bonus accrual due to improved quarterly results compared to the Company’s performance target under the annual incentive plan, as well as other 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 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.

Loss on impairment of goodwill of $5,644,000 related to the impairment of goodwill at our Retail and Wholesale Products Group reporting unit.

Our goodwill impairment test is based on cash flow considerations and other approaches that require significant judgment with respect to volume, revenue, expenses and allocations.

We determined that, as a result of lower share prices and the continued adverse impacts of rising costs and additional expenses to prevent supply chain disruptions, that, despite improving margins, we had a triggering event during the third quarter of fiscal 2022 that necessitated a goodwill impairment test and resulted in the carrying value of our Retail and Wholesale Products Group reporting unit being higher than its fair value which led to the $5,644,000 impairment charge.

Other income of $892,000 for the first nine months of fiscal year 2022 was higher than the same period in fiscal year 2021 by $170,000 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 (loss) income before taxes for the first nine months of fiscal year 2022 was a loss of $772,000 compared to net income before taxes of $12,074,000 for the first nine months of fiscal year 2021.

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

We had a tax benefit for the first nine months of fiscal year 2022 of $1,195,000 compared to tax expense of $1,651,000 for the first nine months of fiscal year 2021.

Our tax benefit was driven primarily by the tax impact of our goodwill impairment, lower net income and one-time tax savings identified during the third quarter of fiscal year 2022.

Total other (expense) income, net of $(0.1) million for the first three months of fiscal year 2023 was mostly driven by foreign currency translations compared to the net other income of $0.3 million in the first three months of fiscal year 2022.

Consolidated net income before taxes for the first three months of fiscal year 2023 was $6.4 million compared to $0.7 million for the first three months of fiscal year 2022.

Results for the first three months of fiscal year 2023 were driven by the factors discussed above.

We had a tax expense for the first three months of fiscal year 2023 of $1.2 million compared to $0.1 million for the first three months of fiscal year 2022.

Our tax expense was driven primarily by higher net income.

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 nine months of fiscal year 2022 increased compared to the first nine months of fiscal year 2021 for all our products.

Net sales were $92,928,000 for the first nine months of fiscal year 2022, an increase of $12,830,000, or 16%, from net sales of $80,098,000 for the first nine months of fiscal year 2021.

Net sales of our fluids purification products increased approximately $6,108,000, or 16%, compared to the first nine months of the prior fiscal 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 in most regions, price increases that were instituted to offset rising costs, and in some cases, timing of net sales.

Much of the increase in net sales relates to North America, but net sales in Latin America and Asia also increased and sales in Europe decreased slightly during the first nine months of fiscal year 2022 compared to the same period in fiscal year 2021 due to 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 $2,527,000 or 23% in net sales during the first nine 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 $2,804,000, or 15%, for the first nine 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 $1,391,000, or 11%, during the first nine months of fiscal year 2022 compared to the first nine 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, ocean freight delays continue to negatively impact our business as does COVID-19, particularly in China which has continued to impose restrictions and quarantine requirements in response to COVID-19 outbreaks.

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 $1,771,000 for the first nine 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 increase in SG&A expenses in the first nine months of fiscal year 2022 also related to an increase in bad debt expense and a write off of patent applications.

These higher costs were, to some degree, reduced by favorable exchange rates.

The Business to Business Products Group’s operating income for the first nine months of fiscal year 2022 was $20,052,000, a decrease of $764,000, or 4%, from operating income of $20,816,000 for the first nine months of fiscal year 2021.

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 nine months of fiscal year 2022 were $162,503,000, an increase of $15,749,000, or 11%, from net sales of $146,754,000 for the first nine 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 $10,580,000, or 9%, higher compared to the first nine months of the prior fiscal year due to increased sales volume and 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 nine months of fiscal year 2022 as we gained business from new customers and existing customers either purchased 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 nine 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 are 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 nine months of fiscal year 2021.

Net sales of our industrial and sports products increased approximately $5,051,000, or 22%, compared to the first nine months of fiscal year 2021, due to an increase in volume due to the re-opening of businesses and sports fields as well as new customers and 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 $1,467,000, or 11%, during the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021 primarily due to lower advertising costs partially offset by compliance penalties caused by supply chain disruptions, unfavorable exchange rates and higher travel 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 experienced an operating loss for the first nine months of fiscal year 2022 of $2,113,000, a decrease of $10,596,000, or 125%, from operating income of $8,483,000 for the first nine months of fiscal year 2021.

The decrease in operating income was driven by the goodwill impairment charge recorded in the third quarter of fiscal year 2022 as well as higher freight, packaging, natural gas and non-fuel costs which outpaced the increase in net sales as described 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 2022 were $14,353,000, an increase of $1,341,000, or 10%, compared to net sales of $13,012,000 during the first nine months 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 first nine months of fiscal year 2022 compared to fiscal year 2021.Total net sales of our subsidiary in Canada during the first nine months of fiscal year 2022 increased by $1,521,000, or 22%, compared to the same period in fiscal year 2021 driven by higher cat litter net sales.

Cat litter sales were $1,834,000 higher during the first nine months of fiscal year 2022 than in the same period in fiscal year 2021.

The increase in cat litter sales 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.

The increase in cat litter sales was partially offset by lower net sales of our industrial absorbent granules in the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021.

Net sales of industrial absorbent granules were higher in the first nine months of fiscal year 2021 as companies emerged from the constraints of the pandemic and there was a surge in demand.

Net sales of our subsidiary in the United Kingdom in the first nine months of fiscal year 2022 increased by $118,000, or 8%, compared to net sales in the first nine 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 nine months of fiscal year 2022 compared to the same period of fiscal year 2021 by $567,000, or 28%, as the first nine months of fiscal year 2021 included net sales of products in that region that are no longer part of our business strategy.

Despite the negative impacts of COVID-19 in China, net sales of our subsidiary in China increased $100,000, or 4%, during the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2021 due primarily to the addition of a new customer.

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

Our foreign subsidiaries reported a net loss of $847,000 for the first nine months of fiscal year 2022, compared to a net loss of $177,000 for the first nine months of fiscal year 2021.

The net loss in the first nine months of fiscal year 2022 was primarily driven by unfavorable exchange rates, 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 April 30, 2022 were $12,594,000, compared to $12,572,000 as of July 31, 2021.

THREE MONTHS ENDED APRIL 30, 2022 COMPARED TO

THREE MONTHS ENDED APRIL 30, 2021

CONSOLIDATED RESULTS

Consolidated net sales for the three months ended April 30, 2022 were $85,761,000, a 12% increase compared to net sales of $76,255,000 for the three months ended April 30, 2021.

The increase in demand for our products has continued to result in higher backlog but we have put in place measures to reduce backlog.

See discussion above in “Results from Operations - Nine Months Ended April 30, 2022 compared to Nine Months ended April 30, 2021” for more detail on backlog.

Segment results are discussed below.

Consolidated gross profit for the three months ended April 30, 2022 was $15,630,000, or 18% of net sales, compared to $14,966,000, or 20%, of net sales, for the three months ended April 30, 2021.

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

Despite the decrease in gross profit compared to the first quarter of fiscal year 2021, we are starting to experience stronger margins during the third quarter of fiscal year 2022 as the selling prices of our products are starting to catch up to rising costs.

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 27% in the third 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.

Currently, availability of diesel fuel reserves in the United States is tight, which is driving the increase in cost.

Ocean freight costs have increased due to rising fuel costs and export fees.

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 third quarter of fiscal year 2022 were approximately 24% higher compared to the third quarter of fiscal year 2021 due to higher commodity costs, particularly as it relates to resin and pallet costs.

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 115% higher in the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021 due to higher natural gas prices which are being driven by demand surpassing available supply as well as the ongoing conflict between Russia and Ukraine.

Non-fuel manufacturing costs per ton also increased during the third quarter of fiscal year 2022 compared to fiscal year 2021 by 12%.

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

In addition to the above, several suppliers have passed 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 $14,013,000 for the third quarter of fiscal year 2022 were higher by $978,000, or 8%, compared to $13,035,000 for the third quarter of fiscal year 2021.

While unallocated corporate expenses increased 285,000 or 4% during the third quarter of fiscal year 2022 compared to fiscal year 2021, SG&A expenses for the operating segments were the primary driver of the increase.

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

Unallocated corporate expenses included higher professional fees related to costs for various outside services related to growing business needs and strategic initiatives partially offset by lower personnel costs.

Loss on impairment of goodwill of $5,644,000 related to the impairment of goodwill at our Retail and Wholesale Products Group reporting unit.

Our goodwill impairment test is based on cash flow considerations and other approaches that require significant judgment with respect to volume, revenue, expenses and allocations.

Other income of $175,000 for the third quarter of fiscal year 2022 was lower than the same period in fiscal year 2021 by $56,000 and included higher interest expense and exchange rate losses.

Consolidated net loss before taxes for the third quarter of fiscal year 2022 was $3,852,000, compared to net income before taxes of $2,162,000 for the third quarter of fiscal year 2021.

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

We had a tax benefit for the third quarter of both fiscal years 2022 and 2021 of $1,719,000 and $24,000, respectively.

Our tax benefit in the third quarter of fiscal year 2022 was driven primarily by the tax impact of our goodwill impairment, net operating losses and one-time tax savings identified during the third quarter of fiscal year 2022.

We used an estimated annual 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.

The tax benefit in the third quarter of fiscal year 2021 reflected a decrease in our expected annual taxable income as well as certain employment related credits we were able to take advantage in addition to a tax deduction for foreign-derived income.

BUSINESS TO BUSINESS PRODUCTS GROUP

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

Net sales were $31,375,000, an increase of $5,082,000, or 19%, from net sales of $26,293,000 for the third quarter of fiscal year 2021.

Net sales of our fluids purification products increased approximately $1,974,000, or 16%, in the third quarter of fiscal year 2022 compared to same period in fiscal year 2021.

In particular, net sales of our Ultra-Clear products rebounded as global air travel increased compared to the same period last year in most, but not all, regions.

Much of the increase in net sales relates to North America, but net sales in Latin America, Europe and Asia either increased or remained essentially flat during the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021.

Net sales of our agricultural and horticultural chemical carrier products increased approximately $1,318,000, or 20%, in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 driven by both volume and price increases.

While volume is still higher during the third quarter of fiscal year 2022 than the same period in fiscal year 2021, several of our customers are still experiencing their own supply chain disruptions, which negatively impacts their demand of our products.

Net sales of our animal health and nutrition products increased approximately $978,000, or 23%, in the third quarter of fiscal 2022 compared to the third quarter of fiscal year 2021 due to a significant increase in volume of net sales.

The increase in net sales is the direct result of our focus on our animal health and nutrition products and the fruition of increased SG&A efforts to grow the animal health and nutrition business as discussed below.

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

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

In addition, while the impacts of COVID-19 are still dampening sales in China as a result of restrictions and quarantine requirements imposed in that region in response to COVID-19 outbreaks, net sales from our subsidiary in China increased during the third 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.

Similar to our Retail and Wholesale Products Group cat litter business, our co-packaged coarse cat litter business experienced a significant increase of $812,000, or 25%, in net sales during the third 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 sales volume.

SG&A expenses for the Business to Business Products Group increased approximately $1,008,000, or 34%, in the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021.

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, broker commissions, and increased marketing efforts associated with our animal feed additives.

The increase in SG&A expenses in the third quarter of fiscal year 2022 also related to higher bad debt expense and a write off of patent applications.

These higher costs were, to some degree, reduced by favorable exchange rates.

The Business to Business Products Group’s operating income for the third quarter of fiscal year 2022 was $5,716,000, a decrease of $705,000, or 11%, from operating income of $6,421,000 in the third quarter of fiscal year 2021.

The decrease 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.

Net sales of the Business to Business Products Group for the first three months of fiscal year 2023 were $33.7 million, an increase of $8.9 million, or 36%, from net sales of $24.8 million for the first three months of fiscal year 2022, with strong increases across all three of our businesses in this group.

Net sales of our agricultural and horticultural chemical carrier products increased approximately $3.8 million, or 61%, for the first three months of fiscal year 2023 compared to the same period in fiscal year 2022.

This is a result of price increases as well as strong demand from several large customers.

Net sales of our fluids purification products increased approximately $3.2 million, or 21%, compared to the first three months of the prior fiscal year.

The increase in net sales was driven by price increases and continued demand for our products used in the filtration of edible oil, renewable diesel, and jet fuel.

Net sales increased in all regions except for the UK, with the majority of the increase in North America and Latin America when compared to the first three months of fiscal year 2022.

Net sales of our animal health and nutrition products increased $1.9 million, or 52%, during the first three months of fiscal year 2023 compared to the first three months of the prior year.

We saw growth in net sales in all regions except Asia (excluding China) with the most impact coming from Latin America.

Latin American sales continued to benefit from the European Union's ("EU") regulations for antibiotic-free foreign protein imports, as a large percentage of meat is exported from that region to the EU.

North American sales rose due to a new product line and increased distribution.

The decrease in Asia is due to timing and ocean freight delays and not indicative of projected sales for the year.

SG&A expenses for the Business to Business Products Group increased approximately 24% or $0.8 million for the first three months of fiscal year 2023 compared to the same period of the prior fiscal year.

The majority of the increase relates to research and development expenses that are now allocated to the animal health business (a change in where existing costs were allocated), previously included in unallocated corporate expenses and increased travel costs.

The Business to Business Products Group’s operating income for the first three months of fiscal year 2023 was $7.3 million, an increase of $1.8 million, or 31%, from operating income of $5.5 million for the first three months of fiscal year 2022.

The increase in operating income was driven by higher net sales due to strategic price increases and continued volume growth.

RETAIL AND WHOLESALE PRODUCTS GROUP

Net sales of the Retail and Wholesale Products Group for the third quarter of fiscal year 2022 were $54,386,000, an increase of $4,424,000, or 9%, from net sales of $49,962,000 for the third 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 $3,318,000, or 8%, higher in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 due to increased sales volume and price increases in response to rising costs.

Net sales of branded scoopable litter, private label lightweight and heavyweight litter increased in the third quarter of fiscal year 2022 as existing customers 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.

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 are no longer included in the prices charged.

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 decreased during the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 as we lost one of our customers due to price increases.

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

Net sales of our industrial and sports products increased approximately $1,083,000, or 11%, in the third quarter of fiscal year 2022 compared to the third quarter of fiscal year 2021, due to both an increase in volume due to the re-opening of businesses and sports fields and winning some smaller customers 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 third quarter of fiscal year 2022 than in fiscal year 2021 by 7%, or $293,000, primarily due to lower advertising costs partially offset by compliance penalties caused by supply chain disruptions, unfavorable exchange rates and personnel costs.

The Retail and Wholesale Products Group experienced an operating loss for the third quarter of fiscal year 2022 of $3,113,000, a decrease of $4,968,000, compared to operating income of $1,855,000 for the third quarter of fiscal year 2021.

The decrease in operating income was driven by the goodwill impairment charge recorded in the third quarter of fiscal year 2022 as well as higher freight, packaging, natural gas, and non-fuel manufacturing costs which outpaced the increase in net sales as described above in “Consolidated Results.”

Net sales of the Retail and Wholesale Products Group for the first three months of fiscal year 2023 were $64.9 million, an increase of $7.2 million, or 12%, from net sales of $57.7 million for the first three months of fiscal year 2022 driven by higher net sales of cat litter, industrial and sport products, slightly offset by a small decline in our co-packaged cat litter business.

Total cat litter net sales were approximately $5.7 million, or 12%, higher compared to the first three months of the prior fiscal year driven mostly by price increases.

Domestic cat litter net sales were $46.8 million an increase of $5.2 million from the first three months of fiscal year 2022 driven primarily by price increases on branded and private label lightweight and coarse litter partially offset by a decrease in net sales of accessories (liners) and private label heavy weight litter.

Net sales of co-packaged products decreased by approximately $0.3 million compared to the same period in fiscal year 2022.

This decrease was primarily due to our customer discontinuing export sales to one of their foreign subsidiaries as well as softer sales volumes domestically.

Net sales of cat litter by our subsidiary in Canada increased period over period, as discussed in “Foreign Operations” below.

Net sales of our global industrial and sports products increased approximately $1.5 million, or 17%, compared to the first three months of fiscal year 2022, primarily due to price increases across both industrial and sport products.

SG&A expenses for the Retail and Wholesale Products Group were lower by approximately $0.4 million, or 10%, during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022, primarily due to significantly lower advertising costs partially offset by higher broker sales commissions which are percentage based on net sales, as well as higher travel costs.

We anticipate total advertising expense in fiscal year 2023 to be higher than fiscal year 2022 and more in line with historical levels, with spending concentrated in the second half of the year.

The Retail and Wholesale Products Group experienced an operating income for the first three months of fiscal year 2023 of $7.6 million, an increase of $6.3 million, or 491%, from operating income of $1.3 million for the first three months of fiscal year 2022.

This was driven primarily by the increase in gross margins due to selling price increases partially offset by higher costs of goods sold, and to a much lesser extent lower than expected advertising spend in the first quarter.

FOREIGN OPERATIONS

Net sales by our foreign subsidiaries during the third quarter of fiscal year 2022 were $4,727,000, a 13% increase compared to net sales of $4,174,000 in the third 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 third quarter of fiscal year 2022 compared to fiscal year 2021.

Total net sales of our subsidiary in Canada during the third quarter of fiscal year 2022 increased by $294,000, or 12%, 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 $605,000, or 35%, in the third quarter of fiscal year 2022 compared to the same period of fiscal year 2021 due to both an increase in volume and price increases.

Cat litter sales in Canada experienced increased sales to existing customers, a key customer carrying three of our products they had not previously purchased, and to some extent, an increase in sales due to our ability to meet demand that our competitors could not.

Partially offsetting this increase was a decrease in net sales of our industrial absorbent granules in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 because net sales were particularly strong in the third quarter of fiscal year 2021 as companies were emerging from the pandemic and were rebuilding stock.

Net sales of our absorbent granules by our subsidiary in the United Kingdom were modestly higher during the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 by $24,000 or 5%.

This increase related partly to timing of net sales and partly 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 in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 by $228,000, or 40%, despite the continued impacts of the pandemic in China.

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

Net sales by our subsidiary in Mexico decreased $147,000, or 25%, in the third quarter of fiscal year 2022 compared to the same period in fiscal year 2021 as the third 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% and 5% of consolidated net sales during the third quarter of fiscal years 2022 and 2021, respectively.

Our foreign subsidiaries reported a net loss of $34,000 for the third quarter of fiscal year 2022 compared to a net loss of $134,000 for the third quarter of fiscal year 2021.

The net loss in the third quarter of fiscal year 2022 was primarily driven by unfavorable foreign exchange rates, 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.

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

Net sales by our foreign subsidiaries during the first three months of fiscal year 2023 were $5.8 million, an increase of $1.4 million, or 32%, compared to net sales of $4.4 million during the first three months of fiscal year 2022.

All of our foreign operations, with the exception of our subsidiary in the UK, experienced an increase in net sales during the first three months of fiscal year 2023 compared to fiscal year 2022.

Total net sales of our subsidiary in Canada during the first three months of fiscal year 2022 increased by $0.8 million, or 29%, compared to the same period in fiscal year 2022 driven by higher private label cat litter net sales.

The increase in cat litter sales was mainly driven by price increases instituted in response to rising costs and to a lesser extent by increases in demand.

Net sales of industrial absorbent granules were also higher in the first three months of fiscal year 2022 driven mainly by price increases.

Net sales of our subsidiary in the United Kingdom in the first three months of fiscal year 2023 decreased by $47 thousand, or 9%, compared to net sales in the first three months of fiscal year 2022.

The decrease relates to the impact of foreign currency in addition to softer sales.

Net sales of our subsidiary in Mexico increased during the first three months of fiscal year 2022 compared to the same period of fiscal year 2022 by $0.2 million, or 38% due to growing demand of our animal health products.

Net sales of our subsidiary in China increased $0.3 million, or 63%, during the first three months of fiscal year 2023 compared to the first three months of fiscal year 2022 due primarily to the addition of a new customer.

Net sales by our foreign subsidiaries represented 6% and 5% of our consolidated net sales during the first three months of fiscal years 2023 and 2022, respectively.

Our foreign subsidiaries reported net income of $0.5 million for the first three months of fiscal year 2023, compared to a net loss of $0.3 million for the first three months of fiscal year 2022.

The net income in the first three months of fiscal year 2023 was driven by price increases in Canada on our cat litter products, and increased demand in China and Mexico offset by unfavorable impacts of foreign exchange rates primarily in the UK.

Identifiable assets of our foreign subsidiaries as of October 31, 2022, were $17.7 million, compared to $17.4 million as of July 31, 2022.

LIQUIDITY AND CAPITAL RESOURCES

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and, from time to time, business acquisitions, and funding our debt service requirements.

During the first nine 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 under our Series Senior C Notes (described below).

During the first three months of fiscal year 2023, we principally funded these short and long-term capital requirements using cash from current operations as well as cash generated in fiscal year 2022 from borrowings under our Series Senior C Notes.

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.

Given the dynamic nature of COVID-19 and its effects, as well as the current inflationary environment and impacts of supply chain disruption on our business, we will continue to assess our liquidity needs and to actively manage our spending.

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 $ 5,460 $ 8,340

For the Three Months Ended October 31,

Net cash provided by (used in) operating activities $ 3,668 $ (596)

Net cash used in investing activities (7,521) (6,736)

Net cash provided by (used in) financing activities 8,807 (8,324)

Net cash used in financing activities (1,943) (4,156)

Effect of exchange rate changes on cash and cash equivalents (32) (48)

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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 2022 and 2021 were as follows:

Deferred income taxes increased $1,311,000 in the first nine months of fiscal year 2022 primarily due to the tax benefit related to the deductible portion of noncash impairment charge of goodwill that is deductible for tax purposes in future years.

Deferred income taxes decreased $716,000 in the first nine months of fiscal year 2022 due to changes in restricted stock balances in the ordinary course of business.

Accounts receivable, less allowance for doubtful accounts, increased $2,454,000 in the first nine months of fiscal year 2022 compared to an increase of $3,971,000 in the first nine months of fiscal year 2021.

Accounts receivable increased in both fiscal years 2022 and 2021 due to the increase in net sales in both periods.

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 $11,456,000 in the first nine months of fiscal year 2022 compared to a decrease of $524,000 in the first nine months of fiscal year 2021.

Inventory increased during the first nine months of fiscal year 2022 due to rising costs and building inventory levels to meet demand and thwart potential supply chain disruptions.

We also increased our inventory to be able to meet demand during a planned shutdown for equipment repairs at one of our plants.

The decrease in inventory in the first nine months of fiscal year 2021 was due to increased demand, which depleted inventory levels and was partially offset by higher packaging costs.

Prepaid expenses decreased $181,000 in the first nine months of fiscal year 2022 due to lower prepaid advertising costs partially offset by higher prepaid insurance costs due to the rising cost of insurance and timing of premium payments.

Prepaid expenses increased $2,117,000 in the first nine months of fiscal year 2021 driven primarily by prepayment of income taxes.

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

Other assets decreased $971,000 in the first nine months of fiscal year 2022 compared to an increase of $1,066,000 in the first nine months of fiscal year 2021.

The decrease in other assets in the first nine 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, partly reduced by an increase in long-term royalties.

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

Accounts payable increased $1,333,000 in the first nine months of fiscal year 2022 compared to a decrease of $4,227,000 in the first nine months of fiscal year 2021.

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

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 .

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 $1,120,000 in the first nine months of fiscal year 2022 compared to a decrease of $4,070,000 in the first nine months of fiscal year 2021.

The increase in accrued expenses during the first nine months of fiscal year 2022 is attributable to an increase in freight costs, natural gas prices and salaries and benefits.

These increases were somewhat lessened by lower accrued advertising costs.

Accrued expenses decreased $4,070,000 in the first nine months of fiscal year 2021 due to decreases in our discretionary accrued bonus, advertising costs, 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 freight can vary with freight rates, timing of shipments, and production requirements as well as supply and demand.

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 2023 and 2022 were as follows:

Accounts receivable, less allowance for doubtful accounts, increased $1.6 million in the first three months of fiscal year 2023 compared to an increase of $2.3 million in the first three months of fiscal year 2022.

The increase in accounts receivable was driven primarily by higher net sales as sales prices increased offset by the level and timing of collections due to payment terms.

Inventory increased by $5.1 million in the first three months of both fiscal year 2023 and 2022 due to a combination of rising costs, specifically due to natural gas, purchased materials, electricity, diesel, and freight and the building of inventory levels for anticipated seasonal demand and thwart potential supply chain disruptions.

Other assets decreased by $1.4 million in the first three months of fiscal year 2023 compared to a decrease of $0.2 million in the first three months of fiscal year 2022.

The decrease in other assets in the first three months of fiscal year 2023 relates to capitalized pre-production costs being transferred to property, plant and equipment as the mines are now in production.

Accounts payable increased by $1.9 million in the first three months of fiscal year 2023 compared to an increase of $1.3 million in the first three months of fiscal year 2022.

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

Accrued expenses decreased $1.6 million in the first three months of fiscal year 2023 compared to an increase of $0.7 million in the first three months of fiscal year 2022.

The payout of the prior fiscal year's bonus reduced accrued salaries in both fiscal years, but to a greater extent in fiscal year 2023 as the accrual was higher at year end 2022 than the prior fiscal year.

The decrease in accrued expenses is also impacted by the decrease in advertising expenses and other accruals.

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.

Other liabilities decreased $1,593,000 in the first nine months of fiscal 2022 compared to a decrease of $330,000 during the first nine months of fiscal year 2021.

The decrease in other liabilities for the first nine months of both fiscal years 2022 and 2021 relate to the timing of when payments for the deferral of employer taxes under the CARES Act are due.

Other liabilities decreased by $0.4 million in the first three months of fiscal year 2023 compared to a decrease of $0.5 million in the first three months of fiscal year 2022.

The decreases in both fiscal years 2022 and 2023 relate primarily to a reduction in our operating lease liability.

Net cash used in investing activities

Cash used in investing activities of $16,012,000 in the first nine months of fiscal year 2022 were higher compared to cash used in investing activities of $10,753,000 in the first nine months of fiscal year 2021 driven by capital expenditures.

During the first nine 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 $7.5 million in the first three months of fiscal year 2023 were higher compared to cash used in investing activities of $6.7 million in the first three months of fiscal year 2022 driven by capital expenditures.

During the first three months of fiscal year 2023 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 provided by financing activities of $8,807,000 in the first nine months of fiscal year 2022 was higher than cash used in financing activities of $8,324,000 in the first nine months of fiscal year 2021.

The first nine 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 nine months of fiscal year 2021.

Total cash and investment balances held by our foreign subsidiaries of $3,107,000 as of April 30, 2022 were slightly higher than the April 30, 2021 balances of $3,054,000.

Cash used in financing activities of $1.9 million in the first three months of fiscal year 2023 was lower than cash used in financing activities of $4.2 million in the first three months of fiscal year 2022 driven by less share repurchases.

Total cash and investment balances held by our foreign subsidiaries of $2.6 million as of October 31, 2022 were slightly lower than July 31, 2022 balances of $3.3 million.

See further discussion in “Foreign Operations” above.

On January 31, 2019, we signed a fifth amendment to our credit agreement with BMO Harris Bank N.A.

(“BMO Harris”), which expires on January 31, 2024.

The agreement provides for a $45,000,000 unsecured revolving credit agreement and a maximum of $10,000,000 for letters of credit.

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, 2022, the variable rates would have been 3.75% for the BMO Harris prime-based rate or 2.58% for the three-month LIBOR-based rate.

We are party to a credit agreement (as amended, the “Credit Agreement”) with BMO Harris Bank N.A.

(“BMO Harris”), which terminates on August 30, 2027.

The agreement provides for a $45 million unsecured revolving credit facility and a maximum of $10 million for letters of credit.

The agreement terms also state that we may select a variable interest rate based on either the BMO Harris prime rate or an adjusted SOFR-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, 2022, the variable rates would have been 6.25% for the BMO Harris prime-based rate or 4.10% for the adjusted SOFR-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, 2022 and 2021, we were in compliance with the covenants.

There were no borrowings during the first nine 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 agreement also requires us to maintain a minimum fixed charge coverage ratio and a maximum net debt to earnings ratio.

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

There were no borrowings during the first three months of either fiscal year 2022 or 2023.

We are party to an Amended and Restated Note Purchase and Private Shelf Agreement (as amended, the “Note Agreement”) with PGIM, Inc.

(“Prudential”) and certain existing noteholders and purchasers affiliated with Prudential named therein pursuant to which, among other things, we issued $10 million in aggregate principal amount of our 3.95% Series B Senior Notes due May 15, 2030 of which $8 million aggregate principal amount remained outstanding as of October 31, 2022.

The Note Agreement provides us with the ability to request, from time to time until May 15, 2023 (or such earlier date as provided for in the agreement), the issuance of additional senior unsecured notes in an aggregate principal amount of up to $75 million 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.

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 April 30, 2022 outstanding notes payable were $33,788,000, net of $212,000 of unamortized debt issuance costs.

See Note 15 of the Notes to the unaudited Condensed Consolidated Financial Statements and Item 5 "Other Information" in this Quarterly Report on Form 10-Q for discussion on amendments made to the credit agreement with BMO Harris and our Senior Note Agreements.

As of April 30, 2022, we had remaining authority to repurchase 485,196 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.

Pursuant to the Note Agreement, on December 16, 2021, we issued $25 million in aggregate principal amount of our 3.25% Series C Senior Notes due December 16, 2031.

As of October 31, 2022 outstanding notes payable totaled $32.8 million, net of $0.2 million of unamortized debt issuance costs.

See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for discussion on amendments made to the credit agreement with BMO Harris and our Senior Note Agreements.

As of October 31, 2022, we had remaining authority to repurchase 433,166 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.

The timing, number and manner of share repurchases will be determined by our management pursuant to the repurchase plan approved by our Board.

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, including capital expenditures to renovate one of our plants, estimated to be approximately $6,500,000.

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 sufficient liquidity 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 2023 to be greater than in fiscal year 2022.

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 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.

Our anticipated advertising expense for fiscal year 2023 is expected to be higher compared to fiscal year 2022 and in line with historical pre-pandemic levels.

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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Item 2. Management’s Discussion and Analysis