ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THROUGHOUT THIS ITEM 2 ALL NON TABULAR FINANCIAL RESULTS ARE PRESENTED IN THOUSANDS OF U.S. DOLLARS EXCEPT WHERE MILLIONS OF DOLLARS IS INDICATED.
Forward-Looking Statements
Statements made in this report, other reports and proxy statements filed with the Securities and Exchange Commission, communications to stockholders, press releases, and oral statements made by representatives of the Company that are not historical in nature, or that state the Company or management intentions, hopes, beliefs, expectations or predictions of the future, may constitute "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," "guidance" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties, and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A (Risk Factors) of the Annual Report on Form 10-K for the fiscal year ended April 30, 2022, and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.
The forward-looking statements in this report are only predictions and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of the Annual Report on Form 10-K for the fiscal year ended April 30, 2022, including the following factors:
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the geographic location of our casino; |
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customer concentration risk; |
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executive officers are family members; |
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industrial business cycles; |
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development, production, testing and marketing of new products; |
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risks associated with international sales; |
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future acquisitions and investments; |
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change of control restrictions; |
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launching new online gaming or sports wagering channels; |
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ability to generate returns on sports wagering operations; |
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fraud, theft, and cheating; |
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cyber-security threats; |
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extensive regulation across our industries; |
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evolving government regulations and law; |
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changes in regulations of financial reporting; |
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the stability of economic markets; |
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potential impairment losses; |
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marketability restrictions of our common stock; |
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the possibility of a reverse-stock split; |
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stock dilution caused by the annual employer match to our 401(k) plan; |
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acts of terrorism and war; |
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inclement weather and natural disasters; |
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pandemics or other national health crisis (including COVID-19); |
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fluctuating fuel and energy costs; |
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rising inflation; |
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extensive taxation; |
Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of the Company's common stock.
Investors should also be aware that while the Company, from time to time, communicates with securities analysts; it is against its policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of Butler National Corporation.
Management Overview
Management is focused on increasing long-term shareholder value from increased cash generation, earnings growth, and prudently managing capital expenditures. We plan to do this by continuing to drive increased revenue from product and service innovations, strategic acquisitions, and targeted marketing programs.
We have two separate reporting segments: Aerospace Products and Professional Services. Aerospace Products and Professional Services do not share the same customers and suppliers and have substantially distinct businesses. The Aerospace Products operating segment provides products and services in the aerospace industry. Companies in Aerospace Products derive their revenue from system design, engineering, manufacturing, integration, installation, repairing, overhauling, servicing and distribution of aerostructures, avionics, aircraft components, accessories, subassemblies and systems. The Professional Services operating segment provides services in the gaming industry. Professional Services companies manage a gaming and entertainment facility and provide architectural and engineering services. These reporting segments operate through various subsidiaries and affiliates listed in the Company’s fiscal year 2022 Annual Report on Form 10-K.
Aerospace Products. The Aerospace Products segment includes the manufacture, sale and service of electronic equipment and systems and technologies to enhance and support products related to aircraft. Additionally, we also operate several Federal Aviation Administration (the "FAA") Repair Stations. Companies in Aerospace Products concentrate on Learjet, Beechcraft King Air, Cessna turbine engine, Cessna multi-engine piston and Dassault Falcon 20 aircraft. Specifically, the design, distribution and support for products for older aircraft, or “Classic” aircraft are areas of focus for companies in Aerospace Products.
Products. The products that the companies within this group design, engineer, manufacture, integrate, install, repair and service include:
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Aerial surveillance products |
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GARMIN GTN Global Position System Navigator with Communication Transceiver |
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Aerodynamic enhancement products |
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J.E.T autopilot products |
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● |
Airspeed and altimeter systems |
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Electrical systems and switching equipment |
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Avcon Fins |
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Noise suppression systems |
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ADS-B (transponder) systems |
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Rate gyroscopes |
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Conversion of passenger configurations to cargo |
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Replacement vertical accelerometers |
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Cargo/sensor carrying pods and radomes |
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Provisions for external stores |
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Electronic navigation instruments, radios and transponders |
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● |
Attitude heading reference systems |
Modifications. The companies in Aerospace Products have authority pursuant to Federal Aviation Administration Supplemental Type Certificates (“STCs”) and Parts Manufacturer Approval (“PMA”), to build required parts and subassemblies and to make applicable installations. Companies in Aerospace Products perform modifications in the aviation industry including:
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Aerial photograph capabilities |
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Extended tip fuel tanks |
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Aerodynamic improvements |
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Radar systems |
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Avionics systems |
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ISR – Intelligence Surveillance Reconnaissance |
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Cargo doors |
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Special mission modifications |
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Conversion from passenger to freighter configuration |
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Stability enhancements |
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Extended doors |
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Traffic collision avoidance systems |
Special Mission Electronics. We supply defense-related, commercial off-the-shelf products to various commercial entities and government agencies and subcontractors in order to update or extend the useful life of aircraft with older components and technology. These products include:
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Cabling |
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HangFire Override Modules |
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Electronic control systems |
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Test equipment |
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Gun Control Units for Apache and Blackhawk helicopters |
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Gun Control Units for land and sea based military vehicles |
Professional Services. The Professional Services segment includes the management of a gaming facility and related dining and entertainment facilities in Dodge City, Kansas. Boot Hill Casino and Resort features approximately 450 slot machines and 14 table games. Companies in Professional Services also provide licensed architectural services, including commercial and industrial building design, and engineering services.
Boot Hill. Butler National Service Corporation (“BNSC”), and BHCMC, LLC (“BHCMC”), a company in Professional Services, manages The Boot Hill Casino and Resort in Dodge City, Kansas (“Boot Hill”) pursuant to the Lottery Gaming Facility Management Contract, by and among BNSC, BHCMC and the Kansas Lottery, as subsequently amended (“Boot Hill Agreement”). As required by Kansas law, all games, gaming equipment and gaming operations, including sports wagering, at Boot Hill are owned and operated by the Kansas Lottery. In July 2022, in anticipation of the legalization of sports wagering in the state of Kansas, the Company entered into provider contracts for sports wagering platforms with DraftKings, Golden Nugget Online Gaming LLC, and Bally Corporation subject to regulatory approval.
Architectural and Engineering Services. Companies in Professional Services provide licensed architectural, including commercial and industrial building design, and engineering services.
COVID-19 Overview
The pandemic caused by COVID-19 has caused volatility in world-wide financial markets since 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic. Although many experts believe the pandemic has ended in 2022, the threat of outbreaks and new variations of the virus continue to affect operations and finances of businesses like ours.
We have experienced lower customer headcount, which has been off-set by a larger net revenue per customer. We are experiencing, and expect to continue experiencing, lower demand for our professional services and increased costs and other challenges related to COVID-19 that adversely affects our business.
The COVID-19 pandemic has impacted our business operations and financial results and continues to impact us in fiscal 2023. We face numerous uncertainties in estimating the direct and indirect effects on our present and future business operations, financial condition, results of operations, and liquidity. Due to several rapidly changing variables related to the COVID-19 pandemic, we cannot reasonably estimate future economic trends and the timing of when stability will return. Refer to Item 1A. “Risk Factors” for a disclosure of risk factors related to COVID-19.
As the economy in general slowly recovers, and vaccinations rates in our operating territory improve and new infections decline, we have continued to see improvements in customer headcount. However, the unpredictable nature of the pandemic could again lead to closures, decreased traffic and demand, and increased COVID-19- related operating expenses, for the foreseeable future. While COVID-19 has resulted in, and will continue to bring, significant challenges and uncertainty to our operating environment, we believe that our resilient business model and the strength of our brand and balance sheet position us well to emerge from the pandemic.
Results Overview
The three months ended July 31, 2022 revenue decreased 14% to $15.3 million compared to $17.7 million in the three months ended July 31, 2021. In the three months ended July 31, 2022 the professional services revenue was $9.0 million compared to $9.3 million in the three months ended July 31, 2021, a decrease of 4%. In the three months ended July 31, 2022 the Aerospace Products revenue was $6.3 million compared to $8.4 million in the three months ended July 31, 2021, a decrease of 25%.
The three months ended July 31, 2022 net income decreased to $431 compared to a net income of $2.9 million in the three months ended July 31, 2021. The three months ended July 31, 2022, operating income decreased to $1.6 million from an operating income of $4.0 million in the three months ended July 31, 2021.
RESULTS OF OPERATIONS
THREE MONTHS ENDING JULY 31, 2022 COMPARED TO THREE MONTHS ENDING JULY 31, 2021
(dollars in thousands) |
|
Three Months Ended July 31, 2022 |
|
|
Percent of Total Revenue |
|
|
Three Months Ended July 31, 2021 |
|
|
Percent of Total Revenue |
|
|
Percent Change 2021-2022 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services |
|
$ |
8,962 |
|
|
|
59 |
% |
|
$ |
9,326 |
|
|
|
53 |
% |
|
|
-4 |
% |
Aerospace Products |
|
|
6,342 |
|
|
|
41 |
% |
|
|
8,419 |
|
|
|
47 |
% |
|
|
-25 |
% |
Total revenue |
|
|
15,304 |
|
|
|
100 |
% |
|
|
17,745 |
|
|
|
100 |
% |
|
|
-14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services |
|
|
3,623 |
|
|
|
24 |
% |
|
|
3,325 |
|
|
|
19 |
% |
|
|
9 |
% |
Cost of Aerospace Products |
|
|
4,827 |
|
|
|
31 |
% |
|
|
6,012 |
|
|
|
34 |
% |
|
|
-20 |
% |
Marketing and advertising |
|
|
1,331 |
|
|
|
9 |
% |
|
|
1,180 |
|
|
|
6 |
% |
|
|
13 |
% |
Employee benefits |
|
|
614 |
|
|
|
4 |
% |
|
|
575 |
|
|
|
3 |
% |
|
|
7 |
% |
Depreciation and amortization |
|
|
771 |
|
|
|
5 |
% |
|
|
702 |
|
|
|
4 |
% |
|
|
10 |
% |
General, administrative and other |
|
|
2,513 |
|
|
|
16 |
% |
|
|
1,929 |
|
|
|
11 |
% |
|
|
30 |
% |
Total costs and expenses |
|
|
13,679 |
|
|
|
89 |
% |
|
|
13,723 |
|
|
|
77 |
% |
|
|
0 |
% |
Operating income |
|
$ |
1,625 |
|
|
|
11 |
% |
|
$ |
4,022 |
|
|
|
23 |
% |
|
|
-60 |
% |
Revenue:
Revenue decreased 14% to $15.3 million in the three months ended July 31, 2022, compared to $17.7 million in the three months ended July 31, 2021. See "Operations by Segment" below for a discussion of the primary reasons for the decrease in revenue.
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● |
Professional Services derives its revenue from (a) professional management services in the gaming industry through Butler National Service Corporation ("BNSC") and BHCMC, LLC ("BHCMC"), and (b) professional architectural, engineering and management support services. Revenue from Professional Services decreased 4% for the three months to $9.0 million at July 31, 2022 compared to $9.3 million at July 31, 2021. |
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● |
Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue decreased 25% for the three months to $6.3 million at July 31, 2022 compared to $8.4 million at July 31, 2021. The decrease in revenue is primarily due to a decrease in aircraft modification revenue of $2.0 million. |
Costs and expenses:
Costs and expenses related to Professional Services and Aerospace Products include the cost of engineering, labor, materials, equipment utilization, control systems, security and occupancy. Costs and expenses remained constant in the three months ended July 31, 2022 at $13.7 million compared to $13.7 million in the three months ended July 31, 2021. Costs and expenses were 89% of total revenue in the three months ended July 31, 2022, as compared to 77% of total revenue in the three months ended July 31, 2021.
Costs of Professional Services increased 9% in the three months ended July 31, 2022 to $3.6 million compared to $3.3 million in the three months ended July 31, 2021. Costs were 24% of total revenue in the three months ended July 31, 2022, as compared to 19% of total revenue in the three months ended July 31, 2021.
Costs of Aerospace Products decreased 20% in the three months ended July 31, 2022 to $4.8 million compared to $6.0 million for the three months ended July 31, 2021. Costs were 31% of total revenue in the three months ended July 31, 2022, as compared to 34% of total revenue in the three months ended July 31, 2021. The decrease is directly related to the decrease in aircraft modification revenue.
Marketing and advertising expenses increased 13% in the three months ended July 31, 2022, to $1.3 million compared to $1.2 million in the three months ended July 31, 2021. Expenses were 9% of total revenue in the three months ended July 31, 2022, as compared to 6% of total revenue in the three months ended July 31, 2021. Marketing and advertising expenses include advertising, sales and marketing labor, gaming development costs, and casino and product promotions.
Employee benefits expenses as a percent of total revenue was 4% in the three months ended July 31, 2022, compared to 3% in the three months ended July 31, 2021. These expenses increased 7% to $614 in the three months ended July 31, 2022, from $575 in the three months ended July 31, 2021. These expenses include the employers' share of all federal, state and local taxes, paid time off for vacation, holidays and illness, employee health and life insurance programs and employer matching contributions to retirement plans.
Depreciation and amortization expenses as a percent of total revenue was 5% in the three months ended July 31, 2022, compared to 4% in the three months ended July 31, 2021. These expenses increased 10% to $771 in the three months ended July 31, 2022 from $702 in the three months ended July 31, 2021. These expenses include depreciation related to owned assets being depreciated over various useful lives and amortization of intangible items including the Kansas privilege fee related to the Boot Hill Casino being expensed over the initial term of the gaming contract with the State of Kansas. BHCMC, LLC depreciation and amortization expense for the three months ended July 31, 2022 was $626 compared to $578 in the three months ended July 31, 2021.
General, administrative and other expenses as a percent of total revenue was 16% in the three months ended July 31, 2022, compared to 11% in the three months ended July 31, 2021. These expenses increased 30% to $2.5 million in the three months ended July 31, 2022, from $1.9 million in the three months ended July 31, 2021. The increase is primarily due to the stock award and cash compensation awarded to a board member of $492.
Other expense:
Interest expense was $723 in the three months ended July 31, 2022, compared with interest expense of $614 in the three months ended July 31, 2021. Interest related to obligations of BHCMC, LLC was $642 in the three months ended July 31, 2022 compared to $548 in the three months ended July 31, 2021.
Operations by Segment
We have two operating segments, Professional Services and Aerospace Products. The Professional Services segment includes revenue contributions and expenditures associated with casino management services and professional architectural, engineering and management support services. Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft.
The following table presents a summary of our operating segment information for the three months ended July 31, 2022 and July 31, 2021:
(dollars in thousands) |
|
Three Months Ended July 31, 2022 |
|
|
Percent of Total Revenue |
|
|
Three Months Ended July 31, 2021 |
|
|
Percent of Total Revenue |
|
|
Percent Change 2021-2022 |
|
Professional Services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boot Hill Casino |
|
$ |
8,893 |
|
|
|
99 |
% |
|
$ |
9,255 |
|
|
|
99 |
% |
|
|
-4 |
% |
Management/Professional Services |
|
|
69 |
|
|
|
1 |
% |
|
|
71 |
|
|
|
1 |
% |
|
|
-3 |
% |
Revenue |
|
|
8,962 |
|
|
|
100 |
% |
|
|
9,326 |
|
|
|
100 |
% |
|
|
-4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Professional Services |
|
|
3,623 |
|
|
|
41 |
% |
|
|
3,325 |
|
|
|
36 |
% |
|
|
9 |
% |
Expenses |
|
|
3,328 |
|
|
|
37 |
% |
|
|
3,007 |
|
|
|
32 |
% |
|
|
11 |
% |
Total costs and expenses |
|
|
6,951 |
|
|
|
78 |
% |
|
|
6,332 |
|
|
|
68 |
% |
|
|
10 |
% |
Professional Services operating income |
|
$ |
2,011 |
|
|
|
22 |
% |
|
$ |
2,994 |
|
|
|
32 |
% |
|
|
-33 |
% |
(dollars in thousands) |
|
Three Months Ended July 31, 2022 |
|
|
Percent of Total Revenue |
|
|
Three Months Ended July 31, 2021 |
|
|
Percent of Total Revenue |
|
|
Percent Change 2021-2022 |
|
Aerospace Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
6,342 |
|
|
|
100 |
% |
|
$ |
8,419 |
|
|
|
100 |
% |
|
|
-25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Aerospace Products |
|
|
4,827 |
|
|
|
76 |
% |
|
|
6,012 |
|
|
|
72 |
% |
|
|
-20 |
% |
Expenses |
|
|
1,901 |
|
|
|
30 |
% |
|
|
1,379 |
|
|
|
16 |
% |
|
|
38 |
% |
Total costs and expenses |
|
|
6,728 |
|
|
|
106 |
% |
|
|
7,391 |
|
|
|
88 |
% |
|
|
-9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace Products operating income (loss) |
|
$ |
(386 |
) |
|
|
-6 |
% |
|
$ |
1,028 |
|
|
|
12 |
% |
|
|
-138 |
% |
Professional Services
|
● |
Revenue from Professional Services decreased 4% for the three months ended July 31, 2022 to $9.0 million compared to $9.3 million for the three months ended July 31, 2021. In the three months ended July 31, 2022 Boot Hill Casino received gross receipts for the State of Kansas of $12.2 million compared to $12.6 million for the three months ended July 31, 2021. Mandated fees, taxes and distributions reduced gross receipts by $3.8 million resulting in gaming revenue of $8.4 million for the three months ended July 31, 2022, compared to a reduction to gross receipts of $4.0 million resulting in gaming revenue of $8.6 million for the three months ended July 31, 2021. Non-gaming revenue at Boot Hill Casino remained constant at $1.1 million for the three months ended July 31, 2022, compared to $1.1 million for the three months ended July 31, 2021. The remaining management and Professional Services revenue includes professional management services in the gaming industry, and licensed architectural services. Professional Services revenue excluding Boot Hill Casino decreased 3% to $69 for the three months ended July 31, 2022, compared to $71 for the three months ended July 31, 2021. |
|
● |
Costs of Professional Services increased 9% in the three months ended July 31, 2022 to $3.6 million compared to $3.3 million in the three months ended July 31, 2021. Costs were 41% of segment total revenue in the three months ended July 31, 2022, as compared to 36% of segment total revenue in the three months ended July 31, 2021. |
|
● |
Expenses increased 11% in the three months ended July 31, 2022 to $3.3 million compared to $3.0 million in the three months ended July 31, 2021. Expenses were 37% of segment total revenue in the three months ended July 31, 2022, as compared to 32% of segment total revenue in the three months ended July 31, 2021. |
Aerospace Products
|
● |
Revenue decreased 25% to $6.3 million in the three months ended July 31, 2022, compared to $8.4 million in the three months ended July 31, 2021. The decrease in revenue is primarily due to a decrease in aircraft modification business of $2.0 million. |
|
● |
Costs of Aerospace Products decreased 20% in the three months ended July 31, 2022 to $4.8 million compared to $6.0 million for the three months ended July 31, 2021. Costs were 76% of segment total revenue in the three months ended July 31, 2022, as compared to 72% of segment total revenue in the three months ended July 31, 2021. The decrease is directly related to the decrease in aircraft modification revenue. |
|
● |
Expenses increased 38% in the three months ended July 31, 2022 to $1.9 million compared to $1.4 million in the three months ended July 31, 2021. Expenses were 30% of segment total revenue in the three months ended July 31, 2022, as compared to 16% of segment total revenue in the three months ended July 31, 2021. The increase is primarily due to the stock award and cash compensation awarded to a board member of $492. |
Employees
Other than persons employed by our gaming subsidiaries there were 113 full time and 5 part time employees on July 31, 2022, compared to 118 full time and 4 part time employees on July 31, 2021. As of September 9, 2022, staffing is 109 full time and 4 part time employees. Our staffing at Boot Hill Casino & Resort on July 31, 2022 was 194 full time and 57 part time employees compared to 161 full time and 55 part time employees on July 31, 2021. At September 9, 2022 there are 192 full time and 61 part time employees. None of the employees are subject to any collective bargaining agreements.
Liquidity and Capital Resources
We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in fiscal 2023 and beyond. Please see footnote 9 to the Company's financial statements regarding "Debt" for additional details concerning our liquidity and capital resources.
Analysis and Discussion of Cash Flow
During the three months ended July 31, 2022 our cash position increased by $2.3 million. Net income was $431 for the three months ended July 31, 2022. Cash flows provided by operating activities was $5.3 million for the three months ended July 31, 2022. Non-cash activities consisting of depreciation and amortization provided $1.5 million, while deferred compensation provided $132, gain on the sale of a building used $69, deferred income tax expense provided $280, and stock awarded to director provided $352. Contract assets increased our cash position by $326. Contract liability increased our cash position by $3.3 million. Inventories decreased our cash position by $449. Accounts receivable increased our cash position by $21. Gaming facility mandated payments decreased our cash position by $308. Prepaid expenses and other assets decreased our cash by $241. A decrease in accounts payable, a decrease in accrued liabilities and lease liabilities, and an increase in other current liabilities decreased our cash by $227. Income tax payable increased our cash position by $260.
Cash used in investing activities was $1.6 million for the three months ended July 31, 2022. We invested $411 towards STCs, and $1.0 million on equipment and furnishings and $534 on the construction of new hangers. We received $164 in proceeds from the sale of a building.
Cash used by financing activities was $1.4 million for the three months ended July 31, 2022. We made repayments on our debt of $1.3 million. We made repayments on lease right-to-use of $64. We purchased company stock of $2. The stock acquired was placed in treasury.
During the quarter ended July 31, 2022, the Company spent an additional $534 on the completion of its hangars in contruction in progress. At July 31, 2022, these new hangars have been reclassified from construction in progress to building and improvements on the balance sheet.
Critical Accounting Policies and Estimates
We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management judgments and estimates. These significant accounting policies relate to revenue recognition, the use of estimates, long-lived assets, and Supplemental Type Certificates. These policies and our procedures related to these policies are described in detail below and under specific areas within this "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Revenue Recognition: See footnote 3 to the condensed consolidated financial statements.
Lease Right-to-Use: See footnote 13 to the condensed consolidated financial statements.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. Significant estimates include assumptions about percentage-of-completion, collection of accounts receivable, inventory obsolescence, the valuation of long-lived assets, including the STC’s, valuation for deferred tax assets and useful life of fixed and other long-term assets.
Long-lived Assets: The Company accounts for its long-lived assets in accordance with ASC Topic 360-10, "Accounting for the Impairment or Disposal of Long-Lived Assets." ASC Topic 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value.
Supplemental Type Certificates: Supplemental Type Certificates (STCs) are authorizations granted by the Federal Aviation Administration (FAA) for specific modification of a certain aircraft. The STC authorizes us to perform modifications, installations, and assemblies on applicable customer-owned aircraft. Costs incurred to obtain STCs are capitalized and subsequently amortized over a seven year life. The legal life of an STC is indefinite.
Changing Prices and Inflation
We have experienced upward pressure from inflation in fiscal year 2023. From fiscal year 2022 to fiscal year 2023 most of the increases we experienced were in material costs. This additional cost may not be transferable to our customers resulting in lower income in the future. We anticipate fuel costs and possibly interest rates to rise in fiscal 2023 and 2024.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.