If applicable, the Company recognizes an asset for the incremental, material costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year and the costs are expected to be recovered.  As of February 28, 2023 and May 31, 2022, the Company does not have material incremental costs on any open contracts with an original expected duration of greater than one year, and therefore such costs are expensed as incurred.  These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer.

10.The February 28, 2022 statement of income has been reclassified to conform with the presentation adopted for February 28, 2023. 

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11.Other current liabilities:  

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements.  Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this 10-Q and its Exhibits that does not consist of historical facts, are "forward-looking statements."  Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements and, as such, are not a guarantee of future performance.  The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements.  Risks and uncertainties can include, among others, reductions in capital budgets by our customers and potential customers; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products; the kind, frequency and intensity of natural disasters that affect demand for the Company’s products; and other factors, many or all of which are beyond the Company's control.  Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results.  The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based.

Results of Operations

A summary of the period to periodperiod-to-period changes in the principal items included in the condensed consolidated statements of income is shown below:

Sales under certain fixed-price contracts, requiring substantial performance over several periods priorin which the product has no alternative use to commencementthe Company and the Company has enforceable rights to payment for progress completed to date, inclusive of deliveries,profit, are accounted for under the percentage-of-completion method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis.  Costs include all material and direct and indirect charges related to specific contracts.

Adjustments to cost estimates are made periodically and any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined.  However, any profits expected on contracts in progress are recognized over the life of the contract.

For financial statement presentation purposes, the Company nets progress billings against the total costs incurred and estimated earnings recognized on uncompleted contracts.  The asset, "costs and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed.  The liability, "billings in excess of costs and estimated earnings," represents billings in excess of revenues recognized.

For the nine months ended February 28, 2023 (All figures discussed are for the nine months ended February 28, 2023 as compared to the nine months ended February 28, 2022).

The Company's consolidated results of operations showed a 39% increase in net revenues and an increase in net income of 483%.  Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 36% more than the level recorded in the prior year.  The Company had 45 Projects in process during the current period as compared to 34 during the same period last year.  Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 45% more than the level recorded in the prior year.  Total sales within the U.S. increased 58% from the same period last year.  Total sales to Asia decreased 10% from the same period of the prior year.  Sales increases were recorded over the same period last year to customers involved in construction of buildings and bridges (29%) as well as to customers in aerospace / defense (44%) and to industrial customers (93%). The increase in aerospace/defense sales is due, in part, to a healthy combination of providing production hardware on several legacy programs and new development programs, along with receiving substantial contracts for the refurbishment of hardware on existing naval platforms. The 93% increase in sales to industrial customers is primarily due to some new domestic manufacturing facilities beginning operations which utilized the Company’s products.

In prior years, the Company reported research and development costs as part of cost of sales and therefore included in the gross profit. Management intends to continue to make significant investments in research and development in order to promote profitable growth of the Company.  In order to more clearly distinguish these investments from the profitability of a period’s sales, effective with the first quarter of fiscal 2023, the Company is disclosing research and development costs separately on the Condensed Consolidated Statements of Income below the gross profit line.  Prior period statements of income as well as disclosures in this document have been reclassified to conform with the presentation adopted for the current period.

The gross profit as a percentage of net revenue of 39% in the current period is eleven percentage points greater than the same period of the prior year (28%). The Company has been able to increase sales prices to recover more of the increased costs for materials and labor that were incurred over the past year. Management continues to work with suppliers to obtain more visibility of conditions affecting their respective markets. These actions combined with benefits from the Company’s continuous improvement initiatives and increased volume have helped to improve the gross margin as a percentage of revenue over the prior year.

Sales of the Company’s products are made to three general groups of customers: industrial, structural and aerospace / defense.  A breakdown of sales to the three general groups of customers is as follows:

At February 28, 2022, the Company had 140 open sales orders in our backlog with a total sales value of $17.4 million.  At February 28, 2023, the Company has 125 open sales orders in our backlog, and the total sales value is $27.8 million.

The Company's backlog, revenues, commission expense, gross profits, and net income fluctuate from period to period.  The changes in the current period, compared to the prior period, are not necessarily representative of future results.

Net revenue by geographic region, as a percentage of total net revenue for the nine-month periods ended February 28, 2023 and February 28, 2022 is as follows:

Research and Development Costs

Research and development costs stayed consistent as a percent of net revenues while increasing by 29% over the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased by 32% from the prior year.  This increase is primarily due to increased employee compensation costs including incentive compensation.

The above factors resulted in an operating income of $4,740,000 for the nine months ended February 28, 2023, 570% more than the $707,000 in the same period of the prior year.

A summary of the period-to-period changes in the principal items included in the condensed consolidated statements of income is shown below:

Sales under certain fixed-price contracts, in which the product has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date, inclusive of profit, are accounted for under the percentage-of-completion method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis.  Costs include all material and direct and indirect charges related to specific contracts.

Adjustments to cost estimates are made periodically and any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined.  However, any profits expected on contracts in progress are recognized over the life of the contract.

For financial statement presentation purposes, the Company nets progress billings against the total costs incurred and estimated earnings recognized on uncompleted contracts.  The asset, "costs and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed.  The liability, "billings in excess of costs and estimated earnings," represents billings in excess of revenues recognized.

For the sixthree months ended November 30, 2017February 28, 2023 (All figures discussed are for the sixthree months ended November 30, 2017February 28, 2023 as compared to the sixthree months ended November 30, 2016)February 28, 2022).

The Company's consolidated results of operations showed a 16% decrease61% increase in net revenues and a decrease$1.8 million increase in net income of 69%.income.  Revenues recorded in the current period for long-term construction projects (“Project(s)”)Projects were 22% less91% more than the level recorded in the prior year.  WeThe Company had 3429 Projects in process during the current period as compared with 42to 27 during the same period last year.  Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 5% less28% more than the level recorded in the prior year. Total sales within the U.S. decreased 19%increased 98% from the same period last year.  Total sales to Asia increased 11%decreased 25% from the same period of the prior year. Sales decreasesincreases were recorded over the same period last year to customers involved in construction of buildings and bridges (30%), were offset slightly by increases in sales to industrial customers (31%(76%) andas well as to customers in aerospace / defense (2%(42%) and to industrial customers (69%).  The significant reductioncircumstances affecting the fluctuations in sales to construction customers was the result of several factors including 1.) scheduling delays at customer construction sites, 2.) delays in receiving custom components from vendors, 3.) quality issues from a subcontractor, and 4.) testing bottlenecks caused by delays in getting a new test machine operating. Most of these issuesrevenue levels are resolved and management is optimistic that the sales volume will improveas identified in the subsequent quarters. Please refer to the charts, below, which show the breakdown of sales. year-to-date comparisons, above.

The gross profit as a percentage of net revenue of 25%41% in the current period is lowernineteen percentage points higher than the 31% recorded in the same period of the prior year (22%).  The Company has been able to increase sales prices to recover more of the increased costs for materials and labor that were incurred over the past year.  The reduction inManagement continues to work with suppliers to obtain more visibility of conditions affecting their respective markets. These actions combined with benefits from the Company’s continuous improvement initiatives and increased volume have helped to improve the gross profitmargin as a percentage of revenue is primarily due to 1.) a lower total volume of product sales inover the current period to cover non-variable manufacturing costs, and 2.) several projects in the current period that were very competitively bid.prior year.

Sales of the Company’s products are made to three general groups of customers: industrial, constructionstructural and aerospace / defense.  A breakdown of sales to the three general groups of customers is as follows:

At November 30, 2016, the Company had 97 open sales orders in our backlog with a total sales value of $20.6 million. At November 30, 2017, the Company has 43% more open sales orders in our backlog (139 orders), and the total sales value is $20.4 million.

The Company's backlog, revenues, commission expense, gross margins, gross profits, and net income fluctuate from period to period. The changes in the current period, compared to the prior period, are not necessarily representative of future results.

Net revenue by geographic region, as a percentage of total net revenue for the six monththree-month periods ended November 30, 2017February 28, 2023 and November 30, 2016February 28, 2022, is as follows:

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by 5%increased 48% from the prior year.  Outside commission expense decreased by 23% from last year's levelThis increase is primarily due to lower levels of commissionable sales. Other selling, general and administrative expenses increased 3% from last year to this.employee compensation costs including incentive compensation.

The above factors resulted in an operating income of $445,000$1,805,000 for the sixthree months ended November 30, 2017, 73% lessFebruary 28, 2023, better than the $1,638,000$191,000 loss in the same period of the prior year.

For the three months ended November 30, 2017 (All figures discussed are for the three months ended November 30, 2017 as compared to the three months ended November 30, 2016).

The Company's consolidated results of operations showed a 38% decrease in net revenues and a decrease in net income of 94%. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 53% less than the level recorded in the prior year. We had 31 Projects in process during the current period compared with 29 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 1% more than the level recorded in the prior year. Total sales within the U.S. decreased 38% from the same period last year. Total sales to Asia decreased 17% from the same period of the prior year. Sales decreases recorded over the same period last year to customers involved in construction of buildings and bridges (62%), were offset slightly by increases in sales to industrial customers (25%) and to customers in aerospace / defense (4%). The significant reduction in sales to construction customers was the result of several factors including 1.) scheduling delays at customer construction sites, 2.) delays in receiving custom components from vendors, 3.) quality issues from a subcontractor, and 4.) testing bottlenecks caused by delays in getting a new test machine operating. Most of these issues are resolved and management is optimistic that the sales volume will improve in the subsequent quarters. Please refer to the charts, below, which show the breakdown of sales. The gross profit as a percentage of net revenue of 26% in the current period is lower than the 35% recorded in the same period of the prior year. The reduction in gross profit as a percentage of revenue is primarily due to 1.) a lower total volume of product sales in the current period to cover non-variable manufacturing costs, and 2.) several projects in the current period that were very competitively bid.

Sales of the Company’s products are made to three general groups of customers: industrial, construction and aerospace / defense. A breakdown of sales to the three general groups of customers is as follows:

Net revenue by geographic region, as a percentage of total net revenue for the three month periods ended November 30, 2017 and November 30, 2016 is as follows:

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by 11% from the prior year. Outside commission expense decreased by 35% from last year's level due to lower levels of commissionable sales. Other selling, general and administrative expenses increased 2% from last year to this.

The above factors resulted in operating income of $35,000 for the three months ended November 30, 2017, significantly less than the $1,372,000 in the same period of the prior year.

Stock Options

The Company has a stock option plan which provides for the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors.  Options granted under the plan are exercisable over a ten yearten-year term.  Options not exercised at the end of the term expire.

The Company expenses stock options using the fair value recognition provisions of the FASB ASC.  The Company recognized $56,000$128,000 and $79,000$126,000 of compensation cost for the six monthnine-month periods ended November 30, 2017February 28, 2023 and 2016.2022.

The fair value of each stock option grant has been determined using the Black-Scholes model.  The model considers assumptions related to exercise price, expected volatility, risk-free interest rate, and the weighted average expected term of the stock option grants.  Expected volatility assumptions used in the model were based on volatility of the Company's stock price for the thirty monththirty-month period ending on the date of grant.  The risk-free interest rate is derived from the U.S. treasury yield.  The Company used a weighted average expected term.

The following assumptions were used in the Black-Scholes model to estimate the fair market value of the Company's stock option grants:

The ultimate value of the options will depend on the future price of the Company's common stock, which cannot be forecast with reasonable accuracy.

A summary of changes in the stock options outstanding during the six monthnine-month period ended November 30, 2017February 28, 2023 is presented below:

Capital Resources Line of Credit and Long-Term Debt

The Company's primary liquidity is dependent upon the working capital needs. These are mainly short-term investments, inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, accrued commissions,other current liabilities, and billings in excess of costs and estimated earnings.  The Company's primary source of liquidity has been operations.

Capital expenditures for the sixnine months ended November 30, 2017February 28, 2023 were $737,000$2,383,000 compared to $1,237,000$722,000 in the same period of the prior year.  As of November 30, 2017,February 28, 2023, the Company has commitments for capital expenditures totaling $150,000$900,000 during the next twelve months.  These costs are primarily related to acquisition of new equipment used to test the function of products prior to shipment to customers.

The Company believes it is carrying adequate insurance coverage on its facilities and their contents.

Effective August 30, 2017, the Company replaced its bank credit facility with a $10,000,000 bank demand line of credit, with interest payable at the Company's option of 30, 60 or 90 day LIBOR rate plus 2.25%. There is no balance outstanding as of November 30, 2017 or as of May 31, 2017. The line is unsecured and includes a negative pledge of substantially all of the Company’s property. This line of credit is subject to the usual terms and conditions applied by the bank, is subject to renewal annually, and is not subject to an express requirement on the bank’s part to lend.