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11.Accrued Expenses:  

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 six months ended November 30, 20172023 (All figures discussed are for the six months ended November 30, 20172023 as compared to the six months ended November 30, 2016)2022).

The Company's consolidated results of operations showed a 16% decrease3% increase in net revenues and a decreasean increase in net income of 69%49%. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 22%1% less than the level recorded in the prior year. WeThe Company had 3429 Projects in process during the current period as compared with 42to 35 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 5% less14% more than the level recorded in the prior year. Total sales within the U.S. decreased 19%increased 13% from the same period last year. Total sales to Asia increased 11%decreased 37% from the same period of the prior year. Sales decreasesincreases were recorded over the same period last year to customers in aerospace / defense (77%) with decreases to customers involved in construction of buildings and bridges (30%(-36%), were offset slightly by increases in sales and to industrial customers (31%(-30%) and to customers. The increase in aerospace / defense (2%). The significant reductionsales is due, in salespart, to construction customers was the resulta combination of providing production hardware on several factors including 1.) scheduling delays at customer construction sites, 2.) delays in receiving custom components from vendors, 3.) quality issues from a subcontractor,legacy programs 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. development programs.

The gross profit as a percentage of net revenue of 25%45% in the current period is lowerfive percentage points greater than the 31% recorded in the same period of the prior year. The reduction inyear (40%). 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 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, 2016,2022, the Company had 97139 open sales orders in our backlog with a total sales value of $20.6$18.1 million. At November 30, 2017,2023, the Company has 43% more141 open sales orders in our backlog, (139 orders), and the total sales value is $20.4$35.5 million. The Company expects to recognize revenue for the majority of the backlog during the 2024 and 2025 fiscal years.

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 monthsix-month periods ended November 30, 20172023 and November 30, 20162022, is as follows:

Research and Development Costs

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreasedincreased by 5%18% 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$3,973,000 for the six months ended November 30, 2017, 73% less2023, 35% more than the $1,638,000$2,935,000 in the same period of the prior year.

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 three months ended November 30, 20172023 (All figures discussed are for the three months ended November 30, 20172023 as compared to the three months ended November 30, 2016)2022).

The Company's consolidated results of operations showed a 38%1% decrease in net revenues and a decrease$0.4 million increase in net income of 94%.income.  Revenues recorded in the current period for long-term construction projects (“Project(s)”)Projects were 53%5% less than the level recorded in the prior year.  WeThe Company had 3116 Projects in process during the current period as compared with 29to 28 during the same period last year.  Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 1%4% more than the level recorded in the prior year. Total sales within the U.S. decreased 38%increased 17% from the same period last year.  Total sales to Asia decreased 17%75% from the same period of the prior year.  Sales decreasesincreases were recorded over the same period last year to customers in aerospace / defense (79%) with decreases to customers involved in construction of buildings and bridges (62%(-41%), were offset slightly by increases in sales and to industrial customers (25%) and to customers in aerospace / defense (4%(-40%).  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 26%47% in the current period is lowerfive percentage points higher than the 35% recorded in the same period of the prior year (42%).  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:

Net revenue by geographic region, as a percentage of total net revenue for the three monththree-month periods ended November 30, 20172023 and November 30, 20162022, is as follows:

Research and Development Costs

Research and development costs declined 73% from the prior year due to the completion of the Taylor Damped Moment Frame project.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by 11%increased 16% from the prior year.  Outside commission expense decreased by 35% from last year's levelThis increase is primarily due to lower levels of commissionable sales. Other selling, general and administrative expenses increased 2% from last year to this.employee compensation costs including incentive compensation.

The above factors resulted in an operating income of $35,000$2,054,000 for the three months ended November 30, 2017, significantly less2023, better than the $1,372,000$1,756,000 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$301,000 and $79,000$128,000 of compensation cost for the six monthsix-month periods ended November 30, 20172023 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 monthsix-month period ended November 30, 20172023 is presented below:

Capital Resources Line of Credit and Long-Term Debt

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

Capital expenditures for the six months ended November 30, 20172023 were $737,000$545,000 compared to $1,237,000$1,391,000 in the same period of the prior year. As of November 30, 2017,2023, the Company has commitments for capital expenditures totaling $150,000$225,000 during the next twelve months. These costs are primarily relatedThe Board of Directors is evaluating additional capital expenditures to acquisition of new equipment used to test the function of products prior to shipment to customers.expand capacity.

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 unsecuredInventory 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.Maintenance Inventory

NOTE: Inventory turnover is annualized for the six monthsix-month period ended November 30, 2017.2023.

Inventory, at $11,790,000$6,857,000 as of November 30, 2017,2023, is $301,000, or 3%,$916,000 more than the prior year-end level of $11,489,000.$5,941,000. Approximately 91%84% of the current inventory is work in process, 2%4% is finished goods, and 7%12% is raw materials.

Maintenance and other inventory represent stock that is estimated to have a product life cycle in excess of twelve months. This stock represents certain items the Company is required to maintain for service of products sold and items that are generally subject to spontaneous ordering. This inventory is particularly sensitive to technological obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was $60,000$144,000 and $90,000zero for the six monthsix-month periods ended November 30, 20172023 and 2016. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.2022.

Accounts Receivable, Costs and Estimated Earnings in Excess of Billings (“CIEB"), and Billings in Excess of Costs and Estimated Earnings ("BIEC")

The Company combines the totals of accounts receivable, the current asset, CIEB, and the current liability, BIEC, to determine how much cash the Company will eventually realize from revenue recorded to date. As the accounts receivable figure rises in relation to the other two figures, the Company can anticipate increased cash receipts within the ensuing 30-60 days.

Accounts receivable of $3,509,000$4,072,000 as of November 30, 20172023 includes approximately $818,000 of amounts retained by customers on Projects. It is expected that amounts retained by customers under contracts will be released in the normal course of the business in accordance with the related contracts. Accounts receivable also includes $110,000$29,000 of an allowance for doubtful accounts (“Allowance”). The accounts receivable balance as of May 31, 20172023 of $2,546,000$5,554,000 included an Allowance of $110,000.

$29,000. The number of an average day's sales outstanding in accounts receivable (“DSO”) increaseddecreased from 3647 days at May 31, 20172023 to 6635 at November 30, 2017.2023. The DSO is a function of 1.) the level of sales for an average day (for example, total sales for the past three months divided by 90 days) and 2.) the level of accounts receivable at the balance sheet date. The level of sales for an average day in the second quarter of the current fiscal year is 24% less than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 38% more than at the end of the prior year. The combined effect of these two factors caused the DSO to increase from last year end to this quarter-end. The primary reasons for the increase in the level of accounts receivable from last year end to this quarter-end, in spite of a significantly lower level of sales, were higher billings in the latter half of the quarter and lower level of collections during the quarter. The Company expects to collect the net accounts receivable balance including the retainage, during the next twelve months.

As noted above, CIEB represents revenues recognized in excess of amounts billed. Whenever possible, the Company negotiates a provision in sales contracts to allow the Company to bill, and collect from the customer, payments in advance of shipments. Unfortunately, such provisions are often not possible. The $7,519,000$1,723,000 balance in this account at November 30, 20172023 is 9% more58% less than the prior year-end balance. This increasedecrease is the result of normal flow of the projectsProjects through production with billings to the customers as permitted in the related contracts. The Company expects to bill the entire amount during the next twelve months. 32%61% of the CIEB balance as of the end of the last fiscal quarter, August 31, 2017,2023, was billed to those customers in the current fiscal quarter ended November 30, 2017.2023. The remainder will be billed as the Projects progress, in accordance with the terms specified in the various contracts.

The balances in this account are comprised of the following components:

As noted above, BIEC represents billings to customers in excess of revenues recognized. The $793,000$3,006,000 balance in this account at November 30, 20172023 is down 39%up 51% from the $1,296,000$1,992,000 balance at the end of the prior year.

The balance in this account fluctuates in the same manner and for the same reasons as the account “costs and estimated earnings in excess of billings”,CIEB, discussed above. Final delivery of product under these contracts is expected to occur during the next twelve months.

The balances in this account are comprised of the following components:

Summary of factors affecting the balances in CIEB and BIEC:

The Company's backlog of sales orders at November 30, 20172023 is $20.4$35.5 million, slightly less than the $20.6up from $32.5 million at the end of the prior year. $7.2$21.2 million of the current backlog is on Projects already in progress.

Other Balance Sheet Items

Accounts payable, at $1,341,000$1,168,000 as of November 30, 2017,2023, is 1% more32% less than the prior year-end. Commission expense on applicable sales orders is recognized at the time revenue is recognized. The commission is paid following receipt of payment from the customers. Accrued commissions as of November 30, 2017 are $1,105,000, up 31% from the $847,000 accrued at the prior year-end. This large increase is due to the increases in the accounts receivable and CIEB, discussed above. Other current liabilities increased slightlyexpenses decreased 26% from the prior year-end, to $919,000.$3,033,000. The Company expects the current accrued amounts to be paid or applied during the next twelve months.

Management believes the Company's cash flows from operations and borrowing capacity under the bank line of credit are sufficient to fund ongoing operations and capital improvements for the next twelve months.

Subsequent Event

On January 4, 2024, the Company entered into a Redemption Agreement to purchase 459,015 shares of the capital stock of the Company, representing approximately 13% of all of the issued and outstanding shares of capital stock of the Company from the Ira Sochet Trust and the Ira Sochet Roth IRA, non-affiliates of the Company.  The agreed purchase price was $19.92 per share, (87.6%) of the average price at which shares of the Company's stock trade on the Closing Date on January 8, 2024.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

Smaller reporting companies are not required to provide the information called for by this item.

Item 4.Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures as of November 30, 20172023 and have concluded that as of the evaluation date, the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

There have been no changes in the Company's internal controls over financial reporting that occurred during the fiscal quarter ended November 30, 20172023 that have materially affected, or are reasonably likely to materially affect, the Company's control over financial reporting.

Part II - Other Information