BUTLER NATIONAL CORP - Quarter Report: 2021 July (Form 10-Q)

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of July 31, 2021 and April 30, 2021

(in thousands except per share data) 

See accompanying notes to condensed consolidated financial statements (unaudited)

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED July 31, 2021 AND 2020

(in thousands, except per share data)

(unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited)

 BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE three months ended July 31, 2021 and 2020

(dollars in thousands) (unaudited)

See accompanying notes to condensed consolidated financial statements (unaudited)

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE three months ended July 31, 2021 and 2020

(in thousands)

(unaudited) 

See accompanying notes to condensed consolidated financial statements (unaudited)

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the annual report on Form 10-K for the fiscal year ended April 30, 2021. In our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three months ended July 31, 2021 are not indicative of the results of operations that may be expected for the fiscal year ending April 30, 2022.

Certain reclassifications within the condensed financial statement captions have been made to maintain consistency in presentation between years. These reclassifications have no impact on the reported results of operations. Financial amounts are in thousands of dollars except per share amounts.

2. Net Income Per Share: Butler National Corporation (“the Company”) follows ASC 260 that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In accordance with ASC 260, any anti-dilutive effects on net earnings per share would be excluded. The number of potential common shares as of July 31, 2021 is 75,366,749.

3. Revenue Recognition: ASC Topic 606, “Revenue from Contracts with Customers”

Under ASC 606, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration we expect to receive in exchange for those services. To achieve this core principal, the Company applies the following five steps:

4. Disaggregation of Revenue

In the following table, revenue is disaggregated by primary geographical market, major product line, and timing of revenue recognition.

Accounts Receivables, net, contract asset and contract liability were as follows (in thousands):

Accounts receivable, net consist of $2,957 and $1,961 from customers as of July 31, 2021 and April 30, 2021, respectively. At July 31, 2021 and April 30, 2021, the allowance for doubtful accounts was $143 and $143, respectively.

Contract assets are net of progress payments and performance based payments from our customers as well as advance payments from customers totaling $578 and $421 as of July 31, 2021 and April 30, 2021. Contract assets increased $157 during the quarter ended July 31, 2021, primarily due to the recognition of revenue related to the satisfaction or partial satisfaction of performance obligations during the quarter ended July 31, 2021 for which we have not yet billed our customers. There were no significant impairment losses related to our contract assets during the quarter ended July 31, 2021. We expect to bill our customers for the majority of the July 31, 2021 contract assets during fiscal year end 2022.

Contract liabilities decreased $3.0 million during the quarter ended July 31, 2021, primarily due to revenue recognized on these performance obligations in excess of payments received.

7. Inventories: Inventories are priced at the lower of cost, determined on a first-in, first-out basis, or net realizable value. Inventories include material, labor and factory overhead required in the production of our products.

Inventory obsolescence is examined on a regular basis. When determining our estimate of obsolescence, we consider inventory that has been inactive for five years or longer and the probability of using that inventory in future production. The obsolete inventory generally consists of Falcon and Learjet parts and electrical components.  At July 31, 2021 and April 30, 2021, the estimate of obsolete inventory was $691 and $691 respectively.

8. Research and Development: We invested in research and development activities. The amount invested in the three months ended July 31, 2021 and 2020 was $326 and $763 respectively.

9. Debt: At July 31, 2021, the Company was utilizing a promissory note in the form of a line of credit totaling $2,000. The unused line at July 31, 2021 was $2,000. The interest rate on this promissory note is 3.65%. The line of credit is due on demand and is collateralized by the first and second positions on all assets of the Company.

At  July 31, 2021, there was one note collateralized by all of BHCMC's assets and compensation due under the State Management contract with a balance of $33,680 (net of unamortized deferred finance costs of $299). The interest rate on this note is 5.32%. This note matures in December 2027, with a balloon payment of $19,250.

At  July 31, 2021, there was one note collateralized by all of BHCMC's assets and compensation due under the State Management contract with a balance of $6,126 (net of unamortized deferred finance costs of $58). The interest rate on this note is 5.83%. This note matures in December 2025.

At July 31, 2021, there was one note with an interest rate of 6.25% collateralized by aircraft security agreements totaling $991. This note was used for the purchase and modifications of collateralized aircraft. This note matures in January 2023.

At July 31, 2021, there is one note totaling $197 collateralized by real estate in Dodge City, Kansas. The interest rate on this note is 6.25%. This note matures in June 2024.

At July 31, 2021, there is one note collateralized by equipment with a balance of $16. The interest rate on this note is 4.5%. This note matures in April 2022.

At July 31, 2021, there is a note payable collateralized by real estate with a balance of $1,227. The interest rate on this note is at LIBOR plus 1.75%. This note matures in March 2029.

At July 31, 2021, there is a note payable collateralized by real estate with a balance of $562. The interest rate on this note is at LIBOR plus 1.75%. This note matures in March 2029.

In May 2020, the Company received a Paycheck Protection Program (PPP) loan for $2,001. In June 2021, the Company received notice of forgiveness from the Small Business Administration.

We are not in default of any of our notes as of July 31, 2021.

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 2021 and beyond.

10. Other Assets: Our other asset account includes assets of $5,500 related to the Kansas Expanded Lottery Act Management Contract privilege fee, $5,966 of gaming equipment we were required to pay for ownership by the State of Kansas Lottery, JET autopilot intellectual property of $1,417 and miscellaneous other assets of $907. BHCMC expects the $5,500 privilege fee to have a value over the remaining life of the initial Management Contract with the State of Kansas which will end in December 2024. The State of Kansas approved a renewal management contract and an amendment to the current management contract for our Professional Services company BNSC via BHCMC. The renewal will take effect December 15, 2024, and continue to 2039, another 15 years. The Managers Certificate asset for use of gaming equipment is being amortized over a period of three years based on the estimated useful life of gaming equipment. The JET intellectual property is being amortized over a period of fifteen years.

11. Stock Options and Incentive Plans:

In November 2016, the shareholders approved and adopted the Butler National Corporation 2016 Equity Incentive Plan. The maximum number of shares of common stock that may be issued under the Plan is 12.5 million.

On April 12, 2019, the Company granted 2.5 million restricted shares to employees. These shares have voting rights at date of grant and become fully vested and nonforfeitable on April 11, 2024. The restricted shares were valued at $0.38 per share, for a total of $950. On March 17, 2020, the Company granted 5.0 million restricted shares to employees. These shares have voting rights at date of grant and become fully vested and non-forfeitable on March 16, 2025. The restricted shares were valued at $0.41 per share, for a total of $2.0 million. The deferred compensation related to these grants will be expensed on the financial statements over the five year vesting period. No other equity awards have been made under the plan.

For the three months ended July 31, 2021 and July 31, 2020, the Company expensed $148 and $150, respectively.

12. Stock Repurchase Program

The Board of Directors approved a stock purchase program authorizing the repurchase of up to $4,000 of its common stock. The timing and amount of any share repurchases will be determined by Butler National’s management based on market conditions and other factors. The program is currently authorized through May 1, 2022.

The table below provides information with respect to common stock purchases by the Company through July 31, 2021.

13. Lease Right-to-Use

On May 1, 2019, the Company adopted ASU 2016-02 Leases – Topic 842. ASU 2016-02 requires that on the balance sheet a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.

We lease hangars and office space with initial lease terms of two, five, and fifty years.

Future minimum lease payments for assets under capital leases at July 31, 2021 are as follows:

14. Segment Reporting and Sales by Major Customer:

Industry Segmentation

Current Activities - The Company focuses on two primary activities, Professional Services and Aerospace Products.

Aerospace Products:

Aircraft Modifications principally includes the modification of customer and company owned business-size aircraft for specific operations or special missions such as addition of aerial photography capabilities and ISR modifications. We provide these services through our subsidiary, Avcon Industries, Inc. ("Aircraft Modifications" or "Avcon").

Special mission electronics principally includes the manufacture, sale, and service of electronics upgrades for classic weapon control systems used on commercial and military aircraft and vehicles. We provide the products through our subsidiary, Butler National Corporation - Tempe, Arizona.

Butler Avionics sells, installs and repairs aircraft avionics equipment (airplane radio equipment and flight control systems). These systems are flight display systems which include intuitive touchscreen controls with large display that enhance pilot situational awareness and give users unprecedented access to high-resolution terrain mapping, graphical flight planning, geo-referenced charting, traffic display, satellite weather and much more. Butler Avionics is also recognized nationwide for its troubleshooting and repair work particularly on autopilot systems.

Professional Services:

Butler National Service Corporation ("BNSC") provides management services to the Boot Hill Casino, a "state-owned casino".

BCS Design, Inc. provides licensed architectural services. These services include commercial and industrial building design.

Our Chief Operating Decision Maker (CODM) does not evaluate operating segments using asset or liability information.

Major Customers: Revenue from major customers (10 percent or more of consolidated revenue) were as follows:

In three months ended July 31, 2021 the Company derived 35.0% of total revenue from five Aerospace customers. The top customer provided 10.7% of total revenue while the next top four customers ranged from 3.8% to 9.7%.

The pandemic caused by the disease COVID-19 was first reported in Wuhan, China in December 2019 and has since spread throughout the world. Financial markets have been volatile in 2020 and 2021, primarily due to uncertainty with respect to the severity and duration of the pandemic.

The pandemic resulted in federal, state and local governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures.

Our aerospace segment qualified as “essential” under applicable federal guidance and state orders. The facilities have continued operations. We are enforcing social distancing and enhanced health, safety and sanitization measures in accordance with guidelines from the Center for Disease Control (the “CDC”).

Our professional services operations at the Boot Hill Casino & Resort was forced to close from March 18, 2020 thru May 21, 2020.  The casino reopened to the public on May 22, 2020 with reduced hours to allow for extra time for cleaning and sanitizing in accordance with CDC guidelines and limited number of games and food offerings. We are also continuing to enforce social distancing measures throughout the casino and are subject to state mandated restrictions.  Since reopening the Boot Hill Casino & Resort we have experienced lower customer headcount, which has been off-set by a larger net revenue per customer.  

The COVID-19 pandemic impacted our business operations and financial results beginning in the fourth quarter of fiscal 2020 and continues to impact us. 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.

As schools, businesses and the economy in general have slowly reopened, 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.

16. Extension of the Shareholder Rights Plan:

On July 22, 2021, the Company extended the shareholder rights plan between the Company and UMB Bank, N.A. as rights agent dated as of August 2, 2011 (the “Rights Plan”). The Rights Plan is intended to protect the interests of the Company’s stockholders and enable them to realize the full potential value of their investment by reducing the likelihood that any person or group gains control of the Company, through open market accumulation or other tactics, without appropriately compensating all stockholders. Pursuant to the Rights Plan, the Company issued, by means of a dividend, one preferred share purchase right (a "Right") for each outstanding share of our Common Stock to shareholders of record on the close of business on August 2, 2011. Shares issued after August 2, 2011 also include one Right. Until triggering event, these Rights will trade with, and be represented by, the shares of our Common Stock. The Rights will generally become exercisable only if any person (or any persons acting as a group) acquires 15% or more of our outstanding Common Stock (the “Acquiring Person”) in a transaction not approved by the Board, subject to certain exceptions.

If the Rights become exercisable, all holders of Rights, other than the Acquiring Person, will be entitled to acquire shares of the Company’s common stock at a 50% discount. In such situation, Rights held by the Acquiring Person would become void and will not be exercisable.

Each Right entitles the registered holder to purchase from the Company one two-hundredth of a share of Series C Participating Preferred Stock, par value $5.00 per share (the “Preferred Shares”), of the Company at a price of $10 per one two-hundredth of a Participating Preferred Share represented by a Right (the “Purchase Price”), subject to adjustment. Unless a triggering event occurs, the value of the Right is considered de minimis. 

Unless earlier redeemed, terminated or exchanged pursuant to the terms of the Rights Plan, or the Rights Plan is extended, the Rights will expire at the close of business on  August 2, 2031. The Board may terminate the Rights Plan before that date if the Board determines that there is no longer a threat to shareholder value.

17. Subsequent Events:

The Company evaluated its July 31, 2021 financial statements for subsequent events through the filing date of this report. The Company is not aware of any subsequent events that would require recognition or disclosure in the financial statements.

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, 2021, 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, 2021, including the following factors:

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 2021 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:

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:

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:

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 645 slot machines and 20 table games. Due to COVID-19, Boot Hill Casino and Resort currently operates 520 slot machines and 16 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”), via BHCMC, LLC (“BHCMC”), a company in Professional Services, has managed The Boot Hill Casino and Resort in Dodge City, Kansas (“Boot Hill”) since 2009 pursuant to the Lottery Gaming Facility Management Contract, by and among BNSC, BHCMC and the Kansas Lottery, originally dated December 8, 2009, as subsequently amended (“Boot Hill Agreement”). As required by Kansas law, all games, gaming equipment and gaming operations at Boot Hill are owned and operated by the Kansas Lottery.

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 the disease COVID-19 was first reported in Wuhan, China in December 2019 and has since spread throughout the world. Financial markets have been volatile in 2020 and 2021, primarily due to uncertainty with respect to the severity and duration of the pandemic.

The pandemic resulted in federal, state and local governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures.

Our aerospace segment qualified as “essential” under applicable federal guidance and state orders. The facilities have continued operations. We are enforcing social distancing and enhanced health, safety and sanitization measures in accordance with guidelines from the Center for Disease Control (the “CDC”).

Our professional services operations at the Boot Hill Casino & Resort was forced to close from March 18, 2020 thru May 21, 2020.  The casino reopened to the public on May 22, 2020 with reduced hours to allow for extra time for cleaning and sanitizing in accordance with CDC guidelines and limited number of games and food offerings. We are also continuing to enforce social distancing measures throughout the casino and are subject to state mandated restrictions.  Since reopening the Boot Hill Casino & Resort we have experienced lower customer headcount, which has been off-set by a larger net revenue per customer.  

The COVID-19 pandemic impacted our business operations and financial results beginning in the fourth quarter of fiscal 2020 and continues to impact us. 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.

As schools, businesses and the economy in general have slowly reopened, 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, 2021 revenue increased 40% to $18.1 million compared to $13.0 million in the three months ended July 31, 2020. In the three months ended July 31, 2021 the professional services revenue was $9.7 million compared to $5.4 million in the three months ended July 31, 2020, an increase of 82%. In the three months ended July 31, 2021 the Aerospace Products revenue was $8.4 million compared to $7.6 million in the three months ended July 31, 2020, an increase of 10%.

The three months ended July 31, 2021 net income increased to $2.9 million compared to a net loss of $15 in the three months ended July 31, 2020.  The three months ended July 31, 2021, operating income increased to $4.0 million from an operating income of $128 in the three months ended July 31, 2020.

RESULTS OF OPERATIONS

THREE MONTHS ENDING JULY 31, 2021 COMPARED TO THREE MONTHS ENDING JULY 31, 2020

Revenue:

Revenue increased 40% to $18.1 million in the three months ended July 31, 2021, compared to $13.0 million in the three months ended July 31, 2020. See "Operations by Segment" below for a discussion of the primary reasons for the increase in revenue.

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 increased 10% in the three months ended July 31, 2021 to $14.1 million compared to $12.9 million in the three months ended July 31, 2020. Costs and expenses were 78% of total revenue in the three months ended July 31, 2021, as compared to 99% of total revenue in the three months ended July 31, 2020.

Costs of Professional Services increased 9% in the three months ended July 31, 2021 to $3.7 million compared to $3.4 million in the three months ended July 31, 2020. Costs were 20% of total revenue in the three months ended July 31, 2021, as compared to 26% of total revenue in the three months ended July 31, 2020.

Costs of Aerospace Products increased 18% in the three months ended July 31, 2021 to $6.0 million compared to $5.1 million for the three months ended July 31, 2020. Costs were 33% of total revenue in the three months ended July 31, 2021, as compared to 39% of total revenue in the three months ended July 31, 2020.

Marketing and advertising expenses increased 26% in the three months ended July 31, 2021, to $1.2 million compared to $1.0 million in the three months ended July 31, 2020. Expenses were 7% of total revenue in the three months ended July 31, 2021, as compared to 7% of total revenue in the three months ended July 31, 2020. 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 3% in the three months ended July 31, 2021, compared to 5% in the three months ended July 31, 2020. These expenses decreased 2% to $575 in the three months ended July 31, 2021, from $585 in the three months ended July 31, 2020. 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 4% in the three months ended July 31, 2021, compared to 8% in the three months ended July 31, 2020. These expenses decreased 33% to $702 in the three months ended July 31, 2021 from $1.0 million in the three months ended July 31, 2020. 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, 2021 was $578 compared to $928 in the three months ended July 31, 2020.

General, administrative and other expenses as a percent of total revenue was 11% in the three months ended July 31, 2021, compared to 14% in the three months ended July 31, 2020. These expenses increased 9% to $1.9 million in the three months ended July 31, 2021, from $1.8 million in the three months ended July 31, 2020.

Other expense:

Interest expense was $614 in the three months ended July 31, 2021, compared with interest expense of $588 in the three months ended July 31, 2020. Interest related to obligations of BHCMC, LLC was $548 in the three months ended July 31, 2021 compared to $502 million in the three months ended July 31, 2020.

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, 2021 and July 31, 2020:

Professional Services

Aerospace Products

Employees

Other than persons employed by our gaming subsidiaries there were 118 full time and 4 part time employees on July 31, 2021, compared to 112 full time and 5 part time employees on July 31, 2020. As of September 3, 2021, staffing is 114 full time and 5 part time employees. Our staffing at Boot Hill Casino & Resort on July 31, 2021 was 161 full time and 55 part time employees compared to 175 full time and 66 part time employees on July 31, 2020. At September 3, 2021 there are 167 full time and 54 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 2022 and beyond.

The ownership structure of BHCMC, LLC is now:

Our wholly owned subsidiary, Butler National Service Corporation continues friendly discussions with the other member of BHCMC, LLC to explore the possible acquisition by Butler National Service Corporation of the other member's 20% equity interest in BHCMC, LLC.   If and when a definitive agreement is reached, such definitive agreement and a press release concerning the acquisition will be issued to describe the terms of the agreement and the intentions of the members.   We have not set a definitive timetable for our discussions and there can be no assurances that the process will result in any transaction being announced or completed.  At present there is no disagreement between the members of BHCMC, LLC.   We do not plan to disclose or comment on developments until further disclosure is deemed appropriate.

Analysis and Discussion of Cash Flow

During the three months ended July 31, 2021 our cash position decreased by $1.4 million. Net income was $4.8 million for the three months ended July 31, 2021. Cash flows provided by operating activities was $860 for the three months ended July 31, 2021. Non-cash activities consisting of depreciation and amortization provided $1.3 million, while deferred compensation provided $148 and forgiveness of debt used $2.0 million. Contract assets decreased our cash position by $157. Contract liability decreased our cash position by $3.0 million. Inventories increased our cash position by $113. Accounts receivable decreased our cash position by $1.0 million. Gaming facility mandated payments decreased our cash position by $227. Prepaid expenses and other assets decreased our cash by $18. An increase in accounts payable, a decrease in accrued expenses, and an increase in other current liabilities increased our cash by $269. Income tax payable increased our cash position by $631.

Cash used in investing activities was $1.3 million for the three months ended July 31, 2021. We invested $115 towards STCs, and $1.1 million on equipment and furnishings.

Cash used by financing activities was $1.0 million for the three months ended July 31, 2021. We made repayments on our debt of $1.0 million. We made payments on our lease liability of $34.

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 2022. From fiscal year 2021 to fiscal year 2022 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 2022 and 2023.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 under the Securities Exchange Act of 1934 and are not required to provide the information required under this item.

Item 4.  CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q and have determined that such disclosure controls and procedures are effective, based on criteria in the Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

Evaluation of disclosure controls and procedures: Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Form 10-Q, our Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2021. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of July 31, 2021.

Internal Control Over Financial Reporting

Limitations on Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Changes in Internal Control Over Financial Reporting: In our opinion there were no changes in the Company's internal control over financial reporting during the three months ended July 31, 2021 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II.  OTHER INFORMATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Exhibit Index