ARTS WAY MANUFACTURING CO INC - Quarter Report: 2023 February (Form 10-Q)

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Notes to Unaudited Condensed Consolidated Financial Statements

Unless otherwise specified, as used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Art’s-Way,” and the “Company” refer to Art’s-Way Manufacturing Co., Inc., a Delaware corporation headquartered in Armstrong, Iowa, and its wholly owned subsidiaries.

The Company began operations as a farm equipment manufacturer in 1956. Since that time, it has become a major worldwide manufacturer of agricultural equipment. Its principal manufacturing plant is located in Armstrong, Iowa.

The Company has organized its business into three operating segments. Management separately evaluates the financial results of each segment because each is a strategic business unit offering different products and requiring different technology and marketing strategies. The Agricultural Products segment manufactures and sells farm equipment and related replacement parts under the Art’s-Way Manufacturing label and private labels. The Modular Buildings segment manufactures and installs modular buildings for animal containment and various laboratory uses, and the Tools segment manufactures steel cutting tools and inserts.

Statement Presentation

The foregoing condensed consolidated financial statements of the Company are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and operating results for the interim periods. The financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2022. The results of operations for the three months ended February 28, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2023.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the three months ended February 28, 2023. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within the year of adoption. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt ASU 2016-13 in fiscal 2024. The Company does not expect the application of the CECL impairment model to have a significant impact on its allowance for uncollectible amounts for accounts receivable.

The following table displays revenue by reportable segment from external customers, disaggregated by major source. The Company believes disaggregating by these categories depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

The Company offered floorplan terms in its Agricultural Products segment during its Fall of 2021 and 2022 early order program to incentivize customers to stock farm equipment on their lots for fiscal 2022 and fiscal 2023. Floorplan terms allow customers to pay the Company at the earliest of retail date or 180 days. This program has an effect on the timing of the Company’s cash flows compared with historical cash flows.

On February 28, 2023, the Company had approximately $950,000 in receivables on the floorplan program with a due date greater than 30 days compared to $468,000 on February 28, 2022

The following table provides information about contract receivables, contract assets, and contract liabilities from contracts with customers included on the Condensed Consolidated Balance Sheets.

The amount of revenue recognized in the first three months of fiscal 2023 that was included in a contract liability on November 30, 2022 was approximately $827,000 compared to $415,000 in the same period of fiscal 2022. The beginning contract receivables, assets and liabilities on December 1, 2021 were approximately $2,663,000; $177,000 and $559,000, respectively. The increase in contract receivables on February 28, 2023 is due to a 40.7% increase in revenue for Q1 of fiscal 2023 and the timing of contract billings that were outstanding at quarter end. Contract liabilities increased significantly during the three months ended February 28, 2022 as the Company received a large number of deposits from our fall early order program. The Company incentivizes cash deposits in exchange for discounts to lock in inventory pricing and help with planning to maximize plant efficiency in the agricultural products segment.

The Company utilizes the practical expedient exception for these contracts and will report only on performance obligations greater than one year. As of February 28, 2023, the Company has no performance obligations with an original expected duration greater than one year.

Basic net income (loss) per share of common stock has been computed on the basis of the weighted average number of common shares outstanding. Diluted net income (loss) per share has been computed on the basis of the weighted average number of common shares outstanding plus equivalent shares assuming exercise of stock options. Potential shares of common stock that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted net income (loss) per share.

Basic and diluted net income (loss) per share have been computed based on the following as of February 28, 2023 and February 28, 2022:

Major classes of inventory are:

Major components of accrued expenses are:

Major components of assets held for lease are:

The Company recognized $32,025 in rents from assets held for lease that were included in sales on the Condensed Consolidated Statements of Operations during the three months ended February 28, 2023 compared to none for the three months ended February 28, 2022.

The Company has $46,591 of future minimum lease receipts expected to be recognized in fiscal 2023 from assets held for lease as of February 28, 2023.

The Company offers warranties of various lengths to its customers depending on the specific product and terms of the customer purchase agreement. The average length of the warranty period is one year from the date of purchase. The Company’s warranties require it to repair or replace defective products during the warranty period at no cost to the customer. Product warranty is included in the price of the product and provides assurance that the product will function in accordance with agreed-upon specifications. It does not represent a separate performance obligation under ASC 606. The Company records a liability for estimated costs that may be incurred under its warranties. The costs are estimated based on historical experience and any specific warranty issues that have been identified. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary. The accrued warranty balance is included in accrued expenses as shown in Note 7 “Accrued Expenses.” Changes in the Company’s product warranty liability for the three months ended February 28, 2023 and February 28, 2022 are as follows:

Bank Midwest Revolving Lines of Credit and Term Loans

The Company maintains a $5,000,000 revolving line of credit (the “Line of Credit”) with Bank Midwest. On February 28, 2023, the balance of the Line of Credit was $3,055,559 with $1,944,441 remaining available, as may be limited by the borrowing base calculation. The Line of Credit borrowing base is an amount equal to 75% of accounts receivable balances (discounted for aged receivables), plus 50% of net inventory, less any outstanding loan balance on the Line of Credit. On February 28, 2023, the Line of Credit was not limited by the borrowing base calculation. Any unpaid principal amount borrowed on the Line of Credit accrues interest at a floating rate per annum equal to 1.25% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 4.25% per annum and the current interest rate is 9.25% per annum. The Line of Credit was most recently renewed on March 30, 2023 which dropped the floating interest rate from 1.50% to 1.25% above the Wall Street Journal rate. The Line of Credit matures on March 30, 2024 and requires monthly interest-only payments. The Line of Credit is governed by the terms of a Promissory Note, dated March 28, 2023, entered into between the Company and Bank Midwest.

The Company carries a $2,600,000 term loan with Bank Midwest due October 1, 2037 (the “Term Loan”), and a $350,000 term loan (the “Roof Term Loan”) due on May 15, 2027. The Term Loan accrued interest at a rate of 5.00% for the first ninety months, which ended on September 28, 2022. Thereafter, the Term Loan interest rate was reset to a fixed rate of 7% based on prime plus 0.75% on the reset date. The interest rate floor is set at 4.15% per annum and the interest rate may only be adjusted by Bank Midwest once every five years. Monthly payments of $19,648 in principal and interest are required. The Term Loan is also guaranteed by the United States Department of Agriculture (“USDA”), which required an upfront guarantee fee of $62,400 and requires an annual fee of 0.5% of the unpaid balance. As part of the USDA guarantee requirements, shareholders owning more than 20% are required to personally guarantee a portion of the Term Loan, in an amount equal to their stock ownership percentage. The J. Ward McConnell Jr. Living Trust, the estate of the former Vice Chairman of the Board of Directors and a shareholder owning more than 20% of the Company’s outstanding stock, is guaranteeing approximately 38% of the Term Loan, for an annual fee of 2% of the personally guaranteed amount. The initial guarantee fee will be amortized over the life of the Term Loan, and the annual fees and personally guaranteed amounts are expensed monthly. The Term Loan is governed by the terms of a Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest.

In connection with the Line of Credit, the Company, Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. each entered into a Commercial Security Agreement with Bank Midwest, dated September 28, 2017, pursuant to which each granted to Bank Midwest a first priority security interest in certain inventory, equipment, accounts, chattel paper, instruments, letters of credit and other assets to secure the obligations of the Company under the Line of Credit. Each of Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. also agreed to guarantee the obligations of the Company pursuant to the Line of Credit, as set forth in Commercial Guaranties, each dated September 28, 2017.

The Company also entered into the Roof Term Loan of $350,000 with Bank Midwest on May 17, 2022. The Roof Term Loan’s proceeds were used to fix sections of the Armstrong facility’s roof. The Roof Term Loan requires 59 regular payments of $2,972 and an estimated balloon payment of $294,168 on the maturity date of May 15, 2027. Any unpaid principal amount borrowed on the Roof Term Loan accrues interest at a rate of 7.0% per annum. The loan previously accrued interest at a floating rate per annum equal to 2.00% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The Company entered into a Change of Terms Agreement with Bank Midwest on March 30, 2023 which modified the interest rate terms of the promissory note. The Roof Term Loan is further governed by the terms of a Promissory Note, dated May 17, 2022, entered into between the Company and Bank Midwest.

To further secure the Line of Credit, the Company granted Bank Midwest a mortgage on its Canton, Ohio property held by Ohio Metal Working Products/Art’s-Way Inc. The Term Loan is secured by a mortgage on the Company’s Armstrong, Iowa and Monona, Iowa properties. Each mortgage is governed by the terms of a separate Mortgage, dated September 28, 2017, and each property is also subject to a separate Assignment of Rents, dated September 28, 2017.

If the Company or its subsidiaries (as guarantors pursuant to the Commercial Guaranties) commits an event of default with respect to the promissory notes and fails or is unable to cure that default, Bank Midwest may immediately terminate its obligation, if any, to make additional loans to the Company and may accelerate the Company’s obligations under the promissory notes. Bank Midwest shall also have all other rights and remedies for default provided by the Uniform Commercial Code, as well as any other applicable law and the various loan agreements. In addition, in an event of default, Bank Midwest may foreclose on the mortgaged property.

Compliance with Bank Midwest covenants is measured annually on November 30. The terms of the Bank Midwest loan agreements require the Company to maintain a minimum of $4,000,000 of monthly working capital. Additionally, a maximum debt to worth ratio of 1 to 1 must be maintained, with a minimum of 40% tangible balance sheet equity, with variations subject to mutual agreement. The Company is also required to maintain a minimum debt service coverage ratio of 1.25, with a 0.10 tolerance. The Company also must receive bank approval for purchases or sales of equipment over $100,000 annually and maintain reasonable salaries and owner compensation. The Company received the necessary approvals for purchases of equipment over $100,000 for the twelve months ended November 30, 2022. The Company was out of compliance with its debt to worth ratio by fifteen percentage points on the Bank Midwest loans as of November 30, 2022. Bank Midwest issued a waiver forgiving the noncompliance, and in turn waived the event of default. The next measurement date is November 30, 2023 for all covenants except the monthly working capital requirement.

SBA Economic Injury Disaster Loans

In June of 2020, the Company executed the standard loan documents required for securing loans offered by the U.S. Small Business Administration under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. Two loans were executed on June 18, 2020 with principal amounts of $150,000 each, with a third loan being executed on June 24, 2020 with a principal amount of $150,000. Proceeds from these EIDLs are being used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue from the date of inception. Installment payments, including principal and interest, were due monthly beginning December 18, 2022 (thirty months from the date of the EIDLs) and December 24, 2022 in the amount of $731 per EIDL. On March 11, 2021, the American Rescue Plan Act of 2021 was enacted, which extended the first due date for repayment of EIDLs made in 2020 from 12 months to 30 months from the date of the note. The balance of principal and interest is payable 30 years from the date of the EIDL. The EIDLs are secured by a security interest on all of the Company’s assets. Each EIDL is governed by the terms of a separate Promissory Note, dated either June 18, 2020 or June 24, 2020, as applicable, entered into by the Company or the applicable subsidiary. EID

A summary of the Company’s term debt is as follows:

A summary of the minimum maturities of term debt follows for the years ending November 30:

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses.

During the three months ended February 28, 2023 and February 28, 2022, the Company did not recognize any revenues from transactions with a related party, and no amounts in accounts receivable balances were due from a related party. From time to time, the Company purchases various supplies from related parties, which are companies previously owned by the late J. Ward McConnell, Jr., the former Vice Chairman of the Company’s Board of Directors and currently owned by his son, Marc McConnell, the Chairman of the Company’s Board of Directors, who also serves as President of these companies. J. Ward McConnell, Jr. as a shareholder owning more than 20% of the Company’s outstanding stock, was required to guarantee a portion of the Company’s term debt in accordance with the USDA guarantee on the Company’s term loan. J. Ward McConnell Jr.’s estate, the J. Ward McConnell, Jr. Living Trust, is paid a monthly fee for the guarantee. In the three months ended February 28, 2023, the Company recognized $4,170 of expense for transactions with related parties, compared to $9,349 for the three months ended February 28, 2022. As of February 28, 2023, accrued expenses contained a balance of $1,385 owed to a related party compared to $1,299 on February 28, 2022.

The Company determines if an arrangement is a lease at inception of a contract. The nature of the Company’s leases at this time is shop machinery and office equipment, mainly copiers, with terms of 12 to 60 months. Operating and finance leases are included in other assets as lease right-of-use (“ROU”) assets on the Consolidated Balance Sheets while current operating lease liabilities are included in accrued expenses. The short-term portion of finance leases along with long-term portions of operating and finance lease liabilities are presented on the face of the Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term while finance lease ROU assets are amortized on a straight-line basis and interest expense is recorded over the lease term.

The Company has copier lease agreements with lease and non-lease components and has elected the practical expedient not to separate lease and non-lease components for this asset class. The Company has also elected not to recognize lease liabilities and ROU assets for leases with an initial term of twelve months or less. The Company recognizes variable costs that depend on usage in profit or loss as they are incurred.

The components of operating leases on the Condensed Consolidated Balance Sheets on February 28, 2023 and November 30, 2022 were as follows:

The Company recorded $5,192 of operating lease costs in the three months ended February 28, 2023, which included variable costs tied to usage, compared to $4,843 for the three months ended February 28, 2022. The Company’s operating leases carry a weighted average lease term of 37 months and have a weighted average discount rate of 4.82%

Future maturities of operating lease liabilities are as follows:

The components of finance leases on the Consolidated Balance Sheets on February 28, 2023 and November 30, 2022 were as follows:

Future maturities of finance lease liabilities as of February 28, 2023 are as follows:

The weighted average lease term of the Company’s finance leases is 48 months while the weighted average rate of finance leases is 4.18%. The Company incurred $36,971 of amortization expense from ROU assets related to finance leases in the first three months ending February 28, 2023 compared to $16,142 for the same period in 2022.

On February 25, 2020, the Board of Directors of the Company (the “Board”) authorized and approved the Art’s-Way Manufacturing Co., Inc. 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan was approved by the stockholders on April 30, 2020. The 2020 Plan replaced the Art’s-Way Manufacturing Co., Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and prior plans. The 2020 Plan added an additional 500,000 shares to the number of shares reserved for issuance pursuant to equity awards. No further awards will be made under the 2011 Plan or other prior plans. Awards to directors and executive officers under the 2020 Plan are governed by the forms of agreement approved by the Board of Directors. Stock options or other awards granted prior to February 25, 2020 are governed by the applicable prior plan and the forms of agreement adopted thereunder.

The 2020 Plan permits the plan administrator to award nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance awards, and stock appreciation rights to employees (including officers), directors, and consultants. The Board has approved a director compensation policy pursuant to which non-employee directors are automatically granted restricted stock awards of 1,000 shares of fully vested common stock annually or initially upon their election to the Board and another 1,000 shares of fully vested common stock on the last business day of each fiscal quarter.

Shares issued under the 2020 Plan for the three months ended February 28, 2023 and 2022 are as follows:

On March 29, 2022, Art’s-Way Manufacturing Co., Inc. (the “Company”) entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Alumni Capital LP, a Delaware limited partnership (“Alumni Capital”), pursuant to which the Company agreed to sell, and Alumni Capital agreed to purchase, upon request of the Company in one or more transactions, a number of shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”) providing aggregate gross proceeds to the Company of up to $3,000,000 (the “Maximum”). The Purchase Agreement expires upon the earlier of the aggregate gross proceeds from the sale of shares meeting the maximum or June 30, 2023.

Among other limitations, unless otherwise agreed upon by Alumni Capital, each sale of shares will be limited to 50,000 shares and further limited to no more than the number of shares that would result in the beneficial ownership by Alumni Capital and its affiliates, at any single point in time, of more than 9.99% of the then-outstanding shares of Common Stock. Alumni Capital will purchase the shares of Common Stock under the Agreement at a discount ranging from 3-5% of the lowest traded price of the Common Stock in the five business days preceding the Company delivering notice of the required purchase of shares to Alumni Capital.

In exchange for Alumni Capital entering into the Purchase Agreement, the Company issued 20,000 shares of Common Stock to Alumni Capital upon execution of the Purchase Agreement (the “Initial Commitment Shares”) and issued another 20,000 shares in connection with the first closing under the Purchase Agreement (with the Initial Commitment Shares, the “Commitment Shares”). Alumni Capital represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)). The Company shares of Common Stock, including the Commitment Shares, are being offered and sold under the Purchase Agreement in reliance upon an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The Purchase Agreement provided that the Company file a registration statement under the Securities Act covering the resale of the shares issued to Alumni Capital. Alumni Capital’s obligation to purchase shares of Common Stock under the Purchase Agreement is conditioned upon, among other things, the registration statement having been declared effective by the Securities and Exchange Commission. The Company filed a registration statement on Form S-3 (the “Registration Statement”) April 27, 2022 which was declared effective on August 9, 2022 by the SEC.

The Company evaluated the embedded options and believed they should not be bifurcated from the agreement and accounted for separately as it is indexed to the Company’s stock and would qualify for equity treatment on the balance sheet.

The Company incurred approximately $203,000 of expense related to equity issuance in the twelve months ended November 30, 2022 in the form of 40,000 commitment shares valued at approximately $160,000, attorney fees for the negotiation and execution of the Purchase Agreement and the preparation and filing of the registration statement. These equity issuance costs reduced proceeds received under the common stock purchase agreement in additional paid in capital in the 2022 fiscal year.

Below is a summary of shares purchased by Alumni Capital under this agreement as of the filing date of this report:

The Company has $2,454,472 of funding under the common stock purchase agreement that can be utilized as of February 28, 2023, subject to the limitations and conditions summarized above.

The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. On February 28, 2023 and November 30, 2022, the carrying amount approximated fair value for cash, accounts receivable, accounts payable, notes payable to bank, finance lease liabilities and other current and long-term liabilities. The carrying amounts of current assets and liabilities approximate fair value because of the short maturity of these instruments. The fair value of the finance lease liabilities also approximate recorded value as that is based on discounting future cash flows at rates implicit in the lease. The rates implicit in the lease do not materially differ from current market rates. The fair value of the Company’s term loans payable also approximates recorded value because the interest rates charged under the loan terms are not substantially different from current interest rates.

The Company has three reportable segments: Agricultural Products, Modular Buildings and Tools. The Agricultural Products segment manufactures and sells farm equipment and related replacement parts under the Art’s-Way Manufacturing label. The Modular Buildings segment manufactures and installs modular buildings for various uses, commonly animal containment and research laboratories. The Tools segment manufactures steel cutting tools and inserts.

The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Management evaluates the performance of each segment based on profit or loss from operations before income taxes, exclusive of nonrecurring gains and losses.

Approximate financial information with respect to the reportable segments is as follows.

*The consolidated total in the tables is a sum of segment figures and may not tie to actual figures in the condensed consolidated financial statements due to rounding.

Management evaluated all other activity of the Company and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements other than the line of credit renewal and change in terms on the roof term loan as discussed in “Item 1 - Notes to Condensed Consolidated Financial Statements - Note 10 Loan and Credit Agreements.”

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

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “report”) and the audited consolidated financial statements and related notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data,” as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2022. Some of the statements in this report may be forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. Many of these forward-looking statements are located in this report under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but they may appear in other sections as well. Forward-looking statements in this report generally relate to: (i) our expectations with respect to order backlog; (ii) our beliefs regarding the sufficiency of working capital and cash flows; (iii) our expectation that we will continue to be able to renew or obtain financing on reasonable terms when necessary as well as our continued positive relationship with our creditors and lenders; (iv) our expectations as to the impact on margins due to recent price increases and expect costs of materials, such as steel; (v) our intentions and beliefs relating to our costs, business strategies, and future performance; (vi) our beliefs about the potential impact of our rebranding and customer experience efforts; (vii) our beliefs concerning our ability to attract and maintain an adequate workforce in a competitive labor market (viii) our expected financial results, including without limitation, our expected results for the Modular and Tools segments; and (ix) our expectations concerning our primary capital and cash flow needs.

You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded. We cannot provide any assurance with respect to our future performance or results. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to: (i) the impact of changing credit markets on our ability to continue to obtain financing on reasonable terms; (ii) our ability to repay current debt, continue to meet debt obligations and comply with financial covenants; (iii) the effect of inflation as well as general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (iv) any further impact from COVID-19; (v) fluctuations in seasonal demand and our production cycle; (vi) the ability of our suppliers to meet our demands for raw materials and component parts; (vii) fluctuations in the price of raw materials, especially steel; (viii) our ability to predict and meet the demands of each market in which our segments operate; and (ix) other factors described from time to time in our Securities and Exchange Commission filings. We do not intend to update the forward-looking statements contained in this report other than as required by law. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Critical Accounting Policies

Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of our financial statements as of February 28, 2023 remain unchanged from November 30, 2022. Disclosure of these critical accounting policies is incorporated by reference from Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2022.

Results of Operations

Net Sales and Cost of Sales

Our consolidated corporate sales for the three-month period ended February 28, 2023 were $7,895,000 compared to $5,613,000 during the same period in fiscal 2022, an increase of $2,282,000, or 40.7%. We saw increased sales across all three of our business segments for the three months ended February 28, 2023 compared to the same period of fiscal 2022. Consolidated gross margin for the three-month period ended February 28, 2023 was 29.8% compared to 21.2% for the same period in fiscal 2022.

Our first quarter fiscal 2023 sales in our Agricultural Products segment were $5,445,000 compared to $4,161,000 for the same period in fiscal 2022, an increase of $1,284,000, or 30.9%. Because of strong demand and continued manufacturing efficiency improvements, this segment was able to build on recent success and increase sales significantly. We saw increased sales in the first fiscal quarter in our portable feed, manure spreader, land maintenance, top spread and defoliator products. Our recent manufacturing improvements allowed us to improve product availability and capitalize on the recent period of heightened demand. In addition, we believe our rebranding efforts and improved customer experience is yielding positive results. Gross margin for the three-month period ended February 28, 2023 was 34.2% compared to 25.9% for the same period in fiscal 2022. Our margins improved in the first fiscal quarter of 2023 as the price of steel has dropped from its peak in fiscal 2022 and also from price increases we have initiated to stay ahead of rising overhead costs. We have started to see the price of steel rise again in fiscal 2023 and expect overhead and component prices to continue to increase.

Our first quarter fiscal 2023 sales in our Modular Buildings segment were $1,642,000 compared to $868,000 for the same period in fiscal 2022, an increase of $774,000, or 89.2%. This segment had a light first quarter of fiscal 2022 as the approval process for some large research projects was longer than originally expected. The first quarter of fiscal 2023 was met with a steady stream of project work in both the agriculture and research sectors and led to the increase in sales. Our fiscal 2022 revenue was dominated by agricultural buildings, while our fiscal 2023 backlog consists of more research buildings which typically carry better margins. Gross margin for the three-month period ended February 28, 2023 was 19.7% compared to 4.8% for the same period in fiscal 2022. The increase in gross margin is due to increased coverage on fixed manufacturing costs from the large revenue increase.

Our Tools segment had sales of $808,000 during the first quarter compared to $584,000 for the same period in fiscal 2022, an increase of $224,000, or 38.4%. The sales increase for the first quarter of fiscal 2023 was due to a more stable workforce than we had seen over the past fiscal year coupled with automation equipment we put in place. This segment’s demand remains steady, and we expect price increases we put into place last year to help with sales increases and improved margins. Gross margin was 20.1% for the three-month period ended February 28, 2023 compared to 12.5% for the same period in fiscal 2022. The increased margin is due to price increases enacted near the end of fiscal 2022 and additional volume to absorb fixed overhead costs.

Expenses

Our first quarter consolidated selling expenses were $594,000 compared to $487,000 for the same period in fiscal 2022. The increase in selling expenses is due to increased commission expense in our Agricultural Products and Modular Buildings segments. Selling expenses as a percentage of sales were 7.5% for the three-month period ended February 28, 2023 compared to 8.7% for the same period in fiscal 2022.

Consolidated engineering expenses were $128,000 for the three-month period ended February 28, 2023 compared to $134,000 from the same period in fiscal 2022. Engineering expenses as a percentage of sales were 1.6% for the three-month period ended February 28, 2023 compared to 2.4% for the same period in fiscal 2022.

Consolidated administrative expenses for the three-month period ended February 28, 2023 were $1,078,000 compared to $1,008,000 for the same period in fiscal 2022. The increase in administrative expenses for the first quarter of fiscal 2023 is due to the rising wages to help battle inflation for our employees. Administrative expenses as a percentage of sales were 13.7% for the three-month period ended February 28, 2023 compared to 18.0% for the same period in fiscal 2022.

Net Income (loss)

Consolidated net income was $342,000 for the three-month period ended February 28, 2023 compared to net loss of $(406,000) for the same period in fiscal 2022. We reported net income in two of our three segments for the first fiscal quarter of 2023 but also reported operating income in all three. Despite the first quarter of our fiscal years being our slowest quarter historically for our Agricultural Products segment, we met our customer inventory demands and finished with a strong first quarter of fiscal 2023. In the Modular Buildings segment, we started to ramp up production of research buildings at the end of Q1 of fiscal 2023 and expect fiscal 2023 to be stronger than 2022 with respect to the segment. In the Tools segment, we wrote-off approximately $18,000 of inventory items that ultimately drove a net loss for the first quarter of fiscal 2023. Our Tools segment had steady revenue and production through the first quarter of fiscal 2023, which we believe will continue based on current backlog.

Order Backlog

The consolidated order backlog net of discounts as of April 5, 2023 was $13,042,000 compared to $11,210,000 as of April 5, 2022, a 16% increase. The Agricultural Products segment order backlog was $8,370,000 as of April 5, 2023 compared to $9,057,000 in fiscal 2022. The backlog for the Modular Buildings segment was $4,203,000 as of April 5, 2023, compared to $1,449,000 in fiscal 2022. The large backlog increase is due to a large research project that came under contract in the first quarter of fiscal 2023 that we believe will drive strong revenue numbers this fiscal year. The backlog for the Tools segment was $469,000 as of April 5, 2023 compared to $704,000 in fiscal 2022. Our Tools backlog has decreased in fiscal 2023 as our workforce has stabilized allowing us to produce more and reduce our past due backlog. Our order backlog is not necessarily indicative of future revenue to be generated from such orders due to the possibility of order cancellations and dealer discount arrangements we may enter into from time to time.

Liquidity and Capital Resources

Our primary source of funds for the three months ended February 28, 2023 was cash generated by our operating activities. We collected approximately $2.5 million in customer deposits on our early order program for fiscal 2023 which we then used to fund a million dollar increase in our inventory. The early order deposit program helps us better plan our production schedule to maximize plant efficiency and helps us lock in material pricing for the year. The large influx of deposits helped to lower our line of credit balance and overall, we retired approximately a million dollars of debt in the first quarter of fiscal 2023. We also saw a large increase in our receivables due to increased sales and large billings in our Modular Buildings segment in February 2023, which we expect to provide a source of cash. We expect our primary capital needs for the remainder of fiscal 2023 to relate to operating costs for the fulfillment of customer deposits, capital expenditures to continue improving operations and the retirement of debt.

We have a $5,000,000 revolving line of credit with Bank Midwest that, as of February 28, 2023, had an outstanding principal balance of $3,055,559. This line of credit was renewed on March 30, 2023 and is scheduled to mature on March 30, 2024.

The Company also has up to $2,454,472 available funds that can potentially be utilized by June 30, 2023 under a Common Stock Purchase Agreement with Alumni Capital LP, subject to certain limitations, conditions and market conditions.

We believe our current financing arrangements will provide sufficient cash to finance operations and pay debt when due during the next twelve months. We expect to continue to be able to procure financing upon reasonable terms.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, we are not required to provide disclosure pursuant to this item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The persons serving as our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period subject to this report. Based on this evaluation, the persons serving as our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of February 28, 2023. Our management has concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

We are currently not a party to any material pending legal proceedings.

Item 1A. Risk Factors.

As a smaller reporting company, we are not required to provide disclosure pursuant to this item.

The following table presents the information with respect to purchases made by us of our common stock during the first quarter of fiscal 2023:

⁽¹⁾ Reflects shares withheld pursuant to the terms of restricted stock awards under our 2020 Plan to offset tax withholding obligations that occur upon vesting and release of shares. The value of the shares withheld is the closing price of our common stock on the date the relevant transaction occurs.

None.

Not applicable.

Line of Credit Renewals and Change in Terms Agreement

Effective March 30, 2023, we renewed our $5,000,000 revolving line of credit with Bank Midwest. The revolving line of credit matures on March 30, 2024 and requires monthly interest-only payments. The updated Promissory Note with Bank Midwest is included as Exhibit 10.1 hereto and is incorporated herein.

Effective March 30, 2023, we agreed to a change in terms on our $350,000 roof term loan with Bank Midwest. The interest rate changed to a fixed 7.0% from a floating rate of 2.0% plus the Wall Street Journal rate. The updated Promissory Note with Bank Midwest is included as Exhibit 10.2 hereto and is incorporated herein.

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.