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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ART’S-WAY MANUFACTURING CO., INC.

Condensed Consolidated Balance Sheets

ART’S-WAY MANUFACTURING CO., INC.

Condensed Consolidated Statements of Operations

(Unaudited)

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 two 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.

During the third quarter of fiscal 2023, the Company ceased operations of its Tools business, which in previous periods, was reported in consolidated numbers as the Company's third operating segment. For more information on discontinued operations, see Note 3 "Discontinued Operations."

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 and nine months ended August 31, 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 and nine months ended August 31, 2023. Actual results could differ from those estimates.

On June 7, 2023, the Company announced that it would be discontinuing the operations of its Tools segment in order to focus its efforts and resources on the business segments that have historically been more successful and that are expected to present greater opportunities for meaningful long-term stockholder returns.  A large portion of this segment's assets were disposed of in the 3rd quarter of fiscal 2023. The primary asset of this business, the real estate, is listed for sale. The company is working to finish liquidation over the next two fiscal quarters.

The cessation of operations and liquidation of the Tools segment represents a strategic shift as a unique business unit of the Company  In accordance with Accounting Standard Code Topic 360, the Company has reclassified Tools as discontinued operations for all periods presented.

The components of discontinued operations in the accompanying Condensed Consolidated Balance Sheets are as follows:

Income from discontinued operations, before income taxes in the accompanying Condensed Consolidated Statements of Operations, is comprised of the following:

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 August 31, 2023, the Company had approximately $1,313,000 in receivables on the floorplan program with a due date greater than 30 days compared to $850,000 on August 31, 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 nine months of fiscal 2023 that was included in a contract liability on  November 30, 2022 was approximately $1,153,000 compared to $559,000 in the same period of fiscal 2022. The beginning contract receivables, assets and liabilities on December 1, 2021 were approximately $2,380,000; $177,000 and $558,000, respectively.

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  August 31, 2023 and August 31, 2022:

Major classes of inventory are:

Major components of accrued expenses are:

Major components of assets held for lease are:

There were approximately $20,000 and $85,000 rents recognized from assets held for lease included in sales on the Condensed Consolidated Statements of Operations during the three and nine months ended August 31, 2023, respectively, compared to zero for the same periods ending August 31, 2022.

The future minimum lease receipts for the years ended November 31, 2023 are as follows:

The Company recognized a gain of $114,156 on the sale of an asset held for lease in the three and nine months ended August 31, 2023 compared to zero for the same periods ending August 31, 2022.

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 and nine months ended August 31, 2023 and  August 31, 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”) and a $500,000 revolving line of credit (the “Reserve Line of Credit”) with Bank Midwest. On August 31, 2023, the balance of the Line of Credit was $4,534,559 with $465,441 remaining available, as may be limited by the borrowing base calculation. The Reserve Line of Credit is used for additional working capital in excess of the $5,000,000 Line of Credit. The Reserve Line of Credit remained undispersed on  August 31, 2023  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 August 31, 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 9.75% per annum. The Line of Credit matures on March 30, 2024 and requires monthly interest-only payments. The Reserve Line of Credit is governed by the terms of a Promissory Note, dated August 30, 2023, entered into between the Company and Bank Midwest. Any unpaid principal amount borrowed on the Reserve 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 9.75% per annum. The Line of Credit matures on November 30, 2023 and requires monthly interest-only payments. 

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, stockholders 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 stockholder 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 $269,517 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 Roof Term Loan is governed by the terms of a Promissory Note, dated May 17, 2022, entered into between the Company and Bank Midwest and by a Change of Terms Agreement dated March 30, 2023 which fixed the interest rate terms of the original Promissory Note.

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 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. 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 subordinate to Bank Midwest’s security interest. 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.

On June 7, 2023 the Company announced it will perform runoff operations of the Tools business and proceed with an orderly liquidation of the Tools segment assets. The Company will be required to pay the balance of the EIDL loan associated with the Tools segment upon liquidation and dissolution of the business. The principal balance of this loan was $161,726 at August 31, 2023. The Company will also be required to pay off the balance of the Bank Midwest Roof Loan in the event the real estate is sold for the Tools segment. The principal balance of this loan at August 31, 2023 is $339,711.

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.

The Company has net operating losses and tax credits that are expected to offset 100% of its 2023 fiscal year tax liability and does not expect to have significant cash tax cost in the near future.

During the three and nine months ended August 31, 2023, and August 31, 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 in which Marc McConnell, the Chairman of the Company’s Board of Directors, has an ownership interest and also serves as President. J. Ward McConnell Jr.’s estate, the J. Ward McConnell, Jr. Living Trust, is paid a monthly fee to guarantee a portion of the Company’s term debt in accordance with the USDA guarantee obtained on the Company’s term debt. In the three and nine months ended August 31, 2023, the Company recognized $4,068 and $12,131 of expense for transactions with related parties, respectively, compared to $4,209 and $19,762 for the three and nine months ended August 31, 2022. As of August 31, 2023, accrued expenses contained a balance of $1,357 owed to a related party compared to $1,408 on August 31, 2022.

The components of operating leases on the Condensed Consolidated Balance Sheets on August 31, 2023 and November 30, 2022 were as follows:

The components of finance leases on the Condensed Consolidated Balance Sheets on August 31, 2023 and November 30, 2022 were as follows:

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  August 31, 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 expired on June 30, 2023.

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”). The Company shares, including the Commitment Shares, were 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.

As required by the Purchase Agreement, 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 $134,000 of expense related to equity issuance in the nine months ended August 31, 2022 in the form of 20,000 commitment shares valued at approximately $117,000, attorney fees for the negotiation and execution of the Purchase Agreement and the preparation and filing of the registration statement. These equity issuance costs are included in prepaid assets at  August 31, 2022 and reduced proceeds received under the common stock purchase agreement in fiscal 2022.

Below is a summary of shares purchased by Alumni Capital under the Purchase Agreement:

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  August 31, 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.

As of August 31, 2023, the Company has two reportable segments: Agricultural Products and Modular Buildings. 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 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 a payroll tax amendment filed in September 19, 2023 to claim Employee Retention Credits in the amount of $1.2 million net of consulting fees.

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 and future demand for products and the expected product mix; (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 beliefs regarding production capabilities; (v) our intentions and beliefs relating to our costs, business strategies, and future performance, including without limitation, our beliefs that Modular and Agricultural Products present greater opportunity for long-term stockholder returns in comparison to our Tools segment; (vi) our beliefs regarding the impact and potential actions with respect to discontinuing our Tools segment, including without limitation, beliefs about customer interest in purchasing inventory or other assets, expenses to be incurred in connection with such discontinuation, potential cash generated by the sale of related real estate and other assets, timing of runoff activities, and fulfillment of sales orders; (vii) our beliefs regarding our early order program providing a picture of future demand; (viii) our expected financial results, including without limitation, our expected results for the Modular and Agricultural Products segments; and (ix) our belief that we can convert certain engineering-only contracts to building contracts; (xx) our expectations regarding receiving Employer Retention Credit Refunds; and (ixi) 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; (ix) fluctuating demand for commercial real estate and the assets we are liquidating as part of closing our Tools segment; (x) 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 August 31, 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 from continuing operations for the three- and nine-month periods ended August 31, 2023 were $ 8,117,000 and $ 23,429,000, respectively, compared to $7,476,000 and $19,031,000 during the same respective periods in fiscal 2022, a $641,000, or 8.6%, increase for the three months and a $4,398,000, or 23.1%, increase for the nine months. We continued to successfully fulfil our pent up backlog in the three and nine months ended August 31, 2023 for our two business segments. Consolidated gross margin for the three-month period ended August 31, 2023 was 28.3% compared to 26.2% for the same period in fiscal 2022. Consolidated gross margin for the nine-month period ended August 31, 2023 was 28.5% compared to 27.1% for the same period in fiscal 2022.

Our third quarter sales in our Agricultural Products segment were $5,530,000 compared to $6,345,000 during the same period of fiscal 2022, a decrease of $815,000, or 12.8%. Our year-to-date agricultural product sales were $17,343,000 compared to $15,823,000 during the same period in fiscal 2022, an increase of $1,520,000, or 9.6%. We saw a decrease in revenue in Q3 of fiscal 2023 compared to 2022 due to the timing of our beet equipment production. We typically see an increase in sales during our beet run as it is our largest and most expensive equipment. We shipped the majority of our beet equipment during the second quarter of fiscal 2023 compared to Q3 of fiscal 2022. Despite the Q3 decrease, year to date sales in our Agricultural Products segment are up 9.6% for the nine-month period ended August 31, 2023. We've seen increased demand for our grinders, beet equipment and manure spreaders thus far in fiscal 2023. We released smaller versions of our manure spreader line in fiscal 2023 that have been well-received in the marketplace. We are continuing our focus on improving our dealer network by increasing the number of stocking dealers we work with. We are incentivizing our sales team to bring new dealers on board and are also offering favorable terms to new dealers to increase our reach. While some supply chain challenges still exist, proper planning has allowed us to overcome most of these issues. We are starting to see drops in commodity prices with the exception of sugar beets at this time. We do expect farmers to start to pull back on purchases if commodity prices continue to stay down. We are also observing increased inventory on dealer lots, which may indicate the supply chain is catching up and that demand may start to decrease. Gross margin for our agricultural products segment for the three-month period ended August 31, 2023 was 26.0% compared to 29.7% for the same period in fiscal 2022. Gross margin for our agricultural products segment for the nine-month period ended August 31, 2023 was 29.4% compared to 30.6% for the same period in fiscal 2022. We are seeing a slight decrease in our gross margin due to increases in component prices. We have been more cautious about raising prices in fiscal 2023 than we were in prior years as commodity prices are down. Further, our decreased gross profit margin was also driven by our product mix for fiscal 2023. We sold a higher mix of manure spreaders which carry lower margins than our portable feed equipment.

Our third quarter sales in our Modular Buildings segment were $2,587,000 compared to $1,131,000 for the same period in fiscal 2022, an increase of $1,456,000, or 128.7%. Our year-to-date sales in our Modular Buildings segment were $6,086,000 compared to $3,208,000 for the same period in fiscal 2022, an increase of $2,878,000, or 89.7%. Progress on a large research project coupled with continued agricultural building demand drove the revenue increase for the three and nine months ended August 31, 2023. Gross margin for the three- and nine-month periods ended August 31, 2023 was 33.4% and 25.8%, respectively, compared to 6.5% and 9.5% for the same respective periods in fiscal 2022. Our gross margin in the three- and nine-month periods of fiscal 2023 has increased due to additional markup we enacted to cover rising costs of overhead from inflationary forces. The increased sales of the Modular Buildings segment also has made it easier to absorb our fixed overhead costs.

As announced in a press release on June 7, 2023, we discontinued our Tools segment with the last day of normal operations on July 14, 2023. One employee remained employed by the Tools segment as of August 31, 2023. This employee was overseeing the liquidation process, mainly the sale of remaining inventory and auctioning off machinery and equipment. The Company real estate is listed for sale at market value for the Canton, Ohio area. The Company estimates cash generation of approximately $950,000 from the liquidation of receivables, inventory and other assets (excluding real estate) to fund estimated liquidation costs of $200,000. These estimates will vary as the liquidation finishes in the next two fiscal quarters. Our Tools segment had sales of $ 439,000 and $ 2,031,000 during the three- and nine-month periods ended August 31, 2023, respectively, compared to $ 664,000 and $ 1,998,000 for the same respective periods in fiscal 2022, a 33.9% decrease and a 1.7% increase, respectively. These numbers are reported above in Note 3 - Discontinued Operations. Management believes the liquidation of the Tools segment will allow for investment in technological advances that improve efficiency and margins in the Agricultural Products and Modular Buildings segments, which have historically been more profitable and which we believe present greater long-term stockholder returns.

Expenses

Our third quarter consolidated selling expenses from continuing operations were $566,000 compared to $418,000 for the same period in fiscal 2022. Our year-to-date selling expenses were $1,609,000 in fiscal 2023 compared to $1,407,000 for the same period in fiscal 2022. We experienced an increase in selling expenses for the three months ended August 31, 2023 compared to fiscal 2022 due to a greater mix of commissionable sales in Q3 2023 compared to Q3 of fiscal 2022, which included a greater mix of beet equipment sales in which commissions are not paid. For the nine months ended August 31, 2023, our selling expenses are up due to the large commissionable sales increases in our Modular Building and Agricultural Products segments. Selling expenses as a percentage of sales were 7.0% and 5.6% for the three- and nine-month periods ended August 31, 2023, respectively, compared to 6.9% and 7.4% for the same respective periods in fiscal 2022.

Consolidated engineering expenses from continuing operations were $171,000 and $439,000 for the three- and nine-month periods ended August 31, 2023, respectively, compared to $168,000 and $446,000 for the same respective periods in fiscal 2022. Engineering expenses as a percentage of sales were 2.1% and 1.9% for the three- and nine-month periods ended August 31, 2023, respectively, compared to 2.2% and 2.3% for the same respective periods in fiscal 2022.

Consolidated administrative expenses from continuing operations for the three- and nine-month periods ended August 31, 2023 were $1,095,000 and $3,178,000, respectively, compared to $873,000 and $2,791,000 for the same respective periods in fiscal 2022. Administrative expenses as a percentage of sales were 13.5% and 13.6% for the three- and nine-month periods ended August 31, 2023, respectively, compared to 11.7% and 14.7% for the same respective periods in fiscal 2022. Administrative expenses have increased primarily due to the addition of staff in accounting, human resources and quality assurance and additional expense related to the implementation of an upgrade to our ERP system, which went live in August of 2023.

Net income from continuing operations

Consolidated net income from continuing operations was $241,000 for the three-month period ended August 31, 2023, compared to $304,000 for the same period in fiscal 2022. While our Modular Buildings segment was profitable in Q3 of fiscal 2023, our Agricultural Products segment incurred a loss for the quarter. While our revenues were strong in this segment, a large portion of our sales were from manure spreaders, which are lower margin sales as opposed to some of our other lines. In addition, we saw increasing component prices on our inventory items, inflationary effects on our overhead items and also incurred some large one-time expenses for recruitment of key employees and ERP conversion costs, which led to an unprofitable quarter. Our consolidated net income from continuing operations for the nine months ended August 31, 2023, was $921,000 compared to $191,000 in the same period in fiscal 2022. We have continued to see success in our Agricultural Products segment due to favorable market conditions, revitalized corporate branding and improved customer service. Our Modular Buildings segment converted pent up demand from the COVID-19 pandemic into strong fiscal 2023 results. We attribute a good portion of the corporate success we have seen over the last two years to strong leadership and a focus on putting the right people in place in our business segments.

Order Backlog

The consolidated order backlog net of discounts for continuing operations as of October 5, 2023 was $5,221,000 compared to $8,424,000 as of October 5, 2022. The Agricultural Products segment order backlog was $3,753,000 as of October 5, 2023 compared to $4,719,000 in fiscal 2022. With a 9.6% increase in revenue in our Agricultural Products segment year to date, a drop in our backlog was expected as we worked through our order bank at a faster rate. Our early order program for fiscal 2024 started at the beginning of October 2023 and we expect this to give us a picture of the demand for fiscal 2024. The backlog for the Modular Buildings segment was $1,468,000 as of October 5, 2023, compared to $3,705,000 in fiscal 2022. The Modular Buildings segment had a large research project in backlog as of October 5, 2023 that was nearing completion at the end of Q3 of fiscal 2023. We have another large research project under an engineering only contract as of October 5, 2023, which we expect to be converted to a building contract in the near future. 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 nine months ended August 31, 2023 was cash generated by financing activities. We utilized our availability on our line of credit to increase inventory levels to meet continued customer demand and combat supply chain delays. We also utilized our floor plan program to generate additional sales for the first nine months of fiscal 2023 to which we have $1.3 million in accounts receivable on extended terms as of August 31, 2023. Our contracts in progress in the Modular Buildings segment generated approximately $481,000 in cash in the first nine months of fiscal 2023. We expect our primary capital needs for the remainder of fiscal 2023 to relate to operating costs, purchases of equipment that improve our operations, and the retirement of debt. We expect the sale of real estate of our Tools segment to provide a large cash influx in the near future. The company also filed IRS Form 941-X's in September 2023 to claim Employee Retention Credits for salaries and wages paid in 2021 while affected by a governmental shutdown ordinance. The company expects to receive $1.2 million net of consulting fees in Employer Retention Credit refunds, although the timing of such refunds is not known.

We have $5,500,000 in revolving lines of credit with Bank Midwest that, as of August 31, 2023, had an outstanding principal balance of $4,534,559. This line of credit was renewed on March 30, 2023 and is scheduled to mature on March 30, 2024. $500,000 under the Reserve Line of Credit was secured in August of 2023 and is scheduled to mature on November 30, 2023.

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 August 31, 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

Item 1. Legal Proceedings.

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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents the information with respect to purchases made by us of our common stock during the third 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.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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.