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.
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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.
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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.
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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.
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