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, 2021. 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 warranty costs and 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) the impact of recently issued accounting pronouncements; (v) our
intentions and beliefs relating to our costs, business strategies, and future
performance; (vi) our beliefs concerning our ability to attract and maintain an
adequate workforce in a competitive labor market (vii) our expected financial
results; (viii) our expectations concerning our primary capital and cash flow
needs; and (viix) our expectations regarding the impact of COVID-19 on our
business condition and results of operations.
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 general economic conditions, including consumer and governmental spending, on
the demand for our products and the cost of our supplies and materials; (iv) the
ongoing COVID-19 pandemic; (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, 2022 remain unchanged from November 30, 2021. 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, 2021.
Results of Operations
Net Sales and Cost of Sales
Our consolidated corporate sales for the three-month period ended February 28,
2022 were $5,613,000 compared to $5,401,000 during the same period in fiscal
2021, an increase of $212,000, or 3.9%. The increase in consolidated revenue is
due to increased sales in our Agricultural Products segment. Consolidated gross
margin for the three-month period ended February 28, 2022 was 21.2% compared to
19.3% for the same period in fiscal 2021.
Our first quarter sales in our Agricultural Products segment were $4,161,000
compared to $3,500,000 for the same period in fiscal 2021, an increase of
$661,000, or 18.9%. The increase in revenue is due to increased demand for our
grinder mixers, beet equipment and manure spreaders. For the second year in a
row, we have experienced historic early order program success and are carrying
record backlog numbers. Strong commodity prices have created demand that is
struggling to be met within the agriculture industry because of labor and supply
chain shortages, which has in turn increased the number of early orders we are
seeing. Gross margin for the three-month period ended February 28, 2022 was
25.9% compared to 25.2% for the same period in fiscal 2021. Price increases in
fiscal 2021 helped us maintain margin moving into fiscal 2022. While we have
seen the price of steel start to drop in Q1 of fiscal 2022, component prices and
freight costs have continued to rise. We anticipate we will need to take action
to mitigate margin erosion from these rising input costs in fiscal 2022.
Our first quarter sales in our Modular Buildings segment were $868,000 compared
to $1,291,000 for the same period in fiscal 2021, a decrease of $423,000, or
32.8%. Our decrease in revenue is due largely to the progress on a large
construction contract that neared completion at the end of the first quarter of
fiscal 2021. We continue to see strong demand for business in this segment
despite the slow start to fiscal 2022. Gross margin for the three-month period
ended February 28, 2022 was 4.8% compared to 2.9% for the same period in fiscal
2021. We saw margin improvement in fiscal 2022 because of the completion of a
large construction project in 2021 that carried a low gross margin. While we did
see margin improvement year to date, our sales level wasn't high enough to
absorb our operating expenses and provide a margin we typically expect.
Our Tools segment had sales of $584,000 during the first quarter compared to
$610,000 for the same period in fiscal 2021, a decrease of $26,000, or 4.3%. The
Tools segment struggled with labor shortages in the first month of fiscal 2022,
which led to a disappointing level of December sales. While employee turnover
continued through the first quarter of fiscal 2022, production remained steady
in the 2nd and 3rd months of fiscal 2022 to mitigate further losses. Since the
labor market continues to be highly competitive in Canton, OH, we are working on
automated solutions to solve workforce issues in Q2 of fiscal 2022. Demand has
grown in this segment in fiscal 2022 and we are currently carrying the largest
backlog on record. Gross margin was 12.5% for the three-month period ended
February 28, 2022 compared to 20.2% for the same period in fiscal 2021. The
decrease in margin is due to the decrease in sales year on year along with wage
and benefit improvements we made in Q3 of fiscal 2021 to try to stabilize our
workforce. We are expecting margin improvement as we get further into fiscal
2022 from price increases enacted in February of 2022.
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Expenses
Our first quarter consolidated selling expenses were $487,000 compared to
$473,000 for the same period in fiscal 2021. The increase in selling expenses is
due to increased commission expense as a result of the 18.9% increase in sales
in our Agricultural Products segment. Selling expenses as a percentage of sales
were 8.7% for the three-month period ended February 28, 2022 compared to 8.8%
for the same period in fiscal 2021.
Consolidated engineering expenses were $134,000 for the three-month period ended
February 28, 2022 compared to $121,000 from the same period in fiscal 2021. The
increase is due to wage and benefit improvements made for fiscal 2022.
Engineering expenses as a percentage of sales were 2.4% for the three-month
period ended February 28, 2022 compared to 2.2% for the same period in fiscal
2021.
Consolidated administrative expenses for the three-month period ended February
28, 2022 were $1,008,000 compared to $817,000 for the same period in fiscal
2021. The increase in administrative expenses for Q1 of fiscal 2022 is due to
the rising wages and benefit improvements. Administrative expenses as a
percentage of sales were 18.0% for the three-month period ended February 28,
2022 compared to 15.1% for the same period in fiscal 2021.
Net Loss
Consolidated net loss was $(406,000) for the three-month period ended February
28, 2022 compared to net loss of $(315,000) for the same period in fiscal 2021.
Our Agricultural Products segment showed improvement in the first fiscal quarter
of 2022, but our Modular Buildings and Tools showed increased losses year over
year. The first quarter of our fiscal year is typically our worst performing
quarter of the year because of the timing of orders and production in our
Agricultural Products segment. Our production increases in the spring and summer
months in this segment and slows down again in the winter months. Our Tools
segment is carrying the backlog to be successful for the remainder of the fiscal
year as we work through labor shortages with automation. The Modular Buildings
segment will be working on closing additional contracts to stabilize revenues
for the remainder of the year.
Order Backlog
The consolidated order backlog net of discounts as of April 8, 2022 was
$11,173,000 compared to $6,483,000 as of April 8, 2021, a 42% increase. The
Agricultural Products segment order backlog was $9,038,000 as of April 8, 2022
compared to $5,408,000 in fiscal 2021. The backlog for the Modular Buildings
segment was $1,463,000 as of April 8, 2022, compared to $717,000 in fiscal 2021.
The backlog for the Tools segment was $671,000 as of April 8, 2022 compared to
$358,000 in fiscal 2021. Our backlog numbers are up significantly in all three
segments while we are carrying historic backlog numbers in our Agricultural
Products and Tools segments. We will be battling supply chain challenges and
workforce shortages in fiscal 2022 as we work through our open orders. 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, 2022 was
cash generated by operating activities. The collection of accounts receivables
and customer deposits related to our fall early order program provided
approximately $2.7 million in cash in the first three months of fiscal 2022. Our
primary uses of cash were related to the retirement of debt and rising inventory
costs. We expect our primary capital needs for the remainder of fiscal 2022 to
relate to operating costs, primarily production costs, fulfillment of customer
deposits, and the retirement of debt. We also expect to use cash on capital
expenditures that improve work force efficiency and maximize shop output over
the next two years as part of Iowa Economic Development Authority's
Manufacturing 4.0 program. The Company will be receiving a $500,000 grant to use
on capital equipment, which requires a 25% match by the Company.
We have a $5,000,000 revolving line of credit with Bank Midwest that, as of
February 28, 2022, had an outstanding principal balance of $3,150,530. This line
of credit is scheduled to mature on March 30, 2023.
The Company continues to seek additional funding up to $2 million under the
SBA's Economic Injury Disaster Loan program.
On March 29, 2022, the Company entered into a Common Stock Purchase Agreement
with Alumni Capital LP to provide aggregate gross proceeds to the Company of up
to $3,000,000 in exchange for the Company's common stock. The Company expects to
fully utilize the $3,000,000 in funding under this Stock Purchase Agreement over
the next twelve months for capital improvements that improve plant efficiency,
production output and new product development.
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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