The following discussion, which focuses on our results of operations, contains forward-looking information and statements. Actual events or results may differ materially from those indicated or anticipated, as discussed in the section entitled "Forward Looking Statements." The following discussion of our financial condition and results of operations should also be read in conjunction with our financial statements and notes to financial statements contained in "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this report.





Financial Condition

The 2021 fiscal year proved to be a turning point for our company. Our Agricultural Products segment saw a 28.6% increase in sales from the 2020 fiscal year and the segment recorded its first profitable year since fiscal 2015. We are seeing even higher demand for our products at the start of fiscal 2022 and believe another year of continued improvement is ahead of us. Our Modular Buildings segment struggled in the first six months of fiscal 2021 as we closed out a large contract that demanded a large portion of our resources. Pent up demand for agriculture buildings and research labs from the pandemic started to give way in the second half of fiscal 2021. The Modular Buildings segment finished the year strong and showed profit for fiscal 2021. Our Tools segment experienced steady demand increases in fiscal 2021, but labor shortages hampered its ability to take advantage of a strengthening economy. We made some wage and benefit improvements in the second half of fiscal 2021 that we anticipate will help with hiring and retainage in fiscal 2022.

Our consolidated balance sheet indicates a stable financial position as of November 30, 2021. We finished the year with approximately $213,000 of consolidated net income and saw our working capital increase by approximately $350,000. Our inventory saw the most significant increase year on year as we prepare to fill our significant demand for 2022.


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We expect to have access to capital as needed throughout fiscal 2022 through the sale of inventory and from the use of our line of credit. On November 30, 2021 we had $925,470 available on our line of credit and $2,257,904 of excess collateral towards our borrowing base. Our working capital remained strong at approximately $4,487,000 in fiscal 2021 with a current ratio of 1.58. Our banking relationship remains positive and we expect it to only strengthen as our financial results continue to improve. We do not foresee liquidity issues within the next twelve months.

While we have largely returned to normal operations, the COVID-19 pandemic continues to cause challenges. During fiscal 2021, we experienced supply chain disruptions and an overall increase in the price of raw materials and other components used in our products. We also incurred higher labor costs and challenges to fill open positions due to a highly competitive job market. Additionally, we experienced periodic operational disruptions as our employees contracted or were potentially exposed to COVID-19 and were forced to self-isolate in accordance with state and federal guidelines. The extent of the pandemic's effect on our financial condition and results of operations will depend in large part on future developments which cannot be reasonably estimated at this time. Future developments include the duration, scope and severity of the pandemic, the emergence of new virus variants that are more contagious or harmful than prior variants, the actions taken to contain or mitigate the pandemic's impact both within and outside the jurisdictions in which we operate, and the potential adverse effects on the global supply chain, labor market, and general economic activity. Due to the inherent uncertainty associated with the COVID-19 pandemic, we are unable to predict the impact the pandemic may have on our future results of operations or financial condition.







Critical Accounting Policies

Our significant accounting policies are described in Note 1 "Summary of Significant Accounting Policies" to our financial statements in "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this report. Critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We believe that the following represents the most critical accounting policies and estimates used in the preparation of our consolidated financial statements.





Inventories

Inventories are stated at the lower of cost or net realizable value, and cost is determined using the standard costing method. Management monitors the carrying value of inventories using inventory control and review processes that include, but are not limited to, sales forecast review, inventory status reports, and inventory reduction programs. We record inventory write downs to net realizable value based on expected usage information for raw materials and historical selling trends for finished goods. If the assumptions made by management do not occur, we may need to record additional write downs.





Revenue Recognition

In accordance with ASC 606, revenue is measured based on consideration specified in a contract with a customer and recognized when we satisfy the performance obligation specified in each contract.

Our revenues primarily result from contracts with customers. The major sources of revenue for the Agricultural Products and Tools segments are farm equipment, service parts related to farm equipment and steel cutting tools and inserts. The Agricultural Products and Tools segments generally execute short-term contracts that contain a single performance obligation - the delivery of product to the common carrier. We recognize revenue for the production and sale of farm equipment, service parts and cutting tools upon shipment of the goods. Shipment of the goods is the point in time when risk of ownership and title pass to the customer. The Tools segment has an OEM agreement with one customer for which sales are recognized FOB destination - when the goods hit the customer's dock. All sales are made to authorized dealers whose application for dealer status has been approved and who have been informed of general sales policies. Any changes in our terms are documented in the most recently published price lists. Pricing is fixed and determinable according to our published equipment and parts price lists. Title to all equipment and parts sold pass to the customer upon delivery to the carrier and is not subject to a customer acceptance provision. Proof of the passing of title is documented by the signing of the delivery receipt by a representative of the carrier. Post shipment obligations are limited to any claim with respect to the condition of the equipment or parts. The Agricultural Products and Tools segments each typically require payment in full 30 days after the ship date. To take advantage of program discounts, some customers pay deposits up front. Any deposits received are considered unearned revenue and increase contract liabilities.


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In certain circumstances, upon the customer's written request, we may recognize revenue when production is complete, and the goods are ready for shipment. At the customer's request, we will bill the customer upon completing all performance obligations, but before shipment. The customer dictates that we ship the goods per its direction from our manufacturing facility, as is customary with this type of agreement, in order to minimize shipping costs. The written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer, with a final specified delivery date, and that we will segregate the goods from our inventory, such that they are not available to fill other orders. This agreement also specifies that the customer is required to purchase all goods manufactured under this agreement. Title of the goods will pass to the customer when the goods are complete and ready for shipment, per the customer agreement. At the transfer of title, all risks of ownership have passed to the customer, and the customer agrees to maintain insurance on the manufactured items that have not yet been shipped. We have operated using bill and hold agreements with certain customers for many years, with consistent satisfactory results for both the customers and us. The credit terms on this agreement are consistent with the credit terms on all other sales. All risks of loss are shouldered by the customer, and there are no exceptions to the customer's commitment to accept and pay for these manufactured goods. Revenues recognized when goods were ready for shipment in fiscal 2021 were approximately $711,000, while we had no bill and hold revenue in fiscal 2020.

The Modular Buildings segment is in the construction industry with its major source of revenue arising from modular building sales. Sales of modular buildings are generally recognized using input methods to measure progress towards the satisfaction of a performance obligation using the percentage of completion method. Revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Contract costs consist of direct costs on contracts, including labor, materials, and amounts payable to subcontractors and those indirect costs related to contract performance, such as equipment costs, insurance and employee benefits. Contract cost is recorded as incurred, and revisions in contract revenues and cost estimates are reflected in the accounting period when known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Contract losses are recognized when current estimates of total contract revenue and contract cost indicate a loss. Estimated contract costs include any and all costs appropriately allocable to the contract. The provision for these contract losses will be the excess of estimated contract costs over estimated contract revenues. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract change orders, penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. We use significant judgements in determining estimated contract costs and completion percentages throughout the life of the project. Stock modular building sales also occur and are recognized at a point in time when the performance obligation is fulfilled through substantial completion. Substantial completion is achieved through customer acceptance of the completed building. The Modular Buildings segment executes contracts with customers that can be short- or long-term in nature. These contracts can have multiple performance obligations and revenue from these can be recognized over time or at a point in time depending on the nature of the contracts. Payment terms for the Modular Buildings segment vary by contract, but typically utilize money down and progress payments throughout the life of the contract. The payment terms of the Modular Buildings segment have the most impact on our contract receivables, contract assets and contract liabilities. Project invoicing from the Modular Buildings segment increases contract receivables and has an effect on contract liabilities through billings in excess of costs and estimated gross profit and advanced payments. The balance of contract assets is typically made up of the balance of costs and estimated gross profit in excess of billings. Costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities.

The Agricultural Products segment offers variable consideration in the form of discounts depending on participation in yearly early order programs. This variable consideration is allocated to the transaction price of all products in a sales arrangement and is not contingent on future outcomes. The Agricultural Products segment does not offer rebates or credits. The Tools segment offers quantity discounts that are allocated to the transaction price of each product once the quantity break is achieved. The Tools segment does not offer rebates or credits. The Modular Buildings segment does not offer discounts, rebates or credits.

Our returns policy allows for new and saleable parts to be returned, subject to inspection and a restocking charge, which is included in net sales. Whole goods are not returnable. Shipping costs charged to customers are included in net sales. Freight costs incurred are included in cost of goods sold. Customer deposits consist of advance payments from customers, in the form of cash, for revenue to be recognized in the following year.


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For information on product warranty as it applies to ASC 606, refer to Note 8 "Product Warranty" contained in our financial statements in "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this report.





Results of Operations

Fiscal Year Ended November 30, 2021 Compared to Fiscal Year Ended November 30, 2020

Our consolidated net sales totaled $24,965,000 for the 2021 fiscal year, which represents a 11.4% increase from our consolidated net sales of $22,409,000 for the 2020 fiscal year. The increase in revenue is due to increased demand in the Agricultural Products segments. Our consolidated gross profit as a percentage of net sales increased to 26.4% in the 2021 fiscal year when compared to 10.7% of net sales in the 2020 fiscal year. We saw increased gross profit percentage in two of three segments in fiscal 2021. Our consolidated operating expenses decreased by 3.8%, from $6,309,000 in the 2020 fiscal year to $6,073,000 in the 2021 fiscal year. Because the majority of our corporate general and administrative expenses are borne by our Agricultural Products segment, that segment represented $4,571,000 of our total consolidated operating expenses, while our Modular Buildings segment represented $928,000 and our Tools segment represented $574,000.

Our consolidated operating income for the 2021 fiscal year was $523,000 compared to operating loss of $(3,910,000) for the 2020 fiscal year. Our Agricultural Products segment had operating income of $599,000, our Modular Buildings segment had operating income of $74,000 and our Tools segment had an operating loss of $(150,000).

Consolidated net income for the 2021 fiscal year was $213,000 compared to net loss of $(2,103,000) in the 2020 fiscal year, an improvement of $2,316,000.

Our effective tax rate for the 2021 and 2020 fiscal years was 20.3% and 28.9%, respectively. The decrease in the effective tax rate is due to the tax treatment of Paycheck Protection Program loan forgiveness as discussed in Note 1 from fiscal year 2020, "Summary of Significant Accounting Policies" to our financial statements in "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this report.

Agricultural Products. Our Agricultural Products segment's net sales for the 2021 fiscal year were $16,826,000 compared to $13,085,000 during the 2020 fiscal year, an increase of $3,741,000, or 28.6%. The sales increase is attributable to favorable agriculture market conditions as commodity prices hit five year highs. We saw increased demand for our grinder mixers, manure spreaders and beet harvesting equipment in fiscal 2021. We are carrying even higher backlog numbers than we saw in fiscal 2021 as we transition to fiscal 2022.

Gross profit percentage for the 2021 fiscal year was 30.7% compared to 16.5% for the 2020 fiscal year. Despite continued margin pressure from increasing material and component costs in fiscal 2021, Art's-Way was able to combat margin erosion through multiple price increases to customers. Much of the gross margin improvement year on year was due to $996,000 of inventory obsolescence expense we had in fiscal 2020 that was related to increasing reserves on product lines we eliminated strategically from our offering including UHC reels, Miller Pro forage boxes, rakes and augers which was not repeated in fiscal 2021. We also saw an 18% increase in our labor output on roughly the same amount of wages in 2021 due to increased demand and better shop floor planning.

Our Agricultural Products segment's operating expenses for the 2021 fiscal year were $4,571,000 compared to $4,483,000 for the 2020 fiscal year, an increase of $88,000, or 2.0%. The increase in operating expenses was primarily due to increased selling expenses from a rebranding initiative that took place in fiscal 2021 and the addition of a product development manager to help drive our product lines towards the needs of the customer. The rebranding initiative refreshed the Art's-Way logo, website, and literature to better fit the customers we serve. Our general and administrative expenses were down in fiscal 2021 as we incurred some one-time pandemic and dual salaries expense in 2020 as we transitioned two members of senior management. We saw a slight increase in engineering expenses in the Agricultural Products segment in fiscal 2021 as we made market competitive salary adjustments for our engineering department. Total income from operations for our Agricultural Products segment during the 2021 fiscal year was $599,000 compared to an operating loss of $(2,318,000) for the 2020 fiscal year, an improvement of $2,917,000.


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Modular Buildings. Our Modular Buildings segment's net sales for the 2021 fiscal year were $5,678,000 compared to $6,993,000 for the 2020 fiscal year, a decrease of $1,315,000, or 18.8%. The decrease in sales was attributable to a large construction project spanning the last three fiscal years that reached completion in fiscal 2021. Gross profit for the 2021 fiscal year was 17.7% compared to (3.7)% during the 2020 fiscal year. The increase in gross profit was due to the completion of a large construction contract that negatively affected our margin and the execution of new contracts with higher quality margins. Operating expenses for the 2021 fiscal year were $928,000 compared to $1,034,000 for the 2020 fiscal year, a decrease of $106,000, or 10.3%. While overall our operating expenses declined, we did see approximately $83,000 of increased selling expenses from commissions on the sale of modular agriculture buildings and increased trade show participation. Our general and administrative expenses were down approximately $189,000 due to decreased bonus expense, one-time pandemic expense in 2020 and reduced corporate allocation expense in fiscal 2021. Total income from operations from our Modular Buildings segment during the 2021 fiscal year was $74,000 compared to an operating loss of $(1,295,000) in the 2020 fiscal year, a reduction in loss of $1,369,000.

Tools. Our Tools segment's net sales for the 2021 fiscal year were $2,461,000 compared to $2,331,000 for the 2020 fiscal year, an increase of $130,000, or 5.6%. This segment has not fully recovered from the drop in oil prices at the start of the pandemic in fiscal 2020 that flattened our sales. Our backlog has remained steady and strong since the pandemic. Like the majority of businesses in current economic conditions, we are having trouble maintaining a skilled workforce, but have taken steps to increase automation to lessen this burden. Gross profit for the 2021 fiscal year was 17.2% compared to 21.3% for the 2020 fiscal year. Our gross margin decreased in fiscal 2021 as we raised wages in order to attract and retain shop employees. We saw a 2% increase in wages while not achieving the same efficiency output we did in 2020 due to the loss of some longer tenured employees and high turnover. Operating expenses were $574,000 for the 2021 fiscal year compared to $792,000 for the 2020 fiscal year, a decrease of $219,000, or 27.6%. This decreased operating expenses were due to decreases in general administrative costs, primarily deceased bonus expense, corporate expense allocation and OEM implementation costs in fiscal 2021 compared to fiscal 2020.





Trends and Uncertainties

We are subject to a number of trends and uncertainties that may affect our short-term or long-term liquidity, sales revenues, and operations. Similar to other farm equipment manufacturers, we are affected by items unique to the farm industry, including fluctuations in farm income resulting from the change in commodity prices, crop damage caused by weather and insects, government farm programs, interest rate fluctuations, and other unpredictable variables. Other uncertainties include our OEM customers and the decisions they make regarding their current supply chain structure, inventory levels, and overall business conditions. Management believes that our business is dependent on the farming industry for the bulk of our sales revenues. As such, our business tends to reap the benefits of increases in farm net income, as farmers tend to purchase equipment in lucrative times and forgo purchases in less profitable years. Direct government payments have been increasing in the past two years and costs of agricultural production are increasing; therefore, we anticipate that further increases in the value of production will benefit our business, while any future decreases in the value of production will decrease farm net income and may negatively affect our financial results.

As with other farm equipment manufacturers, we depend on our network of dealers to influence customers' decisions, and dealer influence is often more persuasive than a manufacturer's reputation or the price of the product.





Seasonality

Sales of our agricultural products are seasonal; however, we have tried to decrease the impact of this seasonality through the development of beet harvesting machinery, as the peak periods for these products occur at different times.

We believe that our tool sales are not seasonal. Our modular building sales are somewhat seasonal, and we believe that this is due to the budgeting and funding cycles of the universities that commonly purchase our modular buildings. We believe that this cycle can be offset by building backlogs of inventory, by increasing sales to other public and private sectors and by creating repeatable business opportunities.

Liquidity and Capital Resources

Our main source of funds during the 2021 fiscal year was cash generated by financing activities. We used proceeds of $1,715,000 from our line of credit to fund our operating and investing activities. Our operations consumed approximately $986,000 of cash, the majority of which was used to increase our inventory levels to combat supply chain delays and to fulfill our massive backlog. We used approximately $620,000 of cash to update facilities and equipment which included development of a new customer portal and website and facility upgrades. We expect to use cash in fiscal 2022 to acquire equipment that improves our shop output and efficiency including robotic weld cells and improved plasma cutting and roller technology. We believe these additions will be key to fulfilling customer demand and allow us to be more competitive in our industry.





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We have a Bank Midwest credit facility consisting of a $5,000,000 revolving line of credit, pursuant to which we had borrowed $4,074,530, with $925,470 remaining, as of November 30, 2021, and one term loan, which had an outstanding principal balance of $2,260,412 as of November 30, 2021. The revolving line of credit is being used for working capital purposes. We also have three Economic Injury Disaster Loans provided by the U.S. Small Business Administration with an aggregate principal balance of $450,000 as of November 30, 2021.

Our loans require us to comply with various covenants, including maintaining certain financial ratios and obtaining prior written consent from Bank Midwest for any investment in, acquisition of, or guaranty relating to another business or entity. We were out of compliance with our debt to worth ratio covenant in place under the Bank Midwest loans as of November 30, 2021. Bank Midwest has issued a waiver forgiving the noncompliance as of November 30, 2021, and in turn waived the event of default.

For additional information about our financing activities, please refer to Note 9 "Loan and Credit Agreements" to our financial statements in "Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" of this report.

The following table represents our working capital and current ratio as of the end of the past two fiscal years:





                       November 30, 2021       November 30, 2020
Current Assets        $        12,174,245     $        10,301,350
Current Liabilities             7,686,817               6,164,776
Working Capital       $         4,487,428     $         4,136,574

Current Ratio                        1.58                    1.67

We believe that our current cash and financing arrangements will provide sufficient cash to finance operations for the next 12 months. We expect to continue to rely on cash from financing activities to supplement our cash flows from operations in order to meet our liquidity and capital expenditure needs in the near future. We expect to continue to be able to procure financing upon reasonable terms.

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