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

We recorded our second straight year of profitability in fiscal 2022 and saw significant success in our Agricultural Products segment. Our consolidated revenues increased 14% year on year and over 24% from fiscal 2020. As we transition into fiscal 2023, we are showing increased demand in all three operating segments.

Our consolidated balance sheet indicates a stable financial position as of November 30, 2022. We finished the year with approximately $98,000 of consolidated net income and saw our working capital increase by approximately $379,000. Our inventory increased significantly in fiscal 2022 as we better positioned ourselves to meet customer demand. We utilized customer deposits and funding from a common stock purchase agreement to meet the increased demands of fiscal 2022.

We expect to have access to capital as needed throughout fiscal 2023 through the sale of inventory and from the use of our line of credit. On November 30, 2022 we had $1,075,500 available on our line of credit and $2,260,402 of excess collateral towards our borrowing base. Our working capital remained strong at approximately $4,866,000 in fiscal 2022 with a current ratio of 1.53. 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.





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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.

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 2022 were approximately $1,010,000 compared to $711,000 in fiscal 2021.


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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, estimated gross profit and customer deposits. 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.

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, 2022 Compared to Fiscal Year Ended November 30, 2021

Our consolidated net sales totaled $28,400,000 for the 2022 fiscal year, which represents a 13.8% increase from our consolidated net sales of $24,965,000 for the 2021 fiscal year. The increase in revenue is due to increased demand in the Agricultural Products and Tools segments. Our consolidated gross profit as a percentage of net sales decreased to 25.7% in the 2022 fiscal year compared to 26.4% of net sales in the 2021 fiscal year. Our consolidated operating expenses increased by 14.8%, from $6,073,000 in the 2021 fiscal year to $6,974,000 in the 2022 fiscal year. Because the majority of our corporate general and administrative expenses are borne by our Agricultural Products segment, that segment represented $5,239,000 of our total consolidated operating expenses, while our Modular Buildings segment represented $1,095,000 and our Tools segment represented $640,000.

Our consolidated operating income for the 2022 fiscal year was $333,000 compared to operating income of $523,000 for the 2021 fiscal year. Our Agricultural Products segment had operating income of $1,205,000, our Modular Buildings segment had operating loss of $600,000 and our Tools segment had an operating loss of $272,000.





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Consolidated net income for the 2022 fiscal year was $98,000 compared to net income of $213,000 in the 2021 fiscal year.

Our effective tax rate for the 2022 and 2021 fiscal years was 16.4% and 20.3%, respectively.

Agricultural Products. Our Agricultural Products segment's net sales for the 2022 fiscal year were $20,912,000 compared to $16,826,000 during the 2021 fiscal year, an increase of $4,086,000, or 24.3%. We continued to see strong commodity prices in fiscal 2022 which led to increased sales in grinder mixers, manure spreaders and our beet harvesting equipment for the second straight fiscal year. Our procurement team was able to navigate the difficult supply chain environment in fiscal 2022 and our production crew delivered on the increased demand.

Gross profit percentage for the 2022 fiscal year was 30.8% compared to 30.7% for the 2021 fiscal year. While the price of steel began to drop near the end of fiscal 2022, we saw component prices and manufacturing overhead increase in fiscal 2022. We utilized price increases to stay ahead of these rising costs in fiscal 2022 and maintain margins consistent with fiscal 2021. We also purchased three robotic weld cells and a high-definition plasma cutter in fiscal 2022 that we expect will increase manufacturing efficiencies, increase output and improve the quality of our products. We are focused on additional capital expenditures in fiscal 2023 to improve our operations as cash flow allows.

Our Agricultural Products segment's operating expenses for the 2022 fiscal year were $5,239,000 compared to $4,571,000 for the 2021 fiscal year, an increase of $668,000, or 14.6%. Our selling expense accounted for approximately $70,000 of this increase as we added some key personnel to our sales team including a new director of sales, an inside salesman and an equipment support technician. We expect these roles to allow us to expand our dealer network and provide better customer support moving forward. Our general and administrative expenses increased approximately $525,000 from fiscal 2021. The increase was due to the addition of a quality technician, additional recruitment expense from the recruitment of our director of sales, additional computer contract expense as we began the transition to a cloud-based ERP system and salary increases to combat inflation for our employees. Our engineering expenses increased approximately $73,000 from fiscal 2021 due to increased salaries and benefit costs. Total income from operations for our Agricultural Products segment during the 2022 fiscal year was $1,205,000 compared to $599,000 for the 2021 fiscal year, an improvement of $606,000. While the increase in revenue largely drove the increase in operating income for fiscal 2022, our efforts to improve the business over the last few years put us in position to take advantage of better economic conditions. We focused heavily on improving our image in the agricultural industry through rebranding and customer satisfaction initiatives. We put added emphasis on quality and functionality of our products to meet our rugged customers' demands. We've analyzed and diminished manufacturing inefficiencies that have bottlenecked our operations to allow for continued growth in the future.

Modular Buildings. Our Modular Buildings segment's net sales for the 2022 fiscal year were $4,734,000 compared to $5,678,000 for the 2021 fiscal year, a decrease of $944,000, or 16.6%. The decrease in sales was due to a slow start to fiscal 2022 where we saw contract delays on active research project bids we expected to procure. Gross profit for the 2022 fiscal year was 10.5% compared to 17.7% during the 2021 fiscal year. The decrease in gross profit was due to rising construction material costs for projects under fixed price contracts. In addition, we incurred additional labor expense as we maintained higher staffing levels through the first six months of fiscal 2022 under the expectation that large research contracts would be underway in early fiscal 2022. Contract delays led to overstaffing and we were faced with a difficult decision to retain employees in a tough job market knowing demand in the modular building market would increase. Operating expenses for the 2022 fiscal year were $1,095,000 compared to $928,000 for the 2021 fiscal year, an increase of $167,000, or 18.0%. Our selling expense accounted for approximately $64,000 of this increase. With agricultural buildings being our primary source of revenue in fiscal 2022, we saw increased commissions in fiscal 2022 from these sales. We also had increased trade show participation in fiscal 2022. Our general and administrative expenses increased approximately $100,000 due to increased administrative wages as we added an additional project manager to help manage our project workload. Total loss from operations from our Modular Buildings segment during the 2022 fiscal year was $600,000 compared to operating income of $74,000 in the 2021 fiscal year.

Tools. Our Tools segment's net sales for the 2022 fiscal year were $2,754,000 compared to $2,461,000 for the 2021 fiscal year, an increase of $293,000, or 11.9%. The increase in sales is due to price increases to partially cover rising material and manufacturing overhead costs coupled with increased demand in fiscal 2022. Gross profit for the 2022 fiscal year was 13.4% compared to 17.2% for the 2021 fiscal year. The decrease in gross profit was due to rising material input costs that outpaced our price increases along with manufacturing inefficiencies resulting from the competitive labor market and related shortages. Operating expenses were $640,000 for the 2022 fiscal year compared to $574,000 for the 2021 fiscal year, an increase of $66,000, or 11.5%. Our selling expenses accounted for approximately $19,000 of the increase primarily from an increase in commission expense and sales salaries. Our administrative expense was up $47,000 primarily from an increase in administrative wages and attendance related bonuses. Total loss from operations from our Tools segment during the 2022 fiscal year was $272,000 compared to operating loss of $150,000 in the 2021 fiscal year.





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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 2022 fiscal year was cash generated by operating activities. Deposits from our early program and use of trade payables funded our operations in fiscal 2022. We used these funds to increase inventory levels for the second straight year to meet increasing demand and to stay ahead of supply chain delays. We used approximately $2,445,000 in fiscal 2022 for purchases of property (including finance lease assets), plant and equipment, primarily facility upgrades and manufacturing equipment to improve efficiency. We also used proceeds from an investor under a common stock purchase agreement to help with cash flow needs in fiscal 2022. We expect to use cash in fiscal 2023 to acquire additional equipment to improve our shop output and efficiency. These additions will be key to improving quality, increasing manufacturing output to fulfill customer demand and ultimately, we expect it to allow us to be more competitive in our industry. We expect our primary capital needs for fiscal 2023 to be for inventory purchases and the retirement of debt.

We received approximately $369,000 from Iowa Economic Development's Manufacturing 4.0 program in Q3 of fiscal 2022. The funds for this award are provided by the State and Local Fiscal Recovery Fund, part of the American Rescue Plan. The total amount of award available to the Company is $500,000 for which the Iowa Economic Development reimburses the Company for 75% of eligible capital expenditures that increase automation or increase operational efficiency. The Company is required to submit quarterly reports to the Iowa Economic Development through April 30, 2027 under this program and the funds are available for purchases through December 31, 2024.

We have a Bank Midwest credit facility consisting of a $5,000,000 revolving line of credit, pursuant to which we had borrowed $3,924,500, with $1,075,500 remaining, as of November 30, 2022, and two term loans, which had outstanding principal balances of $2,165,554 and $344,932 as of November 30, 2022. 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 $491,433 as of November 30, 2022.

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, 2022. Bank Midwest has issued a waiver forgiving the noncompliance as of November 30, 2022, and in turn waived the event of default.


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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, 2022       November 30, 2021
Current Assets        $        14,133,429     $        12,174,245
Current Liabilities             9,267,289               7,686,817
Working Capital       $         4,866,140     $         4,487,428

Current Ratio                        1.53                    1.58

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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