Arts Way Manufacturing Co Inc: Form 10-K for the period ended Nov 30, 2023

General

Art’s-Way Manufacturing Co., Inc., a Delaware corporation (“we,” “us,” “our,” and the “Company”), began operations as a farm equipment manufacturer in 1956. Since that time, we have become a worldwide manufacturer of agricultural equipment and specialized modular science and agricultural buildings. Our principal manufacturing plant and corporate headquarters is located in Armstrong, Iowa.

We have organized our 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. Our Agricultural Products segment manufactures and distributes farm equipment under the Art’s-Way name. Our Modular Buildings segment manufactures modular buildings for various uses, commonly animal containment and research laboratories, through our wholly-owned subsidiary, Art’s-Way Scientific, Inc., an Iowa corporation. 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. The remaining components of the Tools segment are reported in discontinued operation for the twelve months ended November 30, 2023 and has been modified retrospectively to be reported in discontinued operations for the twelve months ended November 30, 2022. For detailed financial information relating to segment reporting, see Note 18 “Segment Information” to our financial statements in “Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this report.

Corporate information about Art’s-Way can be found on our website, http://www.artsway-mfg.com/ while information on our agriculture products can be found on http://www.artsway.com/. We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Exchange Act requires us to file periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website at http://www.sec.gov.

Business of Our Segments

Agricultural Products

Our Agricultural Products segment, which accounted for 74.2% of our net revenue in the 2023 fiscal year and 81.5% of our net revenue in the 2022 fiscal year, is located primarily in Armstrong, Iowa. This segment manufactures a variety of specialized farm machinery under our own label, including portable and stationary animal feed processing equipment and related attachments used to mill and mix feed grains into custom animal feed rations; a line of forage equipment consisting of forage boxes, bale processors, running gear, and dump boxes; a line of manure spreaders; sugar beet harvesting equipment; and a line of dirt work equipment. We sell our labeled products through independent farm equipment dealers throughout the United States, Australia, Canada, Japan and the United Kingdom. We also provide after-market service parts that are available to keep our branded equipment operating to the satisfaction of the end user of our products.

Modular Buildings

Our Modular Buildings segment, which accounted for 25.8% of our net revenue in the 2023 fiscal year and 18.5% of our net revenue in the 2022 fiscal year, is located in Monona, Iowa. This segment produces, sells and leases modular buildings, which are custom-designed to meet the specific research needs of our customers. The buildings we commonly produce range from basic swine buildings to complex containment research laboratories. Our focus is providing research facilities for academic research institutions, government research and diagnostic centers, public health institutions and private research and pharmaceutical companies, as those are our primary market sectors. We provide services from start to finish by designing, manufacturing, delivering and installing these facilities to meet customers’ critical requirements. In addition to selling these facilities, we also offer a lease option to customers in need of temporary facilities.

Our Principal Agricultural Products

Arthur Luscombe built the first PTO powered grinder mixer on his farm near Dolliver, Iowa. The product’s ability to tackle even the most demanding workload made it an overwhelming success – and secured Luscombe’s reputation as a farmer, entrepreneur and independent thinker who did things his way. Over the years our Agricultural Products segment has grown through developing several new products and with acquisitions. We take pride in our manure spreaders, forage equipment, bale processors, dirt work equipment, sugar beet harvesting equipment and feed mills. We provide limited OEM parts to some of the industry’s leading manufacturers.

Feed mills. There’s no one better than Art’s Way when it comes to processing feed. Stationary mills for livestock feeding or breweries, portable units for small operations and large grinder mixers for the modern feeding operation have our customers’ backs day in and day out. Hammer mills provide faster processing and easily changing micron size or roller mills offer more consistency. We offer the most complete lineup of equipment in feed processing.

Manure spreaders. The X Series spreaders have a unique vertical beater placement combined with guillotine slop gate controls to create the best spread pattern in the industry. Flared sides and densilite flooring provide easy loading and material movement. Backed by our limited lifetime warranty on the apron chain, customers can depend on this rugged machine. The upgraded rate control option powered by Raven is the only unit in the industry to have completely automatic spreading capabilities with apron speed and slop gate control.

Forage. The 2100 series are user-friendly forage boxes in different lengths and unload configurations. It is the only box in its class to offer 100% in-cab controls. Tube side stakes and corrugated sides give users confidence when side-by-side with competitor models. The 9016-HD High Dump cart boasts the largest capacity in the industry at 40,000 pounds.

Bale processors. Spread large round or square bales in the same machine attached to a skid steer, telehandler, or tractor with the patented TOP-SPREAD loader mounted spreader. The compact size fits into barns and alleyways and is easy to maneuver. On a construction site, cover roadsides or fresh seeding quickly from the seat of a skid steer.

Dirt work equipment. Level out and shape fields with the single blade or folding land planes featuring our patented floating hitch design. Reduce erosion by eliminating water pockets, furrows, and implement scars in the field. Shape yards or work sites with standard or rear steer graders that follow closely behind the tractor for leveling in smaller spaces.

Sugar beet harvesting equipment. We are proud to offer the best sugar beet cleaning in the industry during muddy harvest conditions with our patented grab roll bed. Our 12-row harvester has been improved with an automatic leveling system add-on for consistent digging across the field. The defoliator cleanly removes the leaves off the beets prior to digging them up for harvest. The leaves are incorporated back into the soil to provide nutrients for next year’s crop.

Product Distribution and Markets

We distribute goods for our Agricultural Products segment primarily through a network of approximately 600 U.S. and Canadian independent dealers, as well as overseas dealers in Australia, Japan and the United Kingdom, whose customers require specialized agricultural machinery. We have sales representation in 48 states and seven Canadian provinces. Our dealers sell our products to various agricultural and commercial customers. We also maintain a local sales force in our Armstrong, Iowa facility to provide oversight services for our distribution network, communicate with end users, and recruit and train dealers on the uses of our products. Our local service parts staff is available to help customers and dealers with their service parts needs. Our Modular Buildings segment typically sells products customized to the end-user’s requirements directly to the end-user.

We currently export products to nine foreign countries. We have been shipping grinder mixers abroad since 2006 and have exported portable rollermills as well. We continue to strengthen these relationships and intend to develop new international markets. Our international sales accounted for 3.1% of consolidated sales during the 2023 fiscal year compared to 4.5% in the 2022 fiscal year.

Backlog. The Company’s backlog of orders vary on a daily basis. The Company’s Agricultural Products segment had a net backlog of approximately $4,364,000 as of February 1, 2024 compared to $9,366,000 on February 1, 2023. The Company saw a decline in orders on its fall early order program for the first time in three years. The Company believes high interest rates are affecting how much risk the dealers are willing to take on stock inventory. While the Company believes farmers are still going to be creating strong demand in 2024, the Company believes it is going to have to be more speculative with its products and have more inventory on hand. The Company’s Modular Buildings segment had approximately $6,170,00 of backlog as of February 1, 2024, compared to $4,985,000 on that date in 2023. The Modular Buildings segment contracted a $5,300,000 research project in December 2023, which is expected to be mostly completed in fiscal 2024. The Company also has two other large research projects with a combined contract price over $6,000,000 that it is expected to land in fiscal 2024. The Company expects that its order backlogs will continue to fluctuate as orders are received, filled, or canceled, and, due to dealer discount arrangements it may enter into from time to time. Accordingly, these figures are not necessarily indicative of future revenue.

Recent Product Developments

In 2023, we continued to make product improvements that improve manufacturability and to meet our customer’s evolving needs. We worked on the development of a chicken litter variation for our manure spreaders, a sonar leveling system for our defoliators, performed redesign work on our commercial forage box and also took steps to improve the design of our grinder mixers for manufacturability and cost savings.

Our Modular Buildings segments complete projects based on customer specifications and did not engage in specific product development during the 2023 fiscal year.

Competition

Each of our segments have competitive strengths described below. In addition to individual competitive strengths, the barrier to entry for competitors in our industries is high.

Agricultural Products

Our Agricultural Products segment competes in a highly competitive agricultural equipment industry. We compete with larger manufacturers and suppliers that have broader product offerings and significant resources at their disposal; however, we believe that our competitive strengths allow us to compete effectively in our market.

Management believes that grain and livestock producers, as well as those who provide services to grain and livestock operations, are the primary purchasers of agricultural equipment. Many factors influence a buyer’s choice for agricultural equipment. Any one or all factors may be determinative, but they include brand loyalty, the relationship with dealers, product quality and performance, product innovation, product availability, parts and warranty programs, price, and customer service.

While our larger competitors may have resources greater than ours, we believe we compete effectively in the farm equipment industry by serving smaller markets in specific product areas rather than directly competing with larger competitors across an extensive range of products. Our Agricultural Products segment caters to niche markets in the agricultural industry. We do not have a direct competitor that has the same product offerings that we do. Instead, each of our product lines competes with similar products of many other manufacturers. Some of our product lines face greater competition than others, but we believe that our products are competitively priced with greater diversity than most competitor product lines. Other companies produce feed processing equipment, sugar beet harvesting and defoliating equipment, grinders, and other products similar to ours; therefore, we focus on providing the best product available at a reasonable price. Overall, we believe our products are competitively priced with above average quality and performance, in a market where price, product performance, and quality are principal elements.

In addition, in order to capitalize on brand recognition for our Agricultural Products segment, we have numerous product lines produced under our own label. We also provide aftermarket service parts which are available to keep our branded and OEM-produced equipment operating to the satisfaction of the customer. We sell products to customers in the United States and nine foreign countries through a network of approximately 600 independent dealers in the United States and Canada, as well as overseas dealers in Australia, Japan and the United Kingdom.

We believe that our competitive pricing, product quality and performance, network of worldwide and domestic distributors, and strong market share for many of our products allow us to compete effectively in the agricultural products market.

Modular Buildings

We expect continued competition from our Modular Buildings segment’s existing competitors, which include conventional design/build firms, as well as competition from new entrants into the modular building market. To some extent, we believe barriers to entry in the modular building industry limit the competition we face in the industry. Barriers to entry in the market consist primarily of access to capital, access to a qualified labor pool, and the bidding process that accompanies many jobs in the health and education markets. Despite these barriers, manufacturers who have a skilled work force and adequate production facilities could adapt their manufacturing facilities to produce modular structures.

We believe the competitive strength of our Modular Buildings segment is our ability to design and produce high-tech modular buildings more quickly than conventional design/build firms. Conventional design/build construction may take two to five years, while our modular laboratories can be delivered in as little as six months. As one of the few companies in the industry to supply turnkey modular buildings and laboratories, we believe we provide high-quality buildings at reasonable prices that meet our customers’ time, flexibility, and security expectations.

Raw Materials, Principal Suppliers, and Customers

Raw materials for our various segments are acquired from domestic and foreign sources and normally are readily available. We saw lead times increase on raw materials in 2022 as labor shortages from the COVID-19 pandemic left many of our suppliers understaffed. Lead times remained heightened during most of fiscal 2023 and began to soften near the end of fiscal 2023. We rely on foreign suppliers and foreign markets for materials and components for some of our products. However, these suppliers are not principal suppliers and there are alternative sources for these materials.

We do not typically rely on sales to one customer or a small group of customers. During the 2023 fiscal year, one customer accounted for just more than 12% consolidated net revenues from continuing operations.

Intellectual Property

We maintain manufacturing rights on several products, which cover unique aspects of design. We also have trademarks covering product identification. We believe our trademarks and licenses help us to retain existing business and secure new relationships with customers. The duration of these rights ranges from 5 to 10 years, with options for renewal. We currently have no pending applications for intellectual property rights.

We have a licensing and royalty agreement with Spreader, LLC to produce a loader mounted spreader in exchange for royalty payments until December 2027.

Government Relationships and Regulations; Environmental Compliance

Our Modular Buildings segment must design, manufacture, and install its modular buildings in accordance with state building codes, and we have been able to achieve the code standards in all instances. In addition, we are subject to various federal, state, and local laws and regulations pertaining to environmental protection and the discharge of materials into the environment. We do not expect that the cost of complying with these regulations will have a material impact on our consolidated results of operations, financial position, or cash flows.

Employees

As of November 30, 2023, we employed 93 employees in our Agricultural Products segment including two on a part-time basis, and 31 employees in our Modular Buildings segment, two on a part-time basis. These numbers do not necessarily represent peak employment during the 2023 fiscal year.

Our executive offices, as well as the primary production and warehousing facilities for our Agricultural Products segment, are located in Armstrong, Iowa. These facilities were constructed after 1965 and remain in fair condition. The facilities in Armstrong contain approximately 249,000 square feet of usable space. We have engaged in several building improvement projects during the last several years including most recently updating our office spaces and employee break room in 2021, new shop and office boilers and roofing improvements in 2022 and remodeling our production facility bathrooms in fiscal 2023. In addition, we own approximately 30 acres of land west of Armstrong, on which the factory and inventory storage space is situated for our Agricultural Products segment.

Our facility in Monona, Iowa was constructed by us in 2007, which houses the manufacturing for our Modular Buildings segment. The facility was custom-designed to meet our production needs. It has approximately 50,000 square feet of useable space and accommodates a sprinkler system and crane. We own a second building to the east with approximately 12,000 square feet of space which is used as our weld shop for building frames.

Our facility in Canton, OH was purchased in connection with the acquisition of certain assets of Ohio Metal Working Products Company in September 2013. The building contains approximately 39,000 square feet of usable space and is in good condition. The purchased land is approximately 4.50 acres and was used by our Tools segment. This property is currently listed for sale at market value.

All of our owned real property is subject to mortgages granted to Bank Midwest as security for our long-term debt and our line of credit. See “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Liquidity and Capital Resources” for more information.

From time to time in the ordinary course of business, we may be named as a defendant in legal proceedings incidental to the business, including without limitation, workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the directors that could result in the commencement of material legal proceedings.

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

Our Agricultural Products segment continued its profitability for the third straight year in fiscal 2023. Our Modular Buildings segment added a strong financial performance for fiscal 2023. Our consolidated revenues from continued operations increased 18.1% year on year and we had $1,531,000 of income from continuing operations for the fiscal year ended November, 30 2023.

We finished the year ended November 30, 2023 with approximately $763,000 of consolidated net income from continued operations and saw our working capital increase by approximately $824,000.

We expect to have access to capital as needed throughout fiscal 2024 from the collection of receivables, sale of inventory, the expected receipt of approximately $1.2 million of gross proceeds from a filed Employee Retention Credit and the potential sale of our Ohio real estate. Due to the timing of filing an ERC claim after the IRS announced a moratorium on processing applications, and uncertainty surrounding the nature and timing of the claim approval and subsequent payment process, recognition of the claim is deferred until payment is received. Accordingly the claim has not been recorded in receivables, assets, or income. On November 30, 2023 we had $1,086,480 available on our line of credit and $2,337,903 of excess collateral towards our borrowing base. Our working capital remained strong at approximately $5,690,000 in fiscal 2023 with a current ratio of 1.61. Our banking relationship remains positive and we expect it to only strengthen as our balance sheet continues to improve through the retirement of debt. 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.

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, which approximates costs determined on the first-in, first-out basis. 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 segment are farm equipment and service parts related to farm equipment. The Agricultural Products segment generally executes 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 and service parts upon shipment of the goods. Shipment of the goods is the point in time when risk of ownership and title pass to the customer. 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 segments 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 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 2023 were approximately $3,110,000 compared to $1,010,000 in fiscal 2022.

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 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 9 “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, 2023 Compared to Fiscal Year Ended November 30, 2022

Our consolidated net sales from continuing operations totaled $30,281,000 for the 2023 fiscal year, which represents a 18.1% increase from our consolidated net sales of $25,646,000 for the 2022 fiscal year. We increased revenue in both our Agricultural Products and Modular Building segments in fiscal 2023. Our consolidated gross profit as a percentage of net sales increased to 28.3% in the 2023 fiscal year compared to 27.1% of net sales in the 2022 fiscal year. Our consolidated operating expenses from continuing operations increased by 11.4%, from $6,334,000 in the 2022 fiscal year to $7,053,000 in the 2023 fiscal year. The majority of our corporate general and administrative expenses are borne by our Agricultural Products segment, including costs to be public. The Agricultural Products segment represented $5,920,000 of our total consolidated operating expenses, while our Modular Buildings segment represented $1,133,000.

Our consolidated operating income from continuing operations for the 2023 fiscal year was $1,531,000 compared to operating income of $605,000 for the 2022 fiscal year. Our Agricultural Products segment had operating income of $664,000, and our Modular Buildings segment had operating income of $867,000.

Consolidated net income for the 2023 fiscal year was $267,000 compared to net income of $98,000 in the 2022 fiscal year.

Our effective tax rate for the 2023 and 2022 fiscal years was 29.8% and 16.4%, respectively. The primary driver for the increase in effective tax rate was due to add backs related to differences in restricted stock values at grant and vest date and non-deductible meals expense.

Agricultural Products. Our Agricultural Products segment’s net sales for the 2023 fiscal year were $22,467,000 compared to $20,912,000 during the 2022 fiscal year, an increase of $ 1,555,000, or 7.4%. Commodity prices in the agricultural market remained strong for the majority of fiscal 2023, and our production execution on our pent up backlog led to the increase in sales in fiscal 2023. Incoming orders began to slow near the end of fiscal 2023 as supply chains in our industry began to catch up to demand.

Gross profit percentage for the 2023 fiscal year was 29.3% compared to 30.8% for the 2022 fiscal year. We saw component prices and manufacturing overhead continue to increase from inflationary forces in fiscal 2023. This, coupled with product mix was the primary driver for the decrease in gross profit percentage. We doubled the number of unit sales on our manure spreaders in fiscal 2023, as we added smaller unit options to our manure spreader line. A large portion of our sales increase was related to the manure spreader line which has a lower profit margin to stay competitive with other industry leaders. We continued to make steps to drive production efficiency in fiscal 2023, most notably with the creation of new fixturing to weld a higher volume of parts in our robotic weld cells. We have identified additional ways to improve our profit margin through automation and continue to make that a focus in fiscal 2024.

Our Agricultural Products segment’s operating expenses for the 2023 fiscal year were $5,920,000 compared to $5,239,000 for the 2022 fiscal year, an increase of $681,000, or 13.0%. Our selling expense accounted for approximately $200,000 of this increase, which included additional commissions in fiscal 2023, from increased sales and more sales in territories represented by our independent reps and increased advertising spend in fiscal 2023 to generate more product interest about our products and to reach new geographic areas. Our general and administrative expenses increased approximately $461,000 from fiscal 2022. This was due in part to ERP conversion expenses included training, data conversion and post implementation support. The new ERP is expected to improve our financial reporting, material resource planning and overall administrative efficiency. We also added a Human Resources manager to our team this fiscal year, which added to the increased general and administrative expense. Our costs of being public, most notably, audit fees also increased in fiscal 2023. Our engineering expenses increased approximately $19,000 from fiscal 2022 due to some consulting work to increase robotic weld cell activity. Total income from operations for our Agricultural Products segment during the 2023 fiscal year was $664,000 compared to $1,205,000 for the 2022 fiscal year. Inflationary forces on components, manufacturing overhead, product mix with lesser profit margin compared to fiscal 2022 and increased operating expenses as discussed above were primary drivers of less operating income for fiscal 2023. We continue to strive for improvements that will improve our product margins and improve manufacturability. We took additional steps in fiscal 2023 to increase our operational effectiveness including product quality and efficiency initiatives with upgraded equipment and new internal programs.

Modular Buildings. Our Modular Buildings segment’s net sales for the 2023 fiscal year were $7,814,000 compared to $4,734,000 for the 2022 fiscal year, an increase of $3,080,000, or 65.1%. We saw an increase in agricultural sales in fiscal 2023 from the continued strength of the agricultural market and also landed a large research product that drove up sales. Our Modular Building segment's gross profit for the 2023 fiscal year was 25.6% compared to 10.5% during the 2022 fiscal year. Sales volume played a key factor in increasing our gross profit for fiscal 2023. We also increased our billing rates to combat rising labor and overhead costs from fiscal 2022 that led to better margins in fiscal 2023. Operating expenses for the 2023 fiscal year were $1,133,000 compared to $1,095,000 for the 2022 fiscal year, an increase of $38,000, or 3.5%. This increase was primarily due to increased selling expenses from additional commissions paid on an increase in agricultural building sales. Total income from operations from our Modular Buildings segment during the 2023 fiscal year was $867,000 compared to operating loss of $600,000 in the 2022 fiscal year. We took steps in fiscal 2023 to improve our project management team to increase profitability on projects and to provide better service to our customers. We believe our brand and sales lead funnel is providing us with increased sales potential in fiscal 2024.

Discontinued Operations. On June 7, 2023 we announced we would be discontinuing our Tools segment with the last day of normal operations on July 14, 2023. There were no employees as of November 30, 2023. One employee remained employed by the Tools segment through October 2, 2023 to oversee the liquidation process, mainly the sale of remaining inventory and auctioning off machinery and equipment. Our discontinued operations generated approximately $661,000 from operating activities for the twelve months ended November 30, 2023, which includes the liquidation of inventory and receivables and approximately $76,000 from investing activities from the sale of equipment. The Company real estate is listed for sale at market value in the Canton, Ohio area. We estimate approximately $2,000,000 in net proceeds on the sale of this real estate based on market value of comps in the area. Our Tools segment had sales of $2,031,000 for the twelve months ended November 30, 2023 and $2,753,000 for the twelve months ended November 30, 2022. Management believes the liquidation of the Tools segment will allow for investment in technological advances that improve efficiency and margins in the Agricultural Products segments, our largest revenue source.

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 payment over the past few years and costs of agricultural production are increasing; 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.

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 2023 fiscal year was cash generated by financing activities. Income from continuing operations, sale of inventory and property, plant and equipment of our discontinued operations and the use of our line of credit were used to fund our operating and investing activities. A large increase in receivables consumed cash in 2023 as we used extended terms to increase our sales in fiscal 2023. We also consumed significant cash increasing our inventory to stay ahead of supply chain delays. We expect to be driving these inventory levels down in fiscal 2024 as many of our vendor lead times are returning to pre pandemic levels. We used approximately $841,000 in fiscal 2023 for purchases of property, plant and equipment, primarily facility upgrades and manufacturing equipment to improve operational efficiency. We expect our primary capital needs for fiscal 2024 to be operating expenses. We also expect to use cash in fiscal 2024 to acquire additional equipment that improves automation and efficiency in our manufacturing process. These additions will help us drive out costs to improve product margins and be more competitive in our industry. We expect to receive approximately $1,200,000 of net proceeds from the Employee Retention Credit in fiscal 2024 and estimate expected net proceeds of approximately $2,000,000 upon sale of our Ohio real estate, which we expect will be used to retire a significant portion of our debt and fund capex needs as discussed above. Due to the timing of filing an ERC claim after the IRS announced a moratorium on processing applications, and uncertainty surrounding the nature and timing of the claim approval and subsequent payment process, recognition of the claim is deferred until payment is received. Accordingly the claim has not been recorded in receivables, assets, or income.

We have a Bank Midwest credit facility consisting of a $5,000,000 revolving line of credit and a $500,000 reserve line of credit, pursuant to which we had borrowed a combined $4,413,520, with $1,086,480 remaining, as of November 30, 2023, and two term loans, which had outstanding principal balances of $2,080,718 and $336,858 as of November 30, 2023. 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 $482,078 as of November 30, 2023. $160,599 of the EIDL balance is tied to our discontinued operation and is expected to be paid upon liquidation of the real estate.

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, 2023. Bank Midwest has issued a waiver for the noncompliance as of November 30, 2023.

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:

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.

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 November 30, 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.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of management, including the persons serving as our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of November 30, 2023.

This report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this report.

Limitations on Controls

Our management, including the persons serving as our principal executive officer and principal financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and controls may become inadequate if conditions change. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes to Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended November 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.