Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "report") and the audited consolidated financial statements and related notes thereto included in Part II, Item 8, "Financial Statements and Supplementary Data," as well as Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the fiscal year ended November 30, 2025. Some of the statements in this report may be forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements by the use of words such as "may," "should," "anticipate," "believe," "expect," "plan," "future," "intend," "could," "estimate," "predict," "hope," "potential," "continue," "foresee," "opportunity," or the negative of these terms or other similar expressions. Many of these forward-looking statements are located in this report under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," but they may appear in other sections as well. Forward-looking statements in this report generally relate to: (i) our expectations with respect to order backlog, future demand for products, expected product mix and resulting sales; (ii) our beliefs regarding the sufficiency of working capital and cash flows; (iii) our expectation that we will continue to be able to renew or obtain financing on reasonable terms when necessary as well as our continued positive relationship with our creditors and lenders; (iv) our beliefs regarding production capabilities; (v) our intentions and beliefs relating to our costs, business strategies, and future performance, including without limitation, the impact of cost cutting measures, process improvement measures and new product development; (vi) our beliefs that normalizing dealer equipment stock levels may positively impact future demand for our agricultural products (vii) our beliefs regarding our early order program providing a picture of future demand; (viii) our expected financial results, including without limitation, our expected results for the Modular Buildings and Agricultural Products segments; and (ix) our expectations concerning our primary capital and cash flow needs.
You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded. We cannot provide any assurance with respect to our future performance or results. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to: (i) the impact of changing credit markets on our ability to continue to obtain financing on reasonable terms; (ii) our ability to repay current debt, continue to meet debt obligations and comply with financial covenants; (iii) the effect of inflation as well as general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (iv) impacts caused by fluctuating commodity prices and fluctuating farm income; (v) fluctuations in seasonal demand and our production cycle; (vi) the ability of our suppliers to meet our demands for raw materials and component parts; (vii) fluctuations in the price of raw materials, especially steel and the impact of U.S. tariff policy and retaliatory tariffs on our business; (viii) our ability to predict and meet the demands of each market in which our segments operate; (ix) the impact of future interest rate changes on our business and the demand of our products, or interest rate changes may be different than we currently expect; and (x) other factors described from time to time in our Securities and Exchange Commission filings. We do not intend to update the forward-looking statements contained in this report other than as required by law. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Critical Accounting Policies
Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of our financial statements as of May 31, 2026 remain unchanged from November 30, 2025. Disclosure of these critical accounting policies is incorporated by reference from Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended November 30, 2025.
Results of Operations
Net Sales and Cost of Sales
Our consolidated corporate sales from continuing operations for the three- and six-month periods ended May 31, 2026 were $7,854,000 and $14,494,000, respectively, compared to $6,337,000 and $11,478,000, respectively, during the same periods in fiscal 2025. Our sales increased $1,517,000, or 23.9% for the three months ended May 31, 2026 and $3,016,000, or 26.3% for the six months ended May 31, 2026 compared to same periods in fiscal 2025. Consolidated gross margin for the three and six months ended May 31, 2026 was 25.9% and 27.2% compared to 32.5% and 31.0% for the same periods in fiscal 2025.
Sales in our Agricultural Products segment during the second quarter of fiscal 2026 were $4,374,000 compared to $4,026,000 during the same period of fiscal 2025, an increase of $348,000, or 8.6%. Sales for the six months ended May 31, 2026 were $8,128,000 compared to $6,973,000, an increase of $1,155,000, or 16.6%. Livestock prices continued to be elevated through the second quarter of fiscal 2026 and are driving the increased demand for our agricultural products year-on-year. We continue to see steady demand for grinder mixers, manure spreaders and bale processors, despite modest row crop prices through the first six months of fiscal 2026. Our sugar beet equipment demand is down from prior years, as sugar beet prices declined in the first fiscal quarter of 2026. To offset some of the demand decrease, we strategically deployed an experienced product specialist into our primary beet territory to drive new customer activity and technological development. The timing of this hire aligns with the unveiling of a new product in the beet market for fiscal 2026. We have increased our finished product inventory since the fall of 2025 to be prepared for retail opportunities in fiscal 2026, which we believe has been an opportunistic move. Our inventory levels are still elevated as compared to prior years, but are putting us in a position where our short lead times are providing a competitive edge. Gross margin for our Agricultural Products segment for the three-month period ended May 31, 2026 was 24.4% compared to 27.2% for the same period in fiscal 2025. Gross margin for the six months ended May 31, 2026 was 29.1% compared to 27.0% for the same period of fiscal 2025. The margin decrease for the three months ended May 31, 2026 is due primarily to price increases on steel. The gross margin increase for the six months ended May 31, 2026 is due primarily to strong demand for our grinder mixers. Our grinder mixer sales are up approximately $1,319,000 year-on-year. Rising steel and oil prices may challenge our margins for the rest of fiscal 2026 if we continue to see increases.
Our second fiscal quarter sales in our Modular Buildings segment were $3,480,000 compared to $2,311,000 for the same period in fiscal 2025, an increase of $1,169,000, or 50.6%. Our sales for the six months ended May 31, 2026 were $6,366,000 compared to $4,505,000 for the same period of fiscal 2025, an increase of $1,861,000, or 41.3%. We carried a strong modular building backlog into fiscal 2026, unlike fiscal 2025, which has driven the revenue increase so far this year. Our agricultural modular building business is up approximately $407,000, or 29.5% year-on-year due to strong livestock prices. Our research-related modular building sales are up approximately $1,578,000 or 53.2% for the six months ended May 31, 2026 due to large projects we contracted at the end of fiscal 2025. Current backlog is expected to carry us through the third quarter of fiscal 2026. Additionally, we expect current engineering projects to convert to construction projects in the third fiscal quarter. The private research market continued to carry strong demand for laboratory space during the first six months of fiscal 2026. Gross margin in the Modular Buildings segment for the three- and six-month period ended May 31, 2026 was 27.8% and 24.8%, respectively, compared to 41.7% and 37.2% for the same periods in fiscal 2025. Our margin decrease for the first six months of fiscal 2026 is due to the selling of a warrantied agriculture modular building at cost, project overages on site work while completing current contracts and contingencies that became profits in the first quarter of fiscal 2025 that was not repeated in the first six months of fiscal 2026.
Expenses
Consolidated selling expenses from continuing operations for the three and six months ended May 31, 2026 were $434,000, and $870,000, respectively, compared to $436,000 and $786,000 for the same periods in fiscal 2025. The increase in selling expenses is due to increased commissions and royalties from increased sales along with additional targeted advertising campaign expenditures in fiscal 2026. Selling expenses as a percentage of sales were 6.0% for the six months ended May 31, 2026 compared to 6.9% for the six months ended May 31, 2025.
Consolidated engineering expenses from continuing operations were $94,000 for the three months ended May 31, 2026 compared to $84,000 for the same period in fiscal 2025. Consolidated engineering expenses from continuing operations were $201,000 for the six months ended May 31, 2026 compared to $169,000 for the same period in fiscal 2025. The increase in engineering expenses is related to additional research and development costs incurred in 2026 as we made product changes that we felt could drive more sugar beet product demand. Engineering expenses as a percentage of sales were 1.4% for the six months ended May 31, 2026, compared to 1.5 % for the same period in fiscal 2025.
Consolidated administrative expenses from continuing operations for the three months ended May 31, 2026 were $1,218,000 compared to $1,029,000 for the same period in fiscal 2025. Consolidated administrative expenses from continuing operations for the six months ended May 31, 2026 were $2,256,000 compared to $2,088,000 for the same period in fiscal 2025. Administrative expenses as a percentage of sales were 15.6% for the six months ended May 31, 2026, compared to 18.2% for the same period in fiscal 2025. Administrative expenses have increased in fiscal 2026 despite the increase in sales as we have not replaced overhead cut in previous years. We continue to be conscious of adding additional overhead while market conditions are still slow in the Agricultural Products segment.
Net income
Consolidated net income was $173,000 for the three-month period ended May 31, 2026, compared to net income of $1,482,000 for the same period in fiscal 2025. Consolidated net income was $370,000 for the six-month period ended May 31, 2026, compared to net income of $1,426,000 for the same period in fiscal 2025. In the six months ended May 31, 2025 we received approximately $1,154,000 of Employee Retention Credit refunds net of preparation fees and tax, which is the primary reason for our decrease in net income for fiscal 2026. Overall we did see improved income from operations for both the three and six months ended May 31, 2026. The small uptick in the agricultural market coupled with cost cutting procedures enacted in fiscal 2024 in the Agricultural Products segment has stabilized our operating results to prepare us for a potential future uptrend in the agriculture cycle. We continue to focus on remaining competitive with pricing, features and availability to ensure we are considered for retail opportunities. Our Modular Buildings segment's success is expected to continue as solid leads make their way to our sales team.
Order Backlog
The consolidated order backlog net of discounts as of July 7, 2026 was $2,744,000 compared to $4,407,000 as of July 7, 2025, a 37.7% decrease. The order backlog in our Agricultural Products segment was $1,413,000 as of July 7, 2026 compared to $863,000 in fiscal 2025, a 63.7% increase. Demand has remained steady throughout fiscal 2026 for our agriculture products and is much improved from a year ago due to higher row crop prices and record cattle prices. The backlog for the Modular Buildings segment was $1,332,000 as of July 7, 2026, compared to $3,544,000 in fiscal 2025, a 62.4% decrease. Quoting activity in both the research and agriculture buildings markets have been strong so far in fiscal 2026, with further contracts expected to execute with customers we are performing design agreements for. Our order backlog is not necessarily indicative of future revenue to be generated from such orders due to the possibility of order cancellations and dealer discount arrangements we may enter into from time to time.
Liquidity and Capital Resources
Our primary source of funds for the six months ended May 31, 2026 was cash generated by operating activities including profitability and the increase of accounts payable as we incurred costs on construction contracts. We expect the collection of accounts receivable, progress on construction contracts, and reduction of inventory to be primary sources of cash for the remainder of fiscal 2026. We expect our primary cash needs for the remainder of the fiscal year to be tied to operating expenses and retirement of debt.
As of May 31, 2026, our revolving credit line (the "Line of Credit") had an outstanding principal balance of $3,495,438. We renewed our revolving line of credit with Bank Midwest on March 19, 2026, with a scheduled maturity date of March 30, 2027. In our most recent renewal, we negotiated an interest rate 50 basis points lower than our previous line of credit tied to SOFR to recognize expected interest rate decreases sooner. Bank Midwest's credit committee has preapproved an additional $1,500,000 of principal for the 2026 renewal, consistent with the borrowing availability of our previous line of credit, in the event we need additional funding. On June 22, 2026, we entered into a credit facility consisting of a $500,000 revolving line of credit (the "Reserve Line of Credit"). The Reserve Line of Credit is secondary to the Line of Credit and will be utilized upon the Line of Credit reaching capacity. The Reserve Line of Credit was activated to pay large equipment deposits on a new fiberoptic laser and crane system. The deposits and balance of this equipment will be converted to a term loan when installation is complete later this year. The Company expects this capital expenditure will improve quality, efficiency and reliability of our products.
We believe our current financing arrangements will provide sufficient cash to finance operations and pay debt when due during the next twelve months. We expect to continue to be able to procure financing upon reasonable terms.