Company Quick10K Filing
Arts Way Manufacturing
Price2.12 EPS-0
Shares4 P/E-5
MCap9 P/FCF-10
Net Debt2 EBIT-2
TEV12 TEV/EBIT-7
TTM 2019-05-31, in MM, except price, ratios
10-Q 2021-02-28 Filed 2021-04-09
10-K 2020-11-30 Filed 2021-02-09
10-Q 2020-08-31 Filed 2020-10-09
10-Q 2020-05-31 Filed 2020-07-10
10-Q 2020-02-29 Filed 2020-04-14
10-K 2019-11-30 Filed 2020-02-06
10-Q 2019-08-31 Filed 2019-10-10
10-Q 2019-05-31 Filed 2019-07-11
10-Q 2019-02-28 Filed 2019-04-09
10-K 2018-11-30 Filed 2019-02-05
10-Q 2018-08-31 Filed 2018-10-09
10-Q 2018-05-31 Filed 2018-07-12
10-Q 2018-02-28 Filed 2018-04-02
10-K 2017-11-30 Filed 2018-02-07
10-Q 2017-08-31 Filed 2017-10-06
10-Q 2017-05-31 Filed 2017-07-14
10-Q 2017-02-28 Filed 2017-04-04
10-K 2016-11-30 Filed 2017-02-02
10-Q 2016-08-31 Filed 2016-10-06
10-Q 2016-05-31 Filed 2016-07-15
10-Q 2016-02-29 Filed 2016-04-14
10-K 2015-11-30 Filed 2016-02-03
10-Q 2015-08-31 Filed 2015-10-01
10-Q 2015-05-31 Filed 2015-06-30
10-Q 2015-02-28 Filed 2015-03-31
10-K 2014-11-30 Filed 2015-01-29
10-Q 2014-08-31 Filed 2014-10-09
10-Q 2014-05-31 Filed 2014-06-27
10-Q 2014-02-28 Filed 2014-04-14
10-K 2013-11-30 Filed 2014-02-26
10-Q 2013-08-31 Filed 2013-10-15
10-Q 2013-05-31 Filed 2013-07-15
10-Q 2013-02-28 Filed 2013-04-15
10-K 2012-11-30 Filed 2013-02-27
10-Q 2012-08-31 Filed 2012-10-15
10-Q 2012-05-31 Filed 2012-07-16
10-Q 2012-02-29 Filed 2012-04-13
10-K 2011-11-30 Filed 2012-02-24
10-Q 2011-08-31 Filed 2011-10-14
10-Q 2011-05-31 Filed 2011-07-15
10-Q 2011-02-28 Filed 2011-04-12
10-K 2010-11-30 Filed 2011-02-22
10-Q 2010-08-31 Filed 2010-10-12
10-Q 2010-05-31 Filed 2010-07-13
10-Q 2010-02-28 Filed 2010-04-12
10-K 2009-11-30 Filed 2010-02-23
8-K 2021-02-05 Earnings, Exhibits
8-K 2020-10-08
8-K 2020-07-21
8-K 2020-07-09
8-K 2020-04-30
8-K 2020-04-20
8-K 2020-04-15
8-K 2020-04-13
8-K 2020-03-05
8-K 2020-02-04
8-K 2020-02-03
8-K 2019-10-09
8-K 2019-07-10
8-K 2019-04-16
8-K 2019-04-08
8-K 2019-02-26
8-K 2019-02-04
8-K 2018-10-08
8-K 2018-07-11
8-K 2018-05-31
8-K 2018-04-25
8-K 2018-03-29
8-K 2018-03-15
8-K 2018-03-06
8-K 2018-02-01

ARTW 10Q Quarterly Report

Part I - Financial Information 1
Part II - Other Information 24
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-10.2 ex_239166.htm
EX-31.1 ex_239167.htm
EX-31.2 ex_239168.htm
EX-32.1 ex_239169.htm
EX-32.2 ex_239170.htm

Arts Way Manufacturing Earnings 2021-02-28

Balance SheetIncome StatementCash Flow
40322416802012201420172020
Assets, Equity
151185202012201420172020
Rev, G Profit, Net Income
2.91.80.7-0.4-1.5-2.62012201420172020
Ops, Inv, Fin

10-Q 1 artw20210228_10q.htm FORM 10-Q artw20210228_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended February 28, 2021

 

or

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______

 

Commission File No. 000-05131

 

ART’S-WAY MANUFACTURING CO., INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

42-0920725

 

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

 

5556 Highway 9

Armstrong, Iowa 50514

(Address of principal executive offices) (Zip Code)

 

(712) 864-3131

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock $.01 par value

ARTW

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
  Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).          Yes ☐ No ☒

 

Number of common shares outstanding as of April 1, 2021: 4,513,402

 

 

 

 

Arts-Way Manufacturing Co., Inc.

Index

 

Page No.

 

 

PART I FINANCIAL INFORMATION        1

 

Item 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets February 28, 2021 and November 30, 2020        1
     
  Condensed Consolidated Statements of Operations Three-month periods ended February 28, 2021 and February 29, 2020 2
     
  Condensed Consolidated Statements of Stockholders’ Equity Three-month periods ended February 28, 2021 and February 29, 2020 3
     
  Condensed Consolidated Statements of Cash Flows Three-month periods ended February 28, 2021 and February 29, 2020 4
     
  Notes to Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
     
Item 4. Controls and Procedures 23

 

PART II OTHER INFORMATION 24

 

Item 1. Legal Proceedings 24
     
Item 1A. Risk Factors 24
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
     
Item 3. Defaults Upon Senior Securities 24
     
Item 4. Mine Safety Disclosures 24
     
Item 5. Other Information 24
     
Item 6. Exhibits 25
     
  SIGNATURES 26

 

 

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

ARTS-WAY MANUFACTURING CO., INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

   

February 28, 2021

   

November 30, 2020

 
Assets                
Current assets:                

Cash

  $ 3,890     $ 2,684  

Accounts receivable-customers, net of allowance for doubtful accounts of $25,974 and $51,175 in 2021 and 2020, respectively

    1,681,025       2,390,604  

Inventories, net

    7,902,244       7,762,400  

Cost and profit in excess of billings

    293,504       56,026  

Net investment in sales-type leases, current

    14,283       28,352  

Other current assets

    295,719       61,284  

Total current assets

    10,190,665       10,301,350  

Property, plant, and equipment, net

    5,222,809       5,218,662  

Assets held for lease, net

    521,555       521,555  

Deferred income taxes

    2,765,099       2,667,686  

Other assets

    81,642       93,760  

Total assets

  $ 18,781,770     $ 18,803,013  

Liabilities and Stockholders Equity

               

Current liabilities:

               

Accounts payable

  $ 1,768,294     $ 1,955,404  

Customer deposits

    1,377,421       198,225  

Billings in excess of cost and profit

    115,784       276,226  

Income taxes payable

    5,000       1,100  

Accrued expenses

    1,198,185       1,279,312  

Line of credit

    1,875,530       2,359,530  

Current portion of long-term debt

    91,336       94,979  

Total current liabilities

    6,431,550       6,164,776  

Long-term liabilities

               

Long-term portion of operating lease liabilities

    15,874       18,342  

Long-term debt, excluding current portion

    2,699,081       2,713,150  

Total liabilities

    9,146,505       8,896,268  

Commitments and Contingencies (Notes 7, 9 and 10)

               

Stockholders’ equity:

               

Undesignated preferred stock - $0.01 par value. Authorized 500,000 shares in 2021 and 2020; issued and outstanding 0 shares in 2021 and 2020.

    -       -  

Common stock – $0.01 par value. Authorized 9,500,000 shares; issued 4,563,504 and 4,470,004 at February 28, 2021 and November 30, 2020, respectively

    45,635       44,700  

Additional paid-in capital

    3,557,362       3,496,243  

Retained earnings

    6,128,618       6,443,856  

Treasury stock, at cost (40,667 in 2021 and 35,097 in 2020 shares)

    (96,350 )     (78,054 )

Total stockholders’ equity

    9,635,265       9,906,745  

Total liabilities and stockholders’ equity

  $ 18,781,770     $ 18,803,013  

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

 

ARTS-WAY MANUFACTURING CO., INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   

Three Months Ended

 
   

February 28, 2021

   

February 29, 2020

 

Sales

  $ 5,400,572     $ 5,025,924  

Cost of goods sold

    4,357,894       4,048,762  

Gross profit

    1,042,678       977,162  
Expenses:                

Engineering

    121,391       109,852  

Selling

    472,974       455,684  

General and administrative

    816,836       881,322  

Total expenses

    1,411,201       1,446,858  

(Loss) from operations

    (368,523 )     (469,696 )

Other income (expense):

               

Interest expense

    (58,684 )     (83,274 )

Other

    27,657       9,199  

Total other income (expense)

    (31,027 )     (74,075 )

Income (loss) before income taxes

    (399,550 )     (543,771 )

Income tax (benefit)

    (84,312 )     (106,579 )

Net Income (Loss)

    (315,238 )     (437,192 )

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

ARTS-WAY MANUFACTURING CO., INC.

Consolidated Statements of Stockholders' Equity

Three Months Ended February 28, 2021 and February 29, 2020

(Unaudited)

 

   

Common Stock

   

Additional

           

Treasury Stock

         
   

Number of

           

paid-in

   

Retained

   

Number of

                 
   

shares

   

Par value

   

capital

   

earnings

   

shares

   

Amount

   

Total

 
                                                         

Balance, November 30, 2019

    4,321,087     $ 43,211     $ 3,250,087     $ 8,547,342       18,842     $ (47,058 )   $ 11,793,582  

Stock based compensation

    53,750       537       37,043       -       10,517       (19,064 )     18,516  

Net (loss)

    -       -       -       (437,192 )     -       -       (437,192 )

Balance, February 29, 2020

    4,374,837       43,748       3,287,130       8,110,150       29,359       (66,122 )     11,374,906  

 

 

   

Common Stock

   

Additional

           

Treasury Stock

         
   

Number of

           

paid-in

   

Retained

   

Number of

                 
   

shares

   

Par value

   

capital

   

earnings

   

shares

   

Amount

   

Total

 
                                                         

Balance, November 30, 2020

    4,470,004     $ 44,700     $ 3,496,243     $ 6,443,856       35,097     $ (78,054 )   $ 9,906,745  

Stock based compensation

    93,500       935       61,119       -       5,570       (18,296 )     43,758  

Net (loss)

    -       -       -       (315,238 )     -       -       (315,238 )

Balance, February 28, 2021

    4,563,504       45,635       3,557,362       6,128,618       40,667       (96,350 )     9,635,265  

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

ARTS-WAY MANUFACTURING CO., INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   

Three Months Ended

 
   

February 28, 2021

   

February 29, 2020

 

Cash flows from operations:

               

Net (loss)

  $ (315,238 )   $ (437,192 )

Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:

               

Stock based compensation

    62,054       37,580  

Decrease in obsolete inventory reserves

    (216,795 )     (118,974 )

Gain on disposal of property, plant, and equipment

    (8,000 )     (1,251 )

Depreciation and amortization expense

    161,107       227,456  

Accrued interest on deferred debt payments

    4,161       -  

Change in allowance for doubtful accounts

    25,201       10,215  

Deferred income taxes

    (97,413 )     (125,253 )

Changes in assets and liabilities:

               

(Increase) decrease in:

               

Accounts receivable

    684,378       (987,521 )

Inventories

    76,951       (416,948 )

Net investment in sales-type leases

    14,069       37,231  

Other assets

    (225,977 )     (191,484 )

Increase (decrease) in:

               

Accounts payable

    (187,110 )     349,256  

Contracts in progress, net

    (397,920 )     559,252  

Customer deposits

    1,179,196       116,906  

Income taxes payable

    3,900       17,581  

Accrued expenses

    (81,262 )     (36,982 )

Net cash provided by (used in) operating activities

    681,302       (960,128 )

Cash flows from investing activities:

               

Purchases of property, plant, and equipment

    (163,927 )     (267,141 )

Net proceeds from sale of assets

    8,000       1,251  

Net cash used in investing activities

    (155,927 )     (265,890 )

Cash flows from financing activities:

               

Net change in line of credit

    (484,000 )     1,266,000  

Repayment of term debt

    (21,873 )     (20,776 )

Repurchases of common stock

    (18,296 )     (19,064 )

Net cash provided by (used in) financing activities

    (524,169 )     1,226,160  

Net increase in cash

    1,206       142  

Cash at beginning of period

    2,684       3,145  

Cash at end of period

  $ 3,890     $ 3,287  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 48,826     $ 77,238  

Income taxes

    -       1,093  

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

1)

Description of the Company

 

Unless otherwise specified, as used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Art’s-Way,” and the “Company” refer to Art’s-Way Manufacturing Co., Inc., a Delaware corporation headquartered in Armstrong, Iowa, and its wholly-owned subsidiaries.

 

The Company began operations as a farm equipment manufacturer in 1956. Since that time, it has become a major worldwide manufacturer of agricultural equipment. Its principal manufacturing plant is located in Armstrong, Iowa.

 

The Company has organized its business into three 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. The Agricultural Products segment manufactures and sells farm equipment and related replacement parts under the Art’s-Way Manufacturing label and private labels. The Modular Buildings segment manufactures and installs modular buildings for animal containment and various laboratory uses, and the Tools segment manufactures steel cutting tools and inserts.

 

 
 

2)

Summary of Significant Accounting Policies

 

Statement Presentation

 

The foregoing condensed consolidated financial statements of the Company are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and operating results for the interim periods. The financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2020. The results of operations for the three months ended February 28, 2021 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2021.

 

Impact of COVID-19

 

The COVID-19 pandemic had little effect on the results of the first fiscal quarter of 2021. The Company did see signs of a strengthening economy in all three segments compared to fiscal 2020. The COVID-19 pandemic may continue to impact our business operations and financial operating results, and there is uncertainty in the nature and degree of its continued effects over time. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part I, Item 2 of this Form 10-Q) for further discussion.

 

Reclassification of Prior Year Presentation

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Condensed Consolidated Statements of Cash Flows for the three months ended February 29, 2020, to identify the non-cash expense related to changes in the Company’s obsolete inventory reserve in the amount of $118,974. This change in classification does not affect previously reported cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows.

 

5

 

Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the three months ended February 28, 2021. Actual results could differ from those estimates.

 

Revenue Recognition

 

The Company’s 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. The Company recognizes revenue for the production and sale of farm equipment, service parts and cutting tools upon shipment of the goods. Risk of ownership and title pass to the customer upon shipment of the goods. 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 the Company’s terms are documented in the most recently published price lists. Pricing is fixed and determinable according to the Company’s published equipment and parts price lists. Title to all equipment and parts sold passes 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 and retained by the Company. 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 increase contract liabilities.

 

In certain circumstances, upon the customer’s written request, the Company may recognize revenue when production is complete, and the goods are ready for shipment. At the customer’s request, the Company will bill the customer upon completing all performance obligations, but before shipment. The customer dictates that the Company ship the goods per the customer’s direction from the Company’s 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 the Company will segregate the goods from its 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. The Company has operated using bill and hold agreements with certain customers for many years, with consistent satisfactory results for both the customer and the Company. The credit terms on these agreements 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.

 

6

 

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, 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. The Company uses 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 the Company’s 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.

 

The Company’s 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.”

 

7

 

Recently Issued Accounting Pronouncements

 

Recently Adopted Accounting Guidance

 

Leases

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, “Leases (Topic 842),” which requires a lessee to recognize a right-of-use asset and a lease liability on its balance sheet for all leases with terms of twelve months or greater. The Company adopted this guidance for fiscal 2020 using the modified retrospective approach, including interim periods within that reporting period. Under the modified retrospective approach, the Company did not adjust prior comparative periods. The Company has a moderate amount of leasing activity mainly as the lessee of office equipment and as the lessor of modular rental buildings. As a result of adoption, the Company recognized $34,316 as a right-of-use asset and $34,316 of lease liabilities on the balance sheet in the first quarter of fiscal 2020 for office equipment it leases. The Company’s activity as a lessor will remain mostly unaffected by this guidance. The Company’s additional disclosures may include, but are not limited to:

 

 

 

Nature of its leases

 

Significant assumptions and judgements used

 

Information about leases that have not yet commenced

 

Related-party lease transactions

 

Accounting policy election regarding short-term leases

 

Finance, operating, short-term and variable lease costs

 

Maturity analysis of operating lease payments, lease receivables and lease obligations

 

Tabular disclosure of lease-related income

 

Components of the net investment in a lease

 

Information on the management of risk associated with residual asset

 

Accounting Pronouncements Not Yet Adopted

 

Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within the year of adoption. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt ASU 2016-13 in fiscal 2024. The Company does not expect the application of the CECL impairment model to have a significant impact on its allowance for uncollectible amounts for accounts receivable.

 

8

 

 
 

3)

Disaggregation of Revenue

 

The following table displays revenue by reportable segment from external customers, disaggregated by major source. The Company believes disaggregating by these categories depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

 

   

Three Months Ended February 28, 2021

 
   

Agricultural

   

Modular Buildings

   

Tools

   

Total

 

Farm equipment

  $ 2,777,000     $ -     $ -     $ 2,777,000  

Farm equipment service parts

    620,000       -       -       620,000  

Steel cutting tools and inserts

    -       -       606,000       606,000  

Modular buildings

    -       1,141,000       -       1,141,000  

Modular building lease income

    -       -       -       -  

Other

    103,000       150,000       4,000       257,000  
    $ 3,500,000     $ 1,291,000     $ 610,000     $ 5,401,000  

 

   

Three Months Ended February 29, 2020

 
   

Agricultural

   

Modular Buildings

   

Tools

   

Total

 

Farm equipment

  $ 2,349,000     $ -     $ -     $ 2,349,000  

Farm equipment service parts

    532,000       -       -       532,000  

Steel cutting tools and inserts

    -       -       609,000       609,000  

Modular buildings

    -       1,271,000       -       1,271,000  

Modular building lease income

    -       156,000       -       156,000  

Other

    72,000       30,000       7,000       109,000  
    $ 2,953,000     $ 1,457,000     $ 616,000     $ 5,026,000  

 

 
 

4)

Contract Receivables, Contract Assets and Contract Liabilities

 

The following table provides information about contract receivables, contract assets, and contract liabilities from contracts with customers included on the Condensed Consolidated Balance Sheets.

 

   

February 28, 2021

   

November 30, 2020

 

Receivables

  $ 1,681,000     $ 2,391,000  

Assets

    294,000       56,000  

Liabilities

    1,458,000       276,000  

 

The amount of revenue recognized in the first three months of fiscal 2021 that was included in a contract liability at November 30, 2020 was approximately $265,000 compared to $89,000 in the same period of fiscal 2020. The decrease in contract receivables at February 28, 2021 is due to collection of receivables in the first quarter of fiscal 2021. Contract assets and contract liabilities increased during the three months ended February 28, 2021 as the Company completed progress on construction contracts in the modular buildings segment and received a large amount of deposits from an early order program.

 

The Company utilizes the practical expedient exception for these contracts and will report only on performance obligations greater than one year. As of February 28, 2021, the Company has no performance obligations with an original expected duration greater than one year.

 

 

 
 

5)

Net Income (Loss) Per Share of Common Stock

 

Basic net income (loss) per share of common stock has been computed on the basis of the weighted average number of common shares outstanding. Diluted net income (loss) per share has been computed on the basis of the weighted average number of common shares outstanding plus equivalent shares assuming exercise of stock options. Potential shares of common stock that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted net income (loss) per share.

 

9

 

Basic and diluted net income (loss) per share have been computed based on the following as of February 28, 2021 and February 29, 2020:

 

   

For the Twelve Months Ended

 
   

February 28, 2021

   

February 29, 2020

 

Numerator for basic and diluted net income (loss) per share:

               
                 

Net income (loss)

  $ (315,238 )   $ (437,192 )
                 

Denominator:

               

For basic net income (loss) per share - weighted average common shares outstanding

    4,475,279       4,315,481  

Effect of dilutive stock options

    -       -  

For diluted net income (loss) per share - weighted average common shares outstanding

    4,475,279       4,315,481  
                 
                 

Net Income (Loss) per share - Basic:

               

Net Income (Loss) per share

  $ (0.07 )   $ (0.10 )
                 

Net Income (Loss) per share - Diluted:

               

Net Income (Loss) per share

  $ (0.07 )   $ (0.10 )

 

 
 

6)

Inventory

 

Major classes of inventory are:

 

   

February 28, 2021

   

November 30, 2020

 

Raw materials

  $ 7,647,204     $ 7,086,367  

Work in process

    239,754       304,009  

Finished goods

    3,665,851       3,777,136  

Total Gross Inventory

  $ 11,552,809     $ 11,167,512  

Less: Reserves

    (3,650,565 )     (3,405,112 )

Net Inventory

  $ 7,902,244     $ 7,762,400  

 

 
 

7)

Accrued Expenses

 

Major components of accrued expenses are:

 

   

February 28, 2021

   

November 30, 2020

 

Salaries, wages, and commissions

  $ 683,180     $ 726,625  

Accrued warranty expense

    295,581       291,454  

Other

    219,424       261,233  
    $ 1,198,185     $ 1,279,312  

 

 
 

8)

Assets Held for Lease

 

Major components of assets held for lease are:

 

   

February 28, 2021

   

November 30, 2020

 

Modular Buildings

  $ 521,555     $ 521,555  

Total assets held for lease

  $ 521,555     $ 521,555  

 

10

 

There were no rents recognized from assets held for lease included in sales on the Condensed Consolidated Statements of Operations during the three months ended February 28, 2021 compared to $155,508 for the three months ended February 29, 2020. Rents recognized in sales were related to the leasing of modular buildings as a part of the normal course of business operations of the Modular Buildings segment.

 

There were no future minimum lease receipts from assets held for lease as of February 28, 2021.

 

 
 

9)

Product Warranty

 

The Company offers warranties of various lengths to its customers depending on the specific product and terms of the customer purchase agreement. The average length of the warranty period is one year from the date of purchase. The Company’s warranties require it to repair or replace defective products during the warranty period at no cost to the customer. Product warranty is included in the price of the product and provides assurance that the product will function in accordance with agreed-upon specifications. It does not represent a separate performance obligation under ASC 606. The Company records a liability for estimated costs that may be incurred under its warranties. The costs are estimated based on historical experience and any specific warranty issues that have been identified. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary. The accrued warranty balance is included in accrued expenses as shown in Note 7 “Accrued Expenses.” Changes in the Company’s product warranty liability for the three months ended February 28, 2021 and February 29, 2020 are as follows:

 

   

For the Three Months Ended

 
   

February 28, 2021

   

February 29, 2020

 

Balance, beginning

  $ 291,454     $ 203,185  

Settlements / adjustments

    33,505       (28,576 )

Warranties issued

    (29,378 )     64,624  

Balance, ending

  $ 295,581     $ 239,233  

 

 
 

10)

Loan and Credit Agreements

 

The Company maintains two revolving lines of credit and one term loan with Bank Midwest. The Company also has three term loans with the U.S. Small Business Administration under the Economic Injury Disaster Loan program.

 

Bank Midwest Revolving Lines of Credit and Term Loan

 

The Company maintains a credit facility with Bank Midwest consisting of a $5,000,000 revolving line of credit (the “2017 Line of Credit”) used for working capital purposes, and a $2,600,000 term loan due October 1, 2037 (the “Term Loan”). On February 28, 2021, the balance of the 2017 Line of Credit was $1,875,530 with $3,124,470 remaining available, as may be limited by the borrowing base calculation. The 2017 Line of Credit borrowing base is an amount equal to 75% of accounts receivable balances (discounted for aged receivables), plus 50% of inventory, less any outstanding loan balance on the 2017 Line of Credit. At February 28, 2021, the 2017 Line of Credit was limited by the borrowing base calculation to a total borrowing of $4,969,155 ($3,093,625 remaining available). Any unpaid principal amount borrowed on the 2017 Line of Credit accrues interest at a floating rate per annum equal to 1.00% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 4.25% per annum and the current interest rate is 4.25% per annum. The 2017 Line of Credit was most recently renewed on February 11, 2021. The 2017 Line of Credit matures on March 30, 2022 and requires monthly interest-only payments.

 

11

 

The Term Loan accrues interest at a rate of 5.00% for the first sixty months. Thereafter, the Term Loan will accrue interest at a floating rate per annum equal to 0.75% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 4.15% per annum and the interest rate may only be adjusted by Bank Midwest once every five years. Monthly payments of $17,271 for principal and interest are required. The Term Loan is also guaranteed by the United States Department of Agriculture (“USDA”), which required an upfront guarantee fee of $62,400 and requires an annual fee of 0.5% of the unpaid balance. As part of the USDA guarantee requirements, shareholders owning more than 20% are required to personally guarantee a portion of the Term Loan, in an amount equal to their stock ownership percentage. J. Ward McConnell Jr., the Vice Chairman of the Board of Directors and a shareholder owning more than 20% of the Company’s outstanding stock, is guaranteeing approximately 38% of the Term Loan, for an annual fee of 2% of the personally guaranteed amount. The initial guarantee fee will be amortized over the life of the Term Loan, and the annual fees and personally guaranteed amounts are expensed monthly.

 

On February 13, 2019, the Company opened a $4,000,000 revolving line of credit (the “2019 Line of Credit”) with Bank Midwest in connection with bonding obligations for the Company’s performance of a large modular laboratory construction project. Funds under the 2019 Line of Credit will be undisbursed to the Company and will be held by Bank Midwest in connection with an Irrevocable Letter of Credit issued by Bank Midwest for the project. The 2019 Line of Credit accrues interest at a floating rate per annum equal to 1.00% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 4.25% per annum and the current interest rate is 4.25% per annum. The 2019 Line of Credit was most recently renewed on February 2, 2021. The 2019 Line of Credit is payable upon demand by Bank Midwest. If no earlier demand is made, the unpaid principal and accrued interest will be payable in one payment, due on February 13, 2022. As of February 28, 2021, the funds on the 2019 Line of Credit remain undisbursed and are held by Bank Midwest. The Company expects to close the 2019 Line of Credit in the second quarter of fiscal 2021 as the Company’s bonding obligations are met.

 

The Term Loan is governed by the terms of a Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest. Each of the 2017 and 2019 Lines of Credit is governed by the terms of a Promissory Note, dated February 11, 2021 and February 2, 2021, respectively, entered into between the Company and Bank Midwest.

 

In connection with the 2017 Line of Credit, the Company, Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. each entered into a Commercial Security Agreement with Bank Midwest, dated September 28, 2017, pursuant to which each granted to Bank Midwest a first priority security interest in certain inventory, equipment, accounts, chattel paper, instruments, letters of credit and other assets to secure the obligations of the Company under the line of credit. Each of Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. also agreed to guarantee the obligations of the Company pursuant to the 2017 Line of Credit, as set forth in Commercial Guaranties, each dated September 28, 2017. The 2019 Line of Credit is also secured by these existing security documents.

 

12

 

To further secure the 2017 Line of Credit, the Company granted Bank Midwest a mortgage on its Canton, Ohio property held by Ohio Metal Working Products/Art’s-Way Inc. The 2019 Line of Credit is also secured by the mortgage on the Canton, Ohio property. The Term Loan is secured by a mortgage on the Company’s Armstrong, Iowa and Monona, Iowa properties. Each mortgage is governed by the terms of a separate Mortgage, dated September 28, 2017, and each property is also subject to a separate Assignment of Rents, dated September 28, 2017.

 

If the Company or its subsidiaries (as guarantors pursuant to the Commercial Guaranties) commits an event of default with respect to the promissory notes and fails or is unable to cure that default, Bank Midwest may immediately terminate its obligation, if any, to make additional loans to the Company and may accelerate the Company’s obligations under the promissory notes. Bank Midwest shall also have all other rights and remedies for default provided by the Uniform Commercial Code, as well as any other applicable law and the various loan agreements. In addition, in an event of default, Bank Midwest may foreclose on the mortgaged property.

 

Compliance with Bank Midwest covenants is measured annually at November 30. A maximum debt to worth ratio of 1 to 1 must be maintained, with a minimum of 40% tangible balance sheet equity, with variations subject to mutual agreement. The Company is also required to maintain a minimum debt service coverage ratio of 1.25, with a 0.10 tolerance. The Company also must receive bank approval for purchases or sales of equipment over $100,000 annually and maintain reasonable salaries and owner compensation. The Company received the necessary approvals for purchases of equipment over $100,000 for the three months ended February 28, 2021. The Company was out of compliance with its debt service coverage ratio and the prior minimum working capital requirements covenants in place under the Bank Midwest loans as of November 30, 2020. Bank Midwest issued a waiver forgiving the noncompliance, and in turn waived the event of default. The next measurement date is November 30, 2021.

 

On January 12, 2021 Bank Midwest amended the Company’s working capital requirement of maintaining a minimum working capital ratio of 1.75, while also maintaining $5,100,000 of working capital. The new covenant requires the Company to maintain a working capital requirement of $4,000,000 and drops the requirement to maintain a minimum working capital ratio of 1.75. The $4,000,000 working capital level serves as a trigger point for Bank Midwest and the Company to continue discussion of capital raising strategies to support additional capital injection. This new covenant is measured monthly. As of February 28, 2021, the Company was not in compliance with the working capital covenant. On March 22, 2021, Bank Midwest issued a letter to the Company allowing correction of the noncompliance by May 31, 2021. If the Company fails to get back in compliance, a meeting will be conducted to review the Company’s strategy to get back into compliance with the covenant. The Company will be considered in default if the plan is not accepted by Bank Midwest or the Company is unable to remedy in the time granted by Bank Midwest.

 

SBA Economic Injury Disaster Loans

 

On June 18, 2020, and again on June 24, 2020 the Company executed the standard loan documents required for securing loans offered by the U.S. Small Business Administration under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. Two loans were executed on June 18, 2020 with principal amounts of $150,000 each, with a third loan executed on June 24, 2020 with a principal amount of $150,000. Proceeds from these EIDLs are being used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue from the date of inception. Installment payments, including principal and interest, are due monthly, twelve months from the date of the EIDLs, in the amount of $731 per EIDL. The balance of principal and interest is payable 30 years from the date of the EIDL. The EIDLs are secured by a security interest on all of the Company’s assets. Each EIDL is governed by the terms of a separate Promissory Note, dated either June 18, 2020 or June 24, 2020, as applicable, entered into by the Company or the applicable subsidiary.

 

13

 

On March 11, 2021, the American Rescue Plan Act of 2021 was enacted, which extends the first due date for repayment of EIDLs made in 2020 to 24 months from the date of the note.

 

A summary of the Company’s term debt is as follows:

 

   

February 28, 2021

   

November 30, 2020

 

Bank Midwest loan payable in monthly installments of $17,271 including interest at 5.00%, due October 1, 2037

  $ 2,328,719     $ 2,350,593  

U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 18, 2022, due June 18, 2050

    153,930       152,543  

U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 24, 2022, due June 24, 2050

    153,838       152,450  

U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 18, 2022, due June 18, 2050

    153,930       152,543  

Total term debt

  $ 2,790,417     $ 2,808,129  

Less current portion of term debt

    91,336       94,979  

Term debt, excluding current portion

  $ 2,699,081     $ 2,713,150  

 

A summary of the minimum maturities of term debt follows for the years ending February 28, 2021:

 

Year

 

Amount

 

2021

  $ 68,307  

2022

    98,275  

2023

    108,314  

2024

    113,474  

2025

    119,584  

2026 and thereafter

    2,282,463  
    $ 2,790,417  

 

 
 

11)

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses.

 

14

 

 
 

12)

Related Party Transactions

 

During the three months ended February 28, 2021 and February 29, 2020, the Company did not recognize any revenues from transactions with a related party, and no amounts in accounts receivable balances were due from a related party. From time to time, the Company purchases various supplies from related parties, which are companies owned by J. Ward McConnell, Jr., the Vice Chairman of the Company’s Board of Directors. Marc McConnell, the Chairman of the Company’s Board of Directors, also serves as President of these companies. J. Ward McConnell, Jr., as a shareholder owning more than 20% of the Company’s outstanding stock, was required to guarantee a portion of the Company’s Term Loan in accordance with the USDA guarantee on the Company’s Term Loan. J. Ward McConnell, Jr. is paid a monthly fee for his guarantee. In the three months ended February 28, 2021, the Company recognized $4,669 of expense for transactions with related parties, compared to $4,588 for the three months ended February 29, 2020. As of February 28, 2021, accrued expenses contained a balance of $1,353 owed to a related party compared to $1,454 on February 29, 2020.

 

 
 

13)

Sales-Type Leases

 

The Company accounts for leases of modular buildings to certain customers as sales-type leases. These leases have terms of up to 36 months and are collateralized by a security interest in the related modular building. The lessee has a bargain purchase option available at the end of the lease term. A minimum lease receivable is recorded net of unearned interest income and profit on sale at the time the Company’s obligation to the lessee is complete. Profit related to the sale of the building is recorded upon fulfillment of the Company’s obligation to the lessee.

 

Modular buildings held for lease by the Modular Buildings segment are recorded at cost. Amortization of each modular building is calculated over the useful life of the building. Estimated useful life is three to five years. Lease revenue is accounted for on a straight-line basis over the term of the related lease agreement. Lease income for modular buildings is included in sales on the consolidated statements of operations.

 

The components related to sales-type leases at February 28, 2021 and November 30, 2020 are as follows:

 

   

February 28, 2021

   

November 30, 2020

 

Minimum lease receivable, current

  $ 14,502     $ 29,002  

Unearned interest income, current

    (219 )     (650 )

Net investment in sales-type leases, current

  $ 14,283     $ 28,352  

 

There was no sales activity related to sales-type leases for the three months ended February 28, 2021 and February 29, 2020.

 

Future minimum lease receipts from sales-type leases are as follows:

 

Year Ending November 30,

 

Amount

 

2021

    14,502  

Total

  $ 14,502  

 

 
 

14)

Operating Leases

 

The Company determines if an arrangement is a lease at inception of a contract. The nature of the Company’s operating leases at this time is office equipment, mainly copiers, with terms of 12 to 60 months. Operating leases are included in other assets as operating lease right-of-use (“ROU”) assets on the Condensed Consolidated Balance Sheets while current lease liabilities are included accrued expenses. The long-term portion of operating lease liabilities are shown as long-term liabilities on the Condensed Consolidated Balance Sheets.

 

15

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

The Company has copier lease agreements with lease and non-lease components and has elected the practical expedient not to separate lease and non-lease components for this asset class. The Company has also elected not to recognize lease liabilities and ROU assets for short-term leases. The Company recognizes variable costs that depend on usage in profit or loss as they are incurred.

 

The components of operating leases on the Condensed Consolidated Balance Sheets at February 28, 2021 were as follows:

 

   

February 28, 2021

   

November 30, 2020

 

Operating lease right-of-use assets

  $ 25,545       27,879  
                 

Current portion of operating lease liabilities

  $ 9,671       9,537  

Long-term portion of operating lease liabilities

    15,874       18,342  

Total operating lease liabilities

  $ 25,545       27,879  

 

The Company included $25,545 of operating lease right-of-use assets in other assets as of February 28, 2021 compared to $27,879 at November 30, 2020. The current portion of operating lease liabilities of $9,671 was included in accrued expenses and $15,874 of long-term operating lease liabilities was included in the long-term liability portion of the Condensed Consolidated Balance Sheets as of February 28, 2021, compared to $9,537 and $18,342, respectively, as of November 30, 2020. The Company recorded $6,080 of operating lease costs in the three months ended February 28, 2021, which included variable costs tied to usage, compared to $8,151 for the three months ended February 29, 2020. The Company’s operating leases carry a weighted average lease term of 32 months and have a weighted average discount rate of 5.50%

 

Future maturities of operating lease liabilities are as follows:

 

Year Ending November 30,

       

2021

    8,135  

2022

    10,847  

2023

    6,911  

2024

    1,630  

Total lease payments

    27,524  

Less imputed interest

    (1,979 )

Total operating lease liabilities

    25,545  

 

16

 

 
 

15)

Equity Incentive Plan and Stock Based Compensation

 

On February 25, 2020, the Board of Directors of the Company (the “Board”) authorized and approved the Art’s-Way Manufacturing Co., Inc. 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan was approved by the stockholders on April 30, 2020. The 2020 Plan replaced the Art’s-Way Manufacturing Co., Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and added an additional 500,000 shares to the number of shares reserved for issuance pursuant to equity awards. No further awards will be made under the 2011 Plan or other prior plans. Awards to directors and executive officers under the 2020 Plan are governed by the forms of agreement approved by the Board of Directors. Stock options or other awards granted prior to February 25, 2020 are governed by the applicable prior plan and the forms of agreement adopted thereunder.

 

The 2020 Plan permits the plan administrator to award nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance awards, and stock appreciation rights to employees (including officers), directors, and consultants. The Board has approved a director compensation policy pursuant to which non-employee directors are automatically granted restricted stock awards of 1,000 shares of fully vested common stock annually or initially upon their election to the Board and another 1,000 shares of fully vested common stock on the last business day of each fiscal quarter. During the three months ended February 28, 2021, restricted stock awards of 88,500 shares were issued to various employees and directors,, which vest over three years from the date of issuance, and restricted stock awards of 5,000 shares were issued to directors as part of the director compensation policy, which vested immediately upon grant. In comparison, during the first three months of fiscal 2020, restricted stock awards of 48,750 shares were issued to various employees and directors, which vest over three years from the date of issuance, and restricted stock awards of 5,000 shares were issued to directors as part of the director compensation policy, which vested immediately upon grant.

 

Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant vesting period. The Company estimates the fair value of each stock-based option award on the measurement date using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate, and dividend yield. Expected volatility is based on historical volatility of the Company’s stock and other factors. The Company uses historical option exercise and termination data to estimate the expected term the options are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is calculated using historical dividend amounts and the stock price at the option issuance date. No stock options were granted during the three months ended February 28, 2021 or in the same respective period of fiscal 2020. The Company incurred a total of $62,054 and $37,580 of stock-based compensation expense for restricted stock awards during the three months ended February 28, 2021 and February 29, 2020, respectively. The Company repurchased 5,570 shares and 10,517 shares from employees in the form of treasury stock as consideration for payroll taxes paid on the employee’s behalf for the three months ended February 28, 2021 and February 29, 2020, respectively. Stock compensation net of treasury shares repurchased for the three months ended February 28, 2021 was $43,758 compared to $18,516, for the same period in fiscal 2020.

 

 
 

16)

Disclosures About the Fair Value of Financial Instruments

 

The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. At February 28, 2021 and November 30, 2020, the carrying amount approximated fair value for cash, accounts receivable, net investment in sales-type leases, accounts payable, notes payable to bank, and other current and long-term liabilities. The carrying amounts of current assets and liabilities approximate fair value because of the short maturity of these instruments. The fair value of the net investment in sales-type leases also approximates recorded value as that is based on discounting future cash flows at rates implicit in the lease. The rates implicit in the lease do not materially differ from current market rates. The fair value of the Company’s term loans payable also approximates recorded value because the interest rates charged under the loan terms are not substantially different from current interest rates.

 

17

 

 
 

17)

Segment Information

 

The Company has three reportable segments: Agricultural Products, Modular Buildings and Tools. The Agricultural Products segment manufactures and sells farm equipment and related replacement parts under the Art’s-Way Manufacturing label and private labels. The Modular Buildings segment manufactures and installs modular buildings for various uses, commonly animal containment and research laboratories. The Tools segment manufactures steel cutting tools and inserts.

 

The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Management evaluates the performance of each segment based on profit or loss from operations before income taxes, exclusive of nonrecurring gains and losses.

 

Approximate financial information with respect to the reportable segments is as follows.

 

   

Three Months Ended February 28, 2021

 
   

Agricultural Products

   

Modular Buildings

   

Tools

   

Consolidated

 

Revenue from external customers

  $ 3,500,000     $ 1,291,000     $ 610,000     $ 5,401,000  

Income (loss) from operations

  $ (198,000 )   $ (165,000 )   $ (6,000 )   $ (369,000 )

Income (loss) before tax

  $ (212,000 )   $ (172,000 )   $ (16,000 )   $ (400,000 )

Total Assets

  $ 12,990,000     $ 3,171,000     $ 2,621,000     $ 18,782,000  

Capital expenditures

  $ 155,000     $ 9,000     $ -     $ 164,000  

Depreciation & Amortization

  $ 99,000     $ 29,000     $ 33,000     $ 161,000  

 

   

Three Months Ended February 29, 2020

 
   

Agricultural Products

   

Modular Buildings

   

Tools

   

Consolidated

 

Revenue from external customers

  $ 2,953,000     $ 1,457,000     $ 616,000     $ 5,026,000  

Income (loss) from operations

  $ (435,000 )   $ 6,000     $ (41,000 )   $ (470,000 )

Income (loss) before tax

  $ (498,000 )   $ 6,000     $ (52,000 )   $ (544,000 )

Total Assets

  $ 13,870,000     $ 4,373,000     $ 2,757,000     $ 21,000,000  

Capital expenditures

  $ 241,000     $ 26,000     $ -     $ 267,000  

Depreciation & Amortization

  $ 126,000     $ 68,000     $ 33,000     $ 227,000  

 

*The consolidated total in the tables is a sum of segment figures and may not tie to actual figures in the condensed consolidated financial statements due to rounding.

 

 
 

18)

Subsequent Events

 

Management evaluated all other activity of the Company and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements, other than the enactment of the American Rescue Plan Act on March 11, 2021, which affects the first payment due date of the EIDLs as mentioned in Note 10.

 

18

 

 

Item 2.

Managements 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, 2020. Some of the statements in this report may be forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. Many of these forward-looking statements are located in this report under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but they may appear in other sections as well. Forward-looking statements in this report generally relate to: (i) our warranty costs and order backlog; (ii) our beliefs regarding the sufficiency of working capital and cash flows; (iii) our expectation that we will continue to be able to renew or obtain financing on reasonable terms when necessary; (iv) the impact of recently issued accounting pronouncements; (v) our intentions and beliefs relating to our costs, business strategies, and future performance; (vi) our expected financial results; (vii) our expectations concerning our primary capital and cash flow needs; and (viii) our expectations regarding the impact of COVID-19 on our business condition and results of operations.

 

You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded. We cannot provide any assurance with respect to our future performance or results. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to: (i) the impact of changing credit markets on our ability to continue to obtain financing on reasonable terms; (ii) our ability to repay current debt, continue to meet debt obligations and comply with financial covenants; (iii) the effect of general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (iv) the ongoing COVID-19 pandemic; (v) fluctuations in seasonal demand and our production cycle; and (vi) 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 February 28, 2021 remain unchanged from November 30, 2020. 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, 2020.

 

19

 

Results of Operations

 

Net Sales and Cost of Sales

 

Our consolidated corporate sales for the three-month period ended February 28, 2021 were $5,401,000 compared to $5,026,000 during the same period in fiscal 2020, an increase of $375,000, or 7.5%. The increase in consolidated revenue is due to increased sales in our Agricultural Products segment. Consolidated gross margin for the three-month period ended February 28, 2021 was 19.3% compared to 19.4% for the same period in fiscal 2020.

 

Our first quarter sales in our Agricultural Products segment were $3,500,000 compared to $2,953,000 for the same period in fiscal 2020, an increase of $547,000, or 18.5%. The increase in revenue is due to increased demand for our grinder mixers, beet equipment and service parts. We had a very successful early order program last fall producing the strongest backlog we have seen in the last five years, setting us up for a strong first half of the year. We attribute the increased backlog to the government payments farmers received last year coupled with recent years of conservative spending during times of agriculture downturn. According to the USDA's Coronavirus Food Assistance Program data, over $13 billion in financial assistance has been given to agricultural producers in the U.S. to date. Gross margin for the three-month period ended February 28, 2021 was 25.2% compared to 19.3% for the same period in fiscal 2020. The increase in gross margin is due to an efficient workforce in 2021 as the result of continuous improvement projects along with strong demand for higher margin products in 2021. We do expect some margin erosion in 2021 as commodity prices (mainly steel) have been steadily rising. We have increased prices to attempt to offset these increased costs.

 

Our first quarter sales in our Modular Buildings segment were $1,291,000 compared to $1,457,000 for the same period in fiscal 2020, a decrease of $166,000, or 11.4%. Our decrease in revenue is due largely to the progress on a large construction contract that neared completion at the end of the first quarter of fiscal 2021. Quoting activity for modular buildings increased greatly during the first quarter of fiscal 2021 compared to activity during fiscal 2020. We believe this bodes well for this business segment going forward. Gross margin for the three-month period ended February 28, 2021 was 2.9% compared to 17.6% for the same period in fiscal 2020. The decrease in gross profit is due to margin erosion on a large construction contract as our estimated costs to complete the contract increased with unforeseen project issues.

 

Our Tools segment had sales of $610,000 during the first quarter compared to $616,000 for the same period in fiscal 2020, a decrease of $6,000, or 1.0%. While the sales volume for the first quarter of fiscal 2021 is comparative to that of the first quarter of fiscal 2020, we believe the potential of this segment will grow as gas prices increase and as we are fully able to handle the volume of our OEM customer. Gross margin was 20.2% for the three-month period ended February 28, 2021 compared to 24.5% for the same period in fiscal 2020. The decreased gross margin is due to increased OEM work in the first quarter of fiscal 2021, which has a lower margin than our other product lines; however, we do not pay commissions on OEM work like we do the rest of our product offering so there is a trade off in selling expense.

 

Expenses

 

Our first quarter consolidated selling expenses were $473,000 compared to $456,000 for the same period in fiscal 2020. The increase in selling expenses is due to increased wages from the addition of a product manager in the Agricultural Products segment and increased commissions as a result of the 18.5% increase in sales from the same segment. Selling expenses as a percentage of sales were 8.8% for the three-month period ended February 28, 2021 compared to 9.1% for the same period in fiscal 2020.

 

20

 

Consolidated engineering expenses were $121,000 for the three-month period ended February 28, 2021 compared to $110,000 from the same period in fiscal 2020. The increase is due to standard wage increases given in the later part of fiscal 2020 and research & development costs related to a landplane redesign. Engineering expenses as a percentage of sales were 2.2% for the three-month period ended February 28, 2021 compared to 2.2% for the same period in fiscal 2020.

 

Consolidated administrative expenses for the three-month period ended February 28, 2021 were $817,000 compared to $882,000 for the same period in fiscal 2020. The decrease in administrative expenses is due to recovery of bad debts, a decrease in expected bonus expense compared to fiscal 2020 and a reduction in implementation costs year on year from the Tools segment OEM customer. Administrative expenses as a percentage of sales were 15.1% for the three-month period ended February 28, 2021 compared to 17.5% for the same period in fiscal 2020.

 

Net Loss

 

Consolidated net loss was $(315,000) for the three-month period ended February 28, 2021 compared to net loss of $(437,000) for the same period in fiscal 2020. The decreased net loss is due to increased sales in our Agricultural Products segment and a decrease in our consolidated administrative costs. We are carrying strong backlogs into the second quarter in two of three segments and are expecting improved results for the second quarter of fiscal 2021.

 

Order Backlog

 

The consolidated order backlog net of discounts as of April 5, 2021 was $6,997,000 compared to $7,395,000 as of April 5, 2020. The agricultural products segment order backlog was $5,456,000 as of April 5, 2021 compared to $2,699,000 in fiscal 2020. While we did report an 18.5% increase in sales in fiscal Q1 of 2021 we are still carrying a backlog that is twice the size of last year’s backlog. The increase is due to increased farmer spending as a result of financial assistance received under coronavirus relief packages. The backlog for the modular buildings segment was $1,205,000 as of April 5, 2021, compared to $4,528,000 in fiscal 2020.  The decrease is due to progress made on a large contract that is not part of our typical year.  Excluding this project from backlog, our backlog would be $1,056,000 compared to $1,094,000 in fiscal 2020. The backlog for the tools segment was $336,000 as of April 5, 2021 compared to $168,000 in fiscal 2020. The increase in backlog for our tools segment is largely due to an OEM customer that has strengthened our business. 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.

 

Potential Impact of COVID-19

 

While the COVID-19 pandemic had little effect on the first fiscal quarters of 2021 and 2020, we believe that there may be some lasting effects of the pandemic that can affect our operations going forward. From March 23, 2020 until May 18, 2020 the majority of our office staff in all three segments worked remotely with the exception of key operations support. At the height of the initial outbreak our workforce was down approximately 17% due to self-quarantine. By the end of May 2020 our entire workforce had returned, and operations have continued as normal with additional safety precautions in place. As COVID-19 cases began to rise in November 2020, we allowed employees that could perform their job functions remotely do so at their discretion. At this time approximately 4% of our office staff is working remote at least part-time and this has had minimal effect on how we operate as a business. We expect that by the end of March 2021 remote employees will return full time to the office. Future outbreaks could have a material effect on our operations, and we are taking precautions to mitigate the spread of COVID-19 including trying to organize mass vaccinations onsite. Workers in our Iowa facilities are eligible to receive the vaccine according to the state’s distribution plan and many employees have started to do so. A small portion of our Ohio facility’s workers have become eligible for the vaccine and have begun the vaccination process.

 

21

 

In our Agricultural Products segment, we did not experience any order cancellations; however, calls for new whole goods slowed significantly in the second quarter of fiscal 2020 and many dealers held off on the shipping or pickup of their completed units. Our sales levels were comparatively steady to the last few years in the third and fourth quarters of fiscal 2020 and we ultimately ended the year down 3.1% on sales. We had a very successful early order program to start 2021 which left us with backlogs higher than we have seen in the last five years. We attribute the large increase in backlog to stimulus payments that farmers received in 2020 along with conservative spending by farmers in 2020. This conservatism allowed farmers to retire debt in 2020 and increase spending in 2021.

 

Our Modular Buildings segment started fiscal 2020 with a more diverse backlog than we had at the beginning of fiscal 2019; however, we had some setbacks on site work as subcontractors were forced to quarantine after testing positive for COVID-19. Our workers were hesitant to travel during the pandemic and, as a result, we had some challenges completing site work in the third and fourth quarters of fiscal 2020. Because of COVID-19, many companies were also hesitant to enter into long-term contracts in fiscal 2020. As a result, our modular building rental fleet remained largely unused in fiscal 2020, which is evidenced by our decrease in lease revenue. Our quoting activity has picked up significantly in 2021 for both agricultural and research modular buildings and we believe there will be a lot of opportunity for this segment in 2021 as companies start spending again.

 

In our Tools segment, oil prices dropped significantly at the start of the pandemic, which caused our sales to drop significantly in the second quarter of fiscal 2020. The diversification of our business with our new OEM customer helped us get through the oil and gas industry lows during that time; however, since oil and gas prices have not yet reached their pre-pandemic levels, we have not seen our sales levels from these customers return. We are optimistic that we have passed the low point in our Tools segment and expect improved sales in fiscal 2021.

 

While our sales were affected in fiscal 2020 by the COVID-19 pandemic, government programs including the Paycheck Protection Program and Economic Injury Disaster Loan program helped protect our liquidity that may have otherwise been materially impacted. At the start of 2021, economic conditions improved in all three segments. In turn, we have seen rises in commodity prices (steel and lumber) driven by the current high demand for these products. In addition, our supplier lead times have increased providing new challenges in fulfilling our large backlog. Travel restrictions and border closures have not had a major impact on our ability to operate and achieve business goals. While we did minimize our travel in 2020 our operations were not materially affected by the inability to travel. Many trade shows shifted to online and some canceled altogether, however, our sales volumes were not significantly affected by the cancellation of these shows. As vaccinations continue to occur in 2021, we expect travel and trade show participation to pick up. We believe the worst of the economic hardship caused by COVID-19 has passed for us. We have built and improved our business over the last few years to help us better weather any economic storms that come our way.

 

22

 

Liquidity and Capital Resources

 

Our primary source of funds for the three months ended February 28, 2021 was cash generated by operating activities, including the collection of receivables and customer deposits related to cash deposit discounts offered on our early order program. Our primary uses of cash were related to the retirement of debt and progress on construction projects for our modular buildings segment. We expect our primary capital needs for the remainder of fiscal 2021 to relate to operating costs, primarily production costs, fulfillment of customer deposits, and the retirement of debt.

 

We have a $5,000,000 revolving line of credit with Bank Midwest that, as of February 28, 2021, had an outstanding principal balance of $1,875,530. This line of credit is scheduled to mature on March 30, 2022.

 

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.

 

Off Balance Sheet Arrangements

 

None.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, we are not required to provide disclosure pursuant to this item.

 

Item 4.

Controls and Procedures.

 

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 February 28, 2021. 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.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

23

 

 

PART II OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

We are currently not a party to any material pending legal proceedings.

 

Item 1A.

Risk Factors.

 

As a smaller reporting company, we are not required to provide disclosure pursuant to this item.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

The following table presents the information with respect to purchases made by us of our common stock during the first quarter of fiscal 2021:

 

   

Total

Number

of Shares

Purchased

(1)

   

Average

Price

Paid per

Share

   

Total Number of

Shares

Purchased as part

of

Publicly

Announced

Plans or Programs

   

Approximate Dollar

Value of Shares that

May

Yet Be Purchased

under the

Plans or Programs

 

December 1 to December 31, 2020

    -     $ -       N/A       N/A  

January 1 to January 31, 2021

    -     $ -       N/A       N/A  

February 1 to February 28, 2021

    5,570     $ 3.28       N/A       N/A  

Total

    5,570     $ 3.28                  

 

(1) Reflects shares withheld pursuant to the terms of restricted stock awards under our 2020 Plan to offset tax withholding obligations that occur upon vesting and release of shares. The value of the shares withheld is the closing price of our common stock on the date the relevant transaction occurs.

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

Line of Credit Renewals

 

Effective February 2, 2021, we renewed our $4,000,000 revolving line of credit with Bank Midwest. The revolving line of credit is payable upon demand by Bank Midwest. If no earlier demand is made, the unpaid principal and accrued interest will be payable in one payment, due on February 13, 2022. The updated Promissory Note with Bank Midwest is included as Exhibit 10.1 hereto and is incorporated herein by reference.

 

Effective February 11, 2021, we renewed our $5,000,000 revolving line of credit with Bank Midwest. The revolving line of credit matures on March 30, 2022 and requires monthly interest-only payments. The updated Promissory Note with Bank Midwest is included as Exhibit 10.2 hereto and is incorporated herein by reference.

 

24

 

Item 6.

Exhibits.

 

 

Exhibit

No.

Description

10.1

Promissory Note, between Bank Midwest and Art’s-Way Manufacturing Co., Inc., dated February 2, 2021 – incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ending November 30, 2020.

10.2

Promissory Note, between Bank Midwest and Art’s-Way Manufacturing Co., Inc., dated February 11, 2021 – filed herewith.

31.1

Certificate of Chief Executive Officer pursuant to 17 CFR 13a-14(a) – filed herewith.

31.2

Certificate of Chief Financial Officer pursuant to 17 CFR 13a-14(a) – filed herewith.

32.1

Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 - filed herewith.

32.2

Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 - filed herewith.

101

The following materials from this report, formatted in XBRL (Extensible Business Reporting Language) are filed herewith: (i) condensed consolidated balance sheets, (ii) condensed consolidated statement of operations, (iii) condensed consolidated statements of cash flows, and (iv) the notes to the condensed consolidated financial statements.

 

25

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ART’S-WAY MANUFACTURING CO., INC.

 

 

 

 

Date: April 9, 2021 By: /s/ David A. King  
    David A. King  
    President and Chief Executive Officer  
       
Date: April 9, 2021 By: /s/ Michael W. Woods  
    Michael W. Woods  
    Chief Financial Officer  

 

 

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