ARTS WAY MANUFACTURING CO INC - Quarter Report: 2016 May (Form 10-Q)

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		(Unaudited)
		May 31, 2016				November 30, 2015
Assets
Current assets:
Cash		$	267,506			$	447,334
Accounts receivable-customers, net of allowance for doubtful accounts of $20,076 and $18,810 in 2016 and 2015, respectively			1,542,763				2,057,739
Inventories, net			14,492,969				15,699,084
Deferred taxes			1,152,700				1,146,242
Cost and Profit in Excess of Billings			74,837				206,672
Income taxes receivable			311,146				345,912
Other current assets			257,052				59,336
Total current assets			18,098,973				19,962,319
Property, plant, and equipment, net			9,360,707				9,694,913
Assets held for sale, net			114,858				1,245,432
Goodwill			375,000				375,000
Other Assets			45,724				53,944
Total assets		$	27,995,262			$	31,331,608
Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit		$	2,101,610			$	3,959,656
Current portion of long-term debt			2,011,943				1,322,662
Accounts payable			616,741				522,400
Customer deposits			307,232				166,626
Billings in Excess of Cost and Profit			148,471				86,858
Accrued expenses			1,066,749				1,279,913
Total current liabilities			6,252,746				7,338,115
Long-term liabilities
Deferred taxes			835,828				846,960
Long-term debt, excluding current portion			2,322,992				4,626,667
Total liabilities			9,411,566				12,811,742
Commitments and Contingencies (Notes 6 and 7)
Stockholders’ equity:
Undesignated preferred stock - $0.01 par value. Authorized 500,000 shares in 2016 and 2015; issued and outstanding 0 shares in 2016 and 2015.			-				-
Common stock – $0.01 par value. Authorized 9,500,000 shares in 2016 and 2015; issued and outstanding 4,105,052 in 2016 and 4,061,052 in 2015			41,051				40,611
Additional paid-in capital			2,705,999				2,667,010
Retained earnings			15,836,646				15,812,245
Total stockholders’ equity			18,583,696				18,519,866
Total liabilities and stockholders’ equity		$	27,995,262			$	31,331,608

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		Three Months Ended								Six Months Ended
		May 31, 2016				May 31, 2015				May 31, 2016				May 31, 2015
Sales		$	5,741,088			$	7,804,111			$	12,133,086			$	15,093,239
Cost of goods sold			4,241,153				5,596,379				8,930,851				10,833,376
Gross profit			1,499,935				2,207,732				3,202,235				4,259,863
Expenses:
Engineering			107,368				119,540				223,540				235,216
Selling			434,952				581,211				918,746				1,145,925
General and administrative			990,666				1,092,837				1,943,763				2,135,429
Total expenses			1,532,986				1,793,588				3,086,049				3,516,570
Income from operations			(33,051	)			414,144				116,186				743,293
Other income (expense):
Interest expense			(60,153	)			(81,582	)			(134,185	)			(161,067	)
Other			17,745				21,445				62,744				16,581
Total other income (expense)			(42,408	)			(60,137	)			(71,441	)			(144,486	)
Income before income taxes			(75,459	)			354,007				44,745				598,807
Income tax expense			(18,888	)			122,386				20,344				198,991
Net income		$	(56,571	)		$	231,621			$	24,401			$	399,816
Net income per share:
Basic net income per share		$	(0.01	)		$	0.06			$	0.01			$	0.10
Diluted net income per share		$	(0.01	)		$	0.06			$	0.01			$	0.10
Weighted average outstanding shares used to compute basic net income per share			4,101,810				4,060,775				4,088,073				4,055,698
Weighted average outstanding shares used to compute diluted net income per share			4,101,810				4,062,294				4,088,073				4,057,073

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		Six Months Ended
		May 31, 2016				May 31, 2015
Cash flows from operations:
Net income		$	24,401			$	399,816
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation			39,429				28,484
(Gain)/Loss on disposal of property, plant, and equipment			(43,884	)			6,955
Depreciation and amortization expense			409,614				459,412
Bad debt expense (recovery)			2,255				3,240
Deferred income taxes			(17,590	)			(72,912	)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			512,721				26,736
Inventories			1,206,115				(881,977	)
Income taxes receivable			34,766				100,417
Other assets			(191,626	)			(319,737	)
Increase (decrease) in:
Accounts payable			94,341				64,306
Contracts in progress, net			193,448				(37,362	)
Customer deposits			140,606				607,275
Income taxes payable			-				10,150
Accrued expenses			(213,164	)			(88,671	)
Net cash provided by operating activities			2,191,432				306,132
Cash flows from investing activities:
Purchases of property, plant, and equipment			(69,662	)			(139,994	)
Net proceeds from sale of assets			1,170,842				14,456
Net cash provided by (used in) investing activities			1,101,180				(125,538	)
Cash flows from financing activities:
Net change in line of credit			(1,858,046	)			749,772
Repayment of term debt			(1,614,394	)			(637,930	)
Dividends paid to stockholders			-				(202,428	)
Net cash (used in) financing activities			(3,472,440	)			(90,586	)
Net increase (decrease) in cash			(179,828	)			90,008
Cash at beginning of period			447,334				511,716
Cash at end of period		$	267,506			$	601,724
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	140,820			$	160,803
Income taxes			4,514				205,296

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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.

 

We began operations as a farm equipment manufacturer in 1956. Since that time, we have become a major worldwide manufacturer of agricultural equipment. Our principal manufacturing plant is located in Armstrong, Iowa.

 

We have organized our business into four operating segments. Management separately evaluates the financial results of each segment because each is a strategic business unit offering different products and requiring different technology and marketing strategies. Our agricultural products segment (“Manufacturing”) manufactures farm equipment under the Art’s-Way Manufacturing label and private labels. Our pressurized vessels segment (“Vessels”) manufactures pressurized vessels. Our modular buildings segment (“Scientific”) manufactures modular buildings for various uses, commonly animal containment and research laboratories and our tools segment (“Metals”) manufactures steel cutting tools and inserts. For detailed financial information relating to segment reporting, see Note 12 “Segment Information.”

 

2)

Summary of Significant Account Policies

 

Statement Presentation

 

The foregoing condensed consolidated financial statements of the Company are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the 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, 2015. The results of operations for the three and six-months ended May 31, 2016 are not necessarily indicative of the results for the fiscal year ending November 30, 2016.

 

 

The financial books of our Canadian operation are kept in the functional currency of Canadian dollars and the financial statements are converted to U.S. Dollars for consolidation. When consolidating the financial results of the Company into U.S. Dollars for reporting purposes, the Company uses the All-Current translation method. The All-Current method requires the balance sheet assets and liabilities to be translated to U.S. Dollars at the exchange rate as of quarter end. Owner’s equity is translated at historical exchange rates and retained earnings are translated at an average exchange rate for the period. Additionally, revenue and expenses are translated at average exchange rates for the periods presented. The resulting cumulative translation adjustment is carried on the balance sheet and distributed among various balance sheet accounts. The Company monitors the amount of the adjustment and considers it to be immaterial.

 

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 and six- months ended May 31, 2016. Actual results could differ from those estimates.

 

3)

Net Income (Loss) Per Share of Common Stock

 

Basic net income (loss) per common share 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 EPS.

 

 

Basic and diluted earnings (loss) per common share have been computed based on the following as of May 31, 2016 and May 31, 2015:

 

 

 

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4)

Inventory

 

Major classes of inventory are:

 

 

5)

Accrued Expenses

 

Major components of accrued expenses are:

 

 

6)

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. 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 5. Changes in the Company’s product warranty liability for the three and six months ended May 31, 2016 and May 31, 2015 are as follows:  

 

 

 

 

7)

Loan and Credit Agreements

 

The Company maintains lines of credit and term loans with U.S. Bank as well as a term loan with The First National Bank of West Union. Pursuant to a Loan Modification Agreement dated April 27, 2016 (the “Loan Modification”) entered into among U.S. Bank, as lender, the Company, as borrower, and Art’s-Way Scientific, Inc., Art’s-Way Vessels, Inc., and Ohio Metal Working Products/Art’s-Way, Inc., as guarantors, the agreements governing the U.S. Bank lines of credit and certain term loans were amended. Following the close of the second quarter, U.S. Bank, as lender, the Company, as borrower, and Art’s-Way Scientific, Inc., Art’s-Way Vessels, Inc., and Ohio Metal Working Products/Art’s-Way, Inc., as guarantors, entered into a Second Loan Modification Agreement dated July 12, 2016 and effective as of July 11, 2016 with respect to loan modification terms (the “Second Loan Modification”) governing the U.S. Bank lines of credit and certain term loans. The description that follows reflects such arrangements as amended by the Loan Modification. For more information regarding the Second Loan Modification, see Part II, Item 5 of this Report.

 

U.S. Bank Lines of Credit

 

The Company has a revolving line of credit (the “Line of Credit”) with U.S. Bank, which, following the Second Loan Modification, has an availability of $5,000,000, that was obtained on May 1, 2013, and is renewable annually with advances funding the Company’s working capital needs. As of May 31, 2016, the Company had a principal balance of $2,101,610 outstanding against the Line of Credit, with $2,953,005 remaining available, limited by the borrowing base calculation. The Line of Credit matures on May 1, 2017 and is secured by real property and fixed asset collateral. The Line of Credit states that the borrowing base will be an amount equal to the sum of 75% of accounts receivable (discounted for aged accounts and customer balances exceeding 20% of aggregate receivables), plus 50% of inventory (this component cannot exceed $3,750,000 following the Second Loan Modification and only includes finished goods and raw materials deemed to be in good condition and not obsolete), less any outstanding loan balance of the Line of Credit and the 2015 Line of Credit (defined below), and less undrawn amounts of outstanding letters of credit issued by U.S. Bank or any affiliate. Monthly interest-only payments are required and the unpaid principal and accrued interest is due on the maturity date. The Company’s obligations under the Line of Credit are evidence by a Revolving Credit Note effective May 1, 2013, a Revolving Credit Agreement dated May 1, 2013 and certain other ancillary documents.

 

 

In addition to the Line of Credit, the Company maintains an additional $200,000 revolving line of credit from U.S. Bank that was obtained on July 16, 2015 (the “2015 Line of Credit”) and which also matures on May 1, 2017. As of May 31, 2016, the Company had a principal balance of $0 outstanding against the 2015 Line of Credit, with $200,000 remaining available. The 2015 Line of Credit was necessary to preserve the Company’s access to capital for a sales incentive program that offers extended payment terms up to 9 months on certain products for our dealers, subject to a Dealer’s Note and Dealer’s Security Agreement. These notes receivable are not included in the borrowing base of our Line of Credit. The 2015 Line of Credit is secured by real property and fixed asset collateral, as well as all of the Company’s right, title and interest in the Dealer’s Notes and Dealer’s Security Agreements related to advances under the 2015 Line of Credit. Advances under the 2015 Line of Credit are due at the earlier of nine months after the date of the advancement, the 2015 Line of Credit maturity date or the sale by the dealer of the equipment relating to the applicable advance. Monthly interest-only payments are required and the unpaid principal and accrued interest is due on the maturity date. The Company’s obligations under the 2015 Line of Credit are evidenced by a Promissory Note effective July 16, 2015 and certain other ancillary documents.

 

The Line of Credit and 2015 Line of Credit are subject to an unused fee which accrues at the rate of 0.25% per annum on the average daily amount by which the amount available for borrowing under each line of credit exceeds the outstanding principal amount relating to such line. The Line of Credit was previously subject to a minimum interest rate of 4.50% per annum under the Loan Modification and now is subject to a minimum interest rate of 5.00% per annum following the Second Loan Modification. The 2015 Line of Credit is subject to a minimum interest rate of 4.50% per annum. As of May 31, 2016, the interest rate on the Line of Credit and the 2015 Line of Credit was the minimum of 4.50%.

 

U.S. Bank Term Loans

 

On May 10, 2012, the Company obtained $880,000 in long-term debt from U.S. Bank issued to acquire the building and property of Universal Harvester Co., Inc. located in Ames, Iowa (the “U.S. Bank UHC Loan”). The maturity date of this loan is May 10, 2017, with a final payment of principal and accrued interest in the amount of $283,500 due May 10, 2017. The principal balance of this loan was $401,351 as of May 31, 2016 and it accrues interest at a fixed rate of 3.15% per annum. This loan was secured by a mortgage on the building and property acquired from Universal Harvester Co., Inc. in Ames, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated May 10, 2012, which was released upon the sale of our Ames, Iowa facility. The U.S. Bank UHC Loan is also secured by a mortgage on the building and property in Monona, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated May 1, 2013 and a mortgage on the building and property owned by Art’s-Way Vessels, Inc. in Dubuque, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between Art’s-Way Vessels, Inc. and U.S. Bank, dated May 1, 2013. On May 1, 2013, the U.S. Bank UHC Loan and the mortgage were amended to extend the mortgage to secure the 2013 Term Notes (defined below) in addition to the U.S. Bank UHC Loan.

 

Three of the Company’s outstanding term loans were obtained from U.S. Bank on May 1, 2013. The principal balance of these loans totaled $2,428,992 at May 31, 2016, and they accrue interest at a fixed rate of 2.98% per annum (the “2013 Term Notes”). There was previously also a fourth term loan obtained from U.S. Bank on May 1, 2013, but the Company voluntarily paid off and terminated the note and the related Term Loan Agreement on February 10, 2016. The payoff amount of $1,078,196 included principal and accrued and unpaid interest. As detailed in the Company’s long-term debt summary below, monthly principal and interest payments in the aggregate amount of $51,350 are required on the remaining 2013 Term Notes, with final payments of principal and accrued interest on the three remaining loans in the aggregate amount of $1,363,000 due on May 1, 2018.

 

 

The Company obtained a term loan from U.S. Bank on May 29, 2014 in the original principal amount of $1,000,000 (the “2014 Term Note”). The 2014 Term Note had a principal balance of $924,136 at May 31, 2016 and accrues interest at a fixed rate of 2.98%. The Company took on the 2014 Term Note in order to partially pay down a draw on its revolving line of credit that it had used to finance the purchase of the building and property of Ohio Metal Working Products Company in Canton, Ohio. The maturity date of the 2014 Term Note is May 25, 2017, with a final payment of principal and accrued interest in the amount of $890,000 due May 25, 2017. This loan is secured by a mortgage on the building and property acquired from Ohio Metal Working Products Company in Canton, Ohio pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated May 29, 2014, and is also subject to a Business Security Agreement between Ohio Metal Working Products/Art’s Way, Inc. (“Ohio Metal”) and U.S. Bank and a Continuing Guaranty (Unlimited) by Ohio Metal. Each of the Company’s term loans from U.S. Bank is governed by a Term Note and a Term Loan Agreement.

 

U.S. Bank Covenants

 

The U.S. Bank UHC Loan and the 2015 Line of Credit are not subject to financial covenants. However, under the U.S. Bank UHC Loan, the Company must provide to U.S. Bank information concerning its business affairs and financial condition as the bank may reasonably request, as well as annual financial statements prepared by an accounting firm acceptable to U.S. Bank within 120 days of the end of the year without request. The Company, in connection with any draws under the 2015 Line of Credit, must provide U.S. Bank with a security agreement and evidence of U.S. Bank’s security interest in the equipment relating to any borrowings thereunder.

 

As amended by the Loan Modification, the Line of Credit, the 2013 Term Notes and the 2014 Term Note require the Company to maintain (i) a fixed charge coverage ratio of at least 1.15 to 1.10 as of the end of each fiscal quarter (except for the fiscal quarters ended May 31, 2016 and August 31, 2016), (ii) a fiscal year-to-date fixed charge coverage ratio as of August 31, 2016 of at least 1.0 to 1.0, and (iii) a fiscal year-to-date EBITDA as of May 31, 2016 of at least $700,000 (with EBITDA meaning income, plus interest expense, plus income tax expense, plus depreciation expense, plus amortization expense, subject to adjustments in USB’s sole discretion). The Company must also provide to U.S. Bank a detailed backlog report by segment as of the last day of each calendar month, monthly internally prepared financial reports, year-end audited financial statements, and a monthly aging of accounts receivable, and must deliver along with any financial statements delivered to U.S. Bank a certificate of compliance executed by the Company’s chief financial officer certifying the Company’s compliance with the financial covenants. The Second Loan Modification further amends certain financial covenants that apply to the Line of Credit, the 2013 Term Notes and the 2014 Term Note. For more information regarding the Second Loan Modification, see Part II, Item 5 of this Report.

 

The 2013 Term Notes, 2014 Term Note, Line of Credit and 2015 Line of Credit are secured by a first position security interest on the assets of the Company and its subsidiaries, including but not limited to, inventories, machinery, equipment and real estate, in accordance with Business Security Agreements entered into by the Company and its subsidiaries, Pledge Agreements entered into by the subsidiaries and Collateral Assignment of Dealer’s Notes and Security Agreements entered into by the Company. Additionally, the Company has mortgaged certain real property in favor of U.S. Bank as documented by mortgage agreements dated May 1, 2013 (as noted above) and May 29, 2014 (together, the “Mortgages”).

 

 

If the Company or its subsidiaries (as guarantors pursuant to continuing guaranties) commits an event of default with respect to the U.S. Bank UHC Loan, 2013 Term Notes, 2014 Term Note, Line of Credit or 2015 Line of Credit and fails or is unable to cure that default, the interest rate on each of the loans and Line of Credit could increase by 5.0% per annum and by 10.0% per annum with respect to the 2015 Line of Credit, U.S. Bank can immediately terminate its obligation, if any, to make additional loans to the Company, and U.S. Bank may accelerate the Company’s obligations under the applicable loan or line of credit. U.S. Bank 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, including, without limitation, the right to repossess, render unusable and/or dispose of the collateral without judicial process. In addition, in an event of default, U.S. Bank may foreclose on mortgaged property pursuant to the terms of the Mortgages.

 

The Company was in compliance with all covenants under the Line of Credit, the 2013 Term Notes and the 2014 Term Note as measured on May 31, 2016, other than its covenant to maintain a fiscal year-to-date EBITDA as of May 31, 2016 of at least $700,000. The main reason for the non-compliance result as of May 31, 2016 was the Company’s reduced earnings level, after the adjustment for goodwill impairment, over the last 12 months. As part of the Second Loan Modification Agreement, U.S. Bank has issued a waiver forgiving the non-compliance for the quarter. The next measurement date is August 31, 2016. For more information regarding the Second Loan Modification, see Part II, Item 5 of this Report.

 

Iowa Finance Authority Term Loan and Covenants

 

On May 1, 2010, the Company obtained a loan to finance the purchase of an additional facility located in West Union, Iowa to be used as a distribution center, warehouse facility, and manufacturing plant for certain products under the Art’s-Way brand. The funds for this loan were made available by the Iowa Finance Authority by the issuance of tax exempt bonds. This loan had an original principal amount of $1,300,000, an interest rate of 3.5% per annum and a maturity date of June 1, 2020. On February 1, 2013, the interest rate was decreased to 2.75% per annum. The other terms of the loan remain unchanged.

 

This loan from the Iowa Finance Authority, which has been assigned to The First National Bank of West Union (n/k/a Bank 1^st), is governed by a Manufacturing Facility Revenue Note dated May 28, 2010 as amended February 1, 2013 and a Loan Agreement dated May 1, 2010 and a First Amendment to Loan Agreement dated February 1, 2013 (collectively, “the IFA Loan Agreement”), which requires the Company to provide quarterly internally prepared financial reports and year-end audited financial statements and to maintain a minimum debt service coverage ratio of 1.5 to 1.0, which is measured at November 30 of each year. Among other covenants, the IFA Loan Agreement also requires the Company to maintain proper insurance on, and maintain in good repair, the West Union Facility, and continue to conduct business and remain duly qualified to do business in the State of Iowa. The loan is secured by a mortgage on the Company’s West Union Facility, pursuant to a Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated May 1, 2010 between the Company and The First National Bank of West Union (the “West Union Mortgage”).

 

If the Company commits an event of default under the IFA Loan Agreement or the West Union Mortgage and does not cure the event of default within the time specified by the IFA Loan Agreement, the lender may cause the entire amount of the loan to be immediately due and payable and take any other action that it is lawfully permitted to take or in equity to enforce the Company’s performance.

 

 

The Company was in compliance with all covenants under the IFA Loan Agreement except the debt service coverage ratio as measured on November 30, 2015. The First National Bank of West Union has issued a waiver, and the next measurement date is November 30, 2016.

 

Long-Term Debt Summary

 

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

 

 

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8)

Assets Available for Sale

 

Major components of assets available for sale are:

 

  

Due to reduced demand for our reels produced by the Universal Harvester by Art’s Way subsidiary, we have been able to absorb the production of reels in our Armstrong, Iowa facility. The Ames, Iowa facility was sold on February 10, 2016 for $1,192,000. After closing expenses, we recognized a gain on this sale of $36,000. The proceeds of this sale were used to pay down term debt, as previously discussed in Note 7.

 

The storage facility in Monona, Iowa is adjacent to our production facilities, and was sold in December 2015. We recorded a gain of $4,000 in December 2015 after closing costs associated with the sale.

 

9)

Recently Issued Accounting Pronouncements

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” which supersedes the guidance in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied retrospectively, with early application permitted only as of annual reporting periods beginning after December 15, 2016. We are evaluating the new standard, but do not at this time expect this standard to have a material impact on our consolidated financial statements.

 

Going Concern

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern” which is authoritative guidance on management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and provide related footnote disclosures, codified in ASC 205-40, Going Concern. The guidance provides a definition of the term substantial doubt, requires an evaluation every reporting period including interim periods, provides principles for considering the mitigating effect of management’s plans, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, requires an express statement and other disclosures when substantial doubt is not alleviated, and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). ASU No. 2015-15 is effective for annual reporting periods ending after December 15, 2016. The Company will adopt this guidance for the fiscal year ending November 30, 2017, and it will apply to each interim and annual period thereafter. Its adoption is not expected to have a material effect on the Company's consolidated financial statements.

 

 

Inventory

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330)”, which requires inventory measured using any method other than last-in, first-out or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than the lower of cost or market. ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company will adopt this guidance for the year-ended November 30, 2017 including interim periods within that reporting period. Its adoption is not expected to have a material impact on our consolidated financial statements.

 

Income Taxes

 

In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740)”, to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. ASU No. 2015-17 is effective for fiscal years beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

Leases

 

In February 2016, 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. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

10)

Equity Incentive Plan and Stock Based Compensation

 

On January 27, 2011, the Board of Directors of the Company authorized and approved the Art’s-Way Manufacturing Co., Inc. 2011 Equity Incentive Plan (the “2011 Plan”).  The 2011 Plan was approved by the stockholders on April 28, 2011.  It replaced the Employee Stock Option Plan and the Directors’ Stock Option Plan (collectively, the “Prior Plans”), and no further stock options will be awarded under the Prior Plans.  Awards to directors and executive officers under the 2011 Plan will be governed by the forms of agreement approved by the Board of Directors.

 

 

The 2011 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 of Directors has approved a director compensation policy pursuant to which non-employee directors are automatically granted restricted stock awards of 1,000 shares of common stock annually or initially upon their election to the Board, which are fully vested. During the first six months of fiscal 2016, 39,000 restricted stock awards have been issued to various employees and directors which vest over the next three years, and 5,000 restricted stock awards were issued to the directors upon their election in April 2016 for a total of 44,000 year-to-date.

 

Stock options granted prior to January 27, 2011 are governed by the applicable Prior Plan and the forms of agreement adopted thereunder.

 

Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant vesting period. We estimate 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. We incurred a total of $28,177 and $39,429 of stock-based compensation expense for stock options and restricted stock awards during the three and six-months ended May 31, 2016, respectively, compared to $15,339 and $28,484 of stock-based compensation expense for restricted stock awards and stock options for the same respective periods of fiscal 2015.

 

11)

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 May 31, 2016, and November 30, 2015, the carrying amount approximated fair value for cash, accounts receivable, accounts payable, notes payable to bank, and other current and long-term liabilities. The carrying amounts approximate fair value because of the short maturity of these instruments. The fair value of the Company’s installment term loans payable also approximate recorded value because the interest rates charged under the loan terms are not substantially different than current interest rates.

 

12)

Segment Information

 

There are four reportable segments: agricultural products, pressurized vessels, modular buildings and tools. The agricultural products segment fabricates and sells farming products as well as related equipment and replacement parts for these products in the United States and worldwide. The pressurized vessels segment produces and services pressurized tanks. The modular buildings segment manufactures and installs modular buildings for animal containment and various laboratory uses. 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.

 

 

 

 

 

 

13)

Subsequent Event

 

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 those previously described in Note 7.

 

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