ARTS WAY MANUFACTURING CO INC - Quarter Report: 2018 August (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[x]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended August 31, 2018

 

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. 0-5131

 

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)

 

(712) 864-3131

(Registrant’s telephone number, including area code)

 

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 [x]   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 [x]   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 [x]	Smaller reporting company [x]
	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 [x]

 

Number of common shares outstanding as of October 2, 2018: 4,207,144

 

 

 

Art’s-Way Manufacturing Co., Inc.

 

Index

 

		Page No.
PART I – FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets August 31, 2018 and November 30, 2017	1
	Condensed Consolidated Statements of Operations Three-month and nine-month periods ended August 31, 2018 and August 31, 2017	2
	Condensed Consolidated Statements of Comprehensive Income Three-month and nine-month periods ended August 31, 2018 and August 31, 2017	3
	Condensed Consolidated Statements of Cash Flows Nine-month periods ended August 31, 2018 and August 31, 2017	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II – OTHER INFORMATION		21
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Mine Safety Disclosures	21
Item 5.	Other Information	21
Item 6.	Exhibits	21
	SIGNATURES	22

 

 

 

		(Unaudited)
		August 31, 2018				November 30, 2017
Assets
Current assets:
Cash		$	4,888			$	212,400
Accounts receivable-customers, net of allowance for doubtful accounts of $24,630 and $32,298 in 2018 and 2017, respectively			2,141,167				1,910,294
Inventories, net			10,668,767				11,966,722
Cost and profit in excess of billings			79,602				65,146
Net investment in sales-type leases, current			142,242				-
Assets of discontinued operations			-				2,454
Other current assets			175,735				275,755
Total current assets			13,212,401				14,432,771
Property, plant, and equipment, net			5,654,140				5,946,957
Assets held for lease, net			1,663,855				1,217,164
Deferred income taxes			1,005,250				901,396
Goodwill			375,000				375,000
Net investment in sales-type leases, long-term			186,779				-
Other assets of discontinued operations			-				1,425,000
Other assets			77,824				81,545
Total assets		$	22,175,249			$	24,379,833
Liabilities and Stockholders’ Equity
Current liabilities:
Line of credit		$	2,693,530			$	2,462,530
Current portion of long-term debt			225,405				221,230
Accounts payable			846,596				673,653
Customer deposits			133,924				600,325
Billings in Excess of Cost and Profit			71,723				48,211
Accrued expenses			1,234,306				981,558
Liabilities of discontinued operations			-				59,149
Income taxes payable			3,500				3,100
Total current liabilities			5,208,984				5,049,756
Long-term liabilities
Long-term liabilities of discontinued operations			-				590,366
Long-term debt, excluding current portion			2,580,387				2,748,677
Total liabilities			7,789,371				8,388,799
Commitments and Contingencies (Notes 8 and 9)
Stockholders’ equity:
Undesignated preferred stock - $0.01 par value. Authorized 500,000 shares in 2018 and 2017; issued 0 shares in 2018 and 2017.			-				-
Common stock – $0.01 par value. Authorized 9,500,000 shares in 2018 and 2017; issued 4,216,430 in 2018 and 4,158,752 in 2017			42,164				41,587
Additional paid-in capital			3,016,565				2,859,052
Retained earnings			11,354,884				13,353,830
Accumulated other comprehensive income			-				(257,010	)
Treasury stock, at cost (9,286 in 2018 and 1,954 in 2017 shares)			(27,735	)			(6,425	)
Total stockholders’ equity			14,385,878				15,991,034
Total liabilities and stockholders’ equity		$	22,175,249			$	24,379,833

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		Three Months Ended								Nine Months Ended
		August 31, 2018				August 31, 2017				August 31, 2018				August 31, 2017
Sales		$	5,280,269			$	6,549,772			$	15,940,268			$	15,660,294
Cost of goods sold			4,105,012				5,104,826				12,504,621				12,290,041
Gross profit			1,175,257				1,444,946				3,435,647				3,370,253
Expenses:
Engineering			201,845				107,944				458,447				372,932
Selling			475,604				432,562				1,448,124				1,401,003
General and administrative			857,740				795,200				2,655,844				2,560,894
Impairment of asset held for lease			199,175				-				199,175				-
Total expenses			1,734,364				1,335,706				4,761,590				4,334,829
Income (Loss) from operations			(559,107	)			109,240				(1,325,943	)			(964,576	)
Other income (expense):
Interest expense			(82,058	)			(92,351	)			(220,445	)			(235,398	)
Other			(307,735	)			75,236				(487,850	)			190,155
Total other income (expense)			(389,793	)			(17,115	)			(708,295	)			(45,243	)
Income (Loss) from continuing operations before income taxes			(948,900	)			92,125				(2,034,238	)			(1,009,819	)
Income tax expense (benefit)			(182,184	)			50,477				(86,145	)			(288,919	)
Income (Loss) from continuing operations			(766,716	)			41,648				(1,948,093	)			(720,900	)
Discontinued Operations
Income (loss) from operations of discontinued segment			-				(26,449	)			(67,177	)			(49,238	)
Income tax expense (benefit)			-				(8,008	)			(16,324	)			(15,756	)
Income (Loss) on discontinued operations			-				(18,441	)			(50,853	)			(33,482	)
Net Income (Loss)			(766,716	)			23,207				(1,998,946	)			(754,382	)
Earnings (Loss) per share - Basic:
Continuing Operations		$	(0.18	)		$	0.01			$	(0.46	)		$	(0.17	)
Discontinued Operations		$	-			$	-			$	(0.01	)		$	(0.01	)
Net Income (Loss) per share		$	(0.18	)		$	0.01			$	(0.47	)		$	(0.18	)
Earnings (Loss) per share - Diluted:
Continuing Operations		$	(0.18	)		$	0.01			$	(0.46	)		$	(0.17	)
Discontinued Operations		$	-			$	-			$	(0.01	)		$	(0.01	)
Net Income (Loss) per share		$	(0.18	)		$	0.01			$	(0.47	)		$	(0.18	)
Weighted average outstanding shares used to compute basic net income per share			4,209,445				4,161,421				4,198,250				4,148,966
Weighted average outstanding shares used to compute diluted net income per share			4,209,445				4,161,421				4,198,250				4,148,966

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		Three Months Ended								Nine Months Ended
		August 31, 2018				August 31, 2017				August 31, 2018				August 31, 2017
Net Income (Loss)		$	(766,716	)		$	23,207			$	(1,998,946	)		$	(754,382	)
Other Comprehensive Income (Loss)
Foreign currency translation adjustsments			-				65,509				3,830				60,411
Release of cumulative translation adjustment due to substantial liquidation of a foreign entity			-				-				253,180				-
Total Other Comprehensive Income (Loss)			-				65,509				257,010				60,411
Comprehensive (Loss)		$	(766,716	)		$	88,716			$	(1,741,936	)		$	(693,971	)

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		Nine Months Ended
		August 31, 2018				August 31, 2017
Cash flows from operations:
Net (loss) from continuing operations		$	(1,948,093	)		$	(720,900	)
Net (loss) from discontinued operations			(50,853	)			(33,482	)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Stock based compensation			158,090				92,225
Loss on release of cumulative translation adjustment			253,180				-
Realized foreign currency loss			3,830				60,411
Impairment of asset held for lease			199,175				-
(Gain)/Loss on disposal of property, plant, and equipment			(12,084	)			20,824
Depreciation and amortization expense			681,939				516,642
Bad debt expense (recovery)			(8,090	)			15,452
Deferred income taxes			(103,854	)			(319,833	)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			(222,783	)			(1,011,520	)
Inventories			489,189				348,888
Income taxes receivable			-				265,924
Net investment in sales-type leases			(329,021	)			-
Other assets			100,020				(155,776	)
Increase (decrease) in:
Accounts payable			172,943				870,377
Contracts in progress, net			9,056				182,985
Customer deposits			(466,401	)			(164,970	)
Income taxes payable			400				3,100
Accrued expenses			252,748				14,638
Net cash provided by (used in) operating activities - continuing operations			(769,756	)			18,467
Net cash (used in) operating activities - discontinued operations			(89,697	)			(69,028	)
Net cash (used in) operating activities			(859,453	)			(50,561	)
Cash flows from investing activities:
Purchases of property, plant, and equipment			(265,418	)			(472,031	)
Net proceeds from sale of assets			52,607				17,156
Net cash (used in) investing activities - continuing operations			(212,811	)			(454,875	)
Net cash provided by investing activities - discontinued operations			1,418,761				40,936
Net cash provided by (used in) investing activities			1,205,950				(413,939	)
Cash flows from financing activities:
Net change in line of credit			231,000				450,000
Repayment of term debt			(164,115	)			(551,585	)
Repurchases of common stock			(21,310	)			(6,425	)
Net cash provided by (used in) financing activities - continuing operations			45,575				(108,010	)
Net cash (used in) financing activities - discontinued operations			(599,584	)			(97,930	)
Net cash (used in) financing activities			(554,009	)			(205,940	)
Net (decrease) in cash			(207,512	)			(670,440	)
Cash at beginning of period			212,400				1,063,716
Cash at end of period		$	4,888			$	393,276
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	225,249			$	247,330
Income taxes		$	3,600			$	-
Supplemental disclosures of non-cash operating and investing activities:
Transfer of inventory to assets held for lease		$	808,766			$	-

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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.

 

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 (“Manufacturing”) manufactures farm equipment under the Art’s-Way Manufacturing label and private labels. The modular buildings segment (“Scientific”) manufactures modular buildings for various uses, commonly animal containment and research laboratories. The tools segment (“Metals”) manufactures steel cutting tools and inserts. During the third quarter of fiscal 2016, the Company discontinued its pressurized vessels segment (“Vessels”) that manufactured pressurized vessels. For more information on discontinued operations, see Note 3 “Discontinued Operations.” For detailed financial information relating to segment reporting, see Note 16 “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) that 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, 2017. The results of operations for the three and nine months ended August 31, 2018 are not necessarily indicative of the results for the fiscal year ending November 30, 2018.

 

During the second quarter of fiscal 2018, the Company liquidated its investment in its Canadian subsidiary by selling off remaining inventory and filing dissolution paperwork for the Canadian entity. Prior to that liquidation and dissolution, the financial books of the Company’s Canadian operations were kept in the functional currency of Canadian dollars and the financial statements were converted to U.S. Dollars for consolidation. When consolidating the financial results of the Company into U.S. Dollars for reporting purposes, the Company used 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. Stockholders’ equity was translated at historical exchange rates and retained earnings were translated at an average exchange rate for the period. Additionally, revenue and expenses were translated at average exchange rates for the periods presented. The resulting cumulative translation adjustment was carried on the balance sheet and was recorded in stockholders’ equity. Following the liquidation and dissolution of the Company’s investment in its Canadian subsidiary the cumulative translation adjustment carried on the balance sheet was released into net income and the financial statements will no longer need translation each period. Since no income tax benefit will be received from the foreign equity sale, the cumulative translation adjustment has not been tax adjusted.

 

Sales-Type Leases

 

The Company leases modular buildings to certain customers and accounts for these transactions 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.

 

 

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 nine months ended August 31, 2018. Actual results could differ from those estimates.

 

 

3)

Discontinued Operations

 

Effective October 31, 2016, the Company discontinued the operations of its Vessels segment in order to focus its efforts and resources on the business segments that have historically been more successful and that are expected to present greater opportunities for meaningful long-term shareholder returns.

 

In January 2018, the Company accepted an offer on the real estate assets of its Vessels segment for $1,500,000, which was below the carrying value of the real estate assets at that time. Based on these facts the Company recorded an impairment of the real estate assets of approximately $289,000 for the fiscal year ended November 30, 2017, which reduced the value to $1,425,000, which is the value the Company expected to receive after commissions on the sale of these real estate assets. On March 29, 2018, the remaining assets of Vessels, consisting of these real estate assets, were disposed of at a selling price of $1,500,000.

 

As Vessels was a unique business unit of the Company, its liquidation was a strategic shift. In accordance with Accounting Standard Codification Topic 360, the Company has classified Vessels as discontinued operations for all periods presented.

 

Income from discontinued operations, before income taxes in the accompanying Condensed Consolidated Statements of Operations is comprised of the following:

 

 

 

 

 

The components of discontinued operations in the accompanying Condensed Consolidated Balance Sheets are as follows:

 

 

 

 

4)

Net Income (Loss) Per Share of Common Stock

 

Basic net income (loss) per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share of common stock has been computed on the basis of the weighted average number of shares outstanding plus equivalent shares of common stock 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 of common stock.

 

Basic and diluted net income (loss) per share of common stock have been computed based on the following as of August 31, 2018 and August 31, 2017:

 

 

 

 

 

5)

Inventory

 

Major classes of inventory are:

 

 

 

6)

Accrued Expenses

 

Major components of accrued expenses are:

 

 

 

 

7)

Assets Held for Lease

 

Major components of assets held for lease are:

 

 

During the third quarter of 2018, the Company discovered mold in its West Union facility.  The Company estimates the remediation will cost approximately $252,000 and has included this amount in other accrued expense at August 31, 2018.  The Company also scrapped approximately $67,000 of inventory related to mold remediation.  Both the remediation cost and inventory scrap have been included in other income (expense) on the statement of operations.  As a result of an adverse change in physical condition of this asset, circumstances indicate that its carrying amount may not be recoverable.  The Company recognized approximately $199,000 related to the impairment of this asset in the three months ended August 31, 2018.

 

 

 

8)

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 6 “Accrued Expenses.” Changes in the Company’s product warranty liability for the three and nine months ended August 31, 2018 and August 31, 2017 are as follows:

 

 

 

 

9)

Loan and Credit Agreements

 

The Company maintains a revolving line of credit and term loan with Bank Midwest as well as a term loan with The First National Bank of West Union.

 

 

Bank Midwest Revolving Line of Credit, Term Loans, and Covenants

 

On September 28, 2017, the Company entered into a credit facility with Bank Midwest, which supersedes and replaces in its entirety the Company’s previous credit facility with U.S. Bank. The Bank Midwest credit facility consists of a $5,000,000 revolving line of credit, a $2,600,000 term loan due October 1, 2037, and a $600,000 term loan due October 1, 2019. The proceeds of the new line of credit and the term loans were used to refinance all debt previously held by U.S. Bank in the amount of approximately $6,562,030, which consisted of $6,528,223 in unpaid principal and approximately $33,807 in accrued and unpaid interest and fees. The revolving line of credit is being used for working capital purposes. On March 29, 2018, the Company paid in full the $600,000 term loan due October 1, 2019 using proceeds from the sale of the Company’s Dubuque, Iowa property. The payment consisted of $596,563 in principal and $2,328 in interest.

 

On August 31, 2018, the balance of the line of credit was $2,693,530 with $2,306,470 remaining available, limited by the borrowing base calculation. The 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 line of credit. Any unpaid principal amount borrowed on the revolving line of credit accrues interest at a floating rate per annum equal to 1.00% above the Wall Street Journal rate published from time to time 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 6.00% per annum. The revolving line of credit was renewed on March 30, 2018. The revolving line of credit is payable upon demand by Bank Midwest, and monthly interest-only payments are required. If no earlier demand is made, the unpaid principal and accrued interest is due on March 30, 2019.

 

The $2,600,000 term loan accrues interest at a rate of 5.00% for the first sixty months. Thereafter, this loan will accrue interest at a floating rate per annum equal to 0.75% above the Wall Street Journal rate published from time to time 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. This loan is also guaranteed by the United States Department of Agriculture (“USDA”), which requires an upfront guarantee fee of $62,400 and 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 loan as well, 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 stock, is guaranteeing approximately 38% of this loan, for an annual fee of 2% of the personally guaranteed amount. The initial guarantee fee will be amortized over the life of the loan, and the annual fees and personally guaranteed amounts are expensed monthly. Prior to repayment, the $600,000 term loan accrued interest at a rate of 5.00%, and monthly payments of $3,249 for principal and interest were required.

 

Each of the revolving line of credit and the $2,600,000 term loan are governed by the terms of a separate Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest. The $600,000 term loan was also governed by the terms of a separate Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest.

 

In connection with the revolving 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 revolving 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 revolving line of credit, as set forth in Commercial Guaranties, each dated September 28, 2017.

 

To further secure the line of credit, the Company has granted Bank Midwest a second mortgage on its West Union, Iowa property and Ohio Metal Working Products/Art’s-Way Inc. has granted Bank Midwest a mortgage on its property located in Canton, Ohio. The $2,600,000 term loan is secured by a mortgage on the Company’s Armstrong, Iowa and Monona, Iowa properties, and the $600,000 term loan was secured by a mortgage on the Company’s Dubuque, Iowa property. 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. The terms of the Bank Midwest loan agreements require the Company to maintain a minimum working capital ratio of 1.75, while maintaining a minimum of $5,100,000 of working capital. Additionally, 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 was in compliance with all covenants as of November 30, 2017 other than the debt service coverage ratio. Bank Midwest issued a waiver forgiving the noncompliance, and no event of default has occurred. The next measurement date is November 30, 2018. The Company is also required to provide audited financial statements within 120 days of its fiscal year end.

 

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 1st), 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 except for the debt service coverage ratio covenant as measured on November 30, 2017. The First National Bank of West Union issued a waiver and the next measurement date is November 30, 2018.

 

 

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

 

 

 

 

10)

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.

 

On December 22, 2017, the Tax Cuts and Job Act of 2017 was enacted, which reduced the top corporate income tax rate from 35% to 21%. This law is generally effective for tax years beginning after December 31, 2017. The application of this new rate was recognized in the first quarter of fiscal 2018. Tax expense from continuing operations includes an adjustment of approximately $300,000 related to the revaluation of the Company’s net deferred tax asset at the new statutory rate.

 

 

11)

Related Party Transactions

 

During the three and nine months ended August 31, 2018, the Company recognized expenses of $5,957 and $17,986 respectively, for transactions with related parties, compared to $385 and $3,691 for the same periods in 2017.  The accrued expenses balance as of August 31, 2018 contains $1,633 due to a related party, compared to $0 for the same period in 2017.

 

12)

Sales-Type Leases

 

The components related to sales-type leases at August 31, 2018 are as follows:

 

 

 

The profit recognized in continuing operations on the condensed consolidated statements of operations from commencement of sales-type leases in the three and nine months ended August 31, 2018 was $0 and $129,104, respectively.

 

 

Future minimum lease receipts are as follows:

 

 

 

 

13)

Recently Issued Accounting Pronouncements

 

Accounting Pronouncements Not Yet Adopted

 

Revenue from Contracts with Customers (Topic 606)

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” which supersedes the guidance in “Revenue Recognition (Topic 605).” The core principle of ASU 2014-09 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 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 not permitted.

 

The Company has evaluated the new standard and applied the core principle to its contract revenue streams.  To be consistent with this core principle, an entity is required to apply the following five-step approach:

 

1.

Identify the contract(s) with a customer;

2.

Identify each performance obligation in the contract;

3.

Determine the transaction price;

4.

Allocate the transaction price to each performance obligation; and

5.

Recognize revenue when or as each performance obligation is satisfied.

 

The Company’s revenues primarily result from contracts with customers. The agricultural products and tools segments are generally short-term contracts and contain a single performance obligation – the delivery of product to the common carrier. The Company recognizes revenue for the sale of agriculture parts, equipment and tools upon shipment of the good. 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 generally are short-term and vary by customer and segment. The implementation process will include modifications to the contracts of the modular buildings segment.

 

The Company intends to adopt ASU 2014-09 using the modified retrospective method. Once adopted, the Company has determined that amounts reported under ASC 606 will not be materially different than amounts that would have been reported under the previous revenue guidance of ASC 605 and would not require an adjustment to retained earnings.

 

The Company, upon adoption of ASU 2014-09, will increase the amount of required disclosures, including but not limited to:

 

●

Disaggregation of revenue that depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors;

●

The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed;

 

 

●

Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period;

●

Information about performance obligations in contracts with customers; and

●

Judgments that significantly affect the determination of the amount and timing of revenue from contracts with customers, including the timing satisfaction of performance obligation, and the transaction price and the amounts allocated to performance obligations.

 

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 will adopt this guidance for its fiscal year ending November 30, 2020, including interim periods within that reporting period. The Company has a moderate amount of leasing activity and is currently evaluating the impact of this guidance on its consolidated financial statements.

 

 

14)

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 are 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 fully-vested common stock annually 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. Additionally, directors can elect to receive their board compensation as restricted stock. During the first nine months of fiscal 2018, restricted stock awards of 46,200 shares were issued to various employees, directors, and consultants, which vest over the next three years, and restricted stock awards of 28,478 shares were issued to directors as part of the compensation policy, which vested immediately upon grant. During the first nine months of fiscal 2018, 17,000 shares of restricted stock were forfeited upon the departure of certain employees.

 

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. 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 nine months ended August 31, 2018 or in the same respective period of fiscal 2017. The Company incurred a total of $46,654 and $158,090 of stock-based compensation expense for restricted stock awards during the three and nine months ended August 31, 2018 compared to $19,266 and $92,225 of stock-based compensation expense for restricted stock awards for the same respective periods of fiscal 2017.

 

 

 

15)

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 August 31, 2018, and November 30, 2017, the carrying amount approximated fair value for cash, accounts receivable, net investment in sale-type leases, 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 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 installment term loans payable also approximates recorded value because the interest rates charged under the loan terms are not substantially different than current interest rates.

 

16)

Segment Information

 

There are three reportable segments: agricultural products, 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 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. The tables below exclude income and balance sheet data from discontinued operations. See Note 3 “Discontinued Operations.”

 

 

 

 

 

 

 

 

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

 

17)

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.

 

 

 

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