ARTS WAY MANUFACTURING CO INC - Annual Report: 2022 (Form 10-K)

Art’s-Way Manufacturing Co., Inc.

Index to Annual Report on Form 10-K

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K (this “report”) may contain forward-looking statements that reflect future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases forward-looking statements may be identified 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. Forward-looking statements in this report generally relate to: our expectations regarding the impact of COVID-19 on our business condition and results of operations; our expectations regarding our warranty costs and order backlog; our beliefs regarding the sufficiency of working capital and cash flows; our expectations regarding our continued ability to renew or obtain financing on reasonable terms when necessary as well as our continued positive relationship with our creditors and lenders; the impact of recently issued accounting pronouncements; our intentions and beliefs relating to our costs, product developments and business strategies; our expectations concerning our continued expansion into international markets; our expectations with respect to government spending and programs that may directly or indirectly be used to purchase our products; our beliefs concerning our ability to attract and maintain an adequate workforce in a competitive labor market; our expected operating and financial results; our beliefs concerning the effects of, and costs of compliance with government regulations; our expectations concerning our primary capital and cash flow needs; our beliefs regarding competitive factors and our competitive strengths; our expectations regarding our capabilities and demand for our products; our predictions regarding the impact of seasonality; our beliefs regarding the impact of the farming industry on our business; our beliefs regarding our internal controls over financial reporting; and our intentions for paying dividends. Many of these forward-looking statements are located in this report under “Item 1. BUSINESS” and “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” but they may appear in other sections as well.

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, the ongoing COVID-19 pandemic; the impact of changes in credit markets on our ability to continue to obtain financing on reasonable terms; our ability to repay current debt, continue to meet debt obligations and comply with financial covenants; obstacles related to liquidation of product lines; the effect of inflation, interest rate fluctuations and general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; fluctuations in seasonal demand and our production cycle; the ability of our suppliers to meet our demands for raw materials and component parts; our original equipment manufacturer customers’ decisions regarding supply chain structure, inventory levels, and overall business conditions; fluctuations in the price of raw materials, especially steel; our ability to predict and meet the demands of each market in which our segments operate; a decrease in demand for our products in international markets; the existence and outcome of product liability claims and other ordinary course litigation; changes in environmental, health and safety regulations and employment laws; our ability to fill open positions within the Company and retain our key employees; the cost of complying with laws, regulations, and standards relating to corporate governance and public disclosure, and the demand such compliance places on management’s time; and other factors described in this report and from time to time in our other reports filed with the Securities and Exchange Commission. We do not intend to update the forward-looking statements contained in this report other than as required by law. We caution investors not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. This report and the documents that we reference in this report and have filed as exhibits should be read 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.

PART I

Item 1. BUSINESS.

General

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

We have organized our 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. Our Agricultural Products segment manufactures and distributes farm equipment under the Art’s-Way name. Our Modular Buildings segment manufactures modular buildings for various uses, commonly animal containment and research laboratories, through our wholly-owned subsidiary, Art’s-Way Scientific, Inc., an Iowa corporation. Our Tools segment manufactures standard single point brazed carbide tipped tools as well as PCD (polycrystalline diamond) and CBN (cubic boron nitride) inserts and OEM tools through our wholly-owned subsidiary, Ohio Metal Working Products/Art’s-Way, Inc., an Ohio corporation. For detailed financial information relating to segment reporting, see Note 16 “Segment Information” to our financial statements in “Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this report.

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

Business of Our Segments

Agricultural Products

Our Agricultural Products segment, which accounted for 73.6% of our net revenue in the 2022 fiscal year and 67.4% of our net revenue in the 2021 fiscal year, is located primarily in Armstrong, Iowa. This segment manufactures a variety of specialized farm machinery under our own label, including portable and stationary animal feed processing equipment and related attachments used to mill and mix feed grains into custom animal feed rations; a line of forage equipment consisting of forage boxes, bale processors, running gear, and dump boxes; a line of manure spreaders; sugar beet harvesting equipment; and a line of dirt work equipment. We sell our labeled products through independent farm equipment dealers throughout the United States, Australia, Canada, Japan and the United Kingdom. We also provide after-market service parts that are available to keep our branded equipment operating to the satisfaction of the end user of our products.

Modular Buildings

Our Modular Buildings segment, which accounted for 16.7% of our net revenue in the 2022 fiscal year and 22.7% of our net revenue in the 2021 fiscal year, is located in Monona, Iowa. This segment produces, sells and leases modular buildings, which are custom-designed to meet the specific research needs of our customers. The buildings we commonly produce range from basic swine buildings to complex containment research laboratories. We plan to continue our focus on providing research facilities for academic research institutions, government research and diagnostic centers, public health institutions and private research and pharmaceutical companies, as those are our primary market sectors. We provide services from start to finish by designing, manufacturing, delivering and installing these facilities to meet customers’ critical requirements. In addition to selling these facilities, we also offer a lease option to customers in need of temporary facilities.

Tools

Our Tools segment, which is located in Canton, Ohio, accounted for 9.7% of our net revenue in the 2022 fiscal year and 9.9% of our net revenue in the 2021 fiscal year. This segment produces and sells standard single point brazed carbide tipped tools as well as PCD (polycrystalline diamond) and CBN (cubic boron nitride) inserts and tools and OEM specialty tools. The tools are used by manufacturers in various industries to cut and shape various parts, pipes, and fittings. The marketing of the tools is primarily through independent distributors supplying manufacturers with industrial tools and supplies. We plan to continue our focus on providing cutting tools to industries such as automotive, aerospace, oil and gas piping, and appliances.

Our Principal Agricultural Products

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

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

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

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

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

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

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

Product Distribution and Markets

We distribute goods for our Agricultural Products segment primarily through a network of approximately 1,000 U.S. and Canadian independent dealers, as well as overseas dealers in Australia, Japan and the United Kingdom, whose customers require specialized agricultural machinery. We have sales representation in 48 states and seven Canadian provinces. Our dealers sell our products to various agricultural and commercial customers. We also maintain a local sales force in our Armstrong, Iowa facility to provide oversight services for our distribution network, communicate with end users, and recruit and train dealers on the uses of our products. Our local service parts staff is available to help customers and dealers with their service parts needs. Our Modular Buildings segment typically sells products customized to the end-user’s requirements directly to the end-user. Our Tools segment distributes products through manufacturers’ representatives, direct sales, and OEM sales channels.

We currently export products to nine foreign countries. We have been shipping grinder mixers abroad since 2006 and have exported portable rollermills as well. We continue to strengthen these relationships and intend to develop new international markets. Our international sales accounted for 4.5% of consolidated sales during the 2022 fiscal year compared to 2.6% in the 2021 fiscal year.

Backlog. Our backlogs of orders vary on a daily basis. As of February 6, 2023, our Tools segment had approximately $556,000 of backlog compared to $578,000 from the same date in 2022. We continue to see heightened demand in this segment from our OEM and oil and gas industry customers. Our Modular Buildings segment had approximately of $4,985,000 of backlog as of February 6, 2023, compared to $1,243,000 on that date in 2022. The Modular Buildings segment had a slow first six months to start fiscal 2022 and our 2022 results were carried by agricultural building revenue. Our 2023 backlog numbers and research building quoting activity would lead us to believe we will see improved results in fiscal 2023. Our Agricultural Products segment had a net backlog of approximately $9,549,000 as of February 6, 2023 compared to $10,513,000 on February 6, 2022. The strong demand in our Agricultural Products is continuing for the third straight fiscal year. We positioned ourselves in fiscal 2022 to more efficiently manufacture our products through the purchasing of robotic weld cells and a high definition plasma cutter. We anticipate we will continue to see improved results as the strong agriculture demand continues. We expect that our order backlogs will continue to fluctuate as orders are received, filled, or canceled, and, due to dealer discount arrangements we may enter into from time to time, these figures are not necessarily indicative of future revenue.

Recent Product Developments

In 2022, we made product improvements to improve manufacturability and to meet our customer’s evolving needs. Most notably, we worked on designs to capture market share of smaller manure spreaders and added truck mount features to our existing manure spreader sizes. We also worked on redesign of commercial forage boxes, improved the functionality of our high dump and enhanced the design on our defoliators.

Our Tools and Modular Buildings segments complete projects based on customer specifications and did not engage in specific product development during the 2022 fiscal year.

Competition

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

Agricultural Products

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

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

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

In addition, in order to capitalize on brand recognition for our Agricultural Products segment, we have numerous product lines produced under our own label. We also provide aftermarket service parts which are available to keep our branded and OEM-produced equipment operating to the satisfaction of the customer. We sell products to customers in the United States and nine foreign countries through a network of approximately 1,000 independent dealers in the United States and Canada, as well as overseas dealers in Australia, Japan and the United Kingdom.

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

Modular Buildings

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

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

Tools

Competition in our Tools segment from offshore products that have gained market share over the last 20 years. Our greatest threat continues to be emerging technologies that replace the need for brazed tools. These competitive threats are countered by our ability to offer the widest range of standard carbide tipped brazed tool inventories to be found in North America. These inventories are strategically located in four warehouses across the United States, enabling our customers to receive product quickly with minimal shipping costs. Our ability to produce special, engineered, value-added products in volume with short lead times sets us apart from our competitors. This is most evident in certain segments of the pipe processing industry, where we have been able to establish and maintain market share despite efforts from companies significantly larger than ourselves.

Raw Materials, Principal Suppliers, and Customers

Raw materials for our various segments are acquired from domestic and foreign sources and normally are readily available. We saw lead times increase on raw materials in 2021 as labor shortages from the COVID-19 pandemic left many of our suppliers understaffed. Lead times remained heightened in 2022 as the labor market continued to stay tight. We do rely on foreign suppliers and foreign markets for materials and components for some of our products. However, these suppliers are not principal suppliers and there are alternative sources for these materials.

We previously had an OEM supplier agreement with Case New Holland (“CNH”) for our Agricultural Products segment. Under the OEM agreement, we agreed to supply CNH’s requirements for certain feed processing and service parts, primarily blowers, under CNH’s label. This agreement expired on October 27, 2022. The Company has not entered into a new supplier agreement with CNH to date but continues to transact with CNH.

We do not typically rely on sales to one customer or a small group of customers. During the 2022 fiscal year, one customer accounted for just more than 11% consolidated net revenues.

Intellectual Property

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

We pay royalties for our use of certain manufacturing rights. Under our previous OEM supplier agreement with CNH, CNH sold us the license to manufacture, sell, and distribute certain plow products designed by CNH and their replacement and component parts. In fiscal 2022, we were liable to pay semi-annual royalty payments based on the invoiced price of each licensed product and service part we sell. We also have a licensing and royalty agreement with Spreader, LLC to produce a loader mounted spreader in exchange for royalty payments until December 2027.

Government Relationships and Regulations; Environmental Compliance

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

Employees

As of November 30, 2022, we employed 97 employees in our Agricultural Products segment including one on a part-time basis, 26 employees in our Tools segment, one of whom was employed on a part-time basis and 26 full-time employees in our Modular Buildings segment. The majority of the employees in our Tools segment are represented by a union and covered by a collective bargaining agreement which expires on June 30, 2024. These numbers do not necessarily represent peak employment during the 2022 fiscal year.

Item 1A. RISK FACTORS.

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

Item 1B. UNRESOLVED STAFF COMMENTS.

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

Item 2. PROPERTIES.

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

We completed construction in November 2007 of our facility in Monona, Iowa, which houses the manufacturing for our Modular Buildings segment. The facility was custom-designed to meet our production needs. It has approximately 50,000 square feet of useable space and accommodates a sprinkler system and crane.

In connection with the acquisition of certain assets of Ohio Metal Working Products Company in September 2013, we also purchased the land and building used for manufacturing of the products sold by Ohio Metal Working Products Company, located in Canton, Ohio. The building contains approximately 39,000 square feet of usable space and is in good condition. The purchased land is approximately 4.50 acres and is used by our Tools segment.

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

Item 3. LEGAL PROCEEDINGS.

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

Item 4. MINE SAFETY DISCLOSURES.

Not applicable.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.’

Market Information

Our common stock trades on the Nasdaq Stock Market LLC under the symbol “ARTW.”

Stockholders

We have two classes of stock, undesignated preferred stock and $0.01 par value common stock. No shares of preferred stock have been issued or are outstanding. As of February 6, 2023, we had 77 common stock stockholders of record, which number does not include stockholders who hold our common stock in street name.

Dividends

We did not pay a dividend during the 2022 or 2021 fiscal years. We expect that the payment of and the amount of any future dividends will depend on our financial condition at that time.

Unregistered Sales of Equity Securities

None.

Purchases of Equity Securities by the Company

There were no purchases of common stock by the Company made in the fourth quarter of fiscal 2022.

Equity Compensation Plans

For information on our equity compensation plans, refer to Item 12, “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.”

Item 6. SELECTED FINANCIAL DATA.

Not applicable.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ’

The following discussion, which focuses on our results of operations, contains forward-looking information and statements. Actual events or results may differ materially from those indicated or anticipated, as discussed in the section entitled “Forward Looking Statements.” The following discussion of our financial condition and results of operations should also be read in conjunction with our financial statements and notes to financial statements contained in “Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this report.

Financial Condition

We recorded our second straight year of profitability in fiscal 2022 and saw significant success in our Agricultural Products segment. Our consolidated revenues increased 14% year on year and over 24% from fiscal 2020. As we transition into fiscal 2023, we are showing increased demand in all three operating segments.

Our consolidated balance sheet indicates a stable financial position as of November 30, 2022. We finished the year with approximately $98,000 of consolidated net income and saw our working capital increase by approximately $379,000. Our inventory increased significantly in fiscal 2022 as we better positioned ourselves to meet customer demand. We utilized customer deposits and funding from a common stock purchase agreement to meet the increased demands of fiscal 2022.

We expect to have access to capital as needed throughout fiscal 2023 through the sale of inventory and from the use of our line of credit. On November 30, 2022 we had $1,075,500 available on our line of credit and $2,260,402 of excess collateral towards our borrowing base. Our working capital remained strong at approximately $4,866,000 in fiscal 2022 with a current ratio of 1.53. Our banking relationship remains positive and we expect it to only strengthen as our financial results continue to improve. We do not foresee liquidity issues within the next twelve months.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 “Summary of Significant Accounting Policies” to our financial statements in “Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this report. Critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We believe that the following represents the most critical accounting policies and estimates used in the preparation of our consolidated financial statements.

Inventories

Inventories are stated at the lower of cost or net realizable value, and cost is determined using the standard costing method. Management monitors the carrying value of inventories using inventory control and review processes that include, but are not limited to, sales forecast review, inventory status reports, and inventory reduction programs. We record inventory write downs to net realizable value based on expected usage information for raw materials and historical selling trends for finished goods. If the assumptions made by management do not occur, we may need to record additional write downs.

Revenue Recognition

In accordance with ASC 606, revenue is measured based on consideration specified in a contract with a customer and recognized when we satisfy the performance obligation specified in each contract.

Our revenues primarily result from contracts with customers. The major sources of revenue for the Agricultural Products 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. We recognize revenue for the production and sale of farm equipment, service parts and cutting tools upon shipment of the goods. Shipment of the goods is the point in time when risk of ownership and title pass to the customer. 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 our terms are documented in the most recently published price lists. Pricing is fixed and determinable according to our published equipment and parts price lists. Title to all equipment and parts sold pass to the customer upon delivery to the carrier and is not subject to a customer acceptance provision. Proof of the passing of title is documented by the signing of the delivery receipt by a representative of the carrier. Post shipment obligations are limited to any claim with respect to the condition of the equipment or parts. The Agricultural Products 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 are considered unearned revenue and increase contract liabilities.

In certain circumstances, upon the customer’s written request, we may recognize revenue when production is complete, and the goods are ready for shipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment. The customer dictates that we ship the goods per its direction from our manufacturing facility, as is customary with this type of agreement, in order to minimize shipping costs. The written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer, with a final specified delivery date, and that we will segregate the goods from our inventory, such that they are not available to fill other orders. This agreement also specifies that the customer is required to purchase all goods manufactured under this agreement. Title of the goods will pass to the customer when the goods are complete and ready for shipment, per the customer agreement. At the transfer of title, all risks of ownership have passed to the customer, and the customer agrees to maintain insurance on the manufactured items that have not yet been shipped. We have operated using bill and hold agreements with certain customers for many years, with consistent satisfactory results for both the customers and us. The credit terms on this agreement are consistent with the credit terms on 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. Revenues recognized when goods were ready for shipment in fiscal 2022 were approximately $1,010,000 compared to $711,000 in fiscal 2021.

The Modular Buildings segment is in the construction industry with its major source of revenue arising from modular building sales. Sales of modular buildings are generally recognized using input methods to measure progress towards the satisfaction of a performance obligation using the percentage of completion method. Revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Contract costs consist of direct costs on contracts, including labor, materials, and amounts payable to subcontractors and those indirect costs related to contract performance, such as equipment costs, insurance and employee benefits. Contract cost is recorded as incurred, and revisions in contract revenues and cost estimates are reflected in the accounting period when known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Contract losses are recognized when current estimates of total contract revenue and contract cost indicate a loss. Estimated contract costs include any and all costs appropriately allocable to the contract. The provision for these contract losses will be the excess of estimated contract costs over estimated contract revenues. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract change orders, penalty provisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. We use significant judgements in determining estimated contract costs and completion percentages throughout the life of the project. Stock modular building sales also occur and are recognized at a point in time when the performance obligation is fulfilled through substantial completion. Substantial completion is achieved through customer acceptance of the completed building. The Modular Buildings segment executes contracts with customers that can be short- or long-term in nature. These contracts can have multiple performance obligations and revenue from these can be recognized over time or at a point in time depending on the nature of the contracts. Payment terms for the Modular Buildings segment vary by contract, but typically utilize money down and progress payments throughout the life of the contract. The payment terms of the Modular Buildings segment have the most impact on our contract receivables, contract assets and contract liabilities. Project invoicing from the Modular Buildings segment increases contract receivables and has an effect on contract liabilities through billings in excess of costs, estimated gross profit and customer deposits. The balance of contract assets is typically made up of the balance of costs and estimated gross profit in excess of billings. Costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities.

The Agricultural Products segment offers variable consideration in the form of discounts depending on participation in yearly early order programs. This variable consideration is allocated to the transaction price of all products in a sales arrangement and is not contingent on future outcomes. The Agricultural Products segment does not offer rebates or credits. The 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.

Our returns policy allows for new and saleable parts to be returned, subject to inspection and a restocking charge, which is included in net sales. Whole goods are not returnable. Shipping costs charged to customers are included in net sales. Freight costs incurred are included in cost of goods sold. Customer deposits consist of advance payments from customers, in the form of cash, for revenue to be recognized in the following year.

For information on product warranty as it applies to ASC 606, refer to Note 8 “Product Warranty” contained in our financial statements in “Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this report.

Results of Operations

Fiscal Year Ended November 30, 2022 Compared to Fiscal Year Ended November 30, 2021

Our consolidated net sales totaled $28,400,000 for the 2022 fiscal year, which represents a 13.8% increase from our consolidated net sales of $24,965,000 for the 2021 fiscal year. The increase in revenue is due to increased demand in the Agricultural Products and Tools segments. Our consolidated gross profit as a percentage of net sales decreased to 25.7% in the 2022 fiscal year compared to 26.4% of net sales in the 2021 fiscal year. Our consolidated operating expenses increased by 14.8%, from $6,073,000 in the 2021 fiscal year to $6,974,000 in the 2022 fiscal year. Because the majority of our corporate general and administrative expenses are borne by our Agricultural Products segment, that segment represented $5,239,000 of our total consolidated operating expenses, while our Modular Buildings segment represented $1,095,000 and our Tools segment represented $640,000.

Our consolidated operating income for the 2022 fiscal year was $333,000 compared to operating income of $523,000 for the 2021 fiscal year. Our Agricultural Products segment had operating income of $1,205,000, our Modular Buildings segment had operating loss of $600,000 and our Tools segment had an operating loss of $272,000.

Consolidated net income for the 2022 fiscal year was $98,000 compared to net income of $213,000 in the 2021 fiscal year.

Our effective tax rate for the 2022 and 2021 fiscal years was 16.4% and 20.3%, respectively.

Agricultural Products. Our Agricultural Products segment’s net sales for the 2022 fiscal year were $20,912,000 compared to $16,826,000 during the 2021 fiscal year, an increase of $4,086,000, or 24.3%. We continued to see strong commodity prices in fiscal 2022 which led to increased sales in grinder mixers, manure spreaders and our beet harvesting equipment for the second straight fiscal year. Our procurement team was able to navigate the difficult supply chain environment in fiscal 2022 and our production crew delivered on the increased demand.

Gross profit percentage for the 2022 fiscal year was 30.8% compared to 30.7% for the 2021 fiscal year. While the price of steel began to drop near the end of fiscal 2022, we saw component prices and manufacturing overhead increase in fiscal 2022. We utilized price increases to stay ahead of these rising costs in fiscal 2022 and maintain margins consistent with fiscal 2021. We also purchased three robotic weld cells and a high-definition plasma cutter in fiscal 2022 that we expect will increase manufacturing efficiencies, increase output and improve the quality of our products. We are focused on additional capital expenditures in fiscal 2023 to improve our operations as cash flow allows.

Our Agricultural Products segment’s operating expenses for the 2022 fiscal year were $5,239,000 compared to $4,571,000 for the 2021 fiscal year, an increase of $668,000, or 14.6%. Our selling expense accounted for approximately $70,000 of this increase as we added some key personnel to our sales team including a new director of sales, an inside salesman and an equipment support technician. We expect these roles to allow us to expand our dealer network and provide better customer support moving forward. Our general and administrative expenses increased approximately $525,000 from fiscal 2021. The increase was due to the addition of a quality technician, additional recruitment expense from the recruitment of our director of sales, additional computer contract expense as we began the transition to a cloud-based ERP system and salary increases to combat inflation for our employees. Our engineering expenses increased approximately $73,000 from fiscal 2021 due to increased salaries and benefit costs. Total income from operations for our Agricultural Products segment during the 2022 fiscal year was $1,205,000 compared to $599,000 for the 2021 fiscal year, an improvement of $606,000. While the increase in revenue largely drove the increase in operating income for fiscal 2022, our efforts to improve the business over the last few years put us in position to take advantage of better economic conditions. We focused heavily on improving our image in the agricultural industry through rebranding and customer satisfaction initiatives. We put added emphasis on quality and functionality of our products to meet our rugged customers’ demands. We’ve analyzed and diminished manufacturing inefficiencies that have bottlenecked our operations to allow for continued growth in the future.

Modular Buildings. Our Modular Buildings segment’s net sales for the 2022 fiscal year were $4,734,000 compared to $5,678,000 for the 2021 fiscal year, a decrease of $944,000, or 16.6%. The decrease in sales was due to a slow start to fiscal 2022 where we saw contract delays on active research project bids we expected to procure. Gross profit for the 2022 fiscal year was 10.5% compared to 17.7% during the 2021 fiscal year. The decrease in gross profit was due to rising construction material costs for projects under fixed price contracts. In addition, we incurred additional labor expense as we maintained higher staffing levels through the first six months of fiscal 2022 under the expectation that large research contracts would be underway in early fiscal 2022. Contract delays led to overstaffing and we were faced with a difficult decision to retain employees in a tough job market knowing demand in the modular building market would increase. Operating expenses for the 2022 fiscal year were $1,095,000 compared to $928,000 for the 2021 fiscal year, an increase of $167,000, or 18.0%. Our selling expense accounted for approximately $64,000 of this increase. With agricultural buildings being our primary source of revenue in fiscal 2022, we saw increased commissions in fiscal 2022 from these sales. We also had increased trade show participation in fiscal 2022. Our general and administrative expenses increased approximately $100,000 due to increased administrative wages as we added an additional project manager to help manage our project workload. Total loss from operations from our Modular Buildings segment during the 2022 fiscal year was $600,000 compared to operating income of $74,000 in the 2021 fiscal year.

Tools. Our Tools segment’s net sales for the 2022 fiscal year were $2,754,000 compared to $2,461,000 for the 2021 fiscal year, an increase of $293,000, or 11.9%. The increase in sales is due to price increases to partially cover rising material and manufacturing overhead costs coupled with increased demand in fiscal 2022. Gross profit for the 2022 fiscal year was 13.4% compared to 17.2% for the 2021 fiscal year. The decrease in gross profit was due to rising material input costs that outpaced our price increases along with manufacturing inefficiencies resulting from the competitive labor market and related shortages. Operating expenses were $640,000 for the 2022 fiscal year compared to $574,000 for the 2021 fiscal year, an increase of $66,000, or 11.5%. Our selling expenses accounted for approximately $19,000 of the increase primarily from an increase in commission expense and sales salaries. Our administrative expense was up $47,000 primarily from an increase in administrative wages and attendance related bonuses. Total loss from operations from our Tools segment during the 2022 fiscal year was $272,000 compared to operating loss of $150,000 in the 2021 fiscal year.

Trends and Uncertainties

We are subject to a number of trends and uncertainties that may affect our short-term or long-term liquidity, sales revenues, and operations. Similar to other farm equipment manufacturers, we are affected by items unique to the farm industry, including fluctuations in farm income resulting from the change in commodity prices, crop damage caused by weather and insects, government farm programs, interest rate fluctuations, and other unpredictable variables. Other uncertainties include our OEM customers and the decisions they make regarding their current supply chain structure, inventory levels, and overall business conditions. Management believes that our business is dependent on the farming industry for the bulk of our sales revenues. As such, our business tends to reap the benefits of increases in farm net income, as farmers tend to purchase equipment in lucrative times and forgo purchases in less profitable years. Direct government payments have been increasing in the past two years and costs of agricultural production are increasing; therefore, we anticipate that further increases in the value of production will benefit our business, while any future decreases in the value of production will decrease farm net income and may negatively affect our financial results.

As with other farm equipment manufacturers, we depend on our network of dealers to influence customers’ decisions, and dealer influence is often more persuasive than a manufacturer’s reputation or the price of the product.

Seasonality

Sales of our agricultural products are seasonal; however, we have tried to decrease the impact of this seasonality through the development of beet harvesting machinery, as the peak periods for these products occur at different times.

We believe that our tool sales are not seasonal. Our modular building sales are somewhat seasonal, and we believe that this is due to the budgeting and funding cycles of the universities that commonly purchase our modular buildings. We believe that this cycle can be offset by building backlogs of inventory, by increasing sales to other public and private sectors and by creating repeatable business opportunities.

Liquidity and Capital Resources

Our main source of funds during the 2022 fiscal year was cash generated by operating activities. Deposits from our early program and use of trade payables funded our operations in fiscal 2022. We used these funds to increase inventory levels for the second straight year to meet increasing demand and to stay ahead of supply chain delays. We used approximately $2,445,000 in fiscal 2022 for purchases of property (including finance lease assets), plant and equipment, primarily facility upgrades and manufacturing equipment to improve efficiency. We also used proceeds from an investor under a common stock purchase agreement to help with cash flow needs in fiscal 2022. We expect to use cash in fiscal 2023 to acquire additional equipment to improve our shop output and efficiency. These additions will be key to improving quality, increasing manufacturing output to fulfill customer demand and ultimately, we expect it to allow us to be more competitive in our industry. We expect our primary capital needs for fiscal 2023 to be for inventory purchases and the retirement of debt.

We received approximately $369,000 from Iowa Economic Development’s Manufacturing 4.0 program in Q3 of fiscal 2022. The funds for this award are provided by the State and Local Fiscal Recovery Fund, part of the American Rescue Plan. The total amount of award available to the Company is $500,000 for which the Iowa Economic Development reimburses the Company for 75% of eligible capital expenditures that increase automation or increase operational efficiency. The Company is required to submit quarterly reports to the Iowa Economic Development through April 30, 2027 under this program and the funds are available for purchases through December 31, 2024.

We have a Bank Midwest credit facility consisting of a $5,000,000 revolving line of credit, pursuant to which we had borrowed $3,924,500, with $1,075,500 remaining, as of November 30, 2022, and two term loans, which had outstanding principal balances of $2,165,554 and $344,932 as of November 30, 2022. The revolving line of credit is being used for working capital purposes. We also have three Economic Injury Disaster Loans provided by the U.S. Small Business Administration with an aggregate principal balance of $491,433 as of November 30, 2022.

Our loans require us to comply with various covenants, including maintaining certain financial ratios and obtaining prior written consent from Bank Midwest for any investment in, acquisition of, or guaranty relating to another business or entity. We were out of compliance with our debt to worth ratio covenant in place under the Bank Midwest loans as of November 30, 2022. Bank Midwest has issued a waiver forgiving the noncompliance as of November 30, 2022, and in turn waived the event of default.

For additional information about our financing activities, please refer to Note 9 “Loan and Credit Agreements” to our financial statements in “Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” of this report.

The following table represents our working capital and current ratio as of the end of the past two fiscal years:

We believe that our current cash and financing arrangements will provide sufficient cash to finance operations for the next 12 months. We expect to continue to rely on cash from financing activities to supplement our cash flows from operations in order to meet our liquidity and capital expenditure needs in the near future. We expect to continue to be able to procure financing upon reasonable terms.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ART’S-WAY MANUFACTURING CO., INC.

Consolidated Balance Sheets

See accompanying Report of Independent Registered Public Accounting Firm and notes to consolidated financial statements.

ART’S-WAY MANUFACTURING CO., INC.

Consolidated Statements of Operations

See accompanying Report of Independent Registered Public Accounting Firm and notes to consolidated financial statements.

ART’S-WAY MANUFACTURING CO., INC.

Consolidated Statements of Stockholders' Equity

Years Ended November 30, 2022 and 2021

See accompanying Report of Independent Registered Public Accounting Firm and notes to consolidated financial statements.

ART’S-WAY MANUFACTURING CO., INC.

Consolidated Statements of Cash Flows

See accompanying Report of Independent Registered Public Accounting Firm and notes to consolidated financial statements.

Art’s-Way Manufacturing Co., Inc.

Notes to Consolidated Financial Statements

Art’s-Way Manufacturing Co., Inc. (the “Company”) is primarily engaged in the fabrication and sale of specialized farm machinery in the agricultural sector of the United States. Primary product offerings include portable and stationary animal feed processing equipment; hay and forage equipment; sugar beet harvesting equipment; dirt work equipment and manure spreaders. The Company sells its labeled products through independent farm equipment dealers throughout the United States. The Company also provides after-market service parts that are available to keep its branded and OEM-produced equipment operating to the satisfaction of the end user of the Company’s products.

The Company’s Modular Buildings segment is primarily engaged in the construction of modular laboratories and animal housing facilities through the Company’s wholly-owned subsidiary, Art’s-Way Scientific, Inc. Buildings commonly produced range from basic swine buildings to complex containment research laboratories. This segment also provides services relating to the design, manufacturing, delivering, installation, and renting of the building units that it produces.

The Company’s Tools segment is a domestic manufacturer and distributor of standard single point brazed carbide tipped tools as well as PCD (polycrystalline diamond), CBN (cubic boron nitride) inserts and OEM specialty tools through the Company’s wholly-owned subsidiary, Ohio Metal Working Company/Art’s-Way, Inc.

The consolidated financial statements include the accounts of Art’s-Way Manufacturing Co., Inc. and its wholly-owned subsidiaries for the 2022 fiscal year, which includes Art’s-Way Scientific, Inc., and Ohio Metal Working Products/Art’s-Way, Inc. All inter-company accounts and transactions are eliminated in consolidation.

The Company maintains several different accounts at one bank, and balances in these accounts could periodically exceed the federally insured limits. However, management believes the risk of loss to be low.

During the 2022 and 2021 fiscal years, one customer accounted for more than 11% and 8%, respectively, of consolidated revenues.

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written-off when deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded when received. Accounts receivable are generally considered past due 60 days past invoice date, with the exception of international sales which primarily are sold with 180 day terms backed by export insurance.

The Company offered floorplan terms in its Agricultural Products segment during its Fall 2021 early order program to incentivize customers to stock farm equipment on their lots during the 2022 fiscal year. Floorplan terms allow customers to pay the Company at the earliest of retail date or 180 days. The Company had approximately $1,033,000 in accounts receivable at November 30, 2022 that was part of its floorplan program on extended terms compared to $0 for the year ended November 30, 2021.

Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Trade receivables are stated at the amount billed to the customer. The Company charges interest on overdue customer account balances at a rate of 1.5% per month. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.

Inventories are stated at the lower of cost or net realizable value, and cost is determined using the standard costing method. Management monitors the carrying value of inventories using inventory control and review processes that include, but are not limited to, sales forecast review, inventory status reports, and inventory reduction programs. The Company records inventory write downs to net realizable value based on expected usage information for raw materials and historical selling trends for finished goods. Additional write downs may be necessary if the assumptions made by management do not occur.

Property, plant, and equipment are recorded at cost. Depreciation of plant and equipment is provided using the straight-line method, based on the estimated useful lives of the assets which range from three to 40 years.

Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable.

For property, plant and equipment used in operations, including lease assets and assets held for lease, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.

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

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. 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. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term while finance lease ROU assets are amortized on a straight-line basis and interest expense is recorded 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 leases with an initial term of twelve months or less. The Company recognizes variable costs that depend on usage in profit or loss as they are incurred.

The components of operating leases on the Consolidated Balance Sheets at November 30, 2022 and November 30, 2021 were as follows:

The Company recorded $20,121 of operating lease expense in the year ended November 30, 2022 compared to $22,445 in the same period of fiscal 2021, including variable costs tied to usage. The Company’s operating leases carry a weighted average lease term of 39 months and have a weighted average discount rate of 5.50%

Future maturities of operating lease liabilities as of November 30, 2022 are as follows:

The components of finance leases on the Consolidated Balance Sheets on November 30, 2022 and November 30, 2021 were as follows:

The Company received $224,513 of grant funds from the Iowa Economic Development’s Manufacturing 4.0 program in Q3 of fiscal 2022. These funds were for 75% reimbursement of three robotic welders that were later financed under a capital lease. These funds have reduced the right-of-use asset account and will reduce amortization over the life of the asset.

Future maturities of finance lease liabilities as of November 30, 2022 are as follows:

The weighted average lease term of the Company’s finance leases are 50 months while the weighted average rate of finance leases is 4.18%. The Company incurred $124,256 of amortization expense from ROU assets related to finance leases in fiscal 2022 compared to $9,356 in fiscal 2021.

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. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is entirely dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

The Company classifies interest and penalties to be paid on an underpayment of taxes as income tax expense. The Company files income tax returns in the U.S. federal jurisdiction and various states and previously in Canada. The Company is no longer subject to Canadian, U.S. federal or state income tax examinations by tax authorities for years ended before November 30, 2019.

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. Revenues recognized at the completion of production in the 2021 and 2020 fiscal years were approximately $1,010,000 and $711,000 respectively.

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, estimated gross profit and customer deposits. The balance of contract assets is typically made up of the balance of costs and estimated gross profit in excess of billings. Costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities.

The Agricultural Products segment offers variable consideration in the form of discounts depending on participation in yearly early order programs. This variable consideration is allocated to the transaction price of all products in a sales arrangement and is not contingent on future outcomes. The Agricultural Products segment does not offer rebates or credits. The 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 8 “Product Warranty.”

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.

The Company offered floorplan terms in its Agricultural Products segment during its Fall 2021 early order program to incentivize customers to stock farm equipment on their lots in fiscal 2022. Floorplan terms allow customers to pay the Company at the earliest of retail date or 180 days. This program has an effect on the timing of the Company’s fiscal 2022 cash flows compared with historical cash flows.

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

The amount of revenue recognized in fiscal year 2022 that was included in a contract liability at November 30, 2021 was approximately $559,000 compared to $474,000 for the prior year. The beginning balance of contract receivables, assets and liabilities at December 1, 2020 was $2,391,000; $56,000 and $474,000, respectively. The change in contract receivables reflected above results from contract billings for all three segments as performance obligations are met. The increase in contract assets on November 30, 2022 is due to construction costs in excess of billings on contracts in the Modular Buildings segment. Contract liabilities include customer deposits and billings in excess of cost and profit on the consolidated balance sheets. Contract liabilities have increased due to customer deposits received on the Agricultural Products segment as part of our fall early order program that offers cash discounts for equipment deposits.

The Company will utilize the practical expedient exception for these contracts and will report only on performance obligations greater than one year. As of November 30, 2022, and November 30, 2021, the Company has no performance obligations with an original expected duration greater than one year.

Research and development costs are expensed when incurred. Such costs approximated $193,000 and $152,000 for the 2022 and 2021 fiscal years, respectively. Research and development costs are included in engineering expenses on the Consolidated Statements of Operations.

Advertising costs are expensed when incurred. Such costs approximated $190,000 and $163,000 for the 2022 and 2021 fiscal years, respectively. Advertising costs are included in selling expenses on the Consolidated Statements of Operations.

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

Basic and diluted income per common share have been computed based on the following as of November 30, 2022 and 2021:

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 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. Restricted stock is valued at market value at the day of grant.

Management has made a number of estimates and assumptions related to the reported amount of assets and liabilities, reported amount of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.

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 smaller reporting entities 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 year 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.                  

A summary of the Company’s activity in the allowance for doubtful accounts is as follows:

Major classes of inventory are:

Amounts included in the consolidated financial statements related to uncompleted contracts are as follows:

The amounts billed on long-term contracts are due 30 days from invoice date. All amounts billed are expected to be collected within the next 12 months. Retainage included in accounts receivable was $4,087 and $0 as of November 30, 2022 and 2021, respectively.

Major classes of property, plant, and equipment are:

Depreciation and amortization expense totaled $807,163 and $613,409 for the 2022 and 2021 fiscal years, respectively. These totals include amortization of right-of-use assets on finance leases as discussed in Note 1 “Summary of Significant Accounting Policies” section (h) “Leases” above.

Major components of assets held for lease are:

The Company’s Modular Buildings segment enters into leasing arrangements with customers from time-to-time. The Company had five buildings in assets held for lease for the year ending November 30, 2022 and seven buildings for the year ended November 30, 2021.

Two modular buildings held for lease were sold in fiscal 2022 for $383,904. The company incurred a gain of approximately $150,069 on the sale of the assets.

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 $61,534 of rents recognized from assets held for lease included in sales on the Consolidated Statements of Operations during the 2022 fiscal year compared to none in the 2021 fiscal year.

The future minimum lease receipts from assets held for lease on November 30, 2022 are as follows:

Major components of accrued expenses are:

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.

Changes in the Company’s product warranty liability included in accrued expenses for the 2022 and 2021 fiscal years are as follows:

Bank Midwest Revolving Lines of Credit and Term Loans

The Company maintains a $5,000,000 revolving line of credit (the “Line of Credit”) and previously maintained a $550,000 revolving line of credit (the “Reserve Line of Credit”) with Bank Midwest. The Reserve Line of Credit expired on November 30, 2022 and was used for additional working capital. On November 30, 2022, the balance of the Line of Credit was $3,924,500 with $1,075,500 remaining available, as may be 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 net inventory, less any outstanding loan balance on the Line of Credit. On November 30, 2022, the Line of Credit was not limited by the borrowing base calculation. Any unpaid principal amount borrowed on the Line of Credit accrues interest at a floating rate per annum equal to 1.50% 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 9.25% per annum following continued increases in fiscal 2022. The Line of Credit was most recently renewed on March 28, 2022. The Line of Credit matures on March 30, 2023 and requires monthly interest-only payments. The unpaid principal amount borrowed on the Reserve Line of Credit accrued interest at a floating rate per annum equal to 2.0% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The Reserve Line of Credit matured on November 30, 2022 and is closed. The Line of Credit is governed by the terms of a Promissory Note, dated March 28, 2022, entered into between the Company and Bank Midwest. The Reserve Line of Credit was governed by the terms of a Promissory Note, dated May 13, 2022, entered into between the Company and Bank Midwest.

The Company carries a $2,600,000 term loan with Bank Midwest due October 1, 2037 (the “Term Loan”), and a $350,000 term loan (the “Roof Term Loan”) due on May 15, 2027. The Term Loan accrued interest at a rate of 5.00% for the first ninety months, which ended on September 28, 2022. Thereafter, the Term Loan accrues 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. The current interest rate is 7.00%. Monthly payments of $19,648 in 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. The J. Ward McConnell Jr. Living Trust, the estate of the former 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. The Term Loan is governed by the terms of a Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest.

In connection with the 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 Line of Credit, as set forth in Commercial Guaranties, each dated September 28, 2017.

The Company also entered into the Roof Term Loan of $350,000 with Bank Midwest on May 17, 2022. The Roof Term Loan’s proceeds were used to fix sections of the Armstrong facility’s roof. The Roof Term Loan requires 59 regular payments of $2,972 and an estimated balloon payment of $269,517 on the maturity date of May 15, 2027. Any unpaid principal amount borrowed on the Roof Term Loan accrues interest at a floating rate per annum equal to 2.00% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 5.00% per annum and the current interest rate is 9.75% per annum. The Roof Term Loan is governed by the terms of a Promissory Note, dated May 17, 2022, 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.

To further secure the 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 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 on November 30. The terms of the Bank Midwest loan agreements require the Company to maintain a minimum of $4,000,000 of monthly 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 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 twelve months ended November 30, 2022. The Company was out of compliance with its debt to worth ratio by fifteen percentage points on the Bank Midwest loans as of November 30, 2022. Bank Midwest issued a waiver forgiving the noncompliance, and in turn waived the event of default. The next measurement date is November 30, 2023 for all covenants except the monthly working capital requirement.

SBA Economic Injury Disaster Loans

In June of 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 being 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 beginning June 18, 2022 (thirty-six months from the date of the EIDLs) and June 24, 2022 in the amount of $731 per EIDL. On March 11, 2021, the American Rescue Plan Act of 2021 was enacted, which extended the first due date for repayment of EIDLs made in 2020 from 12 months to 24 months from the date of the note. 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.

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

A summary of the minimum maturities of term debt follows for the years ending November 30:

During the 2022 and 2021 fiscal years, 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 in which Marc McConnell, the Chairman of the Company’s Board of Directors, has an ownership interest and also serves as President. J. Ward McConnell Jr.’s estate, the J. Ward McConnell, Jr. Living Trust, is paid a monthly fee to guarantee a portion of the Company’s term debt in accordance with the USDA guarantee obtained on the Company’s term debt. In the 2022 fiscal year, the Company recognized $23,880 of expense for transactions with related parties, compared to $26,368 in the 2021 fiscal year. As of November 30, 2022, accrued expenses contained a balance of $1,348 owed to a related party compared to $1,407 on November 30, 2021.

The Company sponsors a defined contribution 401(k) savings plan which covers substantially all full-time employees who meet eligibility requirements. Participating employees may contribute as salary reductions any amount of their compensation up to the limit prescribed by the Internal Revenue Code. The Company makes a 50% matching contribution to employees up to 3% of eligible compensation. The Company recognized an expense of $116,603 and $77,010 related to this plan during the 2022 and 2021 fiscal years, respectively.

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. 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.

Shares issued under the 2020 Plan for the years ended November 30, 2022 and 2021 are as follows:

Book and tax stock-based compensation expense for the years ended November 30, 2022 and 2021 are as follows:

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 years ended November 30, 2022 or 2021.

The following is a summary of activity under the plans as of November 30, 2022 and 2021, and changes during the years then ended:

2022 Option Activity

2021 Option Activity

On March 29, 2022, Art’s-Way Manufacturing Co., Inc. (the “Company”) entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Alumni Capital LP, a Delaware limited partnership (“Alumni Capital”), pursuant to which the Company agreed to sell, and Alumni Capital agreed to purchase, upon request of the Company in one or more transactions, a number of shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”) providing aggregate gross proceeds to the Company of up to $3,000,000 (the “Maximum”). The Purchase Agreement expires upon the earlier of the aggregate gross proceeds from the sale of shares meeting the Maximum or June 30, 2023.

Among other limitations, unless otherwise agreed upon by Alumni Capital, each sale of shares will be limited to 50,000 shares and further limited to no more than the number of shares that would result in the beneficial ownership by Alumni Capital and its affiliates, at any single point in time, of more than 9.99% of the then-outstanding shares of Common Stock. Alumni Capital will purchase the shares of Common Stock under the Agreement at a discount ranging from 3-5% of the lowest traded price of the Common Stock in the five business days preceding the Company delivering notice of the required purchase of shares to Alumni Capital.

In exchange for Alumni Capital entering into the Purchase Agreement, the Company issued 20,000 shares of Common Stock to Alumni Capital upon execution of the Purchase Agreement (the “Initial Commitment Shares”) and issued another 20,000 shares in connection with the first closing under the Purchase Agreement (with the Initial Commitment Shares, the “Commitment Shares”). Alumni Capital represented to the Company, among other things, that it was an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)). The Company shares of Common Stock, including the Commitment Shares, are being offered and sold under the Purchase Agreement in reliance upon an exemption from the registration requirements of the Securities Act afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. The securities sold may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The Purchase Agreement provided that the Company file a registration statement under the Securities Act covering the resale of the shares issued to Alumni Capital. Alumni Capital’s obligation to purchase shares of Common Stock under the Purchase Agreement is conditioned upon, among other things, the registration statement having been declared effective by the Securities and Exchange Commission. The Company filed a registration statement on Form S-3 (the “Registration Statement”) April 27, 2022 which was declared effective on August 9, 2022 by the SEC.

The Company evaluated the embedded options and believe they should not be bifurcated from the agreement and accounted for separately as it is indexed to the Company’s stock and would qualify for equity treatment on the balance sheet.

The Company incurred approximately $203,000 of expense related to equity issuance in the twelve months ended November 30, 2022 in the form of 40,000 commitment shares valued at approximately $160,000, attorney fees for the negotiation and execution of the Purchase Agreement and the preparation and filing of the registration statement. These equity issuance costs have reduced proceeds received under the common stock purchase agreement in additional paid in capital.

Below is a summary of shares purchased by Alumni Capital under this agreement as of the filing date of this report:

The Company has $2,454,472 of funding under the common stock purchase agreement that can be utilized as of November 30, 2022.

Total income tax expense for the 2022 and 2021 fiscal years consists of the following:

The reconciliation of the statutory Federal income tax rate is as follows:

Tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) on November 30, 2022 and 2021 are presented as approximate amounts below:

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company has net operating losses amounting to approximately $4,496,000 and tax credit carryforward amounting to approximately $109,000 for its U.S. operations that will expire on November 30, 2036, 2037, 2038, 2039 and 2040. The Company has another $4,869,000 of net operating losses that can be carried forward indefinitely. Management believes that the Company will be able to utilize the U.S. net operating losses and credits before their expiration.

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. On November 30, 2022 and November 30, 2021, the carrying amount approximated fair value for cash, accounts receivable, operating and finance 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 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.

There are three reportable segments: Agricultural Products, Modular Buildings, and Tools. The Agricultural Products segment fabricates and sells farming products as well as replacement parts for these products in the United States and worldwide. The Modular Buildings segment produces 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.

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

Management evaluated all other activity of the Company and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

Item 9A. 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 November 30, 2022. Our management has concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of management, including the persons serving as our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of November 30, 2022.

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

Limitations on Controls

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

Changes to Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended November 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. OTHER INFORMATION.

None.

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by Item 10 is incorporated by reference to the sections entitled “Questions and Answers about the 2023 Annual Meeting and Voting,” “Election of Directors,” “Delinquent Section 16(a) Reports,” “Corporate Governance,” and “Executive Officers” in our definitive proxy statement relating to our 2023 Annual Meeting of Stockholders.

Item 11. EXECUTIVE COMPENSATION.

The information required by Item 11 is incorporated by reference to the sections entitled “Executive Compensation” and “Director Compensation” in our definitive proxy statement relating to our 2023 Annual Meeting of Stockholders.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by Item 12 is incorporated by reference to the sections entitled “Security Ownership of Principal Stockholders,” “Security Ownership of Directors and Management” and “Equity Compensation Plan Information” in our definitive proxy statement relating to our 2023 Annual Meeting of Stockholders.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by Item 13 is incorporated by reference to the sections entitled “Corporate Governance” and “Certain Transactions and Business Relationships” in our definitive proxy statement relating to our 2023 Annual Meeting of Stockholders.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 is incorporated by reference to the section entitled “Independent Registered Public Accountant Firm” in our definitive proxy statement relating to our 2023 Annual Meeting of Stockholders.

PART IV

Item 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

Report of Eide Bailly, LLP (PCAOB ID 286) on Consolidated Financial Statements as of November 30, 2022 and 2021

Consolidated Balance Sheets as of November 30, 2022 and 2021

Consolidated Statements of Operations for each of the years ended November 30, 2022 and 2021

Consolidated Statements of Stockholders’ Equity for each of the years ended November 30, 2022 and 2021

Consolidated Statements of Cash Flows for each of the years ended November 30, 2022 and 2021

Notes to Consolidated Financial Statements

(B) Financial Statement Schedules.

Not applicable.

(C) Exhibits.

Item 16.          FORM 10-K SUMMARY.

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

POWER OF ATTORNEY

Each person whose signature appears below appoints DAVID A. KING his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agent, or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.