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

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

The Company has organized its business into three operating segments. Management separately evaluates the financial results of each segment because each is a strategic business unit offering different products and requiring different technology and marketing strategies. The Agricultural Products segment manufactures and sells farm equipment and related replacement parts under the Art’s-Way Manufacturing label and private labels. The Modular Buildings segment manufactures and installs modular buildings for animal containment and various laboratory uses, and the Tools segment manufactures steel cutting tools and inserts.

 i Statement Presentation

The foregoing condensed consolidated financial statements of the Company are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and operating results for the interim periods. The financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2021. The results of operations for the three and six months ended May 31, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2022.

 i Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the three months and six months ended May 31, 2022. Actual results could differ from those estimates.

 i Recently Issued Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

Measurement of Credit Losses on Financial Instruments

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

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. Floorplan terms allow customers to pay the Company at the earliest of retail date or 180 days. This program has an affect 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 Condensed Consolidated Balance Sheets.

The amount of revenue recognized in the first six months of fiscal 2022 that was included in a contract liability on November 30, 2021 was approximately $ i 559,000. $ i 276,000 of revenue was recognized in the first six months of fiscal 2021 while the contract liability balance at November 30, 2020 was $ i 474,000. The decrease in contract receivables on May 31, 2022 is due to normal collection cycle of receivables in the first two quarters of fiscal 2022. Contract liabilities increased significantly during the six months ended May 31, 2022 as the Company received a large amount of deposits on its fall and spring early order programs.

The Company utilizes the practical expedient exception for these contracts and will report only on performance obligations greater than one year. As of May 31, 2022, the Company has no performance obligations with an original expected duration greater than one year.

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

Basic and diluted net income (loss) per share have been computed based on the following as of May 31, 2022 and May 31, 2021:

Major classes of inventory are:

Major components of accrued expenses are:

Major components of assets held for lease are:

There were no rents recognized from assets held for lease included in sales on the Condensed Consolidated Statements of Operations during the three and six months ended May 31, 2022 and May 31, 2021.

The Company has two of the seven rental buildings under lease agreements as of July 5, 2022.

The future minimum lease receipts from assets held for lease for periods after May 31, 2022 are as follows:

On June 14, 2022, the Company received a purchase order in the amount of $ i 383,904 for the purchase of two rental buildings in the Company’s fleet.

The Company offers warranties of various lengths to its customers depending on the specific product and terms of the customer purchase agreement. The average length of the warranty period is one year from the date of purchase. The Company’s warranties require it to repair or replace defective products during the warranty period at no cost to the customer. Product warranty is included in the price of the product and provides assurance that the product will function in accordance with agreed-upon specifications. It does not represent a separate performance obligation under ASC 606. The Company records a liability for estimated costs that may be incurred under its warranties. The costs are estimated based on historical experience and any specific warranty issues that have been identified. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the balance as necessary. The accrued warranty balance is included in accrued expenses as shown in Note 7 “Accrued Expenses.” Changes in the Company’s product warranty liability for the three and six months ended May 31, 2022 and May 31, 2021 are as follows:

The Company was carrying a larger warranty accrual in fiscal 2021 than historically reported due to a large construction project in the Modular Buildings segment. The warranty period for this project closed on April 9, 2022.

Bank Midwest Revolving Lines of Credit

The Company maintains a $ i 5,000,000 revolving line of credit (the “Line of Credit”) and a $ i 550,000 revolving line of credit (the “Reserve Line of Credit”), both used for working capital purposes. The Reserve Line of Credit funds will remain undisbursed until all funds on the Line of Credit are used. On May 31, 2022, the combined balance of the Line of Credit and Reserve Line of Credit was $ i 4,703,225 with $ i 846,775 remaining available, as may be limited by the borrowing base calculation. The Line of Credit borrowing base is an amount equal to  i 75% of accounts receivable balances (discounted for aged receivables), plus  i 50% of net inventory, less any outstanding loan balance on the Line of Credit. On May 31, 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  i 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  i 4.25% per annum and the current interest rate is  i 6.25% per annum following several increases in the 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. Any unpaid principal amount borrowed on the Reserve Line of Credit accrues interest at a floating rate per annum equal to  i 2.0% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at  i 4.00% per annum and the current interest rate is  i 6.75% per annum. The Reserve Line of Credit matures on November 30, 2022 and any unpaid balance will need to be repaid at that time. The Line of Credit is governed by the terms of a Promissory Note, dated February 11, 2021, entered into between the Company and Bank Midwest. The Reserve Line of Credit 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 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.

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.

The Reserve Line of Credit is secured by any and all security documents between the Company and Bank Midwest.

Bank Midwest Term Loans

The Company carries a $ i 2,600,000 term loan due October 1, 2037 (the “Term Loan”), and a $ i 350,000 term loan (the “Roof Term Loan”) due on May 15, 2027. The Term Loan accrues interest at a rate of  i 5.00% for the first sixty months, which will end on September 28, 2022. Thereafter, the Term Loan will accrue interest at a floating rate per annum equal to  i 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  i 4.15% per annum and the interest rate may only be adjusted by Bank Midwest once every five years. Monthly payments of $ i 17,271 for principal and interest are required. The Term Loan is also guaranteed by the United States Department of Agriculture (“USDA”), which required an upfront guarantee fee of $ i 62,400 and requires an annual fee of  i 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  i 20% of the Company’s outstanding stock, is guaranteeing approximately  i 38% of the Term Loan, for an annual fee of  i 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 Company also entered into the Roof Term Loan of $ i 350,000 on May 17, 2022. The Roof Term Loan’s proceeds are being used to fix sections of the Armstrong facility’s roof. The Roof Term Loan requires  i 59 regular payments of $ i 2,972 and an estimated balloon payment of $ i 268,176 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  i 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  i 5.00% per annum and the current interest rate is  i 6.75% per annum. The Term Loan is governed by the terms of a Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest. 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.

Compliance

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 the following Bank Midwest covenants is measured annually at November 30. A maximum debt to worth ratio of  i 1 to 1 must be maintained, with a minimum of  i 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  i 0.10 tolerance. The Company also must receive bank approval for purchases or sales of individual equipment over $ i 50,000 individually and maintain reasonable salaries and owner compensation. The Company was out of compliance with its debt to worth ratio covenant in place under the Bank Midwest loan agreements as of November 30, 2021. Bank Midwest issued a waiver forgiving the noncompliance, and in turn waived the event of default. The next measurement date is November 30, 2022.

The Company also has a minimum working capital requirement of $ i 4,000,000 that is measured monthly. The $ i 4,000,000 working capital level serves as a trigger point for Bank Midwest and the Company to continue discussion of capital raising strategies to support additional capital injection. As of May 31, 2022, the Company was in compliance with its working capital requirement.

SBA Economic Injury Disaster Loans

The Company secured three loans in the amount of $ i 150,000 each in June of 2021 with the U.S. Small Business Administration under its Economic Injury Disaster Loan (“EIDL”) program. Proceeds from the EIDLs were used for working capital purposes. Interest accrues at the rate of  i 3.75% per annum and will accrue from the date of inception. Installment payments, including principal and interest, are due monthly, thirty months from the date of disbursement, in the amount of $ i 731 per loan. The balance of principal and interest is payable  i 30 years from the date of disbursement. 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:

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.

During the three and six months ended May 31, 2022, and May 31, 2021, 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 three and six months ended May 31, 2022, the Company recognized $ i 6,203 and $ i 15,552 of expense for transactions with related parties, respectively, compared to $ i 7,992 and $ i 12,661 for the three and six months ended May 31, 2021. As of May 31, 2022, accrued expenses contained a balance of $ i 1,423 owed to a related party compared to $ i 1,483 on May 31, 2021.

The Company recorded $ i 5,192 and $ i 10,035 of operating lease costs in the three and six months ended May 31, 2022, respectively, which included variable costs tied to usage, compared to $ i 5,909 and $ i 11,989 for the three and six months ended May 31, 2021.The Company’s operating leases carry a weighted average lease term of  i 46 months and have a weighted average discount rate of  i 4.88%

Future maturities of operating lease liabilities are as follows:

The components of finance leases on the Consolidated Balance Sheets on May 31, 2022 and November 30, 2021 were as follows:

Future maturities of finance lease liabilities as of May 31, 2022 are as follows: