As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 4/09/21  Arts Way Manufacturing Co. Inc.   10-Q        2/28/21   77:4M                                     RDG Filings/FA

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                (Unaudited)                                                      
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                Compensation                                                     
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

or

 

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

 

Commission File No. 000-05131

 

ART’S-WAY MANUFACTURING CO., INC.

(Exact name of registrant as specified in its charter)

 

	DELAWARE	42-0920725
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

5556 Highway 9 Armstrong, Iowa 50514

(Address of principal executive offices) (Zip Code)

 

(712) 864-3131

(Registrant’s telephone number, including area code)

 

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock $.01 par value	ARTW	The Nasdaq Stock Market LLC

 

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

Yes ☒ No ☐

 

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

Yes ☒ No ☐

 

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

 

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

 

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

☐

 

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

 

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

 

 

Art’s-Way Manufacturing Co., Inc.

Index

 

Page No.

 

 

PART I – FINANCIAL INFORMATION

1

 

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

 

PART II – OTHER INFORMATION

24

 

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

 

 

 

		February 28, 2021				November 30, 2020
Assets
Current assets:
Cash		$	3,890			$	2,684
Accounts receivable-customers, net of allowance for doubtful accounts of $25,974 and $51,175 in 2021 and 2020, respectively			1,681,025				2,390,604
Inventories, net			7,902,244				7,762,400
Cost and profit in excess of billings			293,504				56,026
Net investment in sales-type leases, current			14,283				28,352
Other current assets			295,719				61,284
Total current assets			10,190,665				10,301,350
Property, plant, and equipment, net			5,222,809				5,218,662
Assets held for lease, net			521,555				521,555
Deferred income taxes			2,765,099				2,667,686
Other assets			81,642				93,760
Total assets		$	18,781,770			$	18,803,013
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	1,768,294			$	1,955,404
Customer deposits			1,377,421				198,225
Billings in excess of cost and profit			115,784				276,226
Income taxes payable			5,000				1,100
Accrued expenses			1,198,185				1,279,312
Line of credit			1,875,530				2,359,530
Current portion of long-term debt			91,336				94,979
Total current liabilities			6,431,550				6,164,776
Long-term liabilities
Long-term portion of operating lease liabilities			15,874				18,342
Long-term debt, excluding current portion			2,699,081				2,713,150
Total liabilities			9,146,505				8,896,268
Commitments and Contingencies (Notes 7, 9 and 10)
Stockholders’ equity:
Undesignated preferred stock - $0.01 par value. Authorized 500,000 shares in 2021 and 2020; issued and outstanding 0 shares in 2021 and 2020.			-				-
Common stock – $0.01 par value. Authorized 9,500,000 shares; issued 4,563,504 and 4,470,004 at February 28, 2021 and November 30, 2020, respectively			45,635				44,700
Additional paid-in capital			3,557,362				3,496,243
Retained earnings			6,128,618				6,443,856
Treasury stock, at cost (40,667 in 2021 and 35,097 in 2020 shares)			(96,350	)			(78,054	)
Total stockholders’ equity			9,635,265				9,906,745
Total liabilities and stockholders’ equity		$	18,781,770			$	18,803,013

 

		Three Months Ended
		February 28, 2021				February 29, 2020
Sales		$	5,400,572			$	5,025,924
Cost of goods sold			4,357,894				4,048,762
Gross profit			1,042,678				977,162
Expenses:
Engineering			121,391				109,852
Selling			472,974				455,684
General and administrative			816,836				881,322
Total expenses			1,411,201				1,446,858
(Loss) from operations			(368,523	)			(469,696	)
Other income (expense):
Interest expense			(58,684	)			(83,274	)
Other			27,657				9,199
Total other income (expense)			(31,027	)			(74,075	)
Income (loss) before income taxes			(399,550	)			(543,771	)
Income tax (benefit)			(84,312	)			(106,579	)
Net Income (Loss)			(315,238	)			(437,192	)

 

		Common Stock								Additional								Treasury Stock
		Number of								paid-in				Retained				Number of
		shares				Par value				capital				earnings				shares				Amount				Total
Balance, November 30, 2019			4,321,087			$	43,211			$	3,250,087			$	8,547,342				18,842			$	(47,058	)		$	11,793,582
Stock based compensation			53,750				537				37,043				-				10,517				(19,064	)			18,516
Net (loss)			-				-				-				(437,192	)			-				-				(437,192	)
Balance, February 29, 2020			4,374,837				43,748				3,287,130				8,110,150				29,359				(66,122	)			11,374,906

		Common Stock								Additional								Treasury Stock
		Number of								paid-in				Retained				Number of
		shares				Par value				capital				earnings				shares				Amount				Total
Balance, November 30, 2020			4,470,004			$	44,700			$	3,496,243			$	6,443,856				35,097			$	(78,054	)		$	9,906,745
Stock based compensation			93,500				935				61,119				-				5,570				(18,296	)			43,758
Net (loss)			-				-				-				(315,238	)			-				-				(315,238	)
Balance, February 28, 2021			4,563,504				45,635				3,557,362				6,128,618				40,667				(96,350	)			9,635,265

 

		Three Months Ended
		February 28, 2021				February 29, 2020
Cash flows from operations:
Net (loss)		$	(315,238	)		$	(437,192	)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities:
Stock based compensation			62,054				37,580
Decrease in obsolete inventory reserves			(216,795	)			(118,974	)
Gain on disposal of property, plant, and equipment			(8,000	)			(1,251	)
Depreciation and amortization expense			161,107				227,456
Accrued interest on deferred debt payments			4,161				-
Change in allowance for doubtful accounts			25,201				10,215
Deferred income taxes			(97,413	)			(125,253	)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			684,378				(987,521	)
Inventories			76,951				(416,948	)
Net investment in sales-type leases			14,069				37,231
Other assets			(225,977	)			(191,484	)
Increase (decrease) in:
Accounts payable			(187,110	)			349,256
Contracts in progress, net			(397,920	)			559,252
Customer deposits			1,179,196				116,906
Income taxes payable			3,900				17,581
Accrued expenses			(81,262	)			(36,982	)
Net cash provided by (used in) operating activities			681,302				(960,128	)
Cash flows from investing activities:
Purchases of property, plant, and equipment			(163,927	)			(267,141	)
Net proceeds from sale of assets			8,000				1,251
Net cash used in investing activities			(155,927	)			(265,890	)
Cash flows from financing activities:
Net change in line of credit			(484,000	)			1,266,000
Repayment of term debt			(21,873	)			(20,776	)
Repurchases of common stock			(18,296	)			(19,064	)
Net cash provided by (used in) financing activities			(524,169	)			1,226,160
Net increase in cash			1,206				142
Cash at beginning of period			2,684				3,145
Cash at end of period		$	3,890			$	3,287
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	48,826			$	77,238
Income taxes			-				1,093

 

 

1)

Description of the Company

 

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

 

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

 

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

 

2)

Summary of Significant Accounting Policies

 

Statement Presentation

 

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

 

Impact of COVID-19

 

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

 

Reclassification of Prior Year Presentation

 

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

 

 

Estimates

 

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

 

Revenue Recognition

 

The Company’s revenues primarily result from contracts with customers. The major sources of revenue for the Agricultural Products and Tools segments are farm equipment, service parts related to farm equipment and steel cutting tools and inserts. The Agricultural Products and Tools segments generally execute short-term contracts that contain a single performance obligation – the delivery of product to the common carrier. The Company recognizes revenue for the production and sale of farm equipment, service parts and cutting tools upon shipment of the goods. Risk of ownership and title pass to the customer upon shipment of the goods. The Tools segment has an OEM agreement with one customer for which sales are recognized FOB destination – when the goods hit the customer’s dock. All sales are made to authorized dealers whose application for dealer status has been approved and who have been informed of general sales policies. Any changes in the Company’s terms are documented in the most recently published price lists. Pricing is fixed and determinable according to the Company’s published equipment and parts price lists. Title to all equipment and parts sold passes to the customer upon delivery to the carrier and is not subject to a customer acceptance provision. Proof of the passing of title is documented and retained by the Company. Post shipment obligations are limited to any claim with respect to the condition of the equipment or parts. The Agricultural Products and Tools segments each typically require payment in full 30 days after the ship date. To take advantage of program discounts, some customers pay deposits up front. Any deposits received increase contract liabilities.

 

In certain circumstances, upon the customer’s written request, the Company may recognize revenue when production is complete, and the goods are ready for shipment. At the customer’s request, the Company will bill the customer upon completing all performance obligations, but before shipment. The customer dictates that the Company ship the goods per the customer’s direction from the Company’s manufacturing facility, as is customary with this type of agreement, in order to minimize shipping costs. The written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer, with a final specified delivery date, and that the Company will segregate the goods from its inventory, such that they are not available to fill other orders. This agreement also specifies that the customer is required to purchase all goods manufactured under this agreement. Title of the goods will pass to the customer when the goods are complete and ready for shipment, per the customer agreement. At the transfer of title, all risks of ownership have passed to the customer, and the customer agrees to maintain insurance on the manufactured items that have not yet been shipped. The Company has operated using bill and hold agreements with certain customers for many years, with consistent satisfactory results for both the customer and the Company. The credit terms on these agreements are consistent with the credit terms on all other sales. All risks of loss are shouldered by the customer, and there are no exceptions to the customer’s commitment to accept and pay for these manufactured goods.

 

 

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

 

The Agricultural Products segment offers variable consideration in the form of discounts depending on participation in yearly early order programs. This variable consideration is allocated to the transaction price of all products in a sales arrangement and is not contingent on future outcomes. The Agricultural Products segment does not offer rebates or credits. The Tools segment offers quantity discounts that are allocated to the transaction price of each product once the quantity break is achieved. The Tools segment does not offer rebates or credits. The Modular Buildings segment does not offer discounts, rebates or credits.

 

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

 

For information on product warranty as it applies to ASC 606, refer to Note 9 “Product Warranty.”

 

 

Recently Issued Accounting Pronouncements

 

Recently Adopted Accounting Guidance

 

Leases

 

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

 

 

●

Nature of its leases

●

Significant assumptions and judgements used

●

Information about leases that have not yet commenced

●

Related-party lease transactions

●

Accounting policy election regarding short-term leases

●

Finance, operating, short-term and variable lease costs

●

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

●

Tabular disclosure of lease-related income

●

Components of the net investment in a lease

●

Information on the management of risk associated with residual asset

 

Accounting Pronouncements Not Yet Adopted

 

Measurement of Credit Losses on Financial Instruments

 

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

 

 

3)

Disaggregation of Revenue

 

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

 

 

 

 

4)

Contract Receivables, Contract Assets and Contract Liabilities

 

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

 

 

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

 

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

 

5)

Net Income (Loss) Per Share of Common Stock

 

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

 

 

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

 

 

6)

Inventory

 

Major classes of inventory are:

 

 

7)

Accrued Expenses

 

Major components of accrued expenses are:

 

 

8)

Assets Held for Lease

 

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 months ended February 28, 2021 compared to $155,508 for the three months ended February 29, 2020. Rents recognized in sales were related to the leasing of modular buildings as a part of the normal course of business operations of the Modular Buildings segment.

 

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

 

9)

Product Warranty

 

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

 

 

10)

Loan and Credit Agreements

 

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

 

Bank Midwest Revolving Lines of Credit and Term Loan

 

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

 

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

SBA Economic Injury Disaster Loans

 

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

 

 

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

 

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

 

 

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

 

 

11)

Income Taxes

 

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

 

 

12)

Related Party Transactions

 

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

 

13)

Sales-Type Leases

 

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

 

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

 

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

 

 

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

 

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

 

 

14)

Operating Leases

 

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

 

 

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

 

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

 

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

 

 

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

 

Future maturities of operating lease liabilities are as follows: