Quarterly Report • Oct 10, 2019
Preview not available for this file type.
Download Source File10-Q 1 artw20190831_10q.htm FORM 10-Q artw20190831_10q.htm Generated by ThunderDome Portal - 10/9/2019 5:51:31 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended August 31, 2019
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 [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
|---|---|
| Non-accelerated filer [x] | Smaller reporting company [x] |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
Number of common shares outstanding as of October 7, 2019: 4,298,212
Art’s-Way Manufacturing Co., Inc.
Index
| PART I – FINANCIAL INFORMATION | Page No. — 1 | |
|---|---|---|
| Item 1. | Financial Statements | 1 |
| Condensed Consolidated Balance Sheets August 31, 2019 and November 30, 2018 | 1 | |
| Condensed Consolidated Statements of Operations Three-month and nine-month periods ended August 31, 2019 and August 31, 2018 | 2 | |
| Condensed Consolidated Statements of Comprehensive Income Three-month and nine-month periods ended August 31, 2019 and August 31, 2018 | 3 | |
| Condensed Consolidated Statements of Stockholders’ Equity Nine-month periods ended August 31, 2019 and August 31, 2018 | 4 | |
| Condensed Consolidated Statements of Cash Flows Nine-month periods ended August 31, 2019 and August 31, 2018 | 5 | |
| Notes to Condensed Consolidated Financial Statements | 6 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22 |
| Item 4. | Controls and Procedures | 22 |
| PART II – OTHER INFORMATION | 23 | |
| Item 1. | Legal Proceedings | 23 |
| Item 1A. | Risk Factors | 23 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 |
| Item 3. | Defaults Upon Senior Securities | 23 |
| Item 4. | Mine Safety Disclosures | 23 |
| Item 5. | Other Information | 23 |
| Item 6. | Exhibits | 23 |
| SIGNATURES | 24 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
| ART’S-WAY MANUFACTURING CO., INC. |
|---|
| Condensed Consolidated Balance Sheets |
| (Unaudited) |
| August 31, 2019 | ||||
|---|---|---|---|---|
| Assets | ||||
| Current assets: | ||||
| Cash | $ 5,045 | $ | 3,512 | |
| Accounts receivable-customers, net of allowance for doubtful accounts of $24,654 and $25,100 in 2019 and 2018, respectively | 2,502,390 | 1,537,113 | ||
| Inventories, net | 9,762,914 | 10,257,102 | ||
| Cost and profit in excess of billings | 80,727 | 99,287 | ||
| Net investment in sales-type leases, current | 152,524 | 123,055 | ||
| Other current assets | 234,510 | 125,089 | ||
| Total current assets | 12,738,110 | 12,145,158 | ||
| Property, plant, and equipment, net | 5,465,620 | 5,647,485 | ||
| Assets held for lease, net | 759,640 | 1,870,125 | ||
| Deferred income taxes | 1,795,256 | 1,432,422 | ||
| Net investment in sales-type leases, long-term | 36,853 | 153,787 | ||
| Other assets | 72,517 | 76,497 | ||
| Total assets | $ 20,867,996 | $ | 21,325,474 | |
| Liabilities and Stockholders’ Equity | ||||
| Current liabilities: | ||||
| Accounts payable | $ 1,035,257 | $ | 802,062 | |
| Customer deposits | 260,000 | 145,632 | ||
| Billings in excess of cost and profit | 1,315,877 | 185,014 | ||
| Income taxes payable | 6,400 | 6,400 | ||
| Accrued expenses | 955,897 | 893,284 | ||
| Line of credit | 2,909,530 | 3,505,530 | ||
| Current portion of long-term debt | 84,319 | 227,459 | ||
| Total current liabilities | 6,567,280 | 5,765,381 | ||
| Long-term liabilities | ||||
| Long-term debt, excluding current portion | 2,372,184 | 2,523,018 | ||
| Total liabilities | 8,939,464 | 8,288,399 | ||
| Commitments and Contingencies (Notes 9 and 10) | ||||
| Stockholders’ equity: | ||||
| Undesignated preferred stock - $0.01 par value. Authorized 500,000 shares in 2019 and 2018; issued 0 shares in 2019 and 2018. | - | - | ||
| Common stock – $0.01 par value. Authorized 9,500,000 shares in 2019 and 2018; issued 4,316,087 in 2019 and 4,225,050 in 2018 | 43,161 | 42,250 | ||
| Additional paid-in capital | 3,214,766 | 3,055,632 | ||
| Retained earnings | 8,715,738 | 9,966,928 | ||
| Treasury stock, at cost (17,875 in 2019 and 9,286 in 2018 shares) | (45,133 | ) | (27,735 | ) |
| Total stockholders’ equity | 11,928,532 | 13,037,075 | ||
| Total liabilities and stockholders’ equity | $ 20,867,996 | $ | 21,325,474 |
See accompanying notes to condensed consolidated financial statements.
| ART’S-WAY MANUFACTURING CO., INC. |
|---|
| Condensed Consolidated Statements of Operations |
| (Unaudited) |
| Three Months Ended — August 31, 2019 | August 31, 2018 | August 31, 2019 | August 31, 2018 | |||||
|---|---|---|---|---|---|---|---|---|
| Sales | $ 5,503,622 | $ | 5,280,269 | $ | 15,375,104 | $ | 15,940,268 | |
| Cost of goods sold | 4,498,800 | 4,105,012 | 12,806,444 | 12,504,621 | ||||
| Gross profit | 1,004,822 | 1,175,257 | 2,568,660 | 3,435,647 | ||||
| Expenses: | ||||||||
| Engineering | 116,153 | 201,845 | 380,139 | 458,447 | ||||
| Selling | 378,811 | 475,604 | 1,119,428 | 1,448,124 | ||||
| General and administrative | 814,702 | 857,740 | 2,466,073 | 2,655,844 | ||||
| Impairment of asset held for lease | - | 199,175 | - | 199,175 | ||||
| Total expenses | 1,309,666 | 1,734,364 | 3,965,640 | 4,761,590 | ||||
| Income (Loss) from operations | (304,844 | ) | (559,107 | ) | (1,396,980 | ) | (1,325,943 | ) |
| Other income (expense): | ||||||||
| Interest expense | (89,208 | ) | (82,058 | ) | (274,649 | ) | (220,445 | ) |
| Other | 24,082 | (307,735 | ) | 61,997 | (487,850 | ) | ||
| Total other income (expense) | (65,126 | ) | (389,793 | ) | (212,652 | ) | (708,295 | ) |
| Income (Loss) from continuing operations before income taxes | (369,970 | ) | (948,900 | ) | (1,609,632 | ) | (2,034,238 | ) |
| Income tax expense (benefit) | (80,754 | ) | (182,184 | ) | (358,442 | ) | (86,145 | ) |
| Income (Loss) from continuing operations | (289,216 | ) | (766,716 | ) | (1,251,190 | ) | (1,948,093 | ) |
| Discontinued Operations | ||||||||
| Income (loss) from operations of discontinued segment | - | - | - | (67,177 | ) | |||
| Income tax expense (benefit) | - | - | - | (16,324 | ) | |||
| Income (Loss) on discontinued operations | - | - | - | (50,853 | ) | |||
| Net Income (Loss) | (289,216 | ) | (766,716 | ) | (1,251,190 | ) | (1,998,946 | ) |
See accompanying notes to condensed consolidated financial statements.
| ART’S-WAY MANUFACTURING CO., INC. |
|---|
| Condensed Consolidated Statements of Comprehensive Income |
| (Unaudited) |
| Three Months Ended — August 31, 2019 | August 31, 2018 | Nine Months Ended — August 31, 2019 | August 31, 2018 | |||||
|---|---|---|---|---|---|---|---|---|
| Net Income (Loss) | $ (289,216 | ) | $ (766,716 | ) | $ (1,251,190 | ) | $ (1,998,946 | ) |
| Other Comprehensive Income (Loss) | ||||||||
| Foreign currency translation adjustments | - | - | - | 3,830 | ||||
| Release of cumulative translation adjustment due to substantial liquidation of a foreign entity | - | - | - | 253,180 | ||||
| Total Other Comprehensive Income (Loss) | - | - | - | 257,010 | ||||
| Comprehensive (Loss) | $ (289,216 | ) | $ (766,716 | ) | $ (1,251,190 | ) | $ (1,741,936 | ) |
See accompanying notes to condensed consolidated financial statements.
| ART’S-WAY MANUFACTURING CO., INC. |
|---|
| Consolidated Statements of Stockholders' Equity |
| Nine Months Ended August 31, 2019 and 2018 |
| (Unaudited) |
| Additional | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of | paid-in | Retained | Comprensive | Number of | ||||||||
| shares | Par value | capital | earnings | Income (Loss) | shares | Amount | Total | |||||
| Balance, November 30, 2017 | 4,158,752 | $ 41,587 | $ 2,859,052 | $ 13,353,830 | $ | (257,010 | ) | 1,954 | $ (6,425 | ) | $ 15,991,034 | |
| Stock based compensation | 57,678 | 577 | 157,513 | - | - | 7,332 | (21,310 | ) | 136,780 | |||
| Foreign Currency Translation Adjustment | - | - | - | - | 3,830 | - | - | 3,830 | ||||
| Release of cumulative translation adjustment due to substantial liquidation of a foreign entity | - | - | - | - | 253,180 | - | - | 253,180 | ||||
| Net (loss) | - | - | - | (1,998,946 | ) | - | - | - | (1,998,946 | ) | ||
| Balance, August 31, 2018 | 4,216,430 | $ 42,164 | $ 3,016,565 | $ 11,354,884 | $ | - | 9,286 | $ (27,735 | ) | $ 14,385,878 |
| Additional | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of | paid-in | Retained | Comprensive | Number of | |||||||
| shares | Par value | capital | earnings | Income (Loss) | shares | Amount | Total | ||||
| Balance, November 30, 2018 | 4,225,050 | $ 42,250 | $ 3,055,632 | $ 9,966,928 | $ | - | 9,286 | $ (27,735 | ) | $ 13,037,075 | |
| Stock based compensation | 91,037 | 911 | 159,134 | - | - | 8,589 | (17,398 | ) | 142,647 | ||
| Net (loss) | - | - | - | (1,251,190 | ) | - | - | - | (1,251,190 | ) | |
| Balance, August 31, 2019 | 4,316,087 | $ 43,161 | $ 3,214,766 | $ 8,715,738 | $ | - | 17,875 | $ (45,133 | ) | $ 11,928,532 |
See accompanying notes to condensed consolidated financial statements.
| ART’S-WAY MANUFACTURING CO., INC. |
|---|
| Condensed Consolidated Statements of Cash Flows |
| (Unaudited) |
| Nine Months Ended — August 31, 2019 | August 31, 2018 | |||
|---|---|---|---|---|
| Cash flows from operations: | ||||
| Net (loss) from continuing operations | $ (1,251,190 | ) | $ (1,948,093 | ) |
| Net (loss) from discontinued operations | - | (50,853 | ) | |
| Adjustments to reconcile net (loss) to net cash provided by (used in) operating activities: | ||||
| Stock based compensation | 160,045 | 158,090 | ||
| Loss on release of cumulative translation adjustment | - | 253,180 | ||
| Realized foreign currency loss | - | 3,830 | ||
| Impairment of asset held for lease | - | 199,175 | ||
| (Gain)/Loss on disposal of property, plant, and equipment | (10,000 | ) | (12,084 | ) |
| Depreciation and amortization expense | 774,068 | 681,939 | ||
| Bad debt expense (recovery) | (1,402 | ) | (8,090 | ) |
| Deferred income taxes | (362,834 | ) | (103,854 | ) |
| Changes in assets and liabilities: | ||||
| (Increase) decrease in: | ||||
| Accounts receivable | (963,875 | ) | (222,783 | ) |
| Inventories | 494,188 | 489,189 | ||
| Income taxes receivable | - | |||
| Net investment in sales-type leases | 87,465 | (329,021 | ) | |
| Other assets | (109,422 | ) | 100,020 | |
| Increase (decrease) in: | ||||
| Accounts payable | 233,195 | 172,943 | ||
| Contracts in progress, net | 1,149,423 | 9,056 | ||
| Customer deposits | 114,368 | (466,401 | ) | |
| Income taxes payable | - | 400 | ||
| Accrued expenses | 62,613 | 252,748 | ||
| Net cash provided by (used in) operating activities - continuing operations | 376,642 | (769,756 | ) | |
| Net cash (used in) operating activities - discontinued operations | - | (89,697 | ) | |
| Net cash provided by (used in) operating activities | 376,642 | (859,453 | ) | |
| Cash flows from investing activities: | ||||
| Purchases of property, plant, and equipment | (367,450 | ) | (265,418 | ) |
| Net proceeds from sale of assets | 899,713 | 52,607 | ||
| Net cash provided by (used in) investing activities - continuing operations | 532,263 | (212,811 | ) | |
| Net cash provided by investing activities - discontinued operations | - | 1,418,761 | ||
| Net cash provided by investing activities | 532,263 | 1,205,950 | ||
| Cash flows from financing activities: | ||||
| Net change in line of credit | (596,000 | ) | 231,000 | |
| Repayment of term debt | (293,974 | ) | (164,115 | ) |
| Repurchases of common stock | (17,398 | ) | (21,310 | ) |
| Net cash provided by (used in) financing activities - continuing operations | (907,372 | ) | 45,575 | |
| Net cash (used in) financing activities - discontinued operations | - | (599,584 | ) | |
| Net cash (used in) financing activities | (907,372 | ) | (554,009 | ) |
| Net increase (decrease) in cash | 1,533 | (207,512 | ) | |
| Cash at beginning of period | 3,512 | 212,400 | ||
| Cash at end of period | $ 5,045 | $ 4,888 | ||
| Supplemental disclosures of cash flow information: | ||||
| Cash paid during the period for: | ||||
| Interest | $ 253,140 | $ 225,249 | ||
| Income taxes | $ 3,855 | $ 3,600 | ||
| Supplemental disclosures of non-cash operating and investing activities: | ||||
| Transfer of inventory to assets held for lease | $ - | $ 808,766 |
See accompanying notes to condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
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.
During the third quarter of fiscal 2016, the Company discontinued its pressurized vessels segment. For more information on discontinued operations, see Note 4 “Discontinued Operations.” For detailed financial information relating to segment reporting, see Note 17 “Segment Information.”
2) Summary of Significant Account Policies
Statement Presentation
The foregoing condensed consolidated financial statements of the Company are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the 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, 2018. The results of operations for the three and nine months ended August 31, 2019 are not necessarily indicative of the results for the fiscal year ending November 30, 2019.
During the second quarter of fiscal 2018, the Company liquidated its investment in its Canadian subsidiary (“International”) by selling off remaining inventory and filing dissolution paperwork. Prior to that liquidation and dissolution, the financial books of the Company’s Canadian operations were kept in the functional currency of Canadian dollars and the financial statements were converted to U.S. Dollars for consolidation. When consolidating the financial results of Canadian operations into U.S. Dollars for reporting purposes, the Company used the All-Current translation method. The All-Current translation method requires the balance sheet assets and liabilities to be translated to U.S. Dollars at the exchange rate as of quarter-end. Stockholders’ equity was translated at historical exchange rates and retained earnings were translated at an average exchange rate for the period. Additionally, revenue and expenses were translated at average exchange rates for the periods presented. The resulting cumulative translation adjustment was carried on the balance sheet and was recorded in stockholders’ equity. Following the liquidation and dissolution of International, the cumulative translation adjustment carried on the balance sheet was released into net income under other income (expense), and the financial statements will no longer need translation each period. Since no income tax benefit was received from liquidation and dissolution, the cumulative translation adjustment was not tax adjusted.
Lessor Accounting and Sales-Type Leases
Modular buildings held for short term 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 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.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the three and nine months ended August 31, 2019. Actual results could differ from those estimates.
Revenue Recognition
Effective December 1, 2018 the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 606, Revenue from Contracts with Customers (“ASC 606”). The Company used the modified retrospective adoption of ASC 606. The adoption of ASC 606 had no impact on prior year or previously disclosed amounts. In accordance with ASC 606, revenue is measured based on consideration specified in a contract with a customer and recognized when the Company satisfies the performance obligation specified in each contract.
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 good(s). 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. 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 in and estimated gross profit in excess of billings. The major source of revenue for the modular buildings segment is 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. 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 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.
For information on product warranty as it applies to ASC 606, refer to Note 9 “Product Warranty.”
3) Revenue Recognition
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.
| Three Months Ended August 31, 2019 — Agricultural | Modular Buildings | Tools | Total | |
|---|---|---|---|---|
| Farm equipment | $ 2,392,000 | $ - | $ - | $ 2,392,000 |
| Farm equipment service parts | 666,000 | - | - | 666,000 |
| Steel cutting tools and inserts | - | - | 499,000 | 499,000 |
| Modular buildings | - | 1,607,000 | - | 1,607,000 |
| Modular building lease income | - | 165,000 | - | 165,000 |
| Other | 136,000 | 30,000 | 9,000 | 175,000 |
| $ 3,194,000 | $ 1,802,000 | $ 508,000 | $ 5,504,000 |
| Three Months Ended August 31, 2018 — Agricultural | Modular Buildings | Tools | Total | |
|---|---|---|---|---|
| Farm equipment | $ 3,005,000 | $ - | $ - | $ 3,005,000 |
| Farm equipment service parts | 768,000 | - | - | 768,000 |
| Steel cutting tools and inserts | - | - | 586,000 | 586,000 |
| Modular buildings | - | 568,000 | - | 568,000 |
| Modular building lease income | - | 126,000 | - | 126,000 |
| Other | 140,000 | 79,000 | 8,000 | 227,000 |
| $ 3,913,000 | $ 773,000 | $ 594,000 | $ 5,280,000 |
| Nine Months Ended August 31, 2019 — Agricultural | Modular Buildings | Tools | Total | |
|---|---|---|---|---|
| Farm equipment | $ 7,274,000 | $ - | $ - | $ 7,274,000 |
| Farm equipment service parts | 1,880,000 | - | - | 1,880,000 |
| Steel cutting tools and inserts | - | - | 1,527,000 | 1,527,000 |
| Modular buildings | - | 3,773,000 | - | 3,773,000 |
| Modular building lease income | - | 512,000 | - | 512,000 |
| Other | 287,000 | 97,000 | 25,000 | 409,000 |
| $ 9,441,000 | $ 4,382,000 | $ 1,552,000 | $ 15,375,000 |
| Nine Months Ended August 31, 2018 — Agricultural | Modular Buildings | Tools | Total | |
|---|---|---|---|---|
| Farm equipment | $ 9,395,000 | $ - | $ - | $ 9,395,000 |
| Farm equipment service parts | 2,036,000 | - | - | 2,036,000 |
| Steel cutting tools and inserts | - | - | 1,789,000 | 1,789,000 |
| Modular buildings | - | 1,981,200 | - | 1,981,200 |
| Modular building lease income | - | 242,000 | - | 242,000 |
| Other | 347,000 | 122,800 | 27,000 | 496,800 |
| $ 11,778,000 | $ 2,346,000 | $ 1,816,000 | $ 15,940,000 |
The following table provides information about contract receivables, contract assets, and contract liabilities from contracts with customers included on the Condensed Consolidated Balance Sheets.
| August 31, 2019 | November 30, 2018 | |
|---|---|---|
| Receivables | $ 1,074,000 | $ 159,000 |
| Assets | 81,000 | 99,000 |
| Liabilities | 1,483,000 | 185,000 |
The amount of revenue recognized in the first nine months of fiscal 2019 that was included in a contract liability at November 30, 2018 was approximately $185,000 compared to $516,217 in the same period of fiscal 2018. The significant change in contract receivables reflected above is due to a large milestone invoice from the modular buildings segment. This invoice also affected contract liabilities by increasing billings in excess of costs and estimated gross profit at August 31, 2019. Swings in contract assets from November 30, 2018 are due to changes in costs and estimated gross profit in excess of billings from the modular buildings segment.
The Company will utilize the practical expedient exception for these contracts and will report only on performance obligations greater than one year. As of August 31, 2019, the Company has no performance obligations with an original expected duration greater than one year.
4) Discontinued Operations
Effective October 31, 2016, the Company discontinued the operations of its pressurized vessels segment in order to focus its efforts and resources on the business segments that have historically been more successful and that are expected to present greater opportunities for meaningful long-term shareholder returns. On March 29, 2018, the remaining assets of this segment, consisting of real estate assets, were disposed of at a selling price of $1,500,000.
As the pressurized vessels segment was a unique business unit of the Company, its liquidation was a strategic shift. In accordance with ASC Topic 360, the Company has classified this segment as discontinued operations for all periods presented.
Income (loss) from discontinued operations, before tax in the accompanying Condensed Consolidated Statements of Operations is comprised of the following:
| Nine Months Ended | ||
|---|---|---|
| August 31, 2018 | ||
| Revenue from external customers | $ - | |
| Gross Profit | - | |
| Operating Expense | 51,133 | |
| Income (loss) from operations | (51,133 | ) |
| Income (loss) before tax | (67,177 | ) |
There were no components of discontinued operations in the accompanying Condensed Consolidated Balance Sheets as of August 31, 2019 or November 30, 2018.
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 August 31, 2019 and August 31, 2018:
| For the Three Months Ended — August 31, 2019 | August 31, 2018 | |||
|---|---|---|---|---|
| Numerator for basic and diluted net income (loss) per share: | ||||
| Net income (loss) from continuing operations | $ (289,216 | ) | $ (766,716 | ) |
| Net income (loss) from discontinued operations | - | - | ||
| Net income (loss) | $ (289,216 | ) | $ (766,716 | ) |
| Denominator: | ||||
| For basic net income (loss) per share - weighted average common shares outstanding | 4,309,587 | 4,209,445 | ||
| Effect of dilutive stock options | - | - | ||
| For diluted net income (loss) per share - weighted average common shares outstanding | 4,309,587 | 4,209,445 | ||
| Net Income (Loss) per share - Basic: | ||||
| Continuing Operations | $ (0.07 | ) | $ (0.18 | ) |
| Discontinued Operations | $ - | $ - | ||
| Net Income (Loss) per share | $ (0.07 | ) | $ (0.18 | ) |
| Net Income (Loss) per share - Diluted: | ||||
| Continuing Operations | $ (0.07 | ) | $ (0.18 | ) |
| Discontinued Operations | $ - | $ - | ||
| Net Income (Loss) per share | $ (0.07 | ) | $ (0.18 | ) |
| For the Nine Months Ended — August 31, 2019 | August 31, 2018 | |||
|---|---|---|---|---|
| Numerator for basic and diluted net income (loss) per share: | ||||
| Net income (loss) from continuing operations | $ (1,251,190 | ) | $ (1,948,093 | ) |
| Net income (loss) from discontinued operations | - | (50,853 | ) | |
| Net income (loss) | $ (1,251,190 | ) | $ (1,998,946 | ) |
| Denominator: | ||||
| For basic net income (loss) per share - weighted average common shares outstanding | 4,285,535 | 4,198,250 | ||
| Effect of dilutive stock options | - | - | ||
| For diluted net income (loss) per share - weighted average common shares outstanding | 4,285,535 | 4,198,250 | ||
| Net Income (Loss) per share - Basic: | ||||
| Continuing Operations | $ (0.29 | ) | $ (0.46 | ) |
| Discontinued Operations | $ - | $ (0.01 | ) | |
| Net Income (Loss) per share | $ (0.29 | ) | $ (0.47 | ) |
| Net Income (Loss) per share - Diluted: | ||||
| Continuing Operations | $ (0.29 | ) | $ (0.46 | ) |
| Discontinued Operations | $ - | $ (0.01 | ) | |
| Net Income (Loss) per share | $ (0.29 | ) | $ (0.47 | ) |
6) Inventory
Major classes of inventory are:
| Raw materials | August 31, 2019 — $ 7,341,067 | $ | 7,825,278 | |
|---|---|---|---|---|
| Work in process | 451,970 | 272,302 | ||
| Finished goods | 4,648,778 | 5,051,330 | ||
| Gross inventory | $ 12,441,815 | $ | 13,148,910 | |
| Less: Reserves | (2,678,901 | ) | (2,891,808 | ) |
| Net Inventory | $ 9,762,914 | $ | 10,257,102 |
7) Accrued Expenses
Major components of accrued expenses are:
| August 31, 2019 | November 30, 2018 | |
|---|---|---|
| Salaries, wages, and commissions | $ 529,072 | $ 448,737 |
| Accrued warranty expense | 140,835 | 96,786 |
| Other | 285,990 | 347,761 |
| $ 955,897 | $ 893,284 |
8) Assets Held for Lease
Major components of assets held for lease are:
| August 31, 2019 | November 30, 2018 | |
|---|---|---|
| West Union Facility | $ - | $ 878,079 |
| Modular Buildings | 759,640 | 992,046 |
| Net assets held for lease | $ 759,640 | $ 1,870,125 |
Rents recognized from assets held for lease included in sales on the Consolidated Statements of Operations during the three and nine months ended August 31, 2019 were $164,508 and $512,017, respectively, compared to $126,248 and $241,766 for the same respective periods in fiscal 2018. 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. Rents recognized from assets held for lease included in other income (expense) on the Consolidated Statements of Operations during the three and nine months ended August 31, 2019 were $0 and $2,500, respectively, compared to $0 and $38,180 for the same respective periods in fiscal 2018. Rents related to the West Union facility in the agricultural products segment were recognized in other income as such income was outside of the scope of this segment’s normal business operations. The West Union facility was sold on December 14, 2018 for $900,000.
Future minimum lease receipts from assets held for lease are as follows:
| Future Minimum Leased Assets | |
|---|---|
| Year Ending November 30, | Amount |
| 2019 | $ 163,008 |
| 2020 | 283,989 |
| Total | $ 446,997 |
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 and nine months ended August 31, 2019 and August 31, 2018 are as follows:
| For the Three Months Ended — August 31, 2019 | August 31, 2018 | |||
|---|---|---|---|---|
| Balance, beginning | $ 89,637 | $ | 71,216 | |
| Settlements / adjustments | (42,691 | ) | (73,108 | ) |
| Warranties issued | 93,889 | 73,155 | ||
| Balance, ending | $ 140,835 | $ | 71,263 |
| For the Nine Months Ended — August 31, 2019 | August 31, 2018 | |||
|---|---|---|---|---|
| Balance, beginning | $ 96,786 | $ | 68,452 | |
| Settlements / adjustments | (237,629 | ) | (214,674 | ) |
| Warranties issued | 281,678 | 217,485 | ||
| Balance, ending | $ 140,835 | $ | 71,263 |
10) Loan and Credit Agreements
The Company maintains two revolving lines of credit and a term loan with Bank Midwest. The Company also previously maintained a term loan with The First National Bank of West Union.
Bank Midwest Revolving Line s of Credit and Term Loans
On September 28, 2017, the Company entered into a credit facility with Bank Midwest, which superseded and replaced in its entirety the Company’s previous credit facility with U.S. Bank. The Bank Midwest credit facility initially consisted of a $5,000,000 revolving line of credit (the “2017 Line of Credit”), a $2,600,000 term loan due October 1, 2037, and a $600,000 term loan due October 1, 2019. The 2017 Line of Credit is being used for working capital purposes. On March 29, 2018, the Company paid in full the $600,000 term loan due October 1, 2019 using proceeds from the sale of the Company’s Dubuque, Iowa property. The payment consisted of $596,563 in principal and $2,328 in interest.
On August 31, 2019, the balance of the 2017 Line of Credit was $2,909,530 with $2,090,470 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 August 31, 2019, the 2017 Line of Credit was not limited by the borrowing base calculation. 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 6.00% per annum. The 2017 Line of Credit was most recently renewed on March 30, 2019. The 2017 Line of Credit is payable upon demand by Bank Midwest, and monthly interest-only payments are required. If no earlier demand is made, the unpaid principal and accrued interest is due on March 30, 2020.
The $2,600,000 term loan accrues interest at a rate of 5.00% for the first sixty months. Thereafter, this loan will accrue interest at a floating rate per annum equal to 0.75% above the Wall Street Journal rate published the money rates section of the Wall Street Journal. The interest rate floor is set at 4.15% per annum and the interest rate may only be adjusted by Bank Midwest once every five years. Monthly payments of $17,271 for principal and interest are required. This loan is also guaranteed by the United States Department of Agriculture (“USDA”), which 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 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 this loan, for an annual fee of 2% of the personally guaranteed amount. The initial guarantee fee will be amortized over the life of the loan, and the annual fees and personally guaranteed amounts are expensed monthly.
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 6.00% per annum. 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, 2020. As of August 31, 2019, the funds on the 2019 Line of Credit remain undisbursed and are held by Bank Midwest.
Each of the 2017 Line of Credit and the $2,600,000 term loan are governed by the terms of a separate Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest. The 2019 Line of Credit is governed by the terms of a Promissory Note, dated February 13, 2019, 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 second mortgage on its West Union, Iowa property and Ohio Metal Working Products/Art’s-Way Inc. granted Bank Midwest a mortgage on its property located in Canton, Ohio. The mortgage on the West Union property was released in conjunction with the sale of that property on December 14, 2018. The 2019 Line of Credit is also secured by the mortgage on the Canton, Ohio property. The $2,600,000 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. The terms of the Bank Midwest loan agreements require the Company to maintain a minimum working capital ratio of 1.75, while maintaining a minimum of $5,100,000 of working capital. Additionally, a maximum debt to worth ratio of 1 to 1 must be maintained, with a minimum of 40% tangible balance sheet equity, with variations subject to mutual agreement. The Company is also required to maintain a minimum debt service coverage ratio of 1.25, with a 0.10 tolerance. The Company was in compliance with all covenants as of November 30, 2018 other than the debt service coverage ratio. Bank Midwest issued a waiver forgiving the noncompliance, and no event of default has occurred. The next measurement date is November 30, 2019.
First National Bank of West Union Term Loan
On May 1, 2010, the Company obtained a $1,300,000 loan to finance the purchase of an additional facility located in West Union, Iowa to be used as a distribution center, warehouse facility, and manufacturing plant for certain products under the Art’s-Way brand. The loan was secured by a mortgage on the Company’s West Union Facility, pursuant to a Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated May 1, 2010 between the Company and The First National Bank of West Union.
On December 14, 2018, the Company repaid this loan in full in connection with the sale of the West Union, Iowa facility.
A summary of the Company’s term debt is as follows:
| August 31, 2019 | November 30, 2018 | |
|---|---|---|
| Bank Midwest loan payable in monthly installments of $17,271 including interest at 5.00%, due October 1, 2037 | $ 2,456,503 | $ 2,517,510 |
| First National Bank of West Union loan payable in monthly installments of $12,500 including interest at 2.75%, due June 1, 2020 | - | 232,967 |
| Total term debt | $ 2,456,503 | $ 2,750,477 |
| Less current portion of term debt | 84,319 | 227,459 |
| Term debt, excluding current portion | $ 2,372,184 | $ 2,523,018 |
A summary of the minimum maturities of term debt follows for the years ending November 30:
| Year | Amount |
|---|---|
| 2019 | 20,511 |
| 2020 | 85,401 |
| 2021 | 90,179 |
| 2022 | 94,858 |
| 2023 | 99,781 |
| 2024 and thereafter | 2,065,773 |
| Total Term Debt | $ 2,456,503 |
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.
On December 22, 2017, the Tax Cuts and Job Act of 2017 was enacted, which reduced the top corporate income tax rate from 35% to 21%. The application of this new rate was recognized in the first quarter of fiscal 2018. Tax expense from continuing operations for the nine months ended August 31, 2018 includes an adjustment of approximately $298,000 related to the revaluation of the Company’s net deferred tax asset at the new statutory rate.
12) Related Party Transactions
From time to time, the Company purchases various supplies from related parties, which are companies owned by J. Ward McConnell, Jr., the Company’s Vice Chairman of the Board of Directors. Also, 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 debt in accordance with the USDA guarantee on the Company’s term loan. Mr. McConnell is paid a monthly fee for his guarantee. During the three and nine months ended August 31, 2019, the Company recognized expenses of $6,624 and $21,273, respectively, for transactions with a related party, compared to $5,957 and $17,986 for the same respective periods in fiscal 2018. The accrued expenses balance as of August 31, 2019 contains $1,581 due to a related party, compared to $1,633 for the same period in fiscal 2018.
13) Sales-Type Leases
The components related to sales-type leases at August 31, 2019 and November 30, 2018 are as follows:
| Minimum lease receivable, current | August 31, 2019 — $ 174,000 | November 30, 2018 — $ 159,500 | ||
|---|---|---|---|---|
| Unearned interest income, current | (21,476 | ) | $ (36,445 | ) |
| Net investment in sales-type leases, current | 152,524 | 123,055 | ||
| Minimum lease receivable, long-term | 37,777 | $ 168,277 | ||
| Unearned interest income, long-term | (924 | ) | $ (14,490 | ) |
| Net investment in sales-type leases, long-term | $ 36,853 | $ 153,787 |
Gross revenue recognized in sales from continuing operations on the Consolidated Statements of Operations from commencement of sales-type leases for the three and nine months ended August 31, 2019 was $0 for both periods compared to $0 and $426,542 for the same periods in fiscal 2018.
Future minimum lease receipts from sales-type leases are as follows:
| Year Ending November 30, | Amount |
|---|---|
| 2019 | $ 43,500 |
| 2020 | 162,426 |
| 2021 | 5,851 |
| Total | $ 211,777 |
14) Recently Issued Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires a lessee to recognize a right-of-use asset and a lease liability on its balance sheet for all leases with terms of twelve months or greater. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company will adopt this guidance for fiscal 2020 using the modified retrospective approach, including interim periods within that reporting period. Under the modified retrospective approach, the Company will 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. The Company expects to recognize a right-of-use asset and lease liability on the balance sheet for office equipment it leases. The Company’s activity as a lessor will remain mostly unaffected by this guidance. The Company expects additional disclosures including but 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
15) Equity Incentive Plan and Stock Based Compensation
On January 27, 2011, the Board of Directors of the Company authorized and approved the Art’s-Way Manufacturing Co., Inc. 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan was approved by the stockholders on April 28, 2011. It replaced the Employee Stock Option Plan and the Directors’ Stock Option Plan (collectively, the “Prior Plans”), and no further stock options will be awarded under the Prior Plans. Awards to directors and executive officers under the 2011 Plan are governed by the forms of agreement approved by the Board of Directors. Stock options granted prior to January 27, 2011 are governed by the applicable Prior Plan and the forms of agreement adopted thereunder.
The 2011 Plan permits the plan administrator to award nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance awards, and stock appreciation rights to employees (including officers), directors, and consultants. The Board of Directors has approved a director compensation policy pursuant to which non-employee directors are automatically granted restricted stock awards of 1,000 shares of fully vested common stock annually 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. During the first nine months of fiscal 2019, restricted stock awards of 72,437 shares were issued to various employees, directors, and consultants, which vest over the next three years, and restricted stock awards of 21,000 were issued to directors as part of the director compensation policy, which vested immediately upon grant. During the first nine months of fiscal 2019, 2,400 shares of restricted stock were forfeited upon departure of certain employees.
Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant vesting period. The Company estimates the fair value of each stock-based option award on the measurement date using the Black-Scholes option valuation model which incorporates assumptions as to stock price volatility, the expected life of the options, risk-free interest rate, and dividend yield. Expected volatility is based on historical volatility of the Company’s stock and other factors. The Company uses historical option exercise and termination data to estimate the expected term the options are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is calculated using historical dividend amounts and the stock price at the option issuance date. No stock options were granted during the nine months ended August 31, 2019 or in the same respective period of fiscal 2018. The Company incurred a total of $40,601 and $160,045 of stock-based compensation expense for restricted stock awards during the three and nine months ended August 31, 2019, respectively, compared to $46,654 and $158,090 of stock-based compensation expense for restricted stock awards for the same respective periods of fiscal 2018. The Company repurchased 8,589 shares and 7,332 shares from employees in the form of treasury stock as consideration for payroll taxes paid on the employee’s behalf for the nine months ended August 31, 2019 and August 31, 2018, respectively. Stock compensation net of treasury shares repurchased for the nine months ended August 31, 2019 was $142,647 compared to $136,780, for the same period in fiscal 2018.
16) Disclosures About the Fair Value of Financial Instruments
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. At August 31, 2019 and November 30, 2018, the carrying amount approximated fair value for cash, accounts receivable, net investment in sales-type 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 net investment in sales-type leases also approximates recorded value as that is based on discounting future cash flows at rates implicit in the lease. The rates implicit in the lease do not materially differ from current market rates. The fair value of the Company’s installment term loans payable also approximates recorded value because the interest rates charged under the loan terms are not substantially different from current interest rates.
17) Segment Information
The Company has three reportable segments: agricultural products, modular buildings and tools. 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 various uses, commonly animal containment and research laboratories. The tools segment manufactures steel cutting tools and inserts.
The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Management evaluates the performance of each segment based on profit or loss from operations before income taxes, exclusive of nonrecurring gains and losses.
Approximate financial information with respect to the reportable segments is as follows. The tables below exclude income and balance sheet data from discontinued operations. See Note 4 “Discontinued Operations.”
| Three Months Ended August 31, 2019 — Agricultural Products | Modular Buildings | Tools | Consolidated* | ||||
|---|---|---|---|---|---|---|---|
| Revenue from external customers | $ 3,194,000 | $ | 1,802,000 | $ 508,000 | $ | 5,504,000 | |
| Income (loss) from operations | (435,000 | ) | 146,000 | (16,000 | ) | (305,000 | ) |
| Income (loss) before tax | (496,000 | ) | 151,000 | (25,000 | ) | (370,000 | ) |
| Total Assets | 14,383,000 | 3,917,000 | 2,568,000 | 20,868,000 | |||
| Capital expenditures | 92,000 | 75,000 | 15,000 | 182,000 | |||
| Depreciation & Amortization | 126,000 | 66,000 | 32,000 | 224,000 |
| Three Months Ended August 31, 2018 — Agricultural Products | Modular Buildings | Tools | Consolidated* | ||||
|---|---|---|---|---|---|---|---|
| Revenue from external customers | $ 3,913,000 | $ | 773,000 | $ | 594,000 | $ 5,280,000 | |
| Income (loss) from operations | (450,000 | ) | (141,000 | ) | 32,000 | (559,000 | ) |
| Income (loss) before tax | (835,000 | ) | (136,000 | ) | 22,000 | (949,000 | ) |
| Total Assets | 15,999,000 | 3,692,000 | 2,484,000 | 22,175,000 | |||
| Capital expenditures | 92,000 | 13,000 | - | 105,000 | |||
| Depreciation & Amortization | 126,000 | 116,000 | 31,000 | 273,000 |
| Nine Months Ended August 31, 2019 — Agricultural Products | Modular Buildings | Tools | Consolidated* | |||||
|---|---|---|---|---|---|---|---|---|
| Revenue from external customers | $ 9,441,000 | $ | 4,382,000 | $ | 1,552,000 | $ | 15,375,000 | |
| Income (loss) from operations | (1,334,000 | ) | (14,000 | ) | (49,000 | ) | (1,397,000 | ) |
| Income (loss) before tax | (1,527,000 | ) | (4,000 | ) | (79,000 | ) | (1,610,000 | ) |
| Total Assets | 14,383,000 | 3,917,000 | 2,568,000 | 20,868,000 | ||||
| Capital expenditures | 201,000 | 123,000 | 43,000 | 367,000 | ||||
| Depreciation & Amortization | 375,000 | 303,000 | 96,000 | 774,000 |
| Nine Months Ended August 31, 2018 — Agricultural Products | Modular Buildings | Tools | Consolidated* | |||||
|---|---|---|---|---|---|---|---|---|
| Revenue from external customers | $ 11,778,000 | $ | 2,346,000 | $ | 1,816,000 | $ | 15,940,000 | |
| Income (loss) from operations | (988,000 | ) | (347,000 | ) | 9,000 | (1,326,000 | ) | |
| Income (loss) before tax | (1,680,000 | ) | (330,000 | ) | (24,000 | ) | (2,034,000 | ) |
| Total Assets | 15,999,000 | 3,692,000 | 2,484,000 | 22,175,000 | ||||
| Capital expenditures | 163,000 | 99,000 | 4,000 | 266,000 | ||||
| Depreciation & Amortization | 391,000 | 196,000 | 95,000 | 682,000 |
*The consolidated total in the tables is a sum of segment figures and may not tie to actual figures in the condensed consolidated financial statements due to rounding.
18) Subsequent Events
Management evaluated all other activity of the Company and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “report”) and the audited consolidated financial statements and related notes thereto included in Part II, Item 8 “Financial Statements and Supplementary Data,” as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2018. Some of the statements in this report may contain forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements 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. Many of these forward-looking statements are located in this report under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but they may appear in other sections as well. Forward-looking statements in this report generally relate to: (i) our warranty costs and order backlog; (ii) our beliefs regarding the sufficiency of working capital and cash flows; (iii) our expectation that we will continue to be able to renew or obtain financing on reasonable terms when necessary; (iv) the impact of recently issued accounting pronouncements; (v) our intentions and beliefs relating to our costs, business strategies, and future performance; (vi) our expected financial results; and (vii) our expectations concerning our primary capital and cash flow needs.
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: (i) the impact of changing credit markets on our ability to continue to obtain financing on reasonable terms; (ii) our ability to repay current debt, continue to meet debt obligations and comply with financial covenants; (iii) the effect of general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (iv) fluctuations in seasonal demand and our production cycle; and (v) other factors described from time to time in our Securities and Exchange Commission filings. We do not intend to update the forward-looking statements contained in this report other than as required by law. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits 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.
Critical Accounting Policies
Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of our financial statements as of August 31, 2019 remain unchanged from November 30, 2018 with the exception of the addition of a critical accounting policy regarding revenue recognition from contracts with customers, which is set forth below. Disclosure of these critical accounting policies is incorporated by reference from Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2018.
Revenue from Contracts with Customers
Effective December 1, 2018 we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of ASC 606 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and is to be applied retrospectively, with early application not permitted. We adopted ASC 606 for fiscal 2019, including interim periods within that reporting period.
We have evaluated the new standard and applied the core principle to our contract revenue streams. To be consistent with this core principle, an entity is required to apply the following five-step approach:
Identify the contract(s) with a customer;
Identify each performance obligation in the contract;
Determine the transaction price;
Allocate the transaction price to each performance obligation; and
Recognize revenue when or as each performance obligation is satisfied.
Our revenues primarily result from contracts with customers. 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 good(s). The modular buildings segment executes contracts with customers that can be short or long-term in nature. These contracts can have multiple performance obligations and revenue from these can be recognized over time or at a point in time depending on the nature of the contracts. Payment terms generally are short-term and vary by customer and segment. Our implementation process for ASC 606 included modifications to the contracts of the modular buildings segment.
We use discounts as a form of variable consideration for our agricultural products and tools segments. The variable consideration is allocated to the transaction price at contract inception and is generally not contingent on future outcomes. The agricultural products and tools segments do not offer rebates or credits. The modular buildings segment does not offer discounts, credits or rebates.
Our product warranty is included in the price of the product and provides assurance that the product will function in accordance with agreed-upon specifications. Product warranty is expensed at the time of sale for the agricultural products and modular buildings segments. A small reserve is kept on the balance sheet as consideration for the tools segment warranty. This product warranty does not represent a separate performance obligation under ASC 606.
We adopted ASC 606 using the modified retrospective method. We have determined that amounts reported under ASC 606 are not materially different than amounts reported under the previous revenue guidance of ASC 605 and therefore, we were not required to make an adjustment to retained earnings.
We, upon adoption of ASC 606, have increased the amount of required disclosures in the notes to our financial statements, including but not limited to:
● Disaggregation of revenue that depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors;
● The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed;
● Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period;
● Information about performance obligations in contracts with customers; and
● Judgments that significantly affect the determination of the amount and timing of revenue from contracts with customers, including the timing satisfaction of performance obligation, and the transaction price and the amounts allocated to performance obligations.
Results of Operations – Continuing Operations
Net Sales and Cost of Sales
Our consolidated corporate sales for continuing operations for the three- and nine-month periods ended August 31, 2019 were $5,504,000 and $15,375,000, respectively, compared to $5,280,000 and $15,940,000 during the same respective periods in fiscal 2018, a $224,000, or 4.2%, increase for the three months and a $565,000, or 3.5%, decrease for the nine months. The increase for the three months is primarily due to an increase in revenue from our modular buildings segment due to a large contract. This contract is approximately 31% complete and is expected to carry over into the spring of 2020. Consolidated gross margin for the three-month period ended August 31, 2019 was 18.3% compared to 22.3% for the same period in fiscal 2018. Consolidated gross margin for the nine-month period ended August 31, 2019 was 16.7% compared to 21.6% for the same period in fiscal 2018. This overall decreased gross margin is attributable to decreased gross margin in both our agricultural products and modular buildings segments, as discussed in further detail below.
Our third quarter sales at our agricultural products segment were $3,194,000 compared to $3,913,000 during the same period of 2018, a decrease of $719,000, or 18.4%. Our year-to-date sales from our agricultural products segment were $9,441,000 compared to $11,778,000 during the same period in fiscal 2018, a decrease of $2,337,000, or 19.8%. Our three-month decrease in revenue is due to crop uncertainty driven by spring flooding across the United States. Many farmers planted on historically late dates during the 2019 planting season, which drove a decrease in demand for our portable feed equipment. The year-to-date decrease in sales is due to decreased demand for portable feed equipment, forage and receiver boxes, and UHC reels. Additionally, the liquidation of our Canadian subsidiary accounted for a decrease of approximately $420,000 in sales in fiscal 2019. Moreover, our year-to-date fiscal 2018 revenue reflects liquidation of an old model of manure spreader, which was sold at a decreased margin, and OEM blower revenue of approximately $262,000 that was not repeated in fiscal 2019 as our OEM blower customer elected not to purchase any blowers from us in fiscal 2019 due to slow-moving inventory on their dealer lots relating to poor agricultural market conditions. Despite the overall sales decrease, we did see increased sales for the nine months ended August 31, 2019 in land maintenance equipment, plows, beet equipment, bale processors and dump boxes compared to the same period in fiscal 2018. Gross margin for our agricultural products segment for the three-month period ended August 31, 2019 was 15.7% compared to 21.6% for the same period in fiscal 2018. Gross margin for our agricultural products segment for the nine-month period ended August 31, 2019 was 15.7% compared to 21.8% for the same period in fiscal 2018. The decrease in gross margin in fiscal 2019 is due to lower revenues with less variable margin to absorb fixed costs coupled with labor inefficiencies in our plant. With the absence of steady demand for portable feed equipment, our most efficient equipment to build, we have struggled to gain operational efficiencies that are generally gained by continued production of a single product. Our efficiency has also been affected by the diversion of direct labor for operational changes that will have long-term benefits. We have partially completed warehouse reorganization, which we expect will improve inventory accuracy and decrease travel time for material handlers and machine operators. We have also implemented a material review board to decrease scrap and eliminate production errors. We believe our continued operational improvement projects will put us in a position to meet increased demand in an improved agriculture economy.
Our third quarter sales at our modular buildings segment were $1,802,000 compared to $773,000 for the same period in 2018, an increase of $1,029,000, or 133.1%. Our year-to-date sales from our modular buildings segment were $4,382,000 compared to $2,346,000 for the same period in 2018, an increase of $2,036,000, or 86.8%. Our increase in revenue is largely attributable to a $8.5 million project that began in the spring of 2019 and increased lease revenue from modular building rentals. Gross margin for the three- and nine-month periods ended August 31, 2019 was 20.0% and 14.7% compared to 15.8% and 13.7% for the same respective periods in fiscal 2018. The increase in gross margin is due to increased revenue from leasing and modular construction providing more variable margin to cover fixed costs.
Our tools segment had sales of $508,000 and $1,552,000 during the three- and nine-month periods ended August 31, 2019 compared to $594,000 and $1,816,000 for the same respective periods in fiscal 2018, a 14.5% decrease for both the three- and nine-month periods. The year to date decrease is primarily due to the loss of a large volume customer at the end of the first quarter of fiscal 2018. Gross margin was 28.0% and 28.4% for the three- and nine-month periods ended August 31, 2019 compared to 34.7% and 30.1% for the same respective periods in fiscal 2018. Our decreased gross margin for the nine-months is largely due to lower revenues with less variable margin to absorb fixed costs.
Expenses
Our third quarter consolidated selling expenses were $379,000 compared to $476,000 for the same period in fiscal 2018. Our year-to-date selling expenses were $1,119,000 compared to $1,448,000 for the same period in fiscal 2018. The decrease in selling expenses is due to decreased commissions as a result of lower sales along with refocused marketing techniques. Our new marketing efforts include a shift to social media from more expensive print advertisements along with less participation in trade shows in fiscal 2019. Selling expenses as a percentage of sales were 6.9% and 7.3% for the three- and nine-month periods ended August 31, 2019 compared to 9.0% and 9.1% for the same respective periods in fiscal 2018.
Consolidated engineering expenses were $116,000 and $380,000 for the three- and nine-month periods ended August 31, 2019 compared to $202,000 and $458,000 for the same respective periods in fiscal 2018. The decrease in engineering expenses is related to lower research and development costs in fiscal 2019 due to an internal focus on process improvement and product cost reductions. We also moved an hourly engineer into a production role and reduced our salaried staff. Engineering expenses as a percentage of sales were 2.1% and 2.5% for the three- and nine-month periods ended August 31, 2019 compared to 3.8% and 2.9% for the same respective periods in fiscal 2018.
Consolidated administrative expenses for the three- and nine-month periods ended August 31, 2019 were $815,000 and $2,466,000 compared to $858,000 and $2,656,000 for the same respective periods in fiscal 2018. The decrease in administrative expenses is largely due to a reduction in indirect employees in the agricultural products segment and a reduction in the number of temporary employees used in our tools segment. Administrative expenses as a percentage of sales were 14.8% and 16.0% for the three- and nine-month periods ended August 31, 2019 compared to 16.2% and 16.7% for the same respective periods in fiscal 2018.
(Loss) from Continuing Operations
Consolidated net (loss) from continuing operations before income taxes was $(370,000) for the three-month period and $(1,610,000) for the nine-month period ended August 31, 2019 compared to net (loss) from continuing operations before income taxes of $(949,000) and $(2,034,000) for the same respective periods in fiscal 2018. The decrease in our net (loss) for the quarter and year-to-date is primarily related to the success of our modular buildings segment on an $8.5 million project and elimination of indirect positions at our agricultural products segment. In the third quarter of fiscal 2018, we also incurred costs of $520,000 related to the impairment and mold remediation of our West Union Facility, which were not repeated in fiscal 2019.
Income Tax Adjustment
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was enacted, which reduced the top corporate income tax rate from 35% to 21%. We have assessed the impact of the law on our reported assets, liabilities, and results of operations, and we believe that going forward, the overall rate reduction will have a positive impact on our net income in the long run. However, during the first quarter of fiscal 2018, we substantially reduced our net deferred tax asset using the new lower rates. Based on our recorded deferred tax asset at November 30, 2017, we reduced the deferred tax asset by approximately $298,000, which was recorded as an adjustment to our tax provision in the first quarter ended February 28, 2018.
Order Backlog
The consolidated order backlog net of discounts for continuing operations as of October 6, 2019 was $7,565,000 compared to $1,384,000 as of October 6, 2018. The agricultural products segment order backlog was $1,174,000 as of October 6, 2019 compared to $682,000 in fiscal 2018. The increase in backlog from the agricultural products segment is due to increasing confidence in crop yields following the spring flooding. The backlog for the modular buildings segment was $6,173,000 as of October 6, 2019, compared to $609,000 in fiscal 2018. This increase in backlog is due to a modular research facility contracted at $8.5 million that is scheduled to be completed in the spring of 2020 and a very active modular research sales market. The backlog for the tools segment was $218,000 as of October 6, 2019 compared to $94,000 in fiscal 2018. The increase in backlog for our tools segment is largely due to an OEM agreement that was signed in the third quarter of fiscal 2019. Our order backlog is not necessarily indicative of future revenue to be generated from such orders due to the possibility of order cancellations and dealer discount arrangements we may enter into from time to time.
Results of Operations – Discontinued Operations
During the third quarter of fiscal 2016, we made the decision to exit the pressurized vessels industry. On March 29, 2018 we disposed of the remaining assets of our pressurized vessels segment at a selling price of $1,500,000.
Liquidity and Capital Resources
Our primary source of funds for the nine months ended August 31, 2019 was cash generated by investing activities, which includes the proceeds from the sale of our prior facility in West Union, Iowa. Our operating activities provided positive cash flow by utilizing a favorable draw schedule on our $8.5 million modular building contract and through the reduction of inventory. Financing activities, including the retirement of debt, were our primary uses of cash for the third quarter of fiscal 2019. We expect our primary capital needs for the remainder of fiscal 2019 to relate to operating costs, primarily production and contract fulfilment, and retirement of debt.
We have a $5,000,000 revolving line of credit with Bank Midwest that, as of August 31, 2019, had an outstanding principal balance of $2,909,530. The line of credit is scheduled to mature on March 30, 2020 if no earlier demand is made.
We believe that our cash flows from operations and current financing arrangements will provide sufficient cash to finance operations and pay debt when due during the next twelve months. We expect to continue to be able to procure financing upon reasonable terms.
Off Balance Sheet Arrangements
None.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The person serving as our principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e), as of the end of the period subject to this report. Based on this evaluation, the person serving as our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective and provide reasonable assurance that information required to be disclosed by us in the periodic and current reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified by the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings.
We are currently not a party to any material pending legal proceedings.
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide disclosure pursuant to this item.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Mine Safety Disclosures.
Not applicable.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits.
| Exhibit No. | Description |
|---|---|
| 31.1 | Certificate of Chief Executive Officer and Interim Chief Financial Officer pursuant to 17 CFR 13a-14(a) – filed herewith. |
| 32.1 | Certificate of Chief Executive Officer and Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350 - filed herewith. |
| 101 | The following materials from this report, formatted in XBRL (Extensible Business Reporting Language) are filed herewith: (i) condensed consolidated balance sheets, (ii) condensed consolidated statement of operations, (iii) condensed consolidated statements of cash flows, and (iv) the notes to the condensed consolidated financial statements. |
SIGNATURES
Pursuant to the requirements 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.
| /s/ Carrie L . Gunnerson |
|---|
| Carrie L. Gunnerson |
| President, Chief Executive Officer and Interim Chief Financial Officer |
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.