UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) (Zip Code) |
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(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 |
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The |
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.
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).
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 ☐ |
Smaller reporting company |
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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
Number of common shares outstanding as of April 5, 2023:
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, 2023 and November 30, 2022 | 1 | ||
Condensed Consolidated Statements of Operations Three-month periods ended February 28, 2023 and February 28, 2022 | 2 | ||
Condensed Consolidated Statements of Stockholders’ Equity Three-month periods ended February 28, 2023 and February 28, 2022 | 3 | ||
Condensed Consolidated Statements of Cash Flows Three-month periods ended February 28, 2023 and February 28, 2022 | 4 | ||
Notes to Condensed Consolidated Financial Statements | 5 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 21 | |
Item 4. | Controls and Procedures | 21 | |
PART II – OTHER INFORMATION | 22 | ||
Item 1. | Legal Proceedings | 22 | |
Item 1A. | Risk Factors | 22 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 22 | |
Item 3. | Defaults Upon Senior Securities | 22 | |
Item 4. | Mine Safety Disclosures | 22 | |
Item 5. | Other Information | 22 | |
Item 6. | Exhibits | 23 | |
SIGNATURES | 24 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
ART’S-WAY MANUFACTURING CO., INC. |
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Consolidated Balance Sheets |
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(Unaudited) |
Assets |
February 28, 2023 |
November 30, 2022 |
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Current assets: | ||||||||
Cash |
$ | $ | ||||||
Accounts receivable-customers, net of allowance for doubtful accounts of $ |
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Inventories, net |
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Cost and profit in excess of billings |
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Other current assets |
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Total current assets |
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Property, plant, and equipment, net |
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Assets held for lease, net |
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Deferred income taxes |
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Other assets |
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Total assets |
$ | $ | ||||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable |
$ | $ | ||||||
Customer deposits |
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Billings in excess of cost and profit |
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Income taxes payable |
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Accrued expenses |
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Line of credit |
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Current portion of finance lease liabilities |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term liabilities | ||||||||
Long-term portion of operating lease liabilities |
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Long-term portion of finance lease liabilities |
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Long-term debt, excluding current portion |
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Total liabilities |
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Commitments and Contingencies (Notes 8, 9 and 15) |
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Stockholders’ equity: | ||||||||
Undesignated preferred stock - $ |
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Common stock – $ |
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Additional paid-in capital |
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Retained earnings |
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Treasury stock, at cost ( |
( |
) | ( |
) | ||||
Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ | $ |
See accompanying notes to consolidated financial statements. |
ART’S-WAY MANUFACTURING CO., INC. |
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Consolidated Statements of Operations |
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(Unaudited) |
Three Months Ended |
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February 28, 2023 |
February 28, 2022 |
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Sales |
$ | $ | ||||||
Cost of goods sold |
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Gross profit |
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Expenses | ||||||||
Engineering |
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Selling |
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General and administrative |
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Total expenses |
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Income (loss) from operations |
( |
) | ||||||
Other income (expense): | ||||||||
Interest expense |
( |
) | ( |
) | ||||
Other |
( |
) | ||||||
Total other income (expense) |
( |
) | ( |
) | ||||
Income (loss) before income taxes |
( |
) | ||||||
Income tax expense |
( |
) | ||||||
Net Income (loss) |
( |
) |
See accompanying notes to consolidated financial statements. |
ART’S-WAY MANUFACTURING CO., INC. |
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Consolidated Statements of Stockholders' Equity |
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Three Months Ended February 28, 2023 and February 28, 2022 |
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(Unaudited) |
Common Stock |
Additional |
Treasury Stock |
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Number of |
paid-in |
Retained |
Number of |
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shares |
Par value |
capital |
earnings |
shares |
Amount |
Total |
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Balance, November 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
Stock based compensation |
( |
) | ||||||||||||||||||||||||||
Net (loss) |
- | ( |
) | - | ( |
) | ||||||||||||||||||||||
Balance, February 28, 2022 |
( |
) |
Common Stock |
Additional |
Treasury Stock |
||||||||||||||||||||||||||
Number of |
paid-in |
Retained |
Number of |
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shares |
Par value |
capital |
earnings |
shares |
Amount |
Total |
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Balance, November 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
Stock based compensation |
( |
) | ||||||||||||||||||||||||||
Net Income |
- | - | ||||||||||||||||||||||||||
Balance, February 28, 2023 |
( |
) |
See accompanying notes to condensed consolidated financial statements. |
ART’S-WAY MANUFACTURING CO., INC. |
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Consolidated Statements of Cash Flows |
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(Unaudited) |
Three Months Ended |
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February 28, 2023 |
February 28, 2022 |
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Cash flows from operations: | ||||||||
Net income (loss) |
$ | $ | ( |
) | ||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Stock based compensation |
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Decrease in obsolete inventory reserves |
( |
) | ( |
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Gain on disposal of property, plant, and equipment |
( |
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Depreciation and amortization expense |
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Accrued interest on deferred debt payments |
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Increase (Decrease) in allowance for doubtful accounts |
( |
) | ||||||
Deferred income taxes |
( |
) | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in: | ||||||||
Accounts receivable |
( |
) | ||||||
Inventories |
( |
) | ( |
) | ||||
Other assets |
( |
) | ( |
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Increase (decrease) in: | ||||||||
Accounts payable |
( |
) | ( |
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Contracts in progress, net |
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Customer deposits |
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Income taxes payable |
( |
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Accrued expenses |
( |
) | ||||||
Net cash provided by operating activities |
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Cash flows from investing activities: | ||||||||
Purchases of property, plant, and equipment |
( |
) | ( |
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Net proceeds from sale of assets |
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Net cash used in investing activities |
( |
) | ( |
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Cash flows from financing activities: | ||||||||
Net change in line of credit |
( |
) | ( |
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Principal payments on finance lease obligations |
( |
) | ( |
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Repayment of term debt |
( |
) | ( |
) | ||||
Repurchases of common stock |
( |
) | ( |
) | ||||
Net cash used in financing activities |
( |
) | ( |
) | ||||
Net increase (decrease) in cash |
( |
) | ||||||
Cash at beginning of period |
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Cash at end of period |
$ | $ | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest |
$ | $ | ||||||
Income taxes |
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Amortization of operating lease ROU assets (included in other assets) | $ | $ |
See accompanying notes to 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
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 |
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.
Three Months Ended February 28, 2023 |
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Agricultural |
Modular Buildings |
Tools |
Total |
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Farm equipment |
$ | $ | $ | $ | ||||||||||||
Farm equipment service parts |
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Steel cutting tools and inserts |
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Modular buildings |
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Modular building lease income |
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Other |
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$ | $ | $ | $ |
Three Months Ended February 28, 2022 |
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Agricultural |
Modular Buildings |
Tools |
Total |
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Farm equipment |
$ | $ | $ | $ | ||||||||||||
Farm equipment service parts |
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Steel cutting tools and inserts |
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Modular buildings |
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Modular building lease income |
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Other |
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$ | $ | $ | $ |
The Company offered floorplan terms in its Agricultural Products segment during its Fall of 2021 and 2022 early order program to incentivize customers to stock farm equipment on their lots for fiscal 2022 and fiscal 2023. Floorplan terms allow customers to pay the Company at the earliest of retail date or 180 days. This program has an effect on the timing of the Company’s cash flows compared with historical cash flows.
On February 28, 2023, the Company had approximately $
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.
February 28, 2023 |
November 30, 2022 |
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Receivables |
$ | $ | ||||||
Assets |
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Liabilities |
The amount of revenue recognized in the first three months of fiscal 2023 that was included in a contract liability on November 30, 2022 was approximately $
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, 2023, 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, 2023 and February 28, 2022:
For the Twelve Months Ended |
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February 28, 2023 |
February 28, 2022 |
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Numerator for basic and diluted net income (loss) per share: |
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Net income (loss) |
$ | $ | ( |
) | ||||
Denominator: |
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For basic net income (loss) per share - weighted average common shares outstanding |
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Effect of dilutive stock options |
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For diluted net income (loss) per share - weighted average common shares outstanding |
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Net Income (Loss) per share - Basic: |
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Net Income (Loss) per share |
$ | $ | ( |
) | ||||
Net Income (Loss) per share - Diluted: |
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Net Income (Loss) per share |
$ | $ | ( |
) |
6) |
Inventory |
Major classes of inventory are:
February 28, 2023 |
November 30, 2022 |
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Raw materials |
$ | $ | ||||||
Work in process |
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Finished goods |
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Total Gross Inventory |
$ | $ | ||||||
Less: Reserves |
( |
) | ( |
) | ||||
Net Inventory |
$ | $ |
7) |
Accrued Expenses |
Major components of accrued expenses are:
February 28, 2023 |
November 30, 2022 |
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Salaries, wages, and commissions |
$ | $ | ||||||
Accrued warranty expense |
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Other |
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$ | $ |
8) |
Assets Held for Lease |
Major components of assets held for lease are:
February 28, 2023 |
November 30, 2022 |
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Modular Buildings |
$ | $ | ||||||
Total assets held for lease |
$ | $ |
The Company recognized $
The Company has $
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
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, 2023 and February 28, 2022 are as follows:
For the Three Months Ended |
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February 28, 2023 |
February 28, 2022 |
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Balance, beginning |
$ | $ | ||||||
Settlements / adjustments |
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Warranties issued |
( |
) | ( |
) | ||||
Balance, ending |
$ | $ |
10) |
Loan and Credit Agreements |
Bank Midwest Revolving Lines of Credit and Term Loans
The Company maintains a $
The Company carries a $
In connection with the Line of Credit, the Company, Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. each entered into a Commercial Security Agreement with Bank Midwest, dated September 28, 2017, pursuant to which each granted to Bank Midwest a first priority security interest in certain inventory, equipment, accounts, chattel paper, instruments, letters of credit and other assets to secure the obligations of the Company under the Line of Credit. Each of Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. also agreed to guarantee the obligations of the Company pursuant to the Line of Credit, as set forth in Commercial Guaranties, each dated September 28, 2017.
The Company also entered into the Roof Term Loan of $
To further secure the Line of Credit, the Company granted Bank Midwest a mortgage on its Canton, Ohio property held by Ohio Metal Working Products/Art’s-Way Inc. The Term Loan is secured by a mortgage on the Company’s Armstrong, Iowa and Monona, Iowa properties. Each mortgage is governed by the terms of a separate Mortgage, dated September 28, 2017, and each property is also subject to a separate Assignment of Rents, dated September 28, 2017.
If the Company or its subsidiaries (as guarantors pursuant to the Commercial Guaranties) commits an event of default with respect to the promissory notes and fails or is unable to cure that default, Bank Midwest may immediately terminate its obligation, if any, to make additional loans to the Company and may accelerate the Company’s obligations under the promissory notes. Bank Midwest shall also have all other rights and remedies for default provided by the Uniform Commercial Code, as well as any other applicable law and the various loan agreements. In addition, in an event of default, Bank Midwest may foreclose on the mortgaged property.
Compliance with Bank Midwest covenants is measured annually on November 30. The terms of the Bank Midwest loan agreements require the Company to maintain a minimum of $
SBA Economic Injury Disaster Loans
In June of 2020, the Company executed the standard loan documents required for securing loans offered by the U.S. Small Business Administration under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. Two loans were executed on June 18, 2020 with principal amounts of $
A summary of the Company’s term debt is as follows:
February 28, 2023 |
November 30, 2022 |
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Bank Midwest loan payable in monthly installments of $ |
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Bank Midwest loan payable in monthly installments of $ |
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U.S. Small Business Administration loan payable in monthly installments of $ |
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U.S. Small Business Administration loan payable in monthly installments of $ |
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U.S. Small Business Administration loan payable in monthly installments of $ |
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Total term debt |
$ | $ | ||||||
Less current portion of term debt |
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Term debt, excluding current portion |
$ | $ |
A summary of the minimum maturities of term debt follows for the years ending November 30:
Year |
Amount |
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2023 |
$ | |||
2024 |
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2025 |
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2026 |
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2027 |
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2028 and thereafter |
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$ |
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, 2023 and February 28, 2022, the Company did
13) |
Leases |
The Company determines if an arrangement is a lease at inception of a contract. The nature of the Company’s leases at this time is shop machinery and office equipment, mainly copiers, with terms of 12 to 60 months. Operating and finance leases are included in other assets as lease right-of-use (“ROU”) assets on the Consolidated Balance Sheets while current operating lease liabilities are included in accrued expenses. The short-term portion of finance leases along with long-term portions of operating and finance lease liabilities are presented on the face of the Consolidated Balance Sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term while finance lease ROU assets are amortized on a straight-line basis and interest expense is recorded over the lease term.
The Company has copier lease agreements with lease and non-lease components and has elected the practical expedient not to separate lease and non-lease components for this asset class. The Company has also elected not to recognize lease liabilities and ROU assets for leases with an initial term of twelve months or less. The Company recognizes variable costs that depend on usage in profit or loss as they are incurred.
The components of operating leases on the Condensed Consolidated Balance Sheets on February 28, 2023 and November 30, 2022 were as follows:
February 28, 2023 |
November 30, 2022 |
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Operating lease right-of-use assets (other assets) |
$ | |||||||
Current portion of operating lease liabilities (accrued expenses) |
$ | |||||||
Long-term portion of operating lease liabilities |
||||||||
Total operating lease liabilities |
$ |
The Company recorded $
Future maturities of operating lease liabilities are as follows:
Year Ending November 30, |
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2023 |
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2024 |
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2025 |
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2026 |
||||
Total lease payments |
||||
Less imputed interest |
( |
) | ||
Total operating lease liabilities |
The components of finance leases on the Consolidated Balance Sheets on February 28, 2023 and November 30, 2022 were as follows:
February 28, 2023 |
November 30, 2022 |
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Finance lease right-of-use assets (net of amortization in other assets) |
$ | $ | ||||||
$ | $ | |||||||
Current portion of finance lease liabilities (accrued expenses) |
$ | $ | ||||||
Long-term portion of finance lease liabilities |
||||||||
Total finance lease liabilities |
$ | $ |
Future maturities of finance lease liabilities as of February 28, 2023 are as follows:
Year Ending November 30, |
||||
2023 |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
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Total lease payments |
||||
Less imputed interest |
( |
) | ||
Total finance lease liabilities |
$ |
The weighted average lease term of the Company’s finance leases is
14) |
Equity Incentive Plan and Stock Based Compensation |
On February 25, 2020, the Board of Directors of the Company (the “Board”) authorized and approved the Art’s-Way Manufacturing Co., Inc. 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan was approved by the stockholders on April 30, 2020. The 2020 Plan replaced the Art’s-Way Manufacturing Co., Inc. 2011 Equity Incentive Plan (the “2011 Plan”) and prior plans. The 2020 Plan added an additional
The 2020 Plan permits the plan administrator to award nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance awards, and stock appreciation rights to employees (including officers), directors, and consultants. The Board has approved a director compensation policy pursuant to which non-employee directors are automatically granted restricted stock awards of
Shares issued under the 2020 Plan for the three months ended February 28, 2023 and 2022 are as follows:
For the Three Months Ended |
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February 28, 2023 |
February 28, 2022 |
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Shares issued to directors (immediate vesting) |
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Shares issued to directors, employees, and consultants (three-year vesting) |
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Unvested shares forfeit upon termination |
( |
) | ||||||
Total shares issued |
15) |
Common Stock Purchase Agreement |
On March 29, 2022, Art’s-Way Manufacturing Co., Inc. (the “Company”) entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Alumni Capital LP, a Delaware limited partnership (“Alumni Capital”), pursuant to which the Company agreed to sell, and Alumni Capital agreed to purchase, upon request of the Company in one or more transactions, a number of shares of the Company’s common stock, par value $
Among other limitations, unless otherwise agreed upon by Alumni Capital, each sale of shares will be limited to
In exchange for Alumni Capital entering into the Purchase Agreement, the Company issued
The Purchase Agreement provided that the Company file a registration statement under the Securities Act covering the resale of the shares issued to Alumni Capital. Alumni Capital’s obligation to purchase shares of Common Stock under the Purchase Agreement is conditioned upon, among other things, the registration statement having been declared effective by the Securities and Exchange Commission. The Company filed a registration statement on Form S-3 (the “Registration Statement”) April 27, 2022 which was declared effective on August 9, 2022 by the SEC.
The Company evaluated the embedded options and believed they should not be bifurcated from the agreement and accounted for separately as it is indexed to the Company’s stock and would qualify for equity treatment on the balance sheet.
The Company incurred approximately $
Below is a summary of shares purchased by Alumni Capital under this agreement as of the filing date of this report:
Date |
Shares | Share price net of discount | Proceeds | |||||||||
7/25/2022 |
$ | $ | ||||||||||
8/03/2022 |
$ | $ | ||||||||||
8/15/2022 |
$ | $ | ||||||||||
8/23/2022 |
$ | $ | ||||||||||
9/23/2022 |
$ | $ | ||||||||||
Total |
$ |
The Company has $
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. On February 28, 2023 and November 30, 2022, the carrying amount approximated fair value for cash, accounts receivable, accounts payable, notes payable to bank, finance lease liabilities 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 finance lease liabilities also approximate 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 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
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. 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.
Three Months Ended February 28, 2023 |
||||||||||||||||
Agricultural Products |
Modular Buildings |
Tools |
Consolidated |
|||||||||||||
Revenue from external customers |
$ | $ | $ | $ | ||||||||||||
Income (loss) from operations |
$ | $ | $ | $ | ||||||||||||
Income (loss) before tax |
$ | $ | $ | ( |
) | $ | ||||||||||
Total Assets |
$ | $ | $ | $ | ||||||||||||
Capital expenditures |
$ | $ | $ | $ | ||||||||||||
Depreciation & Amortization |
$ | $ | $ | $ |
Three Months Ended February 28, 2022 |
||||||||||||||||
Agricultural Products |
Modular Buildings |
Tools |
Consolidated |
|||||||||||||
Revenue from external customers |
$ | $ | $ | $ | ||||||||||||
Income (loss) from operations |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Income (loss) before tax |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Total Assets |
$ | $ | $ | $ | ||||||||||||
Capital expenditures |
$ | $ | $ | $ | ||||||||||||
Depreciation & Amortization |
$ | $ | $ | $ |
*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 other than the line of credit renewal and change in terms on the roof term loan as discussed in “Item 1 - Notes to Condensed Consolidated Financial Statements - Note 10 Loan and Credit Agreements.”
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, 2022. Some of the statements in this report may be 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 expectations with respect to 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 as well as our continued positive relationship with our creditors and lenders; (iv) our expectations as to the impact on margins due to recent price increases and expect costs of materials, such as steel; (v) our intentions and beliefs relating to our costs, business strategies, and future performance; (vi) our beliefs about the potential impact of our rebranding and customer experience efforts; (vii) our beliefs concerning our ability to attract and maintain an adequate workforce in a competitive labor market (viii) our expected financial results, including without limitation, our expected results for the Modular and Tools segments; and (ix) 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 inflation as well as general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (iv) any further impact from COVID-19; (v) fluctuations in seasonal demand and our production cycle; (vi) the ability of our suppliers to meet our demands for raw materials and component parts; (vii) fluctuations in the price of raw materials, especially steel; (viii) our ability to predict and meet the demands of each market in which our segments operate; and (ix) 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 February 28, 2023 remain unchanged from November 30, 2022. 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, 2022.
Results of Operations
Net Sales and Cost of Sales
Our consolidated corporate sales for the three-month period ended February 28, 2023 were $7,895,000 compared to $5,613,000 during the same period in fiscal 2022, an increase of $2,282,000, or 40.7%. We saw increased sales across all three of our business segments for the three months ended February 28, 2023 compared to the same period of fiscal 2022. Consolidated gross margin for the three-month period ended February 28, 2023 was 29.8% compared to 21.2% for the same period in fiscal 2022.
Our first quarter fiscal 2023 sales in our Agricultural Products segment were $5,445,000 compared to $4,161,000 for the same period in fiscal 2022, an increase of $1,284,000, or 30.9%. Because of strong demand and continued manufacturing efficiency improvements, this segment was able to build on recent success and increase sales significantly. We saw increased sales in the first fiscal quarter in our portable feed, manure spreader, land maintenance, top spread and defoliator products. Our recent manufacturing improvements allowed us to improve product availability and capitalize on the recent period of heightened demand. In addition, we believe our rebranding efforts and improved customer experience is yielding positive results. Gross margin for the three-month period ended February 28, 2023 was 34.2% compared to 25.9% for the same period in fiscal 2022. Our margins improved in the first fiscal quarter of 2023 as the price of steel has dropped from its peak in fiscal 2022 and also from price increases we have initiated to stay ahead of rising overhead costs. We have started to see the price of steel rise again in fiscal 2023 and expect overhead and component prices to continue to increase.
Our first quarter fiscal 2023 sales in our Modular Buildings segment were $1,642,000 compared to $868,000 for the same period in fiscal 2022, an increase of $774,000, or 89.2%. This segment had a light first quarter of fiscal 2022 as the approval process for some large research projects was longer than originally expected. The first quarter of fiscal 2023 was met with a steady stream of project work in both the agriculture and research sectors and led to the increase in sales. Our fiscal 2022 revenue was dominated by agricultural buildings, while our fiscal 2023 backlog consists of more research buildings which typically carry better margins. Gross margin for the three-month period ended February 28, 2023 was 19.7% compared to 4.8% for the same period in fiscal 2022. The increase in gross margin is due to increased coverage on fixed manufacturing costs from the large revenue increase.
Our Tools segment had sales of $808,000 during the first quarter compared to $584,000 for the same period in fiscal 2022, an increase of $224,000, or 38.4%. The sales increase for the first quarter of fiscal 2023 was due to a more stable workforce than we had seen over the past fiscal year coupled with automation equipment we put in place. This segment’s demand remains steady, and we expect price increases we put into place last year to help with sales increases and improved margins. Gross margin was 20.1% for the three-month period ended February 28, 2023 compared to 12.5% for the same period in fiscal 2022. The increased margin is due to price increases enacted near the end of fiscal 2022 and additional volume to absorb fixed overhead costs.
Expenses
Our first quarter consolidated selling expenses were $594,000 compared to $487,000 for the same period in fiscal 2022. The increase in selling expenses is due to increased commission expense in our Agricultural Products and Modular Buildings segments. Selling expenses as a percentage of sales were 7.5% for the three-month period ended February 28, 2023 compared to 8.7% for the same period in fiscal 2022.
Consolidated engineering expenses were $128,000 for the three-month period ended February 28, 2023 compared to $134,000 from the same period in fiscal 2022. Engineering expenses as a percentage of sales were 1.6% for the three-month period ended February 28, 2023 compared to 2.4% for the same period in fiscal 2022.
Consolidated administrative expenses for the three-month period ended February 28, 2023 were $1,078,000 compared to $1,008,000 for the same period in fiscal 2022. The increase in administrative expenses for the first quarter of fiscal 2023 is due to the rising wages to help battle inflation for our employees. Administrative expenses as a percentage of sales were 13.7% for the three-month period ended February 28, 2023 compared to 18.0% for the same period in fiscal 2022.
Net Income (loss)
Consolidated net income was $342,000 for the three-month period ended February 28, 2023 compared to net loss of $(406,000) for the same period in fiscal 2022. We reported net income in two of our three segments for the first fiscal quarter of 2023 but also reported operating income in all three. Despite the first quarter of our fiscal years being our slowest quarter historically for our Agricultural Products segment, we met our customer inventory demands and finished with a strong first quarter of fiscal 2023. In the Modular Buildings segment, we started to ramp up production of research buildings at the end of Q1 of fiscal 2023 and expect fiscal 2023 to be stronger than 2022 with respect to the segment. In the Tools segment, we wrote-off approximately $18,000 of inventory items that ultimately drove a net loss for the first quarter of fiscal 2023. Our Tools segment had steady revenue and production through the first quarter of fiscal 2023, which we believe will continue based on current backlog.
Order Backlog
The consolidated order backlog net of discounts as of April 5, 2023 was $13,042,000 compared to $11,210,000 as of April 5, 2022, a 16% increase. The Agricultural Products segment order backlog was $8,370,000 as of April 5, 2023 compared to $9,057,000 in fiscal 2022. The backlog for the Modular Buildings segment was $4,203,000 as of April 5, 2023, compared to $1,449,000 in fiscal 2022. The large backlog increase is due to a large research project that came under contract in the first quarter of fiscal 2023 that we believe will drive strong revenue numbers this fiscal year. The backlog for the Tools segment was $469,000 as of April 5, 2023 compared to $704,000 in fiscal 2022. Our Tools backlog has decreased in fiscal 2023 as our workforce has stabilized allowing us to produce more and reduce our past due backlog. 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.
Liquidity and Capital Resources
Our primary source of funds for the three months ended February 28, 2023 was cash generated by our operating activities. We collected approximately $2.5 million in customer deposits on our early order program for fiscal 2023 which we then used to fund a million dollar increase in our inventory. The early order deposit program helps us better plan our production schedule to maximize plant efficiency and helps us lock in material pricing for the year. The large influx of deposits helped to lower our line of credit balance and overall, we retired approximately a million dollars of debt in the first quarter of fiscal 2023. We also saw a large increase in our receivables due to increased sales and large billings in our Modular Buildings segment in February 2023, which we expect to provide a source of cash. We expect our primary capital needs for the remainder of fiscal 2023 to relate to operating costs for the fulfillment of customer deposits, capital expenditures to continue improving operations and the retirement of debt.
We have a $5,000,000 revolving line of credit with Bank Midwest that, as of February 28, 2023, had an outstanding principal balance of $3,055,559. This line of credit was renewed on March 30, 2023 and is scheduled to mature on March 30, 2024.
The Company also has up to $2,454,472 available funds that can potentially be utilized by June 30, 2023 under a Common Stock Purchase Agreement with Alumni Capital LP, subject to certain limitations, conditions and market conditions.
We believe our 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.
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 persons serving as our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period subject to this report. Based on this evaluation, the persons serving as our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of February 28, 2023. Our management has concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
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. |
The following table presents the information with respect to purchases made by us of our common stock during the first quarter of fiscal 2023:
Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs |
|||||||||||||
December 1 to December 31, 2022 |
- | $ | - | N/A | N/A | |||||||||||
January 1 to January 31, 2023 |
8,125 | $ | 2.50 | N/A | N/A | |||||||||||
February 1 to February 28, 2023 |
- | $ | - | N/A | N/A | |||||||||||
Total |
8,125 | $ | 2.50 |
(1) Reflects shares withheld pursuant to the terms of restricted stock awards under our 2020 Plan to offset tax withholding obligations that occur upon vesting and release of shares. The value of the shares withheld is the closing price of our common stock on the date the relevant transaction occurs.
Item 3. |
Defaults Upon Senior Securities. |
None.
Item 4. |
Mine Safety Disclosures. |
Not applicable.
Item 5. |
Other Information. |
Line of Credit Renewals and Change in Terms Agreement
Effective March 30, 2023, we renewed our $5,000,000 revolving line of credit with Bank Midwest. The revolving line of credit matures on March 30, 2024 and requires monthly interest-only payments. The updated Promissory Note with Bank Midwest is included as Exhibit 10.1 hereto and is incorporated herein.
Effective March 30, 2023, we agreed to a change in terms on our $350,000 roof term loan with Bank Midwest. The interest rate changed to a fixed 7.0% from a floating rate of 2.0% plus the Wall Street Journal rate. The updated Promissory Note with Bank Midwest is included as Exhibit 10.2 hereto and is incorporated herein.
Item 6. |
Exhibits. |
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.
ART’S-WAY MANUFACTURING CO., INC. | ||
Date: April 13, 2023 |
|
By: /s/ David A. King |
David A. King |
||
President and Chief Executive Officer |
||
Date: April 13, 2023 |
By: /s/ Michael W. Woods |
|
Michael W. Woods |
||
Chief Financial Officer |