PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

We haveThe Company has organized ourits business into three operating segments. Management separately evaluates the financial results of each segment because each is a strategic business unit offering different products and requiring different technology and marketing strategies. Our agricultural productsThe Agricultural Products segment (“Manufacturing”) manufactures and sells farm equipment and related replacement parts under the Art’s-Way Manufacturing label and private labels. Our modular buildingsThe Modular Buildings segment (“Scientific”) manufactures and installs modular buildings for various uses, commonly animal containment and research laboratoriesvarious laboratory uses, and our toolsthe Tools segment (“Metals”) manufactures steel cutting tools and inserts. During

On June 7, 2023, the third quarterCompany announced it will discontinue its Tools business segment. Runoff operations will be ongoing through July 14, 2023, whereafter, a limited number of fiscal 2016, westaff members will be employed to assist in the liquidation process. The Tools segment is included as continuing operations in our financial statements as of and for the periods ending May 31, 2023 as remaining orders and ancillary operations are being fulfilled. This segment will be considered a discontinued our pressurized vessels segment (“Vessels”) that manufactured pressurized vessels. For more information on discontinued operations, see Note 3 “Discontinued Operations.” For detailed financial information relating to segment reporting, see Note 13 “Segment Information.”operation when the plant and office facilities are closed, or it meets the criteria as held for sale.

Statement Presentation

The foregoing condensed consolidated financial statements of the Company are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) whichthat 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, 2016.2022. The results of operations for the three and ninesix months ended AugustMay 31, 20172023 are not necessarily indicative of the results to be expected for the fiscal year ending November 30, 2017.2023.

The financial books of the Company’s Canadian operation are kept in the functional currency of Canadian dollars and the financial statements are converted to U.S. Dollars for consolidation. When consolidating the financial results of the Company into U.S. Dollars for reporting purposes, the Company uses the All-Current translation method. The All-Current 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 is translated at historical exchange rates and retained earnings are translated at an average exchange rate for the period. Additionally, revenue and expenses are translated at average exchange rates for the periods presented. The resulting cumulative translation adjustment is carried on the balance sheet and is recorded in stockholders’ equity for 2017. Since the Company believes that it is more likely than not that no income tax benefit will occur if the foreign equity is sold or liquidated, the cumulative translation adjustment has not been tax adjusted.

Estimates

The preparation of financial statementsstatements 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 ninesix months ended AugustMay 31, 2017.2023. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

Measurement of Credit Losses on Financial Instruments

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

Effective October 31, 2016,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 Company discontinued the operationsnature, amount, timing, and uncertainty of its Vessels segment in order to focus its effortsrevenue and resources on the business segments that have historically been more successful and thatcash flows are expected to present greater opportunities for meaningful long-term shareholder returns. The Company’s plan is to dispose of these assets over the next several quarters. At this time, the Company is working to dispose of the remaining assets, primarily the real estate.affected by economic factors.

As Vessels was a unique business unit of the Company, its liquidation was a strategic shift. In accordance with Accounting Standard Code Topic 360, the Company has classified Vessels as discontinued operations for all periods presented.

Income from discontinued operations, before income taxes in the accompanying Condensed Consolidated Statements of Operations, is comprised of the following:

The componentsCompany offered floorplan terms in its Agricultural Products segment during its Fall of discontinued operations in2021 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 accompanying Condensed Consolidated Balance Sheets are as follows: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 May 31, 2023, the Company had approximately $773,000 in receivables on the floorplan program with a due date greater than 30 days compared to $725,000 on May 31, 2022.

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

The amount of revenue recognized in the first six months of fiscal 2023 that was included in a contract liability on November 30, 2022 was approximately $1,145,000 compared to $559,000 in the same period of fiscal 2022. The beginning contract receivables, assets and liabilities on December 1, 2021 were approximately $2,663,000; $177,000 and $559,000, respectively.

Basic net income (loss) per share of common sharestock 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 earningsnet income (loss) per common share.

Basic and diluted earnings net income (loss) per common share have been computed based on the following as of AugustMay 31, 20172023 and AugustMay 31, 2016:2022:

Major classes of inventory are:

Major components of accrued expenses are:

Major components of assets held for lease are:

There were approximately $32,000 and $64,000 rents recognized from assets held for lease included in sales on the Condensed Consolidated Statements of Operations during the three and six months ended May 31, 2023, respectively, compared to zero for the same periods ending May 31, 2022.

The Company has $37,606 of future minimum lease receipts expected to be recognized in fiscal 2023 from assets held for lease as of May 31, 2023.

The Company recognized a gain of $114,156 on the sale of an asset held for lease in the three and six months ended May 31, 2023 compared to zero for the same periods ending May 31, 2022.

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’sCompany’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 6.7 “Accrued Expenses.” Changes in the Company’s product warranty liability for the three and ninesix months ended AugustMay 31, 20172023 and AugustMay 31, 20162022 are as follows:

The Company previously maintained a revolving lineBank Midwest Revolving Lines of creditCredit and term loans with U.S. Bank. Pursuant to a Forbearance and Fourth Loan Modification Agreement dated August 10, 2017 the (“Loan Modification”) entered into among U.S. Bank, as lender, the Company, as borrower, and Art’s-Way Scientific, Inc., Art’s-Way Vessels, Inc., and Ohio Metal Working Products/Art’s-Way, Inc., as guarantors, the agreements governing the U.S. Bank line of credit and certain term loans were amended. The description that follows reflects such arrangements as amended by the Loan Modification.

U.S. Bank Revolving Line of CreditTerm Loans

The Company hadmaintains a $5,000,000 revolving line of credit (the “Line of Credit”) with U.S. Bank which had an availability of $4,500,000, that was obtained onMidwest. On May 1, 2013.As of August 31, 2017,2023, the Company had a principal balance of $3,734,114 outstanding against the Line of Credit was $4,704,059 with $765,886$295,941 remaining available, as may be limited by the borrowing base calculation. The maturity dateLine of Credit borrowing base is an amount equal to 75% of accounts receivable balances (discounted for aged receivables), plus 50% of net inventory, less any outstanding loan balance on the Line of Credit. On May 31, 2023, the Line of Credit was September 25, 2017. The Line of Credit was securednot limited by real property and fixed asset collateral. The Line of Credit stated that the borrowing base will be an amount equal to the sum of 75% of accounts receivable (discounted for aged accounts and customer balances exceeding 20% of aggregate receivables), plus 50% of inventory (this component could not exceed $3,375,000 and only included finished goods and raw materials deemed to be in good condition and not obsolete), less any outstanding loan balance of the Line of Credit, undrawn amounts of outstanding letters of credit issued by U.S. Bank or any affiliate, and any reserves that U.S. Bank deemed necessary to maintain. Monthly interest-only payments were required and the unpaid principal and accrued interest were due on the maturity date. The Company’s obligations under the Line of Credit were evidenced by a Revolving Credit Note effective May 1, 2013, a Revolving Credit Agreement dated May 1, 2013, as amended, and certain other ancillary documents.

The Line of Credit was subject to: (i) a minimum interest rate of 5.5% per annum; and (ii) an unused fee which accrued at the rate of 0.25% per annum on the average daily amount by which the amount available for borrowing under the Line of Credit exceeded the outstanding principal amount. As of August 31, 2017, the interest rate on the Line of Credit was the minimum of 5.5%.

U.S. Bank Term Loans

On May 10, 2012, the Company obtained $880,000 in long-term debt from U.S. Bank issued to acquire the building and property of Universal Harvester Co., Inc. located in Ames, Iowa (the “U.S. Bank UHC Loan”), the assets and operations of which are now held by Art’s Way Manufacturing Co., Inc. in Armstrong, Iowa. The maturity date of this loan was scheduled to be May 10, 2017, with a final payment of principal and accrued interest in the amount of $283,500 due May 10, 2017. This loan accrued interest at a fixed rate of 3.15% per annum. Following the Fourth Loan Modification the maturity date was September 25, 2017, and the interest rate was an annual rate equal to 2.0% plus the prime rate, but not less than 5%. The interest rate was to be adjusted each time that the prime rate changes. The principal balance of this loan was $238,945 as of August 31, 2017. This loan was secured by a mortgage on the building and property acquired from Universal Harvester Co., Inc. in Ames, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated May 10, 2012, which was released upon the sale of the Company’s Ames, Iowa facility. The U.S. Bank UHC Loan was also secured by a mortgage on the building and property in Monona, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated May 1, 2013 and a mortgage on the building and property owned by the Company in Dubuque, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company (as successor by merger to Art’s-Way Vessels, Inc.) and U.S. Bank, dated May 1, 2013. On May 1, 2013, the U.S. Bank UHC Loan and the mortgage were amended to extend the mortgage to secure the 2013 Term Notes (defined below) in addition to the U.S. Bank UHC Loan.

Three of the Company’s outstanding term loans were obtained from U.S. Bank on May 1, 2013. The principal balance of these loans totaled $1,738,533 at August 31, 2017. Following the Fourth Loan Modification, the 2013 Term Notes accrued interest at a rate of 2.0% plus the prime rate, with a minimum of 5% per annum. There was previously also a fourth term loan obtained from U.S. Bank on May 1, 2013, but the Company voluntarily paid off and terminated the note and the related Term Loan Agreement on February 10, 2016. The payoff amount of $1,078,196 included principal and accrued and unpaid interest. As detailed in the Company’s debt summary below, monthly principal and interest payments in the aggregate amount of $46,672 were required on the remaining 2013 Term Notes, with a revised maturity date of September 25, 2017. The 2013 Term Notes previously had a maturity date of May 1, 2018.

The Company obtained a term loan from U.S. Bank on May 29, 2014 in the original principal amount of $1,000,000 (the “2014 Term Note”). The 2014 Term Note had a principal balance of $874,263 at August 31, 2017. Following the Fourth Loan Modification, the 2014 Term Note accrued interest at a rate of 2.0% plus the prime rate, with a minimum of 5% per annum. The Company took on the 2014 Term Note in order to partially pay down a draw on its revolving line of credit that it had used to finance the purchase of the building and property of Ohio Metal Working Products Company in Canton, Ohio. The maturity date of the 2014 Term Note was September 25, 2017. This loan was secured by a mortgage on the building and property acquired from Ohio Metal Working Products Company in Canton, Ohio pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated May 29, 2014, and was also subject to a Business Security Agreement between Ohio Metal Working Products/Art’s Way, Inc. (“Ohio Metal”) and U.S. Bank and a Continuing Guaranty (Unlimited) by Ohio Metal. Each of the Company’s term loans from U.S. Bank were governed by a Term Note and a Term Loan Agreement.

U.S. Bank Covenants

As amended by the Fourth Loan Modification the Company was required to maintain (i) fiscal 2017 third quarter EBIDTA (with EBITDA meaning income, plus interest expense, plus income tax expense, plus depreciation expense, plus amortization expense, subject to adjustments in U.S. Bank’s sole discretion) of $411,000.  The Company was not in compliance with this covenant as of August 31, 2017.  The main reason for the non-compliance result as of August 31, 2017 was the decreased gross margins from continuing operations. 

On September 28, 2017, the Company repaid its U.S. Bank debt in full in connection with its new credit facility with Bank Midwest, as discussed below.

Iowa Finance Authority Term Loan and Covenants

On May 1, 2010, the Company obtained a 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 funds for this loan were made available by the Iowa Finance Authority by the issuance of tax exempt bonds. This loan had an original principal amount of $1,300,000, an interest rate of 3.5% per annum and a maturity date of June 1, 2020. On February 1, 2013, the interest rate was decreased to 2.75% per annum. The other terms of the loan remain unchanged.

This loan from the Iowa Finance Authority, which has been assigned to The First National Bank of West Union (n/k/a Bank 1^st), is governed by a Manufacturing Facility Revenue Note dated May 28, 2010 as amended February 1, 2013 and a Loan Agreement dated May 1, 2010 and a First Amendment to Loan Agreement dated February 1, 2013 (collectively, “the IFA Loan Agreement”), which requires the Company to provide quarterly internally prepared financial reports and year-end audited financial statements and to maintain a minimum debt service coverage ratio of 1.5 to 1.0, which is measured at November 30 of each year. Among other covenants, the IFA Loan Agreement also requires the Company to maintain proper insurance on, and maintain in good repair, the West Union Facility, and continue to conduct business and remain duly qualified to do business in the State of Iowa. The loan is 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 (the “West Union Mortgage”).

If the Company commits an event of default under the IFA Loan Agreement or the West Union Mortgage and does not cure the event of default within the time specified by the IFA Loan Agreement, the lender may cause the entire amount of the loan to be immediately due and payable and take any other action that it is lawfully permitted to take or in equity to enforce the Company’s performance.

The Company was in compliance with all covenants under the IFA Loan Agreement except the debt service coverage ratio as measured on November 30, 2016. The First National Bank of West Union has issued a waiver, and the next measurement date is November 30, 2017.

Debt Summary

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

Bank Midwest Revolving Line of Credit and Term Loans

On September 28, 2017, the Company entered into a credit facility with Bank Midwest, which supersedes and replaces in its entirety the U.S. Bank credit facility. The new Bank Midwest credit facility consists of a $5,000,000 revolving line of credit, a $2,600,000 term loan due October 1, 2037, and a $600,000 term loan due October 1, 2019. The proceeds of the term loans were used to refinance all debt previously held by U.S. Bank in the amount of approximately $6,562,030, which consists of $6,528,223 in unpaid principal and approximately $33,807 in accrued and unpaid interest and fees. The revolving line of credit will be used for working capital purposes.

The maturity date of the revolving line of credit is March 1, 2018.calculation. Any unpaid principal amount borrowed on the revolving lineLine of creditCredit accrues interest at a floating rate per annum equal to 1.000%1.25% above the Wall Street Journal rate published from time to time in the money rates section of the Wall Street Journal. The interest rate floor is set at 4.250%4.25% per annum and the current interest rate is 5.250%9.50% per annum. The revolving lineLine of credit is payable upon demand by Bank Midwest,Credit matures on March 30, 2024 and requires monthly interest-only payments are required. If no earlier demandpayments. The Line of Credit is made,governed by the unpaid principalterms of a Promissory Note, dated March 28, 2023, entered into between the Company and accrued interest is due on the maturity date.  Bank Midwest.

The Company carries a $2,600,000 term loan accrueswith Bank Midwest due October 1, 2037 (the “Term Loan”), and a $350,000 term loan (the “Roof Term Loan”) due on May 15, 2027. The Term Loan accrued interest at a rate of 5.000%5.00% for the first sixty months.ninety months, which ended on September 28, 2022. Thereafter, this loan will accruethe Term Loan interest atrate was reset to a floatingfixed rate per annum equal to 0.750% aboveof 7% based on prime plus 0.75% on the Wall Street Journal rate published from time to time in the money rates section of the Wall Street Journal.reset date. The interest rate floor is set at 4.150%4.15% per annum and the interest rate may only be adjusted by Bank Midwest once every five years. This loan is payable upon demand by Bank Midwest, and monthlyMonthly payments of $19,648 in principal and interest are required. This loan willThe Term Loan is also be guaranteed by the United States Department of Agriculture (USDA)(“USDA”), which requiresrequired an upfront guarantee fee of $62,500$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 as well,Term Loan, in an amount equal to their stock ownership percentage. The J. Ward McConnell Jr. will beLiving Trust, the estate of the former Vice Chairman of the Board of Directors and a shareholder owning more than 20% of the Company’s outstanding stock, is guaranteeing approximately 38% of this loan,the Term Loan, for aan annual fee of 2% of the personally guaranteed amount. The $600,000 term loan accrues interest at a rate of 5.000%, and is payable upon demand by Bank Midwest. Monthly payments of principal and interest are required.

Eachinitial guarantee fee will be amortized over the life of the revolving line of creditTerm Loan, and the term loansannual fees and personally guaranteed amounts are expensed monthly. The Term Loan is governed by the terms of a separate Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest.

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

The Company also entered into the Roof Term Loan of $350,000 with Bank Midwest on May 17, 2022. The Roof Term Loan’s proceeds were used to fix sections of the Armstrong facility’s roof. The Roof Term Loan requires 59 regular payments of $2,972 and an estimated balloon payment of $289,797 on the maturity date of May 15, 2027. Any unpaid principal amount borrowed on the Roof Term Loan accrues interest at a rate of 7.0% per annum. The Roof Term Loan is governed by the terms of a Promissory Note, dated May 17, 2022, entered into between the Company and Bank Midwest and by a Change of Terms Agreement dated March 30, 2023 which fixed the interest rate terms of the original Promissory Note.

To further secure the lineLine of credit,Credit, the Company has granted Bank Midwest a mortgage on its West Union, IowaCanton, Ohio property andheld by Ohio Metal Working Products/Art’s-Way Inc. has granted Bank Midwest a mortgage on its property located in Canton, Ohio. The $2,600,000 term loanTerm Loan is secured by a mortgage on the Company’s Armstrong, Iowa and Monona, Iowa properties, and the $600,000 term loan is secured by a mortgage on the Company’s Dubuque, Iowa property.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 Loan Covenants

covenants is measured annually on November 30. The terms of thesethe Bank Midwest loan agreements require the Company to maintain a minimum working capital ratio of 1.75, while maintaining a minimum$4,000,000 of $5,100,000 ofmonthly working capital.  AAdditionally, a maximum debt to worth ratio of 1 to 1 willmust be maintained, as well, 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 ata 0.10 tolerance. The Company will provide audited financial statements within 120 daysalso must receive bank approval for purchases or sales of the fiscal year end.  

Major components of assets available for sale (excluding assets of discontinued operations as discussed in Note 3 “Discontinued Operations”) are:

Due to reduced demand for reels produced by the Universal Harvester by Art’s Way subsidiary, the Company has been able to absorb the production of reels into its Armstrong, Iowa facility.equipment over $100,000 annually and maintain reasonable salaries and owner compensation. The Company continueswas out of compliance with its debt to holdworth ratio by fifteen percentage points on the powder coat system previously usedBank Midwest loans as of November 30, 2022. Bank Midwest issued a waiver forgiving the noncompliance, and in its Ames, Iowa location as availableturn waived the event of default. The next measurement date is November 30, 2023 for sale. During fiscal 2016,all covenants except the Company recognized an impairment of $44,858 related to this asset based on recent offers and comparable sales information.monthly working capital requirement.