Notes to Consolidated Financial Statements
(
1
)
|
Summary of Significant Accounting Policies
|
Art’s-Way Manufacturing Co., Inc. (the “Company”) is primarily engaged in the fabrication and sale of specialized farm machinery in the agricultural sector of the United States. Primary product offerings include portable and stationary animal feed processing equipment; hay and forage equipment; sugar beet harvesting equipment; land maintenance equipment ; manure spreaders; moldboard plows; potato harvesters; and reels. The Company also manufactured commercial snow blowers under the Agro Trend label but sold the Agro Trend product line to Metco, Inc. on
December 15, 2017.
The Company sells its labeled products through independent farm equipment dealers throughout the United States. In addition, the Company manufactures and supplies hay blowers pursuant to OEM agreements. The Company also provides after-market service parts that are available to keep its branded and OEM-produced equipment operating to the satisfaction of the end user of the Company’s products.
The Company’s Modular Buildings segment is primarily engaged in the construction of modular laboratories and animal housing facilities through the Company’s wholly-owned subsidiary, Art’s-Way Scientific, Inc. Buildings commonly produced range from basic swine buildings to complex containment research laboratories. This segment also provides services relating to the design, manufacturing, delivering, installation, and renting of the building units that it produces.
The Company’s Tools segment is a domestic manufacturer and distributor of standard single point brazed carbide tipped tools as well as PCD (polycrystalline diamond) and CBN (cubic boron nitride) inserts and tools through the Company’s wholly-owned subsidiary, Ohio Metal Working Company/Art’s Way, Inc.
The Company’s discontinued Pressurized Vessels segment was primarily engaged in the fabrication and sale of pressurized vessels and tanks through the Company’s wholly-owned subsidiary, Art’s-Way Vessels, Inc. On
August 11, 2016,
the Company announced its plan to discontinue 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. The operations of Art’s-Way Vessels, Inc. were discontinued in the
third
quarter of the
2016
fiscal year, and Art’s-Way Vessels, Inc. was merged into the Company effective
October 31, 2016.
On
March 29, 2018,
the remaining assets of the Pressurized Vessels segment, consisting of primarily of real estate, were disposed of at a selling price of
$1,500,000.
|
(b)
|
Principles of Consolidation
|
The consolidated financial statements include the accounts of Art’s-Way Manufacturing Co., Inc. and its wholly-owned subsidiaries for the
2018
fiscal year, which includes Art’s-Way Scientific, Inc., Art’s-Way Manufacturing International LTD (“International”), and Ohio Metal Working Products/Art’s-Way, Inc. All material inter-company accounts and transactions are eliminated in consolidation.
During the
second
quarter of the
2018
fiscal year, the Company liquidated its investment in its Canadian subsidiary, International, by selling off remaining inventory and filing dissolution paperwork for International. 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 the Company into U.S. Dollars for reporting purposes, the Company used 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 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 will be received from the foreign equity sale, the cumulative translation adjustment has
not
been tax adjusted.
The Company maintains several different accounts at
two
different banks, and balances in these accounts are periodically in excess of federally insured limits. However, management believes the risk of loss to be low.
|
(d)
|
Customer Concentration
|
During the
2018
and
2017
fiscal years
no
one
customer accounted for more than
6%
and
4%
of consolidated revenues for continuing operations, respectively.
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written-off when deemed uncollectible. Recoveries of accounts receivable previously written-off are recorded when received. Accounts receivable are generally considered past due
60
days past invoice date, with the exception of international sales which primarily are sold with a letter of credit for
180
day terms.
Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within
30
days from the invoice date. Trade receivables are stated at the amount billed to the customer. The Company charges interest on overdue customer account balances at a rate of
1.5%
per month. Payments of trade receivables are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the earliest unpaid invoices.
Inventories are stated at the lower of cost or net realizable value, and cost is determined using the standard costing method. Management monitors the carrying value of inventories using inventory control and review processes that include, but are
not
limited to, sales forecast review, inventory status reports, and inventory reduction programs. The Company records inventory write downs to net realizable value based on expected usage information for raw materials and historical selling trends for finished goods. Additional write downs
may
be necessary if the assumptions made by management do
not
occur.
|
(g)
|
Property, Plant, and Equipment
|
Property, plant, and equipment are recorded at cost. Depreciation of plant and equipment is provided using the straight-line method, based on the estimated useful lives of the assets which range from
three
to
forty
years.
|
(h)
|
Lessor Accounting
and Sales-Type Leases
|
Modular buildings held for short term lease by our Modular Buildings segment are recorded at cost. Amortization of the property 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 leases modular buildings to certain customers and accounts for these transactions 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.
|
(i)
|
Goodwill and Impairment
|
Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business combinations. The Company performs an annual test for impairment of goodwill during the
fourth
quarter, unless factors determine an earlier test is necessary. The Company recorded an impairment of
$375,000
in the
2018
fiscal year compared to
$0
for the
2017
fiscal year. This amount represents the entire balance of goodwill carried by the Company related to the acquisition of the Miller Pro product line.
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. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than
not
that some portion or all of the deferred tax assets will
not
be realized. The ultimate realization of deferred tax assets is entirely dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
The Company classifies interest and penalties to be paid on an underpayment of taxes as income tax expense. The Company files income tax returns in the U.S. federal jurisdiction and various states and Canada. The Company is
no
longer subject to Canadian, U.S. federal or state income tax examinations by tax authorities for years ended before
November 30, 2014.
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%.
This law is generally effective for tax years beginning after
December 31, 2017.
The application of this new rate was recognized in the
first
quarter of the
2018
fiscal year. Tax expense from continuing operations includes an adjustment of approximately
$298,000
related to the revaluation of the Company’s net deferred tax asset at the new statutory rate.
Revenue is recognized when risk of ownership and title pass to the buyer, generally upon the shipment of the product. All sales are made to authorized dealers whose application for dealer status has been approved and who have been informed of general sales policies. Any changes in Company terms are documented in the most recently published price lists. Pricing is fixed and determinable according to the Company’s published equipment and parts price lists. Title to all equipment and parts sold pass to the buyer upon delivery to the carrier and is
not
subject to a customer acceptance provision. Proof of the passing of title is documented by the signing of the delivery receipt by a representative of the carrier. Post shipment obligations are limited to any claim with respect to the condition of the equipment or parts. Applicable sales taxes imposed on the Company’s revenues are presented on a net basis on the consolidated statements of operations and therefore do
not
impact net revenues or cost of goods sold. A provision for warranty expenses, based on sales volume, is included in the financial statements. The Company’s return policy allows for new and saleable parts to be returned, subject to inspection and a restocking charge which is included in net sales. Whole goods are
not
returnable. Shipping costs charged to customers are included in net sales. Freight costs incurred are included in cost of goods sold. Customer deposits consist of advance payments from customers, in the form of cash, for revenue to be recognized in the following year.
In certain circumstances, upon the customer’s written request, the Company
may
recognize revenue when production is complete and the good is ready for shipment. At the buyer’s request, the Company will bill the buyer upon completing all performance obligations, but before shipment. The buyer dictates that the Company ship the goods per their direction from the Company’s manufacturing facility, as is customary with this type of agreement, in order to minimize shipping costs. The written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer, with a final specified delivery date, and that the Company will segregate the goods from its inventory, such that they are
not
available to fill other orders. This agreement also specifies that the buyer is required to purchase all goods manufactured under this agreement. Title of the goods passes to the buyer when the goods are complete and ready for shipment, per the customer agreement. At the transfer of title, all risks of ownership have passed to the buyer, and the buyer agrees to maintain insurance on the manufactured items that have
not
yet been shipped. The Company has operated using bill and hold agreements with certain customers for many years. The credit terms on these agreement are consistent with the credit terms on all other sales. All risks of loss are shouldered by the buyer, and there are
no
exceptions to the buyer’s commitment to accept and pay for these manufactured goods. Revenues recognized at the completion of production in the
2018
and
2017
fiscal years were approximately
$202,000
and
$184,000,
respectively.
The Company’s Modular Buildings segment is in the construction industry, and as such accounts for contracts on the percentage of completion method. Revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Contract costs consist of direct costs on contracts, including labor, materials, amounts payable to subcontractors and those indirect costs related to contract performance, such as equipment costs, insurance and employee benefits. Contract cost is recorded as incurred, and revisions in contract revenues and cost estimates are reflected in the accounting period when known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Contract losses are recognized when current estimates of total contract revenue and contract cost indicate a loss. Estimated contract costs include any and all costs appropriately allocable to the contract. The provision for these contract losses will be the excess of estimated contract costs over estimated contract revenues. Changes in job performance, job conditions and estimated profitability, including those changes arising from contract change orders, penalty provisions and final contract settlements
may
result in revisions to costs and income and are recognized in the period in which the revisions are determined.
Costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities.
The Company leases modular buildings to certain customers and accounts for these transactions as operating or sales-type leases. These leases have terms of up to
36
months and are collateralized by a security interest in the related modular building. On sales-type leases, 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 building is substantially complete. Profit related to the sale of the building is recorded upon fulfillment of the Company’s obligation to the lessee. On operating leases, the Company recognizes rent when the lessee has all the rights and benefits of ownership of the asset.
|
(l)
|
Research and Development
|
Research and development costs are expensed when incurred. Such costs approximated
$178,000
and
$183,000
for the
2018
and
2017
fiscal years, respectively.
Advertising costs are expensed when incurred. Such costs approximated
$312,000
and
$356,000
for the
2018
and
2017
fiscal years, respectively.
|
(n)
|
Net Income (Loss) Per Share of Common Stock
|
Basic net income (loss) per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share of common stock has been computed on the basis of the weighted average number of shares outstanding plus equivalent shares of common stock 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 of common stock.
Basic and diluted (loss) per common share have been computed based on the following as of
November 30, 2018
and
2017:
|
|
For the Twelve Months Ended
|
|
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Numerator for basic and diluted (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) from continuing operations
|
|
$
|
(3,336,049
|
)
|
|
$
|
(1,369,359
|
)
|
Net (loss) from discontinued operations
|
|
|
(50,853
|
)
|
|
|
(267,722
|
)
|
Net (loss)
|
|
$
|
(3,386,902
|
)
|
|
$
|
(1,637,081
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
For basic net (loss) per share - weighted average shares of common stock outstanding
|
|
|
4,202,836
|
|
|
|
4,151,406
|
|
Effect of dilutive stock options
|
|
|
-
|
|
|
|
-
|
|
For diluted net (loss) per share - weighted average shares of common stock outstanding
|
|
|
4,202,836
|
|
|
|
4,151,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share - basic:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.80
|
)
|
|
$
|
(0.33
|
)
|
Discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
Net (loss) per share
|
|
$
|
(0.81
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) per share - diluted:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.80
|
)
|
|
$
|
(0.33
|
)
|
Discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
Net (loss) per share
|
|
$
|
(0.81
|
)
|
|
$
|
(0.39
|
)
|
|
(p)
|
Stock Based Compensation
|
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 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. Restricted stock is valued at market value at the day of grant.
Management has made a number of estimates and assumptions related to the reported amount of assets and liabilities, reported amount of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
|
(r)
|
Recently Issued Accounting Pronouncements
|
Adopted Accounting Pronouncements
Going Concern
In
August 2014,
the FASB issued ASU
No.
2014
-
15,
“Presentation of Financial Statements – Going Concern” which is authoritative guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures, codified in ASC
205
-
40,
Going Concern
. The guidance provides a definition of the term substantial doubt, requires an evaluation every reporting period including interim periods, provides principles for considering the mitigating effect of management’s plans, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, requires an express statement and other disclosures when substantial doubt is
not
alleviated, and requires an assessment for a period of
one
year after the date that the financial statements are issued (or available to be issued). ASU
No.
2014
-
15
is effective for annual reporting periods ending after
December 15, 2016.
The Company has adopted this guidance for the year ended
November 30, 2017,
and it will apply to each interim and annual period thereafter. Its adoption has
not
had a material impact on the Company’s consolidated financial statements other than the increased disclosures in the interim periods of fiscal
2017.
Inventory
In
July 2015,
the FASB issued ASU
2015
-
11,
“Inventory (Topic
330
),” which requires inventory measured using any method other than last-in,
first
-out or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than the lower of cost or market. ASU
No.
2015
-
11
is effective for fiscal years beginning after
December 15, 2016,
including interim periods within those years. The Company has adopted this guidance for the year ended
November 30, 2017,
including interim periods within that reporting period. The Company chose early adoption for this guidance, as its impact was expected
not
to be material, and it will allow the Company to focus more of its efforts on preparing for the adoption of more complex guidance. Its adoption has
not
had a material impact on the Company’s consolidated financial statements.
Income Taxes
In
November 2015,
the FASB issued ASU
2015
-
17,
“Income Taxes (Topic
740
)”, to simplify the presentation of deferred income taxes. Under the new standard, both deferred tax liabilities and assets are required to be classified as noncurrent in a classified balance sheet. ASU
No.
2015
-
17
is effective for fiscal years beginning after
December 15, 2016
and interim periods within annual periods beginning after
December 15, 2017.
During the
first
quarter of fiscal
2017,
the Company elected to prospectively adopt ASU
2015
-
17,
thus reclassifying current deferred tax assets to noncurrent on the accompanying consolidated balance sheet. The prior reporting period was
not
retrospectively adjusted. The Company chose early adoption for this guidance, as its impact was expected
not
to be material, and it will allow the Company to focus more of its efforts on preparing for the adoption of more complex guidance. The adoption of this guidance had
no
impact on the Company’s consolidated statements of operations and comprehensive income.
Accounting Pronouncements
Not
Yet Adopted
Revenue from Contracts with Customers
In
May 2014,
the Financial Accounting Standards Board (“FASB”) issued ASU
No.
2014
-
09,
“Revenue from Contracts with Customers (Topic
606
)” which supersedes the guidance in “Revenue Recognition (Topic
605
).” The core principle of ASU
2014
-
09
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. ASU
2014
-
09
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. The Company will adopt ASU
2014
-
09
for its
2019
fiscal year, including interim periods with that reporting period.
The Company has evaluated the new standard and applied the core principle to its contract revenue streams. To be consistent with this core principle, an entity is required to apply the following
five
-step approach:
1.
Identify the contract(s) with a customer;
2.
Identify each performance obligation in the contract;
3.
Determine the transaction price;
4.
Allocate the transaction price to each performance obligation; and
5.
Recognize revenue when or as each performance obligation is satisfied.
The Company’s revenues primarily result from contracts with customers. The Agricultural Products and Tools segments are generally short-term contracts and contain a single performance obligation – the delivery of product to the common carrier. The Company recognizes revenue for the sale of agriculture parts, equipment and tools upon shipment of the good. 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. The implementation process will include modifications to the contracts of the modular buildings segment.
The Company intends to adopt ASU
2014
-
09
using the modified retrospective method. Once adopted, the Company has determined that amounts reported under ASC
606
will
not
be materially different than amounts that would have been reported under the previous revenue guidance of ASC
605
and would
not
require an adjustment to retained earnings.
The Company, upon adoption of ASU
2014
-
09,
will increase the amount of required disclosures, 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.
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 its
2020
fiscal year, including interim periods within that reporting period. The Company has a moderate amount of leasing activity and is currently evaluating the impact of this guidance on its consolidated financial statements.
|
(
2
)
|
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.
In
January 2018,
the Company accepted an offer on the real estate assets of its Pressurized Vessels segment for
$1,500,000,
which was below the carrying value of the real estate assets at that time. Based on these facts the Company recorded an impairment of the real estate assets of approximately
$289,000
for the
2017
fiscal year, which reduced the value to
$1,425,000,
which is the value the Company expected to receive after commissions on the sale of these real estate assets. On
March 29, 2018,
the remaining assets of the Pressurized Vessels segment, consisting of these 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 the Pressurized Vessels segment as discontinued operations for all periods presented.
Income from discontinued operations, before income taxes, in the accompanying consolidated statements of operations is comprised of the following:
|
|
Twelve Months Ended
|
|
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Revenue from external customers
|
|
$
|
-
|
|
|
$
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
Total operating expense
|
|
|
51,133
|
|
|
|
357,709
|
|
(Loss) from operations
|
|
|
(51,133
|
)
|
|
|
(357,709
|
)
|
(Loss) before tax
|
|
|
(67,177
|
)
|
|
|
(400,739
|
)
|
The components of discontinued operations in the accompanying consolidated balance sheets are as follows:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Cash
|
|
$
|
-
|
|
|
$
|
2,454
|
|
Property, plant, and equipment, net
|
|
|
-
|
|
|
|
1,425,000
|
|
Assets of discontinued operations
|
|
$
|
-
|
|
|
$
|
1,427,454
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
-
|
|
|
$
|
49,931
|
|
Notes payable
|
|
|
-
|
|
|
|
599,584
|
|
Liabilities of discontinued operations
|
|
$
|
-
|
|
|
$
|
649,515
|
|
(
3
)
|
Allowance for Doubtful Accounts
|
A summary of the Company’s activity in the allowance for doubtful accounts is as follows:
|
|
For the Twelve Months Ended
|
|
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Balance, beginning
|
|
$
|
32,298
|
|
|
$
|
22,746
|
|
Provision charged to expense
|
|
|
2,242
|
|
|
|
11,187
|
|
Less amounts charged-off
|
|
|
(9,440
|
)
|
|
|
(1,635
|
)
|
Balance, ending
|
|
$
|
25,100
|
|
|
$
|
32,298
|
|
Major classes of inventory are:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Raw materials
|
|
$
|
7,825,278
|
|
|
$
|
8,731,985
|
|
Work in process
|
|
|
272,302
|
|
|
|
460,687
|
|
Finished goods
|
|
|
5,051,330
|
|
|
|
5,395,353
|
|
Total Gross Inventory
|
|
$
|
13,148,910
|
|
|
$
|
14,588,025
|
|
Less: Reserves
|
|
|
(2,891,808
|
)
|
|
|
(2,621,303
|
)
|
Net Inventory
|
|
$
|
10,257,102
|
|
|
$
|
11,966,722
|
|
(
5
)
|
Contracts in Progress
|
Amounts included in the consolidated financial statements related to uncompleted contracts are as follows:
|
|
Cost and Profit in
|
|
|
Billings in Excess of
|
|
|
|
Excess of Billings
|
|
|
Costs and Profit
|
|
November 30, 2018
|
|
|
|
|
|
|
|
|
Costs
|
|
$
|
190,861
|
|
|
$
|
99,782
|
|
Estimated earnings
|
|
|
54,721
|
|
|
|
121,115
|
|
|
|
|
245,582
|
|
|
|
220,897
|
|
Less: amounts billed
|
|
|
(146,295
|
)
|
|
|
(405,911
|
)
|
|
|
$
|
99,287
|
|
|
$
|
(185,014
|
)
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
|
|
|
|
|
|
|
Costs
|
|
$
|
105,639
|
|
|
$
|
612,370
|
|
Estimated earnings
|
|
|
34,611
|
|
|
|
173,764
|
|
|
|
|
140,250
|
|
|
|
786,134
|
|
Less: amounts billed
|
|
|
(75,104
|
)
|
|
|
(834,345
|
)
|
|
|
$
|
65,146
|
|
|
$
|
(48,211
|
)
|
The amounts billed on these long-term contracts are due
30
days from invoice date. All amounts billed are expected to be collected within the next
12
months. Retainage was
$8,405
and
$37,052
as of
November 30, 2018
and
2017,
respectively.
(
6
)
|
Property, Plant, and Equipment
|
Major classes of property, plant, and equipment used in continuing operations are:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Land
|
|
$
|
220,503
|
|
|
$
|
220,503
|
|
Buildings and improvements
|
|
|
6,985,273
|
|
|
|
6,966,550
|
|
Construction in progress
|
|
|
35,669
|
|
|
|
14,798
|
|
Manufacturing machinery and equipment
|
|
|
11,062,856
|
|
|
|
10,932,085
|
|
Trucks and automobiles
|
|
|
491,822
|
|
|
|
428,774
|
|
Furniture and fixtures
|
|
|
121,646
|
|
|
|
113,956
|
|
|
|
|
18,917,769
|
|
|
|
18,676,666
|
|
Less accumulated depreciation
|
|
|
(13,270,284
|
)
|
|
|
(12,729,709
|
)
|
Property, plant and equipment
|
|
$
|
5,647,485
|
|
|
$
|
5,946,957
|
|
Depreciation and amortization expense for continuing operations totaled
$960,606
and
$702,349
for the
2018
and
2017
fiscal years, respectively.
(
7
)
|
Assets Held for Lease
|
Major components of assets held for lease are:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
West Union Facility
|
|
$
|
878,079
|
|
|
$
|
1,118,330
|
|
Modular Buildings
|
|
|
992,046
|
|
|
|
98,834
|
|
|
|
$
|
1,870,125
|
|
|
$
|
1,217,164
|
|
During the
third
quarter of the
2018
fiscal year, the Company discovered mold in its West Union facility. The Company incurred
$235,000
of expense for mold remediation in the
2018
fiscal year. The Company also scrapped approximately
$67,000
of inventory related to mold remediation. Both the remediation cost and inventory scrap have been included in other income (expense) on the consolidated statements of operations. At
November 30, 2018
the Company was leasing
20,000
square feet of the West Union facility to
third
parties for storage purposes. On
December 14, 2018,
this facility and remaining assets was sold for
$900,000.
The Company recognized approximately
$216,000
related to the impairment of this asset in the
2018
fiscal year, which was attributable to the selling price less commissions.
The Company’s Modular Buildings segment enters into leasing arrangements with customers from time-to-time. The Company had
seven
small leased buildings at
November 30, 2018
compared to
one
at
November 30, 2017.
Rents recognized from assets held for lease included in sales on the consolidated statements of operations during the
2018
fiscal year were
$374,000
compared to
$161,000
in the
2017
fiscal year. Rents recognized from assets held for lease included in other income (expense) on the consolidated statements of operations during the
2018
fiscal year were
$44,000
compared to
$234,000
in the
2017
fiscal year.
Future minimum lease receipts from assets held for lease are as follows:
Year Ending November 30,
|
|
Amount
|
|
2019
|
|
|
443,294
|
|
2020
|
|
|
90,411
|
|
Total
|
|
|
533,705
|
|
Major components of accrued expenses are:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Salaries, wages, and commissions
|
|
$
|
448,737
|
|
|
$
|
584,768
|
|
Accrued warranty expense
|
|
|
96,786
|
|
|
|
68,451
|
|
Other
|
|
|
347,761
|
|
|
|
328,339
|
|
|
|
$
|
893,284
|
|
|
$
|
981,558
|
|
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 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. 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.
Changes in the Company’s product warranty liability included in “accrued expenses” for the
2018
and
2017
fiscal years are as follows:
|
|
For the Twelve Months Ended
|
|
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Balance, beginning
|
|
$
|
68,451
|
|
|
$
|
134,373
|
|
Settlements / adjustments
|
|
|
(233,316
|
)
|
|
|
(276,667
|
)
|
Warranties issued
|
|
|
261,651
|
|
|
|
210,745
|
|
Balance, ending
|
|
$
|
96,786
|
|
|
$
|
68,451
|
|
(
10
)
|
Loan and Credit Agreements
|
The Company maintains a revolving line of credit and a term loan with Bank Midwest as well as a term loan with The First National Bank of West Union, and previously maintained a
second
term loan with Bank Midwest.
Bank Midwest Revolving Line 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, a
$2,600,000
term loan due
October 1, 2037,
and a
$600,000
term loan due
October 1, 2019.
The proceeds of the line of credit and the term loans were used to refinance all debt previously held by U.S. Bank in the amount of approximately
$6,562,030,
which consisted of
$6,528,223
in unpaid principal and approximately
$33,807
in accrued and unpaid interest and fees. The 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
November 30, 2018,
the balance of the line of credit was
$3,505,530
with
$1,494,470
remaining available, limited by the borrowing base calculation. The 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 line of credit. At
November 30, 2018,
the line of credit was
not
limited by the borrowing base calculation. Any unpaid principal amount borrowed on the line of credit accrues interest at a floating rate per annum equal to
1.00%
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
4.25%
per annum and the current interest rate is
6.50%
per annum. The line of credit was renewed on
March 30, 2018.
The 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, 2019.
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 from time to time in the money rates section of the Wall Street Journal. The interest rate floor is set at
4.15%
per annum and the interest rate
may
only be adjusted by Bank Midwest once every
five
years. Monthly payments of
$17,271
for principal and interest are required. This loan is also guaranteed by the United States Department of Agriculture (“USDA”), which required an upfront guarantee fee of
$62,400
and 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, 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. Prior to repayment, the
$600,000
term loan accrued interest at a rate of
5.00%,
and monthly payments of
$3,249
for principal and interest were required.
Each of the 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
$600,000
term loan was also 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 line of credit, the Company, Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. each entered into a Commercial Security Agreement with Bank Midwest, dated
September 28, 2017,
pursuant to which each granted to Bank Midwest a
first
priority security interest in certain inventory, equipment, accounts, chattel paper, instruments, letters of credit and other assets to secure the obligations of the Company under the line of credit. Each of Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. also agreed to guarantee the obligations of the Company pursuant to the line of credit, as set forth in Commercial Guaranties, each dated
September 28, 2017.
To further secure the line of credit, the Company granted Bank Midwest a
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 in
December 2018.
The
$2,600,000
term loan is secured by a mortgage on the Company’s Armstrong, Iowa and Monona, Iowa properties, and the
$600,000
term loan was secured by a mortgage on the Company’s Dubuque, Iowa property. The mortgage on the Dubuque property was released in conjunction with the sale of that property in
March 2018.
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.
Bank Midwest Loan Covenants
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.
The Company is also required to provide audited financial statements within
120
days of its fiscal year end.
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 remained unchanged.
This loan from the Iowa Finance Authority, which was assigned to The First National Bank of West Union (n/k/a Bank
1st
), was 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 required 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 required 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 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.
The Company was in compliance with all covenants except for the debt service coverage ratio covenant as measured on
November 30, 2018.
On
December 14, 2018
this loan was paid off with the sale of the West Union facility rendering a waiver unnecessary.
U.S. Bank Credit Facility
The Company previously maintained a revolving line of credit and term loans with U.S. Bank. The material terms of the U.S. Bank credit facility were most recently disclosed in the Company’s Form
10
-Q for the quarter ended
August 31, 2017,
in Note
8
“Loan and Credit Agreements” to the financial statements in “Item
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” to such report. On
September 28, 2017,
the Company repaid its U.S. Bank debt in full in connection with its credit facility with Bank Midwest, as discussed above.
A summary of the Company’s term debt is as follows:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Bank Midwest loan payable in monthly installments of $17,271 including interest at 5.00%, due October 1, 2037
|
|
$
|
2,517,510
|
|
|
$
|
2,595,007
|
|
Bank Midwest loan payable in monthly installments of $3,249 including interest at 5.00%, due October 1, 2019
|
|
|
-
|
|
|
|
599,584
|
|
Iowa Finance Authority loan payable in monthly installments of $12,500 including interest at 2.75%, due June 1, 2020
|
|
|
232,967
|
|
|
|
374,900
|
|
Total term debt
|
|
$
|
2,750,477
|
|
|
$
|
3,569,491
|
|
Less current portion of term debt
|
|
|
227,459
|
|
|
|
221,230
|
|
Term debt of discontinued operations
|
|
|
-
|
|
|
|
599,584
|
|
Term debt, excluding current portion
|
|
$
|
2,523,018
|
|
|
$
|
2,748,677
|
|
A summary of the minimum maturities of term debt follows for the years ending
November 30:
Year:
|
|
Amount
|
|
2019
|
|
$
|
227,459
|
|
2020
|
|
|
172,426
|
|
2021
|
|
|
90,179
|
|
2022
|
|
|
94,858
|
|
2023
|
|
|
99,781
|
|
2024 and thereafter
|
|
|
2,065,774
|
|
Total term debt
|
|
$
|
2,750,477
|
|
(
11
)
|
Related Party Transactions
|
During the
2018
and
2017
fiscal years, the Company did
not
recognize any revenues with a related party, and
no
amounts in accounts receivable balances were due from a related party. From time to time, the Company purchases various supplies from related parties, which are companies owned by J. Ward McConnell, Jr., our 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. In the
2018
fiscal year, the Company recognized
$25,773
of expense with related parties, compared to
$8,281
in
2017.
As of
November 30, 2018,
accrued expenses contained a balance of
$1,568
owed to a related party compared to
$1,621
on
November 30, 2017.
The components related to sales-type leases at
November 30, 2018
are as follows:
|
|
November 30, 2018
|
|
Minimum lease receivable, current
|
|
$
|
159,500
|
|
Unearned interest income, current
|
|
|
(36,445
|
)
|
Net investment in sales-type leases, current
|
|
$
|
123,055
|
|
|
|
|
|
|
Minimum lease receivable, long-term
|
|
$
|
168,277
|
|
Unearned interest income, long-term
|
|
|
(14,490
|
)
|
Net investment in sales-type leases, long-term
|
|
$
|
153,787
|
|
Gross revenue recognized in sales from continuing operations on the consolidated statements of operations from commencement of sales-type leases for the
2018
fiscal year was
$426,542.
There was
no
activity related to sales-type leases for the
2017
fiscal year.
Future minimum lease receipts from sales-type leases are as follows:
Year Ending November 30,
|
|
Amount
|
|
2019
|
|
$
|
159,500
|
|
2020
|
|
|
162,425
|
|
2021
|
|
|
5,852
|
|
Total
|
|
$
|
327,777
|
|
(
13
)
|
Employee Benefit Plans
|
The Company sponsors a defined contribution
401
(k) savings plan which covers substantially all full-time employees who meet eligibility requirements. Participating employees
may
contribute as salary reductions any amount of their compensation up to the limit prescribed by the Internal Revenue Code. The Company makes a
25%
matching contribution to employees contributing a minimum of
4%
of their compensation, up to
1%
of eligible compensation. The Company recognized an expense of
$31,980
and
$34,523
related to this plan during the
2018
and
2017
fiscal years, respectively.
(
14
)
|
Equity Incentive Plan
|
On
November 30, 2018,
the Company had
one
equity incentive plan, the
2011
Plan, which is described below. The compensation cost charged against income was
$197,243
and
$113,039
for the
2018
and
2017
fiscal years, respectively, for all awards granted under the
2011
Plan during such years. The total income tax deductions for share-based compensation arrangements were
$157,529
and
$68,886
for the
2018
and
2017
fiscal years, respectively.
No
compensation cost was capitalized as part of inventory or fixed assets.
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”), subject to approval by the stockholders on or before
January 27, 2012.
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.
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 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. Additionally, directors can elect to receive their board compensation as restricted stock. During the
2018
fiscal year, restricted stock awards of
51,200
shares were issued to various employees, directors, and consultants, which vest over the next
three
years, and restricted stock awards of
37,098
shares were issued to directors as part of the compensation policy, which vested immediately upon grant. During the
2018
fiscal year,
22,000
shares of restricted stock were forfeited upon the departure of certain employees.
Stock options granted prior to
January 27, 2011
are governed by the applicable Prior Plan and the forms of agreement adopted thereunder.
The fair value of each option award is estimated on the date of grant using the Black Scholes option-pricing model. 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.
|
|
201
8
|
|
|
201
7
|
|
Expected Volatility
|
|
|
-
|
|
|
|
-
|
|
Expected Dividend Yield
|
|
|
-
|
|
|
|
-
|
|
Expected Term (in years)
|
|
|
-
|
|
|
|
-
|
|
Risk-Free Rate
|
|
|
-
|
|
|
|
-
|
|
The following is a summary of activity under the plans as of
November 30, 2018
and
2017,
and changes during the years then ended:
2018
Option Activity
Options
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Options Outstanding at the Beginning of the Period
|
|
|
96,000
|
|
|
$
|
7.77
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Options Expired or Forfeited
|
|
|
(37,000
|
)
|
|
|
10.37
|
|
|
|
|
|
|
|
|
|
Options Outstanding at the End of the Period
|
|
|
59,000
|
|
|
|
6.07
|
|
|
|
3.86
|
|
|
|
-
|
|
Options Exercisable at the End of the Period
|
|
|
59,000
|
|
|
|
6.07
|
|
|
|
3.86
|
|
|
|
-
|
|
2017
Option Activity
Options
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Options Outstanding at the Beginning of the Period
|
|
|
143,500
|
|
|
$
|
8.78
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Options Expired or Forfeited
|
|
|
(47,500
|
)
|
|
|
10.84
|
|
|
|
|
|
|
|
|
|
Options Outstanding at the End of the Period
|
|
|
96,000
|
|
|
|
7.77
|
|
|
|
3.55
|
|
|
|
-
|
|
Options Exercisable at the End of the Period
|
|
|
96,000
|
|
|
|
7.77
|
|
|
|
3.55
|
|
|
|
-
|
|
No
options were granted during the
2018
or
2017
fiscal years. As of both
November 30, 2018
and
November 30, 2017,
there were
no
non-vested options. As of
November 30, 2018,
there was
no
unrecognized compensation cost related to non-vested share-based compensation arrangements under the plan related to stock options.
No
options vested during the
2018
or
2017
fiscal years.
The Company received
no
cash from the exercise of options during the
2018
or
2017
fiscal years.
During the
2018
fiscal year, the Company issued
88,298
shares of restricted stock,
26,150
shares of restricted stock became unrestricted and
22,000
shares of restricted stock forfeited. During the
2017
fiscal year, the Company issued
53,700
shares of restricted stock,
22,550
shares of restricted stock became unrestricted and
4,000
shares of restricted stock were forfeited.
Total income tax expense (benefit) for the
2018
and
2017
fiscal years consists of the following:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Current Expense (benefit)
|
|
$
|
127,673
|
|
|
$
|
15,360
|
|
Deferred expense (benefit)
|
|
|
(654,413
|
)
|
|
|
(572,175
|
)
|
|
|
$
|
(526,740
|
)
|
|
$
|
(556,815
|
)
|
The reconciliation of the statutory Federal income tax rate is as follows:
|
|
November 30, 2018
|
|
|
November 30, 2017
|
|
Statutory federal income tax rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
Valuation allowance on foreign net operating loss
|
|
|
(1.4
|
)
|
|
|
(7.8
|
)
|
Revaluation of deferred tax asset
|
|
|
(7.6
|
)
|
|
|
-
|
|
Permanent Differences and Other
|
|
|
1.5
|
|
|
|
(0.7
|
)
|
|
|
|
13.5
|
%
|
|
|
25.5
|
%
|
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at
November 30, 2018
and
2017
are presented below:
|
|
November 30
|
|
|
|
2018
|
|
|
2017
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
59,000
|
|
|
$
|
95,000
|
|
Inventory capitalization
|
|
|
73,000
|
|
|
|
33,000
|
|
Net operating loss and tax credit carryforward
|
|
|
826,000
|
|
|
|
586,000
|
|
Asset reserves
|
|
|
609,000
|
|
|
|
746,000
|
|
Total current deferred tax assets
|
|
$
|
1,567,000
|
|
|
$
|
1,460,000
|
|
Non-current deferred tax assets
|
|
|
|
|
|
|
|
|
Property, plant, and equipment
|
|
$
|
(135,000
|
)
|
|
$
|
(559,000
|
)
|
Total non-current deferred tax assets (liabilities)
|
|
$
|
(135,000
|
)
|
|
$
|
(559,000
|
)
|
Net deferred taxes
|
|
$
|
1,432,000
|
|
|
$
|
901,000
|
|
Based on the Company’s adoption of ASU
2015
-
17,
Income Taxes, the Company has prospectively classified the
2018
and
2017
net deferred tax assets as a noncurrent asset in the accompanying financial statements.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than
not
that some portion or all of the deferred tax assets will
not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company’s net operating loss amounting to approximately
$3,300,000
and tax credit carryforward amounting to approximately
$124,000
for its U.S. operations expire on
November 30, 2036,
2037
and
2038.
Management believes that the Company will be able to utilize the U.S. net operating losses and credits before their expiration.
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%.
The Company has assessed the impact of the law on its reported assets, liabilities, and results of operations, and believes that, going forward, the overall rate reduction will have a positive impact on the Company’s net earnings in the long run. However, during the
first
quarter of the
2018
fiscal year, the Company substantially reduced its net deferred tax asset using the new lower rates. Based on the Company’s recorded deferred tax asset at
November 30, 2017,
the Company reduced the deferred tax asset by approximately
$298,000,
which was recorded as an adjustment to our tax provision in the
first
quarter of the
2018
fiscal year.
(
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
November 30, 2018,
and
November 30, 2017,
the carrying amount approximated fair value for cash, accounts receivable, net investment in sale-type leases, accounts payable, notes payable to bank, and other current and long-term liabilities. The carrying amounts 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 than current interest rates.
(
17
) Litigation and Contingencies
Various legal actions and claims that arise in the normal course of business are pending against the Company. In the opinion of management adequate provisions have been made in the accompanying financial statements for all pending legal actions and other claims.
(
18
)
|
Segment Information
|
There are
three
reportable segments: Agricultural Products, Modular Buildings, and Tools. The Agricultural Products segment fabricates and sells farming products as well as replacement parts for these products in the United States and worldwide. The Modular Buildings segment produces modular buildings for animal containment and various laboratory uses. 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.
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
2
above, “Discontinued Operations.”
|
|
Twelve Months Ended November 30, 2018
|
|
|
|
Agricultural Products
|
|
|
Modular Buildings
|
|
|
Tools
|
|
|
Consolidated
|
|
Revenue from external customers
|
|
$
|
14,344,000
|
|
|
$
|
3,109,000
|
|
|
$
|
2,274,000
|
|
|
$
|
19,727,000
|
|
(Loss) from operations
|
|
|
(2,462,000
|
)
|
|
|
(566,000
|
)
|
|
|
(67,000
|
)
|
|
|
(3,095,000
|
)
|
(Loss) before tax
|
|
|
(3,206,000
|
)
|
|
|
(530,000
|
)
|
|
|
(110,000
|
)
|
|
|
(3,846,000
|
)
|
Total assets
|
|
|
15,458,000
|
|
|
|
3,401,000
|
|
|
|
2,466,000
|
|
|
|
21,325,000
|
|
Capital expenditures
|
|
|
321,000
|
|
|
|
439,000
|
|
|
|
4,000
|
|
|
|
764,000
|
|
Depreciation & amortization
|
|
|
516,000
|
|
|
|
317,000
|
|
|
|
128,000
|
|
|
|
961,000
|
|
|
|
Twelve Months Ended November 30, 2017
|
|
|
|
Agricultural Products
|
|
|
Modular Buildings
|
|
|
Tools
|
|
|
Consolidated
|
|
Revenue from external customers
|
|
$
|
15,407,000
|
|
|
$
|
2,700,000
|
|
|
$
|
2,608,000
|
|
|
$
|
20,715,000
|
|
(Loss) from operations
|
|
|
(1,381,000
|
)
|
|
|
(313,000
|
)
|
|
|
(28,000
|
)
|
|
|
(1,722,000
|
)
|
(Loss) before tax
|
|
|
(1,371,000
|
)
|
|
|
(349,000
|
)
|
|
|
(73,000
|
)
|
|
|
(1,793,000
|
)
|
Total assets
|
|
|
17,237,000
|
|
|
|
3,108,000
|
|
|
|
2,607,000
|
|
|
|
22,952,000
|
|
Capital expenditures
|
|
|
303,000
|
|
|
|
121,000
|
|
|
|
90,000
|
|
|
|
514,000
|
|
Depreciation & amortization
|
|
|
506,000
|
|
|
|
69,000
|
|
|
|
127,000
|
|
|
|
702,000
|
|
Management evaluated all other activity of the Company and concluded that
no
subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements other than those previously described in Note
7
above, “Assets Held for Lease” relating to the sale of the West Union facility and the payment of the related loan from the Iowa Finance Authority described in Note
10
above, “Loan and Credit Agreements.”