ARTS WAY MANUFACTURING CO INC

Notes to Unaudited Condensed Consolidated Financial Statements

Unless otherwise specified, as used in this Quarterly Report on Form10-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 in1956. 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 intotwo 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.

During thethird quarter of fiscal2023, the Company ceased operations of its Tools business, which in previous periods, was reported in consolidated numbers as the Company'sthird operating segment. The Tools segment has been modified retrospectively to be reported in discontinued operations for thethree months ended* February 28, 2023.For more information on discontinued operations, see Note3* "Discontinued Operations."

Statement Presentation

The foregoing condensed consolidated financial statements of the Company are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and operating results for the interim periods. The financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form10-K for the fiscal year ended* November 30, 2023*. The results of operations for thethree months ended* February**29,* 2024 arenot necessarily indicative of the results to be expected for the fiscal year ending* November 30,*2024.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during thethree months ended* February**29,* 2024. Actual results could differ from those estimates.

Allowance for Credit Losses

The Company uses aging categories to estimate expected credit losses on trade receivables. The Company considers in its analysis: historical loss experience, forward-looking macroeconomic factors, company credit risk including previous delinquencies, disputed amounts, and the intent and ability to pay. The Company's typical credit terms are Net30, however, it does offer terms up to180 days on floor plan units. The Company would consider trade receivables greater than30 days past due, but isnot required to disclose past due receivables with an original term less thanone year. The Company performs additional analysis on amounts over90 days monthly to determine collectability. The Company has assigned expected credit loss percentages based on where the asset falls in the aging schedule. The Company's actual credit losses have been low compared to historical allowance estimates. The Company had to consider the current interest rate environment and the recent decline in the agricultural commodity market and believes its method of estimating a higher than historical loss percentage to be an adequate estimate. The Company foresees increased credit risk over the next year or so until inventory on dealer lots starts to decline, interest rates drop and farm income strengthens.

The Company carries contract assets related to its Modular Buildings segment in the form of costs and profit in excess of billings. These contract assets are typically converted to trade receivables in30 to90 days, depending on contract terms, and due30 days or less from the billing date. Because these contract assets are typically converted to receivables and collected in less than a year, consideration for these contract assets have been included in the expected credit loss model for trade receivables.

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On* June 7, 2023,the Company announced that it would be discontinuing the operations of its Tools 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 stockholder returns. A large portion of this segment's assets were disposed of in the3rd* quarter of fiscal2023. The primary asset of this business, the real estate, is listed for sale as of* February**29,* 2024.

The cessation of operations and liquidation of the Tools segment represented a strategic shift as a unique business unit of the Company In accordance with Accounting Standard Code Topic360, the Company has reclassified Tools as discontinued operations for all periods presented.

The components of discontinued operations in the accompanying Condensed Consolidated Balance Sheets are as follows:

Segment information as of* February**29,* 2024 and* February 28, 2023*for discontinued operations is as follows:

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Recently Issued Accounting Pronouncements

Recently Adopted Pronouncement

Measurement of Credit Losses on Financial Instruments

In* June 2016,the FASB issued ASU2016*-13, “Measurement of Credit Losses on Financial Instruments.” ASU2016-13 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. ASU2016-13 is effective for smaller reporting entities 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 adopted ASU2016*-13 in the period presented. The Company hasnot made a cumulative-effect adjustment to retained earnings.

Accounting PronouncementsNot Yet Adopted

Segment Reporting - Improvements to Reportable Segment Disclosures

In* November**2023,* the FASB issued ASU2023-07, “Segment Reporting - Improvements to Reportable Segment Disclosures.” ASU2023-07 adds enhanced disclosures about significant segment expenses, clarifies circumstances in which an entity can disclose multiple segment measures of profit and loss and provides new segment disclosure requirements for entities with a single reportable segment. ASU2023-07 is effective for fiscal years beginning after* December 15, 2023,and interim periods within fiscal years beginning after December 15, 2024.Early adoption is permitted. An entity will be required to recast any changes to segment information for prior periods presented. The Company will adopt ASU2023*-07 in fiscal2025. The Company doesnot expect the application ASU2023-07 to have a significant impact on segment disclosures.

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.

The Company offered floorplan terms in its Agricultural Products segment during its Fall of2022 and2023 early order program to incentivize customers to stock farm equipment on their lots for fiscal2023 and fiscal2024. Floorplan terms allow customers to pay the Company at the earliest of retail date or180 days. This program has an effect on the timing of the Company’s cash flows compared with historical cash flows.

On* February**29,* 2024, the Company had approximately $1,011,000 in receivables on the floorplan program with a due date greater than30 days compared to $950,000 on* February 28, 2023*.

Accounts receivable are shown net of allowances for expected credit losses. Expected losses are recorded in administrative expense at the time of receivable

recognition.

The activity related to expected credit losses for thethree months ended* February**29,* 2024 ended is as follows:

The activity of allowance for doubtful accounts for activity for thethree months ended* February 28, 2023* under legacy US GAAP is as follows:

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 thefirst three months of fiscal2024 that was included in a contract liability on* November 30, 2023* was approximately $560,000 compared to $1,153,000 in the same period of fiscal2023. The beginning contract receivables, assets and liabilities on* December 1, 2022*were approximately$2,466,000; $451,000 and$1,153,000, respectively.

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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**29,* 2024 and* February 28, 2023*:

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Major classes of inventory are:

Major components of accrued expenses are:

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Major components of assets held for lease are:

There were approximately $36,000 rents recognized from assets held for lease included in sales on the Condensed Consolidated Statements of Operations during thethree months ended* February**29,* 2024, respectively, compared to $32,000 for the same periods ending* February 28, 2023*.

The future minimum lease receipts for the years ended* November 30, 2024*are as follows:

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 isone year from the date of purchase. The Company’s warranties require it to repair or replace defective products during the warranty period atno 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 doesnot represent a separate performance obligation under ASC606. The Company records a liability for estimated costs that* maybe 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 beno* assurance that future warranty costs willnot 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 Note9 “Accrued Expenses.” Changes in the Company’s product warranty liability for thethree months ended* February**29,* 2024 and* February 28, 2023* are as follows:

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Bank Midwest Revolving Lines of Credit and Term Loans

The Company maintains a $5,500,000 revolving line of credit (the “Line of Credit”) with Bank Midwest. On* February29,* 2024, the balance of the Line of Credit was $4,880,437 with $619,563 remaining available, as* maybe 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 net inventory, less any outstanding loan balance on the Line of Credit. On February29,* 2024, the Line of Credit wasnot 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 0.75% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 6.00% per annum and the current interest rate is 9.25% per annum. The Line of Credit was most recently renewed on* March 4, 2024with a maturity date of March 30, 2025*and requires monthly interest-only payments. The most recent renewal of the Line of Credit combined the previous Line of Credit and a Reserve Line of Credit and decreased the floating rate by 0.50%.

The Company carries a $2,600,000 term loan with 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 interest rate accrues at a fixed rate of 7% based on prime plus 0.75%. The interest rate floor is set at 4.15% per annum and the interest rate mayonly be adjusted by Bank Midwest once everyfive* years. Monthly payments of $19,648 in principal and interest are required. The Term Loan is also guaranteed by the United States Department of Agriculture (“USDA”), which required an upfront guarantee fee of $62,400 and requires an annual fee of 0.5% of the unpaid balance. As part of the USDA guarantee requirements, stockholders owning more than20% are required to personally guarantee a portion of the Term Loan, in an amount equal to their stock ownership percentage. The J. Ward McConnell Jr. Living Trust, the estate of the former Vice Chairman of the Board of Directors and a stockholder owning more than 20% of the Company’s outstanding stock, is guaranteeing approximately 38% of the Term Loan, for an annual fee of 2% of the personally guaranteed amount. The initial guarantee fee will be amortized over the life of the Term Loan, and the annual fees and personally guaranteed amounts are expensed monthly. The Term Loan is governed by the terms of a 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 afirst* 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 $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 $269,517 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 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* mayimmediately terminate its obligation, if any, to make additional loans to the Company and mayaccelerate 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 $4,000,000 of monthly working capital. Additionally, a maximum debt to worth ratio of 1 to1* must be maintained, with a minimum of 40% tangible balance sheet equity, with variations subject to mutual agreement. The Company is also required to maintain a minimum debt service coverage ratio of 1.25, with a 0.10 tolerance. The Company also must receive bank approval for purchases or sales of equipment over $100,000 annually and maintain reasonable salaries and owner compensation. The Company was out of compliance with its debt to worth ratio byfifteen percentage points on the Bank Midwest loans as of* November 30, 2023*. Bank Midwest issued a waiver forgiving the noncompliance, and in turn waived the event of default. In the* March 2024renewal Bank Midwest dropped the debt to worth ratio requirement going forward. The next measurement date is November 30, 2024*for all covenants except the monthly working capital requirement.

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SBA Economic Injury Disaster Loans

In* Juneof2020,* 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, 2020with principal amounts of $150,000 each, with athird* loan being executed on* June 24, 2020with a principal amount of$150,000. Proceeds from these EIDLs are being used for working capital purposes. Interest accrues at the rate of 3.75% per annum and will accrue from the date of inception. Installment payments, including principal and interest, were due monthly beginning December 18, 2022 (thirty months from the date of the EIDLs) and December 24, 2022in the amount of $731 per EIDL. The balance of principal and interest is payable 30 years from the date of the EIDL. The EIDLs are secured by a security interest on all of the Company’s assets subordinate to Bank Midwest’s security interest. Each EIDL is governed by the terms of a separate Promissory Note, dated either June 18, 2020or June 24, 2020,*as applicable, entered into by the Company or the applicable subsidiary.

The Company will be required to pay the balance of the EIDL loan associated with the Tools segment upon liquidation of real estate and dissolution of the business. The principal balance of this loan was $159,512 at* February29,* 2024. The Company will also be required to pay off the balance of the Bank Midwest Roof Loan in the event the real estate is sold for the Tools segment. The principal balance of this loan at* February29,* 2024 is $333,951.

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

A summary of the minimum maturities of term debt follows fortwelve month periods ending* February 28,*are as follows:

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.

The Company has net operating losses and tax credits that are expected to offset any2024 fiscal year tax liability and doesnot expect to have significant cash tax cost in the near future.

During thethree months ended* February29,* 2024, and* February 28, 2023*, the Company didnot recognize any revenues from transactions with a related party, andno 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 in which Marc McConnell, the Chairman of the Company’s Board of Directors, has an ownership interest and also serves as President. J. Ward McConnell Jr.’s estate, the J. Ward McConnell, Jr. Living Trust, is paid a monthly fee to guarantee a portion of the Company’s term debt in accordance with the USDA guarantee obtained on the Company’s term debt. In thethree months ended* February29,* 2024, the Company recognized $3,931 of expense for transactions with related parties, respectively, compared to $4,170 for thethree months ended* February 28, 2023*. As of* February**29,* 2024, accrued expenses contained a balance of $1,329 owed to a related party compared to $1,385 on* February 28, 2023*.

The components of operating leases on the Condensed Consolidated Balance Sheets on* February**29,* 2024 and* November 30, 2023* were as follows:

The components of finance leases on the Condensed Consolidated Balance Sheets on* February**29,* 2024 and* November 30, 2023* were as follows:

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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”). The2020 Plan was approved by the stockholders on* April 30, 2020.The2020* Plan replaced the Art’s-Way Manufacturing Co., Inc.2011 Equity Incentive Plan (the*“2011* Plan”) and prior plans. The2020 Plan added an additional 500,000 shares to the number of shares reserved for issuance pursuant to equity awards. No further awards will be made under the2011 Plan or other prior plans. Awards to directors and executive officers under the2020 Plan are governed by the forms of agreement approved by the Board of Directors. Stock options or other awards granted prior to* February 25, 2020*are governed by the applicable prior plan and the forms of agreement adopted thereunder.

The2020 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 1,000 shares of fully vested common stock annually or initially upon their election to the Board and another 1,000 shares of fully vested common stock on the last business day of each fiscal quarter.

Shares issued under the2020 Plan for thethree months ended* February**29,* 2024 and* February 28, 2023* are as follows:

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**29,* 2024 and* November 30, 2023*, 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 donot 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 arenot substantially different from current interest rates.

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As of* February**29,* 2024, the Company hastwo reportable segments: Agricultural Products and Modular Buildings. 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 accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Management evaluates the performance of each segment based on profit or loss from operations before income taxes, exclusive of nonrecurring gains and losses.

Approximate financial information with respect to the reportable segments is as follows.

The 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.

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Management evaluated all other activity of the Company and concluded thatno subsequent events have occurred that would require recognition in the condensed consolidated financial statements other than the renewal of the line of credit discussed in Note12 Loan and Credit Agreements.