# Arts Way Manufacturing Co Inc: Form 10-Q for the period ended Aug 31, 2023

- Company: [Arts Way Manufacturing Co Inc](/companies/artw.md) (CIK 7623)
- Form: 10-Q
- Filed: 2023-10-13
- Accepted by EDGAR: Oct 13, 2023, 21:24 ET
- Period: 2023-08-31
- Accession: 0001437749-23-028228
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/7623/000143774923028228/artw20230831_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/7623/000143774923028228/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-06-01 to 2023-08-31 | $8.1m | us-gaap:Revenues |
| Revenue | 9 months, 2022-12-01 to 2023-08-31 | $23.4m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-06-01 to 2023-08-31 | $5.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-12-01 to 2023-08-31 | $16.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-06-01 to 2023-08-31 | $2.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-12-01 to 2023-08-31 | $6.7m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-06-01 to 2023-08-31 | $468.2k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-12-01 to 2023-08-31 | $1.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-06-01 to 2023-08-31 | $160.8k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-12-01 to 2023-08-31 | $419.8k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-06-01 to 2023-08-31 | $64.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-12-01 to 2023-08-31 | $245.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-06-01 to 2023-08-31 | −$74.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-12-01 to 2023-08-31 | $574.8k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-06-01 to 2023-08-31 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-12-01 to 2023-08-31 | $0.11 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-06-01 to 2023-08-31 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-12-01 to 2023-08-31 | $0.11 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-06-01 to 2023-08-31 | 5,009,041 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-12-01 to 2023-08-31 | 5,000,185 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-12-01 to 2023-08-31 | −$518.6k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-12-01 to 2023-08-31 | $569.4k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2022-12-01 to 2023-08-31 | $64.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-08-31 | $4.2k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-08-31 | $16.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-08-31 | $25.6m | us-gaap:Assets |
| Current liabilities | at 2023-08-31 | $10.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-08-31 | $13.7m | us-gaap:Liabilities |
| Long-term debt | at 2023-08-31 | $2.7m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-08-31 | $106.6k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-08-31 | $11.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 18,070 characters.

### Forward-Looking Statements

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “report”) and the audited consolidated financial statements and related notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data,” as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2022. Some of the statements in this report may be forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. Many of these forward-looking statements are located in this report under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but they may appear in other sections as well. Forward-looking statements in this report generally relate to: (i) our expectations with respect to order backlog and future demand for products and the expected product mix; (ii) our beliefs regarding the sufficiency of working capital and cash flows; (iii) our expectation that we will continue to be able to renew or obtain financing on reasonable terms when necessary as well as our continued positive relationship with our creditors and lenders; (iv) our beliefs regarding production capabilities; (v) our intentions and beliefs relating to our costs, business strategies, and future performance, including without limitation, our beliefs that Modular and Agricultural Products present greater opportunity for long-term stockholder returns in comparison to our Tools segment; (vi) our beliefs regarding the impact and potential actions with respect to discontinuing our Tools segment, including without limitation, beliefs about customer interest in purchasing inventory or other assets, expenses to be incurred in connection with such discontinuation, potential cash generated by the sale of related real estate and other assets, timing of runoff activities, and fulfillment of sales orders; (vii) our beliefs regarding our early order program providing a picture of future demand; (viii) our expected financial results, including without limitation, our expected results for the Modular and Agricultural Products segments; and (ix) our belief that we can convert certain engineering-only contracts to building contracts; (xx) our expectations regarding receiving Employer Retention Credit Refunds; and (ixi) our expectations concerning our primary capital and cash flow needs.

You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded. We cannot provide any assurance with respect to our future performance or results. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to: (i) the impact of changing credit markets on our ability to continue to obtain financing on reasonable terms; (ii) our ability to repay current debt, continue to meet debt obligations and comply with financial covenants; (iii) the effect of inflation as well as general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (iv) any further impact from COVID-19; (v) fluctuations in seasonal demand and our production cycle; (vi) the ability of our suppliers to meet our demands for raw materials and component parts; (vii) fluctuations in the price of raw materials, especially steel; (viii) our ability to predict and meet the demands of each market in which our segments operate; (ix) fluctuating demand for commercial real estate and the assets we are liquidating as part of closing our Tools segment; (x) other factors described from time to time in our Securities and Exchange Commission filings. We do not intend to update the forward-looking statements contained in this report other than as required by law. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

### Critical Accounting Policies

Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of our financial statements as of August 31, 2023 remain unchanged from November 30, 2022. Disclosure of these critical accounting policies is incorporated by reference from Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2022.

### Results of Operations

#### Net Sales and Cost of Sales

Our consolidated corporate sales from continuing operations for the three- and nine-month periods ended August 31, 2023 were $ 8,117,000 and $ 23,429,000, respectively, compared to $7,476,000 and $19,031,000 during the same respective periods in fiscal 2022, a $641,000, or 8.6%, increase for the three months and a $4,398,000, or 23.1%, increase for the nine months. We continued to successfully fulfil our pent up backlog in the three and nine months ended August 31, 2023 for our two business segments. Consolidated gross margin for the three-month period ended August 31, 2023 was 28.3% compared to 26.2% for the same period in fiscal 2022. Consolidated gross margin for the nine-month period ended August 31, 2023 was 28.5% compared to 27.1% for the same period in fiscal 2022.

Our third quarter sales in our Agricultural Products segment were $5,530,000 compared to $6,345,000 during the same period of fiscal 2022, a decrease of $815,000, or 12.8%. Our year-to-date agricultural product sales were $17,343,000 compared to $15,823,000 during the same period in fiscal 2022, an increase of $1,520,000, or 9.6%. We saw a decrease in revenue in Q3 of fiscal 2023 compared to 2022 due to the timing of our beet equipment production. We typically see an increase in sales during our beet run as it is our largest and most expensive equipment. We shipped the majority of our beet equipment during the second quarter of fiscal 2023 compared to Q3 of fiscal 2022. Despite the Q3 decrease, year to date sales in our Agricultural Products segment are up 9.6% for the nine-month period ended August 31, 2023. We've seen increased demand for our grinders, beet equipment and manure spreaders thus far in fiscal 2023. We released smaller versions of our manure spreader line in fiscal 2023 that have been well-received in the marketplace. We are continuing our focus on improving our dealer network by increasing the number of stocking dealers we work with. We are incentivizing our sales team to bring new dealers on board and are also offering favorable terms to new dealers to increase our reach. While some supply chain challenges still exist, proper planning has allowed us to overcome most of these issues. We are starting to see drops in commodity prices with the exception of sugar beets at this time. We do expect farmers to start to pull back on purchases if commodity prices continue to stay down. We are also observing increased inventory on dealer lots, which may indicate the supply chain is catching up and that demand may start to decrease. Gross margin for our agricultural products segment for the three-month period ended August 31, 2023 was 26.0% compared to 29.7% for the same period in fiscal 2022. Gross margin for our agricultural products segment for the nine-month period ended August 31, 2023 was 29.4% compared to 30.6% for the same period in fiscal 2022. We are seeing a slight decrease in our gross margin due to increases in component prices. We have been more cautious about raising prices in fiscal 2023 than we were in prior years as commodity prices are down. Further, our decreased gross profit margin was also driven by our product mix for fiscal 2023. We sold a higher mix of manure spreaders which carry lower margins than our portable feed equipment.

Our third quarter sales in our Modular Buildings segment were $2,587,000 compared to $1,131,000 for the same period in fiscal 2022, an increase of $1,456,000, or 128.7%. Our year-to-date sales in our Modular Buildings segment were $6,086,000 compared to $3,208,000 for the same period in fiscal 2022, an increase of $2,878,000, or 89.7%. Progress on a large research project coupled with continued agricultural building demand drove the revenue increase for the three and nine months ended August 31, 2023. Gross margin for the three- and nine-month periods ended August 31, 2023 was 33.4% and 25.8%, respectively, compared to 6.5% and 9.5% for the same respective periods in fiscal 2022. Our gross margin in the three- and nine-month periods of fiscal 2023 has increased due to additional markup we enacted to cover rising costs of overhead from inflationary forces. The increased sales of the Modular Buildings segment also has made it easier to absorb our fixed overhead costs.

As announced in a press release on June 7, 2023, we discontinued our Tools segment with the last day of normal operations on July 14, 2023. One employee remained employed by the Tools segment as of August 31, 2023. This employee was overseeing the liquidation process, mainly the sale of remaining inventory and auctioning off machinery and equipment. The Company real estate is listed for sale at market value for the Canton, Ohio area. The Company estimates cash generation of approximately $950,000 from the liquidation of receivables, inventory and other assets (excluding real estate) to fund estimated liquidation costs of $200,000. These estimates will vary as the liquidation finishes in the next two fiscal quarters. Our Tools segment had sales of $ 439,000 and $ 2,031,000 during the three- and nine-month periods ended August 31, 2023, respectively, compared to $ 664,000 and $ 1,998,000 for the same respective periods in fiscal 2022, a 33.9% decrease and a 1.7% increase, respectively. These numbers are reported above in Note 3 - Discontinued Operations. Management believes the liquidation of the Tools segment will allow for investment in technological advances that improve efficiency and margins in the Agricultural Products and Modular Buildings segments, which have historically been more profitable and which we believe present greater long-term stockholder returns.

#### Expenses

Our third quarter consolidated selling expenses from continuing operations were $566,000 compared to $418,000 for the same period in fiscal 2022. Our year-to-date selling expenses were $1,609,000 in fiscal 2023 compared to $1,407,000 for the same period in fiscal 2022. We experienced an increase in selling expenses for the three months ended August 31, 2023 compared to fiscal 2022 due to a greater mix of commissionable sales in Q3 2023 compared to Q3 of fiscal 2022, which included a greater mix of beet equipment sales in which commissions are not paid. For the nine months ended August 31, 2023, our selling expenses are up due to the large commissionable sales increases in our Modular Building and Agricultural Products segments. Selling expenses as a percentage of sales were 7.0% and 5.6% for the three- and nine-month periods ended August 31, 2023, respectively, compared to 6.9% and 7.4% for the same respective periods in fiscal 2022.

Consolidated engineering expenses from continuing operations were $171,000 and $439,000 for the three- and nine-month periods ended August 31, 2023, respectively, compared to $168,000 and $446,000 for the same respective periods in fiscal 2022. Engineering expenses as a percentage of sales were 2.1% and 1.9% for the three- and nine-month periods ended August 31, 2023, respectively, compared to 2.2% and 2.3% for the same respective periods in fiscal 2022.

Consolidated administrative expenses from continuing operations for the three- and nine-month periods ended August 31, 2023 were $1,095,000 and $3,178,000, respectively, compared to $873,000 and $2,791,000 for the same respective periods in fiscal 2022. Administrative expenses as a percentage of sales were 13.5% and 13.6% for the three- and nine-month periods ended August 31, 2023, respectively, compared to 11.7% and 14.7% for the same respective periods in fiscal 2022. Administrative expenses have increased primarily due to the addition of staff in accounting, human resources and quality assurance and additional expense related to the implementation of an upgrade to our ERP system, which went live in August of 2023.

#### Net income from continuing operations

Consolidated net income from continuing operations was $241,000 for the three-month period ended August 31, 2023, compared to $304,000 for the same period in fiscal 2022. While our Modular Buildings segment was profitable in Q3 of fiscal 2023, our Agricultural Products segment incurred a loss for the quarter. While our revenues were strong in this segment, a large portion of our sales were from manure spreaders, which are lower margin sales as opposed to some of our other lines. In addition, we saw increasing component prices on our inventory items, inflationary effects on our overhead items and also incurred some large one-time expenses for recruitment of key employees and ERP conversion costs, which led to an unprofitable quarter. Our consolidated net income from continuing operations for the nine months ended August 31, 2023, was $921,000 compared to $191,000 in the same period in fiscal 2022. We have continued to see success in our Agricultural Products segment due to favorable market conditions, revitalized corporate branding and improved customer service. Our Modular Buildings segment converted pent up demand from the COVID-19 pandemic into strong fiscal 2023 results. We attribute a good portion of the corporate success we have seen over the last two years to strong leadership and a focus on putting the right people in place in our business segments.

#### Order Backlog

The consolidated order backlog net of discounts for continuing operations as of October 5, 2023 was $5,221,000 compared to $8,424,000 as of October 5, 2022. The Agricultural Products segment order backlog was $3,753,000 as of October 5, 2023 compared to $4,719,000 in fiscal 2022. With a 9.6% increase in revenue in our Agricultural Products segment year to date, a drop in our backlog was expected as we worked through our order bank at a faster rate. Our early order program for fiscal 2024 started at the beginning of October 2023 and we expect this to give us a picture of the demand for fiscal 2024. The backlog for the Modular Buildings segment was $1,468,000 as of October 5, 2023, compared to $3,705,000 in fiscal 2022. The Modular Buildings segment had a large research project in backlog as of October 5, 2023 that was nearing completion at the end of Q3 of fiscal 2023. We have another large research project under an engineering only contract as of October 5, 2023, which we expect to be converted to a building contract in the near future. Our order backlog is not necessarily indicative of future revenue to be generated from such orders due to the possibility of order cancellations and dealer discount arrangements we may enter into from time to time.

### Liquidity and Capital Resources

Our primary source of funds for the nine months ended August 31, 2023 was cash generated by financing activities. We utilized our availability on our line of credit to increase inventory levels to meet continued customer demand and combat supply chain delays. We also utilized our floor plan program to generate additional sales for the first nine months of fiscal 2023 to which we have $1.3 million in accounts receivable on extended terms as of August 31, 2023. Our contracts in progress in the Modular Buildings segment generated approximately $481,000 in cash in the first nine months of fiscal 2023. We expect our primary capital needs for the remainder of fiscal 2023 to relate to operating costs, purchases of equipment that improve our operations, and the retirement of debt. We expect the sale of real estate of our Tools segment to provide a large cash influx in the near future. The company also filed IRS Form 941-X's in September 2023 to claim Employee Retention Credits for salaries and wages paid in 2021 while affected by a governmental shutdown ordinance. The company expects to receive $1.2 million net of consulting fees in Employer Retention Credit refunds, although the timing of such refunds is not known.

We have $5,500,000 in revolving lines of credit with Bank Midwest that, as of August 31, 2023, had an outstanding principal balance of $4,534,559. This line of credit was renewed on March 30, 2023 and is scheduled to mature on March 30, 2024. $500,000 under the Reserve Line of Credit was secured in August of 2023 and is scheduled to mature on November 30, 2023.

We believe our current financing arrangements will provide sufficient cash to finance operations and pay debt when due during the next twelve months. We expect to continue to be able to procure financing upon reasonable terms.

## Controls and procedures

As filed, 1,224 characters.

### Evaluation of Disclosure Controls and Procedures

The persons serving as our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period subject to this report. Based on this evaluation, the persons serving as our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of August 31, 2023. Our management has concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Filed Oct 13, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-028228. Last ingested by Listed: Oct 24, 2026, 14:51 ET. No prices; not investment advice.