Note 10 - Loan and Credit Agreements

9 Months Ended

Aug. 31, 2021

Notes to Financial Statements

Debt Disclosure [Text Block]

10) Loan and Credit Agreements

The Company maintains two revolving lines of credit and one term loan with Bank Midwest. The Company also has three term loans with the U.S. Small Business Administration under the Economic Injury Disaster Loan program.

Bank Midwest Revolving Lines of Credit and Term Loan

The Company maintains a credit facility with Bank Midwest consisting of a $5,000,000 revolving line of credit (the “2017 Line of Credit”) used for working capital purposes, and a $2,600,000 term loan due October 1, 2037 (the “Term Loan”). On August 31, 2021, the balance of the 2017 Line of Credit was $4,290,030 with $709,970 remaining available, as may be limited by the borrowing base calculation. The 2017 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 2017 Line of Credit. On August 31, 2021, the 2017 Line of Credit was not limited by the borrowing base calculation. Any unpaid principal amount borrowed on the 2017 Line of Credit accrues interest at a floating rate per annum equal to 1.00% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 4.75% per annum and the current interest rate is 4.75% per annum. The 2017 Line of Credit was most recently renewed on February 11, 2021. The 2017 Line of Credit matures on March 30, 2022 and requires monthly interest-only payments.

The Term Loan accrues interest at a rate of 5.00% for the first sixty months. Thereafter, the Term Loan will accrue 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 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. 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, shareholders owning more than 20% are required to personally guarantee a portion of the Term Loan, in an amount equal to their stock ownership percentage. J. Ward McConnell, Jr., the former Vice Chairman of the Board of Directors and a shareholder owning more than 20% of the Company’s outstanding stock, guaranteed approximately 38% of the Term Loan, for an annual fee of 2% of the personally guaranteed amount. J. Ward McConnell, Jr. passed away on May 31, 2021, and his shares are currently held in trust. The USDA will require any shareholders owning 20% once the trust assets are distributed to guarantee a portion of the Term Loan. 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.

On February 13, 2019, the Company opened a $4,000,000 revolving line of credit (the “2019 Line of Credit”) with Bank Midwest in connection with bonding obligations for the Company’s performance of a large modular laboratory construction project. Funds under the 2019 Line of Credit will be undisbursed to the Company and will be held by Bank Midwest in connection with an Irrevocable Letter of Credit issued by Bank Midwest for the project. The 2019 Line of Credit accrues interest at a floating rate per annum equal to 1.00% above the Wall Street Journal rate published 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 4.75% per annum. The 2019 Line of Credit was most recently renewed on February 2, 2021. The 2019 Line of Credit is payable upon demand by Bank Midwest. If no earlier demand is made, the unpaid principal and accrued interest will be payable in one payment, due on February 13, 2022. As of August 31, 2021, the funds on the 2019 Line of Credit remain undisbursed and are held by Bank Midwest. The Company has completed its obligation on the construction project and is expecting the irrevocable letter of credit to be released in Q4 of 2021.

The Term Loan is governed by the terms of a Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest. Each of the 2017 and 2019 Lines of Credit is governed by the terms of a Promissory Note, dated February 11, 2021 and February 2, 2021, respectively, entered into between the Company and Bank Midwest.

In connection with the 2017 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 2017 Line of Credit, as set forth in Commercial Guaranties, each dated September 28, 2017. The 2019 Line of Credit is also secured by these existing security documents.

To further secure the 2017 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 2019 Line of Credit is also secured by the mortgage on the Canton, Ohio property. The Term Loan is secured by a mortgage on the Company’s Armstrong, Iowa and Monona, Iowa properties. Each mortgage is governed by the terms of a separate Mortgage, dated September 28, 2017, and each property is also subject to a separate Assignment of Rents, dated September 28, 2017.

If the Company or its subsidiaries (as guarantors pursuant to the Commercial Guaranties) commits an event of default with respect to the promissory notes and fails or is unable to cure that default, Bank Midwest may immediately terminate its obligation, if any, to make additional loans to the Company and may accelerate the Company’s obligations under the promissory notes. Bank Midwest shall also have all other rights and remedies for default provided by the Uniform Commercial Code, as well as any other applicable law and the various loan agreements. In addition, in an event of default, Bank Midwest may foreclose on the mortgaged property.

Compliance with Bank Midwest covenants is measured annually on November 30. A maximum debt to net 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 out of compliance with the debt to net worth covenant as of August 31, 2021. The Company expects to need a waiver for this covenant on or prior to November 30, 2021. 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 received the necessary approvals for purchases of equipment over $100,000 for the nine months ended August 31, 2021. The Company was out of compliance with its debt service coverage ratio and the prior minimum working capital requirements covenants in place under the Bank Midwest loans as of November 30, 2020. Bank Midwest issued a waiver forgiving the noncompliance, and in turn waived the event of default. The Company is currently projecting to be in compliance with the debt service coverage ratio as of November 30, 2021.

On January 12, 2021, Bank Midwest amended the Company’s working capital requirement of maintaining a minimum working capital ratio of 1.75, while also maintaining $5,100,000 of working capital. The new covenant requires the Company to maintain a working capital requirement of $4,000,000 and eliminates the requirement to maintain a minimum working capital ratio of 1.75. The $4,000,000 working capital level serves as a trigger point for Bank Midwest and the Company to continue discussion of capital raising strategies to support additional capital injection. This new covenant is measured monthly. As of February 28, 2021, the Company was out of compliance with the working capital covenant by $240,885. On March 22, 2021, Bank Midwest issued a letter to the Company allowing correction of the noncompliance by May 31, 2021. As of May 31, 2021, the Company was out of compliance with the working capital requirement by $126,496, which triggered communication with Bank Midwest to evaluate the Company’s strategy to get back into compliance with the covenant. The Company and Bank Midwest determined that the Company’s strategy to utilize additional funds available under the Economic Injury Disaster Loans (“EIDL”) was acceptable. On August 31, 2021, the Company had $1,050,000 of Economic Injury Disaster Loans (“EIDL”) pending with the U.S. Small Business Administration (“SBA”), which, once received, are expected to put the Company back in compliance.

SBA Economic Injury Disaster Loans

On June 18, 2020, and again on June 24, 2020, the Company executed the standard loan documents required for securing loans offered by the SBA under its EIDL assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. Two loans were executed on June 18, 2020, with principal amounts of $150,000 each, with a third loan executed on June 24, 2020, with 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, are due monthly, twelve months from the date of the EIDLs, in 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. Each EIDL is governed by the terms of a separate Promissory Note, dated either June 18, 2020, or June 24, 2020, as applicable, entered into by the Company or the applicable subsidiary.

On March 11, 2021, the American Rescue Plan Act of 2021 was enacted, which extends the first due date for repayment of EIDLs made in 2020 to 24 months from the date of the note. This act also increased the maximum loan amount from $150,000 to $500,000 per entity. The Company requested EIDL increases of $350,000 per entity under this program for a total of $1,050,000 in additional funding.

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

	August 31, 2021		November 30, 2020
Bank Midwest loan payable in monthly installments of $17,271 including interest at 5.00%, due October 1, 2037	$	2,283,148	$	2,350,593
U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 18, 2022, due June 18, 2050		156,765		152,543
U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 24, 2022, due June 24, 2050		156,727		152,450
U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 18, 2022, due June 18, 2050		156,765		152,543
Total term debt	$	2,753,405	$	2,808,129
Less current portion of term debt		96,222		94,979
Term debt, excluding current portion	$	2,657,183	$	2,713,150

A summary of the minimum maturities of term debt follows for the years ending November 30, 2021:

Year	Amount
2021	$	22,735
2022		99,463
2023		108,284
2024		113,444
2025		119,552
2026 and thereafter		2,289,927
	$	2,753,405