Note 1 - Summary of Significant Accounting Policies

12 Months Ended

Nov. 30, 2021

Notes to Financial Statements

Significant Accounting Policies [Text Block]

(1) Summary of Significant Accounting Policies

(a) Nature of Business

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; dirt work equipment and manure spreaders. The Company sells its labeled products through independent farm equipment dealers throughout the United States. 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), CBN (cubic boron nitride) inserts and OEM specialty tools through the Company’s wholly-owned subsidiary, Ohio Metal Working Company/Art’s-Way, Inc.

(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 2021 fiscal year, which includes Art’s-Way Scientific, Inc., and Ohio Metal Working Products/Art’s-Way, Inc. All material inter-company accounts and transactions are eliminated in consolidation.

(c) Change in Accounting Estimate

During the fiscal year 2020, the Company made a change in accounting estimate related to the estimated costs to complete a material construction contract. The change in estimate was related to the expected collectability of change orders driven from project modifications in the design process and scope gaps that occurred because of the design changes. Further unforeseen costs including increased costs from project delays due to COVID-19, issues with site conditions, subcontractor rework and expected liquidated damages deteriorated the gross profit margin on the project further through the fourth fiscal quarter of 2020. Overall, approximately $1.3 million of additional revenue was generated since the inception of the contract compared to $2.8 million of additional estimated costs to complete. The Company determined this was a change in accounting estimate in accordance with Accounting Standards Codification (“ASC”) 250-10 “Accounting Changes and Error Corrections” based on the timing of when information was reasonably considered available for the expected additional costs. The Company recognized approximately $1.2 million in revenue at a reduced margin for the Modular Buildings segment in the first and second quarters of fiscal 2021 as a result of this change in estimate.

In the fourth quarter of fiscal 2020, the Company made a change in accounting estimate related to the inventory obsolescence reserve for UHC reels, Miller Pro forage and rake, auger, and other non-current product lines. The Company concluded these items were not going to be a part of the Company’s strategic product offering going forward and increased the reserve on these items approximately $681,000 in November 2020. The Company scrapped approximately $543,000 of obsolete inventory in 2021 and expects these efforts to continue into 2022. The effect of the increased reserve reduced net inventory, added additional cost of goods sold expense reducing income from operations and also had an effect on working capital debt covenants by approximately $681,000. The Company determined this was a change in accounting estimated in accordance with Accounting Standards Codification (“ASC”) 250-10 “Accounting Changes and Error Corrections.”

(d) Cash Concentration

The Company maintains several different accounts at one bank, and balances in these accounts could periodically exceed the federally insured limits. However, management believes the risk of loss to be low.

(e) Customer Concentration

During the 2021 and 2020 fiscal years, one customer accounted for more than 8% and 18%, respectively, of consolidated revenues. The large concentration percentage in fiscal 2020 was due to a large construction contract in our Modular Buildings segment while our largest customer in 2021 was in the Agricultural Products segment.

(f) Accounts Receivable

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 180 day terms backed by export insurance.

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.

(g) Inventories

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.

(h) 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 40 years.

(i) Leases

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.

There were no future minimum lease receipts from sales-type leases as of November 30, 2021.

The components related to sales-type leases on November 30, 2020 are as follows:

	November 30, 2020
Minimum lease receivable, current	$	29,002
Unearned interest income, current		(650	)
Net investment in sales-type leases, current	$	28,352

There was no sales activity related to sales-type leases for the years ended November 30, 2021 and November 30, 2020.

The Company determines if an arrangement is a lease at inception of a contract. The nature of the Company’s leases at this time is shop machinery and office equipment, mainly copiers, with terms of 12 to 60 months. Operating and finance leases are included in other assets as lease right-of-use (“ROU”) assets on the Consolidated Balance Sheets while current lease liabilities are included as accrued expenses. The long-term portions of lease liabilities are shown as long-term liabilities on the Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term while finance lease ROU assets are amortized on a straight line basis and interest expense is recorded over the lease term.

The Company has copier lease agreements with lease and non-lease components and has elected the practical expedient not to separate lease and non-lease components for this asset class. The Company has also elected not to recognize lease liabilities and ROU assets for leases with an initial term of twelve months or less. The Company recognizes variable costs that depend on usage in profit or loss as they are incurred.

The components of operating leases on the Consolidated Balance Sheets at November 30, 2021 and November 30, 2020 were as follows:

	November 30, 2021		November 30, 2020
Operating lease right-of-use assets (in other assets)	$	47,794		27,879
Current portion of operating lease liabilities (in accrued expenses)	$	12,863		9,537
Long-term portion of operating lease liabilities		34,931		18,342
Total operating lease liabilities	$	47,794		27,879

The Company recorded $22,445 of operating lease expense in the year ended November 30, 2021 compared $23,121 in the same period of fiscal 2020, including variable costs tied to usage. The Company’s operating leases carry a weighted average lease term of 48 months and have a weighted average discount rate of 5.50%

Future maturities of operating lease liabilities as of November 30, 2021 are as follows:

2022	14,914
2023	12,344
2024	11,162
2025	9,532
2026	4,765
Total lease payments	52,717
Less imputed interest	(4,924	)
Total operating lease liabilities	47,794

The components of finance leases on the Consolidated Balance Sheets on November 30, 2021 were as follows while there were no finance leases on November 30, 2020:

	November 30, 2021
Finance lease right-of-use assets (net of amortization in other assets)	$	190,667
	$	190,667
Current portion of finance lease liabilities (in accrued expenses)	$	48,591
Long-term portion of finance lease liabilities		142,386
Total finance lease liabilities	$	190,977

Future maturities of finance lease liabilities as of November 30, 2021 are as follows:

2022	$	56,646
2023		56,646
2024		68,029
2025		14,203
2026		12,618
Total lease payments		208,142
Less imputed interest		(17,165	)
Total finance lease liabilities	$	190,977

The weighted average lease term of the Company’s finance leases are 42 months while the weighted average rate of finance leases is 4.77%. The Company incurred $9,356 of amortization expense from ROU assets related to finance leases.

(j) Income Taxes

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.

On December 28, 2020 the Consolidated Appropriations Act, 2021 was signed into law. This law provides that no amount of loan forgiveness granted under the Paycheck Protection Program shall be included in gross income for tax purposes. The law also allows the deduction of expenses related to the Paycheck Protection Program creating a double tax benefit. The Company attributes 8.8% of tax rate benefit related to the permanent difference from this law for the fiscal year ended November 30, 2020.

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 previously in 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, 2018.

(k) Revenue Recognition

The Company’s revenues primarily result from contracts with customers. The major sources of revenue for the Agricultural Products and Tools segments are farm equipment, service parts related to farm equipment and steel cutting tools and inserts. The Agricultural Products and Tools segments generally execute short-term contracts that contain a single performance obligation – the delivery of product to the common carrier. The Company recognizes revenue for the production and sale of farm equipment, service parts and cutting tools upon shipment of the goods. Risk of ownership and title pass to the customer upon shipment of the goods. The Tools segment has an OEM agreement with one customer for which sales are recognized FOB destination – when the goods hit the customer’s dock. 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 the Company’s 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 passes to the customer upon delivery to the carrier and is not subject to a customer acceptance provision. Proof of the passing of title is documented and retained by the Company. Post shipment obligations are limited to any claim with respect to the condition of the equipment or parts. The Agricultural Products and Tools segments each typically require payment in full 30 days after the ship date. To take advantage of program discounts, some customers pay deposits up front. Any deposits received increase contract liabilities.

In certain circumstances, upon the customer’s written request, the Company may recognize revenue when production is complete, and the goods are ready for shipment. At the customer’s request, the Company will bill the customer upon completing all performance obligations, but before shipment. The customer dictates that the Company ship the goods per the customer’s 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 customer is required to purchase all goods manufactured under this agreement. Title of the goods will pass to the customer 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 customer, and the customer 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, with consistent satisfactory results for both the customer and the Company. The credit terms on these agreements are consistent with the credit terms on all other sales. All risks of loss are shouldered by the customer, and there are no exceptions to the customer’s commitment to accept and pay for these manufactured goods. Revenues recognized at the completion of production in the 2021 and 2020 fiscal years were approximately $1,621,832 and $0, respectively.

The Modular Buildings segment is in the construction industry with its major source of revenue arising from modular building sales. Sales of modular buildings are generally recognized using input methods to measure progress towards the satisfaction of a performance obligation using 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. The Company uses significant judgements in determining estimated contract costs and completion percentages throughout the life of the project. Stock modular building sales also occur and are recognized at a point in time when the performance obligation is fulfilled through substantial completion. Substantial completion is achieved through customer acceptance of the completed building. 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 for the Modular Buildings segment vary by contract, but typically utilize money down and progress payments throughout the life of the contract. The payment terms of the Modular Buildings segment have the most impact on the Company’s contract receivables, contract assets and contract liabilities. Project invoicing from the Modular Buildings segment increases contract receivables and has an effect on contract liabilities through billings in excess of costs and estimated gross profit and advanced payments. The balance of contract assets is typically made up of the balance of costs and estimated gross profit in excess of billings. 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 Agricultural Products segment offers variable consideration in the form of discounts depending on participation in yearly early order programs. This variable consideration is allocated to the transaction price of all products in a sales arrangement and is not contingent on future outcomes. The Agricultural Products segment does not offer rebates or credits. The Tools segment offers quantity discounts that are allocated to the transaction price of each product once the quantity break is achieved. The Tools segment does not offer rebates or credits. The Modular Buildings segment does not offer discounts, rebates or credits.

The Company’s returns 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.

For information on product warranty as it applies to ASC 606, refer to Note 8 “Product Warranty.”

(l) Disaggregation of Revenue

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.

	Twelve Months Ended November 30, 2021
	Agricultural		Modular Buildings		Tools		Total
Farm equipment	$	13,630,000	$	-	$	-	$	13,630,000
Farm equipment service parts		2,799,000		-		-		2,799,000
Steel cutting tools and inserts		-		-		2,440,000		2,440,000
Modular buildings		-		5,382,000		-		5,382,000
Modular building lease income		-		-		-		-
Other		397,000		296,000		21,000		714,000
	$	16,826,000	$	5,678,000	$	2,461,000	$	24,965,000

	Twelve Months Ended November 30, 2020
	Agricultural		Modular Buildings		Tools		Total
Farm equipment	$	10,149,000	$	-	$	-	$	10,149,000
Farm equipment service parts		2,519,000		-		-		2,519,000
Steel cutting tools and inserts		-		-		2,308,000		2,308,000
Modular buildings		-		6,517,000		-		6,517,000
Modular building lease income		-		318,000		-		318,000
Other		417,000		158,000		23,000		598,000
	$	13,085,000	$	6,993,000	$	2,331,000	$	22,409,000

(m) Contract Receivables, Contract Assets and Contract Liabilities

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

	November 30, 2021		November 30, 2020
Receivables	$	2,663,000	$	2,391,000
Assets		177,000		56,000
Liabilities		559,000		474,000

The amount of revenue recognized in fiscal year 2021 that was included in a contract liability at November 30, 2020 was approximately $474,000 compared to $89,000 for the prior year. The change in contract receivables reflected above results from contract billings for all three segments as performance obligations are met. The increase in contract assets on November 30, 2021 is due to construction costs in excess of billings on contracts in the Modular Buildings segment. Contract liabilities have increased due to customer deposits received on the Agricultural Products segment as part of its early order program.

The Company will utilize the practical expedient exception for these contracts and will report only on performance obligations greater than one year. As of November 30, 2021, and November 30, 2020, the Company has no performance obligations with an original expected duration greater than one year.

(n) Research and Development

Research and development costs are expensed when incurred. Such costs approximated $152,000 and $199,000 for the 2021 and 2020 fiscal years, respectively. Research and development costs are included in engineering expenses on the Consolidated Statements of Operations.

(o) Advertising

Advertising costs are expensed when incurred. Such costs approximated $163,000 and $175,000 for the 2021 and 2020 fiscal years, respectively. Advertising costs are included in selling expenses on the Consolidated Statements of Operations.

(p) 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, 2021 and 2020:

	For the Twelve Months Ended
	November 30, 2021		November 30, 2020
Numerator for basic and diluted net income (loss) per share:
Net income (loss)	$	212,631	$	(2,103,486	)
Denominator:
For basic net income (loss) per share - weighted average common shares outstanding		4,515,229		4,393,887
Effect of dilutive stock options		-		-
For diluted net income (loss) per share - weighted average common shares outstanding		4,515,229		4,393,887
Net Income (Loss) per share - Basic:
Net Income (Loss) per share	$	0.05	$	(0.48	)
Net Income (Loss) per share - Diluted:
Net Income (Loss) per share	$	0.05	$	(0.48	)

(q) 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.

(r) Use of Estimates

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.

(s) Recently Issued Accounting Pronouncements

Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (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 12 months or greater. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company adopted this guidance for fiscal 2020 using the modified retrospective approach, including interim periods within that reporting period. Under the modified retrospective approach, the Company did not adjust prior comparative periods. The Company has a moderate amount of leasing activity mainly as the lessee of office equipment and as the lessor of modular buildings. As a result of adoption in the first fiscal quarter of 2020, the Company recognized $34,316 as a right-of-use asset and $34,316 of lease liabilities on the balance sheet for office equipment it leases. The Company’s activity as a lessor will remain mostly unaffected by this guidance. The Company’s additional disclosures may include, but are not limited to:

• Nature of its leases

• Significant assumptions and judgements used

• Information about leases that have not yet commenced

• Related-party lease transactions

• Accounting policy election regarding short-term leases

• Finance, operating, short-term and variable lease costs

• Maturity analysis of operating lease payments, lease receivables and lease obligations

• Tabular disclosure of lease-related income

• Components of the net investment in a lease

• Information on the management of risk associated with residual asset

Accounting Pronouncements Not Yet Adopted

Measurement of Credit Losses on Financial Instruments

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