Note 10 - Loan and Credit Agreements

9 Months Ended

Aug. 31, 2022

Notes to Financial Statements

Debt Disclosure [Text Block]

10) Loan and Credit Agreements

Bank Midwest Revolving Lines of Credit

The Company maintains a $5,000,000 revolving line of credit (the “Line of Credit”) and a $550,000 revolving line of credit (the “Reserve Line of Credit”), both used for working capital purposes. The Reserve Line of Credit funds will remain undisbursed until all funds on the Line of Credit are used. On August 31, 2022, the combined balance of the Line of Credit and Reserve Line of Credit was $4,559,000with $991,000remaining available, as may be 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 August 31, 2022, 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 1.50% 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 (as of filing date) interest rate is 7.750% per annum following several increases in fiscal 2022. The Line of Credit was most recently renewed on March 28, 2022. The Line of Credit matures on March 30, 2023 and requires monthly interest-only payments. Any unpaid principal amount borrowed on the Reserve Line of Credit accrues interest at a floating rate per annum equal to 2.0% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 4.00% per annum and the current interest rate is 8.250% per annum. The Reserve Line of Credit matures on November 30, 2022 and any unpaid balance must be repaid at that time. The Line of Credit is governed by the terms of a Promissory Note, dated February 11, 2021, entered into between the Company and Bank Midwest. The Reserve Line of Credit is governed by the terms of a Promissory Note, dated August 17, 2022, 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 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.

The Reserve Line of Credit is secured by any and all security documents between the Company and Bank Midwest.

Bank Midwest Term Loans

The Company carries a $2,600,000 term loan due October 1, 2037 (the “Term Loan”), and a $350,000 term loan (the “Roof Term Loan”) due on August 15, 2027. The Term Loan accrues interest at a rate of 5.00% for the first ninety months, which will end on September 28, 2022. 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 $17,271in 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 $62,400and 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. The J. Ward McConnell Jr. Living Trust, the estate of the former 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 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 Company also entered into the Roof Term Loan of $350,000on August 17, 2022. The Roof Term Loan’s proceeds were used to fix sections of the Armstrong facility’s roof. The Roof Term Loan requires 59regular payments of $2,972and an estimated balloon payment of $268,176on the maturity date of August 15, 2027. Any unpaid principal amount borrowed on the Roof Term Loan accrues interest at a floating rate per annum equal to 2.00% above the Wall Street Journal rate published in the money rates section of the Wall Street Journal. The interest rate floor is set at 5.00% per annum and the current interest rate is 8.25% per annum. The Term Loan is governed by the terms of a Promissory Note, dated September 28, 2017, entered into between the Company and Bank Midwest. The Roof Term Loan is governed by the terms of a Promissory Note, dated August 17, 2022, entered into between the Company and Bank Midwest.

Compliance

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 the following Bank Midwest covenants is measured annually on November 30. 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 0.10tolerance. The Company also must receive bank approval for purchases or sales of individual equipment over $50,000individually and maintain reasonable salaries and owner compensation. The Company was out of compliance with its debt to worth ratio covenant in place under the Bank Midwest loan agreements as of November 30, 2021. Bank Midwest issued a waiver forgiving the noncompliance, and in turn waived the event of default. The next measurement date is November 30, 2022.

The Company also has a minimum working capital requirement of $4,000,000 that is measured monthly. 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. As of August 31, 2022, the Company was in compliance with its working capital requirement.

SBA Economic Injury Disaster Loans

The Company secured three loans in the amount of $150,000 each in June of 2021 with the U.S. Small Business Administration under its Economic Injury Disaster Loan (“EIDL”) program. Proceeds from the EIDLs were 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, thirty months from the date of disbursement, in the amount of $731 per loan. The balance of principal and interest is payable 30 years from the date of disbursement. 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.

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

	August 31, 2022		November 30, 2021
Bank Midwest loan payable in monthly installments of $17,271 including interest at 5.00%, due October 1, 2037	$	2,189,491	$	2,260,412
U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 18, 2021, due June 18, 2050		162,390		158,168
U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 18, 2021, due June 18, 2050		162,390		158,168
U.S. Small Business Administration loan payable in monthly installments of $731 including interest at 3.75% beginning June 24, 2021, due June 24, 2050		162,509		158,181
Bank Midwest loan payable in monthly installments of $2,972 including interest at 6.00%, due May 15, 2027		346,825		-
Total term debt	$	3,023,605	$	2,734,929
Less current portion of term debt		114,407		99,462
Term debt, excluding current portion	$	2,909,198	$	2,635,467

A summary of the minimum maturities of term debt follows for the twelve months ending August 31:

Year	Amount
2023	$	114,407
2024		122,185
2025		129,095
2026		135,971
2027		433,873
2028 and thereafter		2,088,074
	$	3,023,605