Art’s-Way(ARTW) - 2020 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended August 31, 2020, reflect a year-over-year increase in sales but a wider net loss Condensed Consolidated Balance Sheets As of August 31, 2020, total assets were $19.32 million, a slight decrease from $19.35 million, while total liabilities increased significantly to $9.02 million, leading to a decrease in total stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Aug 31, 2020 | Nov 30, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Current Assets | $11,088 | $11,407 | ($319) | | Total Assets | $19,320 | $19,347 | ($27) | | Total Current Liabilities | $5,022 | $5,203 | ($181) | | Total Liabilities | $9,019 | $7,553 | $1,466 | | Total Stockholders' Equity | $10,300 | $11,794 | ($1,494) | Condensed Consolidated Statements of Operations For the nine months ended August 31, 2020, sales increased by 10.2% to $16.94 million, but the net loss widened to $(1.66) million due to higher operating expenses Statement of Operations Summary (in thousands, except per share data) | Metric | Nine Months Ended Aug 31, 2020 | Nine Months Ended Aug 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Sales | $16,937 | $15,375 | +10.2% | | Gross Profit | $2,897 | $2,569 | +12.8% | | Loss from Operations | $(1,908) | $(1,397) | +36.6% | | Net Loss | $(1,663) | $(1,251) | +32.9% | | Net Loss Per Share | $(0.38) | $(0.29) | +31.0% | Condensed Consolidated Statements of Cash Flows For the nine months ended August 31, 2020, net cash used in operating activities was $(359) thousand, a significant shift from the prior year, while financing activities provided $792 thousand, largely from new term debt Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months Ended Aug 31, 2020 | Nine Months Ended Aug 31, 2019 | | :--- | :--- | :--- | | Net cash (used in) operating activities | $(359) | $377 | | Net cash provided by (used in) investing activities | $(432) | $532 | | Net cash provided by (used in) financing activities | $792 | $(907) | | Net increase in cash | $1 | $2 | Notes to Condensed Consolidated Financial Statements The notes detail the company's structure, accounting policies, and financial components, including the acquisition of PPP and EIDL loans due to COVID-19 and a new equity incentive plan - The company is organized into three operating segments: Agricultural Products (farm equipment), Modular Buildings (animal containment and labs), and Tools (steel cutting tools)[15][83] - The COVID-19 pandemic impacted second and third-quarter 2020 results, causing a temporary 17% workforce reduction due to self-quarantine, though all staff had returned by the end of May 2020[17] - In April 2020, the company obtained a $1,242,900 loan under the Paycheck Protection Program (PPP), which may be partially or fully forgiven[52] - In June 2020, the company secured three Economic Injury Disaster Loans (EIDL) totaling $450,000 for working capital purposes, with a 3.75% interest rate and a 30-year term[58] - The Art's-Way Manufacturing Co., Inc. 2020 Equity Incentive Plan was approved, replacing the 2011 plan and adding 500,000 shares for issuance[78] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported a 10.2% increase in consolidated sales for the first nine months of fiscal 2020, driven by growth across all three segments, despite a wider net loss due to increased administrative expenses Consolidated Sales Performance (in thousands) | Period | FY 2020 | FY 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Three Months | $6,465 | $5,504 | $961 | +17.5% | | Nine Months | $16,937 | $15,375 | $1,562 | +10.2% | - Administrative expenses increased significantly for the nine-month period to $3.2 million from $2.5 million in the prior year, due to non-recurring costs including management recruitment ($133k), dual CEO/director salaries during transition ($68k), and pandemic-related employee rewards ($197k)[102] - The consolidated order backlog as of October 6, 2020, was $3.54 million, a significant decrease from $7.56 million a year prior, mainly due to progress on a large modular building contract[106] - The company's primary source of funds for the nine months was financing activities, including a PPP loan and three EIDL loans, with management expecting a significant portion of the PPP loan to be forgiven[113] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Art's-Way is not required to provide this disclosure - The company is not required to provide disclosure for this item as it qualifies as a smaller reporting company[117] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of August 31, 2020, due to an ongoing material weakness related to estimating completed subcontract work in the modular buildings segment - Disclosure controls and procedures were deemed not effective as of August 31, 2020, due to an ongoing material weakness[117] - The material weakness relates to the estimation of completed subcontract work on modular building contracts, first identified as of November 30, 2019[118] - New internal controls were implemented in Q1 2020 to remediate the weakness, including enhanced review and sign-off procedures for receiving transactions and large subcontract work, though remediation is not yet considered complete as testing has not been performed[119] PART II – OTHER INFORMATION Legal Proceedings The company is not currently a party to any material pending legal proceedings - The company reports no material pending legal proceedings[120] Risk Factors As a smaller reporting company, Art's-Way is not required to provide this disclosure - The company is not required to provide disclosure for this item as it qualifies as a smaller reporting company[121] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None reported[121] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None reported[121] Exhibits This section lists the exhibits filed with the Form 10-Q, including promissory notes related to SBA loans, a consulting agreement, and officer certifications