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Note 1 - Summary of Significant Accounting Policies | 12 Months Ended
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Nov. 30, 2023
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. During the third quarter of fiscal 2023, the Company ceased operations of its Tools business, Ohio Metal Working Products/Art's Way, which in previous periods, was reported in the consolidated numbers as the Company's third operating segment.
| (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 2023 fiscal year, which includes Art’s-Way Scientific, Inc. and Ohio Metal Working Products/Art’s-Way, Inc, which is presented separately as a discontinued operation for all periods presented. All inter-company accounts and transactions are eliminated in consolidation.
| (c) | 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.
| (d) | Customer Concentration
During the 2023 and 2022 fiscal years, one customer accounted for more than approximately 12% and 11%, respectively, of consolidated revenues from continuing operations.
| (e) | 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. The Company began offering floorplan terms in its Agricultural Products segment during its Fall 2021 early order program to incentivize customers to stock farm equipment on their lots during the 2022 fiscal year and continued to offer this program for fiscal 2023. Floorplan terms allow customers to pay the Company at the earliest of retail date or 180 days. The Company had approximately $1,920,000 in accounts receivable at November 30, 2023 that was part of its floorplan program on extended terms compared to $1,033,000 for the year ended November 30, 2022. 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.
| (f) | Inventories
Inventories are stated at the lower of cost or net realizable value, and cost is determined using the standard costing method which approximates costs determined on the first-in, first-out basis. 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.
| (g) | 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 forty years. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or any other significant adverse change that would indicate that the carrying amount of an asset or group of assets may not be recoverable. For property, plant and equipment used in operations, including lease assets and assets held for lease, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and estimated fair value.
| (h) | Leases
Lessee. 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 operating lease liabilities are included in accrued expenses. The short-term portion of finance leases along with long-term portions of operating and finance lease liabilities are presented on the face of 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, 2023 and November 30, 2022 were as follows:
|  | November 30, 2023 |  |  | November 30, 2022 |
Operating lease right-of-use assets (other assets) |  | $ | 22,427 |  |  | $ | 31,527 |
Current portion of operating lease liabilities (accrued expenses) |  | $ | 8,653 |  |  | $ | 9,101 |
Long-term portion of operating lease liabilities |  |  | 13,774 |  |  |  | 22,426 |
Total operating lease liabilities |  | $ | 22,427 |  |  | $ | 31,527 |
The Company's continuing operations recorded $17,459 of operating lease expense in the year ended November 30, 2023 compared to $17,366 in the same period of fiscal 2022, including variable costs tied to usage. The Company’s operating leases carry a weighted average lease term of 30 months and have a weighted average discount rate of 4.75%. Future maturities of operating lease liabilities as of November 30, 2023 are as follows:
Year Ending November 30, |  |  |  |
2024 |  |  | 9,532 |
2025 |  |  | 9,532 |
2026 |  |  | 4,766 |
Total lease payments |  |  | 23,829 |
Less imputed interest |  |  | (1,402 | )
Total operating lease liabilities |  |  | 22,427 |
The components of finance leases on the Consolidated Balance Sheets on November 30, 2023 and November 30, 2022 were as follows:
|  | November 30, 2023 |  |  | November 30, 2022 |
Finance lease right-of-use assets (net of amortization in other assets) |  | $ | 511,367 |  |  | $ | 396,220 |
|  | $ | 511,367 |  |  | $ | 396,220 |
Current portion of finance lease liabilities |  | $ | 257,454 |  |  | $ | 142,893 |
Long-term portion of finance lease liabilities |  |  | 722,200 |  |  |  | 475,411 |
Total finance lease liabilities |  | $ | 979,654 |  |  | $ | 618,304 |
The Company received grant funds from the Iowa Economic Development’s Manufacturing 4.0 program in prior years for the purchase of assets. These funds have reduced the right-of-use asset account for the proceeds and will reduce amortization over the life of the asset. Future maturities of finance lease liabilities as of November 30, 2023 are as follows:
Year Ending November 30, |  |  |  |
2024 |  | $ | 302,714 |
2025 |  |  | 248,050 |
2026 |  |  | 246,466 |
2027 |  |  | 213,481 |
2028 |  |  | 82,147 |
Total lease payments |  |  | 1,092,858 |
Less imputed interest |  |  | (113,204 | )
Total finance lease liabilities |  | $ | 979,654 |
The weighted average lease term of the Company’s finance leases are 45 months while the weighted average rate of finance leases is 5.19%. The Company's continuing operations incurred $129,891 of amortization expense from ROU assets related to finance leases in fiscal 2023 compared to $110,426 in fiscal 2022. Lessor. The Company's lessor arrangements primarily include contracts for temporary building rentals or permanent building financing for our Modular Buildings segment. The Company classifies its leases at inception as operating, direct financing or sales-type leases. A lease is classified as a sales-type lease if at least one of the following criteria is met: (1) the lease transfers ownership of the underlying asset to the lessee, (2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (3) the lease term is for a major part of the remaining economic life of the underlying asset, (4) the present value of the sum of the lease payments equals or exceeds substantially all of the fair value of the underlying assets, or (5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Furthermore, when none of the above criteria is met, a lease is classified as a direct financing lease if both of the following criteria are met: (1) the present value of the of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds the fair value of the underlying asset and (2) it is probable that the lessor will collect the lease payments plus any amount necessary to satisfy a residual value guarantee. A lease is classified as an operating lease if it does not qualify as a sales-type or direct financing lease. Currently, the Company classifies all of its lessor arrangements as operating leases. See note 7 Assets Held for Lease for more information.
| (i) | 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 basis 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. 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, 2020.
| (j) | Revenue Recognition
The Company’s revenues primarily result from contracts with customers. The major sources of revenue for the Agricultural Products are farm equipment and service parts related to farm equipment. The Agricultural Products segment generally executes 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 and service parts upon shipment of the goods. Risk of ownership and title pass to the customer upon shipment of the goods. 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 segment typically requires 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 2023 and 2022 fiscal years were approximately $3,110,000 and $1,010,000 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, estimated gross profit and customer deposits. 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 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 9 “Product Warranty.”
| (k) | 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, 2023 |
|  | Agricultural |  |  | Modular Buildings |  |  | Total |
Farm equipment |  | $ | 19,188,000 |  |  | $ | - |  |  | $ | 19,188,000 |
Farm equipment service parts |  |  | 2,886,000 |  |  |  | - |  |  |  | 2,886,000 |
Modular buildings |  |  | - |  |  |  | 7,590,000 |  |  |  | 7,590,000 |
Modular building lease income |  |  | - |  |  |  | 112,000 |  |  |  | 112,000 |
Other |  |  | 393,000 |  |  |  | 112,000 |  |  |  | 505,000 |
|  | $ | 22,467,000 |  |  | $ | 7,814,000 |  |  | $ | 30,281,000 |
|  | Twelve Months Ended November 30, 2022 |
|  | Agricultural |  |  | Modular Buildings |  |  | Total |
Farm equipment |  | $ | 17,825,000 |  |  | $ | - |  |  | $ | 17,825,000 |
Farm equipment service parts |  |  | 2,575,000 |  |  |  | - |  |  |  | 2,575,000 |
Modular buildings |  |  | - |  |  |  | 4,550,000 |  |  |  | 4,550,000 |
Modular building lease income |  |  | - |  |  |  | 62,000 |  |  |  | 62,000 |
Other |  |  | 512,000 |  |  |  | 122,000 |  |  |  | 634,000 |
|  | $ | 20,912,000 |  |  | $ | 4,734,000 |  |  | $ | 25,646,000 |
The Company began offering floorplan terms in its Agricultural Products segment during its Fall 2021 early order program to incentivize customers to stock farm equipment on their lots during the 2022 fiscal year and continued to offer this program for fiscal 2023. Floorplan terms allow customers to pay the Company at the earliest of retail date or 180 days. This program has an effect on the timing of the Company’s fiscal 2023 cash flows compared with historical cash flows.
| (l) | 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, 2023 |  |  | November 30, 2022 |
Receivables |  | $ | 3,432,000 |  |  | $ | 2,466,790 |
Assets |  |  | 289,000 |  |  |  | 451,000 |
Liabilities |  |  | 767,000 |  |  |  | 1,153,000 |
The amount of revenue recognized in fiscal year 2023 that was included in a contract liability at November 30, 2022 was approximately $1,153,000 compared to $558,000 for the prior year. The beginning balance of contract receivables, assets and liabilities at December 1, 2021 was $2,380,000; $177,000 and $558,000, respectively. The change in contract receivables reflected above results from contract billings for all three segments as performance obligations are met. The decrease in contract assets on November 30, 2023 is due to progress on construction contracts and the reduction of construction costs in excess of billings in the Modular Buildings segment. Contract liabilities include customer deposits and billings in excess of cost and profit on the consolidated balance sheets. Contract liabilities have decreased due to the fulfillment of customer deposits received on the Agricultural Products segment as part of our 2022 fall early order program that offers cash discounts for equipment deposits. 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, 2023, and November 30, 2022, the Company has no performance obligations with an original expected duration greater than one year.
| (m) | Software Development Costs
The Company capitalizes costs related to software developed or obtained for internal use in accordance with the ASC 350-40, Internal-Use Software (“ASC 350-40”). The following illustrates the various stages and related processes of computer software development in accordance with ASC 350-40: Preliminary project stage: (a) conceptual formulation of alternatives; (b) evaluation of alternatives; (c) determination of existence of needed technology; and (d) final selection of alternatives. Internal and external costs incurred during the preliminary project stage are expensed as incurred. Application development stage: (a) design of chosen path, including software configuration and software interfaces; (b) coding; installation to hardware; and (c) testing, including parallel processing phase. Internal and external costs incurred to develop internal-use computer software during the application development stage are capitalized. Data Conversion costs are expensed as incurred. Post-implementation-operation stage: (a) training; and (b) application maintenance. Internal and external costs incurred during the post-implementation-operation stage are expensed as incurred. Certain costs incurred are considered enhancements, modifications to existing internal-use software that result in additional functionality. Enhancements normally require new software specifications and may also require a change to all or part of the existing software specifications. When this additional functionality is determinable, the related costs are capitalized. Otherwise, costs are expensed as incurred. Capitalization of internal-use software costs ceases when a computer software project is substantially complete and ready for its intended use. The Company moved to an updated cloud based version of its QAD ERP system in the third fiscal quarter of 2023. Since the software is a cloud computing arrangement, the Company accounts for the software as a service contract while the costs related to implementation still fall under ASC 350-40 for internal use software and are capitalized. Because the agreement is considered a service contract, the implementation costs are amortized over the original service contract period and any automatic renewal period and are included in operating costs with the service contract. The Company had approximately $183,000 of capitalized costs in other current assets to be amortized as operating expense over the service agreement period through May 31, 2025. The Company amortized approximately $30,000 of implementation costs in the twelve months ended November 30, 2023. The Company expensed approximately $26,000 of non capitalizable implementation costs twelve months ended November 30, 2022 compared to approximately $58,000 twelve months ended November 30, 2023.
| (m) | Research and Development
Research and development costs are expensed when incurred. Such costs approximated $204,000 and $193,000 for the 2023 and 2022 fiscal years, respectively. Research and development costs are included in engineering expenses on the Consolidated Statements of Operations.
| (n) | Advertising
Advertising costs are expensed when incurred. Such costs approximated $229,000 and $190,000 for the 2023 and 2022 fiscal years, respectively. Advertising costs are included in selling expenses on the Consolidated Statements of Operations.
| (o) | Net Income Per Share of Common Stock
Basic net income per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted net income 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 per share of common stock. Basic and diluted income per common share have been computed based on the following as of November 30, 2023 and 2022:
|  | For the Twelve Months Ended |
|  | November 30, 2023 |  |  | November 30, 2022 |
Numerator for basic and diluted net income per share: |  |  |  |  |  |  |  |
Net income from continuing operations |  | $ | 762,789 |  |  | $ | 374,121 |
Net loss from discontinued operations |  |  | (495,820 | ) |  |  | (276,324 | )
Net Income |  | $ | 266,969 |  |  | $ | 97,797 |
Denominator: |  |  |  |  |  |  |  |
For basic net income per share - weighted average common shares outstanding |  |  | 5,002,238 |  |  |  | 4,707,384 |
Effect of dilutive stock options |  |  | - |  |  |  | - |
For diluted net income per share - weighted average common shares outstanding |  |  | 5,002,238 |  |  |  | 4,707,384 |
Net income per share - Basic: |  |  |  |  |  |  |  |
Continuing Operations |  | $ | 0.15 |  |  | $ | 0.08 |
Discontinued Operations |  |  | (0.10 | ) |  |  | (0.06 | )
Net income per share |  | $ | 0.05 |  |  | $ | 0.02 |
Net income per share - Diluted: |  |  |  |  |  |  |  |
Continuing Operations |  | $ | 0.15 |  |  | $ | 0.08 |
Discontinued Operations |  |  | (0.10 | ) |  |  | (0.06 | )
Net income per share |  | $ | 0.05 |  |  | $ | 0.02 |
| (p) | 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.
| (q) | 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.
| (r) | Recently Issued Accounting Pronouncements
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.

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