)

Equity Incentive Plan and Stock Based Compensation

January 27, 2011,

the Board of Directors of the Company authorized and approved the Art’s-Way Manufacturing Co., Inc.

2011

Equity Incentive Plan (the

“2011

Plan”). The

2011

Plan was approved by the stockholders on

April 28, 2011.

It replaced the Employee Stock Option Plan and the Directors’ Stock Option Plan (collectively, the “Prior Plans”), and

further stock options will be awarded under the Prior Plans. Awards to directors and executive officers under the

2011

Plan are governed by the forms of agreement approved by the Board of Directors. Stock options granted prior to

January 27, 2011

are governed by the applicable Prior Plan and the forms of agreement adopted thereunder. On

February 25, 2020,

the Board of Directors adopted, subject to stockholder approval, the Art’s-Way Manufacturing Co., Inc

2020

Equity Incentive Plan (the

“2020

Plan”). If approved, the

2020

Plan will replace the

2011

Plan and will add an additional

500,000

shares to the number of shares reserved for issuance pursuant to equity awards.

The

2011

Plan permits the plan administrator to award nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance awards, and stock appreciation rights to employees (including officers), directors, and consultants. The Board of Directors has approved a director compensation policy pursuant to which non-employee directors are automatically granted restricted stock awards of

1,000

shares of fully vested common stock annually or initially upon their election to the Board and another

1,000

shares of fully vested common stock on the last business day of each fiscal quarter. During the

first

three

months of fiscal

2020,

restricted stock awards of

48,750

shares were issued to various employees, directors, and consultants, which vest over the next

three

years, and restricted stock awards of

5,000

shares were issued to directors as part of the director compensation policy, which vested immediately upon grant. In comparison, restricted stock awards of

67,053

shares were issued to various employees, directors, and consultants, which vest over the next

three

years, and restricted stock awards of

6,000

were issued to directors as part of the director compensation policy during the

first

three

months of fiscal

2019.

During the

first

three

months of fiscal

2020,

shares of restricted stock were forfeited upon departure of certain employees compared to

1,400

shares of restricted stock for the same period of fiscal

2019.

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 option 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. Expected volatility is based on historical volatility of the Company’s stock and other factors. The Company uses historical option exercise and termination data to estimate the expected term the options are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is calculated using historical dividend amounts and the stock price at the option issuance date.

stock options were granted during the

three

months ended

February

29,

2020

or in the same respective period of fiscal

2019.

The Company incurred a total of

$37,580

and

$65,546

of stock-based compensation expense for restricted stock awards during the

three

months ended

February

29,

2020

and

February 28, 2019,

respectively. The Company repurchased

10,517

shares and

5,493

shares from employees in the form of treasury stock as consideration for payroll taxes paid on the employee’s behalf for the

three

months ended

February

29,

2020

and

February 28, 2019,

respectively. Stock compensation net of treasury shares repurchased for the

three

months ended

February

29,

2020

was

$18,516

compared to

$54,726,

for the same period in fiscal

2019.