)

Equity Incentive Plan and Stock Based Compensation

February 25, 2020,

the Board of Directors of the Company (the “Board”) authorized and approved the Art's-Way Manufacturing Co., Inc.

2020

Equity Incentive Plan (the

“2020

Plan”). The

2020

Plan was approved by the stockholders on

April 30, 2020.

The

2020

Plan replaces the Art's-Way Manufacturing Co., Inc.

2011

Equity Incentive Plan (the

“2011

Plan”) and adds an additional

500,000

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

further stock options will be awarded under the

2011

Plan or other prior plans. Awards to directors and executive officers under the

2020

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

February 25, 2020

are governed by the applicable prior plan and the forms of agreement adopted thereunder.

The

2020

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 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

nine

months ended

August 31, 2020,

restricted stock awards of

128,750

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

three

years, and restricted stock awards of

20,000

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

first

nine

months of fiscal

2019,

restricted stock awards of

72,437

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

three

years from the date of issuance, and restricted stock awards of

21,000

were issued to directors as part of the director compensation policy. During the

first

nine

months of fiscal

2020,

4,833

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

2,400

shares of restricted stock forfeited during 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

nine

months ended

August 31, 2020

or in the same respective period of fiscal

2019.

The Company incurred a total of

$42,910

and

$195,662

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

three

and

nine

months ended

August 31, 2020,

respectively, compared to

$40,601

and

$160,045

of stock-based compensation expense for restricted stock awards for the same respective periods of fiscal

2019.

The Company repurchased

and

14,471

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

three

and

nine

months ended

August 31, 2020,

respectively, compared to

and

8,589

shares repurchased for the same respective periods in fiscal

2019.

Stock compensation net of treasury shares repurchased for the

nine

months ended

August 31, 2020

was

$169,126

compared to

$142,647

for the same period in fiscal

2019.