(

)

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; land maintenance equipment; manure spreaders and moldboard plows. The Company sells its labeled products through independent farm equipment dealers throughout the United States. In addition, the Company manufactures and supplies hay blowers pursuant to OEM agreements. 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.

The Company's Tools segment is a domestic manufacturer and distributor of standard single point brazed carbide tipped tools as well as PCD (polycrystalline diamond), CBN (cubic boron nitride) inserts and OEM specialty tools through the Company's wholly-owned subsidiary, Ohio Metal Working Company/Art's Way, Inc.

(b)

Impact of COVID-

While the COVID-

pandemic had very little impact on the Company's results of operations for the

first

quarter of fiscal

2020,

it did impact results of operations for the rest of fiscal

2020

and the Company believes that it

may

continue to do so for the foreseeable future. From

March 23, 2020

until

May 18, 2020

the majority of the Company's office staff in all

three

segments worked remotely with the exception of key operations support. At the height of the initial outbreak the Company's workforce was down approximately

17%

due to self-quarantine. By the end of

May 2020,

the Company's entire workforce had returned and operations have continued as normal with additional safety precautions in place. As COVID-

cases began to rise in

November 2020,

the Company allowed employees that could perform their job functions remotely do so at their discretion. At this time approximately

75%

of the Company's office staff is working remote at least part-time and this has had minimal effect on operations. The Company expects that by the end of

February 2021

remote employees will return full time to the office. Future outbreaks could have a material effect on the Company's operations and are taking precautions to mitigate the spread of COVID-

19.

(c)

Principles of Consolidation

The consolidated financial statements include the accounts of Art's-Way Manufacturing Co., Inc. and its wholly-owned subsidiaries for the

2020

fiscal year, which includes Art's-Way Scientific, Inc., and Ohio Metal Working Products/Art's-Way, Inc. All material inter-company accounts and transactions are eliminated in consolidation.

(

)

Change in Accounting Estimate

During the fiscal year

2020,

the Company made a change in accounting estimate related to the estimated costs to complete a material construction contract. The change in estimate was related to the expected collectability of change orders driven from project modifications in the design process and scope gaps that occurred because of the design changes. Further unforeseen costs including increased costs from project delays due to COVID-

19,

issues with site conditions, subcontractor rework and expected liquidated damages have deteriorated the gross profit margin on the project further through the

fourth

fiscal quarter of

2020.

Overall, approximately

$1.3

million of additional revenue has been generated since inception of the contract compared to

$2.8

million of additional estimated costs to complete. The Company determined this was a change in accounting estimate in accordance with Accounting Standards Codification (“ASC”)

250

“Accounting Changes and Error Corrections” based on the timing of when information was reasonably considered available for the expected additional costs. The Company has approximately

million in revenue to recognize at a reduced margin for the Modular Buildings segment in the

first

quarter of fiscal

2021

as a result of this change in estimate.

In the

fourth

quarter of fiscal

2020,

the Company made a change in accounting estimate related to the inventory obsolescence reserve for UHC reels, Miller Pro forage and rake, auger, and other non-current product lines. The Company concluded these items were

not

going to be a part of the Company's strategic product offering going forward and increased the reserve on these items approximately

$681,000

November 2020.

The Company is actively working on a scrap plan for these items to decrease carrying costs for inventory in

2021.

The effect of the increased reserve reduced net inventory, added additional cost of goods sold expense reducing income from operations and also had an effect on working capital debt covenants by approximately

$681,000.

The Company determined this was a change in accounting estimated in accordance with Accounting Standards Codification (“ASC”)

250

“Accounting Changes and Error Corrections.”

(

)

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had

effect on the reported results of operations. An adjustment has been made to the Consolidated Statements of Cash Flows for the fiscal year ended

November 30, 2019,

to identify the non-cash expense related to changes in the Company's obsolete inventory reserve in the amount of

$79,265.

This change in classification does

not

affect previously reported cash flows from operating activities in the Consolidated Statements of Cash Flows.

(

)

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.

(

)

Customer Concentration

During the

2020

and

2019

fiscal years,

one

customer accounted for more than

18%

and

21%,

respectively, of consolidated revenues due to a large contract in the Modular Buildings segment. The Company's highest recurring customer accounted for just under

and

10%

of consolidated net revenues in

2020

and

2019

fiscal years, respectively.

(h)	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

days past invoice date, with the exception of international sales which primarily are sold with

180

day terms backed by export insurance.

Trade receivables due from customers are uncollateralized customer obligations due under normal trade terms requiring payment within

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.

(i)

Inventories

Inventories are stated at the lower of cost or net realizable value, and cost is determined using the standard costing method. 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.

(j)

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

years.

(

)

ales-Type Leases

Modular buildings held for short term lease by the Modular Buildings segment are recorded at cost. Amortization of the property is calculated over the useful life of the building. Estimated useful life is

three

five

years. Lease revenue is accounted for on a straight-line basis over the term of the related lease agreement. Lease income for modular buildings is included in sales on the Consolidated Statements of Operations.

The Company leases modular buildings to certain customers and accounts for these transactions as sales-type leases. These leases have terms of up to

months and are collateralized by a security interest in the related modular building. The lessee has a bargain purchase option available at the end of the lease term. A minimum lease receivable is recorded net of unearned interest income and profit on sale at the time the Company's obligation to the lessee is complete. Profit related to the sale of the building is recorded upon fulfillment of the Company's obligation to the lessee.

The components related to sales-type leases at

November 30, 2020

and

November 30, 2019

are as follows:

	November 30, 2020			November 30, 2019
Minimum lease receivable, current	$	29,002		$	162,425
Unearned interest income, current		(650	)		(14,420	)
Net investment in sales-type leases, current	$	28,352		$	148,005

Minimum lease receivable, long-term	$	-		$	5,851
Unearned interest income, long-term		-			(69	)
Net investment in sales-type leases, long-term	$	-		$	5,782

There was

sales activity related to sales-type leases for the years ended

November 30, 2020

and

November

30,2019.

Future minimum lease receipts from sales-type leases are as follows:

Year Ending November 30,	Amount
2021		29,002
Total	$	29,002

(l)

Operating Leases

The Company determines if an arrangement is a lease at inception of a contract. The nature of the Company's operating leases at this time is office equipment, mainly copiers, with terms of

months. Operating leases are included in other assets as operating lease right-of-use (“ROU”) assets on the Consolidated Balance Sheets while current lease liabilities are included as accrued expenses. The long-term portions of operating lease liabilities are shown as long-term liabilities on 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. Operating 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. Lease expense for lease payments is recognized on a straight-line basis 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 short-term leases. 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, 2020

were as follows:

	November 30, 2020
Operating lease right-of-use assets	$	27,879

Current portion of operating lease liabilities	$	9,537
Long-term portion of operating lease liabilities		18,342
Total operating lease liabilities	$	27,879

The Company included

$27,879

of operating lease ROU assets in other assets, the current portion of operating lease liabilities of

$9,537

was included in accrued expenses and the

$18,342

of long-term operating lease liabilities was included in the long-term liability portion of the Consolidated Balance Sheets. The Company recorded

$23,121

of operating lease costs in the year ended

November 30, 2020,

which included variable costs tied to usage. The Company's operating leases carry a weighted average lease term of

months and have a weighted average discount rate of

5.50%

Future maturities of operating lease liabilities are as follows:

Year Ending November 30,
2021	10,847
2022	10,847
2023	6,911
2024	1,630
Total lease payments	30,236
Less imputed interest	(2,356	)
Total operating lease liabilities	27,879

(m)

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 bases 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.

December 28, 2020

the Consolidated Appropriations Act,

2021

was signed into law. This law provides that

amount of loan forgiveness granted under the Paycheck Protection Program shall be included in gross income for tax purposes. The law also allows the deduction of expenses related to the Paycheck Protection Program creating a double tax benefit. The Company attributes

8.8%

of tax rate benefit related to the permanent difference from this law.

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

longer subject to Canadian, U.S. federal or state income tax examinations by tax authorities for years ended before

November 30, 2017.

(n)

Revenue Recognition

The Company's revenues primarily result from contracts with customers. The major sources of revenue for the Agricultural Products and Tools segments are farm equipment, service parts related to farm equipment and steel cutting tools and inserts. The Agricultural Products and Tools segments generally execute 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, service parts and cutting tools upon shipment of the goods. Risk of ownership and title pass to the customer upon shipment of the goods. The Tools segment has an OEM agreement with

one

customer for which sales are recognized FOB destination – when the goods hit the customer's dock. 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 and Tools segments each typically require payment in full

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

exceptions to the customer's commitment to accept and pay for these manufactured goods. Revenues recognized at the completion of production in the

2020

and

2019

fiscal years were approximately

and

$16,000,

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 and estimated gross profit and advanced payments. 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 Company leases modular buildings to certain customers and accounts for these transactions as operating or sales-type leases. These leases have terms of up to

months and are collateralized by a security interest in the related modular building. On sales-type leases, the lessee has a bargain purchase option available at the end of the lease term. A minimum lease receivable is recorded net of unearned interest income and profit on sale at the time the building is substantially complete. Profit related to the sale of the building is recorded upon fulfillment of the Company's obligation to the lessee. On operating leases, the Company recognizes rent when the lessee has all the rights and benefits of ownership of the asset.

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 Tools segment offers quantity discounts that are allocated to the transaction price of each product once the quantity break is achieved. The Tools 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

“Product Warranty.”

(

)

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, 2020
	Agricultural		Modular Buildings		Tools		Total
Farm equipment	$	10,149,000	$	-	$	-	$	10,149,000
Farm equipment service parts		2,519,000		-		-		2,519,000
Steel cutting tools and inserts		-		-		2,308,000		2,308,000
Modular buildings		-		6,517,000		-		6,517,000
Modular building lease income		-		318,000		-		318,000
Other		417,000		158,000		23,000		598,000
	$	13,085,000	$	6,993,000	$	2,331,000	$	22,409,000

	Twelve Months Ended November 30, 2019
	Agricultural		Modular Buildings		Tools		Total
Farm equipment	$	10,435,000	$	-	$	-	$	10,435,000
Farm equipment service parts		2,638,000		-		-		2,638,000
Steel cutting tools and inserts		-		-		2,086,000		2,086,000
Modular buildings		-		6,460,000		-		6,460,000
Modular building lease income		-		674,000		-		674,000
Other		435,000		126,000		35,000		596,000
	$	13,508,000	$	7,260,000	$	2,121,000	$	22,889,000

(

)

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, 2020		November 30, 2019
Receivables	$	2,391,000	$	1,680,000
Assets		56,000		727,000
Liabilities		276,000		89,000

The amount of revenue recognized in fiscal year

2020

that was included in a contract liability at

November 30, 2019

was approximately

$89,000

compared to

$185,000

for the same period of fiscal year

2019.

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 from

November 30, 2019

is due to billings on construction contracts catching up to expenses incurred while the increase in contract liabilities is due to overbillings on projects for the Modular Buildings segment.

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, 2020,

and

November 30, 2019,

the Company has

performance obligations with an original expected duration greater than

one

year.

(q)

Research and Development

Research and development costs are expensed when incurred. Such costs approximated

$199,000

and

$149,000

for the

2020

and

2019

fiscal years, respectively.

(

)

Advertising

Advertising costs are expensed when incurred. Such costs approximated

$175,000

and

$198,000

for the

2020

and

2019

fiscal years, respectively. The Company has made a concerted effort to reduce trade show participation that was

not

providing the level of product exposure expected.

(s)

Net Income (Loss) Per Share of Common Stock

Basic net income (loss) per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted net income (loss) 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 (loss) per share of common stock.

Basic and diluted (loss) per common share have been computed based on the following as of

November 30, 2020

and

2019:

	For the Twelve Months Ended
	November 30, 2020			November 30, 2019
Numerator for basic and diluted net income (loss) per share:

Net income (loss)	$	(2,103,486	)	$	(1,419,586	)

Denominator:
For basic net income (loss) per share - weighted average common shares outstanding		4,393,887			4,277,375
Effect of dilutive stock options		-			-
For diluted net income (loss) per share - weighted average common shares outstanding		4,393,887			4,277,375

Net Income (Loss) per share - Basic:
Net Income (Loss) per share	$	(0.48	)	$	(0.33	)

Net Income (Loss) per share - Diluted:
Net Income (Loss) per share	$	(0.48	)	$	(0.33	)

(t)

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.

(u)

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.

(v)

Recently Issued Accounting Pronouncements

dopted Accounting Pronouncements

Leases

February 2016,

the Financial Accounting Standards Board (the “FASB”) issued ASU

2016

02,

“Leases (Topic

842

),” which requires a lessee to recognize a right-of-use asset and a lease liability on its balance sheet for all leases with terms of

months or greater. This guidance is effective for fiscal years beginning after

December 15, 2018,

including interim periods within those years. The Company adopted this guidance for fiscal

2020

using the modified retrospective approach, including interim periods within that reporting period. Under the modified retrospective approach, the Company did

not

adjust prior comparative periods. The Company has a moderate amount of leasing activity mainly as the lessee of office equipment and as the lessor of modular buildings. As a result of adoption in the

first

fiscal quarter of

2020,

the Company recognized

$34,316

as a right-of-use asset and

$34,316

of lease liabilities on the balance sheet for office equipment it leases. The Company's activity as a lessor will remain mostly unaffected by this guidance. The Company's additional disclosures

may

include, but are

not

limited to:

•

Nature of its leases

•

Significant assumptions and judgements used

•

Information about leases that have

not

yet commenced

•

Related-party lease transactions

•

Accounting policy election regarding short-term leases

•

Finance, operating, short-term and variable lease costs

•

Maturity analysis of operating lease payments, lease receivables and lease obligations

•

Tabular disclosure of lease-related income

•

Components of the net investment in a lease

	•	Information on the management of risk associated with residual asset

		Accounting Pronouncements Not Yet Adopted Measurement of Credit Losses on Financial Instruments

June 2016,

the FASB issued ASU

2016

13,

“Measurement of Credit Losses on Financial Instruments.” ASU

2016

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

is effective 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

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.