(

)

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; moldboard plows; potato harvesters; and reels. 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) and CBN (cubic boron nitride) inserts and tools through the Company’s wholly-owned subsidiary, Ohio Metal Working Company/Art’s Way, Inc.

The Company’s discontinued Pressurized Vessels segment was primarily engaged in the fabrication and sale of pressurized vessels and tanks through the Company’s wholly-owned subsidiary, Art’s-Way Vessels, Inc. On

August 11, 2016,

the Company announced its plan to discontinue the operations of its Pressurized Vessels segment in order to focus its efforts and resources on the business segments that have historically been more successful and that are expected to present greater opportunities for meaningful long-term shareholder returns. The operations of Art’s-Way Vessels, Inc. were discontinued in the

third

quarter of the

2016

fiscal year, and Art’s-Way Vessels, Inc. was merged into the Company effective

October 31, 2016.

March 29, 2018,

the remaining assets of the Pressurized Vessels segment, consisting of primarily real estate, were disposed of at a selling price of

$1,500,000.

(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

2019

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.

During the

second

quarter of the

2018

fiscal year, the Company liquidated its investment in its Canadian subsidiary, Art’s-Way Manufacturing International LTD, (“International”), by selling off remaining inventory and filing dissolution paperwork for International. Prior to that liquidation and dissolution, the financial books of the Company’s Canadian operations were kept in the functional currency of Canadian dollars and the financial statements were converted to U.S. Dollars for consolidation. When consolidating the financial results of the Company into U.S. Dollars for reporting purposes, the Company used the All-Current translation method. The All-Current method requires the balance sheet assets and liabilities to be translated to U.S. Dollars at the exchange rate as of quarter end. Stockholders’ equity was translated at historical exchange rates and retained earnings were translated at an average exchange rate for the period. Additionally, revenue and expenses were translated at average exchange rates for the periods presented. The resulting cumulative translation adjustment was carried on the balance sheet and was recorded in stockholders’ equity. Following the liquidation and dissolution of International, the cumulative translation adjustment carried on the balance sheet was released into net income under other income (expense) and the financial statements will

longer need translation each period. Since

income tax benefit will be received from the foreign equity sale, the cumulative translation adjustment has

not

been tax adjusted.

(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

2018

fiscal year,

one

customer accounted for more than

of consolidated revenues for continuing operations. During the

2019

fiscal year,

one

customer accounted for more than

21%

of consolidated revenues as the result of a large contract in the Modular Buildings segment. The Company’s highest recurring customer accounted for just under

10%

of consolidated net revenues.

(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

days past invoice date, with the exception of international sales which primarily are sold with a letter of credit for

180

day terms.

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.

(f)

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.

(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

forty

years.

(h)

Lessor Accounting

and Sales-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.

(i)

Goodwill and Impairment

Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business combinations. The Company performs an annual test for impairment of goodwill during the

fourth

quarter, unless factors determine an earlier test is necessary. The Company did

not

record an impairment in the

2019

fiscal year compared to a

$375,000

write down for the

2018

fiscal year. This amount represents the entire balance of goodwill carried by the Company related to the Miller Pro product line. There is

goodwill reported on the consolidated balance sheets as of

November 30, 2019

and

2018.

(j)

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.

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, 2016.

December 22, 2017,

the Tax Cuts and Job Act of

2017

was enacted, which reduced the top corporate income tax rate from

35%

21%.

The application of this new rate was recognized in the

first

quarter of the

2018

fiscal year. Tax expense from continuing operations for the

2018

fiscal year includes an adjustment of approximately

$298,000

related to the revaluation of the Company’s net deferred tax asset at the new statutory rate.

(k)

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 buyer 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 buyer 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 buyer’s request, the Company will bill the buyer upon completing all performance obligations, but before shipment. The buyer dictates that the Company ship the goods per their 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 inventory, such that they are

not

available to fill other orders. This agreement also specifies that the buyer is required to purchase all goods manufactured under this agreement. Title of the goods will pass to the buyer 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 buyer, and the buyer 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 buyer and seller. The credit terms on these agreements are consistent with the credit terms on all other sales. All risks of loss are shouldered by the buyer, and there are

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

2019

and

2018

fiscal years were approximately

$16,000

and

$202,000,

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 judgments in determining estimated contract costs and estimated completion 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 in 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.”

(l)

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, 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

	Twelve Months Ended November 30, 2018
	Agricultural		Modular Buildings		Tools		Total
Farm equipment	$	11,149,000	$	-	$	-	$	11,149,000
Farm equipment service parts		2,735,000		-		-		2,735,000
Steel cutting tools and inserts		-		-		2,239,000		2,239,000
Modular buildings		-		2,271,000		-		2,271,000
Modular building lease income		-		373,000		-		373,000
Revenue from sales-type leases		-		427,000		-		427,000
Other		460,000		38,000		35,000		533,000
	$	14,344,000	$	3,109,000	$	2,274,000	$	19,727,000

(m)

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, 2019		November 30, 2018
Receivables	$	115,000	$	159,000
Assets		727,000		99,000
Liabilities		89,000		185,000

The amount of revenue recognized in fiscal year

2019

that was included in a contract liability at

November 30, 2018

was approximately

$185,000.

The change in contract receivables reflected above results from collections and progress billings from the Modular Buildings segment. The increase in contract assets from

November 30, 2018

is due to estimated revenue earned in excess of contract billings from the Modular Buildings segment. The decrease in contract liabilities is due to decreases in customer deposits and decreases in excess billing over estimated revenue earned.

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, 2019,

the Company has

performance obligations with an original expected duration greater than

one

year.

(n)

Research and Development

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

$149,000

and

$178,000

for the

2019

and

2018

fiscal years, respectively.

(

)

Advertising

Advertising costs are expensed when incurred. Such costs approximated

$198,000

and

$312,000

for the

2019

and

2018

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

not

providing the level of product exposure it expected.

(p)

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, 2019

and

2018:

	Twelve Months Ended
	November 30, 2019			November 30, 2018
Numerator for basic and diluted net income (loss) per share:

Net income (loss) from continuing operations	$	(1,419,586	)	$	(3,336,049	)
Net income (loss) from discontinued operations		-			(50,853	)
Net income (loss)	$	(1,419,586	)	$	(3,386,902	)

Denominator:
For basic net income (loss) per share - weighted average common shares outstanding		4,277,375			4,202,836
Effect of dilutive stock options		-			-
For diluted net income (loss) per share - weighted average common shares outstanding		4,277,375			4,202,836


Net Income (Loss) per share - Basic:
Continuing Operations	$	(0.33	)	$	(0.80	)
Discontinued Operations	$	-		$	(0.01	)
Net Income (Loss) per share	$	(0.33	)	$	(0.81	)

Net Income (Loss) per share - Diluted:
Continuing Operations	$	(0.33	)	$	(0.80	)
Discontinued Operations	$	-		$	(0.01	)
Net Income (Loss) per share	$	(0.33	)	$	(0.81	)

(q)

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.

(r)

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.

(s)

Recently Issued Accounting Pronouncements

Adopted Accounting Pronouncements

Effective

December 1, 2018

the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic

606,

Revenue from Contracts with Customers (“ASC

606”

). The core principle of ASC

606

requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC

606

is effective for annual reporting periods beginning after

December 15, 2017,

including interim periods within that reporting period, and is to be applied retrospectively, with early application

not

permitted. The Company adopted ASC

606

for the

2019

fiscal year, including interim periods within that reporting period.

The Company has evaluated the new standard and applied the core principle to its contract revenue streams. To be consistent with this core principle, an entity is required to apply the following

five

-step approach:

Identify the contract(s) with a customer;

Identify each performance obligation in the contract;

Determine the transaction price;

Allocate the transaction price to each performance obligation; and

Recognize revenue when or as each performance obligation is satisfied.

The Company’s revenues primarily result from contracts with customers. 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. 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 generally are short-term and vary by customer and segment. The Company’s implementation process for ASC

606

included modifications to the contracts of the Modular Buildings segment.

The Company uses discounts as a form of variable consideration for the Agricultural Products and Tools segments. The variable consideration is allocated to the transaction price at contract inception and is generally

not

contingent on future outcomes. The Agricultural Products and Tools segments do

not

offer rebates or credits. The Modular Buildings segment does

not

offer discounts, credits or rebates.

The Company’s product warranty is included in the price of the product and provides assurance that the product will function in accordance with agreed-upon specifications. Product warranty is expensed at the time of sale for the Agricultural Products and Modular Buildings segments. A small reserve is kept on the balance sheet as consideration for the Tools segment warranty. This product warranty does

not

represent a separate performance obligation under ASC

606.

The Company adopted ASC

606

using the modified retrospective method. The Company has determined that amounts reported under ASC

606

are

not

materially different than amounts reported under the previous revenue guidance of ASC

605

and therefore, the Company was

not

required to make an adjustment to retained earnings.

The Company, upon adoption of ASC

606,

has increased the amount of required disclosures in the notes to its financial statements, including but

not

limited to:

• Disaggregation of revenue that depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors;

• The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if

not

otherwise separately presented or disclosed;

• Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period;

• Information about performance obligations in contracts with customers; and

• Judgments that significantly affect the determination of the amount and timing of revenue from contracts with customers, including the timing satisfaction of performance obligation, and the transaction price and the amounts allocated to performance obligations.

Accounting Pronouncements

Not

Yet Adopted

February 2016,

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

twelve

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

December 15, 2018,

including interim periods within those years. The Company will adopt this guidance for the

2020

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

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 rental buildings. The Company expects to recognize a right-of-use asset and lease liability on the balance sheet for office equipment it leases. The Company does

not

expect a material impact for the addition of lessee activity to its consolidated balance sheets. The Company’s activity as a lessor will remain mostly unaffected by this guidance. The Company expects additional disclosures including but

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