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Item 8. Financial Statements and Supplementary Data

2021-01-08 compared with 2020-01-03 · 613 added, 1179 removed, 346 unchanged (84% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public

Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Shareholders

2 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheets of Hurco Companies, Inc.

and its subsidiaries (the Company) as of October 31, 2019 and 2018, the related consolidated

statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period

ended October 31, 2019, and the related notes and schedule listed in Item 15(a) (collectively, the financial statements).

opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October

31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended October

31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with

the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control

over financial reporting as of October 31, 2019, based on criteria established in Internal Control

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013,

and our report dated January 3, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over

financial reporting.

We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc.

and its subsidiaries (the Company) as of October 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the three years in the period ended October 31, 2020, and the related notes and schedule listed in Item 15(a) (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated January 8, 2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based

on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the

Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange

Commission and the PCAOB.

We conducted our audits in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether

the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures

to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures

in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made

by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a

reasonable basis for our opinion.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company's

auditor since 2017.

We have served as the Company's auditor since 2017.

Indianapolis, Indiana

January 8, 2021

Report of Independent Registered Public

Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Shareholders

1 unchanged sentence

of Hurco Companies, Inc.

Opinion on the Internal Control Over

Financial Reporting

We have audited Hurco Companies, Inc.'s

(the Company) internal control over financial reporting as of October 31, 2019, based on criteria established in Internal

Control —

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting

as of October 31, 2019, based on criteria established in Internal Control —

Integrated Framework

issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with

the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the

Company as of October 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’

equity and cash flows, for the three years then ended, and the related notes and schedule listed in Item 15(a) of the Company,

and our report dated January 3, 2020 expressed an unqualified opinion.

Opinion on the Internal Control Over Financial Reporting

We have audited Hurco Companies, Inc.'s (the Company) internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows, for each of the three years in the period ended October 31, 2020, and the related notes and schedule listed in Item 15(a) of the Company, and our report dated January 8, 2021 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible

for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control

over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding

of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the

design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other

procedures as we considered necessary in the circumstances.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal

Control Over Financial Reporting

A company's internal control over financial

reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation

of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal

control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in

reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable

assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally

accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations

of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized

acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal

control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness

to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree

of compliance with the policies or procedures may deteriorate.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ RSM US LLP

2 unchanged sentences

HURCO COMPANIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended October 31,

3 unchanged sentences

Selling, general and administrative expenses

Operating income

Goodwill impairment

Operating income (loss)

Interest expense

3 unchanged sentences

Other expense, net

Income before income taxes

Provision for income taxes

Income per common share –

Weighted average common shares outstanding –

Income per common share –

Weighted average common shares outstanding –

Income (loss) before income taxes

Provision (benefit) for income taxes

Net income (loss)

Income (loss) per common share – basic

Weighted average common shares outstanding – basic

Income (loss) per common share – diluted

Weighted average common shares outstanding – diluted

Dividends paid per share

The accompanying notes are an integral

part of the consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

HURCO COMPANIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year Ended October 31,

(In thousands)

Net income (loss)

Other comprehensive income (loss):

Translation gain (loss) of foreign currency financial statements

(Gain) / loss on derivative instruments reclassified

into operations, net of tax of $(70), $453, and $(745), respectively

Gain / (loss) on derivative instruments, net of tax of

$183, $52, and $(390), respectively

(Gain) / loss on derivative instruments reclassified into operations, net of tax of $( 126 ), $( 70 ) and $ 453 , respectively

Gain / (loss) on derivative instruments, net of tax of $ 118 , $ 183 and $ 52 , respectively

Total other comprehensive income (loss)

Comprehensive income

The accompanying notes are an integral

part of the consolidated financial statements.

Comprehensive income (loss)

The accompanying notes are an integral part of the consolidated financial statements.

HURCO COMPANIES, INC.

5 unchanged sentences

Cash and cash equivalents

Accounts receivable,

less allowance for doubtful accounts of $891 in 2019 and $1,027 in 2018

Accounts receivable, less allowance for doubtful accounts of $ 1,401 in 2020 and $ 891 in 2019

Inventories, net

10 unchanged sentences

Intangible assets, net

Operating lease - right of use assets, net

Deferred income taxes

1 unchanged sentence

Total non–current assets

LIABILITIES AND SHAREHOLDERS’

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

1 unchanged sentence

Accounts payable–related parties

Derivative liabilities

Operating lease liabilities

Accrued payroll and employee benefits

Accrued income taxes

Accrued expenses and other

Accrued expenses

Accrued warranty expenses

Derivative liabilities

Short-term debt

Total current liabilities

Non–current liabilities:

Accrued tax liability

Deferred income taxes

Accrued tax liability

Operating lease liabilities

Deferred credits and other

Total non–current liabilities

Shareholders’

Shareholders’ equity:

Preferred stock:

no par value per share, 1,000,000 shares authorized, no shares issued

no par value per share, 1,000,000 shares authorized;

no shares issued

Common stock:

par value, $.10 stated value per share, 12,500,000 shares authorized, 6,967,719 and 6,891,508 shares issued;

6,767,237 and 6,723,160 shares outstanding, as of October 31, 2019 and October 31, 2018, respectively

no par value, $ .10 stated value per share, 12,500,000 shares authorized 6,636,906 and 6,967,719 shares issued;

and 6,565,163 and 6,767,237 shares outstanding, as of October 31, 2020 and October 31, 2019, respectively

Additional paid-in capital

1 unchanged sentence

Accumulated other comprehensive loss

Total shareholders’

Total liabilities and shareholders’

The accompanying notes are

an integral part of the consolidated financial statements.

Total shareholders’ equity

Total liabilities and shareholders’ equity

The accompanying notes are an integral part of the consolidated financial statements.

HURCO COMPANIES, INC.

3 unchanged sentences

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by (used for) operating activities, net of acquisitions:

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities, net of acquisitions:

Provision for doubtful accounts

5 unchanged sentences

Stock–based compensation

Goodwill impairment charge

Change in assets and liabilities, net of acquisitions:

6 unchanged sentences

Increase (decrease) in accrued tax liability

Net change in operating lease assets and liabilities

Net change in derivative assets and liabilities

11 unchanged sentences

Taxes paid related to net settlement of restricted shares

Stock repurchases

Repayment of short-term debt

Net cash provided by (used for) financing activities

of exchange rate changes on cash and cash equivalents

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

4 unchanged sentences

Income taxes, net

The accompanying notes are an integral

part of the consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

HURCO COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS' EQUITY

(In thousands, except shares outstanding)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Comprehensive

(In thousands, except shares outstanding)

Balances, October 31, 2017

Net income (loss)

Other comprehensive income (loss)

Exercise of common stock options

Stock-based compensation expense

Stock–based compensation expense, net of taxes withheld for vested restricted shares

Dividends paid

Balances, October 31, 2018

Net income (loss)

Other comprehensive income (loss)

Exercise of common stock options

Stock–based compensation expense, net of taxes withheld for vested restricted shares

1 unchanged sentence

Balances, October 31, 2019

Net income (loss)

Other comprehensive income (loss)

Stock-based compensation expense, net of taxes

withheld for vested restricted shares

Stock-based compensation expense, net of taxes withheld for vested restricted shares

Exercise of common stock options

Stock repurchases

Dividends paid

Balances, October 31, 2020

The accompanying notes are

an integral part of the consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1 unchanged sentence

The consolidated financial statements include the accounts of Hurco Companies, Inc.

(an Indiana corporation) and its wholly-owned

subsidiaries.

(an Indiana corporation) and its wholly–owned subsidiaries (“we”, “us”, “our”, “Hurco” or the “Company”).

We have a 35 % ownership interest in a Taiwan affiliate that is accounted for using the equity method.

Our investment

in that affiliate was approximately $4.2 million and $4.0 million as of October 31, 2019 and 2018, respectively.

That investment

is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets.

Intercompany accounts and transactions

have been eliminated.

Our investment in that affiliate was approximately $ 4.4 million and $ 4.2 million as of October 31, 2020 and 2019, respectively.

That investment is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets.

Inter-company accounts and transactions have been eliminated.

Reclassifications.

Certain prior year amounts have been reclassified to conform to the current year presentation.

This reclassification has no

impact on previously reported net income or shareholders’

Statements of Cash

We consider all highly liquid investments with a stated maturity at the date of purchase of three months or less to

be cash equivalents.

This reclassification has no impact on previously reported net income or shareholders’ equity.

Statements of Cash Flows .

We consider all highly liquid investments with a stated maturity at the date of purchase of three months or less to be cash equivalents.

Cash flows from hedges are classified consistent with the items being hedged.

Translation of Foreign

Translation of Foreign Currencies .

All balance sheet accounts of non–U.S.

subsidiaries are translated at the exchange rate as of the end of the year

and translation adjustments of foreign currency balance sheets are recorded as a component of Accumulated other comprehensive loss

in shareholders' equity.

subsidiaries are translated at the exchange rate as of the end of the year and translation adjustments of foreign currency balance sheets are recorded as a component of Accumulated other comprehensive loss in shareholders’ equity.

Income and expenses are translated at the average exchange rates during the year.

Cumulative foreign currency

translation adjustments, net of gains related to our net investment hedges, as of October 31, 2019, were a net loss of $10.0 million,

net of tax, and are included in Accumulated other comprehensive loss.

Foreign currency transaction gains and losses are recorded

as income or expense as incurred and are recorded in Other expense, net.

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest

rate risk and credit risk.

Cumulative foreign currency translation adjustments, net of gains related to our net investment hedges, as of October 31, 2020, were a net loss of $ 4.1 million, net of tax, and are included in Accumulated other comprehensive loss.

Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net.

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk.

We manage our exposure to these and other market risks through regular operating and financing activities.

Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk.

on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely

affected by changes in foreign currency exchange rates.

To reduce the potential effects of foreign exchange rate movements on our

net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries,

we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution.

We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros,

Pounds Sterling, Indian Rupee, South African Rand, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars.

for derivative instruments as either assets or liabilities and carry them at fair value.

The accounting for changes in the fair

value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated

as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or

gain on the hedged item attributed to the risk being hedged.

For a derivative instrument designated as a cash flow hedge, the effective

portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in

shareholders’

equity and subsequently reclassified into earnings when the hedged exposure affects earnings.

The ineffective

portion of the gain or loss is reported in earnings immediately.

For derivative

instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards

Board (the “FASB”), changes in fair value are recognized in earnings in the period of change.

We do not hold or issue

derivative financial instruments for speculative trading purposes.

We only enter into derivatives with one counterparty, which

is among one of the largest U.S.

banks (ranked by assets), in order to minimize

credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Designated as Hedging Instruments

into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated

in foreign currencies (the Pound Sterling, Euro and New Taiwan Dollar).

The purpose of these instruments is to mitigate the risk

that the U.S.

Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be

adversely affected by changes in exchange rates.

These forward contracts have been designated as cash flow hedge instruments, and

are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities.

The effective portion

of the gains and losses resulting from the changes in the fair value of these hedge contracts are deferred in Accumulated other

comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory

sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the

corresponding change in the U.S.

We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates.

To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution.

We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars.

We account for derivative instruments as either assets or liabilities and carry them at fair value.

The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged.

For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in shareholders’ equity and subsequently reclassified into earnings when the hedged exposure affects earnings.

The ineffective portion of the gain or loss is reported in earnings immediately.

For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (the “FASB”), changes in fair value are recognized in earnings in the period of change.

We do not hold or issue derivative financial instruments for speculative trading purposes.

We only enter into derivatives with one counterparty, which is among one of the largest U.S.

banks (ranked by assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts.

Derivatives Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter–company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro, and New Taiwan Dollar).

The purpose of these instruments is to mitigate the risk that the U.S.

Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates.

These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities.

The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts are deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S.

Dollar value of the inter–company sale or purchase being hedged.

The ineffective portion of gains

and losses resulting from the changes in the fair value of these hedge contracts is reported in Other expense, net immediately.

We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument

and determining that forecasted transactions have not changed significantly.

We also assess on a quarterly basis whether there

have been adverse developments regarding the risk of a counterparty default.

We had forward contracts outstanding as

of October 31, 2019, in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from November 2019 through

October 2020.

The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is reported in Other expense, net immediately.

We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly.

We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default.

We had forward contracts outstanding as of October 31, 2020, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2020 through October 2021 .

The contract amount at forward rates in U.S.

Dollars at October 31, 2019 for Euros and Pounds Sterling was $16.5

million and $5.4 million, respectively.

Dollars at October 31, 2020 for Euros and Pounds Sterling was $ 9.0 million and $ 3.1 million, respectively.

The contract amount at forward rates in U.S.

Dollars for New Taiwan Dollars was $18.7 million

at October 31, 2019.

At October 31, 2019, we had approximately $612,000 of gains, net of tax, related to cash flow hedges deferred

in Accumulated other comprehensive loss.

Of this amount, $373,000 represented unrealized gains, net of tax, related to cash flow

hedge instruments that remain subject to currency fluctuation risk.

The majority of these deferred gains will be recorded as an

adjustment to Cost of sales and service in periods through October 2020, in which the corresponding inventory that is the subject

of the related hedge contract is sold, as described above.

We are exposed to foreign currency exchange

risk related to our investment in net assets in foreign countries.

To manage this risk, we entered into a forward contract with

a notional amount of €3.0 million in November 2018.

We designated this forward contract as a hedge of our net investment in

Euro denominated assets.

We selected the forward method under the FASB guidance related to the accounting for derivative instruments

and hedging activities.

The forward method requires all changes in the fair value of the contract to be reported as a cumulative

translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets.

This forward contract matured in November 2019, and we entered into a new forward contract for the same notional amount that is

set to mature in November 2020.

As of October 31, 2019, we had a realized gain of $804,000 and an unrealized gain of $129,000,

net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts.

Not Designated as Hedging Instruments

We enter into foreign currency

forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated

in foreign currencies.

These derivative instruments are not designated as hedges under FASB guidance and, as a result, changes

in their fair value are reported currently as Other expense, net in the Consolidated Statements of Income consistent with the transaction

gain or loss on the related receivables and payables denominated in foreign currencies.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We had forward contracts outstanding as

of October 31, 2019, in Euros, Pound Sterling, South African Rand and New Taiwan Dollars with set maturity dates ranging from November

2019 through October 2020.

Dollars for New Taiwan Dollars was $ 13.9 million at October 31, 2020.

At October 31, 2020, we had approximately $ 395,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss.

Of this amount, $ 262,000 represented unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk.

The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through October 2021, in which the corresponding inventory that is the subject of the related hedge contract is sold, as described above.

We are exposed to foreign currency exchange risk related to our investment in net assets in foreign countries.

To manage this risk, we entered into a forward contract with a notional amount of € 3.0 million in November 2019.

We designated this forward contract as a hedge of our net investment in Euro denominated assets.

We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities.

The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets.

This forward contract matured in November 2020 , and we entered into a new forward contract for the same notional amount that is set to mature in November 2021 .

As of October 31, 2020, we had a realized gain of $ 947,000 and an unrealized loss of $ 78,000 , net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts.

Derivatives Not Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on inter-company receivables, payables, and loans denominated in foreign currencies.

These derivative instruments are not designated as hedges under FASB guidance and, as a result, changes in their fair value are reported currently as Other expense, net in the Consolidated Statements of Operations consistent with the transaction gain or loss on the related inter-company receivables, payables and loans denominated in foreign currencies.

We had forward contracts outstanding as of October 31, 2020, in Euros, Pound Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2020 through October 2021 .

The contract amounts at forward rates in U.S.

Dollars at October 31, 2019 for Euros, Pounds Sterling

and South African Rand totaled $36.3 million.

Dollars at October 31, 2020 for Euros and Pounds Sterling totaled $ 18.0 million.

The contract amount at forward rates in U.S.

Dollars for New Taiwan Dollars was $28.2

million at October 31, 2019.

Dollars for New Taiwan Dollars was $ 24.5 million at October 31, 2020.

Fair Value of Derivative Instruments

We recognize the fair value of derivative

instruments as assets and liabilities on a gross basis on our Consolidated Balance Sheets.

As of October 31, 2019 and October 31,

2018, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands):

We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Consolidated Balance Sheets.

As of October 31, 2020 and October 31, 2019, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands):

Balance Sheet

14 unchanged sentences

Derivative liabilities

of Derivative Instruments on the Consolidated Balance Sheets, Statements of Changes in Shareholders’

Equity and Statements

instruments had the following effects on our Consolidated Balance Sheets, Statements of Changes in Shareholders’

Statements of Income, net of tax, during the fiscal years ended October 31, 2019, 2018, and 2017 (in thousands):

of Gain (Loss)

Comprehensive

Effect of Derivative Instruments on the Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity, and Statements of Operations

Derivative instruments had the following effects on our Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity, and Statements of Operations, net of tax, during the fiscal years ended October 31, 2020, 2019, and 2018 (in thousands):

Amount of Gain (Loss)

Recognized in

Reclassified from

Other Comprehensive

Income (Loss)

Comprehensive

as Hedging Instruments:

Income (Loss)

Designated as Hedging Instruments:

(Effective Portion)

Foreign exchange forward

Intercompany sales/purchases

Foreign exchange forward contracts

Cost of sales

– Intercompany sales/purchases

–Net Investment

recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2019 and 2018.

recognized a gain of $18,000 during the fiscal year ended October 31, 2017 as a result of contracts closed early that were deemed

ineffective for financial reporting and did not qualify as cash flow hedges.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We recognized

the following gains and losses in our Consolidated Statements of Income during the fiscal years ended October 31, 2019, 2018, and

2017 on derivative instruments not designated as hedging instruments (in thousands):

We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2020, 2019, and 2018.

We recognized the following gains and losses in our Consolidated Statements of Operations during the fiscal years ended October 31, 2020, 2019, and 2018 on derivative instruments not designated as hedging instruments (in thousands):

Amount of Gain (Loss)

5 unchanged sentences

Other expense, net

The following table presents

the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2019

and 2018 (in thousands):

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2020 and 2019 (in thousands):

Balance, October 31, 2018

6 unchanged sentences

Inventories .

are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out method.

are made to reduce excess or obsolete inventories to their estimated realizable value.

Inventories are stated at the lower of cost or net realizable value, with cost determined using the first–in, first–out method.

Provisions are made to reduce excess or obsolete inventories to their estimated realizable value.

Property and Equipment .

Property and equipment are carried at cost.

Depreciation and amortization of assets are provided primarily under the straight-line

method over the shorter of the estimated useful lives or the lease terms as follows:

Depreciation and amortization of assets are provided primarily under the straight–line method over the shorter of the estimated useful lives or the lease terms as follows:

Number of Years

1 unchanged sentence

Building & leasehold improvements

Total depreciation and

amortization expense recognized for property and equipment was $2.6 million for fiscal 2019 and $2.5 million for each of the fiscal

years ended October 31, 2018 and 2017.

Total depreciation and amortization expense recognized for property and equipment was $ 2.7 million for fiscal 2020, $ 2.6 million for fiscal 2019, and $ 2.5 million for fiscal 2018.

Revenue Recognition.

We design, manufacture, and sell computerized machine tools.

Our computer control systems and software products are primarily

sold as integral components of our computerized machine tool products.

We also provide machine tool components, automation equipment

and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as

customer service, training and applications support.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”

606”) on November 1, 2018, the start of our 2019 fiscal year, and elected the modified retrospective method as of the

date of adoption.

Prior to the adoption of ASC 606, our revenues were already recognized in the same manner as that required

Therefore, the adoption of ASC 606 did not have an effect on our beginning retained earnings or our overall

financial statements as of and for the twelve months ended October 31, 2019.

We recognize revenues

from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be

We record revenues based on a five-step model in accordance with FASB guidance codified in ASC 606.

In accordance with

ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or

shipping documents, invoices, and, periodically, verbal requests for components and accessories.

For each contract, we identify

our performance obligations, which is delivering goods or services, determine the transaction price, allocate the contract transaction

price to each of the performance obligations (when applicable), and recognize the revenue when (or as) the performance obligation

to the customer is fulfilled.

Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.

We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support.

We recognize revenues from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be entitled.

We record revenues based on a five-step model in accordance with FASB guidance codified in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”).

In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories.

For each contract, we identify our performance obligations, which is delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) the performance obligation to the customer is fulfilled.

A good or service is transferred when the customer obtains control of that good or service.

Our computerized

machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations.

shipment, we test each machine to ensure the machine’s compliance with standard operating specifications.

We deem that the

customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance.

Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor,

which is normally at the time of shipment.

Depending upon geographic

location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor

or by one of our service technicians.

In most instances where a machine is sold through a distributor, we have no installation

If sales are direct or through sales agents, we will typically complete the machine installation, which consists of

the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing

within the standard specifications.

We consider the machine installation process for our three-axis machines to be inconsequential

and perfunctory.

For our five-axis machines that we install, we estimate the fair value of the installation performance obligation

and recognize that installation revenue on a prorata basis over the period of the installation process.

From time to time, and

depending upon geographic location, we may provide training or freight services.

We consider these services to be perfunctory within

the context of the contract, as the value of these services typically does not rise to a material level as a component of the total

contract value.

Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term

of the contract and are generally sold on a stand-alone basis.

Customer discounts and estimated product returns are considered

variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded.

reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant.

Allowance for Doubtful

Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand–alone operations.

Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications.

We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance.

Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment.

Depending upon geographic location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor, or by one of our service technicians.

In most instances where a machine is sold through a distributor, we have no installation involvement.

If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications.

We consider the machine installation process for our three-axis machines to be inconsequential and perfunctory.

For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process.

From time to time, and depending upon geographic location, we may provide training or freight services.

We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value.

Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis.

Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded.

We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant.

Allowance for Doubtful Accounts .

The allowance for doubtful accounts is based on our best estimate of probable credit issues and historical experience.

We perform credit evaluations of the financial condition of our customers.

No collateral is required for sales made on open account

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising

our customer base and their dispersion across many geographic areas.

We consider trade accounts receivable to be past due when

payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable

collection efforts have been exhausted.

No collateral is required for sales made on open account terms.

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across many geographic areas.

We consider trade accounts receivable to be past due when payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable collection efforts have been exhausted.

Product Warranty .

Expected future product warranty claims are recorded to expense when the product is sold.

Product warranty estimates are established

using historical information about the nature, frequency, and average cost of warranty claims.

Warranty claims are influenced by

factors such as new product introductions, technological developments, the competitive environment, and the costs of component

Actual payments for warranty claims could differ from the amounts estimated, requiring adjustments to the liabilities in

future periods.

See Note 12 of Notes to Consolidated Financial Statements for further discussion of warranties.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS - Continued

Development Costs.

The costs associated with research and development programs for new products and significant product

improvements, other than software development costs which are eligible for capitalization per FASB guidance, are expensed as

incurred and are included in Selling, general and administrative expenses.

Research and development expenses totaled $4.4

million, $4.7 million, and $4.2 million, in fiscal 2019, 2018, and 2017, respectively.

Product warranty estimates are established using historical information about the nature, frequency, and average cost of warranty claims.

Warranty claims are influenced by factors such as new product introductions, technological developments, the competitive environment, and the costs of component parts.

Actual payments for warranty claims could differ from the amounts estimated, requiring adjustments to the liabilities in future periods.

See Note 12 of these Notes to Consolidated Financial Statements for further discussion of warranties.

Research and Development Costs.

The costs associated with research and development programs for new products and significant product improvements, other than software development costs, which are eligible for capitalization per FASB guidance, are expensed as incurred and are included in Selling, general, and administrative expenses.

Research and development expenses totaled $ 3.5 million, $ 4.4 million, and $ 4.7 million, in fiscal 2020, 2019, and 2018, respectively.

Software Development Costs.

software products that are essential to our machine tools.

Costs incurred to develop computer software products and significant

enhancements to software features of existing products to be sold or otherwise marketed are capitalized, after technological feasibility

is established.

Software development costs are amortized on a straight-line basis over the estimated product life of the related

software, which ranges from three to five years.

We capitalized costs of $1.8 million in fiscal 2019, $2.3 million in fiscal 2018,

and $2.3 million in fiscal 2017 related to software development projects.

Amortization expense for software development costs was

$1.0 million, $1.1 million, and $1.0 million, for the fiscal years ended October 31, 2019, 2018, and 2017, respectively.

amortization at October 31, 2019 and 2018 was $19.5 million and $18.5 million, respectively.

Estimated amortization expense

for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands):

We sell software products that are essential to our machine tools.

Costs incurred to develop computer software products and significant enhancements to software features of existing products to be sold or otherwise marketed are capitalized, after technological feasibility is established.

Software development costs are amortized on a straight–line basis over the estimated product life of the related software, which ranges from three to five years.

We capitalized costs related to software development projects of $ 1.0 million in fiscal 2020, $ 1.8 million in fiscal 2019, and $ 2.3 million in fiscal 2018.

Amortization expense for software development costs was $ 1.5 million, $ 1.0 million, and $ 1.1 million, for the fiscal years ended October 31, 2020, 2019, and 2018, respectively.

Accumulated amortization at October 31, 2020 and 2019 was $ 21.0 million and $ 19.5 million, respectively.

Estimated amortization expense for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands):

Amortization Expense

2025 and thereafter

Goodwill and Intangible Assets.

and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time.

goodwill and indefinite-lived intangibles must be reviewed annually for impairment, or more frequently, if circumstances arise

indicating potential impairment.

This impairment review was most recently completed as of July 31, 2019.

For goodwill, if the carrying

amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized

for that excess, but only to the extent of the goodwill amount allocated to that reporting unit.

For indefinite-lived intangible

assets, if the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess.

assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review

for impairment, if indicators of impairment are identified.

The changes in the carrying amounts of goodwill for the fiscal year

ended October 31, 2019 were as follows (in thousands):

Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time.

Instead, goodwill and indefinite-lived intangibles must be reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment.

For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit.

We have a total of $ 4.9 million of goodwill for our single reporting unit, arising from the acquisitions of ProCobots, LLC (“ProCobots”) ($ 2.5 million) in 2019, LCM Precision Technology S.r.l.

(“LCM”) ($ 2.2 million) in 2013, and our wholly-owned distributor located in Michigan ($ 0.2 million) in 2008.

The adverse change in the business climate resulting from the COVID-19 pandemic created triggering events during the second quarter of fiscal 2020, which warranted our review of these assets for potential impairment.

With the assistance of a third-party expert, we developed a discounted cash flow model, which included projected growth rates and an appropriate market-participant discount rate, to compute the fair value of the reporting unit as of April 30, 2020.

In addition, the fair value determined was also compared to the value obtained using a market approach from guideline public company multiples.

The computed fair value of the reporting unit was in excess of our book value of equity as of April 30, 2020, and, therefore, we determined that goodwill and indefinite lived assets were not impaired at that time.

Due to the prolonged ongoing uncertainty in the global markets as a result of the COVID-19 pandemic and the net loss for fiscal 2020, we believed there was a risk that the total cash flow projections of this reporting unit could fall short of its previous projections, As such, we reperformed the goodwill impairment test as of October 31, 2020 using a similar discounted cash flow model.

As a result of the net loss for fiscal 2020 and the delayed timing of the recovery period, the total cash flow projected at October 31, 2020 fell short of those projected at April 30, 2020, causing the fair value of the reporting unit to fall below our book value of equity as of October 31, 2020, thus, resulting in a full impairment loss of $ 4.9 million.

The changes in the carrying amounts of goodwill for the fiscal year ended October 31, 2020 were as follows (in thousands):

Balance as of October 31, 2019

Goodwill acquired

Changes in goodwill acquired

Goodwill impairment

Impact of foreign currency translation

Balance as of October 31, 2020

There were no impairments recognized with

respect to the carrying value of goodwill or intangible assets for the years ended October 31, 2019, 2018 or 2017.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL

STATEMENTS –

As of October 31, 2019, the balances of intangible assets, other

than goodwill, were as follows (in thousands):

For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess.

Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment, if indicators of impairment are identified.

There were no impairments recognized with respect to the carrying value of intangible assets for the years ended October 31, 2020, 2019, or 2018.

As of October 31, 2020, the balances of intangible assets, other than goodwill, were as follows (in thousands):

Net Intangible

2 unchanged sentences

Customer relationships

As of October 31, 2018, the balances of intangible assets, other

than goodwill, were as follows (in thousands):

As of October 31, 2019, the balances of intangible assets, other than goodwill, were as follows (in thousands):

Net Intangible

2 unchanged sentences

Customer relationships

Intangible asset amortization expense was

$117,000, $107,000, and $136,000 for fiscal 2019, 2018 and 2017, respectively.

Annual intangible asset amortization expense is

estimated to be $132,000 per year for fiscal years 2020 through 2024.

Intangible asset amortization expense was $ 358,000 , $ 117,000 , and $ 107,000 for fiscal 2020, 2019, and 2018, respectively.

Annual intangible asset amortization expense is estimated to be $ 280,000 per year for fiscal years 2021 through 2025 .

Impairment of Long–Lived Assets.

Annually, or when there are indicators of impairment, we evaluate the carrying value of long-lived assets to be held and used,

including property and equipment, software development costs and intangible assets, including goodwill, when events or circumstances

warrant such a review.

The carrying value of a long-lived asset (or group of assets) to be held and used is considered impaired

when the anticipated separately identifiable undiscounted cash flows from such an asset (or group of assets) are less than the

carrying value of the asset (or group of assets) in accordance with FASB guidance related to accounting for the impairment or disposal

of long-lived assets.

Annually, or when there are indicators of impairment, we evaluate the carrying value of long–lived assets to be held and used, including property and equipment, software development costs, and intangible assets, including goodwill, when events or circumstances warrant such a review.

The carrying value of a long-lived asset (or group of assets) to be held and used is considered impaired when the anticipated separately identifiable undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the asset (or group of assets).

We determined that we have a single asset group due to the interdependent nature of our operations.

We estimated the cash flows during the remaining useful life of the primary asset, and our undiscounted cash flow was in excess of the book value of our single asset group, and therefore, there was no impairment indications for our long-lived assets for the period ended April 30, 2020.

Due to the prolonged ongoing uncertainty in the global markets as a result of the COVID-19 pandemic and the net loss for fiscal 2020, we believed there was a risk that the total cash flow projections could fall short of its previous projections, As such, we reevaluated the cash flows during the remaining useful life of the primary asset as of October 31, 2020.

The result indicated that our undiscounted cash flow continued to be in excess of the book value of our single asset group, and therefore, there was no impairment indications for our long-lived assets for the period ended October 31, 2020.

Thus, there was no impairment recognized with respect to the carrying values of long-lived assets for the years ended October 31, 2020, 2019, or 2018.

Earnings Per Share.

Basic earnings

per share is calculated by dividing net income by the weighted-average number of common shares actually outstanding during the

Diluted earnings per share assumes the issuance of additional shares of common stock upon exercise of all outstanding stock

options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method discussed

in FASB guidance on “Earnings Per Share.”

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents a reconciliation

of our basic and diluted earnings per share computation:

Basic earnings per share is calculated by dividing net income (loss) by the weighted–average number of common shares actually outstanding during the period.

Diluted earnings per share assumes the issuance of additional shares of common stock upon exercise of all outstanding stock options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method discussed in FASB guidance on “Earnings Per Share.”

The following table presents a reconciliation of our basic and diluted earnings per share computation:

Fiscal Year Ended October 31,

(in thousands, except per share amounts)

Undistributed earnings allocated to participating shares

Net income applicable to common Shareholders

Net income (loss)

Undistributed earnings (loss) allocated to participating shares

Net income (loss) applicable to common shareholders

Weighted average shares outstanding

Stock options and contingently issuable securities

Income per share

Income Taxes –

for income taxes and the related accounts under the asset and liability method.

Deferred tax assets and liabilities are measured

using enacted income tax rates in each jurisdiction in effect for the year in which the temporary differences are expected to be

recovered or settled.

These deferred tax assets are reduced by a valuation allowance, which is established when it is more

likely than not that some portion or all of the deferred tax assets will not be realized.

Net deferred tax assets and liabilities

are classified as non-current in the consolidated financial statements.

Our judgment regarding the realization of deferred tax

assets may change due to future profitability and market conditions, changes in U.S.

Income (loss) per share

Income Taxes – We account for income taxes and the related accounts under the asset and liability method.

Deferred tax assets and liabilities are measured using enacted income tax rates in each jurisdiction in effect for the year in which the temporary differences are expected to be recovered or settled.

These deferred tax assets are reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements.

Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, changes in U.S.

or foreign tax laws and other factors.

These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase

in net income in the period when such determinations are made.

The determination of our provision for

income taxes requires judgment, the use of estimates and the interpretation and application of complex federal, state and

foreign tax laws.

Our provision for income taxes reflects a combination of income earned and taxed at the federal and state

level in the U.S., as well as in various foreign jurisdictions.

In addition to the risks to the effective

tax rate described above, the future effective tax rate reflected in forward-looking statements is based on currently effective

These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made.

The determination of our provision for income taxes requires judgment, the use of estimates, and the interpretation and application of complex federal, state and foreign tax laws.

Our provision for income taxes reflects a combination of income earned and taxed at the federal and state level in the U.S., as well as in various foreign jurisdictions.

In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in forward–looking statements is based on currently effective tax laws.

Significant changes in those laws could materially affect these estimates.

We operate in multiple jurisdictions through

wholly-owned subsidiaries, and our global structure is complex.

The estimates of our uncertain tax positions involve judgments

and assessment of the potential tax implications.

We recognize uncertain tax positions when it is more likely than not that the

tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position.

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized

upon ultimate settlement.

Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions and

the resolution of such audits may span multiple years.

Tax law is complex and often subject to varied interpretations, accordingly,

the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized.

We operate in multiple jurisdictions through wholly-owned subsidiaries, and our global structure is complex.

The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications.

We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position.

The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions, and the resolution of such audits may span multiple years.

Tax law is complex and often subject to varied interpretations.

Accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized.

Stock Compensation.

We account for

share-based compensation according to FASB guidance relating to share-based payments, which requires the measurement and recognition

of compensation expense for all share-based awards made to employees and directors based on estimated fair values on the grant

This guidance requires that we estimate the fair value of share-based awards on the date of grant and recognize as expense

the value of the portion of the award that is ultimately expected to vest over the requisite service period.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The preparation of financial

statements in conformity with U.S.

Generally Accepted Accounting Principles requires us to make estimates and assumptions that

affect the reported amounts presented and disclosed in our consolidated financial statements.

Significant estimates and assumptions

in these consolidated financial statements require the exercise of judgment and are used for, but not limited to, allowance for

doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill, intangible and long-lived asset

impairment tests, useful lives for depreciation and amortization, warranty programs, stock compensation, income taxes and deferred

tax valuation allowances, and contingencies.

Due to the inherent uncertainty involved in making estimates, actual results reported

in future periods may be different from these estimates.

We account for share–based compensation according to FASB guidance relating to share–based payments, which requires the measurement and recognition of compensation expense for all share–based awards made to employees and directors based on estimated fair values on the grant date.

This guidance requires that we estimate the fair value of share–based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period.

The preparation of financial statements in conformity with U.S.

Generally Accepted Accounting Principles requires us to make estimates and assumptions that affect the reported amounts presented and disclosed in our consolidated financial statements.

Significant estimates and assumptions in these consolidated financial statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other

assumptions associated with goodwill, intangible and long–lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, stock compensation, income taxes and deferred tax valuation allowances, and contingencies.

Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates.

BUSINESS OPERATIONS

Nature of Business .

We design, manufacture

and sell computerized CNC machine tools, computer control systems and software products, machine tool components, automation equipment

and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as

customer service and training and applications support, to companies in the metal cutting industry through a worldwide sales, service

and distribution network.

The machine tool industry is highly cyclical and changes in demand can occur abruptly in the geographic

markets we serve.

As a result of this cyclicality, we have experienced significant fluctuations in our sales, which, in periods

of reduced demand, have adversely affected our results of operations and financial condition.

The end market for our

products consists primarily of precision tool, die and mold manufacturers, independent job shops, and specialized short-run production

applications within large manufacturing operations.

We design, manufacture, and sell computerized CNC machine tools, computer control systems and software products, machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training, and applications support, to companies in the metal cutting industry through a worldwide sales, service, and distribution network.

The machine tool industry is highly cyclical and changes in demand can occur abruptly in the geographic markets we serve.

As a result of this cyclicality, we have experienced significant fluctuations in our sales, which, in periods of reduced demand, have adversely affected our results of operations and financial condition.

The end market for our products consists primarily of precision tool, die and mold manufacturers, independent job shops, and specialized short–run production applications within large manufacturing operations.

Industries served include:

aerospace, defense, medical equipment, energy, automotive/transportation,

electronics and computer industries.

Our products are sold principally through more than 190 independent agents and distributors

throughout the Americas, Europe and Asia.

We also have our own direct sales and service organizations in China, France, Germany,

India, Italy, Poland, Singapore, Taiwan, the United Kingdom, and certain areas of the United States.

aerospace, defense, medical equipment, energy, automotive/transportation, electronics, and computer industries.

Our products are sold principally through more than 200 independent agents and distributors throughout the Americas, Europe and Asia.

We also have our own direct sales and service organizations in China, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and certain areas of the United States.

Credit Risk .

sell products to customers located throughout the world.

We perform ongoing credit evaluations of customers and generally do not

require collateral.

We sell products to customers located throughout the world.

We perform ongoing credit evaluations of customers and generally do not require collateral.

Allowances are maintained for potential credit losses.

Concentration of credit risk with respect to trade accounts

receivable is limited due to the large number of customers and their dispersion across many geographic areas.

Although a significant

amount of trade receivables are with distributors primarily located in the United States, no single distributor or region represents

a significant concentration of credit risk.

Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across many geographic areas.

Although a significant amount of trade receivables are with distributors primarily located in the United States, no single distributor or region represents a significant concentration of credit risk.

Manufacturing Risk.

our wholly-owned subsidiaries, Hurco Manufacturing Limited (“HML”), Ningbo Hurco Machine Tool Co., Ltd.

(“NHML”)

and Milltronics USA, Inc.

(“Milltronics”) produce the vast majority of our machine tools for all three brands, Hurco,

Milltronics and Takumi.

In addition, we manufacture electro-mechanical components and accessories for machine tools through our

wholly-owned subsidiary, LCM Precision Technology S.r.l.

(“LCM”).

HML, NHML, Milltronics and LCM manufacture their

products in Taiwan, China, the U.S.

and Italy, respectively.

Any interruption in manufacturing at any of these locations would

have an adverse effect on our financial operating results.

Interruption in manufacturing at one of these locations could result

from a change in the political environment or a natural disaster, such as trade wars or tariffs, or an earthquake, typhoon, or

Any interruption with one of our key suppliers may also have an adverse effect on our operating results and our financial

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Inventories as of October

31, 2019 and 2018 are summarized below (in thousands):

At present, our wholly–owned subsidiaries, Hurco Manufacturing Limited (“HML”), Ningbo Hurco Machine Tool Co., Ltd.

(“NHML”), and Milltronics USA, Inc.

(“Milltronics”) produce the vast majority of our machine tools for all three brands, Hurco, Milltronics, and Takumi.

In addition, we manufacture electro–mechanical components and accessories for machine tools through our wholly–owned subsidiary, LCM.

HML, NHML, Milltronics, and LCM manufacture their products in Taiwan, China, the U.S., and Italy, respectively.

Any interruption in manufacturing at any of these locations would have an adverse effect on our financial operating results.

Interruption in manufacturing at one of these locations could result from a change in the political environment or a natural disaster, such as trade wars or tariffs, or an earthquake, typhoon, or tsunami.

Any interruption with one of our other third-party key suppliers may also have an adverse effect on our operating results and our financial condition.

Inventories as of October 31, 2020 and 2019 are summarized below (in thousands):

Purchased parts and sub–assemblies

1 unchanged sentence

Finished goods

Finished goods inventory

consigned to our distributors and agents throughout the Americas, Europe and Asia was $12.0 million and $9.9 million as of October

31, 2019 and 2018, respectively.

ACQUISITION OF

On August 5, 2019,

we (through a newly-formed subsidiary, ProCobots, LLC) acquired substantially all of the assets of a U.S.-based automation integration

company for approximately $4.4 million.

This acquired business provides automation solutions that can be integrated with

any machine tool.

The purchase price has been preliminarily allocated to the assets acquired and the liabilities assumed

based on their fair values, and approximated $4.4 million.

The allocation of the opening balance sheet of ProCobots as of August

5, 2019 is as follows (in thousands):

Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe, and Asia was $ 17.2 million and $ 12.0 million as of October 31, 2020 and 2019, respectively.

ACQUISITION OF BUSINESS

On August 5, 2019, we (through a newly-formed subsidiary, ProCobots) acquired substantially all of the assets of a U.S.-based automation integration company for approximately $ 4.4 million.

This acquired business provides automation solutions that can be integrated with any machine tool.

The acquisition was accounted for in accordance with ASC Topic 805, Business Combinations.

Accordingly, the total purchase price was allocated to tangible assets and liabilities based on their fair value and the intangibles and goodwill were allocated on a provisional basis at the date of acquisition.

These allocations reflected various provisional estimates that were available at the time and were subject to change during the purchase price allocation period as valuations were finalized.

All valuations are now final.

The following table summarizes the allocation of the opening balance sheet of ProCobots as of August 5, 2019 (in thousands):

Initial Allocation

Final Allocation

Current assets

3 unchanged sentences

Total purchase price and cash expended

The acquisition was accounted for in accordance

with ASC Topic 805, Business Combinations.

Accordingly, the total purchase price was allocated to tangible assets and liabilities

based on their fair value and the intangibles and goodwill were allocated on a provisional basis at the date of acquisition.

allocations reflected various provisional estimates that were available at the time and are subject to change during the purchase

price allocation period as valuations are in the process of being finalized.

The results of operations of ProCobots

have been included in the consolidated financial statements from the date of acquisition.

CREDIT AGREEMENTS

AND BORROWINGS

On December 7, 2012, we entered into a

credit agreement, which was subsequently amended on May 9, 2014, June 5, 2014, December 5, 2014 and December 6, 2016 (as amended,

the “2012 Credit Agreement”) with JP Morgan Chase Bank, N.A that provided us with an unsecured revolving credit and

letter of credit facility.

The 2012 Credit Agreement terminated on its scheduled maturity date of December 31, 2018.

On December 31, 2018, we and our subsidiary

entered into a new credit agreement (the “2018 Credit Agreement”) with Bank of America, N.A., as the lender.

The 2018 Credit Agreement replaced the 2012 Credit Agreement.

The 2018 Credit Agreement provides for an unsecured revolving credit

and letter of credit facility in a maximum aggregate amount of $40.0 million.

The 2018 Credit Agreement provides that the maximum

amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans

made to our subsidiary Hurco B.V.

at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans

denominated in alternative currencies at any one time may not exceed $20.0 million.

Under the 2018 Credit Agreement, we and Hurco

Intangible assets of $ 1.1 million were recorded as a result of the purchase.

The fair value of the intangible assets was based upon a discounted cash flow method that involves inputs that are not observable in the market (Level 3).

Intangible assets are amortized primarily using a straight-line methodology.

The intangible assets consisted of the following (in thousands):

Remaining Economic Useful Life

Trademark/name

The excess purchase price over the fair value of the assets acquired and the liabilities assumed was recorded as goodwill in the amount of $ 2.5 million.

Goodwill recognized in the acquisition relates primarily to expanding our current product offering.

The amount recorded as goodwill will be fully deductible for tax purposes.

As of October 31, 2020, we have recognized an impairment loss for the full $ 2.5 million of goodwill relating to ProCobots.

See Note 1 of these Notes to Consolidated Financial Statements for further information.

The results of operations of ProCobots have been included in the consolidated financial statements from the date of acquisition.

CREDIT AGREEMENTS AND BORROWINGS

On December 31, 2018, we and our subsidiary Hurco B.V.

entered into a new credit agreement, which was amended by that certain First Amendment dated March 13, 2020 and that certain Second Amendment dated December 23, 2020 (as amended, the “2018 Credit Agreement”), with Bank of America, N.A., as the lender.

The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $ 40.0 million.

Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $ 10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V.

at any one time may not exceed $ 20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $ 20.0 million.

Under the 2018 Credit Agreement, we and Hurco B.V.

are borrowers, and certain of our other subsidiaries are guarantors.

The scheduled maturity date of the 2018 Credit Agreement

is December 31, 2020.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Borrowings under the 2018 Credit Agreement

bear interest at floating rates based on, at our option, either (i) a LIBOR-based rate, or other alternative currency-based rate

approved by the lender, plus 0.75% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%,

(b) the prime rate or (c) the one month LIBOR-based rate plus 1.00%), plus 0.00% per annum.

Outstanding letters of credit will

carry an annual rate of 0.75%.

The 2018 Credit Agreement contains customary

affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments,

loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million);

(2) restricting

us from making certain payments, including cash dividends, except that we may pay cash dividends as long as immediately before

and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our

cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend

The scheduled maturity date of the 2018 Credit Agreement is December 31, 2021 .

Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a LIBOR–based rate, or other alternative currency–based rate approved by the lender, plus 1.25 % per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50 %, (b) the prime rate or (c) the one month LIBOR–based rate plus 1.00 %), plus 0.00 % per annum.

Outstanding letters of credit will carry an annual rate of 1.25 %.

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $ 10.0 million);

(2) restricting us from making certain payments, including (a) cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $ 10.0 million, and as long as we are not in default before and after giving effect to such dividend payments and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $ 10.0 million;

(3) requiring that we maintain a minimum working capital of $ 125.0 million;

and (4) requiring that we maintain a minimum

tangible net worth of $170.0 million.

We may use the proceeds from advances under the 2018 Credit Agreement for general corporate

In December 2018, in connection with our

entry into the 2018 Credit Agreement, (1) using cash on hand, we repaid in full the $1.4 million outstanding under, and terminated,

our credit facility in China and (2) we terminated our United Kingdom credit facility.

In March 2019, our wholly-owned subsidiaries

in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million

New Taiwan Dollars (the “Taiwan credit facility”) and 32.5 million Chinese Yuan (the “China credit facility”),

respectively.

Both the Taiwan and China credit facilities have a final maturity date of March 5, 2020.

As a result, as of October 31, 2019, our

existing credit facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars

Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under

the 2018 Credit Agreement.

As of October 31, 2019, there were no borrowings

under any of our credit facilities and there was $51.2 million of available borrowing capacity thereunder.

Estimated Fair Value

of Financial Instruments

FASB fair value guidance establishes

a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value.

(4) requiring that we maintain a minimum tangible net worth of $ 170.0 million;

and (5) providing that if the total amount of indebtedness outstanding owed by the Company and its Taiwanese and Chinese subsidiaries to the lender or its affiliates (the “Specified Outstanding Amount”) exceeds $ 25.0 million, then the Company will not permit the amount of unrestricted cash-on-hand of the Company and its subsidiaries to be less than the Specified Outstanding Amount.

We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

In December 2018, in connection with our entry into the 2018 Credit Agreement, (1) using cash on hand, we repaid in full the $ 1.4 million outstanding under, and terminated, our credit facility in China and (2) we terminated our United Kingdom credit facility.

In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the "Taiwan credit facility") and 32.5 million Chinese Yuan (the "China credit facility"), respectively.

As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institutions from time to time.

As a result, as of October 31, 2020, our existing credit facilities consisted of our € 1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $ 40.0 million revolving credit facility under the 2018 Credit Agreement.

As of October 31, 2020, there were no borrowings under any of our credit facilities and there was $ 51.8 million of available borrowing capacity thereunder.

FINANCIAL INSTRUMENTS

Estimated Fair Value of Financial Instruments

FASB fair value guidance establishes a three–tier fair value hierarchy, which categorizes the inputs used in measuring fair value.

These tiers include:

1, defined as observable inputs, such as quoted prices in active markets;

Level 2, defined as inputs other than quoted prices in

active markets that are either directly or indirectly observable;

and Level 3, defined as unobservable inputs for which little

or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying amounts

for cash and cash equivalents approximate their fair values due to the short maturity of these instruments, and such instruments

meet the Level 1 criteria of the three-tier fair value hierarchy discussed above.

The carrying amount of short-term debt approximates

fair value due to the variable rate of the interest and the short term nature of the instrument.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with this guidance, the following table represents

the fair value hierarchy for our financial assets and liabilities measured at fair value as of October 31, 2019 and 2018 (in thousands):

Level 1, defined as observable inputs, such as quoted prices in active markets;

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable;

and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The carrying amounts for cash and cash equivalents approximate their fair values due to the short maturity of these instruments, and such instruments meet the Level 1 criteria of the three–tier fair value hierarchy discussed above.

carrying amount of short–term debt approximates fair value due to the variable rate of the interest and the short term nature of the instrument.

In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of October 31, 2020 and 2019 (in thousands):

Deferred compensation

Recurring Fair Value Measurements

Included in Level 1 assets are mutual fund

investments under a nonqualified deferred compensation plan.

We estimate the fair value of these investments on a recurring basis

using market prices which are readily available.

Included as Level 2 fair value measurements

are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with

a third party.

We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained

from active markets.

Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan.

We estimate the fair value of these investments on a recurring basis using market prices which are readily available.

Included as Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with a third party.

We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets.

Derivative instruments are reported in the accompanying consolidated financial statements at fair value.

have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 1 of Notes

to Consolidated Financial Statements in which the U.S.

Dollar equivalent notional amount of these contracts was $108.6 million

and $145.2 million at October 31, 2019 and 2018, respectively.

The fair value of the foreign currency

forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency

exchange rate volatility.

We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 1 of Notes to Consolidated Financial Statements in which the U.S.

Dollar equivalent notional amount of these contracts was $ 70.8 million and $ 108.6 million at October 31, 2020 and 2019, respectively.

The fair value of the foreign currency forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility.

The counterparty to the forward exchange contract is a substantial and creditworthy financial institution.

We do not consider either the risk of counterparty non-performance or the economic consequences of counterparty non-performance

as material risks.

In December 2017, the U.S.

Jobs Act (the “Tax Reform Act”) was enacted.

We do not consider either the risk of counterparty non–performance or the economic consequences of counterparty non–performance as material risks.

We account for income taxes using the asset and liability method.

Under this method, the (benefit) provision for income taxes represents income taxes payable or refundable for the current year plus the change in deferred taxes during the year.

On March 27, 2020, the U.S.

Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to COVID-19 pandemic.

The CARES Act, among other things, allows net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes, permits net operating loss carryovers and carrybacks to offset 100 percent of taxable income for taxable years beginning before January 1, 2021.

Any net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021, are created in years that have a 21.0 % federal income tax rate.

If these net operating losses are carried back to years prior to December 31, 2017, the resulting refund would be in years with a 34.0 % federal income tax rate.

We are planning to carry back our taxable loss in the U.S.

for fiscal 2020 under the provisions of the CARES Act and has recorded a tax benefit in the current year at 34 %.

The 2019 rate and 2018 rate reflect several effects associated with the U.S.

Tax Cuts and Jobs Act (the “Tax Reform Act”), which was enacted in December 2017.

The Tax Reform Act significantly revised the U.S.

corporate income tax

regime by, among other things, lowering the U.S.

corporate tax rate from 35% to 21% effective January 1, 2018, and implementing

a modified territorial tax system from a global system by adding provisions related to Global Intangible Low Taxed Income (“GILTI”)

and Foreign-derived Intangible Income (”FDII”) among other provisions.

The GILTI and FDII provisions under the Tax

Reform Act became effective for the Company in fiscal 2019.

The Tax Reform Act also imposed a one-time transition tax on deemed

repatriation of historical earnings of foreign subsidiaries, which was recorded in fiscal 2018.

In December 2017, the United States

Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No.

118 (“SAB 118”), which

provides guidance on accounting for the tax effects of the Tax Reform Act.

The Tax Reform Act created a new

requirement that GILTI income earned by Controlled Foreign Corporations (“CFC’s”) must be included in the

gross income of the CFC’s U.S.

shareholder effective for us in fiscal 2019 for the Company.

Accepted Accounting Principles, we are allowed to make an accounting policy choice of either (1) treating taxes due on U.S.

inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost

method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred

method”).

We have elected the period cost method to account for GILTI tax.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Tax Reform Act also created FDII for

US companies that derive income from the export of tangible and intangible property and services effective for us in fiscal 2019.

We have recorded a deduction attributable to FDII based on our current operations.

In the fiscal years set forth below, the

provision for income taxes consisted of the following (in thousands):

corporate income tax regime by, among other things, lowering the U.S.

corporate tax rate from 35 % to 21 % effective January 1, 2018, implemented a modified territorial tax system from a global system by adding provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign-derived Intangible Income (”FDII”) among other provisions.

These provisions under the Tax Reform Act became effective for our fiscal 2019.

The Tax Reform Act also imposed a one-time transition tax which was

recorded in the fiscal 2018, on deemed repatriation of historical earnings of foreign subsidiaries.

The components of income (loss) before taxes are (in thousands):

Year Ended October 31,

Income (loss) before income taxes:

The components of income tax provision (benefit) are (in thousands):

Year Ended October 31,

Foreign taxes

1 unchanged sentence

A comparison of income tax expense at the U.S.

statutory rate to the Company’s effective tax rate is as follows (dollars in thousands):

statutory rate to the Company’s effective tax rate is as follows:

Year Ended October 31,

Income before income taxes:

statutory rate

6 unchanged sentences

US benefit of foreign intangible income

Impact of CARES act

Effective tax rate

The Tax Reform Act also made

comprehensive changes to U.S.

The Tax Reform Act also made comprehensive changes to U.S.

federal income tax laws by moving from a global to a modified territorial tax regime.

result, cash repatriated to the U.S.

As a result, cash repatriated to the U.S.

is generally no longer subject to U.S federal income tax.

At October 31, 2019,

undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested.

Accordingly, we have not

provided for any withholding taxes on the undistributed earnings of our foreign subsidiaries since January 1, 2018.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred income taxes are determined based

on the difference between the amounts used for financial reporting purposes and tax bases of assets and liabilities using enacted

tax rates in effect for the year in which the differences are expected to reverse.

Deferred taxes are adjusted for changes

in tax rates and tax laws when changes are enacted.

Valuation allowances are recorded to reduce deferred tax assets

when it is more likely than not that a tax benefit will not be realized.

Net deferred tax assets and liabilities are classified

as non-current in the consolidated financial statements.

As of October 31, 2019, we had deferred

tax assets established for accumulated net operating loss carryforwards of $1.4 million, primarily related to certain states in

On October 31, 2020, undistributed earnings of our foreign subsidiaries are expected to be permanently reinvested or otherwise retained for continuing operations.

Accordingly, we have not provided for any withholding taxes on the undistributed earnings of our foreign subsidiaries beginning January 1, 2018.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted.

Valuation allowances

are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements.

As of October 31, 2020, we had deferred tax assets established for accumulated net operating loss carryforwards of $ 2.0 million, primarily related to certain states in the U.S.

and foreign jurisdictions.

We also had deferred tax assets for research and development tax credits of $0.8

We also had deferred tax assets for tax credits of $ 0.9 million.

We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization.

of October 31, 2019 and 2018, the balance of this valuation allowance was $2.2 million and $2.1 million, respectively.

Significant components of our deferred

tax assets and liabilities at October 31, 2019 and 2018 are as follows (in thousands):

As of October 31, 2020 and 2019, the balance of this valuation allowance was $ 2.2 million for each fiscal year.

Significant components of our deferred tax assets and liabilities at October 31, 2020 and 2019 were as follows (in thousands):

Deferred Tax Assets:

6 unchanged sentences

Other credit carryforwards

Operating lease liabilities

Goodwill and intangibles

Valuation allowance – net operating loss and other credit carryforwards

3 unchanged sentences

Property and equipment and capitalized software development costs

Operating lease - right of use assets

Net deferred tax assets

As of October 31, 2019, we had net operating

losses carryforwards for international and U.S.

income tax purposes of $5.9 million, of which $5.2 million related to foreign jurisdictions

will expire within 5 years beginning in fiscal 2020 and $0.7 million will expire between 5 and 20 years.

We also had tax credits

of $765,000 that will expire between years 2023 and 2030.

A reconciliation

of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as

follows (in thousands):

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of October 31, 2020, we had net operating loss carryforwards for international and U.S.

income tax purposes of $ 6.8 million, of which $ 5.1 million related to foreign jurisdictions will expire within 5 years beginning in fiscal 2021 and $ 1.7 million will expire between 5 and 20 years .

We also had tax credits of $ 0.9 million that will expire between years 2021 and 2030 .

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands):

Balance, beginning of year

3 unchanged sentences

Balance, end of year

The entire balance of the unrecognized

tax benefits and related interest at October 31, 2019, if recognized, could affect the effective tax rate in future periods.

We recognize accrued interest and penalties

related to unrecognized tax benefits as components of our income tax provision.

As of October 31, 2019, the amount of

interest accrued, reported in other liabilities, was approximately $32,000, which did not include the federal tax benefit of interest

The statute of limitations with respect to unrecognized tax benefits will expire between July 2020 and August 2023.

federal and state income

tax returns, as well as tax returns in several foreign jurisdictions.

A summary of open tax years by major jurisdiction

is presented below:

The entire balance of the unrecognized tax benefits and related interest at October 31, 2020, if recognized, could affect the effective tax rate in future periods.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision.

As of October 31, 2020, the amount of interest accrued, reported in other liabilities, was approximately $ 36,000 which did not include the federal tax benefit of interest deductions.

The statute of limitations with respect to unrecognized tax benefits will expire between August 2021 and August 2024 .

federal and state income tax returns, as well as tax returns in several foreign jurisdictions.

Currently, our subsidiary in France is under tax audit for fiscal years 2018 and 2019.

A summary of open tax years by major jurisdiction is presented below:

United States federal

Fiscal 2017 through the current period

Germany¹

Fiscal 2018 through the current period

1 unchanged sentence

Includes federal as well as state, provincial or similar local jurisdictions, as applicable.

We have defined contribution

plans that include a majority of our employees, under which our matching contributions are primarily discretionary.

of these plans is generally to provide additional financial security during retirement by providing employees with an incentive

to save throughout their employment.

Our contributions and related expense totaled $1.4 million, $1.2 million, $1.1 million, for

the fiscal years ended October 31, 2019, 2018, and 2017, respectively.

In March 2016, we adopted the Hurco Companies,

2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation

rights, restricted stock, stock units and other stock-based awards.

EMPLOYEE BENEFITS

We have defined contribution plans that include a majority of our U.S.

employees, under which our matching contributions are primarily discretionary.

The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save throughout their employment.

Our contributions and related expense totaled $ 1.3 million, $ 1.4 million, $ 1.2 million, for the fiscal years ended October 31, 2020, 2019, and 2018, respectively.

STOCK–BASED COMPENSATION

In March 2016, we adopted the Hurco Companies, Inc.

2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation rights, restricted stock, stock units and other stock–based awards.

The 2016 Equity Plan replaced the Hurco Companies, Inc.

Equity Incentive Plan (the “2008 Plan”) and is the only active plan under which equity awards may be made by us to

our employees and non-employee directors.

No further awards will be made under our 2008 Plan.

The total number of shares of our

common stock that may be issued pursuant to awards under the 2016 Equity Plan is 856,048, which includes 386,048 shares remaining

available for future grants under the 2008 Plan as of March 10, 2016, the date our shareholders approved the 2016 Equity Plan.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Compensation Committee of our Board

of Directors has the authority to determine the officers, directors and key employees who will be granted awards under the 2016

2008 Equity Incentive Plan (the “2008 Equity Plan”) and is the only active plan under which equity awards may be made by us to our employees and non–employee directors.

No further awards will be made under our 2008 Equity Plan.

The total number of shares of our common stock that may be issued pursuant to awards under the 2016 Equity Plan is 856,048 , which includes 386,048 shares remaining available for future grants under the 2008 Equity Plan as of March 10, 2016, the date our shareholders approved the 2016 Equity Plan.

The Compensation Committee of our Board of Directors has the authority to determine the officers, directors and key employees who will be granted awards under the 2016 Equity Plan;

designate the number of shares subject to each award;

determine the terms and conditions upon which awards will be

determine the terms and conditions upon which awards will be granted;

and prescribe the form and terms of award agreements.

We have granted restricted shares and performance units under the

2016 Equity Plan that are currently outstanding, and we have granted stock options under the 2008 Plan that are currently outstanding.

No stock option may be exercised more than ten years after the date of grant or such shorter period as the Compensation Committee

may determine at the date of grant.

The market value of a share of our common stock, for purposes of the 2016 Equity Plan, is the

closing sale price as reported by the Nasdaq Global Select Market on the date in question or, if not a trading day, on the last

preceding trading date.

A summary of the status of the options

as of October 31, 2019, 2018 and 2017 and the related activity for the year is as follows:

We have granted restricted shares and performance units under the 2016 Equity Plan that are currently outstanding, and we have granted stock options under the 2008 Equity Plan that are currently outstanding.

No stock option may be exercised more than ten years after the date of grant or such shorter period as the Compensation Committee may determine at the date of grant.

The market value of a share of our common stock, for purposes of the 2016 Equity Plan, is the closing sale price as reported by the Nasdaq Global Select Market on the date in question or, if not a trading day, on the last preceding trading date.

A summary of the status of the options as of October 31, 2020, 2019 and 2018 and the related activity for the year is as follows:

Weighted Average Grant

4 unchanged sentences

Balance October 31, 2020

The total intrinsic value of

stock options exercised during the twelve months ended October 31, 2019, 2018 and 2017 was approximately $0, $847,000 and $771,000,

respectively.

As of October 31, 2019, the total intrinsic

value of stock options that are outstanding and exercisable was $485,000.

Stock options outstanding and exercisable on October

31, 2019, were as follows:

Range of Exercise

Prices Per Share

The total intrinsic value of stock options exercised during the twelve months ended October 31, 2020, 2019 and 2018 was approximately $ 44,000 , $ 0 , and $ 847,000 , respectively.

As of October 31, 2020, the total intrinsic value of stock options that were outstanding and exercisable was $ 258,000 .

Stock options outstanding and exercisable on October 31, 2020, were as follows:

Weighted Average

Exercise Price Per Share

Weighted Average

Remaining Contractual Life in Years

Range of Exercise

Exercise Price Per

Remaining Contractual

Prices Per Share

Life in Years

Outstanding and Exercisable

$ 18.13 –

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On March 14, 2019, the Compensation Committee

granted a total of 11,824 shares of time-based restricted stock to our non-employee directors.

The restricted shares vest in full

one year from the date of grant provided the recipient remains on the board of directors through that date.

The grant date fair

value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was $40.58 per

On January 2, 2019, the Compensation Committee

determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2016-2018 performance period

was attained, and the resulting payout level relative to the target amount for each of the metrics that were established by the

Compensation Committee in 2016.

As a result, the Compensation Committee determined that a total of 32,559 performance shares were

earned by our executive officers, which performance shares vested on January 2, 2019.

The vesting date fair value of the performance

shares was based on the closing sales price of our common stock on the vesting date, which was $36.08 per share.

On January 2, 2019, the Compensation Committee

also approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and performance

stock units (“PSUs”) under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and

21.45 - 23.30

On March 12, 2020, the Compensation Committee granted a total of 17,780 shares of time-based restricted stock to our non-employee directors.

The restricted shares vest in full one year from the date of grant provided the recipient remains on the board of directors through that date.

The grant date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was $ 23.62 per share.

On January 2, 2020, the Compensation Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2017-2019 performance period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established by the Compensation Committee in 2017.

As a result, the Compensation Committee determined that a total of 28,979 performance stock units (“PSUs”) were earned by our executive officers, which PSUs vested on January 2, 2020.

The vesting date fair value of the PSUs was based on the closing sales price of our common stock on the vesting date, which was $ 37.79 per share.

On January 2, 2020, the Compensation Committee also approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

The awards were approximately 25 % time-based vesting and approximately 75 % performance-based vesting.

The three-year performance

period for the PSUs is fiscal 2019 through fiscal 2021.

On that date, the Compensation Committee

granted a total of 21,825 shares of time-based restricted stock to our executive officers.

The restricted shares vest in thirds

over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value of

the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $36.08 per share.

On January 2, 2019, the Compensation Committee

also granted a total target number of 30,943 PSUs to our executive officers designated as “PSU –

PSUs were weighted as approximately 40% of the overall 2019 executive long-term incentive compensation arrangement and will vest

and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2019-2021, relative

to the total shareholder return of the companies in a specified peer group over that period.

Participants will have the ability

to earn between 50% of the target number of the PSUs –

TSR for achieving threshold performance and 200% of the target number

of the PSUs –

TSR for achieving maximum performance.

The grant date fair value of the PSUs –

TSR was $40.72 per PSU

and was calculated using the Monte Carlo approach.

On January 2, 2019, the Compensation Committee

also granted a total target number of 30,557 PSUs to our executive officers designated as “PSU –

PSUs were weighted as approximately 35% of the overall 2019 executive long-term incentive compensation arrangement and will vest

and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year

period of fiscal 2019-2021.

Participants will have the ability to earn between 50% of the target number of the PSUs - ROIC for

achieving threshold performance and 200% of the target number of the PSUs - ROIC for achieving maximum performance.

The grant date

fair value of the PSUs –

ROIC was based on the closing sales price of our common stock on the grant date, which was $36.08

On November 14, 2018, the Compensation

Committee granted a total of 7,200 shares of time-based restricted stock to our non-executive employees.

The restricted shares

vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date

fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was

$40.01 per share.

On March 15, 2018, the Compensation Committee granted a total

of 9,114 shares of time–based restricted stock to our non–employee directors.

The restricted shares vest in full one

year from the date of grant provided the recipient remains on the board of directors through that date.

The grant date fair value

of the restricted shares was based on the closing sales price of our common stock on the grant date, which was $46.05 per share.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 3, 2018, the Compensation Committee

determined the degree to which the long–term incentive compensation arrangement approved for the fiscal 2015–2017 performance

period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established

by the Compensation Committee in 2015.

As a result, the Compensation Committee determined that a total of 23,299 performance shares

were earned by our executive officers, which performance shares vested on January 3, 2018.

The vesting date fair value of the performance

shares was based on the closing sales price of our common stock on the vesting date, which was $42.20 per share.

All related stock–based

compensation cost for these vested performance shares was expensed accordingly during the three–year performance period ended

October 31, 2017.

On January 3, 2018, the Compensation Committee

also approved a long–term incentive compensation arrangement for our executive officers in the form of restricted shares

and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

The awards were

25% time–based vesting and 75% performance–based vesting.

The three–year performance period for the PSUs is fiscal

2018 through fiscal 2020.

On that date, the Compensation Committee

granted a total of 14,810 shares of time–based restricted stock to our executive officers.

The restricted shares vest in

thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value

of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $42.20 per

On January 3, 2018, the Compensation Committee

also granted a total target number of 21,891 PSUs to our executive officers designated as “PSU –

PSUs were weighted as approximately 40% of the overall 2018 executive long–term incentive compensation arrangement and will

vest and be paid based upon the total shareholder return of our common stock over the three–year period of fiscal 2018–2020,

relative to the total shareholder return of the companies in a specified peer group over that period.

Participants will have the

ability to earn between 50% of the target number of the PSUs –

TSR for achieving threshold performance and 200% of the target

number of the PSUs –

TSR for achieving maximum performance.

The grant date fair value of the PSUs –

TSR was $45.68

per PSU and was calculated using the Monte Carlo approach.

On January 3, 2018, the Compensation Committee

also granted a total target number of 20,734 PSUs to our executive officers designated as “PSU –

PSUs were weighted as approximately 35% of the overall 2018 executive long–term incentive compensation arrangement and will

vest and be paid based upon the achievement of pre–established goals related to our average return on invested capital over

the three–year period of fiscal 2018–2020.

Participants will have the ability to earn between 50% of the target number

of the PSUs –ROIC for achieving threshold performance and 200% of the target number of the PSUs –

ROIC for achieving

maximum performance.

The grant date fair value of the PSUs –

ROIC was based on the closing sales price of our common stock

on the grant date, which was $42.20 per share.

On November 15, 2017, the Compensation

Committee granted a total of 2,364 shares of time–based restricted stock to our non–executive employees.

The restricted

shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which

was $42.30 per share.

On March 9, 2017, the Compensation Committee

granted a total of 14,920 shares of time–based restricted stock to our non–employee directors.

The restricted shares

vest in full one year from the date of grant provided the recipient remains on the board of directors through that date.

date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was

$26.80 per share.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 5, 2017, the Compensation Committee

determined the degree to which the long–term incentive compensation arrangement approved for the fiscal 2014–2016 performance

period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established

by the Compensation Committee in 2014.

As a result, the Compensation Committee determined that a total of 30,683 performance shares

were earned by our executive officers, which performance shares vested on January 5, 2017.

The vesting date fair value of the performance

shares was based on the closing sales price of our common stock on the vesting date, which was $33.90 per share.

All related stock–based

compensation cost for these vested performance shares was expensed accordingly during the three–year performance period ended

October 31, 2016.

On January 5, 2017, the Compensation Committee

also approved a long–term incentive compensation arrangement for our executive officers in the form of restricted shares

and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

The awards were

25% time–based vesting and 75% performance–based vesting.

The three–year performance period for the PSUs is fiscal

2017 through fiscal 2019.

On that date, the Compensation Committee

granted a total of 14,747 shares of time–based restricted stock to our executive officers.

The restricted shares vest in

thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value

of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $33.90 per

On January 5, 2017, the Compensation Committee

also granted a total target number of 18,496 PSUs to our executive officers designated as “PSU –

PSUs were weighted as approximately 40% of the overall 2017 executive long–term incentive compensation arrangement and will

vest and be paid based upon the total shareholder return of our common stock over the three–year period of fiscal 2017–2019,

relative to the total shareholder return of the companies in a specified peer group over that period.

Participants will have the

ability to earn between 50% of the target number of the PSUs –

TSR for achieving threshold performance and 200% of the target

number of the PSUs –

TSR for achieving maximum performance.

The grant date fair value of the PSUs –

TSR was $43.25

per PSU and was calculated using the Monte Carlo approach.

On January 5, 2017, the Compensation Committee

also granted a total target number of 20,647 PSUs to our executive officers designated as “PSU –

PSUs were weighted as approximately 35% of the overall 2017 executive long–term incentive compensation arrangement and will

vest and be paid based upon the achievement of pre–established goals related to our average return on invested capital over

the three–year period of fiscal 2017–2019.

Participants will have the ability to earn between 50% of the target number

of the PSUs –

ROIC for achieving threshold performance and 200% of the target number of the PSUs –

ROIC for achieving

maximum performance.

The grant date fair value of the PSUs –

ROIC was based on the closing sales price of our common stock

on the grant date, which was $33.90 per share.

A reconciliation of our restricted stock,

performance share and PSU activity and related information is as follows:

The three-year performance period for the PSUs is fiscal 2020 through fiscal 2022.

On that date, the Compensation Committee granted a total of 20,837 shares of time-based restricted stock to our executive officers.

The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 37.79 per share.

On January 2, 2020, the Compensation Committee also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU – TSR”.

These PSUs were weighted as approximately 40 % of the overall 2020 executive long-term incentive compensation arrangement and will vest and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2020-2022, relative to the total shareholder return of the companies in a specified peer group over that period.

Participants will have the ability to earn between 50 % of the target number of the PSUs – TSR for achieving threshold performance and 200 % of the target number of the PSUs – TSR for achieving maximum performance.

The grant date fair value of the PSUs – TSR was $ 46.81 per PSU and was calculated using the Monte Carlo approach.

On January 2, 2020, the Compensation Committee also granted a total target number of 29,174 PSUs to our executive officers designated as “PSU – ROIC”.

These PSUs were weighted as approximately 35 % of the overall 2020 executive long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period of fiscal 2020-2022.

Participants will have the ability to earn between 50 % of the target number of the PSUs - ROIC for achieving threshold performance and 200 % of the target number of the PSUs - ROIC for achieving maximum performance.

The grant date fair value of the PSUs – ROIC was based on the closing sales price of our common stock on the grant date, which was $ 37.79 per share.

On November 13, 2019, the Compensation Committee granted a total of 8,052 shares of time-based restricted stock to our non-executive employees.

The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 35.75 per share.

On March 14, 2019, the Compensation Committee granted a total of 11,824 shares of time–based restricted stock to our non–employee directors.

The restricted shares vest in full one year from the date of grant provided the recipient remains on the board of directors through that date.

The grant date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was $ 40.58 per share.

On January 2, 2019, the Compensation Committee determined the degree to which the long–term incentive compensation arrangement approved for the fiscal 2016–2018 performance period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established by the Compensation Committee in 2016.

As a result, the Compensation Committee determined that a total of 32,559 performance shares were earned by our executive officers, which performance shares vested on January 2, 2019.

The vesting date fair value of the performance shares was based on the closing sales price of our common stock on the vesting date, which was $ 36.08 per share.

On January 2, 2019, the Compensation Committee also approved a long–term incentive compensation arrangement for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

The awards were approximately 25 % time–based vesting and approximately 75 % performance–based vesting.

The three-year performance period for the PSUs is fiscal 2019 through fiscal 2021.

On that date, the Compensation Committee granted a total of 21,825 shares of time–based restricted stock to our executive officers.

The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 36.08 per share.

On January 2, 2019, the Compensation Committee also granted a total target number of 30,943 PSUs to our executive officers designated as “PSU – TSR”.

These PSUs were weighted as approximately 40 % of the overall 2019 executive long–term incentive compensation arrangement and will vest and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2019–2021, relative to the total shareholder return of the companies in

a specified peer group over that period.

The grant date fair value of the PSUs – TSR was $ 40.72 per PSU and was calculated using the Monte Carlo approach.

On January 2, 2019, the Compensation Committee also granted a total target number of 30,557 PSUs to our executive officers designated as “PSU – ROIC”.

These PSUs were weighted as approximately 35 % of the overall 2019 executive long–term incentive compensation arrangement and will vest and be paid based upon the achievement of pre–established goals related to our average return on invested capital over the three-year period of fiscal 2019–2021.

Participants will have the ability to earn between 50 % of the target number of the PSUs – ROIC for achieving threshold performance and 200 % of the target number of the PSUs – ROIC for achieving maximum performance.

The grant date fair value of the PSUs – ROIC was based on the closing sales price of our common stock on the grant date, which was $ 36.08 per share.

On November 14, 2018, the Compensation Committee granted a total of 7,200 shares of time–based restricted stock to our non–executive employees.

The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 40.01 per share.

On March 15, 2018, the Compensation Committee granted a total of 9,114 shares of time–based restricted stock to our non–employee directors.

The restricted shares vest in full one year from the date of grant provided the recipient remains on the board of directors through that date.

The grant date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was $ 46.05 per share.

On January 3, 2018, the Compensation Committee determined the degree to which the long–term incentive compensation arrangement approved for the fiscal 2015–2017 performance period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established by the Compensation Committee in 2015.

As a result, the Compensation Committee determined that a total of 23,299 performance shares were earned by our executive officers, which performance shares vested on January 3, 2018.

The vesting date fair value of the performance shares was based on the closing sales price of our common stock on the vesting date, which was $ 42.20 per share.

All related stock–based compensation cost for these vested performance shares was expensed accordingly during the three-year performance period ended October 31, 2017.

On January 3, 2018, the Compensation Committee also approved a long–term incentive compensation arrangement for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested.

The awards were 25 % time–based vesting and 75 % performance–based vesting.

The three-year performance period for the PSUs is fiscal 2018 through fiscal 2020.

On that date, the Compensation Committee granted a total of 14,810 shares of time–based restricted stock to our executive officers.

The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 42.20 per share.

On January 3, 2018, the Compensation Committee also granted a total target number of 21,891 PSUs to our executive officers designated as “PSU – TSR”.

These PSUs were weighted as approximately 40 % of the overall 2018 executive long–term incentive compensation arrangement and will vest and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2018–2020, relative to the total shareholder return of the companies in a specified peer group over that period.

The grant date fair value of the PSUs – TSR was $ 45.68 per PSU and was calculated using the Monte Carlo approach.

On January 3, 2018, the Compensation Committee also granted a total target number of 20,734 PSUs to our executive officers designated as “PSU – ROIC”.

These PSUs were weighted as approximately 35 % of the overall 2018 executive long–term incentive compensation arrangement and will vest and be paid based upon the achievement of pre–established

goals related to our average return on invested capital over the three-year period of fiscal 2018–2020.

The grant date fair value of the PSUs – ROIC was based on the closing sales price of our common stock on the grant date, which was $ 42.20 per share.

On November 15, 2017, the Compensation Committee granted a total of 2,364 shares of time–based restricted stock to our non–executive employees.

The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date.

The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $ 42.30 per share.

A reconciliation of our restricted stock, performance share and PSU activity and related information is as follows:

Weighted Average Grant

Number of Shares

Weighted Average

Grant Date Fair Value

Date Fair Value

Unvested at October 31, 2019

4 unchanged sentences

Unvested at October 31, 2020

During fiscal 2019, 2018, and 2017, we

recorded approximately $2.7 million, $2.5 million, and $1.7 million, respectively, of stock–based compensation expense related

to grants under the 2008 Plan and the 2016 Equity Plan.

As of October 31, 2019, there was an estimated $3.2 million of total unrecognized

stock–based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2022.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RELATED PARTY

As of October 31, 2019,

we owned approximately 35% of the outstanding shares of a Taiwanese-based contract manufacturer, Hurco Automation, Ltd.

(“HAL”).

HAL’s scope of activities includes the design, manufacture, sales and distribution of industrial automation products, software

systems and related components, including control systems and components produced under contract for sale exclusively to us.

are accounting for this investment using the equity method.

The investment of $4.2 million and $4.0 million at October 31, 2019

and 2018, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets.

Purchases of controls

from HAL amounted to $8.5 million, $11.3 million and $10.0 million in fiscal 2019, 2018 and 2017, respectively.

Sales of control

component parts to HAL were $198,000, $197,000 and $139,000 for the fiscal years ended October 31, 2019, 2018 and 2017, respectively.

Trade payables to HAL were $938,000 and $3.4 million at October 31, 2019 and 2018, respectively.

Trade receivables from HAL were

$22,000 and $68,000 at October 31, 2019 and 2018, respectively.

Summary unaudited financial information

for HAL’s operations and financial condition is as follows (in thousands):

During fiscal 2020, 2019, and 2018, we recorded approximately $ 2.1 million, $ 2.7 million, and $ 2.5 million, respectively, of stock–based compensation expense related to grants under the 2008 Equity Plan and the 2016 Equity Plan.

As of October 31, 2020, there was an estimated $ 2.8 million of total unrecognized stock–based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2023.

RELATED PARTY TRANSACTIONS

As of October 31, 2020, we owned approximately 35 % of the outstanding shares of a Taiwanese–based contract manufacturer, Hurco Automation, Ltd.

HAL’s scope of activities includes the design, manufacture, sales, and distribution of industrial automation products, software systems, and related components, including control systems and components produced under contract for sale exclusively to us.

We are accounting for this investment using the equity method.

The investment of $ 4.4 million and $ 4.2 million at October 31, 2020 and 2019, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets.

Purchases of controls from HAL amounted to $ 6.2 million, $ 8.5 million, and $ 11.3 million in fiscal 2020, 2019 and 2018, respectively.

Sales of control component parts to HAL were $ 265,000 , $ 198,000 and $ 197,000 for the fiscal years ended October 31, 2020, 2019, and 2018, respectively.

Trade payables to HAL were $ 1.3 million and $ 938,000 at October 31, 2020 and 2019, respectively.

Trade receivables from HAL were $ 25,000 and $ 22,000 at October 31, 2020 and 2019, respectively.

Summary unaudited financial information for HAL’s operations and financial condition is as follows (in thousands):

Operating Income

2 unchanged sentences

Current Liabilities

CONTINGENCIES

AND LITIGATION

From time to time, we

are involved in various claims and lawsuits arising in the normal course of business.

Pursuant to applicable accounting rules,

we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within

that range is more likely than another.

We maintain insurance policies for such matters, and we record insurance recoveries

when we determine such recovery to be probable.

We do not expect any of these claims, individually or in the aggregate, to

have a material adverse effect on our consolidated financial position or results of operations.

We believe that the ultimate

resolution of claims for any losses will not exceed our insurance policy coverages.

AND PRODUCT WARRANTIES

to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that

use financing.

CONTINGENCIES AND LITIGATION

From time to time, we are involved in various claims and lawsuits arising in the normal course of business.

Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another.

We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable.

We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations.

We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages.

GUARANTEES AND PRODUCT WARRANTIES

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing.

We follow FASB guidance for accounting for guarantees (codified in ASC 460).

As of October 31, 2019, we had 21

outstanding third party payment guarantees totaling approximately $0.5 million.

The terms of these guarantees are consistent

with the underlying customer financing terms.

As of October 31, 2020, we had 14 outstanding third party payment guarantees totaling approximately $ 0.4 million.

The terms of these guarantees are consistent with the underlying customer financing terms.

Upon shipment of a machine, the customer assumes the risk of ownership.

customer does not obtain title, however, until it has paid for the machine.

A retention of title clause allows us to recover

the machine if the customer defaults on the financing.

We accrue liabilities under these guarantees at fair value, which

amounts are insignificant.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We provide warranties

on our products with respect to defects in material and workmanship.

The terms of these warranties are generally one year for machines

and shorter periods for service parts.

We recognize a reserve with respect to this obligation at the time of product sale, with

subsequent warranty claims recorded against the reserve.

The amount of the warranty reserve is determined based on historical trend

experience and any known warranty issues that could cause future warranty costs to differ from historical experience.

A reconciliation

of the changes in our warranty reserve is as follows (in thousands):

The customer does not obtain title, however, until it has paid for the machine.

A retention of title clause allows us to recover the machine if the customer defaults on the financing.

We accrue liabilities under these guarantees at fair value, which amounts are insignificant.

We provide warranties on our products with respect to defects in material and workmanship.

The terms of these warranties are generally one year for machines and shorter periods for service parts.

We recognize a reserve with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve.

The amount of the warranty reserve is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience.

A reconciliation of the changes in our warranty reserve for each of the last three fiscal years is as follows (in thousands):

Balance, beginning of year

3 unchanged sentences

Balance, end of year

The decrease in

our warranty reserve from fiscal 2018 to fiscal 2019 was primarily due to a decrease in the number of machines under warranty resulting

from decreased sales volume.

The increase in our warranty reserve from fiscal 2017 to fiscal 2018 was primarily due to an increase

in the number of machines under warranty resulting from increased sales volume.

We lease facilities,

certain equipment and vehicles under operating leases that expire at various dates through 2029.

Future payments required under

operating leases as of October 31, 2019, are summarized as follows (in thousands):

The decreases in our warranty reserve from fiscal 2019 to fiscal 2020 and from fiscal 2018 to fiscal 2019 were primarily due to a decrease in the number of machines under warranty resulting from decreased sales volume.

We adopted Accounting Standards Update (“ASU”) No.

2016-02, “Leases” (“ASC 842”) on November 1, 2019, the start of our 2020 fiscal year, and utilized the transition method allowed.

Accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date.

Upon adoption of ASC 842, we utilized the following elections and practical expedients:

● We elected to combine non-lease components with lease components.

● If at the lease commencement date, a lease has a lease term of 12 months or less and does not include a purchase option that is reasonably certain to be exercised, we have elected not to apply ASC 842 recognition requirements.

Nonetheless, we intend to include leases of less than 12 months within the updated footnote disclosures, if material.

● We elected not to use the portfolio method if we enter into a large number of leases in the same month with the same terms and conditions.

● As we have applied the new transition method allowed per ASU 2018-11, we have elected not to reassess arrangements entered into prior to November 1, 2019 for whether an arrangement is or contains a lease, the lease classification applied or to separate initial direct costs.

● We elected not to use hindsight in determining the lease term for lease contracts that have historically been renewed or amended.

Our lease portfolio includes leased production and assembly facilities, warehouses and distribution centers, office space, vehicles, material handling equipment utilized in our production and assembly facilities, laptops and other information technology equipment, as well as other miscellaneous leased equipment.

Most of the leased production and assembly facilities have lease terms ranging from two to five years , although the terms and conditions of our leases can vary significantly from lease to lease.

We have assessed the specific terms and conditions of each lease to determine the amount of the lease payments and the length of the lease term, which includes the minimum period over which lease payments are required plus any renewal options that are both within our control to exercise and reasonably certain of being exercised upon lease commencement.

In determining whether or not a renewal option is reasonably certain of being exercised, we assessed all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably certain.

There are no material residual value guarantees provided by us, nor any restrictions or covenants imposed by the leases to which we are a party.

In determining the lease liability, we utilize our incremental borrowing rate to discount the future lease payments over the lease term to present value.

We record a right-of-use asset and lease liability on our Consolidated Balance Sheets for all leases for which we are a lessee, in accordance with ASC 842.

We are a lessor in a small number of lease agreements associated with our automation integration equipment for which the impact to our consolidated financial statements is immaterial.

All our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840.

We recorded total operating lease expense for the fiscal years ended October 31, 2020, 2019, and 2018 of $ 5.0 million, $ 5.1 million, and $ 4.5 million, respectively, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Consolidated Statements of Operations.

Operating lease expense includes short-term leases and variable lease payments which are immaterial.

There have been no cost to obtain leases capitalized on the Consolidated Balance Sheets as of October 31, 2020.

The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for fiscal 2020 (in thousands):

Operating cash flow information:

Cash paid for amounts included in the measurement of lease liabilities

Noncash information:

Right-of-use assets obtained in exchange for new operating lease liabilities

The following table summarizes the maturities of lease commitments as of October 31, 2019, prior to the adoption of the new lease guidance, as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 (in thousands):

2024 and thereafter

Lease expense for the

fiscal years ended October 31, 2019, 2018, and 2017 was $5.1 million, $4.5 million, and $4.4 million, respectively.

QUARTERLY FINANCIAL

INFORMATION (Unaudited)

The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of October 31, 2020 (in thousands):

2026 and thereafter

Imputed interest

Present value of operating lease liabilities

As of October 31, 2020, the weighted-average remaining term of our lease portfolio was approximately 4.4 years and the weighted-average discount rate was approximately 1.5 %.

QUARTERLY FINANCIAL INFORMATION (Unaudited)

2020 (In thousands, except per share data)

2 unchanged sentences

Selling, general and administrative expenses

Operating income

Provision for income taxes

Income per common share –

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS –

2018 (In thousands,

except per share data)

Goodwill impairment

Operating income (loss)

Provision (benefit) for income taxes

Net income (loss)

Income (loss) per common share – basic

Income (loss) per common share – diluted

2019 (In thousands, except per share data)

Sales and service fees

2 unchanged sentences

Operating income

Provision for income taxes

Income per common share –

Provision (benefit) for income taxes

Income per common share – basic

Income per common share – diluted

SEGMENT INFORMATION

We operate in a single segment:

industrial automation equipment.

We design, manufacture and sell computerized (i.e., Computer Numeric Control) machine tools,

consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting

industry through a worldwide sales, service and distribution network.

Although the majority of our computer

control systems and software products are proprietary, they predominantly use industry standard personal computer components.

Our computer control systems and software products are primarily sold as integral components of our computerized machine tool

We also provide machine tool components, automation equipment and solutions for job shops, software

options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and

applications support.

principally sell our products through more than 190 independent agents and distributors throughout the Americas, Europe and Asia.

We design, manufacture, and sell computerized (i.e., Computer Numeric Control) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network.

Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components.

Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.

We principally sell our products through more than 200 independent agents and distributors throughout the Americas, Europe and Asia.

Our line is the primary line for the majority of our distributors globally even though some may carry competitive products.

also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, Taiwan, the

United Kingdom, and certain areas of the United States, which are among the world's principal machine tool consuming countries.

During fiscal 2020, no distributor accounted for more than 5% of our sales and service fees .

In fiscal 2019, approximately 64%

of our revenues were from customers located outside of the U.S.

customers located in Canada, Mexico and Central and South America, and no single end-user

of our products accounted for more than 5% of our total sales and service fees.

The following table sets

forth the contribution of each of our product groups and services to our total sales and service fees during each of the past three

fiscal years (in thousands):

In fiscal 2020, approximately 61 % of our revenues were from customers located outside of the Americas, and no single end-user of our products accounted for more than 5% of our total sales and service fees.

The following table sets forth the contribution of each of our product groups and services to our total sales and service fees during each of the past three fiscal years (in thousands):

Net Sales and Service Fees by Product Category

1 unchanged sentence

Computerized Machine Tools

Computer Control Systems and Software &dagger;

Computer Control Systems and Software †

Service Parts

† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS –

The following table sets forth revenues by geographic area,

based on customer location, for each of the past three fiscal years (in thousands):

Revenues by Geographic Area

The following table sets forth revenues by geographic area, based on customer location, for each of the past three fiscal years (in thousands):

Year Ended October 31,

6 unchanged sentences

Other Foreign

Long-lived tangible assets, net by geographic area, were (in

Long–lived tangible assets, net by geographic area, were (in thousands):

As of October 31,

1 unchanged sentence

Foreign countries

Net assets by geographic

area were (in thousands):

Net assets by geographic area were (in thousands):

As of October 31,

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS –

NEW ACCOUNTING

PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements:

May 2014 and December 2016, FASB issued Accounting Standards Update (“ASU”) No.

2014–09, Revenue from Contracts

with Customers (Topic 606) , and various related updates, establishing a single comprehensive model for entities to use in accounting

for revenue arising from contracts with customers.

This standard provides a five–step analysis in determining when and how

revenue is recognized.

The new model requires revenue recognition to depict the transfer of promised goods or services to customers

in an amount that reflects the consideration a company expects to receive in exchange for those goods or services and supersedes

most of the prior revenue recognition guidance, including industry specific guidance.

We had the option of applying this new standard

retrospectively to each prior period presented (“full retrospective approach”) or retrospectively with the cumulative

effect recognized in retained earnings as of the date of adoption (“modified retrospective approach”).

Topic 606 was

effective for us beginning November 1, 2018 and we adopted it on that date using the modified retrospective approach.

to the adoption of ASC 606, our revenues were already recognized in the same manner as that required by ASC 606.

Therefore, the

adoption of ASC 606 did not have an effect on our beginning retained earnings or our overall financial statements as of and for

the twelve months ended October 31, 2019.

2017, FASB issued ASU No.

2017-04, Intangibles–Goodwill and Other (Topic 350):

Simplifying the Test of Goodwill Impairment ,

which eliminates Step 2 from the goodwill impairment test (i.e., the requirement for an entity to calculate the implied fair value

of goodwill in measuring a goodwill impairment loss).

ASU 2017-04 provides that a company should perform its goodwill impairment

test by comparing the fair value of a reporting unit with its carrying value and should recognize an impairment charge if the carrying

value exceeds the fair value of the reporting unit, but only to the extent of the goodwill amount allocated to that reporting unit.

Companies still have the option to perform a qualitative assessment to determine if the quantitative impairment test is necessary.

ASU 2017-04 is effective for our fiscal year 2021, including interim periods within the fiscal year.

Early adoption is permitted

for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017.

We early adopted this

standard in the fourth quarter of fiscal 2019.

This standard did not have a significant effect on our accounting policies or on

our consolidated financial statements and related disclosures.

Between February 2016 and February 2019,

FASB issued ASU No.

2016-02, Leases (Topic 842) , and various related updates, which establish a comprehensive new lease

accounting model.

Topic 842 clarifies the definition of a lease, requires a dual approach to lease classification similar to current

lease classifications, and requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding

right-of-use asset for leases with a lease-term of more than twelve months.

Under Topic 842, the income statement will reflect

lease expense for operating leases and amortization/interest expense for financing leases.

Topic 842 is effective for our fiscal year

2020, including interim periods within the fiscal year, and requires modified retrospective application.

We adopted Topic 842 on

November 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information

will not be adjusted for the effects of adopting Topic 842.

No cumulative-effect adjustment was required to the opening balance

of retained earnings on the adoption date.

We have substantially completed an assessment of the new standard’s impact and

determined the new standards will not have a material impact on our Condensed Consolidated Statements of Income or Cash Flows;

however, the estimated impact of adopting Topic 842 will result in the recognition of a right-of-use (“ROU”) asset

and lease liability on the Condensed Consolidated Balance Sheets subsequent to October 31, 2019 in the range of approximately $12-14

million, based on the lease portfolio existing as of this date.

While the ROU asset will be classified as a noncurrent asset, approximately

one-third of the lease liability amount is expected to be classified as a current liability, with the remainder being classified

as noncurrent.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS –

We are also in the process of updating

our systems, policies, and internal controls over financial reporting related to the adoption of this standard.

Upon adoption of Topic 842, we utilized

the following elections and practical expedients:

We have elected to combine non-lease components

with lease components.

If at the lease commencement date, a lease

has a lease term of 12 months or less and does not include a purchase option that is reasonably certain to be exercised, we have

elected not to apply Topic 842 recognition requirements.

Nonetheless, we intend to include leases of less than 12 months within

the updated footnote disclosures, if material.

We have elected

not to use the portfolio method if we enter into a large number of leases in the same month with the same terms and conditions.

As we have applied the new transition

method allowed per ASU 2018-11, we have elected to not reassess arrangements entered into prior to November 1, 2019 for whether

an arrangement is or contains a lease, the lease classification applied or to separate initial direct costs.

We have elected not to use hindsight in

determining the lease term for lease contracts that have historically been renewed or amended.

We have no significant lease agreements

in place for which we are a lessor, and substantially all of our leases for which we are a lessee are classified as operating leases

under the guidance in Topic 840 as of October 31, 2019.

As such, due to the practical expedient election to not reassess lease

classification, substantially all our leases will continue to be classified as operating leases under Topic 842.

When available,

we will utilize the rate implicit in the lease as the discount rate to determine the lease liability in accordance with Topic 842.

However, if this rate is not available, we will use our incremental borrowing rate as the discount rate, which is the rate, at

inception of the lease, we would incur to borrow over a similar term the funds needed to purchase the leased asset.

Our lease portfolio includes leased production

and assembly facilities, warehouses and distribution centers, office space, vehicles, material handling equipment utilized in our

production and assembly facilities, laptops and other information technology equipment, as well as other miscellaneous leased equipment.

Most of the leased production and assembly facilities have lease terms ranging from two to five years, although the terms and conditions

of our leases can vary significantly from lease to lease.

We have assessed the specific terms and conditions of each lease to determine

the amount of the lease payments and the length of the lease term, which includes the minimum period over which lease payments

are required plus any renewal options that are both within our control to exercise and reasonably certain of being exercised upon

lease commencement.

In determining whether or not a renewal option is reasonably certain of being exercised, we assessed all relevant

factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably certain.

no material residual value guarantees provided by us, nor any restrictions or covenants imposed by the leases to which we are a

In determining the lease liability, we utilize our incremental borrowing rate to discount the future lease payments over

the lease term to present value.

As of October 31, 2019, the weighted-average remaining term of our lease portfolio was approximately

NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements:

Between February 2016 and February 2019, FASB issued ASC 842, and various related updates, which establish a comprehensive new lease accounting model.

ASC 842 clarifies the definition of a lease, requires a dual approach to lease classification similar to previous lease classifications, and requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months.

Under ASC 842, the income statement reflects lease expense for operating leases and amortization/interest expense for financing leases.

ASC 842 was effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application.

We adopted ASC 842 on November 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date.

See Note 13 of these Notes to the Consolidated Financial Statements for further information.

In August 2017, FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities , which simplifies the application of hedge accounting and enables companies to better portray the economics of their risk management activities in their financial statements .

ASU 2017-12 was effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application.

We adopted this standard on November 1, 2019.

This standard did not have a significant effect on our accounting policies or on our consolidated financial statements and related disclosures.

In February 2018, FASB issued ASU No.

2018-02, Income Statement –

Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects

from Accumulated Other Comprehensive Income , which will allow a reclassification from accumulated other comprehensive income

to retained earnings for the tax effects resulting from the Tax Reform Act that are stranded in accumulated other comprehensive

2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects resulting from the Tax Reform Act that are stranded in accumulated other comprehensive income.

This standard also requires certain disclosures about stranded tax effects.

This ASU, however, does not change the underlying

guidance that requires the effect of a change in tax laws or rates be included in income from continuing operations.

will be effective for our fiscal year 2020, with the option to early adopt at any time prior to the effective date.

applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S.

corporate income tax rate in the Tax Reform Act is recognized.

We are currently assessing the impact this new accounting guidance

will have on our consolidated financial statements and disclosures.

HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS –

In August 2017, FASB issued ASU 2017-12,

Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities , which simplifies the application

of hedge accounting and enables companies to better portray the economics of their risk management activities in their financial

ASU 2017-12 is effective for our fiscal year 2020, including interim periods within the fiscal year, and requires

modified retrospective application.

Early adoption is permitted.

We do not anticipate that the adoption of this new accounting

guidance will have a material impact on our consolidated financial statements and disclosures.

been no other significant changes in the Company’s critical accounting policies and estimates during the fiscal year ended

October 31, 2019.

This ASU, however, does not change the underlying guidance that requires the effect of a change in tax laws or rates be included in income from continuing operations.

ASU 2018-02 became effective for our fiscal year 2020 and we adopted this standard on November 1, 2019.

This standard did not have a significant effect on our accounting policies or on our consolidated financial statements and related disclosures.

New Accounting Pronouncements:

In June 2016, FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

This standard modifies the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables.

This may result in the earlier recognition of allowances for losses.

This standard is effective for our fiscal year 2021.

We do not anticipate that the adoption of this ASU will have a material impact on our consolidated financial statements and related disclosures.

In December 2019, FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, which allows for companies to remove certain exceptions and clarifies certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations.

This standard is effective for our

fiscal year 2022, with early adoption permitted.

We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures.

In March 2020, FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

This standard provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR.

This standard is effective for all entities as of March 12, 2020 through December 31, 2022.

We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures.

There have been no other significant changes in the Company’s critical accounting policies and estimates during the fiscal year ended October 31, 2020.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data