(10)

Loan and Credit Agreements

The Company maintains a revolving line of credit and term loans with U.S. Bank as well as a term loan with The First National Bank of West Union. Pursuant to a Second Loan Modification Agreement dated

July

12,

2016

and effective

July

11,

2016

(the “Loan Modification”) entered into among U.S. Bank, as lender, the Company, as borrower, and Art’s-Way Scientific, Inc., Art’s-Way Vessels, Inc., and Ohio Metal Working Products/Art’s-Way, Inc., as guarantors, the agreements governing the U.S. Bank line of credit and certain term loans were amended, and a

$200,000

line of credit that the Company had opened to facilitate dealer floorplan financing but had not drawn on was terminated, along with the related agreements. The description that follows reflects such arrangements as amended by the Loan Modification.

U.S. Bank Revolving Line of Credit

The Company has a

$5,000,000

revolving line of credit (the “Line of Credit”) with U.S. Bank that was obtained on

May

2013,

which is renewable annually with advances funding the Company’s working capital needs. As of

November

30,

2016,

the Company had a principal balance of

$3,284,114

outstanding against the Line of Credit, with

$1,559,208

remaining available, limited by the borrowing base calculation. The Line of Credit matures on

May

2017

and is secured by real property and fixed asset collateral. The Line of Credit states that the borrowing base will be an amount equal to the sum of

75%

of accounts receivable (discounted for aged accounts and customer balances exceeding

20%

of aggregate receivables), plus

50%

of inventory (this component cannot exceed

$3,750,000

and only includes finished goods and raw materials deemed to be in good condition and not obsolete), less any outstanding loan balance of the Line of Credit and the

2015

Line of Credit (defined below), and less undrawn amounts of outstanding letters of credit issued by U.S. Bank or any affiliate. Monthly interest-only payments are required and the unpaid principal and accrued interest is due on the maturity date. The Company’s obligations under the Line of Credit are evidence by a Revolving Credit Note effective

May

2013,

a Revolving Credit Agreement dated

May

2013,

as amended with the Loan Modification Agreement dated

July

12,

2016,

and certain other ancillary documents.

The Line of Credit is subject to: (i) a minimum interest rate of

5.0%

per annum; and (ii) an unused fee which accrues at the rate of

0.25%

per annum on the average daily amount by which the amount available for borrowing under the Line of Credit exceeds the outstanding principal amount. As of

November

30,

2016,

the interest rate on the Line of Credit was the minimum of

5.0%.

U.S. Bank Term Loans

May

10,

2012,

the Company obtained

$880,000

in long-term debt from U.S. Bank issued to acquire the building and property of Universal Harvester Co., Inc. located in Ames, Iowa (the “U.S. Bank UHC Loan”), the assets and operations of are now held by Art’s Way Manufacturing Co., Inc in Armstrong, Iowa. The maturity date of this loan is

May

10,

2017,

with a final payment of principal and accrued interest in the amount of

$283,500

due

May

10,

2017.

The principal balance of this loan was

$337,147

as of

November

30,

2016

and it accrues interest at a fixed rate of

3.15%

per annum. This loan was secured by a mortgage on the building and property acquired from Universal Harvester Co., Inc. in Ames, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated

May

10,

2012,

which was released upon the sale of our Ames, Iowa facility. The U.S. Bank UHC Loan is also secured by a mortgage on the building and property in Monona, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated

May

2013

and a mortgage on the building and property owned by Art’s-Way Vessels, Inc. in Dubuque, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between Art’s-Way Vessels, Inc. and U.S. Bank, dated

May

2013.

May

2013,

the U.S. Bank UHC Loan and the mortgage were amended to extend the mortgage to secure the

2013

Term Notes (defined below) in addition to the U.S. Bank UHC Loan.

Three of the Company’s outstanding term loans were obtained from U.S. Bank on

May

2013.

The principal balance of these loans totaled

$2,156,168

November

30,

2016,

and they accrue interest at a fixed rate of

2.98%

per annum (the

“2013

Term Notes”). There was previously also a

fourth

term loan obtained from U.S. Bank on

May

2013,

but the Company voluntarily paid off and terminated the note and the related Term Loan Agreement on

February

10,

2016.

The payoff amount of

$1,078,196

included principal and accrued and unpaid interest. As detailed in the Company’s long-term debt summary below, monthly principal and interest payments in the aggregate amount of

$51,350

are required on the remaining

2013

Term Notes, with final payments of principal and accrued interest on the

three

remaining loans in the aggregate amount of

$1,363,000

due on

May

2018.

The Company obtained a term loan from U.S. Bank on

May

29,

2014

in the original principal amount of

$1,000,000

(the

“2014

Term Note”). The

2014

Term Note had a principal balance of

$904,751

November

30,

2016

and accrues interest at a fixed rate of

2.98%.

The Company took on the

2014

Term Note in order to partially pay down a draw on its revolving line of credit that it had used to finance the purchase of the building and property of Ohio Metal Working Products Company in Canton, Ohio. The maturity date of the

2014

Term Note is

May

25,

2017,

with a final payment of principal and accrued interest in the amount of

$890,000

due

May

25,

2017.

This loan is secured by a mortgage on the building and property acquired from Ohio Metal Working Products Company in Canton, Ohio pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company and U.S. Bank, dated

May

29,

2014,

and is also subject to a Business Security Agreement between Ohio Metal Working Products/Art’s Way, Inc. (“Ohio Metal”) and U.S. Bank and a Continuing Guaranty (Unlimited) by Ohio Metal. Each of the Company’s term loans from U.S. Bank is governed by a Term Note and a Term Loan Agreement.

U.S. Bank Covenants

The U.S. Bank UHC Loan is not subject to financial covenants. However, under the U.S. Bank UHC Loan, the Company must provide to U.S. Bank information concerning its business affairs and financial condition as the bank

may

reasonably request, as well as annual financial statements prepared by an accounting firm acceptable to U.S. Bank within

120

days of the end of the year without request.

As amended by the Loan Modification, the Line of Credit, the

2013

Term Notes and the

2014

Term Note require the Company to maintain (i) a fixed charge coverage ratio of at least

1.15

1.0

as of the end of each fiscal quarter (except for the fiscal quarters ended

August

31,

2016,

November

30,

2016

and

February

28,

2017),

(ii) a fiscal year-to-date fixed charge coverage ratio as of

February

28,

2017

of at least

1.0

1.0,

(iii) a fiscal year-to-date EBITDA (with EBITDA meaning income, plus interest expense, plus income tax expense, plus depreciation expense, plus amortization expense, subject to adjustments in USB’s sole discretion) of

$360,000

as of

August

31,

2016,

$390,000

as of

September

30,

2016,

$395,000

as of

October

31,

2016,

and of

$400,000

as of

November

30,

2016,

and (iv) minimum liquidity as of the end of each month commencing

August

31,

2016

of not less than

$750,000

(with minimum liquidity meaning unrestricted cash and cash equivalents plus borrowing base availability under the Line of Credit, the

2013

Term Notes and the

2014

Term Note). The Company must also provide to U.S. Bank a

-week cash flow forecast on Tuesday of each week, a detailed backlog report by segment as of the last day of each calendar month, monthly internally prepared financial reports, year-end audited financial statements, and a monthly aging of accounts receivable, and must deliver along with any financial statements delivered to U.S. Bank a certificate of compliance executed by the Company’s chief financial officer certifying the Company’s compliance with the financial covenants.

The

2013

Term Notes,

2014

Term Note, and Line of Credit are secured by a

first

position security interest on the assets of the Company and its subsidiaries, including but not limited to, inventories, machinery, equipment and real estate, in accordance with Business Security Agreements entered into by the Company and its subsidiaries, Pledge Agreements entered into by the subsidiaries and Collateral Assignment of Dealer’s Notes and Security Agreements entered into by the Company. Additionally, the Company has mortgaged certain real property noted above and in favor of U.S. Bank as documented by mortgage agreements dated

May

2013

and

May

29,

2014

(together, the “Mortgages”).

If the Company or its subsidiaries (as guarantors pursuant to continuing guaranties) commits an event of default with respect to the U.S. Bank UHC Loan,

2013

Term Notes,

2014

Term Note, or Line of Credit and fails or is unable to cure that default, the interest rate on each of the loans and Line of Credit could increase by

5.0%

per annum, U.S. Bank can immediately terminate its obligation, if any, to make additional loans to the Company, and U.S. Bank

may

accelerate the Company’s obligations under the applicable loan or line of credit. U.S. Bank shall also have all other rights and remedies for default provided by the Uniform Commercial Code, as well as any other applicable law and the various loan agreements, including, without limitation, the right to repossess, render unusable and/or dispose of the collateral without judicial process. In addition, in an event of default, U.S. Bank

may

foreclose on mortgaged property pursuant to the terms of the Mortgages.

The Company was in compliance with all covenants under the Line of Credit, the

2013

Term Notes, and the

2014

Term Note as measured on

November

30,

2016.

Iowa Finance Authority Term Loan and Covenants

May

2010,

the Company obtained a loan to finance the purchase of an additional facility located in West Union, Iowa to be used as a distribution center, warehouse facility, and manufacturing plant for certain products under the Art’s-Way brand. The funds for this loan were made available by the Iowa Finance Authority by the issuance of tax exempt bonds. This loan had an original principal amount of

$1,300,000,

an interest rate of

3.5%

per annum and a maturity date of

June

2020.

February

2013,

the interest rate was decreased to

2.75%

per annum. The other terms of the loan remain unchanged.

This loan from the Iowa Finance Authority, which has been assigned to The First National Bank of West Union (n/k/a Bank

1st),

is governed by a Manufacturing Facility Revenue Note dated

May

28,

2010

as amended

February

2013

and a Loan Agreement dated

May

2010

and a First Amendment to Loan Agreement dated

February

2013

(collectively, “the IFA Loan Agreement”), which requires the Company to provide quarterly internally prepared financial reports and year-end audited financial statements and to maintain a minimum debt service coverage ratio of

1.5

1.0,

which is measured at

November

of each year. Among other covenants, the IFA Loan Agreement also requires the Company to maintain proper insurance on, and maintain in good repair, the West Union Facility, and continue to conduct business and remain duly qualified to do business in the State of Iowa. The loan is secured by a mortgage on the Company’s West Union Facility, pursuant to a Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated

May

2010

between the Company and The First National Bank of West Union (the “West Union Mortgage”).

If the Company commits an event of default under the IFA Loan Agreement or the West Union Mortgage and does not cure the event of default within the time specified by the IFA Loan Agreement, the lender

may

cause the entire amount of the loan to be immediately due and payable and take any other action that it is lawfully permitted to take or in equity to enforce the Company’s performance.

The Company was in compliance with all covenants under the IFA Loan Agreement except the debt service coverage ratio as measured on

November

30,

2016.

The First National Bank of West Union has issued a waiver, and the next measurement date is

November

30,

2017.

A summary of the Company’s term debt is as follows:

	November 30, 2016		November 30, 2015
U.S. Bank loan payable in monthly installments of $42,500 including interest at 2.98%, paid February 10, 2016	$	-	$	1,196,088
U.S. Bank loan payable in monthly installments of $11,000 including interest at 2.98%, due May 1, 2018		632,126		743,149
U.S. Bank loan payable in monthly installments of $12,550 including interest at 2.98%, due May 1, 2018		715,946		842,769
U.S. Bank loan payable in monthly installments of $27,800 including interest at 2.98%, due May 1, 2018		808,096		1,112,205
U.S. Bank loan payable in monthly installments of $11,700 including interest at 3.15%, due May 10, 2017		337,147		464,605
U.S. Bank loan payable in monthly installments of $5,556 including interest at 2.98%, due May 25, 2017		904,751		943,381
Iowa Finance Authority loan payable in monthly installments of $12,500 including interest at 2.75%, due June 1, 2020		512,935		647,132
Total term debt	$	3,911,001	$	5,949,329
Less current portion of term debt		1,807,937		1,195,839
Term debt of discontinued operations		715,946		842,768
Term debt, excluding current portion	$	1,387,118	$	3,910,722

A summary of the minimum maturities of term debt follows for the years ending

November

30:

Year:	Amount
2017	$	1,938,714
2018		1,727,351
2019		145,597
2020		99,339
2021 and thereafter		-
	$	3,911,001