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 (n/k/a Bank

). 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. Following the close of the

first

quarter, U.S. Bank, as lender, the Company, as borrower, and Art’s-Way Scientific, Inc. and Ohio Metal Working Products/Art’s-Way, Inc., as guarantors, entered into a Third Loan Modification Agreement dated

March

30,

2017

and effective as of

May

2017

with respect to certain modifications to the U.S. Bank UHC Loan (as defined below) and effective as of

April

2017

with respect to all other loan modification terms (the “Third Loan Modification”) governing the U.S. Bank lines of credit and certain term loans. For more information regarding the Third Loan Modification, see Part II, Item

of this Report.

U.S. Bank Revolving Line of Credit

The Company has a revolving line of credit (the “Line of Credit”) with U.S. Bank, which, following the Third Loan Modification, has an availability of

$4,500,000

, that was obtained on

May

2013,

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

February

28,

2017,

the Company had a principal balance of

$3,034,114

outstanding against the Line of Credit, with

$1,699,433

remaining available, limited by the borrowing base calculation. The maturity date of the Line of Credit was scheduled to be

May

2017.

Following the Third Loan Modification, the Line of Credit matures on

September

25,

2017.

The Line of Credit is secured by real property and fixed asset collateral. The Line of Credit, as amended by the Third Loan Modification, 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

$3,375,000

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, undrawn amounts of outstanding letters of credit issued by U.S. Bank or any affiliate

, and any reserves that U.S. Bank

may

deem necessary to maintain. 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 evidenced by a Revolving Credit Note effective

May

2013,

a Revolving Credit Agreement dated

May

2013,

as amended, 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

February

28,

2017,

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 which are now held by Art’s Way Manufacturing Co., Inc. in Armstrong, Iowa. The maturity date of this loan was scheduled to be

May

10,

2017,

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

$283,500

due

May

10,

2017.

This loan accrued interest at a fixed rate of

3.15%

per annum

. Following the Third Loan Modification the maturity date is

September

25,

2017,

and the interest rate is an annual rate equal to

1.5%

plus the prime rate, but not less than

5%.

The interest rate will be adjusted each time that the prime rate changes. The principal balance of this loan was

$304,655

as of

February

28,

2017.

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 the Company in Dubuque, Iowa, pursuant to a Mortgage, Security Agreement and Assignment of Rents between the Company (as successor by merger to 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

$2,018,184

February

28,

2017,

and they accrued interest at a fixed rate of

2.98%

per annum (the

“2013

Term Notes”). Following the Third Loan Modification, the

2013

Term Notes accrue interest at a rate of

1.5%

plus the prime rate, with a minimum of

per annum. 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 debt summary below, following the Third Loan Modification, monthly principal and interest payments in the aggregate amount of

$46,672

are required on the remaining

2013

Term Notes, with a revised maturity date of

September

25,

2017.

The

2013

Term Notes previously had a maturity date of

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

$894,497

February

28,

2017

and accrued interest at a fixed rate of

2.98%.

Following the Third Loan Modification, the

2014

Term Note accrues interest at a rate of

1.5%

plus the prime rate, with a minimum of

per annum. 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 was

May

25,

2017,

but is now

September

25,

2017,

as amended by the Third Loan Modification. 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

As of

February

28,

2017,

the U.S. Bank UHC Loan was not subject to financial covenants. However, under the U.S. Bank UHC Loan, the Company was required to provide to U.S. Bank information concerning its business affairs and financial condition as U.S. 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. The Third Loan Modification adds certain financial covenants to the U.S. Bank UHC Loan that are consistent with the financial covenants for the remainder of the US Bank loans. For more information regarding the Third Loan Modification, see Part II, Item

of this Report.

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 U.S. Bank’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. As amended by the Third Loan Modification the Company is required to maintain (i) fiscal year-to-date EBIDTA (with EBITDA meaning income, plus interest expense, plus income tax expense, plus depreciation expense, plus amortization expense, subject to adjustments in U.S. Bank’s sole discretion) of

as of

May

31,

2017

and

$648,000

as of

August

31,

2017,

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

April

30,

2017

of not less than

$500,000

(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). For more information regarding the Third Loan Modification, see Part II, Item

of this Report.

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 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

February

28,

2017,

other than the fiscal year-to-date fixed charge ratio of

1.0

1.0.

The main reason for the non-compliance result as of

February

28,

2017

was the net loss from continuing operations. As part of a Third Loan Modification Agreement, U.S. Bank has issued a waiver forgiving the non-compliance for the quarter and no event of default occurred. The next measurement date is

May

31,

2017.

For more information regarding the Third Loan Modification, see Part II, Item

of this Report.

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

), 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.

Debt Summary

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

	February 28, 2017		November 30, 2016
U.S. Bank loan payable in monthly installments of $9,600 plus interest at 5.00%, due September 25, 2017	$	603,867	$	632,126

U.S. Bank loan payable in monthly installments of $10,965 plus interest at 5.0%, due September 25, 2017		683,665		715,945

U.S. Bank loan payable in monthly installments of $26,107 plus interest at 5.0%, due September 25, 2017		730,652		808,096

U.S. Bank loan payable in monthly installments of $10,960 plus interest at 5.0%, due September 25, 2017		304,655		337,147

U.S. Bank loan payable in monthly installments of $4,301 plus interest at 5.0%, due September 25, 2017		894,947		904,751

Iowa Finance Authority loan payable in monthly installments of $12,500 including interest at 2.75%, due June 1, 2020		478,815		512,935
Total term debt	$	3,696,601	$	3,911,000
Less current portion of term debt		2,673,128		1,807,937
Term debt of discontinued operations		683,665		715,945
Term debt, excluding current portion	$	339,808	$	1,387,118

* Terms are updated according to the Third Loan Modification