)

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 Third Loan Modification Agreement dated

March 30, 2017 (

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 effective as of

May 1, 2017

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

April 1, 2017

with respect to all other loan modification terms. The description that follows reflects such arrangements as amended by the Loan Modification.

U.S. Bank Revolving Line of Credit

The Company has a

$4,500,000

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

May 1, 2013,

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

May 31, 2017,

the Company had a principal balance of

$3,734,114

outstanding against the Line of Credit, with

$657,766

remaining available, limited by the borrowing base calculation. The maturity date of the Line of Credit is

September 25, 2017.

The Line of Credit 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

$3,375,000

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 1, 2013,

a Revolving Credit Agreement dated

May 1, 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

May 31, 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 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

$271,825

as of

May 31, 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 1, 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 1, 2013.

May 1, 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 1, 2013.

The principal balance of these loans totaled

$1,878,549

May 31, 2017,

and they accrue interest at a rate of

1.5%

plus the prime rate, with a minimum of

per annum (the

“2013

Term Notes”)

. The interest rate will be adjusted each time that the prime rate changes. There was previously also a

fourth

term loan obtained from U.S. Bank on

May 1, 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, monthly principal and interest payments in the aggregate amount of

$46,672

are required on the remaining

2013

Term Notes, with a maturity date of

September 25, 2017.

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

$887,164

May 31, 2017

and accrues interest at a rate of

1.5%

plus the prime rate, with a minimum of

per annum. The interest rate will be adjusted each time that the prime rate changes. 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

September 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

As of

May 31, 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 Line of Credit, the

2013

Term Notes and the

2014

Term Note require the Company to maintain (i) 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

as of

May 31, 2017,

and of

$648,000

as of

August 31, 2017,

and (ii) minimum liquidity as of the end of each month 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). 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. With respect to the Line of Credit, upon U.S. Bank’s request, the Company shall engage a reputable turnaround consulting firm of national or regional standing acceptable to U.S. Bank.

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 1, 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

may

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

May 31, 2017,

other than the fiscal year-to-date EBIDTA requirement of

. The main reason for the non-compliance result as of

May 31, 2017

was the net loss from continuing operations. While we are in technical default under the Line of Credit, the

2013

Term Notes and the

2014

Term Note,

notice has been received from U.S. Bank with respect to acceleration of obligations thereunder. We are currently in negotiation with U.S. Bank regarding a forbearance or similar arrangement. The next measurement date is

August 31, 2017.

Iowa Finance Authority Term Loan and Covenants

May 1, 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 1, 2020.

February 1, 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 1, 2013

and a Loan Agreement dated

May 1, 2010

and a First Amendment to Loan Agreement dated

February 1, 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 30

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 1, 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:

	May 31, 2017		November 30, 2016

U.S. Bank loan payable in monthly installments of $9,600 plus interest at 5.0%, due September 25, 2017	$	575,192	$	632,126

U.S. Bank loan payable in monthly installments of $10,965 plus interest at 5.0%, due September 25, 2017		650,911		715,945

U.S. Bank loan payable in monthly installments of $26,107 plus interest at 5.0%, due September 25, 2017		652,446		808,096

U.S. Bank loan payable in monthly installments of $10,960 plus interest at 5.0%, due September 25, 2017		271,825		337,147

U.S. Bank loan payable in monthly installments of $4,301 plus interest at 5.0%, due September 25, 2017		887,164		904,751

Iowa Finance Authority loan payable in monthly installments of $12,500 including interest at 2.75%, due June 1, 2020		444,347		512,935
Total term debt	$	3,481,885	$	3,911,000
Less current portion of term debt		2,526,581		1,807,937
Term debt of discontinued operations		650,911		715,945
Term debt, excluding current portion	$	304,393	$	1,387,118