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Loan and Credit Agreements

The Company

previously maintained a revolving line of credit and term loans with U.S. Bank. Pursuant to a Forbearance and Fourth Loan Modification Agreement dated

August 10, 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. The description that follows reflects such arrangements as amended by the Loan Modification.

U.S. Bank

Revolving Line

of Credit

The Company

had a revolving line of credit (the “Line of Credit”) with U.S. Bank, which had an availability of

$4,500,000,

that was obtained on

May 1, 2013

.As of

August 31, 2017,

the Company had a principal balance of

$3,734,114

outstanding against the Line of Credit, with

$765,886

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

September 25, 2017.

The Line of Credit was secured by real property and fixed asset collateral. The Line of Credit stated 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 could

not

exceed

$3,375,000

and only included 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 deemed necessary to maintain. Monthly interest-only payments were required and the unpaid principal and accrued interest were due on the maturity date. The Company’s obligations under the Line of Credit were 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

was subject to: (i) a minimum interest rate of

5.5%

per annum; and (ii) an unused fee which accrued 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 exceeded the outstanding principal amount. As of

August 31, 2017,

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

5.5%.

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 Fourth Loan Modification the maturity date was

September 25, 2017,

and the interest rate was an annual rate equal to

2.0%

plus the prime rate, but

not

less than

5%.

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

$238,945

as of

August 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 the Company’s Ames, Iowa facility. The U.S. Bank UHC Loan was 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

$1,738,533

August 31, 2017.

Following the Fourth Loan Modification, the

2013

Term Notes accrued interest at a rate of

2.0%

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 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

were 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 1, 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

$874,263

August 31, 2017

. Following the Fourth Loan Modification, the

2014

Term Note accrued interest at a rate of

2.0%

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

September 25, 2017.

This loan was 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 was 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 were governed by a Term Note and a Term Loan Agreement.

U.S. Bank Covenants

As amended by the Fourth Loan Modification the Company was required to maintain (i) fiscal

2017

third

quarter 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

$411,000.

The Company was

not

in compliance with this covenant as of

August 31, 2017.

The main reason for the non-compliance result as of

August 31, 2017

was the decreased gross margins from continuing operations.

September 28, 2017,

the Company repaid its U.S. Bank debt in full in connection with its new credit facility with Bank Midwest, as discussed below.

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:

	August 31, 2017		November 30, 2016
U.S. Bank loan payable in monthly installments of $9,600 plus interest at 5. 5%, due September 25, 2017	$	546,392	$	632,126

U.S. Bank loan payable in monthly installments of $10,965 plus interest at 5. 5%, due September 25, 2017		618,016		715,945

U.S. Bank loan payable in monthly installments of $26,107 plus interest at 5. 5%, due September 25, 2017		574,125		808,096

U.S. Bank loan payable in monthly installments of $10,960 plus interest at 5. 5%, due September 25, 2017		238,945		337,147

U.S. Bank loan payable in monthly installments of $4,301 plus interest at 5. 5%, due September 25, 2017		874,263		904,751

Iowa Finance Authority loan payable in monthly installments of $12,500 including interest at 2.75%, due June 1, 2020		409,745		512,935
Total term debt	$	3,261,486	$	3,911,000
Less current portion of term debt		2,374,665		1,807,937
Term debt of discontinued operations		618,016		715,945
Term debt, excluding current portion	$	268,805	$	1,387,118

Bank Midwest Revolving Line of Credit and Term Loans

September 28, 2017,

the Company entered into a credit facility with Bank Midwest, which supersedes and replaces in its entirety the U.S. Bank credit facility. The new Bank Midwest credit facility consists of a

$5,000,000

revolving line of credit, a

$2,600,000

term loan due

October 1, 2037,

and a

$600,000

term loan due

October 1, 2019.

The proceeds of the term loans were used to refinance all debt previously held by U.S. Bank in the amount of approximately

$6,562,030,

which consists of

$6,528,223

in unpaid principal and approximately

$33,807

in accrued and unpaid interest and fees. The revolving line of credit will be used for working capital purposes.

The maturity date of the revolving line of credit is

March 1, 2018.

Any unpaid principal amount borrowed on the revolving line of credit accrues interest at a floating rate per annum equal to

1.000%

above the Wall Street Journal rate published from time t

o time in the money rates section of the Wall Street Journal. The interest rate floor is set at

4.250%

per annum and the current interest rate is

5.250%

per annum. The revolving line of credit is payable upon demand by Bank Midwest, and monthly interest-only payments are required. If

earlier demand is made, the unpaid principal and accrued interest is due on the maturity date. The

$2,600,000

term loan accrues interest at a rate of

5.000%

for the

first

sixty

months. Thereafter, this loan will accrue interest at a floating rate per annum equal to

0.750%

above the Wall Street Journal rate published from time to time in the money rates section of the Wall Street Journal. The interest rate floor is set at

4.150%

per annum and the interest rate

may

only be adjusted by Bank Midwest once every

five

years. This loan is payable upon demand by Bank Midwest, and monthly payments of principal and interest are required. This loan will also be guaranteed by the United States Department of Agriculture (USDA), which requires an upfront guarantee fee of

$62,500

and an annual fee of

0.5%

of the unpaid balance. As part of the USDA guarantee requirements, shareholders owning more than

20%

are required to personally guarantee a portion of the loan as well, in an amount equal to their stock ownership percentage. J. Ward McConnell Jr. will be guaranteeing approximately

38%

of this loan, for a fee of

of the personally guaranteed amount. The

$600,000

term loan accrues interest at a rate of

5.000%,

and is payable upon demand by Bank Midwest. Monthly payments of principal and interest are required.

Each of the revolving line of credit and the term loans are governed by the terms of

a separate Promissory Note, dated

September 28, 2017,

entered into between the Company and Bank Midwest.

In connection with the

revolving line of credit, the Company, Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. each entered into a Commercial Security Agreement with Bank Midwest, dated

September 28, 2017,

pursuant to which each granted to Bank Midwest a

first

priority security interest in certain inventory, equipment, accounts, chattel paper, instruments, letters of credit and other assets to secure the obligations of the Company under the revolving line of credit. Each of Art’s-Way Scientific Inc. and Ohio Metal Working Products/Art’s-Way Inc. also agreed to guarantee the obligations of the Company pursuant to the revolving line of credit, as set forth in Commercial Guaranties, each dated

September 28, 2017.

To further secure the l

ine of credit, the Company has granted Bank Midwest a mortgage on its West Union, Iowa property and Ohio Metal Working Products/Art’s-Way Inc. has granted Bank Midwest a mortgage on its property located in Canton, Ohio. The

$2,600,000

term loan is secured by a mortgage on the Company’s Armstrong, Iowa and Monona, Iowa properties, and the

$600,000

term loan is secured by a mortgage on the Company’s Dubuque, Iowa property. Each mortgage is governed by the terms of a separate Mortgage, dated

September 28, 2017,

and each property is also subject to a separate Assignment of Rents, dated

September 28, 2017.

If the Company or its subsidiaries (as guarantors pursuant to the Commercial Guaranties) commits an event of default with respect to the

promissory notes and fails or is unable to cure that default, Bank Midwest

may

immediately terminate its obligation, if any, to make additional loans to the Company and

may

accelerate the Company’s obligations under the promissory notes. Bank Midwest 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. In addition, in an event of default, Bank Midwest

may

foreclose on the mortgaged property.

Bank Midwest Loan Covenants

The terms of these loan agreements require the Company to maintain a minimum working capital ratio of

1.75,

while maintaining a minimum of

$5,100,000

of working capital.

A maximum debt to worth ratio of

will be maintained as well, with a minimum of

40%

tangible balance sheet equity, with variations subject to mutual agreement. The Company is also required to maintain a minimum debt service coverage ratio of

1.25,

with at

0.10

tolerance. The Company will provide audited financial statements within

120

days of the fiscal year end.