)

Loan and Credit Agreements

The Company maintains a revolving line of credit and term loans with Bank Midwest as well as a term loan with The First National Bank of West Union.

Bank Midwest Revolving Line o

f Credit,

Term Loans

and

Covenants

September 28, 2017,

the Company entered into a credit facility with Bank Midwest, which supersedes and replaces in its entirety the Company

’s previous credit facility with U.S. Bank. The 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 new line of credit and the term loans were used to refinance all debt previously held by U.S. Bank in the amount of approximately

$6,562,030,

which consisted of

$6,528,223

in unpaid principal and approximately

$33,807

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

February 28, 2018,

the balance of the line of credit was

$1,960,530

with

$3,039,470

remaining available, limited by the borrowing base calculation. The line of credit borrowing base is an amount equal to

75%

of accounts receivable balances (discounted for aged receivables), plus

50%

of inventory, less any outstanding loan balance on the line of credit. 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 to 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 was renewed on

March 30, 2018.

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

March 30, 2019.

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. Monthly payments of

$17,271

for principal and interest are required. This loan

is also guaranteed by the United States Department of Agriculture (“USDA”), which requires an upfront guarantee fee of

$62,400

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. is guaranteeing approximately

38%

of this loan, for an annual fee of

of the personally guaranteed amount. The initial guarantee fee will be amortized over the life of the loan, and the annual fees and personally guaranteed amounts are expensed monthly. The

$600,000

term loan accrues interest at a rate of

5.000%,

and monthly payments of

$3,249

for 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 line of credit, the Company has granted Bank Midwest a

second

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.

Compliance with Bank Midwest convenants is measured annually at

November 30.

The terms of the

Bank Midwest 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. Additionally, a maximum debt to worth ratio of

must be maintained, 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 a

0.10

tolerance. The Company was in compliance with all covenants as of

November 30, 2017

other than the debt service coverage ratio. Bank Midwest issued a waiver forgiving the noncompliance, and

event of default has occurred and the next measurement date is

November 30, 2018.

The Company is also required to provide audited financial statements within

120

days of its fiscal year end.

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

1st

), 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 except for the debt service coverage ratio covenant as measured on

November 30, 2017.

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

November 30, 2018.

A summary of the Company

’s term debt is as follows:

	February 28, 2018		November 30, 2017
Bank Midwest loan payable in monthly installments of $17,271 including interest at 5.00%, due October 1, 2037	$	2,576,273	$	2,595,007

Bank Midwest loan payable in monthly installments of $3,249 including interest at 5.00%, due October 1, 2019		597,323		599,584

Iowa Finance Authority loan payable in monthly installments of $12,500 including interest at 2.75%, due June 1, 2020		339,808		374,900
Total term debt	$	3,513,404	$	3,569,491
Less current portion of term debt		222,475		221,230
Term debt of discontinued operations		597,323		599,584
Term debt, excluding current portion	$	2,693,606	$	2,748,677