THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE
BE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID
ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO AIR INDUSTRIES GROUP,
INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

Principal Amount: $1,000,000 Issue Date: August 4, 2016

 

Subordinated Promissory Note due December 31, 2016

 

FOR VALUE RECEIVED, AIR INDUSTRIES GROUP, a Nevada corporation (the “Company”)
hereby promises to pay to the order of MICHAEL N. TAGLICH or his assigns (the
"Holder"), without demand, the sum of ONE MILLION Dollars ($1,000,000), together
with accrued interest thereon from the date hereof at the rate of seven percent
(7%) per annum, on the earlier of (i) December 31, 2016 (the "Maturity Date") or
(ii) such date following the date hereof on which the Company shall consummate a
debt or equity financing in one or a series of related transactions in an
aggregate amount of $2,000,000 or more, if not paid sooner.

 

This Note may be prepaid in whole or in part at any time. All payments made
pursuant to this Note shall be applied first to reimbursable expenses, interest
accrued, if any, and then principal.

 

The following is a statement of rights of the Holder and the conditions to which
this Note is subject, and to which the Holder, by acceptance of this Note,
agrees:

 

1.     Subordination. (a)    This Note will be subordinate and inferior to the
Company’s Senior Indebtedness (as hereinafter defined). The Company for itself,
its successors and assigns, covenants and agrees and the Holder of this Note,
for himself, his successors and assigns, by his acceptance of this Note likewise
covenants and agrees that, to the extent provided below, the payment of all
amounts due pursuant to this Note is hereby expressly subordinated and junior in
right of payment to the extent and in the manner hereinafter set forth, to the
Company’s Senior Indebtedness. As used herein, the term “Senior Indebtedness”
shall mean the principal of, and interest and premium, if any, on any and all,
(i) indebtedness of the Company for borrowed money or obligations with respect
to which the Company is a guarantor, to banks, insurance companies, or other
financial institutions or entities regularly engaged in the business of lending
money, in each case as in effect as of the date hereof, or as may be borrowed
hereafter, including without limitation, indebtedness incurred by one or more of
the Company’s subsidiaries under the Amended and Restated Revolving Credit, Term
Loan, Equipment Line and Security Agreement, dated as of June 27, 2013 among Air
Industries Machining, Corp., Welding Metallurgy, Inc., Nassau Tool Works, Inc.,
Woodbine Products Inc., Eur-Pac Corporation, Electronic Connection Corporation,
AMK Welding, Inc., The Sterling Engineering Corporation, and PNC Bank, National
Association, as agent for the various lenders named therein, as amended as of
the date hereof, the payment of which has been guaranteed by the Company and Air
Realty Group, LLC (the “Guarantors”), (ii) any such indebtedness or any
debentures, notes or other evidence of indebtedness issued in exchange for or to
refinance such Senior Indebtedness, or any indebtedness arising from the
satisfaction of such Senior Indebtedness by a Guarantor, provided that such
indebtedness issued in exchange for or to refinance Senior Indebtedness or
arising from the satisfaction of Senior Indebtedness by a Guarantor is on
commercially reasonable terms as of the date of incurrence not to exceed the
principal amount under such Senior Indebtedness and provided further that the
Company provides the Holder with prior written notice of such action.

 

 

(b)    Upon the acceleration of any Senior Indebtedness or upon the maturity of
all or any portion of the principal amount of any Senior Indebtedness by lapse
of time, acceleration or otherwise, all such Senior Indebtedness which has been
so accelerated or matured shall first indefeasibly be paid in full before any
payment is made by the Company or any person acting on behalf of the Company on
account of any obligations evidenced by this Note.

 

(c)    The Company shall not pay any principal portion of this Note, or interest
accrued hereon, if at such time there exists a Blockage Event (as hereafter
defined) and written notice thereof has been given to the Company and the Holder
by the holders of the Senior Indebtedness.

 

(d)    A “Blockage Event” is deemed to exist for the period of time commencing
on the date of receipt by the Holder of written notice of the occurrence of a
Default or an Event of Default (as defined in the instruments evidencing the
Senior Indebtedness), provided that the failure to pay accrued interest on this
Note when due shall not give rise to a Blockage Event in the absence of another
Default or Event of Default, which notice shall specify such Default or Event of
Default, and ending on:

 

(i)    the date such Default or Event of Default under the Senior Indebtedness,
as applicable, is cured or waived, provided that such Default or Event of
Default is in the payment of any amount due thereunder; or

 

(ii)   in the case of any other Default or Event of Default under the Senior
Indebtedness, the earlier of (A) the date on which Holder has received written
notice of such Default or Event of Default shall have been cured or waived and
(B) the date that is 365 days after the occurrence of such Default or Event of
Default, provided that a Blockage Event with respect to a single specified
Default or Event of Default may be deemed to occur only once for each
twelve-month period, provided, further, that no Default or Event of Default that
existed at the commencement of, or during the pendency of, a Blockage Event
shall serve as the basis for the institution of any subsequent Blockage Event.

 

A Blockage Event shall not be deemed to have existed during the period of time
commencing on the date upon which the holder of this Note accelerates payment of
the principal amount of this Note or such other Notes as a result of any Event
of Default hereunder and ending on the 365th day after written notice of such
acceleration given by the holder or such other holders to the Company and the
holders of the instruments evidencing the Senior Indebtedness; provided that in
no event shall the Company pay the holder of this Note or the holders of any
other Notes the principal amount so accelerated if a Blockage Event then exists
until the Senior Indebtedness has been paid in full.

 

 

(e)    At any time there exists a Blockage Event, (i) the Company shall not,
directly or indirectly, make any payment of any part of this Note, (ii) the
Holder shall not demand or accept from the Company or any other person any such
payment or cancel, set-off or otherwise discharge any part of the indebtedness
represented by this Note, and (iii) neither the Company nor the Holder shall
otherwise take or permit any action prejudicial to or inconsistent with the
priority position of any holder of Senior Indebtedness over the Holder of this
Note.

 

(f)    No right of any holder of Senior Indebtedness to enforce the
subordination provisions of this obligation shall be impaired by any act or
failure to act by the Company or the Holder or by their failure to comply with
this Note or any other agreement or document evidencing, related to or securing
the obligations hereunder. Without in any way limiting the generality of the
preceding sentence, the holders of Senior Indebtedness may, at any time and from
time to time, without the consent of or notice to the Holder, without incurring
responsibility to the Holder and without impairing or releasing the
subordination provided in this Note or the obligations of the Holder to the
holders of Senior Indebtedness, do any one or more of the following: (i) change
the manner, place or terms of payment of any Senior Indebtedness provided that
such change does not materially impact Holder in an adverse manner; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing any Senior Indebtedness; (iii) release any person or entity
liable in any manner for the collection of any Senior Indebtedness; and (iv)
exercise or refrain from exercising any rights against the Company or any other
person or entity.

 

(g)   In the event that the Company shall make any payment or prepayment to the
Holder on account of the obligations under this Note which is prohibited by this
Section, such payment shall be held by the Holder, in trust for the benefit of,
and shall be paid forthwith over and delivered to, the holders of Senior
Indebtedness (pro rata as to each of such holders on the basis of the respective
amounts and priorities of Senior Indebtedness held by them) to the extent
necessary to pay all Senior Indebtedness due to such holders of Senior
Indebtedness in full in accordance with its terms (whether or not such Senior
Indebtedness is due and owing), after giving effect to any concurrent payment or
distribution to or for the holders of such Senior Indebtedness.

 

(h)   After all Senior Indebtedness indefeasibly is paid in full and until the
obligations under the Note are paid in full, the Holder shall be subrogated to
the rights of holders of Senior Indebtedness to the extent that distributions
otherwise payable to the Holder have been applied to the payment of Senior
Indebtedness. For purposes of such subrogation, no payments or distributions to
holders of such Senior Indebtedness of any cash, property or securities to which
the Holder would be entitled except for the provisions of this Section and no
payment over pursuant to the provisions of this Section to holders of such
Senior Indebtedness by the Holder, shall, as between the Company, its creditors
other than holders of such Senior Indebtedness, and the Holder, be deemed to be
a payment by the Company to or on account of such Senior Indebtedness, it being
understood that the provisions of this Section are solely for the purpose of
defining the relative rights of the holders of such Senior Indebtedness, on the
one hand and the Holder, on the other hand.

 

 

(i)    In any insolvency, receivership, bankruptcy, dissolution, liquidation or
reorganization proceeding, or in any other proceeding, whether voluntary or
involuntary, by or against the Company under any bankruptcy or insolvency law or
laws relating to relief of debtors, to compositions, extensions or readjustments
of indebtedness:

 

(i)   the claims of any holders of Senior Indebtedness against the Company shall
be paid indefeasibly in full in cash or such payment shall have been provided
for in a manner acceptable to the holders of at least a majority of the then
outstanding principal amount of the Senior Indebtedness before any payment is
made to the Holder;

 

(ii)  until all Senior Indebtedness is indefeasibly paid in full in cash or such
payment shall have been provided for in a manner acceptable to the holders of at
least a majority of the then outstanding principal amount of the Senior
Indebtedness before any payment is made to the Holder, any distribution to which
the Holder would be entitled but for this Section shall be made to holders of
Senior Indebtedness, except for distribution of securities issued by the Company
which are subordinate and junior in right of payment to the Senior Indebtedness;
and

 

(iii)  the holders of Senior Indebtedness shall have the right to enforce,
collect and receive every such payment or distribution and give acquittance
therefor. If, in or as a result of any action case or proceeding under Title 11
of the United States Code, as amended from time to time, or any comparable
statute, relating to the Company, the holders of the Senior Indebtedness return,
refund or repay to the Company, or any trustee or committee appointed in such
case or proceeding receive any payment or proceeds of any collateral in
connection with such action, case or proceeding alleging that the receipt of
such payments or proceeds by the holders of the Senior Indebtedness was a
transfer voidable under state or federal law, then the holders of the Senior
Indebtedness shall not be deemed ever to have received such payments or proceeds
for purposes of this Note in determining whether and when all Senior
Indebtedness has been paid in full and the Company shall pay or cause to be
paid, and the Holder shall be entitled to receive any such funds, proceeds or
collateral to satisfy all amounts due hereunder. In the event the holders of
Senior Indebtedness receive amounts in excess of payment in full (cash) of
amounts outstanding in respect of Senior Indebtedness (without giving effect to
whether claims in respect of the Senior Indebtedness are allowed in any
insolvency proceeding), the holders of Senior Indebtedness shall pay such excess
amounts to the Holder.

 

(k)    By its acceptance of this Note, the Holder agrees to execute and deliver
such documents as may be reasonably requested from time to time by the Company
or the holder of any Senior Indebtedness in order to implement the foregoing
provisions of this Section.

 

2.    Events of Default. The occurrence of any of the following events of
default ("Event of Default") shall, at the option of the Holder hereof and
subject to the provisions of section 1 (a) hereof, make all sums of principal
and interest then remaining unpaid hereon and all other amounts payable
hereunder immediately due and payable, upon demand, without presentment, or
grace period, all of which hereby are expressly waived, except as set forth
below:

 

 

(a)    Failure to Pay Principal or Interest. The Company fails to pay any
installment of principal, interest or other sum due under this Note when due.

 

(b)    Receiver or Trustee. The Company shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for it or for a substantial part of its property or business; or such a
receiver or trustee shall otherwise be appointed without the consent of the
Company is not dismissed within sixty (60) days of appointment.

 

(c)    Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law,
or the issuance of any notice in relation to such event, for the relief of
debtors shall be instituted by or against the Company and if instituted against
Company are not dismissed within sixty (60) days of initiation.

 

The holder of this Note shall give the Company and the holders of the Senior
Indebtedness written notice of any Event of Default hereunder.

 

3.    Miscellaneous.

 

(a)    Waiver. No failure or delay on the part of Holder hereof in the exercise
of any power, right or privilege hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege. All rights and remedies existing hereunder are cumulative to, and not
exclusive of, any rights or remedies otherwise available.

 

(b)   Notices. All notices, demands, requests, consents, approvals, and other
communications required or permitted hereunder shall be in writing and, unless
otherwise specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery or e-mail, addressed as set forth below or to such
other address as such party shall have specified most recently by written
notice. Any notice or other communication required or permitted to be given
hereunder shall be deemed effective (a) upon hand delivery or delivery by
e-mail, at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be: (i) if to the Company to: Air Industries Group, 360
Motor Parkway, Suite 100, Hauppauge, New York 11788, Attn: Daniel R. Godin,
President and CEO, e-mail: dgodin@airindustriesgroup.com, with a copy by e-mail
only to: Eaton & Van Winkle LLP, Three Park Avenue, 16th floor, New York, NY
10016, Attn: Vincent J. McGill, Esq., e-mail: vmcgill@evw.com, and (ii) if to
the Holder, to c/o Taglich Brothers, Inc., 790 New York Avenue, Huntington, NY
11743, with a copy to c/o Taglich Brothers, Inc., 790 New York Avenue,
Huntington, NY 11743, Attn: Mr. Richard Oh, e-mail: roh@taglichbrothers.com.

 

(c)    Terms. The term "Note" and all reference thereto, as used throughout this
instrument, shall mean this instrument as originally executed, or if later
amended or supplemented, then as so amended or supplemented.

 

(d)    Successors and Assigns. This Note shall be binding upon the Company and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns.

 

 

(e)    Expenses. The Company shall reimburse Holder for all reasonable costs and
expenses, including without limitation, reasonable attorneys’ fees and expenses,
incurred in connection with (i) drafting, negotiating, executing and delivering
any amendment, modification or waiver of, or consent with respect to, any matter
relating to the rights of Holder hereunder and (ii) enforcing any provisions of
this Note and/or collecting any amounts due under this Note.

 

(f)   Governing Law. This Note shall be governed by and construed in accordance
with the laws of the State of New York. Any action brought by either party
against the other concerning the transactions contemplated by this Agreement
shall be brought only in the civil or state courts of New York or in the federal
courts located in the State and county of New York. Both parties and the
individual signing this Agreement on behalf of the Company agree to submit to
the jurisdiction of such courts. The prevailing party shall be entitled to
recover from the other party its reasonable attorney's fees and costs.

 

(g)   Savings Clause. Nothing contained herein shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
required to be paid or other charges hereunder exceed the maximum permitted by
such law, any payments in excess of such maximum shall be credited against
amounts owed by the Company to the Holder and thus refunded to the Company.

 

IN WITNESS WHEREOF, Company has caused this Note to be signed in its name by an
authorized officer as of the 4th day of August, 2016.

 

 

AIR INDUSTRIES GROUP

 

By: /s/ Daniel R. Godin 

Daniel R. Godin 

President and Chief Executive Officer