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

 

 

7% Subordinated Promissory Note due September17, 2017

 

FOR VALUE RECEIVED,AIR INDUSTRIES GROUP, a Nevada corporation (the “Company”) hereby promises to pay to the order of MICHAEL N. TAGLICHor his assigns (the "Holder"), without demand, the sum of Two Hundred Thousand Dollars ($200,000), together with accruedinterest thereon from the date hereof at the rate of seven percent (7%) per annum, on September 17, 2017 (the “Maturity Date”),or such earlier date as the same may become due as provided in Section 3 hereof.

 

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

 

The following is astatement of rights of the Holder and the conditions to which this Note is subject, and to which the Holder, by acceptance of thisNote, 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 providedbelow, the payment of all amounts due pursuant to this Note is hereby expressly subordinated and junior in right of payment tothe extent and in the manner hereinafter set forth, to the Company’s Senior Indebtedness. As used herein, the term “SeniorIndebtedness” shall mean the principal of, and interest and premium, if any, on any and all, (i) indebtedness of the Companyfor borrowed money or obligations with respect to which the Company is a guarantor, to banks, insurance companies, or other financialinstitutions or entities regularly engaged in the business of lending money, in each case as in effect as of the date hereof, oras may be borrowed hereafter, including without limitation, indebtedness incurred by one or more of the Company’s subsidiariesunder the Amended and Restated Revolving Credit, Term Loan, Equipment Line and Security Agreement, dated as of June 27, 2013 amongAir Industries Machining, Corp., Welding Metallurgy, Inc., Nassau Tool Works, Inc., Woodbine Products Inc., Eur-Pac Corporation,Electronic Connection Corporation, The Sterling Engineering Corporation, and PNC Bank, National Association, as agent for the variouslenders named therein, as amended as of the date hereof, the payment of which has been guaranteed by the Company and Air RealtyGroup, LLC (the “Guarantors”), (ii) any such indebtedness or any debentures, notes or other evidence of indebtednessissued in exchange for or to refinance such Senior Indebtedness, or any indebtedness arising from the satisfaction of such SeniorIndebtedness by a Guarantor, provided that such indebtedness issued in exchange for or to refinance Senior Indebtedness or arisingfrom the satisfaction of Senior Indebtedness by a Guarantor is on commercially reasonable terms as of the date of incurrence notto exceed the principal amount under such Senior Indebtedness and provided further that the Company provides the Holder with priorwritten 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 SeniorIndebtedness by lapse of time, acceleration or otherwise, all such Senior Indebtedness which has been so accelerated or maturedshall first indefeasibly be paid in full before any payment is made by the Company or any person acting on behalf of the Companyon 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 BlockageEvent (as hereafter defined) and written notice thereof has been given to the Company and the Holder by the holders of the SeniorIndebtedness.

 

(d)   A “Blockage Event” is deemed to exist for the period of time commencing on the date of receipt by the Holder of writtennotice 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 absenceof 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 suchDefault or Event of Default is in the payment of any amount due thereunder; or

 

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

 

A Blockage Event shallnot be deemed to have existed during the period of time commencing on the date upon which the holder of this Note accelerates paymentof the principal amount of this Note or such other Notes as a result of any Event of Default hereunder and ending on the 365thday after written notice of such acceleration given by the holder or such other holders to the Company and the holders of the instrumentsevidencing the Senior Indebtedness; provided that in no event shall the Company pay the holder of this Note or the holders of anyother Notes the principal amount so accelerated if a Blockage Event then exists until the Senior Indebtedness has been paid infull.

 

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

 

(f)    Noright of any holder of Senior Indebtedness to enforce the subordination provisions of this obligation shall be impaired by anyact or failure to act by the Company or the Holder or by their failure to comply with this Note or any other agreement or documentevidencing, 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, withoutincurring responsibility to the Holder and without impairing or releasing the subordination provided in this Note or the obligationsof the Holder to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or termsof 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) releaseany person or entity liable in any manner for the collection of any Senior Indebtedness; and (iv) exercise or refrain from exercisingany rights against the Company or any other person or entity.

 

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

 

(h)   Afterall Senior Indebtedness indefeasibly is paid in full and until the obligations under the Note are paid in full, the Holder shallbe subrogated to the rights of holders of Senior Indebtedness to the extent that distributions otherwise payable to the Holderhave been applied to the payment of Senior Indebtedness. For purposes of such subrogation, no payments or distributions to holdersof such Senior Indebtedness of any cash, property or securities to which the Holder would be entitled except for the provisionsof 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 apayment by the Company to or on account of such Senior Indebtedness, it being understood that the provisions of this Section aresolely 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.

 

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(i)    Inany insolvency, receivership, bankruptcy, dissolution, liquidation or reorganization proceeding, or in any other proceeding, whethervoluntary 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)   theclaims of any holders of Senior Indebtedness against the Company shall be paid indefeasibly in full in cash or such payment shallhave been provided for in a manner acceptable to the holders of at least a majority of the then outstanding principal amount ofthe Senior Indebtedness before any payment is made to the Holder;

 

(ii)  until allSenior Indebtedness is indefeasibly paid in full in cash or such payment shall have been provided for in a manner acceptable tothe holders of at least a majority of the then outstanding principal amount of the Senior Indebtedness before any payment is madeto 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 SeniorIndebtedness; and

 

(iii)  theholders of Senior Indebtedness shall have the right to enforce, collect and receive every such payment or distribution and giveacquittance therefor. If, in or as a result of any action case or proceeding under Title 11 of the United States Code, as amendedfrom time to time, or any comparable statute, relating to the Company, the holders of the Senior Indebtedness return, refund orrepay to the Company, or any trustee or committee appointed in such case or proceeding receive any payment or proceeds of any collateralin connection with such action, case or proceeding alleging that the receipt of such payments or proceeds by the holders of theSenior Indebtedness was a transfer voidable under state or federal law, then the holders of the Senior Indebtedness shall not bedeemed ever to have received such payments or proceeds for purposes of this Note in determining whether and when all Senior Indebtednesshas 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 inexcess of payment in full (cash) of amounts outstanding in respect of Senior Indebtedness (without giving effect to whether claimsin respect of the Senior Indebtedness are allowed in any insolvency proceeding), the holders of Senior Indebtedness shall pay suchexcess amounts to the Holder.

 

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

 

2. Conversion Atthe Option of the Holder or Lender. (a) The Holder shall have the option at any time while this Note remains outstanding toconvert the unpaid principal amount and accrued interest thereon into shares of common stock or other securities of the Companywhich the Company may offer and sell in a public or private financing on the same terms and conditions as are offered to purchasersin such offering (a “Financing”), or, if more favorable to the Company, on such other terms as may be required underthe rules of the NYSE MKT. The Holder shall notify the Company of its election to convert in accordance with the provisions ofSection 4(b).

 

(b) Should the Companycomplete a Financing prior to satisfaction of this Note, for a period of three business days commencing the business day immediatelyafter completion of such Financing, the Company shall have the right to convert the unpaid principal amount of this Note and accruedinterest thereon into the shares of common stock or other securities of the Company sold in the Financing on the same terms andconditions as are offered to purchasers in the Financing, or, if more favorable to the Company, such other terms as may be requiredunder the rules of the NYSE MKT. The Company promptly shall notify the Holder of its election to convert this Note in accordancewith the provisions of Section 4(b).

 

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3.    Eventsof Default. The occurrence of any of the following events of default ("Event of Default") shall, at the option ofthe Holder hereof and subject to the provisions of section 1 (a) hereof, make all sums of principal and interest then remainingunpaid 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)    Failureto Pay Principal or Interest. The Company fails to pay any installment of principal, interest or other sum due under this Notewhen due.

 

(b)    Receiveror Trustee. The Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment ofa receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwisebe 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 anylaw, or the issuance of any notice in relation to such event, for the relief of debtors shall be instituted by or against the Companyand if instituted against Company are not dismissed within sixty (60) days of initiation.

 

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

 

4.   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 awaiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercisethereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusiveof, any rights or remedies otherwise available.

 

(b)   Notices.All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writingand, unless otherwise specified herein, shall be (i) personally served or (ii) delivered by reputable air courier service withcharges prepaid, addressed as set forth below or to such other address as such party shall have specified most recently by writtennotice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon receiptif personally served or (b) on the second business day following the date of deposit with a reputable air courier service, fullyprepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for suchcommunications shall be: (i) if to the Company to: Air Industries Group, 360 Motor Parkway, Suite 100, Hauppauge, New York 11788,Attn: Michael E. Recca, Chief Financial Officer, e-mail: mrecca@airindustriesgroup.com, with, in the case of notices to the Company,a copy by e-mail only to: Eaton & Van Winkle LLP, Three Park Avenue, 16th floor, New York, NY 10016, Attn: VincentJ. 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 originallyexecuted, or if later amended or supplemented, then as so amended or supplemented.

 

(d)    Successorsand Assigns. This Note shall be binding upon the Company and its successors and assigns, and shall inure to the benefit ofthe 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, modificationor waiver of, or consent with respect to, any matter relating to the rights of Holder hereunder and (ii) enforcing any provisionsof this Note and/or collecting any amounts due under this Note.

 

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

 

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(g)   SavingsClause. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other chargesin excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other chargeshereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owedby 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 date set forth above.

 

 

Accepted as of the date set forth above

 

/s/ Michael N. Taglich

      Michael N. Taglich 

 

 

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