Document:

LOAN
AGREEMENT

 

THIS
LOAN AGREEMENT (sometimes hereinafter referred to as Date”), by and between WSI INDUSTRIES, INC., a Minnesota corporation
(hereinafter referred “Loan Agreement”) made effective as of this 15th day of February, 2017 (the “Effective
to as “Borrower”), and TRADITION CAPITAL BANK, a Minnesota state banking corporation (hereinafter referred
to as “Lender”).

 

WITNESSETH:

 

WHEREAS,
Borrower has applied to Lender for a revolving line of credit up to the principal amount of One Million Five Hundred Thousand
and 00/100 Dollars ($1,500,000.00) (the “Loan”) to fund working capital of the Borrower; and

 

WHEREAS,
Lender is willing to agree to provide the Loan to the Borrower on the terms and conditions more fully set forth in this Loan Agreement.

 

NOW,
THEREFORE, in consideration of the mutual covenants herein contained the parties hereto agree as follows:

 

1.       Documents
Delivered by Borrower. To induce the Lender to commit to make the requested Loan, and as a condition to an Advance (as defined
herein) to the Borrower, the Borrower shall, on the date hereof, deliver or cause to be delivered to Lender the following, all
of which shall be in form and substance acceptable to Lender:

 

	 	1.1	Loan
    Agreement. This Loan Agreement executed by the Borrower and the Lender;
	 	 	 
	 	1.2	Revolving
    Promissory Note. A Revolving Promissory Note of even date herewith made by Borrower and payable to the order of Lender
    (“Note”) up to the principal amount of One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00)
    (the “Loan Amount”);
	 	 	 
	 	1.3	Guaranties.
    Guaranties (each, a “Guaranty” and collectively, the “Guaranties”) of Borrower’s
    obligations hereunder in favor of Lender executed and delivered by WSI Industries, Co., a Minnesota corporation and WSI Rochester,
    Inc., a Minnesota corporation (each, a “Guarantor” and collectively, the “Guarantors”),
    guarantying the Loan as more fully set forth in each Guaranty.
	 	 	 
	 	1.4	Security
    Agreements. A Security Agreement executed by Borrower and each Guarantor in favor of Lender (each a “Security
    Agreement” and collectively, the “Security Agreements”), pledging all business assets of the
    Borrower and each Guarantor, including accounts receivable, equipment, inventory and general intangibles;
	 	 	 
	 	1.5	UCC
    Financing Statements. UCC Financing Statements authorized and delivered by the Borrower and Guarantors for filing in such
    offices as the Lender may deem necessary or desirable to perfect the security interest granted by the Security Agreements
    (“Financing Statements”).

 

    	 	 	 

    	 

    

 

	 	1.6	Certificate
    and Resolution of Borrower. A Certificate of Incumbency and Resolution executed by the Borrower with attached copies of
    the Borrower’s organizational documents and a resolution authorizing the borrowing of the Loan and execution and delivery
    of the Loan Document (the “Borrower Authority Documentation”).
	 	 	 
	 	1.7	Certificate
    and Resolution of Each Entity Guarantor. A Certificate of Incumbency and Resolution executed by each Guarantor that is
    an entity with attached copies of such Guarantor’s organizational documents and a resolution authorizing the guarantying
    of the Loan and execution and delivery of the Guaranty (the “Guarantor Authority Documentation”).
	 	 	 
	 	1.8	Affidavit
    Regarding Borrower. An Affidavit of Borrower setting forth certain facts pertaining to the Borrower.
	 	 	 
	 	1.9	Affidavit
    Regarding Each Guarantor. An Affidavit of Guarantor setting forth certain facts pertaining to each Guarantor.
	 	 	 
	 	1.10	Searches.
    Complete five part searches (UCC, state and federal tax liens, judgments, bankruptcies and pending litigation) on Borrower
    and Guarantors from such offices as the Lender may request which confirm there are no liens which would be prior to Lender’s
    interest (except as approved by Lender);
	 	 	 
	 	1.11	Financial
    Statement. Current financial statement from Borrower and Guarantors prepared in form and in manner acceptable to Lender.

 

(The
Loan Agreement, Note, Guaranties, Security Agreements, Financing Statements, Borrower Authority Documents, Guarantor Authority
Documentation, Affidavit of Borrower, Affidavit of Guarantors, together with any other documents executed and delivered in connection
with the Loan, are hereinafter collectively referred to as the “Loan Documents”).

 

2.       Commitment
of Lender. So long as there exists no Event of Default hereunder and no event has occurred which would be an Event of Default
with the giving of notice or lapse of time or both, and subject to all other terms and conditions hereof, the Lender shall lend
to the Borrower and Borrower may borrow from the Lender against the Note for the account of Borrower up to the amount of $1,500,000.00.
The Borrower and Lender acknowledge and agree that the Note shall be revolving and that any payments by Borrower applied to the
principal balance of the Note may be re-drawn by Borrower.

 

	 	2.1	Late
    Fees. Borrower agrees to pay a late payment service charge in an amount equal to five percent (5.0%) of any installment
    of principal or interest on the Note not received by the Lender within ten (10) days after the date due.

 

    	 	2 	 

    	 

    

 

	 	2.2	Payments.
    Payments shall be made in accordance with the terms and provisions of the Note.
	 	 	 
	 	2.3	Maturity.
    All unpaid principal of the Note and all interest accrued thereon shall be due and payable on February 15, 2018.
	 	 	 
	 	2.4	Computations.
    Interest on the Note and any other compensation payable to Lender thereunder shall be computed on a 365/360 basis; that is,
    by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance,
    multiplied by the actual number of days the principal balance is outstanding.
	 	 	 
	 	2.5	Conditions
    Precedent to each Advance. The obligation of Lender to make any advance against the Note shall be subject to the further
    conditions precedent that on the date of each such Advance the following statements shall be true (the receipt by the Borrower
    of the proceeds of such Advance shall be deemed to constitute the representation or warranty by the Borrower that such statements
    are true):

 

	 	(a)	The
    representations and warranties contained in Section 3 hereof and the affirmative covenants contained in Section 4 are true
    and correct on and as of the date of such Advance as though made on or as of such date; and
	 	 	 
	 	(b)	No
    Event of Default, as hereinafter defined, has occurred and is continuing, or would result from such Advance and no event has
    occurred which with the giving of notice or passage of time or both would mature into an Event of Default hereunder.

 

3.       Representations
and Warranties. The Borrower represents and warrants that:

 

	 	3.1	Organization,
    Qualification and Authorization. Borrower is a corporation, validly existing and in good standing under the laws of the
    State of Minnesota; has the power and authority to own its property and to carry on its business as now being conducted; and
    is duly qualified and licensed to do business, and is in good standing, in every jurisdiction in which the nature of the business
    in which it is engaged makes such qualification or licensing necessary.
	 	 	 
	 	3.2	Organization,
    Qualification and Authorization. Each Guarantor is a corporation, validly existing and in good standing under the laws
    of the State of Minnesota; has the power and authority to own its property and to carry on its business as now being conducted;
    and is duly qualified and licensed to do business, and is in good standing, in every jurisdiction in which the nature of the
    business in which it is engaged makes such qualification or licensing necessary.

 

    	 	3 	 

    	 

    

 

	 	3.3	Validity
    of Obligations. Borrower has full power, right and authority to execute and deliver this Agreement, the Loan Documents
    and all other documents and agreements required to be delivered by it hereunder, to obtain the credit herein provided for,
    and to perform and observe each and all of the matters and things provided for in the Loan Documents. The execution and delivery
    of the Loan Documents and the performance or observance of the terms thereof has been duly authorized by all necessary company
    and member action and do not contravene or violate any provision of law or any provision of the Borrower’s organizational
    documents or any covenant, indenture or agreement of or binding upon Borrower nor require the consent or approval of any governmental
    entity or agency.
	 	 	 
	 	3.4	Title
    to Assets. The Borrower has good and marketable title to all of its property and assets reflected in the latest financial
    statements delivered to the Lender, subject to the encumbrances as therein detailed, and subject to such restrictions, easements,
    encroachments and other encumbrances to which such assets are customarily subject or which have no material adverse effect
    on the value of or development of the Property.
	 	 	 
	 	3.5	Litigation.
    To its actual knowledge, no actions, suits or proceedings are pending or, to Borrower’s knowledge, threatened, against
    or affecting it before any court, governmental or administrative body or agency which might result in any material adverse
    change in the operations, business property, assets or condition (financial or otherwise) of Borrower, or which would question
    the validity of this Agreement or of any action taken or to be taken by the Borrower pursuant to or in connection with this
    Agreement.
	 	 	 
	 	3.6	No
    Events of Default. No Event of Default as hereinafter defined has occurred and is continuing as of the date hereof and
    no event has occurred and is continuing which would be an Event of Default hereunder were it not for any grace period specified
    herein or which would become an Event of Default if notice thereof were given to Borrower.
	 	 	 
	 	3.7	Use
    of Proceeds. The Borrower shall use the proceeds to fund working capital for the Borrower.
	 	 	 
	 	3.8	Financial
    Condition. The financial statements of the Borrower heretofore furnished to the Lender, are complete and correct in all
    material aspects and fairly present the financial condition of the Borrower, as of the date of such statements, and have been
    accurately prepared containing all relevant financial items. Since the most recent set of financial statements delivered by
    the Borrower to the Lender, there have been no material adverse changes in the financial condition of the Borrower.

 

    	 	4 	 

    	 

    

 

	 	3.9	Licenses.
    The Borrower possesses adequate licenses, permits, franchises, patents, copyrights, trademarks and trade names, or rights
    thereto, to conduct its business substantially as now conducted and as presently proposed to be conducted with Borrower.
	 	 	 
	 	3.10	Taxes.
    The Borrower has filed all tax returns required to be filed and either paid all taxes shown thereon to be due, including interest
    and penalties, which are not being contested in good faith and by appropriate proceedings, or provided adequate reserves for
    payment thereof, and the Borrower has no information or knowledge of any objections to or claims for additional taxes in respect
    of federal income or excise profit tax returns for prior years.

 

4.       Affirmative
Covenants. The Borrower covenants and agrees with Lender that so long as any amount remains unpaid on the Note, Borrower will:

 

	 	4.1	Maintain
    Assets. Maintain and keep its assets, properties and equipment in good repair, working order and condition and from time
    to time make or cause to be made all needed renewals, replacements and repairs so that at all times Borrower’s business
    can be operated efficiently.
	 	 	 
	 	4.2	Insurance.
    Insure and keep insured all of its property of an insurable value (except sign structures, posters, or panels) under all risk
    policies in an amount reasonably acceptable to the Lender and carry such other property insurance as is usually carried by
    persons engaged in the same or similar business, all such insurance, to name the Lender as loss payee, and from time to time
    furnish to Lender upon request appropriate evidence of the carrying of such insurance, but not more often than twice in a
    calendar year.
	 	 	 
	 	4.3	Financial
    Information. Furnish to the Lender:

 

	 	(a)	Within
    ninety (90) days after the end of Borrower’s fiscal year, a set of consolidated audited financial statements for such
    fiscal year for Borrower and Guarantors, including a balance sheet, statement of cash flow, profit and loss statement and
    related statements prepared by a certified public accountant in accordance with normal and customary accounting procedures,
    all in reasonable detail;
	 	 	 
	 	(b)	Within
    thirty (30) days after the end of each month, a set of internally prepared consolidated financial statements for Borrower
    for the previous month, including a balance sheet, statement of cash flow, profit and loss statement and related statements
    in accordance with normal and customary accounting procedures, all in reasonable detail;

 

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	 	(c)	Within
    forty-five (45) days after the end of each quarter, a set of consolidated financial statements for Borrower for the previous
    quarter, including a balance sheet, statement of cash flow, profit and loss statement and related statements as such financial
    statements are approved by the Board of Directors and in accordance with normal and customary accounting procedures, all in
    reasonable detail; 
	 	 	 
	 	(d)	Within
    twenty (20) days of the request of Lender, Borrower shall provide to Lender an accounts receivable aging and inventory listing,
    both in form and content reasonably acceptable to Lender; and
	 	 	 
	 	(e)	Such
    other information as the Lender may reasonably request from time to time.

 

	 	4.4	Access
    to Records. Permit any person designated by Lender, at Lender’s expense upon at least twenty-four (24) hour reasonable
    prior notice, to visit and inspect any of its properties, corporate books and financial records and to discuss its affairs,
    finances and accounts with the principal officers of Borrower, all at such reasonable times and as often as Lender may reasonably
    request.
	 	 	 
	 	4.5	Taxes,
    Assessments and Charges. Promptly pay over to the appropriate authorities all sums for taxes deducted and withheld from
    wages as well as the employer’s contributions and other governmental charges imposed upon or asserted against Borrower’s
    income, profits, properties and rental charges or otherwise which are or might become a lien charged upon Borrower’s
    properties, unless the same are being contested in good faith by appropriate proceedings and adequate reserves shall have
    been established on Borrower’s books with respect thereto.
	 	 	 
	 	4.6	Notification
    of Changes. Promptly notify the Lender of:

 

	 	(a)	Any
    litigation which might materially and adversely affect Borrower;
	 	 	 
	 	(b)	The
    occurrence of any Event of Default under this Agreement or any event of which Borrower has knowledge and which, with the passage
    of time or giving of notice or both, would constitute an Event of Default under this Agreement; or
	 	 	 
	 	(c)	Any
    material adverse change in the operations, business, properties, assets or conditions, financial or otherwise, of the Borrower.

 

	 	4.7	Company
    Existence. The Borrower shall maintain its corporate existence in compliance with all applicable statutes, laws, rules
    and regulations.

 

    	 	6 	 

    	 

    

 

		4.8	Books
                                         and Records. Keep true and accurate books, records and accounts in accordance with
                                         sound accounting and bookkeeping practices.

 

	 	4.9	Reimbursement
    of Expenses. Promptly reimburse Lender for any and all reasonable out-of-pocket expenses, and all fees and disbursements,
    including actual and reasonable attorneys’ fees incurred and paid for by Lender, incurred in connection with the preparation
    and performance of this Agreement and the instruments and documents related thereto, and all expenses of collection of the
    Loan to be made hereunder, including actual and reasonable attorneys’ fees incurred and paid for by Lender.
	 	 	 
	 	4.10	Repayment
    of Excess Borrowings. Immediately pay to the Lender any amounts by which the outstanding principal balance of the Note
    exceeds the amount of the Loan.
	 	 	 
	 	4.11	Working
    Capital. At all times while the Loan is outstanding, Borrower shall maintain minimum Working Capital of no less than $4,500,000.00.
    “Working Capital” shall be defined as current assets (to include cash, accounts, receivables and inventory)
    minus current liabilities. The Working Capital covenant shall be tested monthly commencing on March 31, 2017 and tested monthly
    thereafter.
	 	 	 
	 	4.12	Tangible
    Net Worth. At all times while the Loan is outstanding, Borrower shall maintain a minimum Tangible Net Worth of no less
    than $9,000,000.00. “Tangible Net Worth” shall be defined as net worth less intangible assets and goodwill.
    The Tangible Net Worth shall be tested monthly commencing on March 31, 2017 and tested monthly thereafter.
	 	 	 
	 	4.13	Compliance
    Certificate. Within thirty (30) days after the end of each month while the Loan is outstanding, Borrower shall complete
    and submit a Compliance Certificate in the form attached as Exhibit A, certifying the information contained
    thereof is true and correct.

 

5.       Negative
Covenants. The Borrower hereby covenants and agrees with the Lender that so long as any amount shall remain unpaid on the
Note, or so long as Lender has any obligation to make advances hereunder, Borrower will not:

 

	 	5.1	Merge,
    Consolidate or Sell. Merge or consolidate with or into another entity, or lease, or sell all or substantially all of its
    property and business to any other entity or entities.
	 	 	 
	 	5.2	Default
    on Other Obligations. Default upon or fail to pay, beyond any applicable periods of grace, any of its other debts or obligations
    as the same mature, unless the same are being contested in good faith by appropriate proceedings and adequate reserves shall
    have been established on Borrower’s books with respect thereto.

 

    	 	7 	 

    	 

    

 

	 	5.3	Material
    Adverse Change. While the Loan is outstanding, Borrower shall not have a material adverse change in its operations, business,
    properties, assets or financial condition, which would materially impair to the risk of repayment of the Note.

 

6.       Defaults.

 

	 	6.1	Events
    of Defaults. Each of the following occurrences shall constitute an event of default hereunder (herein called an “Event
    of Default”):

 

	 	(a)	Payment.
    Borrower shall fail to pay, within ten (10) days of when due, any payments due under the Note; or
	 	 	 
	 	(b)	Other
    Payments. Borrower shall fail to pay any amounts other than those set forth in Section 6.1(a) herein required by the Borrower
    under the Loan Documents within ten (10) days of when due; or
	 	 	 
	 	(c)	Other
    Covenants or Agreements Herein. Borrower shall default in any material respect in the due performance or observance of
    any term, covenant or agreement contained in this Agreement or any of the other Loan Documents (other than payments under
    the Note) and such default shall continue for a period of thirty (30) days after written notice thereof shall have been given
    by Lender to Borrower or if such default does not consist of the non-payment of money and cannot reasonably be cured within
    thirty (30) days, for such longer period of time not exceeding sixty (60) days as may be necessary to cure such default with
    the exercise of due diligence so long as Borrower is diligently proceeding to cure such default; or
	 	 	 
	 	(d)	Default
    In Favor of Third Parties. Borrower defaults under any loan, extension of credit, security agreement, purchase or sales
    agreement, or any other agreement, in favor of any other creditor or person that may reasonably be expected to materially
    affect Borrower’s ability to repay the Note or perform Borrower’s obligations under any of the Loan Documents
    and such default is not cured within thirty (30) days; or
	 	 	 
	 	(e)	Insolvency.
    Borrower or Guarantors shall: (i) become insolvent; (ii) suspend business; (iii) make a general assignment for the benefit
    of its or their creditors; (iv) admit in writing its, his or their inability to pay its, his or their debts generally as they
    mature; (v) file a petition in bankruptcy or a petition or answer seeking a reorganization, arrangement with creditors or
    other similar relief under the Federal bankruptcy laws or under any other applicable law of the United States of America or
    any State thereof; (vi) consent to the appointment of a trustee or receiver for Borrower or for a substantial part of its,
    his or their property; (vii) be adjudicated a bankrupt or fail to cause an involuntary petition in bankruptcy to be dismissed
    within sixty (60) days after the filing thereof; (viii) take any action for the purpose of effecting or consenting to any
    of the foregoing; or (ix) have an order, judgment or decree entered appointing a trustee, conservator or receiver for Borrower
    or Guarantors or for a substantial part of its property, or approving a petition filed against Borrower or Guarantors seeking
    a reorganization, arrangement with creditors or other similar relief under the Federal bankruptcy laws or under any other
    applicable law of the United States of America or any State hereof, which order, judgment or decree shall not be vacated or
    set aside or stayed within sixty (60) days from the date of entry; or

 

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	 	(f)	Representations
    and Warranties. If any material representation or warranty contained in this Agreement or any of the other Loan Documents
    or any letter or certificate furnished or to be furnished to the Lender by the Borrower pursuant to this Agreement proves
    to be false in any material respect as of the date executed or delivered to Lender; or
	 	 	 
	 	(g)	Judgments.
    Judgments against Borrower for the payment of money totaling in excess of $50,000.00 shall be outstanding for a period of
    thirty (30) days without a stay of execution; or
	 	 	 
	 	(h)	Material
    Adverse Change. Any Material Adverse Change shall occur in the condition (financial or otherwise) of the Borrower or any
    Guarantor which, in the reasonable opinion of the Lender, materially increases its risk with respect to the Note; or
	 	 	 
	 	(i)	Other
    Agreements. Borrower defaults under the terms and conditions of any other agreements with or indebtedness to the Lender
    which default is not cured within any applicable cure period, or if no cure period is provided and such other default does
    not consist of non-payment of money, such default is not cured within thirty (30) days of receipt of written notice from Lender
    of such default, except no notice shall be provided for a default under Section 6.1(a) or 6.1(b) herein.

 

	 	6.2	Lender’s
    Right Upon Default. Upon an Event of Default, Lender, at its option, shall, in addition to any other remedies which it
    might be entitled to by law, have the right to:

 

	 	(a)	Cancel
    its obligations pursuant to this Loan Agreement;
	 	 	 
	 	(b)	Refuse
    to advance any further amount under the Note;

 

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	 	(c)	Accelerate
    amounts outstanding on the Note and demand their immediate payment in full without presentment or other demand, protest, notice
    of dishonor or any other notice of any kind, all of which are expressly waived;
	 	 	 
	 	(d)	Bring
    appropriate action to enforce performance and the correction of such failure or default;
	 	 	 
	 	(e)	Foreclose
    the security interests in the collateral granted pursuant to the Security Agreements;
	 	 	 
	 	(f)	Cure
    such default on behalf of Borrower and add the amount necessary to cure such default to the amount owing under the Note;
	 	 	 
	 	(g)	Enforce
    any other rights or remedies the Lender may have under the Loan Documents.
	 	 	 
	 	(h)	Take
    such other actions as may otherwise be available in equity or at law.

 

7.       Notices.
Any notices given hereunder shall be in writing and shall be deemed to have been given when delivered personally or two (2) days
after deposited in the United States mail, certified, postage prepaid, addressed as follows:

 

	 	If
    to Borrower at:	WSI
    Industries, Inc.
	 	 	213
    Chelsea Road
	 	 	Monticello,
    MN 55362
	 	 	Attn:
    Paul Sheely
	 	 	 
	 	If
    to Lender at:	Tradition
    Capital Bank
	 	 	7601
    France Avenue South, Suite 140
	 	 	Edina,
    MN 55435
	 	 	Attn:
    Natalia Armitage

 

or
addressed to any such party at such other address as such party shall hereafter furnish by ten (10) days’ advance notice
to the other party.

 

	 	7.1	Headings.
    The headings used in this Loan Agreement are for convenience only and do not define, limit or construe the contents of this
    Loan Agreement.
	 	 	 
	 	7.2	Bindings
    on Successors and Assigns. Subject to the limitations contained in this Loan Agreement, this Loan Agreement shall be binding
    upon and inure to the benefit of the successors and assigns of the parties hereto.
	 	 	 
	 	7.3	Survival
    of Warranties and Agreements. All of the representations, warranties and agreements made herein, in the application for
    the Loan, any other instrument required under this Loan Agreement or in connection with the Loan shall survive the Closing
    and inure to the benefit of the Lender, its successor and assigns.

 

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	 	7.4	Counterparts.
    This Loan Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement,
    and any of the parties hereto may execute this Loan Agreement by signing any such counterpart.
	 	 	 
	 	7.5	Amendments.
    This Loan Agreement and the documents related hereto may not be amended or modified, nor may any of their terms (including
    without limitation, terms affecting the maturity of or rate of interest on the Note) be modified or waived, except by written
    instruments signed by the Lender and the Borrower.
	 	 	 
	 	7.6	Offset.
    Borrower hereby grants to Lender a security interest in all accounts of Borrower with the Lender. Upon the occurrence of an
    Event of Default, Lender is authorized at any time and from time to time without notice to Borrower or to any other person,
    any such notice being hereby expressly waived, to set off any and all deposits, and any other indebtedness at any time held
    or owing by Lender, to or for the credit or the account of Borrower, against the obligations and liabilities of Borrower to
    Lender under this Loan Agreement and the Note.
	 	 	 
	 	7.7	Account
    Relationship. Borrower acknowledges that it shall maintain its primary deposit account, including its operating account,
    with the Lender. The monthly payment due under the Note shall be automatically deducted each month out of the operating account
    held by the Borrower at the Lender. Borrower shall be responsible to ensure sufficient amounts exist in the deposit account
    for the monthly payment amount to be under the Note and that a failure to keep sufficient funds in the deposit account shall
    not alleviate Borrower’s obligation to timely make payments under the Note.
	 	 	 
	 	7.8	Governing
    Law. This Agreement and the rights and obligations of the parties hereunder and under the Note, as applicable, and any
    other Loan Documents, shall be construed in accordance with and governed by the laws of the State of Minnesota. Borrower hereby
    consents to the jurisdiction of the Courts of Hennepin County, the State of Minnesota, for any actions brought hereon or under
    the Note, as applicable.
	 	 	 
	 	7.9	No
    Waivers. No failure or delay on the part of the Lender in exercising any right, power or privilege hereunder and no course
    of dealing between the Borrower and Lender shall operate as a waiver thereof; nor shall any single or partial exercise of
    any right, power, or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right,
    power or privilege.

 

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	 	7.10	OFAC
    Lists. Borrower represents and warrants to Lender that: (i) no Related Entity is (and to Borrower’s knowledge after
    diligent inquiry, no other person holding any legal or beneficial interest whatsoever in Borrower, directly or indirectly,
    is) included in, owned by, controlled by, acting for or on behalf of, providing assistance, support, sponsorship, or services
    of any kind to, or otherwise associated with any of the persons referred to or described in any list of persons, entities,
    and governments issued by the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”)
    pursuant to Executive Order 13224 – Blocking Property and prohibiting Transactions with Persons Who Commit, Threaten
    to Commit, or Support Terrorism, as amended (“Executive Order 13224”), or any similar list issued by OFAC or any
    other department or agency of the United States of America (collectively, the “OFAC Lists”); and (ii) none of
    the Related Entities are controlled by, acting for or on behalf of, providing assistance, support, sponsorship, or services
    of any kind to, or otherwise associated with any of the persons referred to or described in any list of persons, entities,
    and governments issued by OFAC pursuant to Executive Order 13224, or any other OFAC Lists. “Related Entity” shall
    mean Borrower, Mortgagor, or Company or any member of Borrower, Mortgagor, Company and any other affiliate of Borrower, Mortgagor,
    and Company which directly or indirectly owns any legal or beneficial interest in Borrower.
	 	 	 
	 	7.11	Compliance
    with Anti-Terrorism Regulations.

 

	 	(a)	Borrower
    hereby covenants and agrees that: (i) no Related Entity will be included in, owned by, controlled by, act for or on behalf
    of, provide assistance, support, sponsorship, or services of any kind to, or otherwise associated with any of the persons
    referred to or described in any list of persons, entities, and governments issued by OFAC pursuant to Executive Order 13224
    or any other OFAC Lists; and (ii) none of the Related Entities will be controlled by, act for or on behalf of, provide assistance,
    support, sponsorship, or services of any kind to, or otherwise associate with any of the persons referred to or described
    in any list of persons, entities, and governments issued by OFAC pursuant to Executive Order 13224, or any other OFAC lists.
	 	 	 
	 	(b)	Borrower
    hereby covenants and agrees that it will comply at all times with the requirements of Executive Order 13224; the International
    Emergency Economic Powers Act, 50 U.S.C. Section 1701-06; the United and Strengthening America by Providing Appropriate Tools
    Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. 107-56; the Iraqi Sanctions Act, Pub. L. 101-513, 104 Stat.
    2047-55; the United Nations Participation Act, 22 U.S. C. Section 287c; the Antiterrorism and Effective Death Penalty Act,
    (enacting 8 U.S.C. Section 219, 18 U.S.C. Section 2332d, and 18 U.S.C. Section 2339b); the International Security and Development
    Cooperation Act, 22 U.S.C. Section 2349 aa-9; the Terrorism Sanctions Regulations, 31 C.F.R. Part 595; the Terrorism List
    Government Sanctions Regulations, 31 C.F.R. Part 596; and the Foreign Terrorist Organizations Sanctions Regulations, 31 C.F.R.
    Part 597 and any similar laws or regulation currently in force or hereafter enacted (collectively, the “Anti-Terrorism
    Regulations”).

 

    	 	12 	 

    	 

    

 

	 	(c)	Borrower
    herby covenants and agrees that if it becomes aware or receives any notice that any Related Entity is named on any of the
    OFAC Lists (such occurrence, an “OFAC Violation”), Borrower will immediately: (i) give notice to Lender of such
    OFAC Violation; and (ii) comply with all laws applicable to such OFAC Violation (regardless of whether the party included
    on any of the OFAC Lists is located within the jurisdiction of the United States of America), including without limitation,
    the Anti-Terrorism Regulations, and Mortgagor hereby authorizes and consents to Lender’s taking any and all steps Lender
    deems necessary, in its sole discretion, to comply with all Laws applicable to any such OFAC Violation, including, without
    limitation, the requirements of the Anti-Terrorism Regulations (including the “freezing” and/or “blocking”
    of assets).
	 	 	 
	 	(d)	Upon
    Lender’s request from time to time during the term of the Loan, Borrower agrees to deliver a certification confirming
    that the representations and warranties set forth in Section 7.10 above remain true and correct as of the date of such certificate
    and confirming Borrower’s compliance with this Section 7.11.

 

	 	7.12	Participations.
    Lender shall have the right to grant participations in the Loan to one or more other lending institutions, and such participants
    shall be entitled to the benefits of this Agreement, to the same extent as if they were a direct party hereto; provided, however,
    that no such participation by any such participant shall in any way affect the obligation of the Lender under the Loan; and
    provided further that no such participant shall be entitled to receive payment hereunder of any amount greater than the amount
    which would have been payable had the Lender not granted a participation to such participant.

 

[Remainder
of this page intentionally left blank; signature page follows]

 

    	 	13 	 

    	 

    

 

IN
TESTIMONY WHEREOF, each of the parties hereto have caused this Loan Agreement to be duly executed as of the day and year first
above written.

 

	 	BORROWER:
	 	 	 
	 	WSI INDUSTRIES, INC., 
	 	a Minnesota corporation 
	 	 	 
	 	By:	/s/
    Paul D. Sheely
	 	Name:	Paul
    D. Sheely 
	 	Its:
    	Chief
    Financial Officer 
	 	 	 
	 	LENDER:
	 	 	 
	 	TRADITION CAPITAL BANK,
	 	a Minnesota banking corporation
	 	 	 
	 	By:	/s/
    Natalia Armitage
	 	Name:	Natalia
    Armitage
	 	Its:	Senior
    Vice President

 

    	 	14 	 

    	 

    

 

EXHIBIT
A

 

COMPLIANCE
CERTIFICATE

 

See
attached.

 

    	 	 	 

    	 

    

 

COMPLIANCE
CERTIFICATE

 

	TO:	Tradition
    Capital Bank, a Minnesota banking corporation (“Lender”).

 

Pursuant
to that certain Loan Agreement dated February 15, 2017, by and between the WSI INDUSTRIES, INC., a Minnesota corporation (“Borrower”)
and Lender, and any amendments thereto and extensions thereof (“Loan Agreement”), the undersigned hereby:

 

	A.	Repeats
    and reaffirms to the Lender each and all of the representations and warranties made by the Borrower in the Loan Agreement
    and the agreements referred to therein or related thereto, and certifies to the Lender that each and all of said warranties
    and representations are true and correct as of the date hereof, except as they relate to an earlier date. Unless otherwise
    defined herein, all terms used herein which are defined in the Loan Agreement shall have the same meanings herein as in the
    Loan Agreement.
	 	 
	B.	Represents,
    warrants and certifies to the Lender that the Borrower has achieved the required dollar amount set forth below for each of
    the covenants as defined in Sections 4.11 and 4.12 of the Loan Agreement as of the date of this Compliance Certificate.

 

	Covenants	 	Required	 	 	Actual	 
	Minimum Tangible Net Worth	 	$	9,000,000.00	 	 	$	-	 
	Minimum Working Capital	 	$	4,500,000.00	 	 	$	-	 

 

	C.	Represents,
    warrants and certifies that no Event of Default is existing at the date of this Compliance Certificate, and to the best of
    the knowledge and belief of the officer of the undersigned executing this Compliance Certificate, there has not been (except
    as may be otherwise indicated below) any change since the computation date specified above which would materially change any
    of the amounts shown above as such amounts were computed as of the date of this Compliance Certificate:____________________________________________________________

 

	Date:
    ______________________.	WSI INDUSTRIES, INC., 
	 	a Minnesota corporation
	 	 	 
	 	By:	 
	 	Name:	Paul
    D. Sheely 
	 	Its:
    	Chief
    Financial OfficerREVOLVING
PROMISSORY NOTE

 

	$1,500,000.00	Edina,
    Minnesota
	 	February
    15, 2017

 

FOR
VALUE RECEIVED, the undersigned, WSI INDUSTRIES, INC., a Minnesota nonprofit corporation (the “Borrower”),
promises to pay to the order of TRADITION CAPITAL BANK, a banking corporation under the laws of the State of Minnesota (the “Lender”)
(Lender and any holder of this Note from time to time are sometimes collectively referred to as “Holder”),
at 7601 France Avenue, Suite 140, Edina, MN 55435, or such other place as may hereinafter be designated from time to time in writing
by the Holder hereof, the principal sum of One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00) or so much thereof
as shall have been advanced hereunder to or for the benefit of the undersigned (the “Loan Amount”) pursuant
to the terms of that certain loan agreement of even date herewith (the “Loan Agreement”), made by the Borrower
and Lender, together with interest from the date hereof until fully paid, at the rates hereinafter provided, on the Loan Amount,
from time to time, advanced and remaining unpaid (the “Principal Balance”). Any portion of the Loan Amount
repaid may be advanced again by Borrower prior to the Maturity Date; provided, Borrower is not in default under the terms and
conditions of the Loan Documents (as defined in the Loan Agreement) and Borrower complies with all conditions precedent to an
advance as provided in the Loan Agreement. The Principal Balance and interest shall be due as follows:

 

A. Monthly
payments of accrued interest on the Principal Balance shall be made commencing on March 15, 2017, and continuing on the 15th day
of each and every month thereafter until February 15, 2018 (the “Maturity Date”) when the entire unpaid principal,
accrued but unpaid interest and any other charges due hereon shall be fully due and payable. On the Maturity Date, the entire
Principal Balance and all accrued and unpaid interest shall be paid in full. Borrower acknowledges that the payment due on
the Maturity Date is a balloon payment and that Lender or any holder of this Note shall have no obligation and has made no
commitment to the Borrower to renew and/or extend or otherwise assist the Borrower in making arrangements for continued financing
of this Note, which Borrower shall have to do from its own funds or from funds obtained from other sources or means.

 

B. Commencing
on the date hereof and continuing through the Maturity Date, interest shall accrue on the Principal Balance at a variable rate
equal to the LIBOR Rate, plus two percent (2.0%) per annum, subject to an interest rate floor of two and seventy-five one hundredths
percent (2.75%) per annum (the “Interest Rate”). The LIBOR Rate shall mean the 30-day London Interbank Offered
Rates (LIBOR) as reported in the “Money Rates” column or section of the Wall Street Journal (Midwest Edition) (the
“LIBOR Rate”). The LIBOR Rate shall float and the Interest Rate shall adjust the next day following any time
there is a change in the LIBOR Rate (each, an “Adjustment Date”). On each Adjustment Date, the Interest Rate
shall change to a new amount and shall continue in effect until the next Adjustment Date. If the LIBOR Rate is no longer available,
Lender shall reasonably select a new index which is based upon comparable information and results in comparable interest rates
as the LIBOR Rate and shall so notify Borrower. The annual Interest Rate for the Note is computed on an actual 360 basis; that
is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding Principal Balance,
multiplied by the actual number of days the Principal Balance is outstanding.

 

    	 	 	 

    	 		 

    

 

C. If
any scheduled payment of principal or interest, including, but not limited to, the balloon payment, due on the Note is not paid
within ten (10) days of the due date thereof, the Borrower shall pay to the Lender a late charge equal to five percent (5%) of
the amount of such late monthly installment, including the final payment.

 

D. The
outstanding principal balance of this Note may be prepaid at any time at the option of Borrower, in whole or in part. All payments
shall, at the option of the Lender, be applied first to any costs of collection, second to any late charges, third to accrued
interest due on the Note, and lastly to principal. 

 

This
Note has been executed by the Borrower and delivered and issued by the Lender in accordance with the Loan Agreement and the Borrower
and the Lender are entitled to all the benefits, rights and privileges contained in the Loan Agreement. This Note shall be revolving
and any payments made by Borrower applied to the Principal Balance may be redrawn in accordance with the terms of the Loan Agreement.

 

This
Note is secured by, inter alia, Security Agreements by executed Borrower and Guarantors (as defined in the Loan
Agreement) in favor of Lender of even date herewith upon all the business assets of the Borrower and Guarantors, as more fully
set forth in the Security Agreements; and pursuant to the terms and conditions contained in the Loan Agreement, which are to be
kept and performed by Borrower are hereby made a part of this Note, and to the same extent and with the same force and effect
as if they were fully set forth herein. The Borrower covenants and agrees to keep and perform them, or cause them to be kept and
performed, strictly in accordance with their terms.

 

Time
is of the essence hereof. During the continuance of an Event of Default (as defined in the Loan Agreement) beyond any applicable
cure period, Lender, at its option, may also, if permitted under applicable law, increase the interest rate of the Note by five
percent (5.0%), except as expressly stated otherwise in the Loan Agreement. Upon an Event of Default, the Holder at its option
and without further notice, demand or presentment for payment to Borrower or others, may declare immediately due and payable the
Loan Amount and interest accrued thereon, together with any reasonable attorneys’ fees incurred by Holder in collecting
or enforcing payment thereof, whether suit be brought or not, and all other sums due by Borrower hereunder, under the Loan Agreement
or under the Loan Documents, anything herein, in the Loan Agreement or in Loan Documents to the contrary notwithstanding, and
payment thereof may be enforced and recovered in whole in or in part at any time by one or more of the remedies provided to Holder
in this Note, the Loan Agreement or in the Loan Documents.

 

The
remedies of Holder as provided herein and in the Security Agreements, Loan Agreement or Loan Documents shall be cumulative and
concurrent and may be pursued singly, successively or together, at the sole discretion of Holder, and may be exercised as often
as occasion therefor shall occur; and the failure to exercise any such right or remedy shall in no event be construed as a waiver
or release thereof.

 

    	 	 2	 

    	 		 

    

 

Borrower
waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this
Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of
this Note.

 

Holder
shall not be deemed by any act of omission or commission to have waived any of its rights or remedies hereunder unless such waiver
is in writing and signed by the Holder, and then only to the extent specifically set forth in the writing. A waiver with reference
to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event.

 

All
agreements herein are expressly limited so that in no contingency or event whatsoever shall the amount paid or agreed to be paid
to the Holder for the use, forbearance or detention of the money to be advanced hereunder exceed the highest lawful rate permissible
under applicable usury laws. If from any circumstances whatsoever fulfillment of any provision hereof at the time performance
of such provisions shall be due shall involve transcending the limit of validity prescribed by law which a court of competent
jurisdiction may deem applicable hereto, then the obligation to be fulfilled shall be reduced to the limit of such validity and
if from any circumstance the Holder shall ever receive as interest an amount which would exceed the highest lawful rate, such
amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance due hereunder and not
to the payment of interest.

 

This
instrument shall be governed by and construed according to the laws of the State of Minnesota, without regard to principles of
conflicts of law.

 

[Remainder
of this page intentionally left blank; signature page follows]

 

    	 	 3	 

    	 		 

    

 

IN
WITNESS WHEREOF, Borrower, intending to be legally bound hereby, has duly executed this Note on the day and year first above written.

 

	 	WSI
    INDUSTRIES, INC., 
	 	a
    Minnesota corporation 
	 	 	 
	 	By:	/s/
    Paul D. Sheely
	 	Name:	Paul
    D. Sheely 
	 	Its:
    	Chief
    Financial Officer 

 

    	 	 4

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