LOAN AGREEMENT

THIS LOAN AGREEMENT (“ Agreement ”) is made as of February 15, 2017, by and between WSI INDUSTRIES, INC., a Minnesota corporation (“ Borrower ”), and TRADITION CAPITAL BANK, a Minnesota banking corporation (“ Lender ”).

RECITALS

A. The Borrower has requested from the Lender an extension of credit in the form of a term loan in the amount of Three Million Seven Hundred Thousand and 00/100 Dollars ($3,700,000.00) (the “ Loan ”), the proceeds are to be used by Borrower to refinance existing debt on certain property located at 213 Chelsea Road, City of Monticello, County of Wright, State of Minnesota (the “ Property ”).

B. The Lender is willing to agree to provide the Loan to the Borrower on the terms and conditions hereinafter contained.

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 of making the Loan to the Borrower, the Borrower shall, on the date hereof, deliver or caused to be delivered to Lender the following, all of which shall be in form and substance reasonably acceptable to the Lender:

2. Loan Documents . The Borrower shall, on the date hereof, deliver to Lender the following, all of which shall be in form and substance reasonably acceptable to the Lender, as evidence of Borrower’s obligation to repay the Loan and to pay interest and other charges, fees and expenses thereon:

(The foregoing shall be hereinafter referred as the “ Loan Documents ”).

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

(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;

(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.

(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.

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:

(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 any of the Property or 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 Guarantors 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

(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 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.

(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 ”).

(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 Borrower 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 7.9 above remain true and correct as of the date of such certificate and confirming Borrower’s compliance with this Section 7.10.

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Executed in Minneapolis, Minnesota, as of the year and day first above written.

EXHIBIT A

COMPLIANCE CERTIFICATE

See attached.

COMPLIANCE CERTIFICATE

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:

PROMISSORY NOTE

FOR VALUE RECEIVED, the undersigned, WSI INDUSTRIES, INC., a Minnesota corporation (hereinafter designated as “ Borrower ”), promises to pay to the order of TRADITION CAPITAL BANK, a Minnesota banking corporation (hereinafter referred to as “ Lender ”), (Lender and any holder of this Note from time to time are each hereinafter sometimes referred to as “ Holder ”), at 7601 France Avenue South, Suite 140, Edina, Minnesota 55435, or such other place as may hereinafter be designated from time to time in writing by the Holder hereof, the principal sum of Three Million Seven Hundred Thousand and 00/100 Dollars ($3,700,000.00) (hereinafter referred to as the “ Loan Amount ”), or so much thereof as shall have been advanced hereunder to or for the benefit of the undersigned pursuant to the terms of a Loan Agreement of even date herewith made by the Borrower and Lender (hereinafter referred to as the “ Loan Agreement ”), 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 (hereinafter referred to as the “ Principal Balance ”). The Principal Balance and interest shall be due and payable as follows:

A. Commencing on the date hereof and continuing through the fifth (5 ^th ) annual anniversary date hereof (the “ Change Date ”), interest shall accrue on the Principal Balance at a fixed rate of three and ninety-nine one hundredths percent (3.99%), and then on the Change Date through the Maturity Date (defined below), the Interest Rate shall be reset and fixed at two percent (2.0%) over the Federal Home Loan Bank of Des Moines Five Year Fixed Advanced Rate (the “ FHLBDM Rate ”) (such rate as is in effect during the terms hereof is hereafter referred to as the “ Interest Rate ”). If the FHLBDM Rate is no longer available, the Lender shall reasonably select a new index which is based upon comparable information as the index and shall so notify Borrower. The annual Interest Rate for the Note is 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.

B. Borrower shall pay monthly installments of principal and interest with the Loan Amount amortized over twenty (20) years after applying the Interest Rate, such monthly payment in the amount of $22,511.23, commencing on March 15, 2017, and continuing on the same day of each successive month thereafter until February 15, 2027 (the “ Maturity Date ”). On the Change Date, the monthly principal and interest payments shall be recalculated based on the change in the Interest Rate with the Loan Amount continuing to be amortized over twenty (20) years with such new monthly payments commencing on March 15, 2022 and continuing on the same day of each successive month thereafter until the Maturity Date. On the Maturity Date, the entire Principal Balance and all accrued and unpaid interest, late fees and any other amounts shall be paid in full. The Payment then due is a balloon payment.

If any scheduled installment 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 (5.0%) of the amount of such late installment, including any balloon payment.

All payments and prepayments 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 (with respect to prepayment to installments of principal, they shall be applied in inverse order of their maturity on the Note). If Borrower prepays in excess of ten percent (10%) of the Principal Balance outside of the normal monthly payments, Borrower shall pay to Lender a prepayment penalty calculated as a specified percentage of the Principal Balance prepaid in any given year based upon the following:

This Note is secured by, inter alia , a Combination Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents executed by Borrower in favor of Lender of even date herewith against certain real property located at 213 Chelsea Road, Monticello, Minnesota (the “ Mortgage ”), 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, beyond any applicable cure period, as defined in the Loan Agreement, including failure to pay the balloon payment, 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. In the event of a default in the payment of any principal or interest due hereunder or in the payment or performance of anything by Borrower to be paid or performed under any of the terms and conditions in this Note or in the Loan Documents continuing beyond any applicable cure periods, 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 Principal Balance 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 or under the Loan Documents, anything herein 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 or in the Loan Documents.

The remedies of Holder as provided herein and in the 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.

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.

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

Prepared by, and after recording return to:

Michelle R. Jester, Esq.

Messerli & Kramer P.A.

1400 Fifth Street Towers

100 South Fifth Street

Minneapolis, MN 55402

COMBINATION MORTGAGE, SECURITY AGREEMENT,

FIXTURE FILING AND ASSIGNMENT OF LEASES AND RENTS

WSI INDUSTRIES, INC. ,

Mortgagor,

having an office at

213 Chelsea Road

Monticello, MN 55362

to

TRADITION CAPITAL BANK,

Mortgagee,

having an office at

7601 France Avenue South, Suite 140

Edina, Minnesota 55435

COMBINATION MORTGAGE, SECURITY AGREEMENT, FIXTURE FILING AND ASSIGNMENT OF LEASES AND RENTS

THIS DOCUMENT SERVES AS A FIXTURE FILING UNDER THE

UNIFORM COMMERCIAL CODE OF MINNESOTA.

This Combination Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents (“ Mortgage ”) is made this 15th day of February, 2017, by WSI INDUSTRIES, INC., a Minnesota corporation (the “ Mortgagor ”), with offices at 213 Chelsea Road, Monticello, Minnesota 55362, for the benefit of TRADITION CAPITAL BANK, a Minnesota banking corporation, with offices located at 7601 France Avenue South, Suite 140, Edina, Minnesota 55435 (the “ Mortgagee ”).

Definitions

For the purpose of this Mortgage, the following terms shall have the following meanings:

Chattels - “Chattels” means all fixtures, fittings, appliances, apparatus, equipment, personal property, rents, leases and profits, and other property in which Mortgagor at any time may own an interest, for location upon and use in the operation of the “Mortgaged Property” (as defined herein), which may be affixed to, attached to, placed upon, or used in any way in connection with the complete and comfortable use, enjoyment or occupancy of the Mortgaged Property, but does not include trade fixtures which are the personal property of any tenant or which may be removed by a tenant or occupant under the terms of an existing lease.

Improvements - “Improvements” means the buildings, fixtures, improvements, other materials incorporated into the buildings on the Mortgaged Property, and all other property which is or will become the property of the Mortgagor under any lease or other agreement with any tenant or occupant of any buildings, or any third party located on the Mortgaged Property.

Note - “Note” means the Promissory Note of the Mortgagor in the original principal amount of Three Million Seven Hundred Thousand and No/100 Dollars ($3,700,000.00) of even date herewith, to and in favor of Mortgagee.

All terms used in this Mortgage not specifically defined in the definition section hereof shall have the meaning set forth in this Mortgage.

Recitals

WHEREAS, Mortgagor is the owner of certain real property commonly known as 213 Chelsea Road, City of Monticello, County of Wright, State of Minnesota, as legally described on Exhibit A attached hereto and made a part hereof, together with all existing and future easements and rights affording access to it (the “ Land ”); and

WHEREAS, the Mortgagor is justly indebted to the Mortgagee in the principal sum of Three Million Seven Hundred Thousand and No/100 Dollars ($3,700,000.00) pursuant to the Note with interest thereon at the rates as set forth therein, which shall be due and payable on February 15, 2027 (the “ Maturity Date ”).

NOW, THEREFORE, THIS MORTGAGE FURTHER WITNESSETH, that in consideration of the aggregate principal sum of Three Million Seven Hundred Thousand and No/100 Dollars ($3,700,000.00) to be advanced pursuant to the Note, and for the purpose of securing (a) the Note and all renewals, extensions and modifications thereof and any Note issued in substitution therefor, and all the sums payable in accordance with the Note; (b) the payment of all other sums with interest thereon as may be advanced by the Mortgagee in accordance with this Mortgage (the sums, obligations and liabilities described in these clauses (a) and (b) are hereinafter collectively referred to as the “ Indebtedness ”); and (c) the performance of all the covenants and agreements of the Mortgagor contained in all other documents securing or executed in connection with the Note, the Mortgagor does hereby mortgage, grant, bargain, sell, assign, transfer, grant a security interest in and convey unto the Mortgagee forever the Land together with (i) all the buildings, structures and other Improvements now standing or at any time hereafter constructed or placed upon the Land; and (ii) all lighting, heating, ventilating, air conditioning, sprinkling and plumbing fixtures, water and power systems, engines and machinery, boilers, furnaces, oil burners, elevators and motors, communication systems, dynamos, transformers, electrical equipment and all other fixtures of every description located in or on, or used, or intended to be used in connection with the Land or any building now or hereafter located thereon; and (iii) all hereditaments, easements, appurtenances, riparian rights, rents, issues, profits, condemnation awards, mineral rights and water rights now or hereafter belonging or in any way pertaining to the Land or to any building now or hereafter located thereon and all the estates, rights and interests of the Mortgagor in the Land; (iv) the Improvements; (v) the Chattels; (vi) all additions, accessions, parts, betterments, and repairs now or hereafter attached or affixed to or used in connection with any of the foregoing; and (vii) all proceeds of any of the foregoing (all the foregoing, together with the Land, are hereinafter collectively referred to as the “ Mortgaged Property .”)

To Have and To Hold the Mortgaged Property unto the Mortgagee forever; provided, nevertheless, that this Mortgage is upon the express condition that if the Mortgagor shall pay to the Mortgagee as and when due and payable, all Indebtedness, and shall also keep and perform each and every covenant and agreement of Mortgagor herein contained, then, this Mortgage and the estate hereby granted shall cease and be and become void and shall be released of record at the expense of the Mortgagor; otherwise this Mortgage shall be and remain in full force and effect.

The Mortgagor represents, warrants, and covenants to and with the Mortgagee that it is lawfully seized of the Land in fee simple; that it has authority to execute this Mortgage and to mortgage the Mortgaged Property; that the Mortgaged Property is free from all liens, security interests, and encumbrances except as listed in Exhibit B attached hereto (“ Permitted Encumbrances ”) or otherwise permitted herein; that the Mortgagor will warrant and defend the title to the Mortgaged Property and the lien and priority of this Mortgage against all claims and demands of all persons whomsoever, whether now existing or hereafter arising, not listed in Exhibit B; and that all buildings and Improvements now or hereafter located on the Land are, or will be located entirely within the boundaries of the Land. The covenants and warranties of this paragraph shall survive foreclosure of this Mortgage and shall run with the Land.

The Mortgagor further covenants and agrees as follows:

Section 1. Payment of the Indebtedness . The Mortgagor will duly and punctually pay all Indebtedness when and as due and payable and will punctually perform and observe all its obligations and covenants under the Note and other documents executed in connection therewith, in accordance with the terms thereof.

Section 2. Additions Subject to Lien of Mortgage . All right, title and interest of the Mortgagor in and to all extensions, Improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Mortgaged Property, hereafter acquired by, or released to, the Mortgagor or constructed, assembled or placed by the Mortgagor on the Mortgaged Property, and all conversions of the security constituted thereby, immediately upon such acquisition, release, construction, assembling, placement or conversion, as the case may be, and in each such case, without any further mortgage, conveyance, assignment or other act by the Mortgagor, shall become subject to the lien of this Mortgage as fully and completely, and with the same effect, as though now owned by the Mortgagor and specifically described in the granting clause hereof, but at any and all times the Mortgagor will execute and deliver to the Mortgagee any and all such further assurances, mortgages, conveyances or assignments thereof as the Mortgagee may reasonably require for the purpose of expressly and specifically subjecting the same to the lien of this Mortgage.

Section 3. Fund for Taxes and Assessments .

Section 4. Application of Payments Inconsistent With Loan Agreement and Note . All payments received by the Mortgagee from the Mortgagor shall be applied by Mortgagee first to any costs of collection, second to any late charges, third to accrued interest due on the Note, and lastly to principal (with respect to prepayment of installments of principal, they shall be applied to inverse order of their maturity on the Note).

Section 5. Payment of Impositions . Except as provided in Section 3, the Mortgagor will pay when due and before any penalty attaches all taxes, installments of assessments, water charges, sewer charges and other fees, taxes, charges and assessments of every kind and nature whatsoever assessed or charged against or constituting a lien on the Mortgaged Property or any interest therein or the Indebtedness (hereinafter referred to as the “ Impositions ”) and will upon demand furnish to the Mortgagee proof of payment of any such Impositions. In the event of a court decree or an enactment after the date hereof by any legislative authority of any law imposing upon a mortgagee the payment of the whole or any part of the Impositions herein required to be paid by Mortgagor, or changing in any way the laws relating to the taxation of mortgages or debts secured by mortgages or any mortgagee’s interest in mortgaged property, so as to impose such Imposition on the Mortgagee or on the interest of the Mortgagee in the Mortgaged Property, then, in any such event, the Mortgagor shall bear and pay the full amount of such Imposition, provided that if for any reason payment by the Mortgagor of any such Imposition would be unlawful, or if the payment thereof would constitute usury or render the Indebtedness wholly or partially usurious, the Mortgagee, at its option, may declare the whole sum secured by this Mortgage with interest thereon to be immediately due and payable, without prepayment premium, or the Mortgagee, at its option, may pay that amount or portion of such Imposition as renders the Indebtedness unlawful or usurious, in which event the Mortgagor shall currently therewith pay the remaining lawful and non-usurious portion or balance of said Imposition.

Section 6. Payment of Utility Charges . Subject to “Permitted Contests” (as defined in Section 9), the Mortgagor shall pay all charges made by utility companies, whether public or private, for electricity, gas, heat, water, or sewer, furnished or used in connection with the Mortgaged Property or any part thereof, and will, upon written request of the Mortgagee, furnish proper receipts evidencing such payment.

Section 7. Liens .

Section 8. Compliance with Permitted Encumbrances and Laws . The Mortgagor shall comply with all present and future statutes, laws, rules, orders, regulations and ordinances affecting the Mortgaged Property, the non-compliance with which will affect the value of the Mortgaged Property as security in the judgment of the Mortgagee, any part thereof or the use thereof, including but not limited to the Americans with Disabilities Act, and shall comply with all covenants, conditions and restrictions applicable to the Mortgagor which are contained in any document constituting a Permitted Encumbrance as set forth in Exhibit B hereto.

Section 9. Permitted Contests . Notwithstanding the provisions of Section 5, 6 and 7 hereof, the Mortgagor shall not be required to pay, discharge or remove any liens so long as the Mortgagor shall in good faith contest the same or the validity thereof by appropriate legal proceedings which shall operate to prevent the collection of the liens so contested and the sale of the Mortgaged Property, or any part thereof to satisfy same (“ Permitted Contests ”); provided that the Mortgagor shall, prior to any such contest, have given such security as may be demanded by the Mortgagee to insure such payments and prevent any sale or forfeiture of the Mortgaged Property by reason of such nonpayment. Any such contest shall be prosecuted with due diligence and the Mortgagor shall promptly after final determination thereof pay the amount of any such liens or impositions so determined, together with all interest and penalties, which may be payable in connection therewith. Notwithstanding the provisions of this Section, the Mortgagor shall (and if the Mortgagor shall fail so to do, the Mortgagee, may but shall not be required to) pay any such liens or impositions notwithstanding such contest if in the reasonable opinion of the Mortgagee, the Mortgaged Property shall be in jeopardy or in danger of being forfeited or foreclosed.

Section 10. Insurance . The Mortgagor shall obtain and keep in full force and effect during the term of this Mortgage at its sole cost and expense the following insurance: (a) insurance against loss by fire, lightning and risk customarily covered by standard extended coverage endorsement, including the cost of debris removal, together with vandalism and malicious mischief endorsement, or an all perils endorsement, all in the amount of not less than the full replacement cost of the Improvements of the Mortgaged Property, and together with an inflation-guard endorsement, and agreed-amount endorsement, a replacement cost endorsement and a waiver of subrogation endorsement; (b) broad form boiler and machinery insurance on all equipment and pressure-fired vehicles or apparatus situate on the Mortgaged Property, and providing for full repair and replacement cost coverage; (c) flood insurance in such amounts and with such minimal limits as the Mortgagee may require unless evidence is provided that the Mortgaged Property is not within a flood plain as defined by the Federal Insurance Administration and the Mortgaged Property is not designated as being within a flood plain during the term of this Mortgage; (d) comprehensive general public liability insurance covering the legal liability of the Mortgagor against claims for bodily injury, death or property damage occurring on, in or about the Mortgaged Property in such amounts and with such limits as determined by Mortgagee; (e) sprinkler insurance; (f) contingent liability insurance and workers’ compensation insurance during the making of any alterations or Improvements to the Mortgaged Property; (g) business income insurance in amounts sufficient to compensate Mortgagee for all rents from the Mortgaged Property during a period of not less than twelve (12) months, with amount of coverage adjusted annually to reflect rents during succeeding twelve (12) month period; and (h) such other forms of insurance as required in the Loan Agreement between Mortgagee and Mortgagor of even date herewith (“ Loan Agreement ”) or as the Mortgagee may require or as may be required by law. Such insurance policies shall be written on forms and with insurance companies having a minimum noncontingent rating in Best’s Casualty Reports of A, Class X, shall be satisfactory to the Mortgagee, shall name as the insured parties the Mortgagor and the Mortgagee, as their interests may appear, shall be in amounts sufficient to prevent the Mortgagor from becoming a co-insurer of any loss thereunder, and shall bear a satisfactory mortgagee clause in favor of the Mortgagee with loss proceeds under any such policies made payable to the Mortgagee. The Mortgagee shall be named as an additional insured along with the Mortgagor on such policies of insurance for the additional benefits and protection of the Mortgagee. All required policies of insurance or acceptable certificates thereof, together with the evidence of the payment of current premiums therefor, shall be delivered to the Mortgagee and shall provide that the Mortgagee shall receive at least thirty (30) days’ advance written notice prior to cancellation, amendment or termination of any such policy of insurance. The Mortgagor shall, within thirty (30) days prior to the expiration of any such policy, deliver other original policies or certificates of the insurer evidencing the renewal of such insurance together with evidence of the payment of current premiums therefor. Insurance coverage must at all times be maintained in proper relationship to such replacement value and must always provide for agreed amount coverage. In the event of a foreclosure of this Mortgage or any acquisition of the Mortgaged Property by the Mortgagee, all such policies and any proceeds payable therefrom, whether payable before or after a foreclosure sale, or during the period of redemption, if any, shall become the absolute property of the Mortgagee to be utilized at its discretion. In the event of foreclosure or the failure to obtain and keep any required insurance, the Mortgagor empowers the Mortgagee to effect insurance upon the Mortgaged Property at the Mortgagor’s expense and for the benefit of the Mortgagee in the amounts and types aforesaid for a period of time covering the time of redemption from foreclosure sale, and if necessary therefor, to cancel any or all existing policies. The Mortgagor agrees to furnish the Mortgagee copies of all inspection reports and insurance recommendations received by the Mortgagor from any insurer. The Mortgagee makes no representations that the above requirements are adequate protection for a prudent mortgagor.

Section 11. Damage or Destruction of the Mortgaged Property . The Mortgagor will give prompt notice of any damage to or destruction of the Mortgaged Property, and in case of loss covered by policies of insurance, the Mortgagor and the Mortgagee shall jointly settle and adjust any claim arising out of such policies and shall jointly collect and receipt for the proceeds payable therefrom, provided that the Mortgagor may itself adjust and collect for any losses arising out of a single occurrence not in excess of Fifty Thousand and no/100 Dollars ($50,000.00). Any expense incurred by the Mortgagee in the adjustment and collection of insurance proceeds (including the cost of any independent appraisal of the loss or damage on behalf of the Mortgagee) shall be reimbursed to the Mortgagee first out of any proceeds. The proceeds or any part thereof shall be applied to reduction of the Indebtedness then most remotely to be paid, whether due or not, unless the same are applied to the restoration or repair of the Mortgaged Property in accordance with Section 13 hereof.

Section 12. Condemnation . The Mortgagor will give the Mortgagee prompt notice of any action, actual or threatened, in condemnation or eminent domain and hereby assigns, transfers and sets over to the Mortgagee the entire proceeds of any award or claim for damages for all or any part of the Mortgaged Property taken or damaged under the power of eminent domain or condemnation, the Mortgagee being hereby authorized to intervene in any such action and to collect and receive from the condemning authorities and give proper receipts and acquittance for such proceeds. The Mortgagor will not enter into any agreements with the condemning authority permitting or consenting to the taking of the Mortgaged Property unless prior written consent of the Mortgagee is obtained. Any expenses incurred by the Mortgagee in intervening in such action or collecting such proceeds (including the cost of any independent appraisal) shall be reimbursed to the Mortgagee first out of the proceeds. The proceeds or any part thereof shall be applied to reduction of the Indebtedness then most remotely to be paid, without prepayment penalty, whether due or not, unless the same are applied to the restoration or repair of the Mortgaged Property in accordance with Section 13 hereof.

Section 13. Disbursement of Insurance and Condemnation Proceeds . So long as the provisions of this Section 13 are complied with, any insurance or condemnation proceeds received in accordance with Sections 11 or 12 of this Mortgage shall be applied to the restoration or repair of the Mortgaged Property. Such restoration or repair shall be done under the supervision of an architect acceptable to the Mortgagee and pursuant to site and building plans and specifications reasonably approved by the Mortgagee. The proceeds shall be held by the Mortgagee for such purposes and will from time to time be disbursed by the Mortgagee to defray the costs of such restoration or repair under such safeguards and controls as the Mortgagee may reasonably require and in accordance with standard construction loan procedures and sound lending practices. Prior to the payment or application of insurance proceeds or a condemnation or eminent domain award to the repair or restoration of the Improvements upon the Mortgaged Property, the Mortgagee shall be entitled to receive the following:

In the event the Mortgagor shall fail to restore, repair or rebuild the Improvements upon the Mortgaged Property within a reasonable time, then the Mortgagee, at its option, and upon not less than sixty (60) days’ written notice to the Mortgagor, may commence to restore, repair or rebuild the Improvements for or on behalf of said Mortgagor, and for such purpose, may perform all necessary acts to accomplish such restoration, repair or rebuilding. In the event insurance proceeds or an eminent domain award shall exceed the amount necessary to complete the repair, restoration or the rebuilding of the Improvements upon the Mortgaged Property, such excess may, at the Mortgagee’s option, be applied on account of the last maturing installments of the Indebtedness, irrespective of whether such installments are then due and payable, or be returned to the Mortgagor. In the event the Mortgagor shall fail to restore, repair or rebuild the Improvements upon the Mortgaged Property within a reasonable time, and if the Mortgagee does not restore, repair or rebuild the said Improvements as herein provided, then the Mortgagee may, at its option, apply all or any part of the insurance proceeds or condemnation or eminent domain award on account of the last maturing installments of the Indebtedness whether then due or not, without application of a prepayment premium, or return the same to the Mortgagor.

Section 14. Preservation and Maintenance of Mortgaged Property . The Mortgagor: (i) shall keep the buildings and other Improvements now or hereafter erected on the Land (including specifically without limitation the Improvements and the Chattels) in safe and good repair and condition, ordinary depreciation and wear and tear excepted; (ii) shall, upon damage to or destruction of the Mortgaged Property or any part thereof by fire or other casualty, restore, repair, replace or rebuild the Mortgaged Property that is damaged or destroyed to the condition it was in immediately prior to such damage or destruction, whether or not any insurance proceeds are available or sufficient for such purpose; (iii) shall constantly maintain or cause to be maintained the parking and landscaped areas of the Mortgaged Property; (iv) shall not commit waste or permit impairment of deterioration of the Mortgaged Property; (v) shall not alter or permit the alteration by any tenant of the design or structural character of any building now or hereafter erected on the Land (including specifically without limitation the Improvements and the Chattels) or hereafter construct, or permit any tenant to construct, additions to existing buildings or additional buildings on the Land without the prior written consent of the Mortgagee which consent shall not be unreasonably withheld, delayed or conditioned; (vi) shall not remove from the Land any of the fixtures and personal property included in the Mortgaged Property unless the same is promptly replaced with property of at least equal value and utility, and this Mortgage becomes a valid first lien and security interest on such property.

Section 15. Inspection . The Mortgagee, or its agents, upon reasonable advanced written notice to Mortgagaor, shall have the right at all reasonable times to enter upon the Mortgaged Property for the purposes of inspecting the Mortgaged Property or any part thereof. The Mortgagee shall, however, have no duty to make such inspection. Any inspection by an agent or officer of the Mortgagee of the Land and facilities constructed thereon, if occupied by lessee, shall be during normal business hours and after reasonable notice to lessee and Mortgagee acknowledges and agrees that Mortgagee will not interfere with the business operations of the lessees in the Mortgaged Property.

Section 16. Protection of Mortgagee’s Security . If the Mortgagor fails to perform any of the covenants and agreements contained in this Mortgage or in the Loan Agreement after applicable cure periods expire, or if any action or proceeding is commenced which affects the Mortgaged Property or the interest of the Mortgagee therein, or the title thereto, then the Mortgagee, at the Mortgagee’s option, may perform such covenants and agreements, defend against and/or investigate such action or proceeding, and take such other action as the Mortgagee deems necessary to protect the Mortgagee’s interest. The Mortgagee shall be the sole judge of the legality, validity and priority of any claim, lien, encumbrance, tax, assessment, charge and premium paid by it and of the amount necessary to be paid in satisfaction thereof. Any reasonable amounts or expenses disbursed or incurred by the Mortgagee pursuant to this Section 16 with interest thereon, shall become additional Indebtedness of the Mortgagor secured by this Mortgage. Unless the Mortgagor and the Mortgagee agree in writing to other terms of repayment, such amounts shall be immediately due and payable, and shall bear interest as the interest rate per annum then in effect on the Note (unless collection from the Mortgagor of interest at such rate of interest would be contrary to applicable law, in which event such amounts shall bear interest at the highest rate of interest which may be collected from the Mortgagor under applicable law) from the date of such demand. The Mortgagee shall, at its option, be subrogated to the lien of any mortgage or other lien discharged in whole or in part by the Indebtedness or by the Mortgagee under the provisions hereof, and any such subrogation rights shall be additional and cumulative security for this Mortgage. Nothing herein shall require the Mortgagee to incur any expense or do any act hereunder, and the Mortgagee shall not be liable to the Mortgagor for any damages or claims arising out of action taken hereby by the Mortgagee.

Section 17. Hazardous Wastes or Substances .

Section 18. Financial Statements and Other Information; Books and Records; Appraisals . The Mortgagor will prepare or cause to be prepared at its expense and deliver to the Mortgagee (in such number as may reasonably be requested) such financial statements and books and records of operation as are required by the Loan Agreement. Mortgagor will provide for the payment of any appraisal obtained by Mortgagee until payment in full of the Indebtedness should Mortgagee obtain any said appraisal subsequent to an Event of Default, as defined below.

Section 19. No Secondary Financing . The Mortgagor shall not create, permit to be created or to remain any subordinate lien on the Mortgaged Property or any part thereof to secure any indebtedness for borrowed money, without obtaining the prior written consent of the Mortgagee.

Section 20. Events of Default . Each of the following occurrences shall constitute an event of default hereunder (herein called an “ Event of Default ”):

Section 21. Acceleration; Foreclosure . Upon the occurrence of any Event of Default, the Mortgagee may, at its option, exercise one or more of the following rights and remedies (and any other rights and remedies which are available to the Mortgagee under applicable law or other collateral documents):

MORTGAGOR EXPRESSLY CONSENTS AND AGREES THAT THE MORTGAGED PROPERTY MAY BE FORECLOSED BY ADVERTISEMENT AND THAT PERSONAL PROPERTY COVERED BY THIS MORTGAGE AND SECURITY AGREEMENT MAY BE DISPOSED OF PURSUANT TO THE UNIFORM COMMERCIAL CODE, ALL AS DESCRIBED HEREIN.

Section 22. Forbearance Not a Waiver; Rights and Remedies Cumulative . No delay by the Mortgagee in exercising any right or remedy provided herein or otherwise afforded by law or equity shall be deemed a waiver of or preclude the exercise of such right or remedy, and no waiver by the Mortgagee of any particular provision of this Mortgage shall be deemed effective unless in writing signed by the Mortgagee. All such rights and remedies provided for herein or which the Mortgagee may have otherwise, at law or in equity, shall be distinct, separate and cumulative and may be exercised concurrently, independently or successively in any order whatsoever, and as often as the occasion therefor arises.

Section 23. Assignment of Leases and Rents .

The rights and powers of Mortgagee under this assignment and the application of Rents of the Mortgaged Property pursuant to this Section 23 shall continue and remain in full force and effect both before and after commencement of any action or proceeding to foreclose the Mortgage, and until expiration of the period of redemption from any such foreclosure sale, whether or not any deficiency from the unpaid balance of the indebtedness secured hereby exists after such foreclosure sale.

Section 24. Subsequent Agreements . Any agreement hereafter made by the Mortgagor and the Mortgagee pursuant to this Mortgage shall be superior to the rights of the holder of any intervening lien or encumbrance.

Section 25. Waiver of Appraisement, Homestead, Marshaling, Etc. The Mortgagor hereby waives to the full extent lawfully allowed the benefit of any homestead, appraisement, evaluation, stay and extension laws now or hereinafter in force. The Mortgagor hereby waives any rights available with respect to marshaling of assets so as to require the separate sales of any portion of the Mortgaged Property, or as to require the Mortgagee to exhaust its remedies against a specific portion of the Mortgaged Property before proceeding against the other and does hereby expressly consent to and authorize the sale of the Mortgaged Property or any part thereof as a single economic unit or parcel.

Section 26. Business Loan Representation . The Mortgagor represents and warrants to the Mortgagee that the loan evidenced by the Note is a business loan transacted solely for the purpose of carrying on the business of the Mortgagor and that none of the Mortgaged Property is classified as homestead property.

Section 27. Nonagricultural Property . Mortgagor hereby states and certifies of its own personal knowledge that the Mortgaged Property is not “agricultural property” or “agricultural land” as those terms are defined in Minnesota Statutes, nor is the Mortgaged Property held or used for “agricultural use” as those terms are defined in Minnesota Statutes.

Section 28. Attorneys’ Fees and Expenses . In the event the Mortgagor should default under any of the provisions of this Mortgage and the Mortgagee should employ attorneys or incur other expenses for the collection of amounts due hereunder or the enforcement of performance of any obligation or agreement on the part of the Mortgagor contained in this Mortgage, or any other instrument securing the obligation to repay the Note, the Mortgagor will pay to the Mortgagee on demand the reasonable fees of such attorneys and such other reasonable expenses so incurred.

Section 29. Indemnification by Mortgagor . The Mortgagor will protect, indemnify, and save harmless the Mortgagee from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs, and expenses (including, without limitation, attorneys fees and expenses) imposed upon or incurred by or asserted against the Mortgagee by reason of (a) ownership of the Mortgaged Property, or any interest therein, or receipt of any rent or other sum therefrom, (b) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Mortgaged Property or any part thereof or the adjoining sidewalks, curbs, vaults, and vault space, if any except if caused by the willful misconduct or gross negligence of the Mortgagee or its agents after Mortgagee gains possession of the Mortgaged Premises or takes title to the Mortgaged Premises, (c) any use, non-use, or condition of the Mortgaged Property or any part thereof or the adjoining sidewalks, curbs, vaults, and vault space, if any, (d) any failure on the part of the Mortgagor to perform or comply with any of the terms of this Mortgage, (e) performance of any labor or services or the furnishing of any materials or other property in respect to the Mortgaged Property or any part thereof, (f) any negligence or tortious act on the part of the Mortgagor or any of its agents, contractors, sublessees, licensees, or invitees, or (g) exercise by the Mortgagee of any remedy provided hereunder or at law or equity, unless such were the result of bad faith or willful misconduct of the Mortgagee. Any amounts, payable to the Mortgagee under this section, which are not paid within thirty (30) days after written demand therefor by the Mortgagee shall bear interest at the interest rate per annum then in effect on the Note (unless collection from the Mortgagor of interest at such rate of interest would be contrary to applicable law, in which event such amounts shall bear interest at the highest rate of interest which may be collected from the Mortgagor under applicable law) from the date of such demand, and shall be secured by this Mortgage. If any action, suit, or proceeding is brought against the Mortgagee by reasons of any such occurrence, the Mortgagor upon the Mortgagee’s request will, at the Mortgagor’s expense, resist and defend such action, suit, or proceeding or will cause the same to be resisted and defended by counsel for the insurer of the liability or by counsel designated by the Mortgagor approved by the Mortgagee.

Section 30. Successors and Assigns Bound; Agents; Captions . The covenants and agreements herein contained shall bind, and the rights hereunder shall inure to, the respective heirs, legal representatives, successors and assigns of the Mortgagee and the Mortgagor. The captions and headings in this Mortgage are for convenience only and are not to be used to interpret or define the provisions hereof.

Section 31. Notice . Any notice under this Mortgage shall be effective upon placing thereof in the United States mail, certified mail with return receipt requested, postage prepaid, to the parties at the following addresses:

or at such other address as the Mortgagor or the Mortgagee may designate in writing to the other party in compliance with this Section 31.

Section 32. Governing Law; Severability . This Mortgage shall be governed by the substantive laws of the State of Minnesota. Any provision of this Mortgage which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. In the event that any provision or clause of this Mortgage conflicts with applicable law, such conflict shall not affect other provisions of this Mortgage which can be given effect without the conflicting provisions and to this end the provisions of this Mortgage are declared to be severable.

Section 33. Counterparts . This Mortgage may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

Section 34. Uniform Commercial Code .

Section 35. Further Assurances . At any time and from time to time until payment in full of the Indebtedness, the Mortgagor will, at the reasonable request of the Mortgagee, promptly execute and deliver to the Mortgagee such additional instruments as may be reasonably required further to evidence the lien of this Mortgage and further to protect the security interest of the Mortgagee with respect to the Mortgaged Property including, without limitation, additional security agreements, financing statements and continuation statements. Any reasonable expenses incurred by the Mortgagee in connection with the preparation and recordation of any such instruments, including, but not limited to reasonable attorneys’ fees, shall become additional Indebtedness of the Mortgagor secured by this Mortgage. Unless the Mortgagor and the Mortgagee agree in writing to other terms of repayment, such amounts shall be immediately due and payable, and shall bear interest at the annual rate then in effect on the Note, unless collecting from the Mortgagor of interest at such rate would be contrary to applicable law, in which event such amounts shall bear interest at the highest rate which may be collected from the Mortgagor under applicable law.

Section 36. Due on Sale or Mortgaging, Etc . In the event the Mortgagor sells, conveys, transfers, further encumbers, changes the form of ownership or otherwise disposes of the Mortgaged Property, or any part thereof, or any interest therein or transfers the full possessory rights to the Mortgaged Property whether voluntarily or involuntarily, without the written consent of the Mortgagee being first obtained, then at the sole option of the Mortgagee, the Mortgagee may declare the entire principal and interest evidenced by the Note due and payable in full and call for payment of the same at once. Any transfer of a partnership, beneficial or corporate ownership interest in Mortgagor shall constitute a conveyance for purposes of this Section and the consent of the Mortgagee shall be required. In the event the Mortgagor shall request the consent of the Mortgagee to any of the foregoing events, the Mortgagor shall deliver a written request to the Mortgagee together with complete information regarding such conveyance, transfer or encumbrance and shall allow the Mortgagee thirty (30) days after delivery of all required information for evaluation of such request. In the event that such request is not approved within such thirty (30) day period, it shall be deemed not approved. Mortgagee may charge an administrative fee to process any such sale, conveyance, transfer, mortgage or other encumbrances. Such approval may be subject to such modifications of the loan terms, interest rate and maturity date as may be established by the Mortgagee. Consent as to any one transaction shall not be deemed to be a waiver of the right to require consent to future or successive transactions.

Section 37. Release and Discharge . Upon payment in full of all Indebtedness as defined herein, the Mortgagee shall execute and deliver a satisfaction of this Mortgage.

Section 38. Incorporation of Documents . The provisions of the Note and Loan Agreement are by this reference incorporated into and made a part of this Mortgage and the Mortgagee is entitled to all the benefits, rights and privileges in any such instruments.

[SIGNATURE PAGE TO FOLLOW]

IN WITNESS WHEREOF, the Mortgagor has caused this Mortgage to be duly executed as of the day and year first above written.

The foregoing instrument was acknowledged before me this ____ day of February, 2017, by Paul D. Sheely, the Chief Financial Officer of WSI Industries, Inc., a Minnesota corporation, on behalf of the corporation.

SEND TAX STATEMENTS TO :

WSI Industries, Inc.

213 Chelsea Road

Monticello, MN 55362

THIS INSTRUMENT PREPARED BY :

Michelle R. Jester, Esq.

Messerli & Kramer P.A.

1400 Fifth Street Towers

100 South Fifth Street

Minneapolis, MN 55402

(612) 672-3600

EXHIBIT A

Legal Description

Lot 1, Block 1, Remmele Addition, according to the recorded plat thereof, Wright County, Minnesota.

(Abstract Property)

EXHIBIT B

Permitted Encumbrances

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:

(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.

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

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

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:

6.        Defaults .

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:

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.

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

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.

EXHIBIT A

COMPLIANCE CERTIFICATE

See attached.

COMPLIANCE CERTIFICATE

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:

REVOLVING PROMISSORY NOTE

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.

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.

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

GUARANTY

THIS GUARANTY (the “ Guaranty ”) is executed as of February 15, 2017, by WSI ROCHESTER, INC., a Minnesota corporation (“ Guarantor ”), for the benefit of TRADITION CAPITAL BANK, a Minnesota banking corporation (“ Lender ”), with reference to the following facts:

A. Lender has agreed to lend $3,700,000.00 (the “ Loan ”) to WSI INDUSTRIES, INC., a Minnesota corporation (“ Borrower ”), pursuant to the terms and conditions contained in that certain Loan Agreement dated of even date herewith (“ Loan Agreement ”) and that certain Promissory Note of even date herewith in the principal amount of the Loan (the “ Note ”) to refinance the current indebtedness encumbering that certain real property owned by Borrower and located at 213 Chelsea Road, Monticello, Minnesota 55362 (the “ Property ”), with the Note secured by a certain Combination Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents on the Property given by Borrower dated of even date herewith (“ Mortgage ”) and by other collateral given by Borrower to secure the Note (and the Loan Agreement and the foregoing documents collectively called the “ Loan Documents ”).

B. As a condition of the making of the Loan, Lender has required that Guarantor guarantee the obligations of Borrower in accordance with the terms of this Guaranty.

C. Guarantor is a subsidiary of Borrower so that the Guarantor has a direct and substantial economic interest in Borrower and therefore expects to derive direct and indirect benefits from the Loan given by Lender to Borrower.

NOW, THEREFORE, in consideration of Lender’s agreement to make the Loan and as an inducement to Lender to do so, Guarantor covenants and agrees with Lender, for the benefit of the holder from time to time of the Note, as follows:

Article I- REPRESENTATIONS AND WARRANTIES

Guarantor makes the following representations and warranties which shall be continuing representations and warranties until this Guaranty expires in accordance with the provisions contained herein:

1.1 Guaranty Authorized and Binding. The execution, delivery and performance of this Guaranty does not require the consent or approval of any governmental body or other regulatory authority; are not in contravention of; or in conflict with, any law or regulation; and this Guaranty is a valid and legally binding obligation of Guarantor enforceable in accordance with its terms.

1.2 No Conflict . The execution and delivery of this Guaranty are not, and the performance of this Guaranty will not be, in contravention of, or in conflict with, any agreement, indenture or undertaking to which Guarantor is a party or by which Guarantor or Guarantor’s property is or may be bound or affected and do not, and will not cause any security interest, lien or other encumbrance to be created or imposed upon any such property.

1.3 Litigation . There is no litigation or other proceeding pending or, to the best of knowledge of Guarantor, threatened against, or affecting, his properties which, if determined adversely to Guarantor, would have a materially adverse effect on the financial condition, properties, businesses or operations of Guarantor or which prevents or interferes with or adversely affects Guarantor’s entering into this Guaranty or the validity of this Guaranty or the carrying out of the terms hereof, and Guarantor is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority.

1.4 Financial Condition . Guarantor’s financial statements, which have heretofore been submitted in writing by Guarantor to Lender in connection herewith, are true and correct in all material respects and fairly present the financial condition of Guarantor for the period covered thereby. Since the date of said financial statements, there has been no materially adverse change in Guarantor’s financial condition. Guarantor has no knowledge of any liabilities, contingent or otherwise, as of the date of said financial statements, which are not reflected in said financial statements; and, other than in the ordinary course of its business, Guarantor has not entered into any commitments or contracts which are not reflected in said financial statements or which may have a materially adverse effect upon Guarantor’s financial condition, operations or business as now conducted.

1.5 Solvency . The execution and delivery of this Guaranty will not (i) leave Guarantor with remaining assets which constitute unreasonably small capital given the nature of Guarantor’s business, or (ii) result in the incurrence of Debts beyond Guarantor’s ability to pay them when and as they mature. For the purposes of this Section, “Debts” includes any legal liability for indebtedness, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent.

1.6 Financial or Other Benefit or Advantage . Guarantor hereby acknowledges and warrants that Guarantor has derived or expects to derive a financial or other benefit or advantage from the Loan and from each and every renewal, extension, release of collateral or other relinquishment of legal rights made or granted or to be made or granted by Lender to Borrower in connection with the Loan.

Article II- AGREEMENTS

2.1 Guaranty. Guarantor hereby unconditionally and irrevocably guarantees the due and punctual payment of the outstanding principal due under the Note plus interest, late fees, reasonable attorneys’ fees and costs at any point in time in connection with the interpretation, protection, defense, enforcement or collection of this Guaranty or with respect to the Loan (and all renewals, extensions, modifications and rearrangements thereof) (collectively the “Guaranteed Obligations”) and whether or not the Guaranteed Obligations are valid and enforceable against the Borrower, whenever the Guaranteed Obligations become due, whether on demand, at maturity or by reason of acceleration, or at the time the Borrower or the Guarantor shall become the subject of any bankruptcy or insolvency proceeding. This is a guaranty of payment only and not of collection.

2.2 Obligation Absolute . The obligation of Guarantor hereunder shall remain in full force and effect without regard to, and shall not be affected or impaired by the following, any of which may occur or be taken without the consent of, or notice to, Guarantor, nor shall any of the following give Guarantor any recourse or right of action against Lender:

2.3 Waivers . Guarantor unconditionally waives any defense to the enforcement of this Guaranty, including, without limitation:

2.4 Subrogation . Guarantor understands that the exercise by Lender of certain rights and remedies may affect or eliminate Guarantor’s right of subrogation against Borrower or any guarantor and that Guarantor may therefore incur partially or totally nonreimbursable liability hereunder. Nevertheless, Guarantor hereby authorizes and empowers Lender, its successors, endorsees and/or assigns, to exercise in its or their sole discretion, any rights and remedies, or any combination thereof; which may then be available, it being the purpose and intent of Guarantor that the obligations hereunder shall be absolute, continuing, independent and unconditional under any and all circumstances.

2.5 Additional Waivers . No Guarantor shall be released or discharged, either in whole or in part, by Lender’s failure or delay to (i) perfect or continue the perfection of any lien or security interest in any collateral which secures the obligations of the Borrower or Guarantor, or (ii) protect the property covered by such lien or security interest.

2.6 Independent and Separate Obligations . The obligation of Guarantor hereunder is independent of the obligation of Borrower and, in the event of any default hereunder, a separate action or actions may be brought and prosecuted against Guarantor whether or not Guarantor is the alter ego of Borrower and whether or not Borrower is joined therein or a separate action or actions are brought against Borrower. Lender’s rights hereunder shall not be exhausted until all of the Guaranteed Obligation has been fully paid and performed.

2.7 Bankruptcy No Discharge; Repayments . So long as any of the Guaranteed Obligation guaranteed hereunder shall be owing to Lender, Guarantor shall not, without the prior written consent of Lender, commence or join with any other party in commencing any bankruptcy, reorganization or insolvency proceedings of or against Borrower. Guarantor understands and acknowledges that by virtue of this Guaranty, he has specifically assumed any and all risks of a bankruptcy or reorganization case or proceeding with respect to Borrower. As an example and not in any way of limitation, a subsequent modification of the Guaranteed Obligation in any reorganization case concerning Borrower shall not affect the obligation of Guarantor to pay and perform the Guaranteed Obligation in accordance with their respective original terms. If claim is ever made upon Lender for repayment of the obligations under the Loan Documents and Lender repays all or any part of said amount, then, notwithstanding any revocation or termination of this Guaranty or the cancellation of the Note or any other instrument evidencing the Loan, Guarantor shall be and remain jointly and severally liable to Lender for the amount so repaid constituting the Guaranteed Obligations to the same extent as if such amount had never originally been received by Lender.

2.8 Subordination . In the event any default, or event which upon the giving of notice or the lapse of time or both could become a default, shall exist in the performance of the Loan Documents, any indebtedness of Borrower now or hereafter held by Guarantor is hereby subordinated to the obligations of Borrower under the Guaranteed Obligation. If requested by Lender, such indebtedness shall be collected, enforced and received by Guarantor as trustee for Lender and paid over to Lender on account of the Loan Documents. However, no such payment shall reduce or affect in any manner the absolute, unconditional and independent liability of Guarantor hereunder except to the extent such payment is applied against the Loan.

2.9 Payments.

2.10 Intentionally Omitted.

2.11 Waiver of Deficiency . Guarantor expressly and specifically agrees that, in the event of the foreclosure of the Mortgage, and in the event the proceeds of foreclosure are not sufficient to pay all indebtedness secured thereby, Guarantor expressly and unconditionally agrees to pay to Lender the amount of such deficiency, but in no event more than the maximum amount of the Guaranteed Obligation, notwithstanding any provision of Minnesota law which might prevent Lender from collecting such deficiency from Borrower, or its successors or assigns, or which provides that the indebtedness secured by the Mortgage has been satisfied as a result of foreclosure thereof. Guarantor hereby expressly and specifically waives and renounces any right to recover from Borrower, its successors and assigns, any deficiency so paid by Guarantor, if Lender would be unable to collect said deficiency from Borrower under Minnesota law, until the Guaranteed Obligation is paid and performed in full.

2.12 Lender’s Right of Setoff . In addition to all liens upon and rights of setoff against the monies, securities or other property of Guarantor given to Lender by law, Lender shall have, with respect to Guarantor’s obligations to Lender under this Guaranty and to the extent permitted by law, a contractual possessory security interest in and a right of setoff following written notice to Guarantor against, and Guarantor hereby assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor’s right, title and interest in and to, all deposits, moneys, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Lender, whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise. Every such security interest and right of setoff may be exercised without demand upon to Guarantor. No security interest or right of setoff shall be deemed to have been waived by any act or conduct on the part of Lender or by any neglect to exercise such right of setoff or to enforce such security interest or by any delay in so doing. Every right of setoff and security interest shall continue in full force and effect until such right of setoff or security interest is specifically waived or released by an instrument in writing executed by Lender.

2.13 Merge, Consolidate or Sell. Guarantor shall not 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 without Lender’s written consent. Guarantor further agrees that no member of Guarantor shall sell, dispose or transfer any ownership interest in Guarantor in a single or series of transactions without the express consent of the Lender.

Article III- MISCELLANEOUS

3.1 Expenses . In addition to the Guaranteed Obligation, Guarantor agrees to pay all costs and expenses, including reasonable attorneys’ fees, which may be incurred by Lender in any effort to collect or enforce any of the Loan Documents or the obligations of Guarantor hereunder, whether or not any lawsuit is filed, including, without limitation, all costs and attorneys’ fees incurred by Lender in any bankruptcy proceeding (including, without limitation, any action for relief from the automatic stay of any bankruptcy proceeding, whether or not Lender prevails therein) and in any judicial or nonjudicial foreclosure action. Such amounts shall bear interest until paid at a rate equal to the Interest Rate, as defined in the Note.

3.2 Amendments; Successors . Neither this instrument nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. All of the terms of this instrument shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. In the event of the death of any individual person included in the term “Guarantor,” this Guaranty shall be enforceable as a claim against that individual’s estate or otherwise against the representatives of the individual’s estate, the individual’s heirs-at-law, the devisees and beneficiaries of the individual’s total estate and each of them. The term “Borrower” shall mean both the named Borrower and any other person or entity at any time assuming or otherwise becoming primarily liable on all or any part of the obligations set forth in the Loan Documents. No delay or failure by Lender to exercise any remedy against Borrower or Guarantor will be construed as a waiver of that right or remedy. All remedies of Lender are cumulative and may be exercised singly, simultaneously, consecutively and in any order. In the event that the provisions of this Guaranty are claimed or held to be inconsistent with any other instrument evidencing or securing the Loan, or the obligations of Guarantor, the terms of this Guaranty shall remain fully valid and effective. Any married person executing this Guaranty agrees that recourse may be had against community assets and against such person’s separate property for the satisfaction of the obligations hereby guaranteed. When the context in which the words are used in this Guaranty indicates that such is the intent, words in the singular number shall include the plural and vice-versa. All references to “Guarantor” shall be interpreted to include Guarantor. If any one or more of the provisions of this Guaranty should be determined to be illegal or unenforceable, all other provisions shall remain effective. Guarantor shall not have the right to assign any of his rights or obligations under this Guaranty.

3.3 Governing Law . This Guaranty shall be governed by and be construed pursuant to the laws of the State of Minnesota applicable to contracts made and performed in the State of Minnesota without reference to any conflict or choice of law rules that would otherwise apply. Any suit, action or proceeding arising out of or in connection with this Agreement may be brought, at Lender’s election, in the Minnesota District Court for Wright County, Minnesota, or the United States District Court for the District of Minnesota, and the parties hereto irrevocably submit and consent to the jurisdiction of each such court and agree that any summons, complaint, writ, judgment or other notice or service or legal process may be sufficiently served upon it in connection with any such suit, action or proceeding, if sent to the last known address of the applicable party in accordance with the provisions of Section 3.7 hereof. The submission to said jurisdiction shall not (and shall not be construed so as to) limit the right of the Lender to take proceedings against the Guarantor, in whatsoever jurisdictions shall be appropriate nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not.

3.4 Assignability by Lender. Lender may, at any time and from time to time, assign, conditionally or otherwise, all of the rights of Lender under the Note and under this Guaranty, whereupon the assignee shall succeed to all rights of Lender hereunder to the extent that such rights may be assigned to it. Lender, or each successor holder of the Note, may give written notice to Guarantor of any such assignment, but any failure to give, or delay in giving, such notice shall not affect the validity or enforceability of any such assignment.

3.5 Demands . Each demand by Lender for performance or payment hereunder shall be in writing and shall be made in the manner set forth in Section 3.7 below. A dated statement signed by an officer of Lender setting forth the amount of indebtedness at the time owing to Lender by Borrower under the Loan Documents shall be presumptive evidence thereof (subject to rebuttal) as between Guarantor and Lender in any legal proceedings against Guarantor in connection with this Guaranty.

3.6 Term . The obligations of Guarantor under this Guaranty shall continue in full force and effect until the obligations under the Loan Documents shall have been fully paid and performed and the period of time has expired during which any payment made by Borrower or Guarantor to Lender may be determined to be a Preferential Payment.

3.7 Notices . All notices and demands hereunder shall be deemed to have been duly given if personally delivered or mailed by United States registered or certified mail, with return receipt requested, postage prepaid to the parties at the following addresses (or at such other addresses as shall be given by written notice by any party to the others) and shall be deemed complete upon any such mailing:

3.8 Complete Agreement . This Guaranty supersedes any prior negotiations, discussions or communications between Guarantor and Lender and constitutes the entire agreement between Lender and Guarantor with respect to the Guaranteed Obligation. This Guaranty may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same Guaranty.

3.9 Interpretation; Severability . In the event that the provisions of this Guaranty are claimed or held to be inconsistent with any other instrument evidencing or securing the Note, or the obligations of Guarantor, the terms of this Guaranty shall remain fully valid and effective. When the context in which the words are used in this Guaranty indicates that such is the intent, words in the singular number shall include the plural and vice-versa. The parties hereto intend and believe that each provision of this Guaranty comports with all applicable local, state and federal laws and judicial decisions. However, if any provision or any portion of any provision contained in this Guaranty is held by a court of law to be invalid, illegal, unlawful, void or unenforceable as written in any respect, then it is the intent of all parties hereto that such portion or provision shall be given force to the fullest possible extent that it is legal, valid and enforceable, that the remainder of the Guaranty shall be construed as if such illegal, invalid, unlawful, void or unenforceable portion or provision was not contained therein, and the rights, obligations and interests of Guarantor and Lender under the remainder of this Guaranty shall continue in full force and effect.

3.10 Obligation Absolute . This Guaranty and the obligations of Guarantor hereunder shall be effective upon delivery to the Lender, without further act, condition or acceptance by the Lender, shall be binding upon the Guarantor and the heirs, representatives, successors and assigns of the Guarantor, and shall inure to the benefit of the Lender and its participants, successors and assigns. The Guarantor further waives notice of Lender’s acceptance hereof.

3.11 Headings . The captions and headings to the sections and paragraphs of this Guaranty are for convenience only and shall not be deemed part of the text of the respective sections or paragraphs and shall not vary, by implication or otherwise, any of the provisions of this Guaranty.

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SIGNATURE PAGE FOLLOWS.]

IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of the date first above written.

The foregoing instrument was acknowledged before me this ____ day of February, 2017, by Paul D. Sheely, the Chief Financial Officer of WSI Rochester, Inc., a Minnesota corporation, on behalf of the corporation, Guarantor

GUARANTY

THIS GUARANTY (the “ Guaranty ”) is executed as of February 15, 2017, by WSI INDUSTRIES, CO., a Minnesota corporation (“ Guarantor ”), for the benefit of TRADITION CAPITAL BANK, a Minnesota banking corporation (“ Lender ”), with reference to the following facts:

A. Lender has agreed to lend $3,700,000.00 (the “ Loan ”) to WSI INDUSTRIES, INC., a Minnesota corporation (“ Borrower ”), pursuant to the terms and conditions contained in that certain Loan Agreement dated of even date herewith (“ Loan Agreement ”) and that certain Promissory Note of even date herewith in the principal amount of the Loan (the “ Note ”) to refinance the current indebtedness encumbering that certain real property owned by Borrower and located at 213 Chelsea Road, Monticello, Minnesota 55362 (the “ Property ”), with the Note secured by a certain Combination Mortgage, Security Agreement, Fixture Filing and Assignment of Leases and Rents on the Property given by Borrower dated of even date herewith (“ Mortgage ”) and by other collateral given by Borrower to secure the Note (and the Loan Agreement and the foregoing documents collectively called the “ Loan Documents ”).

B. As a condition of the making of the Loan, Lender has required that Guarantor guarantee the obligations of Borrower in accordance with the terms of this Guaranty.

C. Guarantor is a subsidiary of Borrower so that the Guarantor has a direct and substantial economic interest in Borrower and therefore expects to derive direct and indirect benefits from the Loan given by Lender to Borrower.

NOW, THEREFORE, in consideration of Lender’s agreement to make the Loan and as an inducement to Lender to do so, Guarantor covenants and agrees with Lender, for the benefit of the holder from time to time of the Note, as follows:

Article I- REPRESENTATIONS AND WARRANTIES

Guarantor makes the following representations and warranties which shall be continuing representations and warranties until this Guaranty expires in accordance with the provisions contained herein:

1.1 Guaranty Authorized and Binding. The execution, delivery and performance of this Guaranty does not require the consent or approval of any governmental body or other regulatory authority; are not in contravention of; or in conflict with, any law or regulation; and this Guaranty is a valid and legally binding obligation of Guarantor enforceable in accordance with its terms.

1.2 No Conflict. The execution and delivery of this Guaranty are not, and the performance of this Guaranty will not be, in contravention of, or in conflict with, any agreement, indenture or undertaking to which Guarantor is a party or by which Guarantor or Guarantor’s property is or may be bound or affected and do not, and will not cause any security interest, lien or other encumbrance to be created or imposed upon any such property.

1.3 Litigation. There is no litigation or other proceeding pending or, to the best of knowledge of Guarantor, threatened against, or affecting, his properties which, if determined adversely to Guarantor, would have a materially adverse effect on the financial condition, properties, businesses or operations of Guarantor or which prevents or interferes with or adversely affects Guarantor’s entering into this Guaranty or the validity of this Guaranty or the carrying out of the terms hereof, and Guarantor is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority.

1.4 Financial Condition. Guarantor’s financial statements, which have heretofore been submitted in writing by Guarantor to Lender in connection herewith, are true and correct in all material respects and fairly present the financial condition of Guarantor for the period covered thereby. Since the date of said financial statements, there has been no materially adverse change in Guarantor’s financial condition. Guarantor has no knowledge of any liabilities, contingent or otherwise, as of the date of said financial statements, which are not reflected in said financial statements; and, other than in the ordinary course of its business, Guarantor has not entered into any commitments or contracts which are not reflected in said financial statements or which may have a materially adverse effect upon Guarantor’s financial condition, operations or business as now conducted.

1.5 Solvency. The execution and delivery of this Guaranty will not (i) leave Guarantor with remaining assets which constitute unreasonably small capital given the nature of Guarantor’s business, or (ii) result in the incurrence of Debts beyond Guarantor’s ability to pay them when and as they mature. For the purposes of this Section, “Debts” includes any legal liability for indebtedness, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent.

1.6 Financial or Other Benefit or Advantage. Guarantor hereby acknowledges and warrants that Guarantor has derived or expects to derive a financial or other benefit or advantage from the Loan and from each and every renewal, extension, release of collateral or other relinquishment of legal rights made or granted or to be made or granted by Lender to Borrower in connection with the Loan.

Article II - AGREEMENTS

2.1 Guaranty. Guarantor hereby unconditionally and irrevocably guarantees the due and punctual payment of the outstanding principal due under the Note plus interest, late fees, reasonable attorneys’ fees and costs at any point in time in connection with the interpretation, protection, defense, enforcement or collection of this Guaranty or with respect to the Loan (and all renewals, extensions, modifications and rearrangements thereof) (collectively the “ Guaranteed Obligations ”) and whether or not the Guaranteed Obligations are valid and enforceable against the Borrower, whenever the Guaranteed Obligations become due, whether on demand, at maturity or by reason of acceleration, or at the time the Borrower or the Guarantor shall become the subject of any bankruptcy or insolvency proceeding. This is a guaranty of payment only and not of collection.

2.2 Obligation Absolute. The obligation of Guarantor hereunder shall remain in full force and effect without regard to, and shall not be affected or impaired by the following, any of which may occur or be taken without the consent of, or notice to, Guarantor, nor shall any of the following give Guarantor any recourse or right of action against Lender:

2.3 Waivers. Guarantor unconditionally waives any defense to the enforcement of this Guaranty, including, without limitation:

2.4 Subrogation. Guarantor understands that the exercise by Lender of certain rights and remedies may affect or eliminate Guarantor’s right of subrogation against Borrower or any guarantor and that Guarantor may therefore incur partially or totally nonreimbursable liability hereunder. Nevertheless, Guarantor hereby authorizes and empowers Lender, its successors, endorsees and/or assigns, to exercise in its or their sole discretion, any rights and remedies, or any combination thereof; which may then be available, it being the purpose and intent of Guarantor that the obligations hereunder shall be absolute, continuing, independent and unconditional under any and all circumstances.

2.5 Additional Waivers. No Guarantor shall be released or discharged, either in whole or in part, by Lender’s failure or delay to (i) perfect or continue the perfection of any lien or security interest in any collateral which secures the obligations of the Borrower or Guarantor, or (ii) protect the property covered by such lien or security interest.

2.6 Independent and Separate Obligations. The obligation of Guarantor hereunder is independent of the obligation of Borrower and, in the event of any default hereunder, a separate action or actions may be brought and prosecuted against Guarantor whether or not Guarantor is the alter ego of Borrower and whether or not Borrower is joined therein or a separate action or actions are brought against Borrower. Lender’s rights hereunder shall not be exhausted until all of the Guaranteed Obligation has been fully paid and performed.

2.7 Bankruptcy No Discharge; Repayments. So long as any of the Guaranteed Obligation guaranteed hereunder shall be owing to Lender, Guarantor shall not, without the prior written consent of Lender, commence or join with any other party in commencing any bankruptcy, reorganization or insolvency proceedings of or against Borrower. Guarantor understands and acknowledges that by virtue of this Guaranty, he has specifically assumed any and all risks of a bankruptcy or reorganization case or proceeding with respect to Borrower. As an example and not in any way of limitation, a subsequent modification of the Guaranteed Obligation in any reorganization case concerning Borrower shall not affect the obligation of Guarantor to pay and perform the Guaranteed Obligation in accordance with their respective original terms. If claim is ever made upon Lender for repayment of the obligations under the Loan Documents and Lender repays all or any part of said amount, then, notwithstanding any revocation or termination of this Guaranty or the cancellation of the Note or any other instrument evidencing the Loan, Guarantor shall be and remain jointly and severally liable to Lender for the amount so repaid constituting the Guaranteed Obligations to the same extent as if such amount had never originally been received by Lender.

2.8 Subordination. In the event any default, or event which upon the giving of notice or the lapse of time or both could become a default, shall exist in the performance of the Loan Documents, any indebtedness of Borrower now or hereafter held by Guarantor is hereby subordinated to the obligations of Borrower under the Guaranteed Obligation. If requested by Lender, such indebtedness shall be collected, enforced and received by Guarantor as trustee for Lender and paid over to Lender on account of the Loan Documents. However, no such payment shall reduce or affect in any manner the absolute, unconditional and independent liability of Guarantor hereunder except to the extent such payment is applied against the Loan.

2.9 Payments.

2.10 Intentionally Omitted.

2.11 Waiver of Deficiency. Guarantor expressly and specifically agrees that, in the event of the foreclosure of the Mortgage, and in the event the proceeds of foreclosure are not sufficient to pay all indebtedness secured thereby, Guarantor expressly and unconditionally agrees to pay to Lender the amount of such deficiency, but in no event more than the maximum amount of the Guaranteed Obligation, notwithstanding any provision of Minnesota law which might prevent Lender from collecting such deficiency from Borrower, or its successors or assigns, or which provides that the indebtedness secured by the Mortgage has been satisfied as a result of foreclosure thereof. Guarantor hereby expressly and specifically waives and renounces any right to recover from Borrower, its successors and assigns, any deficiency so paid by Guarantor, if Lender would be unable to collect said deficiency from Borrower under Minnesota law, until the Guaranteed Obligation is paid and performed in full.

2.12 Lender’s Right of Setoff. In addition to all liens upon and rights of setoff against the monies, securities or other property of Guarantor given to Lender by law, Lender shall have, with respect to Guarantor’s obligations to Lender under this Guaranty and to the extent permitted by law, a contractual possessory security interest in and a right of setoff following written notice to Guarantor against, and Guarantor hereby assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor’s right, title and interest in and to, all deposits, moneys, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Lender, whether held in a general or special account or deposit, whether held jointly with someone else, or whether held for safekeeping or otherwise. Every such security interest and right of setoff may be exercised without demand upon to Guarantor. No security interest or right of setoff shall be deemed to have been waived by any act or conduct on the part of Lender or by any neglect to exercise such right of setoff or to enforce such security interest or by any delay in so doing. Every right of setoff and security interest shall continue in full force and effect until such right of setoff or security interest is specifically waived or released by an instrument in writing executed by Lender.

2.13 Merge, Consolidate or Sell. Guarantor shall not 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 without Lender’s written consent. Guarantor further agrees that no member of Guarantor shall sell, dispose or transfer any ownership interest in Guarantor in a single or series of transactions without the express consent of the Lender.

Article III- MISCELLANEOUS

3.1 Expenses. In addition to the Guaranteed Obligation, Guarantor agrees to pay all costs and expenses, including reasonable attorneys’ fees, which may be incurred by Lender in any effort to collect or enforce any of the Loan Documents or the obligations of Guarantor hereunder, whether or not any lawsuit is filed, including, without limitation, all costs and attorneys’ fees incurred by Lender in any bankruptcy proceeding (including, without limitation, any action for relief from the automatic stay of any bankruptcy proceeding, whether or not Lender prevails therein) and in any judicial or nonjudicial foreclosure action. Such amounts shall bear interest until paid at a rate equal to the Interest Rate, as defined in the Note.

3.2 Amendments; Successors. Neither this instrument nor any term hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. All of the terms of this instrument shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns. In the event of the death of any individual person included in the term “Guarantor,” this Guaranty shall be enforceable as a claim against that individual’s estate or otherwise against the representatives of the individual’s estate, the individual’s heirs-at-law, the devisees and beneficiaries of the individual’s total estate and each of them. The term “Borrower” shall mean both the named Borrower and any other person or entity at any time assuming or otherwise becoming primarily liable on all or any part of the obligations set forth in the Loan Documents. No delay or failure by Lender to exercise any remedy against Borrower or Guarantor will be construed as a waiver of that right or remedy. All remedies of Lender are cumulative and may be exercised singly, simultaneously, consecutively and in any order. In the event that the provisions of this Guaranty are claimed or held to be inconsistent with any other instrument evidencing or securing the Loan, or the obligations of Guarantor, the terms of this Guaranty shall remain fully valid and effective. Any married person executing this Guaranty agrees that recourse may be had against community assets and against such person’s separate property for the satisfaction of the obligations hereby guaranteed. When the context in which the words are used in this Guaranty indicates that such is the intent, words in the singular number shall include the plural and vice-versa. All references to “Guarantor” shall be interpreted to include Guarantor. If any one or more of the provisions of this Guaranty should be determined to be illegal or unenforceable, all other provisions shall remain effective. Guarantor shall not have the right to assign any of his rights or obligations under this Guaranty.

3.3 Governing Law. This Guaranty shall be governed by and be construed pursuant to the laws of the State of Minnesota applicable to contracts made and performed in the State of Minnesota without reference to any conflict or choice of law rules that would otherwise apply. Any suit, action or proceeding arising out of or in connection with this Agreement may be brought, at Lender’s election, in the Minnesota District Court for Wright County, Minnesota, or the United States District Court for the District of Minnesota, and the parties hereto irrevocably submit and consent to the jurisdiction of each such court and agree that any summons, complaint, writ, judgment or other notice or service or legal process may be sufficiently served upon it in connection with any such suit, action or proceeding, if sent to the last known address of the applicable party in accordance with the provisions of Section 3.7 hereof. The submission to said jurisdiction shall not (and shall not be construed so as to) limit the right of the Lender to take proceedings against the Guarantor, in whatsoever jurisdictions shall be appropriate nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not.

3.4 Assignability by Lender. Lender may, at any time and from time to time, assign, conditionally or otherwise, all of the rights of Lender under the Note and under this Guaranty, whereupon the assignee shall succeed to all rights of Lender hereunder to the extent that such rights may be assigned to it. Lender, or each successor holder of the Note, may give written notice to Guarantor of any such assignment, but any failure to give, or delay in giving, such notice shall not affect the validity or enforceability of any such assignment.

3.5 Demands. Each demand by Lender for performance or payment hereunder shall be in writing and shall be made in the manner set forth in Section 3.7 below. A dated statement signed by an officer of Lender setting forth the amount of indebtedness at the time owing to Lender by Borrower under the Loan Documents shall be presumptive evidence thereof (subject to rebuttal) as between Guarantor and Lender in any legal proceedings against Guarantor in connection with this Guaranty.

3.6 Term. The obligations of Guarantor under this Guaranty shall continue in full force and effect until the obligations under the Loan Documents shall have been fully paid and performed and the period of time has expired during which any payment made by Borrower or Guarantor to Lender may be determined to be a Preferential Payment.

3.7 Notices. All notices and demands hereunder shall be deemed to have been duly given if personally delivered or mailed by United States registered or certified mail, with return receipt requested, postage prepaid to the parties at the following addresses (or at such other addresses as shall be given by written notice by any party to the others) and shall be deemed complete upon any such mailing:

3.8 Complete Agreement. This Guaranty supersedes any prior negotiations, discussions or communications between Guarantor and Lender and constitutes the entire agreement between Lender and Guarantor with respect to the Guaranteed Obligation. This Guaranty may be executed in one or more counterparts, all of which, taken together, shall constitute one and the same Guaranty.

3.9 Interpretation; Severability. In the event that the provisions of this Guaranty are claimed or held to be inconsistent with any other instrument evidencing or securing the Note, or the obligations of Guarantor, the terms of this Guaranty shall remain fully valid and effective. When the context in which the words are used in this Guaranty indicates that such is the intent, words in the singular number shall include the plural and vice-versa. The parties hereto intend and believe that each provision of this Guaranty comports with all applicable local, state and federal laws and judicial decisions. However, if any provision or any portion of any provision contained in this Guaranty is held by a court of law to be invalid, illegal, unlawful, void or unenforceable as written in any respect, then it is the intent of all parties hereto that such portion or provision shall be given force to the fullest possible extent that it is legal, valid and enforceable, that the remainder of the Guaranty shall be construed as if such illegal, invalid, unlawful, void or unenforceable portion or provision was not contained therein, and the rights, obligations and interests of Guarantor and Lender under the remainder of this Guaranty shall continue in full force and effect.

3.10 Obligation Absolute . This Guaranty and the obligations of Guarantor hereunder shall be effective upon delivery to the Lender, without further act, condition or acceptance by the Lender, shall be binding upon the Guarantor and the heirs, representatives, successors and assigns of the Guarantor, and shall inure to the benefit of the Lender and its participants, successors and assigns. The Guarantor further waives notice of Lender’s acceptance hereof.

3.11 Headings . The captions and headings to the sections and paragraphs of this Guaranty are for convenience only and shall not be deemed part of the text of the respective sections or paragraphs and shall not vary, by implication or otherwise, any of the provisions of this Guaranty.

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SIGNATURE PAGE FOLLOWS.]

IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of the date first above written.

The foregoing instrument was acknowledged before me this ____ day of February, 2017, by Paul D. Sheely, the Chief Financial Officer of WSI Industries, Co., a Minnesota corporation, on behalf of the corporation, Guarantor

GUARANTY

THIS GUARANTY (the “ Guaranty ”) is executed as of February 15, 2017, by WSI ROCHESTER, INC., a Minnesota corporation (“ Guarantor ”), for the benefit of TRADITION CAPITAL BANK, a Minnesota banking corporation (“ Lender ”), with reference to the following facts:

A. Lender has agreed to lend $1,500,000.00 (the “ Loan ”) to WSI INDUSTRIES, INC., a Minnesota corporation (“ Borrower ”), pursuant to the terms and conditions contained in that certain Loan Agreement dated of even date herewith (“ Loan Agreement ”) and that certain Revolving Promissory Note of even date herewith in the principal amount of the Loan (the “ Note ”) to finance working capital for the Borrower, with the Note secured by certain Security Agreements given by Guarantor, WSI Industries, Co. and Borrower, all dated of even date herewith (each a “ Security Agreement ” and collectively, the “ Security Agreements ”) (the Loan Agreement, Note, Security Agreements and the foregoing documents collectively called the “ Loan Documents ”).