SECURITY AGREEMENT

THIS SECURITY AGREEMENT (the “Security Agreement”) is executed as of February 15, 2017, by and between WSI INDUSTRIES, INC., a Minnesota corporation, whose address is 213 Chelsea Road, Monticello, MN 55362 (hereinafter called “Borrower”) does hereby grant unto TRADITION CAPITAL BANK, a Minnesota state banking corporation, whose address is 7601 France Avenue South, Suite 140, Edina, MN 55435 (hereinafter called “Lender”), a security interest in the following described property (hereinafter called “Collateral”):

1. Collateral.

All substitutions and replacements for and products of any of the foregoing property not constituting consumer goods and together with proceeds of any and all of the foregoing property and, in case of all tangible collateral, together with all accessions and, except in the case of consumer goods, together with all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any such goods.

2. To secure prompt payment to Lender at the address stated above or such other place as designated in a Revolving Promissory Note, of even date herewith, executed by Borrower to Lender in the sum of One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00) with interest as provided therein, and any and all extensions and renewals thereof, and any and all future advances made by Lender to Borrower at Lender’s option, together with all other liabilities of Borrower to Lender (primarily, secondarily, direct, contingent, sole, joint, or several) due or to become due or which may have been heretofore, or may be hereafter, contracted or acquired and the performance by Borrower of all of the terms and conditions of this Security Agreement (hereinafter referred to as “Obligations”).

BORROWER WARRANTS, REPRESENTS AND AGREES THAT:

1. Borrower is or will be the owner of the Collateral which shall be free of all liens, encumbrances and security interests except purchase money security interests as specific pieces of equipment as approved by Lender (the “Existing Liens”) and has authority to execute this Security Agreement.

2. Any and all accounts receivable which are Collateral are genuine and enforceable, and there are no offsets, counterclaims, or defenses to any of them.

3. Borrower’s inventory, books, records, contract rights and other property above specified relating to the Collateral are or will be kept at the location of 213 Chelsea Road, Monticello, MN 55362 and Borrower will not, without the prior written consent of Lender, remove or permit the same to be removed from the location or locations set forth above.

4. Borrower will keep the Collateral insured at all times against loss by fire and/or other hazards concerning which, in the judgment of Lender, insurance protection is reasonably necessary, in a company or companies satisfactory to Lender and in amounts sufficient to protect Lender against loss or damage to said Collateral and will pay the premiums therefor; that such policy or policies of insurance will be delivered to and held by Lender, together with loss payable clauses in favor of Lender as its interest may appear, in form satisfactory to Lender; and Lender may act as attorney for Borrower in obtaining, adjusting, settling and canceling such insurance and endorsing any drafts.

5. No financing statement covering the Collateral, or any part thereof, is on file in any public office, except the financing statement to be filed by Lender concurrent herewith and financing statements in connection with the Existing Liens.

6. Borrower will at any time or times hereafter execute such financing statements and other instruments and perform such acts as Lender may request to establish and maintain a valid security interest in the Collateral, and will pay all costs of filing and recording.

7. Until Lender shall notify Borrower of the revocation of such power and authority, Borrower will, at is own expense, endeavor to collect, as and when due, any accounts which are Collateral. Upon the occurrence of an Event of Default (as defined herein) Borrower will, at the Lender’s request, deliver all proceeds of such collections to Lender at its request.

8. Borrower will not compromise any accounts which are Collateral without the prior written consent of Lender.

9. At any time before or after an Event of Default, Lender may, and at the request of Lender Borrower shall, promptly notify any account borrower or obligor of any account, instrument, chattel paper, other right to payment or general intangible constituting Collateral that the same has been assigned to Lender and direct such account borrower or obligor to make all future payments to Lender.

10. Borrower will at all times keep accurate and complete records of the Collateral and permit Lender to inspect the same, and the Collateral, at all reasonable times. Borrower will, upon request of Lender, furnish to Lender such reports and statements as Lender may request with respect to the Collateral and the operation of the Property.

11. If Borrower at any time fails to perform or observe any agreements herein, Lender, in the name and on behalf of the Borrower or, at its option in its own name, may perform or observe such agreements and take any action which Lender may deem necessary or desirable to cure or correct such failure. Borrower irrevocably authorizes Lender and grants Lender a limited power of attorney in the name and on behalf of Borrower or, at its option in its own name, to take any action deemed by Lender to be necessary or desirable to establish, perfect, protect or enforce the security interest created by this Security Agreement.

12. Borrower will keep and maintain the Collateral in good order and repair, ordinary wear and tear excepted, and will not sell, encumber, offer to sell, transfer, lease or otherwise dispose of the Collateral other than in the ordinary course of its business without the written consent of Lender.

13. Until the occurrence of an Event of Default, the Borrower shall be entitled to possession of the Collateral.

14. Borrower shall be in default under this Security Agreement upon the occurrence of an Event of Default under the Loan Agreement, or if any covenant, warranty or representation of this Security Agreement shall prove to be untrue in any material respect.

15. In the event of an occurrence of an Event of Default:

16. The following terms and conditions shall apply to this Security Agreement:

17. The Borrower represents, certifies, warrants and agrees that the Borrower understands all of the provisions of this Security Agreement. The Borrower also agrees that compliance by the Lender with the express provisions of this Security Agreement shall constitute good faith and shall be considered reasonable for all purposes.

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IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, have duly executed this Security Agreement on the day and year first above written.