UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 29, 2014 ,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File No. 0-12719
GIGA-TRONICS INCORPORATED
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
94-2656341
(I.R.S. Employer Identification No.)
4650 Norris Canyon Road, San Ramon, CA
(Address of principal executive offices)
94583
(Zip Code)
Registrant’s telephone number, including area code: (925) 328-4650
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, No par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes [ ] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days:
Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
[ ]
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
[ ]
Smaller reporting company
[ ]
[ X ]
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes [ ] No [ X ]
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the
price at which the common equity was sold or the average bid and asked prices as of September 28, 2013 was $6,321,121.
There were a total of 5,181,247 shares of the Registrant’s Common Stock outstanding as of June 16, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into the parts indicated:
PART OF FORM 10-
K
PART III
DOCUMENT
Registrant’s PROXY STATEMENT for its 2014 Annual Meeting of Shareholders to be filed no later than 120
days after the close of the fiscal year ended March 29, 2014.
2
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
Market for Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Consolidated Balance Sheets as of March 29, 2014 and March 30, 2013
Consolidated Statements of Operations for the years ended March 29, 2014 and March 30, 2013
Consolidated Statements of Shareholders' Equity for the years ended March 29, 2014 and March 30, 2013
Consolidated Statements of Cash Flows for the years ended March 29, 2014 and March 30, 2013
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Changes In and Disagreements With Accountants On Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
ITEM 15.
SIGNATURES
Exhibits and Financial Statements Schedules
PART IV
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11
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20
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25
42
43
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PART 1
The forward-looking statements included in this report including, without limitation, statements containing the words “believes”,
“anticipates”, “estimates”, “expects”, “intends” and words of similar import, which reflect management’s best judgment based on factors
currently known, involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including but not limited to those discussed under “Certain Factors Which May Adversely
Affect Future Operations Or An Investment In Giga-tronics” in Item 1 below and in Item 7, “Management’s Discussion and Analysis”.
ITEM 1. BUSINESS
General
Giga-tronics Incorporated (Giga-tronics, or the Company) includes the operations of the Giga-tronics Division and Microsource Inc.
(Microsource), a wholly owned subsidiary. Giga-tronics Division designs, manufactures and markets a broad line of test and measurement
equipment used in the development, test and maintenance of wireless communications products and systems, flight navigational
equipment, electronic defense systems and automatic testing systems. These products are used primarily in the design, production, repair
and maintenance of commercial telecommunications, radar, and electronic warfare equipment.
Microsource develops and manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers,
which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments and devices.
Giga-tronics was incorporated on March 5, 1980, and Microsource was acquired by Giga-tronics on May 18, 1998.
The combined Company principal executive offices are located at 4650 Norris Canyon Road, San Ramon, California, and its telephone
number at that location is (925) 328-4650.
Giga-tronics intends to broaden its product lines and expand its market primarily through internal development of new products.
Industry Segments
The Company manufactures products used in test, measurement and control. The Company has two reporting segments: Giga-tronics
Division and Microsource.
Products and Markets
Giga-tronics
The Giga-tronics Division produces signal sources, generators, power measurement and amplification instruments for use in the
microwave and radio frequency (RF) range (10 kilohertz (kHz) to 50 gigahertz (GHz)). Within each product line are a number of different
models and options allowing customers to select frequency range and specialized capabilities, features and functions. The end-user
markets for these products can be divided into three broad segments: electronic warfare, radar and commercial telecommunications.
These instruments are used in the design, production, repair and maintenance and calibration of other manufacturers’ products, from
discrete components to complex systems.
The Giga-tronics Division also produces switching systems that operate with a bandwidth from direct current (DC) to optical frequencies.
These switch systems may be incorporated within customers’ automated test equipment. The end-user markets for these products are
primarily related to defense, aeronautics, communications, satellite and electronic warfare, commercial aviation and semiconductors.
Microsource
The Microsource segment develops and manufactures a broad line of YIG tuned oscillators, filters, filter components, and microwave
synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments or
devices. The end-user markets for these products are primarily related to defense and commercial aerospace.
4
Sources and Availability of Raw Materials and Components
Substantially all of the components required by Giga-tronics to make its assemblies are available from more than one source. The
Company occasionally uses sole source arrangements to obtain leading-edge technology or favorable pricing or supply terms, but not in
any material volume. In the Company’s opinion, the loss of any sole source arrangement it has would not be material to its operations.
Some suppliers are also competitors of Giga-tronics. In the event a competitor-supplier chooses not sell its products to Giga-tronics,
production delays could occur as the Company seeks new suppliers; or, the Company re-designs components to its products.
Although extended delays in receipt of components from its suppliers could result in longer product delivery schedules for the Company,
the Company believes that its protection against this possibility stems from its practice of dealing with well-established suppliers and
maintaining good relationships with such suppliers.
Patents and Licenses
The Company’s competitive position is largely dependent upon its ability to provide performance specifications for its instruments and
systems that (a) are easy to use and effectively and reliably meet customers’ needs and (b) selectively surpass competitors’ specifications in
competing products. Patents may occasionally provide some short-term protection of proprietary designs. However, because of the rapid
progress of technological development in the Company’s industry, such protection is most often, although not always, short-lived.
Therefore, although the Company occasionally pursues patent coverage, it places major emphasis on the development of new products
with superior performance specifications and the upgrading of existing products toward this same end.
The Company’s products are based on its own designs, which are derived from its own engineering abilities. If the Company’s new
product engineering efforts fall behind, its competitive position weakens. Conversely, effective product development greatly enhances its
competitive status.
The Company presently holds 31 patents. Some of these are critical to the Company’s ongoing business, and the Company intends to
actively maintain them. Capitalized costs relating to these patents were both incurred and fully amortized prior to March 27, 2011.
Accordingly, these patents have no recorded value included in the Company’s consolidated financial statements for the fiscal years ended
March 29, 2014 (“fiscal 2014”) and March 30, 2013 (“fiscal 2013”).
The Company is not dependent on trademarks, licenses or franchises. It does utilize certain software licenses in certain functional aspects
for some of its products. Such licenses are readily available, non-exclusive and are obtained at either no cost or for a relatively small fee.
Seasonal Nature of Business
The business of the Company is not seasonal.
Working Capital Practices
The Company generally strives to maintain adequate levels of inventory and generally sells to customers on 30-day payment terms in the
U.S. and generally allows more time for overseas payments. Typically, the Company receives payment terms of 30 days from its suppliers.
The Company believes that these practices are consistent with typical industry practices.
Importance of Limited Number of Customers
The Company is a supplier of microwave and RF test instruments to various United States (U.S.) government defense agencies, as well as
to their prime contractors. Management anticipates sales to U.S. government agencies and their prime contractors will remain significant in
fiscal 2015. U.S. and international defense-related agencies accounted for 57% and 58% of net sales in fiscal 2014 and 2013, respectively.
Commercial business accounted for the remaining 43% and 42% of net sales in fiscal 2014 and fiscal 2013, respectively.
At the Giga-tronics Division, U.S. defense agencies and their prime contractors accounted for 25% and 40% of net sales in fiscal 2014 and
fiscal 2013, respectively. Microsource reported 96% and 91% of net sales to U.S. defense agencies and their prime contractors during
fiscal 2014 and year 2013, respectively.
During fiscal 2014, one customer accounted for 39% of the Company’s consolidated revenues and was included in the Microsource
reporting segment. A second customer accounted for 16% of the Company’s consolidated revenues during fiscal 2014 and was included in
the Giga-tronics Division reporting segment.
5
During fiscal 2013, one customer accounted for 30% of the Company’s consolidated revenues and was included in the Microsource
reporting segment. A second customer accounted for 12% of the Company’s consolidated revenues during fiscal 2013 and was included in
the Giga-tronics Division reporting segment.
In management’s opinion, the Company could experience a material adverse effect on its financial stability if there was a significant loss
of either its defense or commercial customers.
The Company’s products are largely capital investments for its customers, and the Company’s belief is that its customers have economic
cycles in which capital investment budgets for the kinds of products that the Company produces expand and contract. The Company,
therefore, expects that a major customer in one year will often not be a major customer in the following year. Accordingly, the Company’s
net sales and earnings will decline if the Company is unable to find new customers or increase its business with other existing customers to
replace declining net sales from the previous year’s major customers. A substantial decline in net sales to U.S. government defense
agencies and their prime contractors would also have a material adverse effect on the Company’s net sales and results of operations unless
replaced by net sales in the commercial sector.
Backlog of Orders
On March 29, 2014, the Company’s backlog of unfilled orders was approximately $6.7 million compared to approximately $7.3 million at
March 30, 2013. As of March 29, 2014, there were approximately $1.2 million of orders scheduled for shipment beyond one year. As of
March 30, 2013, there were approximately $638,000 of orders scheduled for shipment beyond one year. Orders for the Company’s
products include program orders from both the U.S. government and defense contractors with extended delivery dates. Accordingly, the
backlog of orders may vary substantially from year to year and the backlog entering any single quarter may not be indicative of sales for
any period.
Backlog includes only those customer orders for which a delivery schedule has been agreed upon between the Company and the customer
and, in the case of U.S. government orders, for which funding has been appropriated.
Competition
Giga-tronics serves the broad market for electronic instrumentation with applications ranging from the design, test, calibration and
maintenance of other electronic devices to providing sophisticated components for complex electronic systems to sub-systems capable of
sorting and identifying high frequency signals. These applications cut across the military, commercial and industrial segments of the
broader market. The Company has a variety of competitors. Several of its competitors such as Agilent/Keysight, Anritsu and Rohde &
Schwarz are much larger than the Company and have greater resources in research and development and manufacturing with substantially
broader product lines and channels. Others are of comparable size or have small product divisions with more limited product lines, such
as EADS, VTI, Elcom, Aeroflex and Herley.
To compete effectively in this circumstance, the Company (a) places strong emphasis on maintaining a high degree of technical
competence as it relates to the development of new products and the upgrading of existing products in less competitive growth areas, (b) is
highly selective in establishing technological objectives and (c) focuses sales and marketing activities in areas that are weakly served or
underserved. The Company does not attempt to compete ‘across the board’, but selectively based upon its particular strengths, the
competitors’ perceived limitations, the customer’s needs and market opportunities.
The Company is able to compete by offering differentiated products that meet a customer’s particular specification requirements in high
value niches; by being able to present the correct product functionality at a high quality level, and by configuring its core platforms to fit
the application need. All of these advantages are attributable to the Company’s continuing investment in platform research and
development and in a highly trained engineering staff.
When the opportunity involves custom solutions, satisfying the customer’s specific requirements assumes greater importance and the
Company has more flexibility in making modifications and enhancements than its larger and more structured competitors.
Sales and Marketing
Giga-tronics and Microsource market their products through various independent distributors and representatives to commercial and
government customers for its instrument products but sell primarily direct on its switch and component products, although not necessarily
through the same distributors and representatives.
Product Development
Products of the type manufactured by Giga-tronics historically have had relatively long product life cycles. However, the electronics
industry is subject to rapid technological changes at the component level. The future success of the Company is dependent on its ability to
steadily incorporate advancements in component technologies into its new products. In fiscal 2014 and fiscal 2013, product development
expenses totaled approximately $3.9 million and $4.3 million including non-recurring engineering (NRE) costs, respectively.
6
Activities included the development of new products and the improvement of existing products. It is management’s intention to maintain
product development at levels required to sustain its competitive position. The Company’s product development activities are funded
internally, or through outside equity investment and debt. Product development activities are expensed as incurred.
Giga-tronics expects to continue to make significant investments in research and development. There can be no assurance that future
technologies, processes or product developments will not render Giga-tronics’ current product offerings obsolete or that Giga-tronics will
be able to develop and introduce new products or enhancements to existing products that satisfy customer needs in a timely manner or
achieve market acceptance. The failure to do so could adversely affect Giga-tronics’ business.
Manufacturing
The assembly and testing of Giga-tronics Division and Microsource’s products are done at its San Ramon facility.
Environment
To the best of its knowledge, the Company is in compliance with all Federal, state and local laws and regulations involving the protection
of the environment.
Employees
As of March 29, 2014, Giga-tronics employed 76 individuals on a full-time basis compared to 90 as of March 30, 2013. Management
believes that the future success of the Company depends on its ability to attract and retain skilled personnel. None of the Company’s
employees are represented by a labor union, and the Company considers its employee relations to be good.
Information about Foreign Operations
The Company sells to its international customers through a network of foreign technical sales representative organizations. All transactions
between the Company and its international customers are in U.S. dollars.
Geographic Distribution of Net Sales
(Dollars in thousands)
Domestic
International
Total
2014
11,832 $
1,477
13,309 $
2013
11,260
2,927
14,187
$
$
2014
88.9%
11.1%
100.0%
2013
79.0%
21.0%
100.0%
See Item 8, footnote 8 of the consolidated financial statements for further breakdown of international sales for the last two years.
ITEM 1A. RISK FACTORS
Future liquidity is uncertain
The Company incurred net losses of $3.7 million in fiscal 2014, and $4.2 million in fiscal 2013. These losses have contributed to an
accumulated deficit of $18.3 million at March 29, 2014, and have resulted in the Company using cash in its operations of $2.5 million in
fiscal 2014. These matters, along with recurring losses in prior years, raise substantial doubt as to the ability of the Company to continue as
a going concern.
In fiscal 2014 and 2013 the Company invested heavily in the development of a new Giga-tronics Division product platform. The Company
anticipates long-term revenue growth and improved gross margins from the new product platform, but delays in completing it have
contributed to the losses of the Company. The new product platform is currently forecasted to start shipping in the second quarter of fiscal
2015, but further delays could cause additional losses.
To help fund operations, the Company relies on advances under its line of credit with Silicon Valley Bank (“SVB”). However the SVB
may terminate or suspend advances under the line of credit if SVB determines there has been a material adverse change in the Company’s
general affairs, financial forecasts or general ability to repay. (see Note 15, Line of Credit).
To address this matter, the Company’s management has taken several actions to address liquidity concerns during fiscal 2014, and reduce
the costs and expenses going forward. These actions are described in Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations and in the Notes to Consolidated Financial Statements (Note 2, Going Concern and Management’s
Plan).
7
Management believes that through the actions described in Item 7, Management’s Discussion and Analysis of Financial Condition and
Results of Operations and in the Notes to Consolidated Financial Statements (Note 2, Going Concern and Management’s Plan), the
Company should have the necessary liquidity to continue its operations at least for the next twelve months, though no assurances can be
made in this regard.
Delivery of new products in development
The Company continues to invest heavily in the development of a new product platform forecasted to start shipping in the second quarter
of fiscal 2015. The Company anticipates long-term revenue growth and improved gross margins from the new product platform. No
assurances can be made that the new product platform will be delivered to customers in the second quarter of fiscal 2015 or that there will
be sufficient market acceptance of it.
Ability to stay listed for trading on The Nasdaq Capital Market
On February 12, 2014, the Company received a notification letter from The NASDAQ Stock Market (“NASDAQ”) advising the Company
of its failure to comply with the required minimum of $2.5 million in shareholders’ equity for continued listing on The Nasdaq Capital
Market, pursuant to NASDAQ listing rule 5550(b)(1). The Company fell below the minimum requirement with reported shareholders’
equity of $2.0 million in its Form 10-Q for the quarterly period ended December 28, 2013.
NASDAQ stated in the February 12, 2014 letter that under the NASDAQ listing rules the Company had 45 calendar days to submit a plan
to regain compliance. The Company submitted a plan on March 31, 2014. On April 10, 2014, the Company received a notification letter
from NASDAQ advising the Company that an extension to August 11, 2014, had been granted to take the steps necessary to regain
compliance with NASDAQ listing rule 5550(b)(1) and promptly thereafter to file a report describing the transaction or event enabling the
company to satisfy the applicable requirement for continued listing.
There can be no assurance that the Company’s plans to comply with the required minimum of $2.5 million in shareholders’ equity will be
successful by August 11, 2014. If the Company’s Common Stock ceases to be listed for trading on the Nasdaq Capital Market, the
Company expects that its Common Stock would be traded on the Over-the-Counter Bulletin Board on or about the same day.
The market price of the Company’s Common Stock may be adversely affected if it ceases to be listed for trading on the Nasdaq Capital
Market.
Giga-tronics’ sales are substantially dependent on the defense industry
Giga-tronics has a significant number of defense-related orders. If the defense market demand decreases, actual shipments could be less
than projected shipments with a resulting decline in sales. The Company’s product backlog has a number of risks and uncertainties such as
the cancellation or deferral of orders, dispute over performance and the Company’s ability to collect amounts due under these orders. If
any of these events occur, actual shipments could be lower than projected shipments and revenues could decline.
Giga-tronics’ markets involve rapidly changing technology and standards
The market for electronics equipment is characterized by rapidly changing technology and evolving industry standards. Giga-tronics
believes that its future success will depend in part upon its ability to develop and commercialize its existing products, and in part to
develop, manufacture and successfully introduce new products and product lines with improved capabilities and to continue to enhance
existing products. There can be no assurance that Giga-tronics will successfully complete the development of current or future products, or
that such products will achieve market acceptance. The inability to develop new products in a timely manner could have a material adverse
impact on operating performance and liquidity.
Giga-tronics’ common stock price is volatile
The market price of the Company’s common stock could be subject to significant fluctuations in response to variations in quarterly
operating results, reduction in revenues or lower earnings or increased losses and reduced levels of liquidity when compared to previous
quarterly periods, and other factors such as announcements of technological innovations or new products by Giga-tronics or by
competitors, government regulations or developments in patent or other proprietary rights. In addition, The Nasdaq Capital Market and
other stock markets have experienced significant price fluctuations in recent years. Some of these fluctuations often have been unrelated to
the reported operating performance of the specific companies whose stocks are traded. Broad market fluctuations, as well as general
foreign and domestic economic conditions, may adversely affect the market price of the common stock.
8
Giga-tronics stock at any time has historically traded on low volume on The Nasdaq Capital Market. Sales of a significant volume of stock
could result in a decline of Giga-tronics’ share price.
Performance problems in Giga-tronics’ products or problems arising from the use of its products together with other vendors’
products may harm its business and reputation
Products as complex as those Giga-tronics produces may contain unknown and undetected defects or performance problems. For example,
it is possible that a product might not comply with stipulated specifications under all circumstances. In addition, Giga-tronics’ customers
generally use its products together with their own products and products from other vendors. As a result, when problems occur in a
combined environment, it may be difficult to identify the source of the problem. A defect or performance problem could result in lost
revenues, increased warranty costs, diversion of engineering and management time and effort, impaired customer relationships and injury
to Giga-tronics’ reputation generally. To date, performance problems in Giga-tronics’ products or in other products used together with
Giga-tronics’ products have not had a material adverse effect on its business. However, management cannot be certain that a material
adverse impact will not occur in the future.
Giga-tronics’ competition has greater resources
The Company’s instrument, switch, oscillator and synthesizer products compete with Agilent/Keysight, Anritsu, EADS, Aeroflex and
Rohde & Schwarz. Many of these companies have substantially greater research and development, manufacturing, marketing, financial,
and technological personnel and managerial resources than Giga-tronics. These resources also make these competitors better able to
withstand difficult market conditions than the Company. There can be no assurance that any products developed by the competitors will
not gain greater market acceptance than any developed by Giga-tronics.
Giga-tronics acquisitions may not be effectively integrated and their integration may be costly
As part of its business strategy, Giga-tronics may broaden its product lines and expand its markets, in part through the acquisition of other
business entities. Giga-tronics is subject to various risks in connection with any future acquisitions. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the acquired companies, the potential disruption of the Company’s
business, the inability of management to maximize the financial and strategic position of the Company by the successful incorporation of
acquired technology and rights into its product offerings, the maintenance of uniform standards, controls, procedures and policies, and the
potential loss of key employees of acquired companies. No assurance can be given that any acquisition by Giga-tronics will or will not
occur, that if an acquisition does occur, that it will not materially harm the Company or that any such acquisition will be successful in
enhancing the Company’s business. The Company currently contemplates that future acquisitions may involve the issuance of additional
shares of common stock. Any such issuance may result in dilution to all Giga-tronics’ shareholders, and sales of such shares in significant
volume by the shareholders of acquired companies may depress the price of its common stock.
The Company has not made any acquisitions in the past several years.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Giga-tronics’ principal executive office and the marketing, sales and engineering offices and manufacturing facilities are located in
approximately 47,300 square feet in San Ramon, California, which the Company occupies under a lease agreement expiring December 31,
2016.
The Company believes that its facilities are adequate for its business activities.
ITEM 3. LEGAL PROCEEDINGS
As of March 29, 2014, the Company has no material pending legal proceedings. From time to time, Giga-tronics is involved in various
disputes and litigation matters that arise in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER REPURCHASES OF
EQUITY SECURITIES
Common Stock Market Prices
Giga-tronics’ common stock is traded on the Nasdaq Capital Market using the symbol ‘GIGA’. The number of record holders of the
Company’s common stock as of March 29, 2014 was approximately 1,500. The table below shows the high and low closing bid quotations
for the common stock during the indicated fiscal periods. These quotations reflect inter-dealer prices without mark-ups, mark-downs, or
commission and may not reflect actual transactions.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
(4/1 - 6/30) $
(7/1 - 9/28)
(9/29 - 12/28)
(12/29 - 3/29)
High
1.79 $
1.44
1.24
1.55
Low
1.37
1.22
0.90
0.92
2013
(4/1 - 6/30) $
(7/1 - 9/29)
(9/30 - 12/29)
(12/30 - 3/30)
High
1.21 $
1.80
1.75
1.71
Low
0.92
1.01
1.25
1.32
On February 12, 2014, the “Company received a notification letter from The NASDAQ Stock Market (“NASDAQ”) advising the
Company of its failure to comply with the required minimum of $2.5 million in shareholders’ equity for continued listing on The Nasdaq
Capital Market, pursuant to NASDAQ listing rule 5550(b)(1). The Company fell below the minimum requirement with reported
shareholders’ equity of $2.0 million in its Form 10-Q for the quarterly period ended December 28, 2013.
NASDAQ stated in the February 12, 2014 letter that under the NASDAQ listing rules the Company had 45 calendar days to submit a plan
to regain compliance. The Company submitted a plan on March 31, 2014. On April 10, 2014, the Company received a notification letter
from NASDAQ advising the Company that an extension to August 11, 2014, had been granted to take the steps necessary to regain
compliance with NASDAQ listing rule 5550(b)(1) and promptly thereafter to file a report describing the transaction or event enabling the
company to satisfy the applicable requirement for continued listing.
As of March 29, 2014, the Company’s shareholders’ equity was $877,000. There can be no assurance that the Company’s plans to comply
with the required minimum of $2.5 million in shareholders’ equity will be successful by August 11, 2014. If the Company’s Common
Stock ceases to be listed for trading on the Nasdaq Capital Market, the Company expects that its Common Stock would be traded on the
Over-the-Counter Bulletin Board on or about the same day.
The market price of the Company’s Common Stock may be adversely affected if it ceases to be listed for trading on the Nasdaq Capital
Market.
Giga-tronics has not paid cash dividends in the past and has no current plans to do so in the future, believing the best use of its available
capital is in the enhancement of its product position.
In fiscal year 2014 Giga-tronics issued 5,111.86 shares of Series D convertible preferred stock at no par value to Alara Capital AVI II,
LLC (“Alara”) for $143 per share and a warrant to purchase up to 511,186 additional shares of common stock at the price of $1.43 per
share in private transactions not registered with the Commission. It also issued warrants for up to 300,000 shares of common stock at an
exercise price of $1.42 per share in connection with debt financing provided by Partners for Growth IV, L.P. in a private transaction
without registration. All such transactions were previously reported in current reports on Form 8-K.
10
Equity Compensation Plan Information
The following table provides information on options and other equity rights outstanding and available at March 29, 2014.
Equity Compensation Plan Information
No. of securities
to be issued upon
exercise of
outstanding
options, stock
awards, warrants
and rights (1)
(a)
1,575,250
235,000
50,000
1,860,250
Weighted average
exercise price of
outstanding
options, stock
awards, warrants
and rights
(b)
$1.5200
$1.1100
$0.0000
$1.4300
No. of securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
(c)
711,427
n/a
n/a
711,427
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders - options
Equity compensation plans not approved by security holders
Total
(1) Includes 189,000 shares issuable under the 2000 Stock Option Plan, 1,386,250 shares issuable under the 2005 Equity Incentive
Plan, 285,000 shares issuable outside of the 2005 Equity Incentive Plan.
Issuer Repurchases
The Company did not repurchase any of its equity securities during the fiscal year ended March 29, 2014.
ITEM 6. SELECTED FINANCIAL DATA
Pursuant to Item 301(c) of Regulation S-K., the Company, as a smaller reporting company, is not required to provide the information
required by this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
Overview
Giga-tronics produces instruments, subsystems and sophisticated microwave components that have broad applications in both defense
electronics and wireless telecommunications. The Company has two reporting segments: Giga-tronics Division and Microsource.
The Giga-tronics Division produces signal sources, generators, power measurement and amplification instruments for use in the
microwave and radio frequency (RF) range (10 kilohertz (kHz) to 50 gigahertz (GHz)). Within each product line are a number of different
models and options allowing customers to select frequency range and specialized capabilities, features and functions. The end-user
markets for these products can be divided into three broad segments: electronic warfare, radar and commercial telecommunications.
These instruments are used in the design, production, repair and maintenance and calibration of other manufacturers’ products, from
discrete components to complex systems.
The Giga-tronics Division also produces switching systems that operate with a bandwidth from direct current (DC) to optical frequencies.
These switch systems may be incorporated in customers’ automated test equipment. The end-user markets for these products are
primarily related to defense, aeronautics, communications, satellite and electronic warfare, commercial aviation and semiconductors.
The Microsource segment develops and manufactures a broad line of YIG tuned oscillators, filters, filter components, and microwave
synthesizers, which are used by its customers in operational applications and in manufacturing a wide variety of microwave instruments or
devices. The end-user markets for these products are primarily related to defense and commercial aerospace.
In fiscal 2014 and fiscal 2013 almost all of the sales for Microsource were to one large aerospace customer associated with programs for
retrofitting radar filter components on existing military aircraft, and radar filter components for new military aircraft being manufactured.
The timing of orders and the contractual shipment schedule associated with this customer cause significant differences in orders, sales,
deferred revenue, inventory and cash flow when comparing one fiscal period to another.
11
A second large aerospace company has engaged Microsource for design services and a production bid associated with a similar radar filter
program. On August 13, 2013 Microsource received an initial order for $733,000, on May 6, 2014 a follow on order of $659,000 was
received, and then on May 20, 2014 the complete order for an additional $5.5 million was received. The total orders for the design and
production bid for the associated program is $6.9 million. The Company anticipates the associated multi-year production agreement to be
for approximately $10.0 million and for it to finalize in calendar 2014. No assurances can be given that the parties will agree on the final
multi-year production agreement, or what the actual terms will be. (see Note 20, Subsequent Events)
In fiscal 2014 the Company saw a continuation of substantial losses as legacy Giga-tronics Division products sales and gross margins
decreased, while the Company continued to invest heavily in the development of a new Giga-tronics Division product platform. The
Company anticipates long-term revenue growth and improved gross margins from the new product platform, but delays in completing it
have contributed to the existence of substantial doubt about the Company’s ability to continue as a going concern.
In fiscal 2014 the Microsource business unit completed its move from Santa Rosa, California, to the Company’s headquarters in San
Ramon, California. Microsource maintained all defense and manufacturing related certifications during the move and increased revenue
shipments by 25% in fiscal 2014 when compared to fiscal 2013. Microsource also started working with a second large aerospace company
on another radar filter program, and finalized the total $6.9 million design and production bid on May 20, 2014. (see Note 20, Subsequent
Events)
Since March 2013 the Company has raised additional capital and generated liquidity to support the ongoing development of a new Giga-
tronics Division product platform by selling a product line, issuing equity in the Company, increasing its debt, and cutting costs. The
Company’s management will continue to look at all these strategies in fiscal 2015 in order to complete development of the new product
design, market introduction and volume production.
Results of Operations
New orders by reporting segment are as follows for the fiscal years ended:
NEW ORDERS
(Dollars in thousands)
Giga-tronics Division
Microsource
Total
2014
8,684 $
4,947
13,631 $
2013
9,013
8,679
17,692
$
$
% change
2013
vs.
2012
(20.0%)
334.0%
33.0%
2014
vs.
2013
(4.0%)
(43.0%)
(23.0%)
New orders received in fiscal 2014 decreased 23% to $13.6 million from the $17.7 million received in fiscal 2013. The decrease in orders
was primarily due to Microsource’s receipt in fiscal 2013 of $8.2 million in long term contracts from a large aerospace company. In fiscal
2014 Microsource received annual extensions of these contracts totaling $4.0 million, and an initial $733,000 order from a second large
aerospace company for design services and a production bid associated with a similar radar filter program. The decrease in new orders for
the Giga-tronics Division in fiscal 2014 was primarily due to the sale of the SCPM product line to Teradyne in April 2013 (see Note 6,
Gain on Sale of Product).
New orders received in fiscal 2013 increased 33% to $17.7 million from the $13.3 million received in fiscal 2012. The increase was
primarily due to Microsource’s receipt in fiscal 2013 of $8.2 million in long term contracts from a large aerospace company compared to
$1.6 million in fiscal 2012. This was partially offset by a $2.2 million decrease in Giga-tronics Division defense orders, primarily from a
decrease of switch modules associated with the older SCPM product line that was sold to Teradyne in April 2013 (see Note 6, Gain on Sale
of Product).
12
The following table shows order backlog and related information at fiscal year-end:
Backlog
(Dollars in thousands)
Backlog of unfilled orders
Backlog of unfilled orders shippable within one year
Long term backlog reclassified during year as shippable within one year
$
2014
6,669 $
5,438
931
2013
7,344
6,706
2,162
% change
2014
vs.
2013
(9%)
(19%)
(57%)
2013
vs.
2012
91%
75%
31%
The decreases in backlog at the end of fiscal 2014 when compared to fiscal 2013 are primarily due to the Microsource business unit’s
fulfilling $6.1 million of scheduled shipments over the past year attributable to long term contracts awarded in fiscal 2013. This was
partially offset by the Microsource business unit’s receipt in fiscal 2014 of $4.0 million follow on orders, and an initial order of design
services and a production bid for $733,000 from a second aerospace company for radar filters.
The increase in backlog at year-end 2013 of 91% was primarily due to the Microsource business unit’s receipt of long term contracts from
a large aerospace company.
The allocation of net sales by reporting segment was as follows for the fiscal years shown:
Allocation of Net Sales
(Dollars in thousands)
Giga-tronics Division
Microsource
Total
2014
7,290 $
6,019
13,309 $
2013
9,385
4,802
14,187
$
$
% change
2014
vs.
2013
(22%)
25%
(6%)
2013
vs.
2012
(11%)
84%
8%
Net sales in fiscal 2014 were $13.3 million, a 6% decrease from $14.2 million in fiscal 2013. Sales for the Giga-tronics Division decreased
22%, or $2.1 million, primarily due to a decrease in SCPM switch product sales as a result of the sale of this product line during fiscal
2014 (see Note 6, Gain on Sale of Product). Sales for the Microsource business unit increased 25%, or $1.2 million, largely due to the
contractual timing of shipments associated with long-term contracts from a large aerospace company.
Net sales in fiscal 2013 were $14.2 million, an 8% increase from $13.1 million in fiscal 2012. The Microsource business unit’s sales
increased 84%, or $2.2 million, primarily due to increased defense sales caused by the fulfillment of radar filter component orders. Sales at
Giga-tronics Division decreased 11%, or $1.1 million, primarily due to lower defense sales caused by the SG VXI product end of life
program in fiscal 2012.
The allocation of cost of sales by reporting segment was as follows for the fiscal years shown:
Cost of Sales
(Dollars in thousands)
Giga-tronics Division
Microsource
Total
2014
5,093 $
3,718
8,811 $
2013
5,727
2,983
8,710
$
$
% change
2014
vs.
2013
(11%)
25%
1%
2013
vs.
2012
(18%)
0%
(13%)
Cost of sales as a percentage of sales increased in fiscal 2014 to 66.2%, compared to 61.4% for fiscal 2013. The increase in fiscal 2014
was primarily due to the change in product mix of Giga-tronics Division, which saw an increase in the sales of lower margin legacy
products in fiscal 2014 when compared to fiscal 2013.
In fiscal 2013 cost of sales as a percentage of sales decreased to 61.4%, compared to 76.2% for fiscal 2012. The decrease is primarily due
to a $1.5 million excess and obsolete inventory reserve charge in fiscal 2012.
13
Operating expenses were as follows for the fiscal years shown:
Operating Expenses
(Dollars in thousands)
Engineering
Selling, general and administrative
Restructuring
Total
2014
3,897 $
4,809
331
9,037 $
2013
4,282
4,976
418
9,676
$
$
% change
2014
vs.
2013
(9%)
(3%)
(21%)
(7%)
2013
vs.
2012
48%
(18%)
1248%
8%
Operating expenses decreased 7%, or $639,000, in fiscal 2014 compared to fiscal 2013. Engineering expenses decreased $385,000 during
fiscal 2014 when compared to fiscal 2013, the decrease is primarily due to some engineers being assigned to a Microsource nonrecurring
engineering project that is recorded as cost of sales. Selling, general and administrative expenses decreased $167,000 in fiscal 2014 when
compared to fiscal 2013, primarily due to reductions in personnel. Restructuring expenses decreased $87,000 in fiscal 2014 when
compared to fiscal 2013, primarily due to the Company’s completion of its closure of the Santa Rosa facility in May 2013.
The Company is currently spending approximately $1.0 million to $1.1 million in research and development per quarter. The majority of
these expenses are associated with the development of the new product platform that experienced delays and is currently forecasted to
begin shipping in the second quarter of fiscal 2015. Expenses associated with the development of the new product platform have
significantly contributed to the losses in fiscal 2014 and fiscal 2013.
In order to reduce its manufacturing and facilities costs, Giga-tronics made the decision during the fourth quarter of fiscal 2012 to
consolidate its Santa Rosa, CA operations with those of its facility in San Ramon, CA. The Company announced its intentions to
employees in February 2012, and entered into employment agreements with all key Santa Rosa employees to retain the talent needed to
continue shipments during the transition and to help ensure the new operation in San Ramon would run smoothly.
The major types of costs associated with this move and estimates of their respective totals were as follows:
Type of cost (In thousands)
Retention agreements for employees
Preparation of San Ramon facility
Training of San Ramon employees
Moving expenses
Clean-up of Santa Rosa facility
Total
$
$
542
59
4
24
151
780
Of the total estimated expense of $780,000, $331,000 was expensed during fiscal 2014; $418,000 was expensed during fiscal 2013; and
$31,000 was expensed during fiscal 2012. The Company vacated its Santa Rosa facility on May 31, 2013 and does not anticipate any
additional expenses.
Gain on the Sale of Product Line
On March 18, 2013, the Company entered into an Asset Purchase Agreement with Teradyne, whereby Teradyne agreed to purchase the
Giga-tronics Division product line known as SCPM for $1.0 million, resulting in a net gain of $913,000. In April 2013 the Company
received $800,000 in proceeds at the closing of the transaction upon delivery of electronic data associated with the purchase. The
Company also earned an additional $50,000 associated with training of Teradyne employees, which was offset by $34,000 of associated
costs. The balance of the consideration ($150,000) was subject to a hold back arrangement until December 31, 2013 to cover certain
contingencies and the requirement to deliver certain inventory. During fiscal 2014, the Company delivered to Teradyne all of the
associated inventory, totaling $53,000. On December 6, 2013, the Company received the remaining $150,000 along with confirmation
from Teradyne that the holdback provisions were removed. Net sales for the SCPM product line during fiscal 2014 and fiscal 2013 were
$265,000 and $1.7 million, respectively.
14
Net Interest Expense
Net interest expense in fiscal 2014 was $106,000, an increase of $90,000 over fiscal 2013 and was primarily due to borrowings under the
SVB line of credit. In order to support operations during the last seven months of fiscal 2014 the Company borrowed on substantially all
eligible receivables under the Line of Credit.
Giga-tronics recorded a pre-tax loss of $3.7 million for fiscal 2014 versus pre-tax loss of $4.2 million for fiscal 2013. The lower pre-tax
loss in fiscal 2014 compared to fiscal 2013 was primarily due to lower operating expenses and the gain on the sale of the SCPM product
line discussed above, which was partially offset by a decline in gross margin.
Net Inventories
Inventories consisted of the following:
Net Inventories
(Dollars in thousands)
Raw materials
Work-in-progress
Finished goods
Demonstration inventory
Total
March 29,
2014
1,501 $
1,400
353
67
3,321 $
$
$
March 30,
2013
2,157
2,049
50
304
4,560
% change
2014
vs.
2013
(30%)
(32%)
606%
(78%)
(27%)
Net inventories decreased by $1.2 million from March 30, 2013 to March 29, 2014. The decrease was primarily due to the sale of lower
margin legacy products, or demonstration inventory, and a reduction of raw materials on hand supporting the Giga-tronics manufacturing
production line.
Financial Condition and Liquidity
As of March 29, 2014, Giga-tronics had $1.1 million in cash and cash-equivalents, compared to $1.9 million as of March 30, 2013.
Working capital at the end of fiscal year 2014 was $1.0 million as compared to $3.2 million at the end of fiscal year 2013.
The current ratio (current assets divided by current liabilities) at March 29, 2014 was 1.17 as compared to 1.60 at March 30, 2013. The
decrease in working capital was primarily attributable to the net loss of $3.7 million for fiscal 2014, which was partially offset by
$817,000 of cash proceeds from the issuance of preferred stock.
Cash used in operating activities amounted to $2.5 million in fiscal 2014 and $1.6 million in fiscal 2013. Cash used in fiscal year 2014
operating activities was primarily attributed to the net loss of $3.7 million for the year, which was partially offset by a $1.2 million
decrease in inventories. Cash used in fiscal year 2013 operating activities was primarily attributed to the net loss of $4.2 million for the
year, which was partially offset by a $2.3 million increase in deferred revenue associated with progress billings for completed contract
milestones prior to final delivery of the finished product.
Additions to property and equipment were $482,000 in fiscal 2014, of which $254,000 were related to capital lease obligations, compared
to $349,000 in fiscal 2013, of which $170,000 were related to capital lease obligations. The increase in property and equipment in fiscal
2014 was primarily attributable to leasehold improvements associated with the move of the Microsource business unit’s manufacturing to
the San Ramon facility. The increase in property and equipment in fiscal 2013 was primarily attributable to test equipment needed to
prepare a manufacturing line for the new Giga-tronics product platform.
Cash provided by financing activities in fiscal year 2014 was $2.1 million, primarily due to $1.0 million in proceeds from a term loan with
Partners For Growth IV, L.P. (“PFG”), $817,000 in net proceeds from the issuance of Series D convertible preferred stock, and $308,000
of net proceeds from the Company’s line of credit with Silicon Valley Bank (“SVB”). Cash provided by financing activities in fiscal year
2013 of $1.3 million was primarily due to $857,000 in net proceeds from the Company’s line of credit with SVB, and $457,000 in net
proceeds from the issuance of Series C convertible preferred stock.
On March 13, 2014 the Company entered into a three year, $2.0 million term loan agreement with PFG under which the Company
received $1.0 million on March 14, 2014. Pursuant to the agreement, the Company may borrow an additional $1.0 million following the
Company’s achievement of certain performance milestones which includes achieving $7.5 million in net sales during the first half of fiscal
2015 and two consecutive quarters of net income greater than zero during fiscal 2015. The PFG loan agreement provides for a fixed
interest rate of 9.75% and requires monthly interest only payments during the first six months of the agreement followed by monthly
principal and interest payments over the remaining thirty months. The Company may prepay the loan at any time prior to maturity by
paying all future scheduled principal and interest payments. The PFG Loan is secured by all of the assets of the Company under a lien that
is junior to the SVB position described in Note 15, and limits borrowing under the SVB credit line limit to $3.0 million. The loan
agreement contains financial covenants associated with the Company achieving minimum quarterly net sales and maintaining a minimum
monthly shareholders’ equity. In the event of default by the Company, all or any part of the Company’s obligation to PFG could become
immediately due.
15
The loan agreement also provided for the issuance of warrants convertible into 300,000 shares of the Company’s common stock, of which
180,000 were exercisable upon receipt of the First Draw and 120,000 would be exercisable if the Second Draw is funded. Each warrant
issued under the loan agreement has a term of five years and an exercise price of $1.42 which is equal to the average NASDAQ closing
price of the Company’s common stock for the ten trading days prior to the First Draw. The number of shares exercisable under the warrant
agreements is subject to downward adjustment from 180,000 to 155,000 and from 120,000 to 95,000 if the Company achieves in fiscal
2015 net sales of at least $18.0 million and net income of at least $1.0 million.
In the event of any acquisition or other change in control of the Company, future public issuance of Company securities, liquidation (or
substantially similar event) of the Company, or expiration of the warrants, the warrants associated with the First Draw can be exchanged
for $150,000 in cash and the warrants associated with the Second Draw can be exchanged for $100,000 in cash. The Company has no plans
for public offering, so the cash out date is estimated to be the expiration date unless warrants are exercised before then. Due to the fixed
payment amount on the expiration date, the warrant structure in substance is a debt arrangement (Warrant Debt) with a zero interest rate, a
fixed maturity date and a feature that makes the debt convertible to common stock. For accounting purposes, the conversion feature is
bifurcated and accounted for separately from the host debt instrument as a derivative liability measured at fair value which resulted in an
initial carrying value of $128,000.
The proceeds from the First Draw were allocated between the PFG Debt and the Warrant Debt (inclusive of its conversion feature) based
on their relative fair values on the date of issuance which resulted in initial carrying values of $822,000 and $178,000, respectively. The
conversion feature is bifurcated from the Warrant Debt and recorded at fair value resulting in a remaining carrying value of $50,000
associated with the Warrant Debt. The resulting discounts of $178,000 and $100,000, respectively, will be accreted to interest expense
under the effective interest method over the three-year term of the PFG Debt and the five-year term of the Warrant Debt. (See Note 16,
Term Loan).
On June 11, 2013 the Company entered into an amendment to the Second Amended Credit Facility (the “New Amended Credit Facility”)
with SVB. The New Amended Credit Facility amended the Second Amended Credit Facility by expanding the definition of eligible
accounts, increasing the maximum limit, and extending the maturity date. The New Amended Credit Facility, which expires on April 15,
2015, is secured by all assets of the Company and provides for a borrowing capacity equal to 80% of eligible accounts receivable (70% of
eligible foreign accounts receivable) on an aggregate basis, up to a maximum $3.0 million, provided the Company maintains borrowing
base eligibility, that is, a minimum of $750,000 of cash in excess of its line of credit liability.
As of March 29, 2014, the Company’s outstanding borrowings under the New Amended Credit Facility were $1.2 million. Management
intends to draw upon the New Amended Credit Facility throughout fiscal 2015 to meet projected cash requirements. As of March 29,
2014, the line of credit was at its maximum borrowing capacity. SVB may terminate or suspend advances under the line of credit if SVB
determines there has been a material adverse change in the Company’s general affairs, financial forecasts or general ability to repay.
The Company has incurred net losses of $3.7 million in fiscal 2014, and $4.2 million in fiscal 2013. These losses have contributed to an
accumulated deficit of $18.3 million at March 29, 2014, and have resulted in the Company using cash in its operations of $2.5 million in
fiscal 2014.
In fiscal 2014 and 2013 the Company invested heavily in the development of a new Giga-tronics Division product platform. The Company
anticipates long-term revenue growth and improved gross margins from the new product platform, but delays in completing it have
contributed significantly to the losses of the Company. The new product platform is forecasted to start shipping in the second quarter of
fiscal 2015, but further delays could cause additional losses.
To help fund operations, the Company relies on advances under the line of credit with Silicon Valley Bank. However the Bank may
terminate or suspend advances under the line of credit if the Bank determines there has been a material adverse change in the Company’s
general affairs, financial forecasts or general ability to repay. (see Note 15, Line of Credit). As of March 29, 2014, the line of credit was at
its maximum borrowing capacity.
These matters, along with recurring losses in prior years, raise substantial doubt as to the ability of the Company to continue as a going
concern.
16
To address this matter, the Company’s management has taken several actions to provide additional liquidity during fiscal 2014, and reduce
costs and expenses going forward. These actions are described in the following paragraph.
● On March 13, 2014 the Company entered into a three year, $2.0 million term loan agreement with PFG under which the
Company received $1.0 million on March 14, 2014. Pursuant to the agreement, the Company may borrow an additional $1.0
million following the Company’s achievement of certain performance milestones which includes achieving $7.5 million in net
sales during the first half of fiscal 2015 and two consecutive quarters of net income greater than zero during fiscal 2015. The PFG
loan agreement provides for a fixed interest rate of 9.75% and requires monthly interest only payments during the first six months
of the agreement followed by monthly principal and interest payments over the remaining thirty months. The Company may
prepay the loan at any time prior to maturity by paying all future scheduled principal and interest payments. The PFG Loan is
secured by all of the assets of the Company under a lien that is junior to the SVB position described in Note 15, and limits
borrowing under the SVB credit line limit to $3.0 million. The loan agreement contains financial covenants associated with the
Company achieving minimum quarterly net sales and maintaining a minimum monthly shareholders’ equity. In the event of
default by the Company, all or any part of the Company’s obligation to PFG could become immediately due. (see Note 16, Term
Loan).
On June 16, 2014 the Company amended the term loan agreement with PFG creating a $500,000 revolving line of credit that the
Company drew $500,000. (see note 20, Subsequent Events).
● On July 8, 2013 the Company received $817,000 in net cash proceeds from Alara Capital AVI II, LLC, a Delaware limited
liability company (the “Investor”). Under a Securities Purchase Agreement (“SPA”), the Company sold to the Investor 5,111.86
shares of a new Series D Convertible Voting Perpetual Preferred Stock and warrants to purchase up to 511,186 additional shares
of common stock at the price of $1.43 per share. (see Note 19, Series D Convertible Voting Perpetual Preferred Stock and
Warrants).
● To assist with the upfront purchases of inventory required for future product deliveries, the Company entered into an advance
payment arrangements with a large customer, whereby the customer reimburses the Company for raw material purchases prior to
the shipment of the finished products. In fiscal 2014 the Company entered into advance payment arrangements totaling $1.3
million, and will seek similar terms in future agreements with this customer, and other customers.
● A second large aerospace company has engaged Microsource for design services and a production bid associated with a similar
radar filter program. On August 13, 2013 Microsource received an initial order for $733,000, on May 6, 2014 a follow on order of
$659,000 was received, and then on May 20, 2014 the complete order for an additional $5.5 million was received. The total
orders for the design and production bid for the associated program is $6.9 million. The Company anticipates the associated
multi-year production agreement to be for approximately $10.0 million and for it to finalize in calendar 2014. No assurances can
be given that the parties will agree on the final multi-year production agreement, or what the actual terms will be. (see Note 20,
Subsequent Events)
Management also plans to further improve asset management by continuing to reduce product inventories that are on hand at March 29,
2014. In addition, management will continue to review all aspects of the business in an effort to improve cash flow and reduce costs and
expenses, while continuing to invest, to the extent possible, in new product development for future revenue streams.
Management will also continue to seek additional working capital through debt, equity financing or possible product line sales, but there
are no assurances that such financings or sales will be available at all, or on terms acceptable to the Company.
The current year losses and the impacts of recurring losses in prior years have had a significant negative impact on the financial condition
of the Company and raise substantial doubt about the Company’s ability to continue as a going concern. Management believes that through
the actions to date and possible future actions described above, the Company should have the necessary liquidity to continue its operations
at least for the next twelve months, though no assurances can be made in this regard based on uncertainties with respect to the continued
development, manufacturing and marketing efforts of the Company’s new product platform and the material adverse change clause in the
Company’s line of credit agreement discussed above. The Consolidated Financial Statements have been prepared assuming the Company
will continue as a going concern and do not include any adjustments that might result if the Company were unable to do so.
Contractual Obligations
The Company leases its facility under an operating lease that expires in December 2016 and leases certain equipment under operating
leases. Total future minimum lease payments under these leases amount to approximately $2.0 million.
The Company leases equipment under capital leases that expire through September 2018. The future minimum lease payments under these
leases are approximately $245,000.
17
The Company is committed to pay the PFG loan with a maturity date of March 2017. Future payments under this loan consist of $1.0
million in principal and $175,000 in interest.
The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 29, 2014, total non–
cancelable purchase orders were approximately $2.1 million through fiscal 2015 and are scheduled to be delivered to the Company at
various dates through March 2015.
Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and the results of operations are based upon the consolidated financial
statements included in this report and the data used to prepare them. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America and management is required to make judgments,
estimates and assumptions in the course of such preparation. The Summary of Significant Accounting Policies included with the
consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated
financial statements. On an ongoing basis, the Company re-evaluates its judgments, estimates and assumptions, including those related to
revenue recognition, product warranties, accounts receivable and allowance for doubtful accounts, valuation of inventories, income taxes
and valuation allowance on deferred tax assets, and share based compensation. The Company bases its judgment and estimates on
historical experience, knowledge of current conditions, and its beliefs of what could occur in the future considering available information.
Actual results may differ from these estimates under different assumptions or conditions. Management of Giga-tronics has identified the
following as the Company’s critical accounting policies:
Revenue Recognition
Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the price is fixed or determinable, and
collectability is reasonably assured. This generally occurs when products are shipped and the risk of loss has passed. Revenue related to
products shipped subject to customers’ evaluation is recognized upon final acceptance. Revenue recognized under the milestone method is
recognized once milestones are met. Determining whether a milestone is substantive is a matter of judgment and that assessment is
performed only at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the
following for the milestone to be considered substantive:
a. It is commensurate with either of the following:
1. The Company’s performance to achieve the milestone
2. The enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company's
performance to achieve the milestone.
b. It relates solely to past performance.
c. It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the
arrangement.
Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones will be tied to
product shipping while others will be tied to design review.
On certain contracts with one of the Company’s significant customers the Company receives payments in advance of manufacturing.
Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.
Product Warranties
The Company’s warranty policy generally provides one to three years of coverage depending on the product. The Company records a
liability for estimated warranty obligations at the date products are sold. The estimated cost of warranty coverage is based on the
Company’s actual historical experience with its current products or similar products. For new products, the required reserve is based on
historical experience of similar products until sufficient historical data has been collected on the new product. Adjustments are made as
new information becomes available.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at their net realizable values. The Company has estimated an allowance for uncollectible accounts based on
analysis of specifically identified problem accounts, outstanding receivables, consideration of the age of those receivables, the Company’s
historical collection experience, and adjustments for other factors management believes are necessary based on perceived credit risk.
18
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company periodically reviews
inventory on hand to identify and write down excess and obsolete inventory based on estimated product demand.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date. Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred tax assets will more
likely than not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during
the periods in which those temporary differences become deductible. Management considers both positive and negative evidence and tax
planning strategies in making this assessment.
The Company considers all tax positions recognized in the consolidated financial statements for the likelihood of realization. When tax
returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others
are subject to uncertainty about the merits of the positions taken or the amounts of the positions that would be ultimately sustained. The
benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management
believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit
that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as described above, if any, would be reflected as unrecognized tax
benefits, as applicable, in the accompanying consolidated balance sheets along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to
unrecognized tax benefits as a component of the provision for income taxes in the consolidated statements of operations.
Share Based Compensation
The Company has a stock incentive plan that provides for the issuance of stock options and restricted stock to employees and directors.
The Company calculates share based compensation expense for stock options using a Black-Scholes-Merton option pricing model and
records the fair value of stock option and restricted stock awards expected to vest over the requisite service period. In so doing, the
Company makes certain key assumptions in making estimates used in the model. The Company believes the estimates used, which are
presented in Note 1 of Notes to Consolidated Financial Statements, are appropriate and reasonable.
Off-Balance-Sheet Arrangements
The Company has no other off-balance-sheet arrangements (including standby letters of credit, guaranties, contingent interests in
transferred assets, contingent obligations indexed to its own stock or any obligation arising out of a variable interest in an unconsolidated
entity that provides credit or other support to the Company), that have or are likely to have a material effect on its financial conditions,
changes in financial conditions, revenue, expense, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements And Schedules
Financial Statements
Consolidated Balance Sheets - As of March 29, 2014 and March 30, 2013
Consolidated Statements of Operations - Years ended March 29, 2014 and March 30, 2013
Consolidated Statements of Shareholders’ Equity - Years ended March 29, 2014 and March 30, 2013
Consolidated Statements of Cash Flows - Years ended March 29, 2014 and March 30, 2013
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
20
Page
21
22
23
24
25 -
41
42
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
Assets
Current assets:
Cash and cash-equivalents
Trade accounts receivable, net of allowance of $44 and $35, respectively
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Other long term-assets
Total assets
Liabilities and shareholders' equity
Current liabilities:
Line of credit
Current portion of long term debt
Accounts payable
Accrued payroll and benefits
Deferred revenue
Deferred rent
Capital lease obligations
Other current liabilities
Total current liabilities
Long term obligation - line of credit
Long term loan and warrant debt, net of discounts
Derivative liability, at estimated fair value
Long term obligations - deferred rent
Long term obligations - capital lease
Total liabilities
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock of no par value;
Authorized - 1,000,000 shares
Series A - designated 250,000 shares; no shares at March 29, 2014 and March 30, 2013
issued and outstanding
Series B - designated 10,000 shares; 9,997 shares at March 29, 2014 and March 30, 2013
issued and outstanding; (liquidation preference of $2,309)
Series C - designated 3,500 shares; 3,424.65 shares at March 29, 2014 and March 30, 2013
issued and outstanding; (liquidation preference of $500)
Series D - designated 6,000 shares; 5,111.86 shares at March 29, 2014 and no shares at
March 30, 2013 issued and outstanding; (liquidation preference of $731)
Common stock of no par value; Authorized - 40,000,000 shares; 5,181,247 shares at March 29,
2014 and 5,079,747 at March 30, 2013 issued and outstanding
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
March 29, 2014 March 30, 2013
$
$
$
$
1,059 $
1,846
3,321
349
6,575
949
69
7,593 $
1,165 $
200
1,430
755
1,329
104
147
472
5,602
-
672
128
237
77
6,716
-
1,882
1,666
4,560
442
8,550
751
59
9,360
577
-
788
1,047
2,278
81
66
505
5,342
280
-
-
341
89
6,052
-
-
-
1,997
1,997
457
457
16,224
(18,258)
877
7,593 $
457
-
15,132
(14,278)
3,308
9,360
See Accompanying Notes to Consolidated Financial Statements
21
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per-share data)
Net sales
Cost of sales
Gross margin
Operating expenses:
Engineering
Selling, general and administrative
Restructuring
Total operating expenses
Operating loss
Gain on sale of product line
Other income (loss)
Interest expense, net
Loss before income taxes
Provision for income taxes
Net loss
Loss per common share – basic
Loss per common share – diluted
Weighted average common shares used in per share calculation:
Basic
Diluted
Years Ended
March 29, 2014 March 30, 2013
14,187
$
8,710
5,477
13,309 $
8,811
4,498
3,897
4,809
331
9,037
(4,539)
913
(8)
(106)
(3,740)
2
(3,742) $
(0.74) $
(0.74) $
5,058
5,058
4,282
4,976
418
9,676
(4,199)
-
11
(16)
(4,204)
2
(4,206)
(0.84)
(0.84)
5,030
5,030
$
$
$
See Accompanying Notes to Consolidated Financial Statements
22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share data)
Balance at March 31, 2012
Net loss
Share based compensation
Series C preferred stock issuance, net
of offering costs of $43
Balance at March 30, 2013
Net loss
Restricted stock granted
Stock granted without restrictions
Share based compensation
Series D preferred stock issuance, net
of offering costs of $41
Balance at March 29, 2014
Preferred Stock
Shares
9,997
Amount
1,997
Common Stock
Shares
5,079,747
Amount
14,822
-
-
-
310
Accumulated
Deficit
(10,072)
(4,206)
-
3,425
13,422 $
457
2,454
-
5,079,747 $
-
15,132 $
-
-
71,500
30,000
-
-
-
494
-
(14,278) $
(3,742)
-
5,112
18,534 $
457
2,911
-
5,181,247 $
598
16,224 $
(238)
(18,258) $
See Accompanying Notes to Consolidated Financial Statements
23
Total
6,747
(4,206)
310
457
3,308
(3,742)
-
-
494
817
877
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
March 29, 2014 March 30, 2013
$
(3,742) $
(4,206)
(In thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization
Share based compensation
Change in deferred rent
Changes in operating assets and liabilities:
Trade accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued payroll and benefits
Deferred revenue
Other current liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Payments on capital leases
Proceeds from line of credit
Proceeds from issuance of term debt
Repayments of line of credit
Proceeds from issuance of preferred stock, net of stock offering costs of $41 and $43
Net cash provided by financing activities
Decrease in cash and cash-equivalents
Beginning cash and cash-equivalents
Ending cash and cash-equivalents
Supplementary disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Supplementary disclosure of noncash financing activities:
Equipment acquired under capital lease
$
$
$
See Accompanying Notes to Consolidated Financial Statements
24
284
494
(81)
(180)
1,239
83
642
(292)
(949)
(33)
(2,535)
(228)
(228)
(185)
5,917
1,000
(5,609)
817
1,940
(823)
1,882
1,059 $
2 $
106
209
310
(70)
(396)
140
(157)
175
308
2,271
(152)
(1,568)
(179)
(179)
(50)
1,552
-
(695)
457
1,264
(483)
2,365
1,882
2
17
254 $
170
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Summary of Significant Accounting Policies
The Company The accompanying consolidated financial statements include the accounts of Giga-tronics Incorporated (“Giga-tronics”) and
its wholly-owned subsidiary, Microsource Incorporated (“Microsource”), collectively the “Company”. The Company’s corporate office
and manufacturing facilities are located in San Ramon, California. Giga-tronics and its subsidiary company design, manufacture and
market a broad line of test and measurement equipment used in the development, test, and maintenance of wireless communications
products and systems, flight navigational equipment, electronic defense systems, and automatic testing systems. The Company also
manufactures and markets a line of test, measurement, and handling equipment used in the manufacturing of semiconductor devices. The
Company’s products are sold worldwide to customers in the test and measurement and semiconductor industries. The Company currently
has no foreign-based operations or material amounts of identifiable assets in foreign countries. Its gross margins on foreign and domestic
sales are similar, and all non-U.S. sales are made in U.S. dollars.
Principles of Consolidation The consolidated financial statements include the accounts of Giga-tronics and its wholly- owned subsidiary.
All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. The allowance for doubtful accounts, inventory reserves,
warranty reserves, share-based compensation, income taxes, and warrant derivative liability are particularly subject to change.
Fiscal Year The Company’s financial reporting year consists of either a 52 week or 53 week period ending on the last Saturday of the
month of March. Fiscal year 2014, ended on March 29, 2014 resulting in a 52 week year. Fiscal year 2013, ended on March 30, 2013 also
resulting in a 52 week year. All references to years in the consolidated financial statements relate to fiscal years rather than calendar years.
Reclassifications Certain reclassifications, none of which affected the prior year’s net loss or shareholders’ equity, have been made to
prior year balances in order to conform to the current year presentation.
Revenue Recognition and Deferred Revenue The Company records revenue when there is persuasive evidence of an arrangement,
delivery has occurred, the price is fixed and determinable, and collectability is reasonably assured. This occurs when products are shipped
or the customer accepts title transfer. If the arrangement involves acceptance terms, the Company defers revenue until product acceptance
is received. On certain large development contracts, revenue is recognized upon achievement of substantive milestones. Determining
whether a milestone is substantive is a matter of judgment and that assessment is performed only at the inception of the arrangement. The
consideration earned from the achievement of a milestone must meet all of the following for the milestone to be considered substantive:
a. It is commensurate with either of the following:
1. The Company’s performance to achieve the milestone.
2. The enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the Company's
performance to achieve the milestone.
b. It relates solely to past performance.
c. It is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the
arrangement.
Milestones for revenue recognition are agreed upon with the customer prior to the start of the contract and some milestones will be tied to
product shipping while others will be tied to design review.
On certain contracts with several of the Company’s significant customers the Company receives payments in advance of manufacturing.
Advanced payments are recorded as deferred revenue until the revenue recognition criteria described above has been met.
Accounts receivable are stated at their net realizable value. The Company has estimated an allowance for uncollectable accounts based on
analysis of specifically identified accounts, outstanding receivables, consideration of the age of those receivables, the Company’s
historical collection experience, and adjustments for other factors management believes are necessary based on perceived credit risk.
25
The activity in the reserve account is as follows for the years ending March 29, 2014 and March 30, 2013:
(Dollars in thousands)
Beginning balance
Provisions (reversals of previous provisions) for doubtful accounts
Write-off of doubtful accounts
Ending balance
March 29, 2014 March 30, 2013
96
35 $
$
(53)
22
(8)
(13)
35
44 $
$
Accrued Warranty The Company’s warranty policy generally provides one to three years of coverage depending on the product. The
Company records a liability for estimated warranty obligations at the date products are sold. The estimated cost of warranty coverage is
based on the Company’s actual historical experience with its current products or similar products. For new products, the required reserve is
based on historical experience of similar products until such time as sufficient historical data has been collected on the new product.
Adjustments are made as new information becomes available.
Inventories Inventories are stated at the lower of cost or fair value using full absorption and standard costing. Cost is determined on a first-
in, first-out basis. Standard costing and overhead allocation rates are reviewed by management periodically, but not less than annually.
Overhead rates are recorded to inventory based on capacity management expects for the period the inventory will be held. Reserves are
recorded within cost of sales for impaired or obsolete inventory when the cost of inventory exceeds its estimated fair value. Management
evaluates the need for inventory reserves based on its estimate of the amount realizable through projected sales including an evaluation of
whether a product is reaching the end of its life cycle. When inventory is discarded it is written off against the inventory reserve, as
inventory generally has already been fully reserved for at the time it is discarded.
Research and Development Research and development expenditures, which include the cost of materials consumed in research and
development activities, salaries, wages and other costs of personnel engaged in research and development, costs of services performed by
others for research and development on the Company’s behalf and indirect costs are expensed as operating expenses when
incurred. Research and development costs totaled approximately $3.9 million and $4.3 million for the years ended March 29, 2014 and
March 30, 2013, respectively.
Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets, which range from three to ten years for machinery and equipment and office fixtures.
Leasehold improvements and assets acquired under capital leases are amortized using the straight-line method over the shorter of the
estimated useful lives of the respective assets or the lease term.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If such review indicates that the carrying amount of an asset exceeds the sum of its expected future
cash flows on an undiscounted basis, the asset’s carrying amount would be written down to fair value. Additionally, the Company reports
long-lived assets to be disposed of at the lower of carrying amount or fair value less cost to sell. As of March 29, 2014 and March 30,
2013, management believes there has been no impairment of the Company’s long-lived assets.
Derivatives The Company accounts for free standing derivatives and embedded derivatives required to be bifurcated and accounted for on
a stand-alone basis at estimated fair value. Changes in fair value are reported in earnings as other income or loss.
Deferred Rent Rent expense is recognized in an amount equal to the guaranteed base rent plus contractual future minimum rental increases
amortized on the straight-line basis over the terms of the leases, including free rent periods.
Income Taxes Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Future tax benefits are subject to a valuation allowance when management is unable to conclude that its deferred tax
assets will more likely than not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable
income during the periods in which those temporary differences become deductible. Management considers both positive and negative
evidence and tax planning strategies in making this assessment.
26
The Company considers all tax positions recognized in its financial statements for the likelihood of realization. When tax returns are filed,
it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the positions taken or the amounts of the positions that would be ultimately sustained. The benefit of a tax
position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is
more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above, if any, would be reflected as unrecognized tax benefits, as
applicable, in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the
taxing authorities upon examination. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits
as a component of the provision for income taxes in the consolidated statements of operations.
Product Development Costs The Company incurs pre-production costs on certain long-term supply arrangements. The costs, which
represent non-recurring engineering and tooling costs, are capitalized as other assets and amortized over their useful life when
reimbursable by the customer. All other product development costs are charged to operations as incurred. There were no capitalized pre-
production costs included in other assets as of March 29, 2014 or March 30, 2013.
Software Development Costs Development costs included in the research and development of new products and enhancements to existing
products are expensed as incurred, until technological feasibility in the form of a working model has been established. To date, completion
of software development has been concurrent with the establishment of technological feasibility, and accordingly, no costs have been
capitalized.
Share-based Compensation The Company has established the 2005 Equity Incentive Plan, which provides for the granting of options for
up to 2,250,000 shares of Common Stock. The Company records share-based compensation expense for the fair value of all stock options
and restricted stock that are ultimately expected to vest as the requisite service is rendered.
The cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those
options (excess tax benefits) are classified as cash flows from financing in the statements of cash flows. These excess tax benefits were not
significant for the Company for the fiscal years ended March 29, 2014 or March 30, 2013.
In calculating compensation related to stock option grants, the fair value of each stock option is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model. The computation of expected volatility used in the Black-Scholes-Merton option-pricing
model is based on the historical volatility of Giga-tronics’ share price. The expected term is estimated based on a review of historical
employee exercise behavior with respect to option grants. The risk free interest rate for the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of the grant. Expected dividend yield was not considered in the option pricing formula since
the Company has not paid dividends and has no current plans to do so in the future.
The fair value of restricted stock awards is based on the fair value of the underlying shares at the date of the grant. Management makes
estimates regarding pre-vesting forfeitures that will impact timing of compensation expense recognized for stock option and restricted
stock awards.
Earnings or Loss Per Common Share Basic earnings or loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed
exercise of stock options and warrants using the treasury stock method. Anti-dilutive options are not included in the computation of diluted
earnings per share. Non-vested shares of restricted stock have nonforfeitable dividend rights and are considered participating securities for
the purpose of calculating basic and diluted earnings per share under the two-class method.
Comprehensive Income or Loss There are no items of comprehensive income or loss other than net income or loss.
Financial Instruments and Concentration of Credit Risk Financial instruments that potentially subject the Company to credit risk consist
of cash, cash-equivalents and trade accounts receivable. The Company’s cash-equivalents consist of overnight deposits with federally
insured financial institutions. Concentration of credit risk in trade accounts receivable results primarily from sales to major customers. The
Company individually evaluates the creditworthiness of its customers and generally does not require collateral or other security. At March
29, 2014, three customers combined accounted for 65% of consolidated gross accounts receivable primarily due to the timing of the
receivables. At March 30, 2013, three customers combined accounted for 59% of consolidated gross accounts receivable primarily due to
the timing of the receivables
Fair Value of Financial Instruments and Fair Value Measurements The Company’s financial instruments consist principally of cash and
cash-equivalents, line of credit, term debt, warrant liability and warrant derivative liability. The fair value of a financial instrument is the
amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the
liability. The Company uses fair value measurements based on quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity can access as of the measurement date (Level 1), significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data (Level 2), or significant unobservable inputs reflect a company’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability (Level 3), depending on the nature of the item being valued.
27
The carrying amounts of the Company’s cash and cash-equivalents and line of credit approximate their fair values at each balance sheet
date due to the short-term maturity of these financial instruments. The fair values of term debt and warrant debt are based on the present
value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company (Level 3) at
March 29, 2014 and resulted in the carrying amount approximating fair value due to the fact that the agreement was entered into near the
balance sheet date. The fair value of the bifurcated conversion feature represented by the warrant derivative liability which is measured at
fair value on a recurring basis is based on a Black Scholes option pricing model with assumptions for stock price, exercise price, volatility,
expected term, risk free interest rate and dividend yield similar to those described previously for share-based compensation which were
generally observable (Level 2). The Company had no assets or liabilities measured at fair value on a non-recurring basis, nor were there
any transfers between Level 1 and Level 2 of the fair value hierarchy.
Adoption of New Accounting Standards In July 2013, the FASB amended existing guidance related to the presentation of an unrecognized
tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an
unrecognized tax benefit, or a position thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional
income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not
intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The effect of
adopting this standard did not have a material effect on the Company’s operating results or financial condition since the Company was
already accounting for unrecognized tax benefits in a manner that is consistent with this standard.
2 Going Concern and Management’s Plan
The Company has incurred net losses of $3.7 million in fiscal 2014, and $4.2 million in fiscal 2013. These losses have contributed to an
accumulated deficit of $18.3 million at March 29, 2014, and have resulted in the Company using cash in its operations of $2.5 million in
fiscal 2014.
In fiscal 2014 and 2013 the Company invested heavily in the development of a new Giga-tronics Division product platform. The Company
anticipates long-term revenue growth and improved gross margins from the new product platform, but delays in completing it have
contributed significantly to the losses of the Company. The new product platform is forecasted to start shipping in the second quarter of
fiscal 2015, but further delays could cause additional losses.
To help fund operations, the Company relies on advances under the line of credit with Silicon Valley Bank (“SVB” or “the Bank”).
However the Bank may terminate or suspend advances under the line of credit if the Bank determines there has been a material adverse
change in the Company’s general affairs, financial forecasts or general ability to repay. (see Note 15, Line of Credit). As of March 29,
2014, the line of credit was at its maximum borrowing capacity.
These matters, along with recurring losses in prior years, raise substantial doubt as to the ability of the Company to continue as a going
concern.
To address this matter, the Company’s management has taken several actions to provide additional liquidity during fiscal 2014, and reduce
costs and expenses going forward. These actions are described in the following paragraph.
● On March 13, 2014 the Company entered into a three year, $2.0 million term loan agreement with Partners For Growth IV, L.P.
(“PFG”) under which the Company received $1.0 million on March 14, 2014. Pursuant to the agreement, the Company may
borrow an additional $1.0 million following the Company’s achievement of certain performance milestones which includes
achieving $7.5 million in net sales during the first half of fiscal 2015 and two consecutive quarters of net income greater than zero
during fiscal 2015. The PFG loan agreement provides for a fixed interest rate of 9.75% and requires monthly interest only
payments during the first six months of the agreement followed by monthly principal and interest payments over the remaining
thirty months. The Company may prepay the loan at any time prior to maturity by paying all future scheduled principal and
interest payments. The PFG Loan is secured by all of the assets of the Company under a lien that is junior to the SVB position
described in Note 15, and limits borrowing under the SVB credit line limit to $3.0 million. The loan agreement contains financial
covenants associated with the Company achieving minimum quarterly net sales and maintaining a minimum monthly
shareholders’ equity. In the event of default by the Company, all or any part of the Company’s obligation to PFG could become
immediately due. (see Note 16, Term Loan).
28
On June 16 the Company amended the term loan agreement with PFG creating a $500,000 revolving line of credit that the
Company drew $500,000. (see Note 20, Subsequent Events).
● On July 8, 2013 the Company received $817,000 in net cash proceeds from Alara Capital AVI II, LLC, a Delaware limited
liability company (the “Investor”). Under a Securities Purchase Agreement (“SPA”), the Company sold to the Investor 5,111.86
shares of a new Series D Convertible Voting Perpetual Preferred Stock and warrants to purchase up to 511,186 additional shares
of common stock at the price of $1.43 per share. (see Note 19, Series D Convertible Voting Perpetual Preferred Stock and
Warrants).
● To assist with the upfront purchases of inventory required for future product deliveries, the Company entered into an advance
payment arrangements with a large customer, whereby the customer reimburses the Company for raw material purchases prior to
the shipment of the finished products. In fiscal 2014 the Company entered into advance payment arrangements totaling $1.3
million, and will seek similar terms in future agreements with this customer, and other customers.
● A second large aerospace company has engaged Microsource for design services and a production bid associated with a similar
radar filter program. On August 13, 2013 Microsource received an initial order for $733,000, on May 6, 2014 a follow on order of
$659,000 was received, and then on May 20, 2014 the complete order for an additional $5.5 million was received. The total
orders for the design and production bid for the associated program is $6.9 million. The Company anticipates the associated
multi-year production agreement to be for approximately $10.0 million and for it to finalize in calendar 2014. No assurances can
be given that the parties will agree on the final multi-year production agreement, or what the actual terms will be. (see Note 20,
Subsequent Events)
Management also plans to further improve asset management by continuing to reduce product inventories that are on hand at March 29,
2014. In addition, management will continue to review all aspects of the business in an effort to improve cash flow and reduce costs and
expenses, while continuing to invest, to the extent possible, in new product development for future revenue streams.
Management will also continue to seek additional working capital through debt, equity financing or possible product line sales, but there
are no assurances that such financings or sales will be available at all, or on terms acceptable to the Company.
The current year losses and the impacts of recurring losses in prior years have had a significant negative impact on the financial condition
of the Company and raise substantial doubt about the Company’s ability to continue as a going concern. Management believes that through
the actions to date and possible future actions described above, the Company should have the necessary liquidity to continue its operations
at least for the next twelve months, though no assurances can be made in this regard based on uncertainties with respect to the continued
development, manufacturing and marketing efforts of the Company’s new product platform and the material adverse change clause in the
Company’s line of credit agreement discussed above. The Consolidated Financial Statements have been prepared assuming the Company
will continue as a going concern and do not include any adjustments that might result if the Company were unable to do so.
3 Cash and Cash-Equivalents
Cash and cash-equivalents of $1.1 million and $1.9 million at March 29, 2014 and March 30, 2013, respectively, consisted of demand
deposits with a financial institution that is a member of the Federal Deposit Insurance Corporation (FDIC). At March 29, 2014, $929,000
of the Company’s demand deposits exceeded FDIC insurance limits.
4 Inventories
Inventories, net of reserves, consisted of the following:
(Dollars in thousands)
Raw materials
Work-in-progress
Finished goods
Demonstration inventory
Total
29
March 29, 2014 March 30, 2013
2,157
$
2,049
50
304
4,560
1,501 $
1,400
353
67
3,321 $
$
5 Property, Plant and Equipment, net
Property, plant and equipment, net is comprised of the following:
(Dollars in thousands)
Leasehold improvements
Machinery and equipment
Computer and software
Furniture and office equipment
Vehicles
Construction in progress
Less: accumulated depreciation and amortization
Total
March 29, 2014 March 30, 2013
608
327
$
12,889
3,848
2,729
388
786
325
23
15
101
227
17,136
5,130
(16,385)
(4,181)
751
949 $
$
During the year ended March 29, 2014, fully depreciated equipment was disposed of in connection with the relocation of the Microsource
business unit from Santa Rosa to San Ramon. In addition management decided in the current year to effectively retire fully depreciated
assets that were held by the Company but were no longer of use with no prospect of return to use. These factors, combined with disposals
of assets in the ordinary course of business resulted in the removal of approximately $12.5 million of assets and accumulated depreciation
in the table above. As these assets were fully depreciated, there was no impact on net loss as a result of the action to consider these assets
as retired.
6 Gain on Sale of Product Line
On March 18, 2013, the Company entered into an Asset Purchase Agreement with Teradyne Inc. (Teradyne), whereby Teradyne agreed to
purchase the Giga-tronics Division product line known as SCPM for $1.0 million, resulting in a net gain of $913,000 during fiscal 2014.
In April 2013 the Company received $800,000 in proceeds at the closing of the transaction upon delivery of electronic data associated
with the purchase. The Company also earned an additional $50,000 associated with training of Teradyne employees, which was offset by
$34,000 of associated costs. The balance of the consideration ($150,000) was subject to a hold back arrangement until December 31, 2013
to cover certain contingencies and the requirement to deliver certain inventory. During fiscal 2014, the Company delivered to Teradyne all
of the associated inventory, totaling $53,000. On December 6, 2013, the Company received the remaining $150,000 along with
confirmation from Teradyne that the holdback provisions were removed. Net sales for the SCPM product line during fiscal 2014 and fiscal
2013 were $265,000 and $1.7 million, respectively.
7 Selling and Advertising Expenses
Selling expenses consist primarily of commissions paid to various sales representatives and marketing agencies. Commission expense
totaled $196,000 and $386,000 for fiscal 2014 and 2013, respectively. Advertising costs, which are expensed as incurred, totaled $14,000
and $23,000 for fiscal 2014 and 2013, respectively.
8 Significant Customers and Industry Segment Information
The Company has two reportable segments: Giga-tronics Division and Microsource. Giga-tronics Division produces a broad line of test
and measurement equipment used in the development, test and maintenance of wireless communications products and systems, flight
navigational equipment, electronic defense systems and automatic testing systems and designs, manufactures, and markets a line of
switching devices that link together many specific purpose instruments that comprise automatic test systems. Microsource develops and
manufactures a broad line of Yttrium, Iron and Garnet (YIG) tuned oscillators, filters and microwave synthesizers, which are used in a
wide variety of microwave instruments or devices.
The accounting policies for the segments are the same as those described in the "Summary of Significant Accounting Policies". The
Company evaluates the performance of its segments and allocates resources to them based on earnings before income taxes. Segment net
sales include sales to external customers. Inter-segment activities are eliminated in consolidation. Assets include accounts receivable,
inventories, equipment, cash, deferred income taxes, prepaid expenses and other long-term assets. The Company accounts for inter-
segment sales and transfers at terms that allow a reasonable profit to the seller. During the periods reported there were no significant inter-
segment sales or transfers.
30
The Company's reportable operating segments are strategic business units that offer different products and services. They are managed
separately because each business utilizes different technology and requires different accounting systems. The Company’s chief operating
decision maker is considered to be the Company’s Chief Executive Officer (“CEO”). The CEO reviews financial information presented on
a consolidated basis accompanied by disaggregated information about revenues and pre-tax income by operating segment. The tables
below present information for the fiscal years ended in 2014 and 2013.
March 29, 2014 (Dollars in thousands)
Revenue
Interest expense, net
Depreciation and amortization
Capital expenditures
Loss before income taxes
Assets
March 30, 2013 (Dollars in thousands)
Revenue
Interest expense, net
Depreciation and amortization
Capital expenditures
Loss before income taxes
Assets
$
$
Giga-tronics
Division
Microsource
7,290 $
(106)
251
482
(3,531)
5,442
6,019 $
-
33
-
(209)
2,151
Giga-tronics
Division
Microsource
9,385 $
(16)
162
349
(3,693)
6,234
4,802 $
-
47
-
(511)
3,126
Total
13,309
(106)
284
482
(3,740)
7,593
Total
14,187
(16)
209
349
(4,204)
9,360
The Company’s Giga-tronics Division and Microsource segments sell to agencies of the U.S. government and U.S. defense-related
customers. In fiscal 2014 and 2013, U.S. government and U.S. defense-related customers accounted for 57% and 58% of sales,
respectively. During fiscal 2014, one customer accounted for 39% of the Company’s consolidated revenues at March 29, 2014 and was
included in the Microsource segment. A second customer accounted for 16% of the Company’s consolidated revenues at March 29, 2014
and was included in the Giga-tronics Division. During fiscal 2013, one customer accounted for 30% of the Company’s consolidated
revenues at March 30, 2013 and was included in the Microsource segment. A second customer accounted for 12% of the Company’s
consolidated revenues at March 30, 2013 and was included in the Giga-tronics Division.
Export sales accounted for 11% and 21% of the Company’s sales in fiscal 2014 and 2013, respectively. Export sales by geographical area
for these fiscal years are shown below:
(Dollars in thousands)
Americas
Europe
Asia
Rest of world
Total
March 29, 2014 March 30, 2013
213
169 $
$
579
661
1,597
507
538
140
2,927
1,477 $
$
31
9 Loss per Common Share
Net loss and common shares used in per share computations for the fiscal years ended March 29, 2014 and March 30, 2013 are as follows:
(In thousands except per-share data)
Net loss
Weighted average:
Common shares outstanding
Potential common shares
Common shares assuming dilution
March 29, 2014 March 30, 2013
(4,206)
$
(3,742) $
5,058
-
5,058
(0.74) $
(0.74) $
1,739
122
1,853
1,317
5,030
-
5,030
(0.84)
(0.84)
1,556
50
1,342
506
Loss per common share - basic
Loss per common share - diluted
Stock options not included in computation that could potentially dilute EPS in the future
Restricted stock awards not included in computation that could potentially dilute EPS in the
future
Convertible preferred stock not included in computation that could potentially dilute EPS in the
future
Warrants not included in computation that could potentially dilute EPS in the future
$
$
The stock options, restricted stock, convertible preferred stocks and warrants not included in the computation of diluted earnings per share
(EPS) for the fiscal years ended March 29, 2014 and March 30, 2013 is a result of the Company’s net loss and, therefore, the effect of
these instrument would be anti-dilutive.
10 Income Taxes
Following are the components of the provision for income taxes:
Fiscal years ended (In thousands)
Current
Federal
State
Total current
Deferred
Federal
State
Total deferred
Change in liability for uncertain tax positions
Change in valuation allowance
Provision for income taxes
32
March 29, 2014 March 30, 2013
$
$
- $
2
2
(568)
(330)
(898)
1,579
(681)
2 $
-
2
2
(1,460)
(198)
(1,658)
799
859
2
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
Fiscal years ended (In thousands)
Net operating loss carryforwards
Income tax credits
Inventory reserves and additional costs capitalized
Accrued vacation
Deferred rent
Non-qualified stock options and restricted stock
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
March 29, 2014 March 30, 2013
12,666
$
802
2,363
142
168
159
103
16,403
14,300 $
143
2,051
129
136
211
114
17,084
$
(17,084)
- $
(16,403)
-
Fiscal years ended (In thousands except percentages)
Statutory federal income tax (benefit)
Valuation allowance
State income tax, net of federal benefit
Net operating loss expiration
Non tax-deductible expenses
(Write-off) generation of tax credit carryovers
Liability for uncertain tax positions
Other
Effective income tax
March 29, 2014
(1,256)
681
(216)
-
132
2,238
(1,579)
2
2
34.0 % $
(18.4)
5.8
-
(3.6)
(60.6)
42.8
(0.1)
(0.1)% $
March 30, 2013
(1,429)
859
(245)
48
97
(148)
799
21
2
34.0 %
(20.4)
5.8
(1.1)
(2.3)
3.5
(19.0)
(0.5)
(0.0)%
$
$
The increase in valuation allowance from March 30, 2013 to March 31, 2014 was $681,000.
As of March 30, 2014, the Company had pre-tax federal net operating loss carryforwards of $36.6 million and state net operating loss
carryforwards of $31.8 million available to reduce future taxable income. The federal and state net operating loss carryforwards begin to
expire from fiscal 2022 through 2034 and from 2014 through 2034, respectively. Utilization of net operating loss carryforwards may be
subject to annual limitations due to certain ownership change limitations as required by Internal Revenue Code Section 382. The federal
income tax credits begin to expire from 2021 through 2034 and state income tax credit carryforwards are carried forward indefinitely.
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized. The
ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers both positive and negative evidence and tax planning strategies in
making this assessment.
As of March 30, 2014, the Company recorded unrecognized tax benefits of $70,000 related to uncertain tax positions. The unrecognized
tax benefit is netted against the noncurrent deferred tax asset on the Consolidated Balance Sheet. The Company has not recorded a liability
for any penalties or interest related to the unrecognized tax benefits.
The Company files U.S federal and California state income tax returns. The Company is generally no longer subject to tax examinations
for years prior to the fiscal year 2011 for federal purposes and fiscal year 2010 for California purposes, except in certain limited
circumstances. The Company does have a California Franchise Tax Board audit that is currently in process. The Company is working with
the California Franchise Tax Board to resolve all audit issues and does not believe any material taxes or penalties are due. However, as a
result of the ongoing examination, the Company eliminated certain income tax credit carryovers. The write-off of these income tax credit
carryovers had no impact on total income tax expense as the majority had an uncertain tax position reserve with the balance having a full
valuation allowance against the deferred tax asset.
33
A reconciliation of the beginning and ending amount of the liability for uncertain tax positions, excluding potential interest and penalties,
is as follows:
(In thousands)
Balance as of beginning of year
Additions based on current year tax positions
(Reductions) additions for prior year tax positions
Balance as of end of year
Fiscal Year 2014 Fiscal Year 2013
850
$
56
743
1,649
1,649 $
-
(1,579)
70 $
$
The total amount of interest and penalties related to unrecognized tax benefits at March 29, 2014 is not material. The amount of tax
benefits that would impact the effective rate, if recognized, is not expected to be material. The Company does not anticipate any
significant changes with respect to unrecognized tax benefits within next twelve (12) months.
11 Share-based Compensation and Employee Benefit Plans
Share-based Compensation The Company has established the 2000 Stock Option Plan and the 2005 Equity Incentive Plan, which provide
for the granting of options and restricted stock for up to 2,250,000 shares of common stock at 100% of fair market value at the date of
grant, with each grant requiring approval by the Board of Directors of the Company. Option grants under the 2000 Stock Option Plan are
no longer available. Options granted generally vest in one or more installments in a four or five year period and must be exercised while
the grantee is employed by the Company or within a certain period after termination of employment. Options granted to employees shall
not have terms in excess of 10 years from the grant date. Holders of options may be granted stock appreciation rights (SAR), which entitle
them to surrender outstanding options for a cash distribution under certain changes in ownership of the Company, as defined in the stock
option plan. As of March 29, 2014, no SAR’s have been granted under the option plan. As of March 29, 2014, the total number of shares
of common stock available for issuance is 711,427. All outstanding options have either a five year or a ten year life.
The weighted average grant date fair value of stock options granted during the fiscal years ended March 29, 2014 and March 30, 2013 was
$1.07 and $0.98, respectively, and was calculated using the following weighted-average assumptions:
Fiscal years ended
Dividend yield
Expected volatility
Risk-free interest rate
Expected term (years)
March 29, 2014
-
86%
1.02%
7.91
March 30, 2013
-
89%
0.59%
6.61
A summary of the changes in stock options outstanding for the fiscal years ended March 29, 2014 and March 30, 2013 is presented below:
(Dollars in thousands)
Outstanding at March 31, 2012
Granted
Exercised
Forfeited / Expired
Outstanding at March 30, 2013
Granted
Exercised
Forfeited / Expired
Outstanding at March 29, 2014
Exercisable at March 29, 2014
At March 29, 2014, expected to vest in the future
Weighted
Average
Shares Exercise Price
1.74
1.31
-
1.58
1.62
1.32
-
1.72
1.53
1,221,312 $
521,000
-
186,062
1,556,250 $
430,750
-
248,250
1,738,750 $
Weighted
Average
Remaining
Contractual
Terms
(Years)
6.7 $
Aggregate
Intrinsic
Value
3
6.8 $
252
6.8 $
113
548,825 $
1.80
4.6 $
925,460 $
1.21
3.5 $
17
74
34
As of March 29, 2014, there was $732,000 of total unrecognized compensation cost related to non-vested options and restricted stock
granted under the 2005 Plan and outside of the 2005 Plan. That cost is expected to be recognized over a weighted average period of 3.63
years and will be adjusted for subsequent changes in estimated forfeitures. There were 320,525 and 208,425 options vested during the
fiscal years ended March 29, 2014 and March 30, 2013 respectively. The total fair value of options vested during the fiscal years ended
March 29, 2014 and March 30, 2013 was $365,000 and $275,000, respectively. No cash was received from the exercise of stock options
during fiscal 2014 and 2013. Share based compensation cost recognized in operating results for the fiscal years ended March 29, 2014 and
March 30, 2013 totaled $310,000 and $295,000, respectively.
Included in the total options outstanding at March 29, 2014 are performance-based options for 100,000 shares granted, which were granted
outside of the 2005 Plan. A portion of the options shall vest following the filing of the Company’s Form 10-K for fiscal 2015 provided
certain bookings goals are achieved by the Company. No compensation cost was recognized for these stock options during fiscal 2014
because management believes it is not more than likely than not that the performance criteria will be met.
During the year ended March 29, 2014, the vesting for 40,000 options was accelerated in connection with a termination agreement with a
former employee. This modification did not result in any incremental compensation expense, however $7,000 of stock-based
compensation expense was accelerated and recognized during the year ended March 29, 2014.
Restricted Stock
The Company granted 71,500 shares of restricted stock during fiscal 2014 to certain members of the Board of Directors in lieu of cash
compensation for services to be performed in fiscal 2014. The weighted average grant date fair value was $1.53. The Company also
granted 30,000 shares of unrestricted stock during 2014 as part of a severance agreement with a former employee. The 30,000 shares did
not have a restriction period because they vested immediately on the grant date, but are included in the roll forward schedule of restricted
stock below because they were granted under the 2005 Plan. The Company granted 50,000 shares of restricted stock outside the 2005 Plan
in fiscal 2013. The restricted stock awards are considered fixed awards as the number of shares and fair value at the grant date is
amortized over the requisite service period net of estimated forfeitures. Compensation cost recognized for restricted stock awards for 2014
and 2013 totaled $184,000 and $15,000, respectively.
A summary of the changes in non-vested restricted stock awards outstanding for the fiscal years ended March 29, 2014 and March 30,
2013 is presented below:
Non-vested at March 31, 2012
Granted
Forfeited or cancelled
Non-vested at March 30, 2013
Granted
Vested
Forfeited or cancelled
Non-vested at March 29, 2014
Weighted
Average Grant
Shares Date Fair Value
2.40
60,000 $
1.18
50,000
2.40
60,000
1.18
50,000 $
1.53
101,500
1.53
30,000
-
-
1.39
121,500 $
401(k) Plans The Company has established 401(k) plans which cover substantially all employees. Participants may make voluntary
contributions to the plans for up to 100% of their defined compensation. The Company matches a percentage of the participant’s
contributions in accordance with the plan. Participants vest ratably in Company contributions over a four-year period. Company
contributions to the plans for fiscal 2014 and 2013 were approximately $44,000 and $47,000, respectively.
12 Commitments
The Company leases a 47,300 square foot facility located in San Ramon, California that expires in December 31, 2016. The Company
leased a 33,400 square foot facility located in Santa Rosa, California, under a lease that expired May 31, 2013. The Company did not
extend the Santa Rosa lease and vacated the facility on May 31, 2013. All of the Company’s operations are in the San Ramon facility as of
March 29, 2014.
35
The Company also leases other equipment under operating leases.
Total future minimum lease payments under these leases amount to approximately $1,975,000 and are as follows.
Fiscal year (Dollars in thousands)
2015
2016
2017
2018
Thereafter
Total
$
$
775
677
523
-
-
1,975
The aggregate rental expense was $630,000 and $1,009,000 in fiscal 2014 and 2013, respectively.
The Company leases equipment under capital leases that expire through September 2018. Capital leases with costs totaling $456,000 and
$201,000 are reported net of accumulated depreciation of $91,000 and $34,000 at March 29, 2014 and March 30, 2013, respectively.
Total future minimum lease payments under these leases amount to approximately $245,000 and are as follows.
Fiscal year (Dollars in thousands)
2015
2016
2017
2018
2019
Total
Principal
Interest
$
$
147 $
53
9
9
6
224 $
12 $
7
1
1
-
21 $
Total
159
60
10
10
6
245
The Company is committed to repay the PFG loan with a maturity date of March 2017. The future payments under this loan, consisting of
$1.0 million in principal and $175,000 in interest, are as follows as of March 29, 2014.
Fiscal year (Dollars in thousands)
2015
2016
2017
Total
Principal
Interest
$
$
200 $
400
400
1,000 $
94 $
60
21
175 $
Total
294
460
421
1,175
The future payments reflected in the table above do not include the $500,000 borrowed by the Company on June 16, 2014 that is discussed
Note 20, Subsequent Events, and is due in March 2017.
The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 29, 2014, total non–
cancelable purchase orders were approximately $2,118,000 through fiscal 2015 and are scheduled to be delivered to the Company at
various dates through March 2015.
13 Warranty Obligations
The Company records a liability in cost of sales for estimated warranty obligations at the date products are sold. Adjustments are made as
new information becomes available. The following provides a reconciliation of changes in the Company’s warranty reserve. The
Company provides no other guarantees.
(Dollars in thousands)
Balance at beginning of year
Provision, net
Warranty costs incurred
Balance at end of year
March 29, 2014 March 30, 2013
210
114 $
$
(5)
(5)
(91)
(48)
114
61 $
$
36
14 Restructuring
The Company took steps to reduce current and future expenses by reducing staff and by combining the operations in Santa Rosa into the
San Ramon facility. This physical move was completed on May 31, 2013. Certain employee retention agreements were extended through
December 2013. Substantially all of the restructuring costs are for the Microsource reportable segment. As of March 29, 2014 the
Company had expensed $780,000 related to these restructuring costs.
Below is a summary of the total restructuring costs, including amounts recognized during the two previous fiscal years and amounts
recognized for the twelve months ended March 29, 2014. The company does not anticipate any additional restructuring costs.
Type of cost incurred
(In thousands)
Retention agreements for employees
Restoration of Santa Rosa facility
Preparation of San Ramon facility
Moving expenses
Training of San Ramon employees
Total
15 Line of Credit
Total
estimated
restructuring
during the
fiscal year
ended
Recognized Recognized Recognized
during the
fiscal year
ended
March 30,
2013
during the
fiscal year
ended
March 29,
2014
March 31, 2012
542 $
151
59
24
4
780 $
31 $
-
-
-
-
31 $
367 $
-
40
7
4
418 $
144
151
19
17
-
331
cost
$
$
On June 11, 2013 the Company entered into an amendment to the Second Amended Credit Facility (the “New Amended Credit Facility”)
with Silicon Valley Bank (the “Bank”). The New Amended Credit Facility amended the Second Amended Credit Facility by expanding
the definition of eligible accounts, increasing the maximum limit, and extending the maturity date. The New Amended Credit Facility,
which expires on April 15, 2015, is secured by all assets of the Company and provides for a borrowing capacity equal to 80% of eligible
accounts receivable (70% of eligible foreign accounts receivable) on an aggregate basis, up to a maximum $3.0 million, provided the
Company maintains borrowing base eligibility, that is, a minimum of $750,000 of cash in excess of its line of credit liability.
The Second Amended Credit Facility and New Amended Credit Facility contain a collateral handling fee of one-tenth of one percent
(0.10%) on outstanding financed receivables for each calendar month based upon a 360 day year. When the Company is borrowing base
eligible, the collateral handling fee is not applicable. Interest accrues on the average outstanding borrowings at a floating per annum rate
equal to the greater of the Prime Rate plus two percent (2.00%) or six percent (6.00%). When the Company is borrowing base eligible, any
borrowings under the New Amended Credit Facility can be repaid and such repaid amounts re-borrowed until the maturity date. When the
Company is not borrowing base eligible, advances are made on the New Amended Credit facility on individual accounts receivable and
the Company is required to instruct its customers to remit payments to a lockbox at the Bank and when the Company is not borrowing base
eligible, such payments are applied by the Bank to the line of credit to the extent monies were advanced to the Company based on such
specific accounts receivable. As of March 29, 2014, the Company was not borrowing base eligible and, as a result, all of the Company’s
outstanding borrowings under the New Amended Credit Facility of $1.2 million are classified as a current liability. As of March 30, 2013,
the Company was borrowing base eligible, and outstanding borrowings under the Second Amended Credit Facility were $857,000, of
which $280,000 was classified as long-term because of management’s ability to refinance the line of credit with the amended facility
discussed above, and $577,000 was classified as a current liability because it had been repaid prior to the refinance occurring.
As of March 29, 2014, the maximum borrowing capacity under the Line of Credit was $1.2 million, of which no additional amount was
available. The Bank may terminate or suspend advances under the line of credit if the Bank determines there has been a material adverse
change in the Company’s general affairs, financial forecasts or general ability to repay.
On June 16, 2014 the Company amended the term loan agreement with PFG creating a $500,000 revolving line of credit on which the
Company drew $500,000. (see Note 20, Subsequent Events).
16 Term Loan and Warrants
On March 13, 2014 the Company entered into a three year, $2.0 million term loan agreement with PFG under which the Company
received $1.0 million on March 14, 2014. Pursuant to the agreement, the Company would have been able to borrow an additional $1.0
million following the Company’s achievement of certain performance milestones which includes achieving $7.5 million in net sales
during the first half of fiscal 2015 and two consecutive quarters of net income greater than zero during fiscal 2015, however with the
amendment discussed in Note 20, Subsequent Events, an additional $500,000 was borrowed and the amount potentially available for the
Company to borrow if the performance criteria are met was reduced to $500,000. The PFG loan agreement provides for a fixed interest
rate of 9.75% and requires monthly interest only payments during the first six months of the agreement followed by monthly principal and
interest payments over the remaining thirty months. The Company may prepay the loan at any time prior to maturity by paying all future
scheduled principal and interest payments. The PFG Loan is secured by all of the assets of the Company under a lien that is junior to the
SVB position described in Note 15, and limits borrowing under the SVB credit line limit to $3.0 million. The Company paid a loan fee of
$30,000 for the first draw and is required to pay a loan fee of $10,000 upon receipt of the second draw. The initial $30,000 loan fee is
recorded within prepaid expenses and will be amortized to interest expense over the three-year term of the PFG loan.
37
The future payments under this loan, consisting of $1.0 million in principal and $175,000 in interest, were as follows as of March 29,
2014.
Fiscal year (Dollars in thousands)
2015
2016
2017
Total
Principal
Interest
$
$
200 $
400
400
1,000 $
94 $
60
21
175 $
Total
294
460
421
1,175
The loan agreement contains financial covenants associated with the Company achieving minimum quarterly net sales and maintaining a
minimum monthly shareholders’ equity. In the event of default by the Company, all or any part of the Company’s obligation to PFG could
become immediately due.
The loan agreement also provided for the issuance of warrants convertible into 300,000 shares of the Company’s common stock, of which
180,000 were exercisable upon receipt of the first draw, 80,000 became exercisable in connection with the June 16, 2014 amendment
discussed in Note 20, Subsequent Events, and 40,000 would become exercisable if the remaining $500,000 is funded. Each warrant issued
under the loan agreement has a term of five years and an exercise price of $1.42 which is equal to the average NASDAQ closing price of
the Company’s common stock for the ten trading days prior to the first draw. The number of shares exercisable under the warrant
agreements are subject to downward adjustment from 180,000 to 155,000, 80,000 to 67,500 and 40,000 to 27,500, respectively, if the
Company achieves in fiscal 2015 net sales of at least $18.0 million and net income of at least $1.0 million.
If the warrants are not exercised before expiration on March 13, 2019, the warrants associated with the first draw would be settled for
$150,000 in cash, the warrants associated with the June 16, 2014 amendment would be settled for $67,000 in cash and the warrants that
would be issued if the additional $500,000 is funded would be settled for $33,000 in cash. The warrants could be settled for cash at an
earlier date in the event of any acquisition or other change in control of the Company, future public issuance of Company securities or
liquidation (or substantially similar event) of the Company. The Company currently has no plans for any of the aforementioned events,
and as a result, the cash payment date is estimated to be the expiration date unless warrants are exercised before then. Due to the fixed
payment amount on the expiration date, the warrant structure in substance is a debt arrangement (Warrant Debt) with a zero interest rate, a
fixed maturity date and a feature that makes the debt convertible to common stock. The conversion feature is an embedded derivative and
due to the adjustment feature based on sales is not considered indexed to the Company’s stock. Thus, for accounting purposes, the
conversion feature is bifurcated and accounted for separately from the host debt instrument as a derivative liability measured at fair value
which resulted in an initial carrying value of $128,000.
The proceeds from the first draw were allocated between the PFG Debt and the Warrant Debt (inclusive of its conversion feature) based on
their relative fair values on the date of issuance which resulted in initial carrying values of $822,000 and $178,000, respectively. The
conversion feature was bifurcated from the Warrant Debt and recorded at fair value resulting in a remaining carrying value of $50,000
associated with the Warrant Debt. The resulting discounts of $178,000 on the PFG Debt and $100,000 on the Warrant Debt will be
accreted to interest expense under the effective interest method over the three-year term of the PFG Debt and the five-year term of the
Warrant Debt.
17 Series B Convertible Voting Perpetual Preferred Stock and Warrant
On November 10, 2011, the Company received $2,199,000 in cash proceeds from Alara Capital AVI II, LLC, a Delaware limited liability
company (the “Investor”), under a Securities Purchase Agreement entered into on October 31, 2011. Under the terms of the Securities
Purchase Agreement, the Company issued 9,997 shares of its Series B Convertible Voting Perpetual Preferred Stock (“Series B Preferred
Stock”) to the Investor at a price of $220 per share.
38
Each share of Series B Preferred Stock initially is convertible at the option of the holder into 100 shares of the Company’s common stock.
The conversion ratio is subject to customary adjustments for stock splits, stock dividends, recapitalizations and similar transactions. Each
share of Series B Preferred Stock has a liquidation preference of $231, equal to 105% of the purchase price. If the Company pays a
dividend on its common stock, it is required to pay a dividend on the Series B Preferred Stock equal to 100% of the cash dividend that
would be payable on the number of shares of common stock into which each share of Series B Preferred Stock is then convertible. The
Series B Preferred Stock generally votes together with the common stock, on an as-converted basis, on each matter submitted to the vote or
approval of the holders of common stock, and votes as a separate class with respect to certain actions that adversely affect the rights of the
Series B Preferred Stock and on other matters as required by law.
The Company also issued to the Investor a Warrant to purchase up to 848,684 additional shares of common stock of the Company;
however, as discussed in Note 19 this warrant was subsequently reduced to 506,219 shares. The exercise price of the Warrant is $1.43 per
share, subject to anti-dilution adjustments for stock splits, stock dividends, reclassifications and similar events. The expiration date was
originally August 7, 2014 but has been extended to August 7, 2015.
In accordance with the terms of the SPA, the Company and the Investor entered into an Investor Rights Agreement upon the closing of the
sale of the Series B Preferred Stock. In the Investor Rights Agreement, the Company agreed to file certain registration statements for the
resale of common stock of the Company that the Investor may acquire upon conversion of the Series C Preferred Stock.
The Company has recorded $2.0 million as Series B Preferred Stock on the consolidated balance sheet. This amount is net of stock
offering costs of approximately $202,000 and represents the value attributable to both the convertible preferred stock and warrants issued
to the Investor. After considering the value of the warrants, the effective conversion price of the preferred stock was greater than the
common stock price on date of issue and therefore no beneficial conversion feature was present.
18 Series C Convertible Voting Perpetual Preferred Stock and Warrants
On February 19, 2013, the Company entered into a Securities Purchase Agreement (the “SPA”) pursuant to which it agreed to sell
3,424.65 shares of its newly designated Series C Convertible Voting Perpetual Preferred Stock (“Series C Preferred Stock”) to the
Investor, an investment vehicle sponsored by Active Value Investors, LLC, for aggregate consideration of $500,000, which is
approximately $146.00 per share. The sale and issuance of Series C Preferred Stock was completed on February 25, 2013 at which time
the Company and the Investor amended the outstanding warrant to purchase common stock and entered into an Investor Rights Agreement,
as described in more detail below.
Each share of Series C Preferred Stock is initially convertible at the option of the holder into 100 shares of the Company’s common stock.
The conversion ratio is subject to adjustments for stock splits, stock dividends, recapitalizations and similar transactions. Each share of
Series C Preferred Stock has a liquidation preference of $146. If the Company pays a dividend on its common stock after January 1, 2014,
it would be required to pay a dividend on the Series C Preferred Stock equal to 100% of the cash dividend that would be payable on the
number of shares of common stock into which each share of Series C Preferred Stock is then convertible. The Series C Preferred Stock
generally votes together with the common stock and the Company’s Series B Preferred Stock on an as-converted to common stock basis,
on each matter submitted to the vote or approval of the holders of common stock, and would vote as a separate class with respect to certain
actions that adversely affect the rights of the Series C Preferred Stock and on other matters as required by law.
Under the terms of the SPA, the Company and the Investor agreed to terminate the Investor’s right to acquire 342,465 shares of the
848,684 shares underlying the Warrant. As a result, the Warrant as reissued (the “Amended Warrant”) represents the right to acquire
506,219 shares of the Company’s common stock at the price of $1.43 per share. The Amended Warrant will expire on August 7, 2015, if
and to the extent not exercised earlier.
In accordance with the terms of the SPA, the Company and the Investor entered into an Investor Rights Agreement upon the closing of the
sale of the Series C Preferred Stock. In the Investor Rights Agreement, the Company agreed to file certain registration statements for the
resale of common stock of the Company that the Investor may acquire upon conversion of the Series C Preferred Stock.
The Company has recorded $457,000 as Series C Preferred Stock on the consolidated balance sheet, which is net of stock offering costs of
approximately $43,000. After considering the reduction in the value of the warrant from the amendment described above, the effective
conversion price of the preferred stock was greater than the common stock price on the date of issue and therefore no beneficial
conversion feature was present.
19 Series D Convertible Voting Perpetual Preferred Stock and Warrants
On July 8, 2013 the Company received $817,000 in net cash proceeds from Alara Capital AVI II, LLC, a Delaware limited liability
company (the “Investor”). Under a Securities Purchase Agreement (“SPA”), the Company sold to the Investor 5,111.86 shares of a new
Series D Convertible Voting Perpetual Preferred Stock (Series D Preferred Stock) and a warrant to purchase up to 511,186 additional
shares of common stock at the price of $1.43 per share (the “New Warrant”).
39
Each share of Series D Preferred Stock is initially convertible at the option of the holder into 100 shares of the Company’s common stock.
The conversion ratio is subject to adjustments for stock splits, stock dividends, recapitalizations and similar transactions. Each share of
Series D Preferred Stock has a liquidation preference of $143. If the Company pays a dividend on its common stock after January 1, 2014,
it would be required to pay a dividend on the Series D Preferred Stock equal 100% of the cash dividend that would be payable on the
number of shares of common stock into which each share of Series D Preferred Stock is then convertible. To date, no dividends have been
paid on the Series D Preferred Stock or any other preferred stock. The Series D Preferred Stock generally votes together with the common
stock, the Company’s Series B Convertible Voting Perpetual Preferred Stock and the Company’s Series C Convertible Voting Perpetual
Preferred Stock on an as-converted to common stock basis, on each matter submitted to the vote or approval of the holders of common
stock, and would vote as a separate class with respect to certain actions that adversely affect the rights of the Series D Preferred Stock and
on other matters as required by law.
The Company also issued to the Investor the New Warrant to purchase up to 511,186 additional shares of common stock of the Company.
The exercise price of the New Warrant is $1.43 per share, subject to anti-dilution adjustments for stock splits, stock dividends,
reclassifications and similar events. The New Warrant will expire January 8, 2016.
Under the terms of the SPA, the Company and the Investor agreed to terminate the Investor’s right to acquire 506,219 common shares at
$3.30 per share from a previously issued warrant and issue a new warrant to purchase 506,219 common shares at $1.43 per share (the
“Amended Warrant”). The Amended Warrant was issued in July 2013 and will expire on August 7, 2015, if and to the extent not exercised
earlier.
The Company recorded the issuance of the Series D Preferred Stock using an allocation of the proceeds based on the relative fair values of
each of the components included in the consideration given to the Investor. These components included the Preferred Stock which was
ascribed an estimated fair value of $269,000, the conversion feature which was ascribed an estimated fair value of $558,000, the New
Warrant which was ascribed an estimated fair value of $349,000 and the Amended Warrant, which was ascribed an estimated fair value of
$248,000 representing the incremental fair value of the Amended Warrant over the Existing warrant that was terminated.
The allocation of the $858,000 in gross proceeds from issuance of Series D Preferred Stock based on the relative fair values noted above
resulted in an allocation of $498,000 (which was recorded net of $41,000 of issuance costs) to Series D Preferred Stock and $360,000 to
Common Stock. In addition, because the effective conversion rate based on the $498,000 allocated to Series D Preferred Stock was $0.97
per common share which was less than the Company’s stock price on the date of issuance, a beneficial conversion feature was present at
the issuance date. The beneficial conversion feature totaled $238,000 and was recorded as a reduction of common stock and an increase to
accumulated deficit.
As of March 29, 2014 the Investor’s beneficial ownership is approximately 36.2% of the Company’s common stock, assuming that New
Warrant and Amended Warrant are exercised.
20 Subsequent Events
Customer Order Received:
A large aerospace company has engaged Microsource for design services and a production bid associated with a radar filter program. On
August 13, 2013 Microsource received an initial order for $733,000, on May 6, 2014 a follow on order of $659,000 was received, and then
on May 20, 2014 the complete order for an additional $5.5 million was received. The total orders for the design and production bid for the
associated program is $6.9 million. The Company anticipates the associated multi-year production agreement to be for approximately
$10.0 million and for it to finalize in calendar 2014. No assurances can be given that the parties will agree on the final multi-year
production agreement, or what the actual terms will be.
Amended Loan Agreement:
On June 16, 2014, the Company amended its loan agreement with PFG. Under the terms of the amendment, PFG made a revolving loan
available to Giga-tronics in the amount of $500,000, and the Company drew the entire amount on June 17, 2014. The Company now has
total debt of $1.5 million with PFG. The amended loan agreement also provides for the Company’s ability to request an additional term
loan of up to $500,000 in Fiscal 2015 if the Company meets the performance criteria discussed in Note 16.
The revolving loan has a three year term, and PFG has the right to convert the revolving loan into a term loan and require principal
payments to be amortized over the remaining loan term. Interest on the revolving loan is fixed, calculated on daily basis rate equal to
12.50% per annum. Interest on the initial loan of $1.0 million remains 9.75% per annum. To stay in compliance with the loan terms, the
Company must meet certain financial covenants associated with minimum quarterly revenues and monthly minimum shareholders’ equity.
The lender can accelerate the maturity of the loan in case of a default. The Company can prepay the loan before maturity, even if PFG
converts it to a term loan.
40
In connection with the original loan to the Company, PFG became entitled to warrants to ultimately purchase up to 300,000 shares of
common stock in the future, dependent on the amount borrowed by the Company. With the initial loan of $1.0 million PFG received
warrants for up to 180,000 shares of common stock. With the amendment of the $500,000 revolving loan PFG received warrants for up to
80,000 shares of common stock. If PFG makes the additional $500,000 loan later in Fiscal 2015, PFG’s warrants entitle PFG to purchase
the remaining 40,000 shares of common stock. The warrants were priced when the original loan agreement was entered at $1.42 per share.
The warrant has a net exercise feature. Issuance of the warrant is exempt from registration under Section 4(2) of the Securities Act of
1933.
If the Company meets certain financial goals in Fiscal 2015, the 260,000 warrants associated with the total $1.5 million borrowed is
reduced to 222,500 shares of common stock. Should PFG earn the rights to exercise the warrant for the additional 40,000 shares of
common stock, that number will be reduced to 27,500 shares of common stock if the Company meets those financial goals.
In the event of any acquisition or other change in control of the Company, future public issuance of Company securities, liquidation (or
substantially similar event) of the Company, or expiration of the warrants, PFG will have the right to exchange the warrant for $250,000
in cash if all loans are made or $217,000 if only the two loans totaling $1.5 million are made.
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Giga-tronics Incorporated
San Ramon, California
We have audited the accompanying consolidated balance sheets of Giga-tronics Incorporated (the “Company”) as of March 29, 2014 and
March 30, 2013 and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Giga-tronics Incorporated as of March 29, 2014 and March 30, 2013, and the consolidated results of its operations and its cash
flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has incurred a current year net loss of $3.7 million, has an
accumulated deficit of $18.2 million, has experienced delays in the launch of its new product line, and has a line of credit with a material
adverse change clause under which the bank may terminate the availability of future borrowings. These matters raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
San Francisco, California
June 24, 2014
/s/ Crowe Horwath LLP
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the
Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company
periodically reviews the design and effectiveness of its disclosure controls and internal control over financial reporting. The Company
makes modifications to improve the design and effectiveness of its disclosure controls and internal control structure, and may take other
corrective action, if its reviews identify a need for such modifications or actions. The Company’s disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives.
As of the end of the period covered by this Form 10-K, an evaluation was completed under the supervision and with the participation of
our management, including our principal executive officer and principal financial officer, regarding the design and effectiveness of our
disclosure controls and procedures. Based on this evaluation, our management, including our principal executive officer and principal
financial officer, has concluded that our disclosure controls and procedures were effective as of March 29, 2014.
Report of Management on Internal Control over Financial Reporting
Management of Giga-tronics is responsible for establishing and maintaining adequate internal control over financial reporting for the
Company, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's management, under the
supervision of the Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of the Company's internal control
over financial reporting as of March 29, 2014. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in its 1992 Internal Control-Integrated Framework. Our internal control
over financial reporting includes policies and procedures designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting purposes in accordance with United States generally accepted
accounting principles and that:
● pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the Company; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
A material weakness is a control deficiency, or combination of control deficiencies, which results in a more than remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or detected.
Based on the above described procedures and actions taken, the Company’s management, including its Chief Executive Officer and its
Chief Financial Officer have concluded that as of March 29, 2014, the Company’s internal control over financial reporting was effective
based on the criteria described in the 1992 “COSO Internal Control – Integrated Framework.”
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of March 29, 2014, has not
been audited by the Company’s independent registered public accounting firm. Management’s report is not subject to attestation by the
Company’s independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this Annual Report.
Material Weakness in Internal Control Over Financial Reporting
The Company determined that as of December 28, 2013 it did not have adequate procedures in place to identify and report on a timely
basis the impact of certain triggering events in its line of credit arrangement. The lack of these procedures resulted in the delayed financial
reporting of the impacts of the triggering events on the balance sheet classification of borrowings under the line of credit as current
liabilities rather than long term liabilities and related disclosures regarding the triggering events.
43
Remediation of Material Weakness
Management has engaged in a contract review policy that addresses the material weakness reported as of December 28, 2013. The
remediation efforts taken are the following:
● Management has adopted a contract agreement review policy
● All material agreements are reviewed by the Chief Financial Officer and Controller
● At the end of each reporting period, the Chief Financial Officer will review and approve the Contract/Agreement Summary
spreadsheet prepared by the Controller.
Management believes the above efforts have effectively remediated the material weakness.
Changes in Internal Control
Except as otherwise discussed above, there were no changes in the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 29, 2014, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
The Company is not aware of any information required to be reported on Form 8-K that has not been previously reported.
44
ITEM 10. DIRECTOR, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Information regarding Directors of the Company is set forth under the heading “Election of Directors” of the Company’s Proxy Statement
for its 2014 Annual Meeting of Shareholders, incorporated herein by reference. This Proxy Statement is to be filed no later than 120 days
after the close of the fiscal year ended March 29, 2014.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Company’s compensation of its executive officers is set for the under the heading “Executive Compensation” of
the Company’s Proxy Statement for its 2014 Annual Meeting of Shareholders, incorporated herein by reference. This Proxy Statement is
to be filed no later than 120 days after the close of the fiscal year ended March 29, 2014.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is set forth under the heading “Stock Ownership of
Certain Beneficial Owners and Management” of the Company’s Proxy Statement for its 2014 Annual Meeting of Shareholders,
incorporated herein by reference. Information about securities authorized for issuance under equity compensation plans is set forth under
the heading “Equity Compensation Plan Information” of its Proxy Statement for the 2014 Annual Meeting of Shareholders, incorporated
herein by reference. This Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended March 29, 2014.
ITEM 13. CERTAIN RELATONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information set forth in the Proxy Statement under the section captioned “Transactions with Management and Others” is incorporated
herein by reference. This Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended March 29, 2014.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information set forth in the Proxy Statement under the section captioned “Appointment of Independent Registered Accounting Firm” is
incorporated herein by reference. This Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended March
29, 2014.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) The following consolidated financial statements of Giga-tronics Incorporated and the related independent registered public
accounting firm are filed herewith:
1. Financial Statements. See Index to Financial Statements on page 21. The financial statements and Report of Independent
Registered Public Accounting Firm are included in Item 8 are filed as part of this report.
2. Exhibits. The exhibit list required by this item is incorporated by reference to the Exhibit Index filed with this report.
45
In accordance with the requirements of Section 13 or 15(d) of the Securities Exchange Act, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
GIGA-TRONICS INCORPORATED
/s/ JOHN R. REGAZZI
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act, this annual report on Form 10-K has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ GARRETT A. GARRETTSON
Garrett A. Garrettson
Chairman of the Board
of Directors
/s/ JOHN R. REGAZZI
John R. Regazzi
/s/ STEVEN D. LANCE
Steven D. Lance
/s/ GORDON L. ALMQUIST
Gordon L. Almquist
/s/ JAMES A. COLE
James A. Cole
/s/ KENNETH A. HARVEY
Kenneth A. Harvey
/s/ LUTZ P. HENCKELS
Lutz P. Henckels
/s/ WILLIAM J. THOMPSON
William J. Thompson
Chief Executive Officer
(Principal Executive Officer)
and Director
Vice President of Finance/
Chief Financial Officer & Secretary
(Principal Financial Officer)
Director
Director
Director
Director
Director
46
06/24/2014
Date
06/24/2014
Date
06/24/2014
Date
06/24/2014
Date
06/24/2014
Date
06/24/2014
Date
06/24/2014
Date
06/24/2014
Date
The following exhibits are filed by reference or herewith as a part of this report:
INDEX TO EXHIBITS
3.1
Articles of Incorporation of the Registrant, as amended, including Certificate of Determination of Preferences for Preferred
Stock Series A, previously filed as Exhibit 3.1 to Form 10-KSB for the fiscal year ended March 27, 1999 and incorporated
herein by reference.
Certificate of Determination for Series B Convertible Voting Perpetual Preferred Stock, incorporated by reference from
exhibits filed with the Company’s current report on Form 8-K filed on November 14, 2011.
Certificate of Determination for Series C Convertible Voting Perpetual Preferred Stock, incorporated by reference from
exhibits filed with the Company’s current report on Form 8-K filed on February 27, 2013.
Certificate of Determination for Series D Convertible Voting Perpetual Preferred Stock, incorporated by reference from exhibits
filed with the Company’s current report on Form 8-K filed on July 3, 2013.
Amended and Restated Bylaws of Giga-tronics Incorporated, as amended on March 7, 2008, previously filed as Exhibit 3.2 to
Form 10-K for the fiscal year ended March 29, 2008, and incorporated herein by reference.
Form of stock certificate for shares of Series B Convertible Voting Perpetual Preferred Stock, incorporated by reference from
exhibits filed with the Company’s current report on Form 8-K Filed on November 14, 2011
Rights Agreement between the Company and American Stock Transfer & Trust Company, LLC dated as of January 23, 2013
which includes as Exhibit A the form of Certificate f Determination for the Series A Junior Participating Preferred Stock, as
Exhibit B the Form of Rights Certificate and Exhibit C, a summary of Rights to Purchase Shares of Preferred Stock,
incorporated by reference from exhibits filed with the Company’s current report on Form 8-K filed on January 25, 2013;
Amendment No. 1 thereto between the Company and American Stock Transfer & Trust Company, LLC as Rights Agent, ,
incorporated by reference from exhibits filed with the Company’s current report on Form 8-K filed on July 3, 2013.
Standard form Indemnification Agreement for Directors and Officers, previously filed as Exhibit 10.1 to Form 10-K for the
fiscal year ended March 27, 2010, and incorporated herein by reference.
First Amendment to Office Lease Agreement between Giga-tronics Incorporated and VIF/ZKS Norris Tech Center, LLC, for
4650 Norris Canyon Road, San Ramon, CA, dated March 29, 2010, previously filed as Exhibit 10.2 to Form 10-K for the fiscal
year ended March 27, 2010, and incorporated herein by reference.
2000 Stock Option Plan and form of Incentive Stock Option Agreement, previously filed on September 8, 2000 as Exhibit 99.1
to Form S-8 (33-45476) and incorporated herein by reference. *
2005 Equity Incentive Plan incorporated herein by reference to Attachment A of the Registrant’s Proxy Statement filed July
21, 2005. *
Amended and Restated Loan and Security Agreement dated June 16, 2014, between the Company and Partners for Growth IV,
L.P..
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
Amended and Restated Warrant dated June 16, 2014, between the Company and Partners for Growth IV, L.P.
10.7
Amended and Restated Warrant dated June 16, 2014, between the Company and SVB Financial Group
10.8
Amended and Restated Warrant dated June 16, 2014, between the Company and PFG Equity Investors, LLC
10.9
10.10
Securities Purchase Agreement dated February 19, 2013, between the Company and Alara Capital AVI II, LLC, incorporated
by reference from exhibit 10.1 to the registrant’s Form 8-K filed on February 25, 2013.
Securities Purchase Agreement dated June 27, 2013, between the Company and Alara Capital AVI II, LLC, incorporated by
reference from exhibit 10.1 to the registrant’s Form 8-K filed on July 3, 2013.
10.11 Warrant to purchase 511,186 shares of common stock, dated July 8, 2013, between the Company and Alara Capital AVI II,
LLC, incorporated by reference from exhibits filed with the Company's current report on Form 8-K filed July 12, 2013.
47
10.12 Warrant to purchase 506,219 shares of common stock, dated July 8, 2013, between the Company and Alara Capital AVI II,
LLC, incorporated by reference from exhibits filed with the Company's current report on Form 8-K filed July 12, 2013.
10.13
10.14
10.15
21
23
Investor Rights Agreement dated November 10, 2011, between the Company and Alara Capital AVI II, LLC, incorporated by
reference from exhibits filed with the Company's current report on Form 8-K filed November 14, 2011.
Investor Rights Agreement dated February 25, 2013, between the Company and Alara Capital AVI II, LLC, incorporated by
reference from exhibits filed with the Company’s current report on Form 8-K filed on February 27, 2013.
Investor Rights Agreement dated November 10, 2013, between the Company and Alara Capital AVI II, LLC, incorporated by
reference from exhibits filed with the Company's current report on Form 8-K filed July 12, 2013.
Significant Subsidiaries.
Consent of Independent Registered Public Accounting Firm, Crowe Horwath LLP.
31.1
Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
32.2
101.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011,
formatted in XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Balances Sheets, (ii) the Consolidated
Statements of Income, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to the Consolidated Financial
Statements, tagged as blocks of text (furnished but not filed).
* Management contract or compensatory plan or arrangement.
48
Partners for Growth
EXHIBIT 10.5
Amended and Restated Loan and Security Agreement
Borrower:
Address:
Giga-tronics Incorporated, a California corporation
4650 Norris Canyon Road, San Ramon CA, 94583
Borrower:
Address:
Microsource, Inc., a California corporation
4650 Norris Canyon Road, San Ramon CA, 94583
Date:
June 16, 2014
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (“Agreement”) is entered into on the above date (the
“Effective Date”) and amends and restates in its entirety that certain Loan and Security Agreement dated March 13, 2014 (“Original Loan
Agreement” and such date, the “Original Loan Effective Date”), between PARTNERS FOR GROWTH IV, L.P. (“PFG”), whose address
is 150 Pacific Avenue, San Francisco, CA 94111 and Borrower(s) named above (jointly and severally, the “Borrower”), whose chief
executive offices are located at the above addresses (“Borrower’s Address”). The Schedule to this Agreement (the “Schedule”) being
signed by the parties concurrently, is an integral part of this Agreement. (Definitions of certain terms used in this Agreement are set forth
in Section 7 below.)
1. LOANS.
1.1 Loans. PFG will make loans to Borrower (the “Loan” or “Loans”) in the amount (s) shown on the Schedule subject at all times to,
and notwithstanding any other provision of this Agreement, no Default or Event of Default having occurred and being continuing at any
time a Loan is requested or made.
1.2 Interest. All Loans and all other monetary Obligations shall bear interest at the rates shown on the Schedule, except where expressly
set forth to the contrary in this Agreement. Interest shall be payable monthly, on the first day of each month for interest accrued during the
prior month.
1.3 Fees. Borrower shall pay PFG the fees shown on the Schedule, which are in addition to all interest and other sums payable to PFG
and are not refundable.
1.4 Loan Requests. To obtain a Loan, Borrower shall make a Qualifying Request to PFG compliant with Section 8.5. Loan Requests are
not deemed made until PFG acknowledges receipt of the same by electronic mail or otherwise in writing. Without limiting the effect of
Section 8.22, each Borrower appoints the Responsible Officer(s) as its authorized agent to make Loan Requests and any Loan Request
made by such Responsible Officer(s) shall be binding on each Borrower as if made by its own respective officers who are duly authorized
to bind Borrower in respect of this Agreement PFG’s obligation to fund a Loan Request shall be subject to its receipt of such reports,
certificates and other information as may be set forth in the Schedule. Loan Requests received after 12:00 Noon Pacific time will not be
deemed to have been received by PFG until the next Business Day. PFG may rely on any Loan Request given by a person whom PFG
believes in good faith is a Responsible Officer, and Borrower will indemnify PFG for any loss PFG suffers as a result of that reliance.
1.5 Late Fee. If any payment of accrued interest for any month is not made within three business days after the later of the date a bill
therefor is sent by PFG or three business days after the due date therefor, or if any payment of principal or any other payment is not made
within three Business Days after the date due, then Borrower shall pay PFG a late payment fee equal to 5% of the amount of each such late
payment. The provisions of this paragraph shall not be construed as PFG’s consent to Borrower’s failure to pay any amounts when due,
and PFG’s acceptance of any such late payments shall not restrict PFG’s exercise of any remedies arising out of any such failure. Unless
expressly waived in writing by PFG in its sole discretion, interest at the Default Rate shall commence to apply to outstanding monetary
Obligations as from the date the above grace periods expire.
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Partners for Growth
Amended and Restated Loan and Security Agreement
2. SECURITY INTEREST.
2.1 Grant of Security Interest. To secure the payment and performance of all of the Obligations when due, Borrower hereby grants to
PFG a continuing security interest in, and pledges to PFG, all of the following (collectively, the “Collateral”): all right, title and interest of
Borrower in and to all of the following, whether now owned or hereafter arising or acquired and wherever located: all Accounts; all
Inventory; all Equipment; all Deposit Accounts; all General Intangibles (including without limitation all Intellectual Property); all
Investment Property; all Other Property; and any and all claims, rights and interests in any of the above, and all guaranties and security for
any of the above, and all substitutions and replacements for, additions, accessions, attachments, accessories, and improvements to, and
proceeds (including proceeds of any insurance policies, proceeds of proceeds and claims against third parties) of, any and all of the above
and all Borrower’s books relating to any and all of the above.
Notwithstanding anything herein to the contrary, that the Collateral will not include (a) any application for a Trademark that would
otherwise be deemed invalidated, cancelled or abandoned due to the grant of a Lien thereon unless and until such time as the grant of such
Lien will not affect the validity of such trademark, (b) any lease, license, contract, or agreement, if the grant of a security interest in such
lease, license, contract, or agreement under the terms thereof or under applicable law with respect thereto, is prohibited and such
prohibition has not been or is not waived or the consent of the other party to such lease, license, contract, or agreement has not been or is
not otherwise obtained or under applicable law such prohibition cannot be waived, (c) more than 65% of the voting equity interests of any
Subsidiary of Borrower organized in a jurisdiction outside of the United States, provided, however, such percentage shall be 100% unless
Borrower demonstrates to PFG’s reasonable satisfaction that pledging more than 65% of the voting equity interests of such Subsidiary
would result in a material adverse tax consequence; (d) vehicles and other goods subject to a certificate of title, and (e) any deposit
accounts used exclusively for payroll or employee benefit payment purposes; provided that (x) any such limitation described in the
foregoing clause (b) on the security interests granted hereunder shall only apply to the extent that any such prohibition could not be
rendered ineffective pursuant to the UCC or any other applicable law or principles of equity and (y) in the event of the termination or
elimination of any such prohibition or the requirement for any consent contained in any applicable law, lease, license, contract or other
agreement, to the extent sufficient to permit any such item to become Collateral hereunder, or upon the granting of any such consent, or
waiving or terminating any requirement for such consent, a security interest in such lease, license, contract or other agreement shall be
automatically and simultaneously granted hereunder and shall be included as Collateral hereunder.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.
In order to induce PFG to enter into this Agreement and to make Loans, Borrower represents and warrants to PFG as follows, and
Borrower covenants that the following representations will continue to be true, except for representations expressly specified to be made as
of a particular date, and that Borrower will at all times comply with all of the following covenants, throughout the term of this Agreement
and thereafter until all Obligations (other than inchoate indemnity obligations) have been paid and performed in full:
3.1 Corporate Existence, Authority and Consents. Borrower is and will continue to be, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation and has in full force and effect all Governmental Authorizations required for
Borrower to lawfully conduct its business as conducted on the Effective Date. Borrower shall give PFG 30 days’ prior written notice
before changing its jurisdiction or form of organization. Borrower is and will continue to be qualified and licensed to do business in all
jurisdictions in which any failure to do so could result in a Material Adverse Change. The execution, delivery and performance by
Borrower of this Agreement, and all other documents contemplated hereby (i) have been duly and validly authorized, (ii) are enforceable
against Borrower in accordance with their terms (except as enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar Legal Requirements relating to creditors' rights generally), and (iii) do not violate
Borrower’s Constitutional Documents, or any material Legal Requirement or any material agreement or instrument of Borrower or relating
to its property, (iv) does not require any action by, filing, registration or qualification with, or Governmental Authorization from, any
Governmental Body (except such Governmental Authorizations which have already been obtained and are in full force and effect), and (v)
do not constitute grounds for acceleration of any material Indebtedness or obligation under any agreement or instrument of Borrower or
relating to its property. Without limiting the foregoing: (A) the Board has the authority under Borrower’s Constitutional Documents to
enter into and cause Borrower to perform, or to delegate such authority to a Responsible Officer to enter into and cause Borrower to
perform, its Obligations, and (B) no consent is required of any Person other than such consents as have already been obtained or could
reasonably result in a cost to or liability of Borrower in excess of $100,000.
3.2 Name; Trade Names and Styles. As of the Effective Date, the name of Borrower set forth in the heading to this Agreement is its
correct name, as set forth in its Constitutional Documents. Listed in the Representations are all prior names of Borrower and all of
Borrower’s present and prior trade names as of the Effective Date. Borrower has complied, and will in the future comply, in all material
respects, with all laws relating to the conduct of business under a fictitious business name, if applicable to Borrower.
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Partners for Growth
Amended and Restated Loan and Security Agreement
3.3 Place of Business; Location of Collateral. As of the Effective Date, the address set forth in the heading to this Agreement is
Borrower’s chief executive office. In addition, as of the Effective Date, Borrower has places of business and Collateral is located only at
the locations set forth in the Representations. Borrower will give PFG at least 30 days prior written notice before opening any additional
place of business, changing its chief executive office, or moving any of the Collateral valued at greater than $10,000 to a location other
than Borrower’s Address or one of the locations set forth in the Representations, except that Borrower may (x) maintain sales offices in the
ordinary course of business at which not more than a total of $10,000 fair market value of Equipment is located, and (y) provide Inventory
to customers on a temporary basis without having sold such Inventory for the purposes of demonstration, consistent in form and substance
with Borrower’s past practice.
3.4 Title to Collateral; Perfection; Permitted Liens.
(a) Borrower is as of the Effective Date, and will at all times in the future be, the sole owner of all the Collateral, except for
Collateral which is leased or licensed to Borrower. The Collateral is as of the Effective Date and will remain free and clear of any and all
liens, charges, security interests, encumbrances and adverse claims, except for Permitted Liens. As of the Effective Date, PFG will have,
and will continue to have, a First-Priority perfected and enforceable security interest in all of the Collateral, subject only to Permitted
Liens, and Borrower will at all times defend the Liens granted to PFG hereunder and use commercially-reasonable efforts to defend the
Collateral against all claims of others.
(b) Borrower has set forth in the Representations all of Borrower’s Deposit Accounts as of the Effective Date, and Borrower shall
(i) give PFG five Business Days advance written notice before establishing any new Deposit Accounts or (ii) depositing any Cash or Cash
Equivalents or Investment Property into any new Deposit Account and (iii) subject to the rights of the Senior Lender, shall cause the
institution where any such new Deposit Account is maintained to execute and deliver to PFG a Control Agreement in form legally and
commercially sufficient to perfect PFG’s security interest in the Deposit Account and otherwise reasonably satisfactory to PFG in its good
faith business judgment.
(c) In the event that Borrower shall at any time after the Effective Date have any commercial tort claims against others, which it is
asserting, and in which the potential recovery exceeds $100,000, Borrower shall promptly notify PFG thereof in writing and provide PFG
with such information regarding the same as PFG shall request (unless providing such information would waive Borrower’s attorney-
client privilege). Such notification to PFG shall constitute a grant of a security interest in the commercial tort claim and all proceeds
thereof to PFG, and Borrower shall execute and deliver all such documents and take all such actions as PFG shall request in connection
therewith.
(d) As of the Effective Date, no Collateral with a value in excess of $100,000 is affixed to any real property in such a manner or
with such intent as to become a fixture, except as disclosed in detail in Exhibit A. From and after the Effective Date, without PFG’s
consent in each instance, no material part of the Collateral or will be affixed to any real property in such a manner, or with such intent, as
to become a fixture. Borrower is not, except as set forth in Exhibit A, and will not become a lessee under any real property lease pursuant to
which the lessor may obtain any rights in any of the Collateral and no such lease now prohibits, restrains, impairs or will prohibit, restrain
or impair Borrower’s right to remove any Collateral from the leased premises. Whenever any Collateral is located upon premises in which
any third party has an interest, Borrower shall, whenever requested by PFG, use commercially reasonable efforts to cause such third party
to execute and deliver to PFG, in form acceptable to PFG, such waivers and subordinations as PFG shall specify in its good faith business
judgment; provided that, with respect to any property of Borrower which is considered work-in-process but not yet inventory and is
temporarily located for finishing with a third party as part of Borrower’s historic manufacturing process, no such third party waiver or
subordination will be required with respect to such property so long as (x) temporarily locating such property with a third party is
consistent with Borrower’s past manufacturing processes and (y) such property is not located with any such third party for a period longer
than the time required by such third party to complete the work on such property. Borrower will keep in full force and effect, and will
comply with all material terms of, any lease of real property where any of the Collateral now or in the future may be located.
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good working condition (ordinary wear and tear excepted), and
Borrower will not use the Collateral for any unlawful purpose. Borrower will promptly advise PFG in writing of any material loss or
damage to the Collateral.
3.6 Books and Records. Borrower has maintained and will maintain at Borrower’s Address complete and accurate books and records,
comprising an accounting system in accordance with GAAP.
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Partners for Growth
Amended and Restated Loan and Security Agreement
3.7 Financial Condition, Statements and Reports. All Financial Statements now or in the future delivered to PFG have been, and will
be, prepared in conformity with GAAP and now and in the future will fairly present the results of operations and financial condition of
Borrower in all material respects, in accordance with GAAP, at the times and for the periods therein stated. Between the last date covered
by any such statement provided to PFG and the Effective Date, there has been no Material Adverse Change.
3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed, and will timely file, all material required Tax
Returns, and Borrower has timely paid, and will timely pay, all Taxes now or in the future owed by Borrower. Borrower may, however,
defer payment of any of the foregoing which are contested by Borrower in good faith, provided that Borrower (i) contests the same by
appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies PFG in writing of the commencement of, and any
material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the same from becoming a lien
upon any of the Collateral. Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could
result in additional Taxes becoming due and payable by Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not
and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with
respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other Governmental Body.
3.9 Compliance with Law. Borrower has, to the best of its knowledge, complied, and will comply, in all material respects, with all
provisions of all Legal Requirements applicable to Borrower, including, but not limited to, those relating to Borrower's ownership of real
or personal property, the conduct and licensing of Borrower’s business, and all environmental matters.
3.10 Litigation. Except as disclosed in Exhibit A hereto as of the Effective Date or disclosed in an update to the Representations as to
future periods, there is no claim, suit, litigation, proceeding or investigation pending or (to Borrower’s Knowledge) threatened against or
affecting Borrower in any court or before any Governmental Body (or any basis therefor known to Borrower) (i) involving any single
claim of $50,000 or more, or involving $100,000 or more in the aggregate, or (ii) which could reasonably be expected to result, either
separately or in the aggregate, in any Material Adverse Change. Borrower will promptly inform PFG in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted against Borrower involving any single claim of $50,000 or more, or
involving $100,000 or more in the aggregate.
3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful business purposes, including any purposes detailed in the
Schedule. Borrower is not purchasing or carrying any “margin stock” (as defined in Regulation U of the Board of Governors of the
Federal Reserve System) and no part of the proceeds of any Loan will be used to purchase or carry any “margin stock” or to extend credit
to others for the purpose of purchasing or carrying any “margin stock.”
3.12 No Default. At the Effective Date, no Default or Event of Default has occurred, and no Default or Event of Default will have
occurred after giving effect to any Loans being made concurrently herewith.
3.13 Protection and Registration of Intellectual Property Rights . Borrower owns or otherwise holds the right to use all Intellectual
Property rights material to Borrower’s business or necessary for the conduct of its business as currently conducted and reflected in any
Borrower’s Plans. Borrower shall: (a) protect, defend and maintain the validity and enforceability of its Intellectual Property, other than
Intellectual Property that is not material to Borrower’s business, has a fair value of less than $25,000 and that Borrower has affirmatively
determined not to maintain or to abandon; (b) promptly advise PFG in writing of infringements of its Intellectual Property material to its
business; (c) except as permitted in clause (a), not allow any Intellectual Property material to Borrower’s business to be abandoned,
forfeited or dedicated to the public without PFG’s written consent, and (d) while any Obligations are Outstanding, shall not Transfer
(except for Liens permitted under clauses (iii) and (ix) of the definition of Permitted Liens) any Intellectual Property without PFG’s
consent, which consent shall not be unreasonably withheld if no Default or Event of Default has occurred and is then continuing, the
Transfer of such Intellectual Property would not give rise to such a Default or Event of Default, and if such Intellectual Property meets the
three criteria set forth as the exceptions to Borrower’s duties to protect, defend and maintain under clause (a), above. If, before the
Obligations have been paid and/or performed in full, Borrower shall (i) adopt, use, acquire or apply for registration of any trademark,
service mark or trade name, (ii) apply for registration of any patent or obtain any patent or patent application; (iii) create or acquire any
published or material unpublished works of authorship material to the business that is or is to be registered with the U.S. Copyright Office
or any non-U.S. equivalent; or (iv) register or acquire any domain name or domain name rights, then the provisions of Section 2.1 shall
automatically apply thereto, and Borrower shall use all commercially reasonable efforts to give PFG advance written notice thereof and in
any event shall thereafter give PFG prompt written notice thereof (which for purposes hereof shall be deemed to be not more than five (5)
Business Days from the occurrence of each and any of the foregoing). Borrower shall further provide PFG with all information and details
relating to the foregoing and take such further actions as PFG may reasonably request from time to time to enable PFG to perfect or
continue the perfection of PFG’s interest in such Collateral. Except as noted in the Representations, Borrower is not a party to, nor is it
bound by, any Restricted License.
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Partners for Growth
Amended and Restated Loan and Security Agreement
3.14 Domain Rights and Related Matters. Borrower (a) is the sole record, legal and beneficial owner of all domain names and domain
name rights used in connection with its business and that of its Subsidiaries, free and clear of any rights or claims of any third party; (b) has
set forth in the Representations with respect to domain names and ownership thereof, domain registry, domain servers, location and
administrative contact information, web hosting and related services and facilities (collectively, “Domain Rights”) is true, accurate and
complete in all material respects and Borrower shall promptly notify PFG of any material changes to such information; (c) shall maintain
all Domain Rights that Borrower has not affirmatively determined to abandon in full force and effect so long as any Obligations remain
outstanding; (d) shall, upon request of PFG, notify such third parties (including domain registrars, hosting companies and internet service
providers) of PFG’s security interest in Borrower’s Domain Rights; and (e) shall promptly advise PFG in writing of any material disputes
or infringements of its Domain Rights. The obligations of Borrower under this Section shall not be limited by any Borrower obligations
under the IP Security Agreement and related Collateral Agreements and Notices executed in connection with this Agreement.
3.15 Internal Controls. Parent maintains a system of internal controls, including, but not limited to, disclosure controls and procedures,
internal controls over accounting matters and financial reporting and legal and regulatory compliance controls (collectively, "Internal
Controls") that are sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general
or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences. The Internal Controls are overseen by the audit committee (the "Audit
Committee") of Parent's board of directors (the "Board") in accordance with the Exchange Act rules. Except as specified in Exhibit A,
Parent does not reasonably expect to publicly disclose or report to the Audit Committee or the Board, a significant deficiency, material
weakness, change in Internal Controls or fraud involving management or other employees who have a significant role in Internal Controls,
any violation of, or failure to comply with, the Securities Laws, or any matter that, if determined adversely, would have or reasonably be
expected to result, individually or in the aggregate, in a Material Adverse Change.
3.16 SEC Reporting. Parent is and will remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act and (i)
has filed and will file all required reports under Section 13 or 15(d) of the Exchange Act, as applicable, other than Form 8-K reports; and
(ii) has submitted and will submit electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T, during the 12 months preceding such sale.
3.17 SEC Filings; FINRA and the Sarbanes-Oxley Act. Parent has timely filed with or furnished to the Securities and Exchange
Commission (the “SEC”) each report, statement, schedule, form or other document or filing required to be filed or furnished (or otherwise
filed or furnished) by Parent with the SEC from the date of its initial filing with the SEC to the Effective Date (all such documents
collectively being the “SEC Documents”). Each SEC Document complied, and each SEC Document filed or furnished to the SEC
subsequent to the Effective Date will comply, in all material respects with the applicable requirements of the Securities Act and the
Exchange Act, and did not or will not contain any untrue statement of material fact or omit to state any material fact necessary in order to
make the statements made therein, in light of the circumstances under which they were made, not misleading. Parent has and at all times
will comply in all material respects with its obligations under FINRA and the Sarbanes-Oxley Act of 2002. Parent has provided PFG with a
copy of any and all notices of material noncompliance and subsequent resulting written communications received from the SEC, FINRA
and the NASDAQ, along with Parent’s responses thereto.
3.18 No Injunctions. Neither Borrower nor any of its predecessors or affiliates has been subject to any order, judgment or decree of any
court of competent jurisdiction temporarily, preliminarily or permanently enjoining such person for a failure to comply with Regulation D
under the Securities Act and Borrower shall comply in all respects with Regulation D in connection with any future securities offerings
made in reliance on Regulation D.
4. ADDITIONAL DUTIES OF BORROWER.
Borrower will at all times comply with all of the following covenants throughout the term of this Agreement:
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Partners for Growth
Amended and Restated Loan and Security Agreement
4.1 Financial and Other Covenants. Borrower shall at all times comply with the financial and other covenants set forth in the Schedule.
4.2. Remittance of Proceeds. Subject to the rights of the Senior Lender, all proceeds arising from the disposition of any Collateral shall
be delivered, in kind, by Borrower to PFG in the original form in which received by Borrower not later than the following Business Day
after receipt by Borrower, to be applied to the Obligations in such order as PFG shall determine; provided that, if no Default or Event of
Default has occurred and is continuing, Borrower shall not be obligated to remit to PFG (i) the proceeds of Accounts arising in the
ordinary course of business, or (ii) the proceeds of the sale of surplus, worn out or obsolete Equipment disposed of by Borrower in good
faith in an arm’s length transaction for an aggregate purchase price of $25,000 or less (for all such transactions in any fiscal year).
Borrower agrees that it will not commingle proceeds of Collateral (other than those described in subclauses (i) and (ii) above) with any of
Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express
trust for PFG, except as set forth above, and subject to the rights of the Senior Lender. Subject to the rights of the Senior Lender, PFG may,
in its good faith business judgment, require that all proceeds of Collateral be deposited by Borrower into a Lock-Box account, or such
other “blocked account” as PFG may specify, pursuant to a blocked account agreement in such form as PFG may specify in its good faith
business judgment. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.
Notwithstanding anything contained herein to the contrary, so long as no Default or Event of Default shall have occurred and be
continuing (unless by reason of a conditional waiver or forbearance then being in effect between PFG and Borrower), Borrower shall not
be required to deliver such proceeds to PFG in connection with any disposition so long as (x) Borrower reinvests all or any portion of such
proceeds in assets used or useful in the business of Borrower, and (y) Borrower has notified PFG in advance of the intended reinvestment
of such proceeds.
4.3 Insurance. Borrower shall at all times insure all of the tangible personal property Collateral and carry such other business insurance,
with insurers reasonably acceptable to PFG, in such form and amounts as PFG may reasonably require and as are customary and in
accordance with standard practices for Borrower’s industry and locations, and Borrower shall provide evidence of such insurance to PFG.
All such insurance policies shall name PFG as an additional loss payee, and shall contain a lenders loss payee endorsement in form
reasonably acceptable to PFG. Upon receipt of the proceeds of any such insurance, subject to the rights of the Senior Lender, PFG shall
apply such proceeds in reduction of the Obligations as PFG shall determine in its good faith business judgment, except that, provided no
Default or Event of Default has occurred and is continuing, PFG shall release to Borrower insurance proceeds with respect to Collateral
totaling less than $100,000, which shall be utilized by Borrower for the replacement of the Collateral with respect to which the insurance
proceeds were paid. PFG may require reasonable assurance that the insurance proceeds so released will be so used. If Borrower fails to
provide or pay for any insurance, PFG may, but is not obligated to, obtain the same at Borrower’s expense. Borrower shall promptly
deliver to PFG copies of all material reports made to insurance companies. Notwithstanding anything contained herein to the contrary, so
long as no Default or Event of Default shall have occurred and be continuing (unless by reason of a conditional waiver or forbearance then
being in effect between PFG and Borrower), Borrower shall not be required to deliver such proceeds of such insurance to PFG so long as
(x) Borrower reinvests all or any portion of such proceeds in assets used or useful in the business of Borrower, and (y) Borrower has
notified PFG in advance of the intended reinvestment of such proceeds.
4.4 Reports. Borrower, at its expense, shall provide PFG with the written reports set forth in the Schedule, and such other written reports
with respect to Borrower (including budgets, projections, operating plans and other financial documentation), as PFG shall from time to
time specify in its good faith business judgment.
4.5 Access to Collateral, Books and Records; Additional Reporting and Notices. At reasonable times, and on three (3) Business Days”
notice, PFG, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower's books and records. The
foregoing inspections and audits shall be at Borrower’s expense and the charge therefor shall be $850 per person per day (or such higher
amount as shall represent PFG’s then current standard charge for the same), plus PFG Expenses, provided that so long as no Default or
Event of Default has occurred and is then continuing and no inspection or audit within the one-year period prior to such inspection or audit
has revealed material deficiencies or inaccuracies in Borrower’s books and records, only one such inspection and audit shall be at
Borrower’s expense during any calendar year. Notwithstanding the foregoing, Borrower shall not be required to disclose to PFG any
document or information (i) where disclosure is prohibited by applicable law, or (ii) is subject to attorney-client or similar privilege or
constitutes attorney work product. If Borrower is withholding any information under the preceding sentence, it shall so advise PFG in
writing, giving PFG a general description of the nature of the information withheld. Without limiting the scope of reporting under Section
6 of the Schedule, Borrower shall promptly disclose to PFG any efforts to sell Borrower, its business or assets or any material part thereof
or to refinance the Loan and shall disclose the salient details of any offers received from time to time in respect of the foregoing. At any
time when a Default or Event of Default has occurred and is continuing (whether or not PFG has agreed to forbear), PFG shall be entitled
(i) to be briefed by the as to such matters as PFG may require in its business discretion, (ii) to receive advance notice of any and all Board
meetings or written consents, together with the agendas for the foregoing, and (iii) to observe any such Board meetings, whether or not
formally constituted as such; provided that, but subject to the next succeeding proviso, with respect to the rights contained in clauses (i)
through (iii), Borrower may exclude confidential compensation information and any other information relating to this Agreement, any
other Loan Document, or Borrower’s relationship with the Senior Lender, PFG or any other lender, or any information Borrower
reasonably believes may create a conflict of interest for PFG or affect the attorney/client or a similar privilege of any of Borrower and their
legal advisors; provided further however, that Borrower’s right to exclude information shall be subject to it providing PFG with a general
description of the information excluded and the claimed basis for exclusion.
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4.6 Negative Covenants. Except as may be permitted in the Schedule, Borrower shall not, without PFG's prior written consent (which
shall be a matter of its good faith business judgment and shall be conditioned on Borrower then being in compliance with the terms of this
Agreement), do any of the following:
(i) acquire any assets, except in the ordinary course of business, or make any Investments other than Permitted Investments;
(ii) enter into any transaction outside the ordinary course of business with a value in excess of $50,000;
(iii) Transfer any Collateral (including without limitation the Transfer of Collateral which is then leased back by Borrower), except
for (A) the sale of finished Inventory in the ordinary course of Borrower’s business, (B) the sale or other disposal of worn-out, obsolete or
unneeded Equipment in the ordinary course of business and otherwise in compliance with the terms of this Agreement, (C) the making of
Permitted Investments, and (D) the granting of Permitted Liens;
(iv) store any Inventory or other Collateral with any warehouseman or other third party with an aggregate value (per location) of
$10,000 or greater, unless there is in place a bailee agreement in such form as PFG shall specify in its good faith business judgment
between PFG and such warehouseman or other third party;
(v) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent basis;
(vi) make any loans of any money or other assets, other than Permitted Investments;
(vi) incur any Indebtedness, other than Permitted Indebtedness;
(viii) guarantee or otherwise become liable with respect to the obligations of another party or entity;
(ix) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower);
(x) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's equity, except as required in the ordinary
course of business and consistent with past practice in connection with redeeming or purchasing equity of departing employees, up to a
maximum aggregate of $25,000 in any fiscal year;
(xi) engage, directly or indirectly, in any business other than the businesses currently engaged in by Borrower or reasonably related
thereto;
(xii) with respect to Non-Borrower Subsidiaries, after the date hereof (A) cause or permit any Non-Borrower Subsidiary to hold
Cash or Cash Equivalents with depositary institutions or otherwise of more than $10,000, or (B) cause or permit Borrower (in the
aggregate) to make Permitted Investments in Non-Borrower Subsidiaries or incur Permitted Indebtedness to Non-Borrower Subsidiaries
(in the aggregate) of more than $10,000 at any time;
(xiii) without at least thirty (30) days prior written notice to PFG: (1) add any new offices or business locations, including
warehouses (unless such new offices or business locations contain less than $10,000 in Borrower’s assets or property), (2) change its
jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, or (5) change any organizational
number (if any) assigned by its jurisdiction of organization; or
(xiv) the Board shall permit or shall resolve to or approve (unless such resolution or approval is expressly conditioned upon the
prior consent of PFG), or Borrower shall otherwise take any affirmative steps to effect, any of the foregoing actions in clauses (i) through
(xiii), inclusive, which are not otherwise expressly permitted herein unless the result of such actions would result in a repayment of all
Obligations in accordance with this Agreement.
Transactions permitted by the foregoing provisions of this Section are only permitted if no Default or Event of Default would occur as a
result of such transaction.
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Amended and Restated Loan and Security Agreement
4.7 Litigation Cooperation. Should any third-party suit or proceeding be instituted by or instituted or threatened in writing against PFG
with respect to any Collateral or relating to Borrower, Borrower shall, without expense to PFG, make available Borrower and its officers,
employees and agents and Borrower’s books and records, to the extent that PFG may deem them reasonably necessary in order to
prosecute or defend any such suit or proceeding.
4.8 Changes. When required under Section 6 of the Schedule, Borrower agrees to promptly notify PFG in writing of any changes in the
information set forth in the Representations, provided that Borrower shall only be required to notify PFG of material changes to the
Collateral value information set forth in Part A, Sections 3(d)(e) and (g), and to the information solicited in Sections 3(i), 4(b), 4(d), Part B,
Sections 8-10, 11(d) and 14.
4.9 Further Assurances. Borrower agrees, at its expense, on reasonable request by PFG, to execute all documents and take all actions,
as PFG, may, in its good faith business judgment, reasonably deem necessary in order to perfect and maintain PFG’s perfected First-
Priority security interest in the Collateral (subject to Permitted Liens), and in order to fully consummate the transactions contemplated by
this Agreement, including without limitation, the joinder of any New Subsidiaries to this Agreement and execution of such other
agreements and instruments as PFG reasonably request, including execution of a cross-corporate continuing guaranty among Borrowers
and any Non-Borrower Subsidiaries. In addition, Borrower shall Deliver to PFG, within five (5) days after the same are sent or received,
copies of all material correspondence, reports, documents and other filings with any Governmental Body regarding compliance with or
maintenance of Governmental Authorizations or Legal Requirements or that could reasonably be expected to have a material adverse
effect on any of the Governmental Authorizations or otherwise on the operations of Borrower or any of its Subsidiaries.
4.10 Collateral Accounts. Subject to Section 8(b) of the Schedule: (a) At all times thereafter, maintain all of its Collateral Accounts with
the Senior Lender; and (b) provide PFG five (5) days prior written notice before establishing any Collateral Account at or with any bank or
financial institution other than the Senior Lender.
4.11 Authorization to File Financing Statements. Borrower hereby authorizes PFG to file financing statements, without notice to
Borrower, with all appropriate jurisdictions to perfect or protect PFG’s interest or rights hereunder, including a notice that any disposition
of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of PFG under the Code. Such financing
statements may indicate the Collateral as “all assets of the Debtor” or words of similar effect, or as being of an equal or lesser scope, or
with greater detail, all in PFG’s discretion.
4.12 Full Disclosure. No written representation, warranty or other statement of Borrower in any certificate or written statement given to
PFG, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and
written statements given to PFG, contains any untrue statement of a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements not misleading (it being recognized by PFG that the projections and forecasts
provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the
period or periods covered by such projections and forecasts may differ from the projected or forecasted results).
5. TERM.
5.1 Maturity Date. This Agreement shall continue in effect until the maturity date(s) set forth on the Schedule (the "Maturity Date”),
subject to Sections 5.2, 5.3 and 5.4, below.
5.2 Early Termination. This Agreement may be terminated prior to the Maturity Date as follows: (i) if expressly permitted in the
Schedule, by Borrower, effective three Business Days after written notice of termination is given to PFG and payment in full in cash of all
Obligations (other than inchoate indemnity obligations); or (ii) by PFG at any time after the occurrence and during the continuance of an
Event of Default, without notice, effective immediately. If a Borrower right to prepay Obligations is provided in the Schedule and the
exercise of such right is subject to payment of any consideration to PFG as a condition to such exercise, a Borrower Default or Event of
Default that results in an acceleration of Obligations and/or termination of this Agreement shall not relieve Borrower of the obligation to
pay such consideration, which shall be included in the Obligations required to be paid or performed by Borrower.
5.3 Payment of Obligations. On the Maturity Date or on any earlier effective date of termination, Borrower shall pay and perform in full
all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise
then due and payable. Notwithstanding any termination of this Agreement, (i) all of PFG’s security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in
full, and (ii) no further Loans will be made to Borrower unless PFG otherwise agrees in its sole and absolute discretion. No termination
shall in any way affect or impair any right or remedy of PFG, nor shall any such termination relieve Borrower of any Obligation to PFG,
until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, PFG shall promptly terminate its financing statements with respect to Borrower and deliver to Borrower
such other documents as may be required to fully terminate PFG’s security interests.
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5.4 Survival of Certain Obligations. Without limiting the survival of obligations addressed otherwise in this Agreement and
notwithstanding any other provision of this Agreement, all covenants, representations and warranties made in this Agreement continue in
full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any
other obligations which, by their terms, are to survive the termination of this Agreement) have been paid in full and satisfied. The
obligation of Borrower in Section 8.9 to indemnify PFG shall survive until the statute of limitations with respect to such claim or cause of
action shall have run.
6. EVENTS OF DEFAULT AND REMEDIES.
6.1 Events of Default. The occurrence of any of the following events shall constitute an “Event of Default” under this Agreement
regardless of whether notice thereof is given by PFG, and Borrower shall give PFG immediate written notice thereof:
(a) Borrower or any Guarantor or any Person acting for Borrower or any Guarantor makes any representation, warranty, or other
statement now or later in this Agreement, any Loan Document or in any writing delivered to PFG or to induce PFG to enter this Agreement
or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect as of the Original
Effective Date, the Effective Date or when made; or
(b) Borrower shall fail to pay any Loan or any interest thereon or any other monetary Obligation when due; or
(c) Borrower (i) shall fail to comply with any of the financial covenants set forth in the Schedule, or (ii) shall breach any of the
provisions of Section 4.6 hereof, or (iii) shall fail to perform any other non-monetary Obligation which by its nature cannot be cured, or
(iv) shall fail to permit PFG to conduct an inspection or audit as provided in Section 4.5 hereof or shall fail to provide the notices,
information, briefing and other rights set forth in Section 4.5, or (v) shall fail to provide PFG with a Report under Section 6 of the
Schedule within three (3) Business Days after the date due; or
(d) Borrower shall fail to perform any non-monetary Obligation not otherwise addressed in this Section 6.1, or a default or breach
shall occur under any other Loan Document (whether or not Borrower is a party), which failure, default or breach is not cured within ten
(10) Business Days after the earlier of date performance is due and the date of such failure, default or breach, as the case may be (which
cure period, for the avoidance of doubt, shall not apply to events set forth in this Agreement for which a cure period is otherwise
specified); or
(e) any levy, assessment, attachment or seizure is made on all or any part of the Collateral which is not cured within five (5)
Business Days after the occurrence of the same, or any lien or encumbrance (other than a Permitted Lien) is made on all or any part of the
Collateral which is not cured within ten (10) Business Days after the occurrence of the same; or
(f) any default or event of default occurs under any obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or
(g) there is, under any agreement to which Borrower or any Guarantor is a party with a third party or parties, (i) any default resulting
in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount individually
or in the aggregate in excess of $100,000; or (ii) any breach or default by Borrower or any Guarantor, the result of which could result in a
Material Adverse Change; provided, however, for purposes of this Section 6.1(g) (only), any default or breach which would be reasonably
likely to result in an overall adverse financial consequence of $600,000 or more shall be presumed to constitute a Material Adverse
Change unless Borrower is able to demonstrate to PFG’s reasonable satisfaction that such adverse financial consequence is not a Material
Adverse Change; or
(h) (i) Dissolution, termination of existence, insolvency or business failure of Borrower or any Guarantor; or (ii) appointment of a
receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any
Insolvency Proceeding by, against or in respect of Borrower or any Guarantor under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, in each above
case that is not dismissed or stayed within 45 days (and for the avoidance of doubt, PFG shall have no obligation to advance any Loan
while any of the foregoing conditions or those set forth in clauses (iii) and (iv), below, exist); or (iii) Borrower or any Guarantor shall
generally not pay its debts as they become due; or (iv) Borrower or any Guarantor shall conceal, remove or Transfer any part of its
property, with intent to hinder, delay or defraud its creditors, or make or suffer any Transfer of any of its property which may be fraudulent
under any bankruptcy, fraudulent conveyance or similar law; or
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Amended and Restated Loan and Security Agreement
(i) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of
the foregoing, or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or
(j) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or
(k) Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations
(other than as permitted in the applicable subordination agreement), or if any Person who has subordinated such indebtedness or
obligations terminates or in any way limits his subordination agreement; or
(l) Borrower shall (i) enter into any agreement, binding or non-binding, that would result in a Change in Control, without prompt
notice to PFG, or (ii) effect or suffer a Change in Control, unless all Obligations would be repaid in accordance with this Agreement upon
or prior to the closing of such Change in Control; or
(m) a Material Adverse Change shall occur.
PFG may cease making any Loans hereunder during any of the cure periods provided above, and thereafter if an Event of Default has
occurred and is continuing.
6.2 Remedies. Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, PFG, at its option,
and without notice or demand of any kind (all of which are hereby expressly waived by Borrower), may do any one or more of the
following: (a) Cease making Loans or otherwise extending credit to Borrower under this Agreement or any other Loan Document; (b)
Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the
Collateral wherever it may be found, and for that purpose Borrower hereby authorizes PFG without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the
premises or cause a custodian to remain on the premises in exclusive control thereof, without charge for so long as PFG deems it
necessary, in its good faith business judgment, in order to complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should PFG seek to take possession of any of the Collateral by court process, Borrower hereby
irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to
such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii)
any requirement that PFG retain possession of, and not dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to PFG at places designated by PFG which are reasonably
convenient to PFG and Borrower, and to remove the Collateral to such locations as PFG may deem advisable; (e) Complete the processing,
manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, PFG shall
have the right to use Borrower's premises, vehicles, hoists, lifts, cranes, and other Equipment and all other property without charge; (f)
Sell, lease or otherwise dispose of any of the Collateral, in its condition at the time PFG obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or
on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. PFG
shall have the right to conduct such disposition on Borrower's premises without charge, for such time or times as PFG deems reasonable,
or on PFG's premises, or elsewhere and the Collateral need not be located at the place of disposition. PFG may directly or through any
affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale; (g) Demand payment of, and collect any Accounts and General
Intangibles comprising Collateral and, in connection therewith, Borrower irrevocably authorizes PFG to endorse or sign Borrower's name
on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in PFG's good faith business judgment, to
grant extensions of time to pay, compromise claims and settle Accounts and the like for less than face value; (h) Exercise any and all rights
under any present or future Control Agreements relating to Deposit Accounts or Investment Property; and (i) Demand and receive
possession of any of Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or
referring thereto. All PFG Expenses, liabilities and obligations incurred by PFG with respect to the foregoing shall be added to and become
part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the
Obligations. Without limiting any of PFG's rights and remedies, from and after the occurrence and during the continuance of any Event of
Default, the interest rate applicable to the Obligations shall be the Default Rate.
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6.3 Standards for Determining Commercial Reasonableness. Borrower and PFG agree that a sale or other disposition (collectively,
“sale”) of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i)
Notice of the sale is given to Borrower at least ten days prior to the sale, and, in the case of a public sale, notice of the sale is published at
least five days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale
describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by PFG, with or without the
Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash
or by cashier’s check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, PFG may (but is not obligated to)
direct any prospective purchaser to ascertain directly from Borrower any and all information concerning the same. PFG shall be free to
employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. Without limiting the
foregoing, if Exigent Circumstances exist, Borrower and PFG agree that notice periods may be shorter than as set forth above and such
shorter notice periods are commercially reasonable in Exigent Circumstances. Borrower further acknowledges and agrees that if PFG’s or
third parties’ access to Collateral is inhibited, restricted or denied, it shall be commercially reasonable for PFG to conduct a sale of
Collateral under such circumstances even though the lack of access to Collateral would likely give rise to a sale price less than if parties
had unfettered access to Collateral for purposes of conducting a sale.
6.4 Power of Attorney. Upon the occurrence and during the continuance of any Event of Default, without limiting PFG’s other rights
and remedies, Borrower grants to PFG an irrevocable power of attorney coupled with an interest, authorizing and permitting PFG (acting
through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to Borrower, and
at Borrower's expense, to do any or all of the following, in Borrower's name or otherwise, but PFG agrees that if it exercises any right
hereunder, it will do so in good faith and in a commercially reasonable manner: (a) Execute on behalf of Borrower any documents that
PFG may, in its good faith business judgment, deem advisable in order to perfect and maintain PFG's security interest in the Collateral, or
in order to exercise a right of Borrower or PFG, or in order to fully consummate all the transactions contemplated under this Agreement,
and all other Loan Documents; (b) Execute on behalf of Borrower, any invoices relating to any Account, any draft against any Account
Debtor and any notice to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or
other lien, or assignment or satisfaction of mechanic's, materialman's or other lien; (c) Take control in any manner of any cash or non-cash
items of payment or proceeds of Collateral; endorse the name of Borrower upon any instruments, or documents, evidence of payment or
Collateral that may come into PFG's possession; (d) Endorse all checks and other forms of remittances received by PFG; (e) Pay, contest
or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or
otherwise take any action to terminate or discharge the same; (f) Grant extensions of time to pay, compromise claims and settle Accounts
and General Intangibles for less than face value and execute all releases and other documents in connection therewith; (g) Pay any sums
required on account of Borrower's taxes or to secure the release of any liens therefor, or both; (h) Settle and adjust, and give releases of,
any insurance claim that relates to any of the Collateral and obtain payment therefor; (i) Instruct any third party having custody or control
of any books or records belonging to, or relating to, Borrower to give PFG the same rights of access and other rights with respect thereto as
PFG has under this Agreement; (j) Execute on behalf of Borrower and file in Borrower’s name such documents and instruments as may be
necessary or appropriate to effect the Transfer of Domain Rights, domain names, domain registry administrative contacts and domain and
website hosting services into the name of PFG or its designees, and (k) Take any action or pay any sum required of Borrower pursuant to
this Agreement and any other Loan Documents. Any and all reasonable sums paid and any and all PFG Expenses, liabilities, obligations
and attorneys' fees incurred by PFG with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on
demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall PFG's rights
under the foregoing power of attorney or any of PFG's other rights under this Agreement be deemed to indicate that PFG is in control of
the business, management or properties of Borrower.
6.5 Application of Proceeds. All proceeds realized as the result of any sale of the Collateral shall be applied by PFG first to the PFG
Expenses, liabilities, obligations and attorneys' fees incurred by PFG in the exercise of its rights under this Agreement, second to the
interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as PFG shall determine in its sole
discretion. Any surplus shall be paid to Borrower or other persons legally entitled thereto; Borrower shall remain liable to PFG for any
deficiency. If, PFG, in its good faith business judgment, directly or indirectly enters into a deferred payment or other credit transaction
with any purchaser at any sale of Collateral, PFG shall have the option, exercisable at any time, in its good faith business judgment, of
either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual
receipt by PFG of the cash therefor.
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6.6 Remedies Cumulative. In addition to the rights and remedies set forth in this Agreement, PFG shall have all the other rights and
remedies accorded a secured party under the Code and under all other applicable laws, and under any other instrument or agreement now
or in the future entered into between PFG and Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise
or partial exercise by PFG of one or more of its rights or remedies shall not be deemed an election, nor bar PFG from subsequent exercise
or partial exercise of any other rights or remedies. The failure or delay of PFG to exercise any rights or remedies shall not operate as a
waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and
performed.
7. DEFINITIONS. As used in this Agreement, the following terms have the following meanings:
“Account Debtor” means the obligor on an Account.
“Accounts” means all present and future “accounts” as defined in the Code in effect on the Effective Date with such additions to such
term as may hereafter be made, and includes without limitation all accounts receivable, healthcare receivables and other sums owing to
Borrower.
“Affiliate” means, with respect to any Person, a relative, partner, shareholder, director, officer, or employee of such Person, or any
parent or Subsidiary of such Person, or any Person directly or indirectly through any other Person controlling, controlled by or under
common control with such Person.
“Board” means the Board of Directors or other governing authority of Borrower as authorized in its Constitutional Documents.
“Business Day” means a day on which PFG is open for business.
“Cash” means unrestricted and unencumbered (except for the Liens of PFG and the Senior Lender) cash or cash equivalents in Deposit
Accounts or other Collateral Accounts for which there is in effect a Control Agreement among Borrower, PFG and the depositary
institution in respect of such accounts, unless the requirement for a Control Agreement has been waived by PFG.
“Cash Equivalents” means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or
any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more
than one (1) year after its creation and having a rating of at least A-1 or the equivalent thereof by Standard & Poor's Ratings Group or a
rating of P-1 or the equivalent thereof by Moody's Investors Service, Inc.; (c) certificates of deposit held with the Senior Lender maturing
no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this definition and (e) Investments pursuant to Borrower's Investment
Policy, provided that such investment policy (and any such amendment thereto) has been provided by Borrower to PFG and approved in
writing by PFG.
“Change in Control” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as an amended (the “Exchange Act”)), other than a trustee or other
fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing thirty-five percent (35%) or more of
the combined voting power of Borrower’s then outstanding securities; or (b) during any period of twelve consecutive calendar months,
individuals who at the beginning of such period constituted the Board of Borrower (together with any new directors whose election by the
Board of Borrower was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death
or disability to constitute a majority of the directors then in office.
“Code” means the Uniform Commercial Code as adopted and in effect in the State of California from time to time.
“Collateral” has the meaning set forth in Section 2 above.
“Collateral Account” is any Deposit Account, Securities Account, or Commodity Account, each as defined in the Code, and any other
account of any kind or type in respect of Investment Property, including each of Borrower’s primary operating and other deposit accounts
and securities accounts, including all cash management, merchant services, and foreign exchange accounts and facilities.
“Compliance Certificate” means Borrower’s certification of its compliance with the terms and conditions of this Agreement and such
other matters as PFG may require to be addressed in such certificate, in the form as initially set forth as Exhibit B hereto, as such form may
be amended from time to time upon advance notice from PFG.
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“Constitutional Document” means for any Person, such Person’s formation documents, as last certified by the Secretary of State (or
equivalent Governmental Body) of such Person’s jurisdiction of organization, together with, (a) if such Person is a corporation, its bylaws
in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or operating or similar
agreement), (c) if such Person is a partnership, its partnership agreement (or similar agreement), and (d) if such Person is a statutory joint
venture company or similar entity, its joint venture (or similar) agreement, each of the foregoing with all current amendments or
modifications thereto.
“Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness,
lease, dividend, letter of credit or other obligation of another such as an obligation, in each case directly or indirectly guaranteed,
endorsed, co made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any
obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person
against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include
endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary
obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it
determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other
support arrangement.
“continuing” and “during the continuance of” when used with reference to a Default or Event of Default means that the Default or Event
of Default has occurred and has not been either waived in writing by PFG or cured within any applicable cure period.
“Control Agreement” means a written agreement among PFG, Borrower and a depositary bank or other custodian in respect of
Borrower’s Collateral Accounts by which the depositary bank or other custodian, as appropriate, agrees to comply with instructions given
from time to time by PFG directing the disposition of the funds, investments and securities in Borrower’s Collateral Accounts without
further consent of Borrower, which instructions may include not complying with instructions (which term may include the honoring of
checks written by Borrower against funds in said accounts) given by Borrower, and containing other terms acceptable to PFG.
“Default” means any event which with notice or passage of time or both, would constitute an Event of Default.
“Default Rate” means the lesser of (i) the applicable rate(s) set forth in the Schedule, plus six percent (6%) per annum, and (ii) the
maximum rate of interest that may lawfully be charged to a commercial borrower under applicable usury laws.
“Deposit Accounts” means all present and future “deposit accounts” as defined in the Code in effect on the Effective Date with such
additions to such term as may hereafter be made, and includes without limitation all general and special bank accounts, demand accounts,
checking accounts, savings accounts and certificates of deposit, and as used in this Agreement, the term “Deposit Accounts” shall be
construed to also include securities, commodities and other Investment Property accounts.
“Equipment” means all present and future “equipment” as defined in the Code in effect on the Effective Date with such additions to such
term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing.
“Event of Default” means any of the events set forth in Section 6.1 of this Agreement.
“Exigent Circumstances” means circumstances that substantially inhibit an orderly sale process or that imply urgency due to rapid
erosion of value or opportunity, including Borrower closing its business or “going dark”, inability or refusal (express or implied by non-
response) to provide for the security of Collateral.
“Financial Statements” means consolidated financial statements of Borrower, including a balance sheet, income statement and cash flow
and, in the case of monthly-required financial statements, showing data for the month being reported and a history showing each month
from the beginning of the relevant fiscal year.
“First-Priority” means, in relation to PFG’s Lien in Collateral, a security interest that is prior to any other security interest, with the
exception of the Liens of the Senior Lender and other Permitted Liens, which other Permitted Liens may only have superior priority to
PFG’s Lien as expressly specified herein or pursuant to the terms of a subordination agreement between PFG and the holder of such other
Permitted Lien.
“GAAP” means generally accepted accounting principles consistently applied.
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“General Intangibles” means all present and future “general intangibles” as defined in the Code in effect on the Effective Date with such
additions to such term as may hereafter be made, and includes without limitation all Intellectual Property, payment intangibles, royalties,
contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims,
income tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or
hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and
business interruption insurance), payments of insurance and rights to payment of any kind.
“good faith business judgment” means honesty in fact and good faith (as defined in Section 1201 of the Code) in the exercise of PFG’s
business judgment.
“Governmental Authorization ” means any: (a) permit, license, certificate, franchise, concession, approval, consent, ratification,
permission, clearance, confirmation, endorsement, waiver, certification, designation, rating, registration, qualification or authorization that
is, has been issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement; or (b) right under any Contract with any Governmental Body.
“Governmental Body” means any: (a) nation, principality, commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any
nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board,
instrumentality, officer, official, representative, organization, unit, body or entity and any court or other tribunal); (d) multi-national
organization or body; or (e) individual, entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative,
regulatory, police, military or taxing authority or power of any nature.
“including” means including (but not limited to).
“Indebtedness” means (a) indebtedness for borrowed money or the deferred purchase price of property or services (other than trade
payables arising in the ordinary course of business), (b) obligations evidenced by bonds, notes, debentures or other similar instruments, (c)
reimbursement obligations in connection with letters of credit, (d) capital lease obligations and (e) Contingent Obligations.
“Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy
or insolvency law in any jurisdiction, including assignments for the benefit of creditors, compositions, receiverships, administrations,
extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.
“Intellectual Property” means all present and future: (a) copyrights, copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof, whether published or unpublished, (b) trade secret rights,
including all rights to unpatented inventions and know-how, and confidential information; (c) mask work or similar rights available for the
protection of semiconductor chips; (d) patents, patent applications and like protections including without limitation improvements,
divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same; (e) trademarks, servicemarks, trade styles,
and trade names, whether or not any of the foregoing are registered, and all applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with and symbolized by any such trademarks; (f) Domain
Rights as described in Section 3.14 hereof, (g) computer software and computer software products; (h) designs and design rights; (i)
technology; (j) all claims for damages by way of past, present and future infringement of any of the rights included above; and (k) all
licenses or other rights to use any property or rights of a type described above.
“Inventory” means all present and future “inventory” as defined in the Code in effect on the Effective Date with such additions to such
term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping
materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody
or possession or in transit and including any returned goods and any documents of title representing any of the above.
“Investment” means any beneficial ownership interest in any Person (including any stock, partnership interest or other equity or debt
securities issued by any Person), and any loan, advance or capital contribution to any Person.
“Investment Property” means all present and future investment property, securities, stocks, bonds, debentures, debt securities,
partnership interests, limited liability company interests, options, security entitlements, securities accounts, commodity contracts,
commodity accounts, and all financial assets held in any securities account or otherwise, and all options and warrants to purchase any of
the foregoing, wherever located, and all other securities of every kind, whether certificated or uncertificated.
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“Knowledge” or “best of knowledge” and words of similar import mean either (i) the actual knowledge of any of Borrower’s officers,
including its Directors, any Chief Executive Officer, President, designated legal representative under the Legal Requirements of any non-
U.S. jurisdiction, Chief Information Officer (if any), Chief Technology Officer (or equivalent), Chief Financial Officer and Corporate
Controller, or Borrower's Vice Presidents or General Managers supervising a business unit or division, or any persons succeeding or
performing the responsibilities of such identified positions including Directors with executive authority, or (ii) such knowledge as the
persons in such identified positions would have assuming (A) Borrower policies in accordance with generally-accepted norms of corporate
governance and (B) the actual exercise of reasonable diligence and prudence by such persons in accordance with such policies.
“Legal Requirement” means any written local, municipal, foreign or other law, statute, legislation, constitution, principle of common
law, resolution, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, ruling, directive, pronouncement,
requirement, specification, determination, decision, opinion or interpretation that is, has been issued, enacted, adopted, passed, approved,
promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Body.
“Lien” or “lien” is a security interest, claim, mortgage, deed of trust, levy, charge, pledge or other encumbrance of any kind, whether
voluntarily incurred or arising by operation of law or otherwise against any property.
“Loan Documents” means, collectively, this Agreement, the Representations, and all other present and future documents, instruments
and agreements between PFG and Borrower, including, but not limited to those relating to this Agreement, and all amendments and
modifications thereto and replacements therefor.
“Loan Request” means any request that may be made by a Borrower in connection with this Agreement, including a borrowing request,
consent request, a waiver request and any other accommodation that may be given by PFG under or relating to the Loan Agreement.
“Material Adverse Change” means any of the following: (i) a material adverse change in the business, operations, or condition (financial
or otherwise) of Borrower or any Guarantor, or (ii) a material impairment of the prospect of repayment of any portion of the Obligations;
or (iii) a material impairment of the perfection or priority of PFG’s Liens in the Collateral.
“Maturity Date” means the Maturity Date(s) set forth in Section 4 of the Schedule, or such earlier date at which Obligations become due
by acceleration or otherwise.
“Net Income” means, as calculated on a consolidated basis for Borrower and its Subsidiaries for any period as at any date of
determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a single
accounting period.
“New Subsidiary(ies)” means any person that becomes a Subsidiary of Borrower after the date hereof.
“Non-Borrower Subsidiary(ies)” means any direct or indirect Subsidiary of Borrower not joined as a co-Borrower hereunder and
otherwise joined to the Loan Documents.
“Non-Overdue Senior Monetary Obligations” means, at any time, the amount of monetary Obligations other than principal Indebtedness
owed by Borrower to the Senior Lender but not then due, such as accrued and unpaid interest not yet due.
“Obligations” means all present and future Loans, advances, debts, liabilities, obligations, guaranties, covenants, duties and indebtedness
at any time owing by Borrower to PFG, including obligations and covenants intended to survive the termination of this Agreement,
whether evidenced by this Agreement or any note or other instrument or document, or otherwise, including indebtedness under any
obligation to purchase equity derivatives (including stock warrants) purchased or otherwise issued to PFG from time to time, whether
arising from an extension of credit, opening of a letter of credit, banker’s acceptance, loan, guaranty, indemnification or otherwise,
whether direct or indirect (including, without limitation, those acquired by assignment and any participation by PFG in Borrower's debts
owing to others), absolute or contingent, due or to become due, including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, collateral monitoring fees, closing fees, facility fees, termination fees, minimum interest charges and
any other sums chargeable to Borrower under this Agreement or under any other Loan Documents.
“Ordinary (or “ordinary”) course of business” and derivatives shall apply to an action taken or an action required to be taken and not
taken by or on behalf of a Borrower. An action will not be deemed to have been taken in the “ordinary course of business” unless: (a) such
action is consistent with its past practices (if such type of action has been taken in the past and, if not, such action shall be deemed not in
the ordinary course of business) and is similar in nature and magnitude to actions customarily taken by it; (b) such action is taken in
accordance with sound and prudent business practices in its jurisdiction of organization; and (c) such action is not required to be authorized
by its shareholders and does not require any other separate or special authorization of any nature.
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“Other Property” means the following as defined in the Code in effect on the Effective Date with such additions to such terms as may
hereafter be made, and all rights relating thereto: all present and future “commercial tort claims” (including without limitation any
commercial tort claims identified in the Representations), “documents”, “instruments”, “promissory notes”, “chattel paper”, “letters of
credit”, “letter-of-credit rights”, “fixtures”, “farm products” and “money”; and all other goods and personal property of every kind,
tangible and intangible, whether or not governed by the Code.
“Parent” means Borrower, Giga-tronics Incorporated, a California corporation.
“Payment” means all checks, wire transfers and other items of payment received by PFG for credit to Borrower’s outstanding
Obligations.
“Permitted Indebtedness” means:
(i) the Loans and other Obligations; and
(ii) Indebtedness existing on the Effective Date and shown on Exhibit A hereto;
(iii) Subordinated Debt;
(iv) Indebtedness owing to Senior Lender not to exceed the Senior Debt Limit specified in the Schedule;
(v) other Indebtedness secured by Permitted Liens described in clauses (i), (ii), (iii), (v), (vi), (vii), (viii) and (ix) of that definition;
(vi) unsecured Indebtedness to trade creditors incurred in the ordinary course of business (for purposes of clarification, the
permission under this clause (vi) shall include trade payables for the deferred purchase price of property or services incurred in the
ordinary course of business);
(vii) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (i) through (vi)
above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose materially more
burdensome terms upon Borrower;
(viii) Indebtedness of up to $100,000 outstanding at any time secured by a Lien described in clause (i) of Permitted Liens; provided
such Indebtedness does not exceed the lesser of the cost or fair market value of the property financed with such Indebtedness; and
(ix) reimbursement obligations in respect of letters of credit in an aggregate face amount outstanding not to exceed $300,000 at any
time outstanding, which have been reported to PFG in writing, and, in the case of reimbursement obligations to the Senior Lender in
respect of letters of credit which do not exceed the Senior Debt Limit (taking into account all other Indebtedness to Senior Lender).
“Permitted Investments” are:
(i) Investments (if any) shown on Exhibit A and existing on the Effective Date;
(ii) Investments consisting of Cash Equivalents;
(iii) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the
ordinary course of Borrower;
(iv) Investments in Subsidiaries existing on the Effective Date.
“Permitted Liens” means the following:
(i) purchase money Liens (including Liens arising under any retention of title, hire purchase or conditional sales arrangement or
arrangements having similar effect) (i) on Equipment acquired or held by Borrower incurred for financing the acquisition of the
Equipment securing no more than $100,000 in the aggregate amount outstanding, or (ii) existing on Equipment when acquired, if the Lien
is confined to the property and improvements and the proceeds of the Equipment;
(ii) Liens for Taxes not yet payable;
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(iii) additional Liens consented to in writing by PFG, which consent may be withheld in its good faith business judgment. PFG shall
have the right to require, as a condition to its consent under this subparagraph (iii), that the holder of the additional security interest or lien
sign a subordination agreement in PFG’s then standard form, acknowledge that the security interest is subordinate to the security interest in
favor of PFG, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding,
and that Borrower agrees that any uncured default in any obligation secured by the subordinate security interest shall also constitute an
Event of Default under this Agreement;
(iv) Liens being terminated substantially concurrently with this Agreement;
(v) Liens of materialmen, mechanics, warehousemen, carriers, or other similar liens arising in the ordinary course of business and
securing obligations which are not delinquent;
(vi) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like
obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);
(vii) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by liens of the type
described above in clauses (i), (ii), (iii) and (ix), provided that any extension, renewal or replacement lien is limited to the property
encumbered by the existing lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase and
other terms are not less favorable to Borrower;
(viii) Liens in favor of customs and revenue authorities which secure payment of customs duties in connection with the importation
of goods; and
(ix) Liens in favor of Senior Lender securing an amount not in excess of the Senior Debt Limit.
“Person” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association,
corporation, government, or any agency or political division thereof, or any other entity.
“PFG Expenses” are all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses) for preparing,
amending, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in
connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower or any Guarantor.
“Plan” means Borrower’s financial plan as presented to PFG on February 24, 2014 for its 2014 fiscal year, as such financial plan is
delivered in subsequent years for future periods.
“Qualifying Request” means a request made by a Responsible Officer of Borrower under Section 1.4 for (i) a Loan that is within
Borrower’s borrowing availability under this Agreement, satisfies the relevant conditions set forth in Section 9 of the Schedule and is
accompanied by such certificates, documents and instruments as may be required under this Agreement or otherwise reasonably required
by PFG to confirm Borrower’s compliance with the Loan Documents at the time of such request, or (ii) any other matter for which PFG’s
consent is required under the Loan Documents.
“Representations” means the written Representations and Warranties provided by Borrower to PFG referred to in the Schedule.
“Restricted License” is any material license or other agreement with respect to which Borrower is the licensee (a) that prohibits or
otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property, or
(b) for which a default under or termination of could interfere with PFG’s right to sell any Collateral.
“Responsible Officer(s)” means Steven Lance and John Regazzi, and any other person authorized to bind Borrower and notified to PFG
in writing by a Responsible Officer as a new Responsible Officer.
“Revenue” means revenues required to be recognized as such under GAAP.
“Security Instruments” means financing statements filed under the Code in any jurisdiction in which such financing statements may be
filed, fixed and floating charges, share charges, mortgage debentures, and any other notices, instruments and filings that reflect the “all
assets” security granted to PFG by Borrower in this Agreement and the other Loan Documents.
“Senior Lender” has the meaning set forth in Section 8 of the Schedule.
“Subordinated Debt” means debt incurred by Borrower subordinated to Borrower’s debt to PFG pursuant to a subordination agreement
entered into between PFG, Borrower and the subordinated creditor(s) upon terms acceptable to PFG in its sole business discretion, but
which may at PFG’s option include: (i) subordination of subordinated creditor Lens, (ii) restrictions or prohibition of payments on
subordinated debt until all Obligations to PFG are fully repaid and performed, and (iii) a prohibition on the exercise of remedies by a
subordinated creditor until all Obligations to PFG are fully repaid and performed.
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“Subordination Agreement” means that certain Subordination Agreement, dated as of the date hereof, by and between PFG and Senior
Lender.
“Subsidiary” means, with respect to any Person, (i) any Person of which more than 50% of the voting stock or other equity interests is
owned or (ii) a Person controlled, directly or indirectly, by such Person or one or more Affiliates of such Person and which, for the
avoidance of doubt, shall include a “sister” company to a Person under common direct or indirect ownership meeting the above specified
percentage for being considered a “Subsidiary”.
“Tax” means any tax (including any income tax, franchise tax, capital gains tax, estimated tax, gross receipts tax, value-added tax,
surtax, excise tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax, occupation tax, inventory tax,
occupancy tax, withholding tax or payroll tax), levy, assessment, tariff, impost, imposition, toll, duty (including any customs duty),
deficiency or fee, and any related charge or amount (including any fine, penalty or interest), that is, has been or may in the future be (a)
imposed, assessed or collected by or under the authority of any Governmental Body, or (b) payable pursuant to any tax-sharing agreement
or similar contract.
“Tax Return ” means any return (including any information return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information that is, has been or may in the future be filed with or submitted to,
or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or
payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal
Requirement relating to any Tax.
“Transfer” or “transfer” shall include any sale, assignment with or without consideration, encumbrance, hypothecation, pledge, or other
transfer or disposition of any kind, including, but not limited to, transfers to receivers, levying creditors, trustees or receivers in bankruptcy
proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly.
Other Terms. All accounting terms used in this Agreement, unless otherwise indicated, shall have the meanings given to such terms in
accordance with GAAP, consistently applied. All other terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the Code, to the extent such terms are defined therein.
8. GENERAL PROVISIONS.
8.1 Confidentiality. PFG agrees to use the same degree of care that it exercises with respect to its own proprietary information, to
maintain the confidentiality of any and all proprietary, trade secret or confidential information provided to or received by PFG from
Borrower prior to and after the Effective Date, which (i) indicates that it is confidential, including business plans and forecasts, non-public
financial information, confidential or secret processes, formulae, devices and contractual information, customer lists, and employee
relation matters, or (ii) by its very nature should reasonably be understood as confidential; provided, however, in each case of (i) and (ii)
above, such information shall actually be treated by Borrower and by policy and conduct of Borrower within its business as confidential
and provided, further, that PFG may disclose such information (A) to its officers, directors, employees, attorneys, accountants, affiliates,
advisory boards, participants, prospective participants, assignees and prospective assignees, and such other Persons to whom PFG shall at
any time be required to make such disclosure in accordance with applicable law or legal process, provided that with respect to voluntary
disclosees, such persons shall be subject to confidentiality obligations that reasonably protect against the disclosure of such information,
and (B) in its good faith business judgment in connection with the enforcement of its rights or remedies after an Event of Default, or in
connection with any dispute with Borrower or any other Person relating to Borrower. The confidentiality agreement in this Section
supersedes any prior confidentiality agreement of PFG relating to Borrower.
8.2 Interest Computation. In computing interest on the Obligations, all Payments received after 12:00 Noon, Pacific Time, on any day
shall be deemed received on the next Business Day.
8.3 Payments. All Payments may be applied, and in PFG's good faith business judgment reversed and re-applied, to the Obligations, in
such order and manner as PFG shall determine in its good faith business judgment.
8.4 Monthly Accountings. PFG may provide Borrower monthly with an account of advances, charges, expenses and payments made
pursuant to this Agreement. Such account shall be deemed correct, accurate and binding on Borrower and an account stated (except for
reverses and reapplications of payments made and corrections of errors discovered by PFG), unless Borrower notifies PFG in writing to the
contrary within 60 days after such account is rendered, describing the nature of any alleged errors or omissions.
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8.5 Notices. All notices to be given under this Agreement shall be in writing and shall be given either personally, or by reputable private
delivery service, or by regular first-class mail, or certified mail return receipt requested, or by fax to the most recent fax number a party has
for the other party (and if by fax, sent concurrently by one of the other methods provided herein), or by electronic mail to the most recent
electronic mail address for Borrower provided for the chief financial officer or financial controller executing the Representations (and if
by electronic mail, with an electronic delivery and/or read receipt), addressed to PFG or Borrower at the addresses shown in the heading to
this Agreement, in the Representations or at any other address designated in writing by one party to the other party. All notices shall be
deemed to have been given upon delivery in the case of notices personally delivered, or at the expiration of one Business Day following
delivery to the private delivery service, or two Business Days following the deposit thereof in the United States mail, with postage
prepaid, or on the first business day of receipt during business hours in the case of notices sent by fax or electronic mail, as provided
herein.
8.6 Authorization to Use Borrower Name, Etc. Borrower irrevocably authorizes PFG to: (i) use Borrower’s logo on PFG’s website and
in its marketing materials to denote the lending relationship between PFG and Borrower; (ii) use a “tombstone” to highlight the
transaction(s) from time to time between PFG and Borrower; and (iii) to issue press releases in a form reasonable acceptable to Borrower
and PFG highlighting and summarizing the credit facilities extended by PFG to Borrower from time to time under this Agreement, as
amended from time to time, all of the above (i) through (iii), for marketing purposes.
8.7 Severability. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable,
such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect.
8.8 Integration. This Agreement and such other written agreements, documents and instruments as may be executed in connection
herewith are the final, entire and complete agreement between Borrower and PFG and supersede all prior and contemporaneous
negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements
signed by the parties in connection herewith.
8.9 Waivers; Indemnity. The failure of PFG at any time or times to require Borrower to strictly comply with any of the provisions of this
Agreement or any other Loan Document shall not waive or diminish any right of PFG later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent, and whether or not similar.
None of the provisions of this Agreement or any other Loan Document shall be deemed to have been waived by any act or knowledge of
PFG or its agents or employees, but only by a specific written waiver signed by an authorized officer of PFG and delivered to Borrower.
Borrower waives the benefit of all statutes of limitations relating to any of the Obligations or this Agreement or any other Loan Document,
and Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper, instrument, account, General Intangible, document or guaranty at
any time held by PFG on which Borrower is or may in any way be liable, and notice of any action taken by PFG, unless expressly required
by this Agreement. Borrower hereby agrees to indemnify PFG and its affiliates, subsidiaries, parent, directors, officers, employees, agents,
and attorneys, and to hold them harmless from and against any and all claims, debts, liabilities, demands, obligations, actions, causes of
action, penalties, costs and PFG Expenses (including reasonable and documented attorneys' fees), of every kind, which they may sustain or
incur based upon or arising out of any of the Obligations, or any relationship or agreement between PFG and Borrower, or any other
matter, relating to Borrower or the Obligations; provided that this indemnity shall not extend to any indemnified costs, expenses or
damages determined by a court of competent jurisdiction in a final judgment to have been proximately caused by the indemnitee’s own
gross negligence or willful misconduct. Notwithstanding any provision in this Agreement to the contrary, the indemnity agreement set
forth in this Section shall survive any termination of this Agreement and shall for all purposes continue in full force and effect.
8.10 No Liability for Ordinary Negligence. Borrower agrees that any and all claims it may have under this Agreement shall be limited to
claims against PFG and not its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG.
Neither PFG, nor any of its directors, officers, employees, agents, attorneys or any other Person affiliated with or representing PFG shall
be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower or any
other party through the negligence of PFG, or any of its directors, officers, employees, agents, attorneys or any other Person affiliated with
or representing PFG, but nothing herein shall relieve PFG from liability for its own willful misconduct.
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Partners for Growth
Amended and Restated Loan and Security Agreement
8.11 Amendment; Electronic Execution of Documents. The terms and provisions of this Agreement may not be waived or amended,
except in a writing executed by Borrower and a duly authorized officer of PFG. The words “execution,” “signed,” “signature” and words
of like import in any Loan Document shall be deemed to include electronic signatures or the keeping of records in electronic form, each of
which shall be of the same legal effect, validity and enforceability as a manually executed signature or the use of a paper-based
recordkeeping systems, as the case may be, to the extent and as provided for in any applicable law, including, without limitation, any state
law based on the Uniform Electronic Transactions Act.
8.12 Time of Essence. Time is of the essence in the performance by Borrower of each and every obligation under this Agreement.
8.13 Attorneys’ Fees and Costs. Borrower shall reimburse PFG for all reasonable attorneys’ fees and fees of accounting and consulting
professionals, and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by PFG, pursuant to, or
in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys'
fees and costs PFG incurs in order to do the following: prepare and negotiate this Agreement and all present and future documents relating
to this Agreement; obtain legal advice in connection with this Agreement or Borrower; enforce, or seek to enforce, any of its rights or retain
the services of consultants to do so; prosecute actions against, or defend actions by, Account Debtors; commence, intervene in, or defend
any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim,
bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce PFG’s security interest in, the Collateral; and otherwise
represent PFG in any litigation relating to Borrower. If either PFG or Borrower files any lawsuit against the other predicated on a breach of
this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys’ fees, including (but not
limited to) reasonable attorneys’ fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or
judgment. All attorneys’ fees and costs to which PFG may be entitled pursuant to this Paragraph shall immediately become part of
Borrower’s Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the
Obligations.
8.14 Benefit of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors,
assigns, heirs, beneficiaries and representatives of Borrower and PFG; provided, however, that Borrower may not assign or Transfer any of
its rights under this Agreement without the prior written consent of PFG, and any prohibited assignment shall be void. No consent by PFG
to any assignment shall release Borrower from its liability for the Obligations.
8.15 Joint and Several Liability. If Borrower consists of more than one Person, their liability shall be joint and several, and the
compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower.
8.16 Limitation of Actions. Any claim or cause of action by Borrower against PFG, its directors, officers, employees, agents,
accountants or attorneys, based upon, arising from, or relating to this Loan Agreement, or any other Loan Document, or any other
transaction contemplated hereby or thereby or relating hereto or thereto, or any other matter, cause or thing whatsoever, incurred, done,
omitted or suffered to be done by PFG, its directors, officers, employees, agents, accountants or attorneys, shall be barred unless asserted
by Borrower by the commencement of an action or proceeding in a court of competent jurisdiction by (a) the filing of a complaint within
one year after the earlier to occur of (i) the first act, occurrence or omission upon which such claim or cause of action, or any part thereof,
is based, or (ii) the date this Agreement is terminated, and (b) the service of a summons and complaint on an officer of PFG, or on any
other person authorized to accept service on behalf of PFG, within thirty (30) days thereafter. Borrower agrees that such one-year period is
a reasonable and sufficient time for Borrower to investigate and act upon any such claim or cause of action. The one-year period provided
herein shall not be waived, tolled, or extended except by the written consent of PFG in its sole discretion. This provision shall survive any
termination of this Loan Agreement or any other Loan Document.
8.17 Loan Monitoring. At reasonable times and upon reasonable advance notice to Borrower, PFG shall have the right to visit
personally with Borrower up to two times per calendar year at its principal place of business or such other location as the parties may
mutually agree, for the purpose of meeting with Borrower’s management in order to remain as up-to-date with Borrower’s business as is
practicable and to maintain best practices in terms of lender loan monitoring and diligence.
8.18 Paragraph Headings; Construction; Counterparts. Paragraph headings are only used in this Agreement for convenience.
Borrower and PFG acknowledge that the headings may not describe completely the subject matter of the applicable paragraph, and the
headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement
has been fully reviewed and negotiated between the parties with the benefit of independent counsel and no uncertainty or ambiguity in any
term or provision of this Agreement shall be construed strictly against PFG or Borrower under any rule of construction or otherwise.
References to “Borrower” are construed to mean “each Borrower”, unless otherwise expressly specified. Amounts set off in brackets or
parentheses are negative. The word “shall” is mandatory, the word “may” is permissive, and the word “or” is not exclusive. The term
“Agreement” includes the Schedule. Obligations of a similar nature addressed in different sections of this Agreement shall be deemed
supplemental to one another and not exclusive unless expressly set forth as such. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken
together, constitute one Agreement.
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Partners for Growth
Amended and Restated Loan and Security Agreement
8.19 Correction of Loan Documents. PFG may correct patent errors and fill in any blanks in the Loan Documents consistent with the
agreement of the parties so long as PFG provides Borrowers with written notice of such correction and allows Borrower at least ten (10)
days to object to such correction. In the event of such objection, such correction shall not be made except by an amendment signed by both
PFG and Borrower.
8.20 Governing Law; Jurisdiction; Venue. This Agreement and all acts and transactions hereunder and all rights and obligations of PFG
and Borrower shall be governed by the laws of the State of California. As a material part of the consideration to PFG to enter into this
Agreement, Borrower (i) agrees that all actions and proceedings relating directly or indirectly to this Agreement shall be litigated in courts
located within California and that the exclusive venue therefor shall, at PFG’s option, be Santa Clara County; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or by
internationally-recognized commercial courier or overnight delivery service or by certified mail, return receipt requested, to the last
known address for Borrower; and (iii) waives any and all rights Borrower may have to object to the jurisdiction of any such court, or to
transfer or change the venue of any such action or proceeding. Notwithstanding the foregoing, PFG, in pursuit of collection and Collateral
or rights therein, may pursue remedies in any jurisdiction in which Borrower or any Collateral resides or is deemed to reside.
8.21 Withholding. Payments received by PFG from Borrower under this Agreement will be made free and clear of and without
deduction for any and all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges
imposed by any Governmental Body (including any interest, additions to tax or penalties applicable thereto). Specifically, however, if at
any time any Governmental Body, applicable law, regulation or international agreement requires Borrower to make any withholding or
deduction from any such payment or other sum payable hereunder to PFG, Borrower hereby covenants and agrees that the amount due
from Borrower with respect to such payment or other sum payable hereunder will be increased to the extent necessary to ensure that, after
the making of such required withholding or deduction, PFG receives a net sum equal to the sum which it would have received had no
withholding or deduction been required, and Borrower shall pay the full amount withheld or deducted to the relevant Governmental Body.
Borrower will, upon request, furnish PFG with proof reasonably satisfactory to PFG indicating that Borrower has made such withholding
payment; provided, however, that Borrower need not make any withholding payment if the amount or validity of such withholding
payment is contested in good faith by appropriate and timely proceedings and as to which payment in full is bonded or reserved against by
Borrower. The agreements and obligations of Borrower contained in this Section 8.21 shall survive the termination of this Agreement.
8.22 Multiple Borrowers; Suretyship Waivers.
(a) Borrowers' Agent. Each Borrower hereby irrevocably appoints each other Borrower, as the agent, attorney-in-fact and legal
representative of all Borrowers for all purposes, including requesting disbursement of the Loan and receiving account statements and other
notices and communications to Borrowers (or any of them) from PFG. PFG may rely, and shall be fully protected in relying, on any
request for a Loan, disbursement instruction, report, information or any other notice or communication made or given by any Borrower,
whether in its own name, as Borrowers' agent, or on behalf of one or more Borrowers, and PFG shall not have any obligation to make any
inquiry or request any confirmation from or on behalf of any other Borrower as to the binding effect on it of any such request, instruction,
report, information, other notice or communication, nor shall the joint and several character of Borrowers' obligations hereunder be
affected thereby.
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Partners for Growth
Amended and Restated Loan and Security Agreement
(b) Waivers. Each Borrower hereby waives: (i) any right to require PFG to institute suit against, or to exhaust its rights and remedies
against, any other Borrower or any other Person, or to proceed against any property of any kind which secures all or any part of the
Obligations, or to exercise any right of offset or other right with respect to any reserves, credits or deposit accounts held by or maintained
with PFG or any indebtedness of PFG to any other Borrower, or to exercise any other right or power, or pursue any other remedy PFG may
have; (ii) any defense arising by reason of any disability or other defense of any other Borrower or any guarantor or any endorser, co-
maker or other Person, or by reason of the cessation from any cause whatsoever of any liability of any other Borrower or any guarantor or
any endorser, co-maker or other Person, with respect to all or any part of the Obligations, or by reason of any act or omission of PFG or
others which directly or indirectly results in the discharge or release of any other Borrower or any guarantor or any other Person or any
Obligations or any security therefor, whether by operation of law or otherwise; (iii) any defense arising by reason of any failure of PFG to
obtain, perfect, maintain or keep in force any Lien on, any property of any Borrower or any other Person; (iv) any defense based upon or
arising out of any Insolvency Proceeding, liquidation or dissolution proceeding commenced by or against or in respect of any Borrower or
any guarantor or any endorser, co-maker or other Person, including without limitation any discharge of, or bar against collecting, any of
the Obligations (including without limitation any interest thereon), in or as a result of any such proceeding. Until all of the Obligations
have been paid, performed, and discharged in full, nothing shall discharge or satisfy the liability of Borrower hereunder except the full
performance and payment of all of the Obligations. If any claim is ever made upon PFG for repayment or recovery of any amount or
amounts received by PFG in payment of or on account of any of the Obligations, because of any claim that any such payment constituted a
preferential Transfer or fraudulent conveyance, or for any other reason whatsoever, and PFG repays all or part of said amount by reason of
any judgment, decree or order of any court or administrative body having jurisdiction over PFG or any of its property, or by reason of any
settlement or compromise of any such claim effected by PFG with any such claimant (including without limitation the any other
Borrower), then and in any such event, Borrower agrees that any such judgment, decree, order, settlement and compromise shall be binding
upon Borrower, notwithstanding any revocation or release of this Agreement or the cancellation of any note or other instrument evidencing
any of the Obligations, or any release of any of the Obligations, and Borrower shall be and remain liable to PFG under this Agreement for
the amount so repaid or recovered, to the same extent as if such amount had never originally been received by PFG, and the provisions of
this sentence shall survive, and continue in effect, notwithstanding any revocation or release of this Agreement. Each Borrower hereby
expressly and unconditionally waives all rights of subrogation, reimbursement and indemnity of every kind against any other Borrower,
and all rights of recourse to any assets or property of any other Borrower, and all rights to any collateral or security held for the payment
and performance of any Obligations, including (but not limited to) any of the foregoing rights which Borrower may have under any present
or future document or agreement with any other Borrower or other Person, and including (but not limited to) any of the foregoing rights
which Borrower may have under any equitable doctrine of subrogation, implied contract, or unjust enrichment, or any other equitable or
legal doctrine. Each Borrower further hereby waives any other rights and defenses that are or may become available to Borrower by reason
of California Civil Code Sections 2787 to 2855 (inclusive), 2899, and 3433, as now in effect or hereafter amended, and under all other
similar statutes and rules now or hereafter in effect.
(c) Consents. Each Borrower hereby consents and agrees that, without notice to or by Borrower and without affecting or impairing
in any way the obligations or liability of Borrower hereunder, PFG may, from time to time before or after revocation of this Agreement, do
any one or more of the following in PFG's sole and absolute discretion: (i) accept partial payments of, compromise or settle, renew, extend
the time for the payment, discharge, or performance of, refuse to enforce, and release all or any parties to, any or all of the Obligations;
(ii) grant any other indulgence to any Borrower or any other Person in respect of any or all of the Obligations or any other matter;
(iii) accept, release, waive, surrender, enforce, exchange, modify, impair, or extend the time for the performance, discharge, or payment of,
any and all property of any kind securing any or all of the Obligations or any guaranty of any or all of the Obligations, or on which PFG at
any time may have a Lien, or refuse to enforce its rights or make any compromise or settlement or agreement therefor in respect of any or
all of such property; (iv) substitute or add, or take any action or omit to take any action which results in the release of, any one or more
other Borrowers or any endorsers or guarantors of all or any part of the Obligations, including, without limitation one or more parties to
this Agreement, regardless of any destruction or impairment of any right of contribution or other right of Borrower; (v) apply any sums
received from any other Borrower, any guarantor, endorser, or co-signer, or from the disposition of any Collateral or security, to any
indebtedness whatsoever owing from such Person or secured by such Collateral or security, in such manner and order as PFG determines
in its sole discretion, and regardless of whether such indebtedness is part of the Obligations, is secured, or is due and payable. Borrower
consents and agrees that PFG shall be under no obligation to marshal any assets in favor of Borrower, or against or in payment of any or all
of the Obligations. Borrower further consents and agrees that PFG shall have no duties or responsibilities whatsoever with respect to any
property securing any or all of the Obligations. Without limiting the generality of the foregoing, PFG shall have no obligation to monitor,
verify, audit, examine, or obtain or maintain any insurance with respect to, any property securing any or all of the Obligations.
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Partners for Growth
Amended and Restated Loan and Security Agreement
( d ) Foreclosure of Trust Deeds. Each Borrower waives all rights and defenses that Borrower may have because any other
Borrower's Obligations are secured by real property. This means, among other things: (1) PFG may collect from Borrower without first
foreclosing on any real or personal property collateral pledged by the other Borrower; and (2) If PFG forecloses on any real property
collateral pledged by another Borrower: (A) The amount of the Obligations may be reduced only by the price for which that collateral is
sold at the foreclosure sale, even if the collateral is worth more than the sale price; and (B) PFG may collect from Borrower even if PFG,
by foreclosing on the real property collateral, has destroyed any right Borrower may have to collect from the other Borrower. This is an
unconditional and irrevocable waiver of any rights and defenses Borrower may have because any other Borrower's Obligations are secured
by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or
726 of the California Code of Civil Procedure. Each Borrower waives all rights and defenses arising out of an election of remedies by
PFG, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has
destroyed Borrower's rights of subrogation and reimbursement against another Borrower or any other Person by the operation of Section
580d of the California Code of Civil Procedure or otherwise.
(e) Independent Liability. Each Borrower hereby agrees that one or more successive or concurrent actions may be brought hereon
against Borrower, in the same action in which any other Borrower may be sued or in separate actions, as often as deemed advisable by
PFG. Each Borrower is fully aware of the financial condition of each other Borrower and is executing and delivering this Agreement based
solely upon its own independent investigation of all matters pertinent hereto, and Borrower is not relying in any manner upon any
representation or statement of PFG with respect thereto. Each Borrower represents and warrants that it is in a position to obtain, and each
Borrower hereby assumes full responsibility for obtaining, any additional information concerning any other Borrower's financial condition
and any other matter pertinent hereto as Borrower may desire, and Borrower is not relying upon or expecting PFG to furnish to it any
information now or hereafter in PFG's possession concerning the same or any other matter.
( f ) Subordination. All indebtedness of a Borrower now or hereafter arising held by another Borrower is subordinated to the
Obligations and Borrower holding the indebtedness shall take all actions reasonably requested by PFG to effect, to enforce and to give
notice of such subordination.
8.23 Electronic Execution of Documents. The words “execution,” “signed,” “signature” and words of like import in any Loan
Document shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same
legal effect, validity and enforceability as a manually executed signature or the use of a paper-based recordkeeping systems, as the case
may be, to the extent and as provided for in any applicable law, including, without limitation, any state law based on the Uniform
Electronic Transactions Act.
8.24 Relationship. The relationship of the parties to this Agreement is determined solely by the provisions of this Agreement. The
parties do not intend to create any agency, partnership, joint venture, trust, fiduciary or other relationship with duties or incidents different
from those of parties to an arm’s-length contract.
8.25 Third Parties. Nothing in this Agreement, whether express or implied, is intended to: (a) confer any benefits, rights or remedies
under or by reason of this Agreement on any persons other than the express parties to it and their respective permitted successors and
assigns; (b) relieve or discharge the obligation or liability of any person not an express party to this Agreement; or (c) give any person not
an express party to this Agreement any right of subrogation or action against any party to this Agreement.
8.26 Mutual Waiver of Jury Trial. BORROWER AND PFG EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN
ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS
AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN PFG AND
BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF PFG OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH PFG OR
BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE. WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY , if the above waiver of the right to a trial by jury is not enforceable, the parties hereto
agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private
judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior
Court) appointed in accordance with Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the
dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the
parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with
the provisions of Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant
provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and
appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be
permanently sealed. If during the course of any dispute, PFG desires to seek provisional relief, but a judge has not been appointed at that
point pursuant to the judicial reference procedures, then PFG may apply to the Santa Clara County, California Superior Court for such
relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of
evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it
would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may
enforce all discovery rules and order applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the
selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and
shall report a statement of decision thereon pursuant to the Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right
of PFG at any time to exercise self-help remedies, foreclose against Collateral, or obtain provisional remedies. The private judge shall also
determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.
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Partners for Growth
Amended and Restated Loan and Security Agreement
27. Effect of Amendment and Restatement. Nothing in this Amendment and Restatement is intended or shall be construed as a waiver
of PFG’s rights or remedies under the Loan Agreement or any agreement to amend, modify, waive or forbear in the future. The Loan
Agreement, as amended and restated, remains in full force and effect.
[SIGNATURE PAGE FOLLOWS]
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Borrower:
GIGA-TRONICS INCORPORATED
PFG:
PARTNERS FOR GROWTH IV, L.P.
By
By
President or Vice President
By
Name:
Secretary or Ass't Secretary
Title: Manager, Partners for Growth IV, LLC
Its General Partner
MICROSOURCE, INC.
By
By
President or Vice President
Secretary or Ass't Secretary
- Signature Page Amended and Restated Loan and Security Agreement -
Partners For Growth
Schedule to
Amended and Restated Loan and Security Agreement
Borrower:
Address:
Giga-tronics Incorporated, a California corporation
4650 Norris Canyon Road, San Ramon CA, 94583
Borrower:
Address:
Microsource, Inc., a California corporation
4650 Norris Canyon Road, San Ramon CA, 94583
Date:
June 16, 2014
This Schedule forms an integral part of the Amended and Restated Loan and Security Agreement between PARTNERS FOR GROWTH
IV, L.P. and the above-borrower of even date.
1. LOAN (Section 1.1):
The Loan:
The Loan shall consist of term loans of up to an aggregate amount of $2,000,000, as follows:
Tranche 1: The Tranche 1 Loan shall consist of a Loan in the principal amount of $1,000,000, all of which was
disbursed on the Original Loan Effective Date.
Tranche 2: The Tranche 2 Loan shall consist of a revolving facility in the maximum principal amount of
$500,000, which Borrower may draw in increments of not less than $50,000 and repay in whole or in part at
any time. To make a Tranche 2 borrowing, Borrower shall submit a Loan Request under Section 1.4 within
three (3) Business Days of the date of intended drawing, together with such certificates as may be required
under this Agreement. Each drawing shall be subject to such conditions as are set forth in Section 10.
Tranche 3: The Tranche 3 Loan shall consist of a Loan in the principal amount of $500,000, all of which shall
be disbursed upon the request of Borrower (if ever) within three (3) Business Days of PFG’s determination
based on Section 6(g) reports delivered by Borrower to PFG that Borrower has satisfied the Performance
Criteria, as defined below, the disbursement of which shall also be subject to Borrower’ s satisfaction of the
conditions set forth in Section 10 of this Schedule (or PFG’ s waiver or deferral of such conditions, subject to
such additional conditions as it may require, in its discretion).
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Partners for Growth
Schedule to Loan and Security Agreement
Repayment:
Tranche 1: Borrower shall pay interest only monthly on the principal amount of the Tranche 1 Loan through
September 30, 2014. Commencing with the payment due on October 1, 2014, Borrower shall repay the
Tranche 1 Loan in thirty (30) equal principal payments of principal and interest, which payments shall
continue on the same day of each month thereafter until the Maturity Date on which date the entire unpaid
principal balance of the Loan plus any and all accrued and unpaid interest shall be paid.
Tranche 2: Tranche 2 borrowings shall bear interest only monthly, with all principal and any unpaid interest
due at the Maturity Date; provided, however, at such time as Borrower’s satisfaction of the Performance
Criteria is determinable, PFG may (in its sole and absolute discretion) require the then outstanding Tranche 2
borrowings to be repaid in level amortized payments on the same basis as Tranche 3 would, if drawn, be
repaid.
Tranche 3: Borrower shall make roughly equal amortized payments of principal and interest monthly on
Tranche 3 until the Maturity Date, on which date all unpaid principal and accrued interest shall be due and
payable. The amortization period of Tranche 3 shall run from the date of disbursement until the Maturity
Date.
Any accrued interest relating to outstanding principal not included in an amortized payment of principal and
interest (such as, for example, interest due for a stub period or during an interest-only period) shall be payable
on the first day of each such month for interest accrued during the prior month.
The principal amount of Tranche 1 and Tranche 3 may be prepaid in whole only at any time, subject only to
Borrower paying concurrently with such principal prepayment all interest that would have fallen due between
the date of such prepayment and the Maturity Date if Borrower had made the regularly-scheduled payments
throughout the term of such Tranches. Tranche 2 may be repaid and redrawn (subject to the terms of this
Agreement) at such time and times Borrower determines in its discretion.
“Performance Criteria” means, (i) for the six (6) month period ending September 30, 2014, Revenues of not
less than $7,500,000, and (ii) for the fiscal year ending March 31, 2015, Net Income greater than $0 over any
two consecutive fiscal quarters. If Borrower should consummate an acquisition of the assets or stock of
another Person after the Effective Date, the parties shall equitably adjust the foregoing Revenues and Net
Income thresholds to preserve the intention of the parties in challenging the Company to achieve its
projections for Revenues and Net Income.
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Prepayment:
Performance
Criteria:
Partners for Growth
Schedule to Loan and Security Agreement
2. Interest.
Interest Rate (Section 1.2):
Tranche 1 and Tranche 3 Loans shall bear interest at a fixed per annum rate equal to 9.75%.
Tranche 2 Loans shall bear interest at a fixed per annum rate equal to 12.5%, calculated on a daily basis.
Interest on Tranche 2 borrowings shall be paid monthly for interest accrued on outstanding Tranche 2 principal
for interest accrued during the prior month.
Interest shall be calculated on the basis of a 360-day year and a year of twelve months of 30 days each for the
actual number of days elapsed. Any accrued interest relating to outstanding principal not included in an
amortized payment of principal and interest (such as, for example, interest due for a stub period or during an
interest-only period) shall be payable on the first day of each such month for interest accrued during the prior
month.
3. Fees (Section 1.3):
Commitment Fee:
$40,000, $30,000 paid on the Original Loan Effective Date, $5,000 on the date Borrower first draws on
Tranche 2, and, if Borrower draws Tranche 3, $5,000, concurrent with the disbursement of Tranche 3.
Restatement Fee:
On the Effective Date, Borrower shall pay PFG a fee in consideration of amending and restating the Loan
Agreement in the amount of $10,000.
4. Maturity Date
(Section 5.1):
March 31, 2017.
5. Financial Covenants
(Section 4.1):
Borrower shall comply with each of the following covenants:
Minimum Revenues:
On a consolidated basis with its Subsidiaries, Borrower shall maintain minimum calendar quarterly Revenues
of at least the amounts set forth below for the periods specified. For future periods, the required Revenue
thresholds shall be set by PFG each year in consultation with Borrower and shall, assuming quarterly period
measurement is continued, be based upon Borrower’s Plan for corresponding periods in each of Borrower’s
future fiscal year(s) and in no event shall such future thresholds be less than Q4-2015 (period ending March
28, 2015) period. For example, the threshold for the quarterly period ending June 28, 2015 would be set by
PFG in consultation with Borrower based on Borrower’s 2016 Plan, but would in no event be less than
$4,000,000.
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Minimum Tangible
Net Worth:
Partners for Growth
Schedule to Loan and Security Agreement
Quarterly Period
Minimum Threshold
Q4-2014 (March 29, 2014)
Q1-2015 (June 28, 2014)
Q2 (9/27/14)
Q3 (12/27/14)
FY-2015 (ending March 28, 2015)
$2,300,000
$3,000,000
$3,500,000
$3,500,000
$4,000,000
For purposes of the foregoing Minimum Revenues covenant, the term “ Revenues” means receipts from
customers in the ordinary course of business for the sale of goods and services and required to be recognized
as revenues in accordance with GAAP, net of discounts and refunds. For purposes of the foregoing definition,
if Borrower (with the consent of PFG) sells a revenue-generating business unit or product line, the parties shall
equitably adjust the Revenue thresholds set forth above to reflect the loss of the associated Revenues
generated by such business unit or product line.
On a consolidated basis with its Subsidiaries and measured monthly as of the last day of each calendar month,
Borrower shall maintain a Tangible Net Worth of not less than the minimum thresholds set forth below for the
corresponding periods. For future monthly periods (April 30, 2015 through the Maturity Date), the required
minimum Tangible Net Worth thresholds shall be set by PFG each year in consultation with Borrower and
shall, assuming monthly period measurement is continued, be based upon Borrower’s Plan for corresponding
periods in each of Borrower’s future fiscal year(s) and in no event shall such future thresholds be less than the
thresholds in the prior year for the corresponding periods. For example, the threshold for the monthly period
ending June 28, 2015 would be set by PFG in consultation with Borrower based on Borrower’s 2016 Plan, but
would in no event be less than $600,000.
May 3, 2014 (April)
May 31, 2014
June 28, 2014
August 2, 2014 (July)
August 30, 2014
September 27, 2014
November 1, 2014 (October)
November 29, 2014
December 27, 2014
January 31,2015
February 28, 2015
March 28, 2015
-4-
negative $47,000
$3,000
$453,000
$153,000
$178,000
$703,000
$353,000
$353,000
$853,000
$653,000
$653,000
$1,153,000
Partners for Growth
Schedule to Loan and Security Agreement
Definitions.
For purposes of the foregoing financial covenants, the following term shall have the following meaning:
“Tangible Net Worth” shall mean Total Assets less Total Liabilities, determined in accordance with GAAP. In
determining Tangible Net Worth, the following adjustment may be made: any material charge required by
Borrower’s auditors to be taken for non-cash stock compensation that adversely affects Tangible Net Worth
may be added or subtracted, as the case may be, in the calculation of Tangible Net Worth. A “one-time”
adjustment would not include a monthly, quarterly or annually-recurring adjustment. The term “material” as
used above means an adjustment that would be required to be disclosed in an annual or quarterly filing (10K or
10Q) with the Securities and Exchange Commission.
“Total Assets” is on any day, the total assets, tangible and intangible of Borrower and its Subsidiaries on a
consolidated basis, as determined in accordance with GAAP.
“Total Liabilities” is on any day, obligations that should, under GAAP, be classified as liabilities on
Borrower’s consolidated balance sheet, including all Indebtedness.
6. Reporting.
(Section 4.4):
Borrower shall provide PFG with the following; provided, however, at any time, from time to time, on a
permanent or temporal basis, PFG shall have the right to require Borrower to redact any information (or
categories of information) that might constitute material non-public information under SEC rules and
regulations, such requirement to be notified by PFG in writing to Borrower:
(a) Monthly accounts payable, accounts receivable and deferred Revenue schedules, aged by invoice date,
and held check registers, if any, within 20 days after the end of each month. After 6 months from the
Effective Date, PFG will consider in its reasonable discretion, converting such reporting from monthly to
quarterly with a due date for such reports to 30 days from the end of each quarter.
-5-
Partners for Growth
Schedule to Loan and Security Agreement
(b) Monthly unaudited consolidated and consolidating Financial Statements, as soon as available, and in any
event within 20 days after the end of each month. After 6 months from the Effective Date, PFG will
consider in its reasonable discretion, converting such reporting from monthly to quarterly with a due date
for such reports to 30 days from the end of each quarter.
(c) Monthly Compliance Certificates within 20 days after the end of each month and at each Loan request,
signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month (or quarter
as the case may be) or as at such date of Loan request Borrower was in compliance with all of the terms
and conditions of this Agreement and setting forth calculations showing compliance with the financial
covenants set forth in this Schedule and such other information as PFG shall reasonably request.
(d) Updates to the Representations, as and when required to render the information therein true, correct,
accurate and complete as of the date of such date to the extent required in Section 4.8 of this Agreement.
(e) Annual Borrower Board-approved Plan, including budgets and forecasts, within the earlier to occur of
thirty (30) days following the end of Borrower’s fiscal year and approval by Borrower’s Board.
(f) Annual consolidated and consolidating Financial Statements, as soon as available, and in any event
within 120 days following the end of Borrower's fiscal year, certified by, and with an unqualified opinion
of, independent certified public accountants reasonably acceptable to PFG. If Borrower is required to file
and is current in its filings of Form 10-K with the Securities and Exchange Commission and the same is
available within said period through EDGAR, this requirement will be deemed satisfied.
(g)
If Borrower intends to request the Tranche 2 Loan, a Certificate of Borrower, together with underlying
Financial Statements demonstrating Borrower's compliance with the Performance Criteria.
(h) Copies of all reports and statements provided by Borrower to the Senior Lender within one (1) Business
Day of the same being provided to the Senior Lender.
-6-
Partners for Growth
Schedule to Loan and Security Agreement
7. BORROWER INFORMATION:
Borrower represents and warrants that the information set forth in the Representations and
Warranties of Borrower dated February 21, 2014 and submitted to PFG on such date (the
“Representations”) is true, correct, accurate and complete as of the Effective Date.
1
8. ADDITIONAL PROVISIONS
(a)
Senior Lender.
(1) Senior Lender. As used herein, “Senior Lender” means Silicon Valley Bank, and
“Senior Loan Documents” means all present and future documents instruments
and agreements entered into between Borrower and Senior Lender or by third
parties relating to Borrower and Senior Lender.
(2) Senior Debt Limit. Borrower shall not permit the total Indebtedness of Borrower
to Senior Lender, other than Non-Overdue Senior Monetary Obligations, to
exceed $3,000,000 at any time outstanding, or such greater amount as PFG may
in its absolute discretion otherwise period upon Borrower request (the “Senior
Debt Limit”), including, but not limited to, monies borrowed by Borrower,
interest on loans due from Borrower, fees and PFG Expenses for which Borrower
is obligated, sums due from Borrower in connection with issuance of commercial
letters of credit, issuance of forward contracts for foreign exchange reserve, and
any other direct or indirect financial accommodation Senior Lender may provide
to Borrower.
( 3 ) Senior Loan Documents. Borrower represents and warrants that it has provided
PFG with true and complete copies of all existing Senior Loan Documents, and
Borrower covenants that it will, in the future, provide PFG with true and
complete copies of any future Senior Loan Documents, including without
limitation any amendments to any existing Senior Loan Documents.
_________________________
1
Should update Representations for this Amendment and Restatement.
-7-
Partners for Growth
Schedule to Loan and Security Agreement
(b)
(c)
Collateral Accounts. Concurrently, Borrower shall cause the banks and other institutions
where its Collateral Accounts are maintained to enter into Control Agreements with PFG,
in form and substance legally sufficient and otherwise reasonably satisfactory to PFG in
its good faith business judgment and sufficient to perfect PFG’s security interest in said
Collateral Accounts, subject to the security interest of the Senior Lender. Said Control
Agreements shall permit PFG, upon a Default or an Event of Default and for so long as
such Default or Event of Default is continuing, to exercise exclusive control over said
Collateral Accounts and proceeds thereof (subject to the rights of the Senior Lender). As a
continuing obligation, all primary operating accounts and excess Cash of Borrower shall
be maintained with the Senior Lender and its affiliates.
Subordination of Inside Debt. All present and future indebtedness of Borrower to its
officers, directors and shareholders (“Inside Debt”) shall, at all times, be subordinated to
the Lien of PFG in respect of and prior payment of Obligations. Borrower represents and
warrants that there is no Inside Debt presently outstanding, except as set forth in Exhibit
A. Prior to incurring any Inside Debt in the future, Borrower shall cause the person to
whom such Inside Debt will be owed to execute and deliver to PFG a subordination
agreement on PFG’s standard form.
In addition to any other conditions to the Loan set out in this Agreement, PFG will not make any
Loan until PFG shall have received from each Borrower, in form and substance satisfactory to PFG,
such documents, and completion of such other matters, as PFG may reasonably deem necessary or
appropriate, including that there shall be no discovery of any facts or circumstances which would,
as determined by PFG in its sole discretion, significantly and adversely affect or be reasonably
expected to significantly and adversely affect the collectability of the Obligations, PFG’s security
interest in Borrower’s Collateral or the value thereof. Notwithstanding the foregoing, Borrower
agrees to deliver to PFG each item required to be delivered to PFG under this Agreement as a
condition precedent to any Loan. Borrower expressly agrees that a Loan made prior to the receipt
by PFG of any such item shall not constitute a waiver by PFG of Borrower’s obligation to deliver
such item, and the making of any Loan in the absence of a required item shall be in PFG’s sole
discretion. Without limiting the foregoing, as a condition to the Loan, Borrower shall provide:
-8-
9. CONDITIONS
Partners for Growth
Schedule to Loan and Security Agreement
(i) duly executed original signatures of Borrower to this Agreement and such other Loan
Documents, including reaffirmations of agreements to which Borrower is was party on the Original
Loan Effective Date, including without limitation, this Agreement, the Intellectual Property
Security Agreement and related Collateral Agreements and Notices and the PFG Warrant;
(ii) If amended since the Original Loan Effective Date, each Borrower’s respective Constitutional
Documents and, where applicable, a good standing certificate of Borrower certified by the Secretary
of State or other Governmental Body of the jurisdiction of formation of each Borrower, as of a date
no earlier than thirty (30) days prior to the date hereof, together with, in the case of each Borrower,
a foreign qualification certificate from each States in which Borrower is required to register or
otherwise qualify to do business;
(iii) An amendment to the PFG Warrant (as issued to PFG, PFG Equity Investors, LLC and SVB
Financial Group);
(iv) To the extent requiring amendment or supplementation to reflect any new Collateral Accounts,
Control Agreements as required by Section 8(b) of this Schedule, duly executed by Borrower and
each relevant depositary institution in favor of PFG;
(v) certified copies, dated as of a recent date, of Security Instrument searches, as PFG shall request,
accompanied by written evidence (including any UCC termination statements) that the Liens
indicated in any such Security Instruments either constitute Permitted Liens or have been or, in
connection with the Loan, will be terminated or released;
(vi) if required, an update to the Representations, duly executed by Borrower;
(vii) as required under the terms of this Agreement and not previously provided, landlord consents
executed in favor of PFG by Borrower’s principal office lessor in respect of its premises in San
Ramon, California and, if required by PFG, each other premises where Borrower holds Collateral
with a fair value in excess of $10,000, and warehouseman’s/bailee waivers in respect of third party
premises where Collateral with a fair value in excess of $10,000 is stored or housed;
-9-
Partners for Growth
Schedule to Loan and Security Agreement
(viii) to the extent to reflect any changes since the Original Loan Effective Date, the insurance
policies and/or endorsements required pursuant to Section 5.2;
(ix) payment of the Fees specified in Section 3 of this Schedule and PFG Expenses incurred and
paid in connection with the Loan, for which PFG Expenses PFG will provide Borrower such
invoices as Borrower may reasonably require for accounting purposes;
(x) any third party consents required in order for Borrower to enter into and perform the Loan
Documents;
(xi) notice of the this Agreement as required under the Subordination Agreement;
(xii) as required, execution, delivery and (as necessary or appropriate) filing of all Security
Instruments; and
(xiii) to the extent that the conditions to this Agreement have not been completed as of the Effective
Date, a post-closing obligations letter in PFG’s customary form by which PFG waives or defers
performance of such conditions as PFG is willing to defer in its sole business discretion.
In addition to any other conditions to Loans set out in this Agreement, PFG will not make any
Tranche 2 or Tranche 3 borrowing until PFG shall have received, in form and substance satisfactory
to PFG:
(a) a Loan Request that constitutes a Qualifying Request;
(b) satisfaction of any conditions set forth in Section 9 not satisfied at the time of any Tranche 2 or
Tranche 3 borrowing.
[Signature Page Follows]
-10-
10. CONDITIONS
Borrower:
GIGA-TRONICS INCORPORATED
PFG:
PARTNERS FOR GROWTH IV, L.P.
By
By
President or Vice President
By
Name:
Secretary or Ass't Secretary
Title: Manager, Partners for Growth IV, LLC
Its General Partner
MICROSOURCE, INC.
By
By
President or Vice President
Secretary or Ass't Secretary
- Signature Page to Schedule to Amended and Restated Loan and Security Agreement -
Exhibit A to Loan and Security Agreement
Section 3.10 – Litigation:
1. On November 1, 2013 we received a letter from Textron/AAI regarding royalties associated with our Hydra product. They claim they
have patents on the technology we are using and we will owe them a royalty. They have yet to see our Hydra product and nor do they
know how it works, but we are a threat to their existing market. We have examined the patents they referenced in the letter, and we are
not using their patented technology. We have engaged a patent attorney to assist us with this issue and if needed we are prepared to
challenge their patent with the US Patent Office.
Section 3.15 – Internal Controls:
1 . The Company carried out an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are
not effective to provide reasonable assurances that (i) the information the Company is required to disclose in the reports it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period required by the
Commission’s rules and forms, and (ii) such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Other than the material weakness described below, there were no significant changes in the Company's internal control over financial
reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect our internal
control over financial reporting.
Based on the above described procedures and actions taken, the Company’s management, including its Chief Executive Officer and its
Chief Financial Officer have concluded that as of December 28, 2013, the Company’s internal control over financial reporting was not
effective based on the criteria described in the “COSO Internal Control – Integrated Framework 1992” as a material weakness in the
Company’s internal control over financial reporting was identified as described below.
The Company determined that it did not have adequate procedures in place to identify and report on a timely basis the impact of certain
triggering events in its line of credit arrangement. The lack of these procedures resulted in the delayed financial reporting of the impacts
of the triggering events on the balance sheet classification of borrowings under the line of credit as current liabilities rather than long term
liabilities and related disclosures regarding the triggering events.
Management has identified the cause of this delayed reporting as a lack of recurring review of contractual arrangements such that the
impact from changes in circumstances are timely accounted for and reported. Management has reported the correct accounting and has
included disclosures related to the triggering events in its current reporting in this Form 10-Q.
Management will take steps to ensure the appropriate procedures are put in place to regularly review all ongoing contractual arrangements
by an individual with adequate knowledge of financial reporting to ensure the financial statements are fairly stated.
Exhibit B to Loan and Security Agreement – Compliance Certificate
EXHIBIT 10.6
AMENDED AND RESTATED WARRANT
THIS AMENDED AND RESTATED WARRANT ("WARRANT") WAS ORIGINALLY SOLD ON THE ISSUE DATE IN A PRIVATE
TRANSACTION AND IS AMENDED AND RESTATED AS OF THE RESTATEMENT DATE, WITHOUT REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE, AND
MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT AND SUCH LAWS OR IF AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH LAWS IS AVAILABLE.
Company / Issuer:
Number of Shares:
Class of Shares:
Exchange Price:
Issue Date:
Restatement Date:
Expiration Date:
Giga-tronics Incorporated, a California corporation
180,000 shares, subject to adjustment
Common Stock, no par value / share
$1.42 per share
March 13, 2014
June 16, 2014
March 31, 2019
The term “Holder” shall initially refer to Partners for Growth IV, L.P., a Delaware limited partnership, which is the initial holder
of this Warrant and shall further refer to any subsequent permitted holder of this Warrant from time to time.
Giga-tronics Incorporated, a California corporation (the “Company”) does hereby certify and agree that, for the sum of $2,899
paid by Holder on the Issue Date, which the parties agree is fair consideration for this Warrant, Holder, or its permitted successors and
assigns, hereby is entitled to Exercise or Exchange this Warrant (each as defined below) in the Company for up to One Hundred Eighty
Thousand (180,000) duly authorized, validly issued, fully paid and non-assessable shares of its Common Stock, no par value per share (the
“Common Stock”) upon the terms and subject to the provisions of this Warrant. The Common Stock issuable upon Exercise or Exchange
of this Warrant is referred to herein as the “Warrant Stock”. Capitalized terms used but not defined in this Warrant have their meanings as
set forth in that certain Loan and Security Agreement of even date herewith between the Company and Holder (as amended, the “Loan
Agreement”), regardless of whether the Loan Agreement is then in effect. When the term “convert” or “conversion” in relation to the
Warrant is used herein, it includes an Exchange and an Exercise, each as defined below, as applicable.
Section 1 Term, Price, Exercise and Exchange of Warrant.
1.1 Term of Warrant. This Warrant shall be convertible from the Issue Date until the Expiration Date.
1 . 2 Exchange Price. The price per share at which the Warrant Stock is issuable upon conversion of this Warrant shall be
$1.42 per share (the “Exchange Price”).
1.3 Exercise of Warrant; Exchange of Warrant.
(a) This Warrant may be Exercised (as defined below) in whole or in part, upon surrender of this Warrant to the
Company at its then principal offices in the United States, together with the form of election to Exchange or Exercise attached hereto as
Exhibit A (the “Election”) duly completed and executed with “Exercise” selected as the mode of conversion, and upon payment to the
Company of the Exchange Price for the number of shares of Warrant Stock in respect of which this Warrant is then being converted (an
“Exercise”). In lieu of an Exercise, Holder may exchange this Warrant in whole or in part on a cashless basis by indicating so in the
Election and proceeding in accordance with the remainder of this Section 1.3 (an “Exchange”).
(b) Upon an Exchange, the Holder shall receive Warrant Stock such that, without the payment of any funds, the
Holder shall surrender this Warrant in exchange for the number of shares of Warrant Stock equal to “X” (as defined below), computed
using the following formula:
Y * (A-B)
X = _______________
A
Where
X = the number of shares of Warrant Stock to be issued to Holder
Y = the number of shares of Warrant Stock to be converted under this Warrant
A = the Fair Market Value of one share of Warrant Stock
B = the Exchange Price (as adjusted to the date of such calculations)
* = multiplied by
(c) For purposes of this Warrant, the “Fair Market Value” of one share of Warrant Stock shall be (i) if the Company’s
Common Stock is becomes listed on a national stock exchange, the highest sale price reported on such exchange over the 90-day period
prior to the date Holder delivers its Election to the Company, or (ii) if the Common Stock is traded over-the-counter, the highest average
of the bid and ask price for Common Stock over the 90-day period prior to the date Holder delivers its Election to the Company. If another
class or series of Company securities is listed or traded as aforesaid, the Fair Market Value shall be adjusted based on the ratio that the
Warrant Stock converts into such other class or series or such other class or series converts into Warrant Stock, as appropriate. If the
Common Stock is not traded as contemplated in clauses (i) or (ii), above, the Fair Market Value of the Company’s Warrant Stock shall be
the price per share of Warrant Stock which the Company could obtain from a willing buyer of Warrant Stock sold by the Company from its
authorized but unissued shares, initially as the Board of Directors of the Company (“Board”) shall determine in its reasonable good faith
judgment, but in no event less than the price per share at which Common Stock (or options for Common Stock) are then issuable to
Company employees based on a valuation compliant with Section 409A of the United States Internal Revenue Code; provided, however, if
Holder disagrees the Fair Market Value of Warrant Stock as determined by the Board, the parties shall jointly engage a valuation expert to
value the Warrant Stock based on a valuation of the Company as a going concern using standard valuation methodologies for the Warrant
Stock. If the Warrant is to be converted in connection with an Acquisition, the Fair Market Value of a share of Warrant Stock shall be
based on the enterprise value specified or implied in such Acquisition and shall be the greater of (A) the value attributable to the Warrant
Stock and (B) the value attributable to the Company securities into which the Warrant Stock is (or may be) convertible (but subject to
Holder’s conversion directly into such other Company securities).
2
(d) Upon surrender of this Warrant, and the duly completed and executed Election, and payment of the Exchange Price
(if an Exercise) or conversion of this Warrant through Exchange, the Company shall promptly issue and deliver to the Holder or such other
person as the Holder may designate in writing a certificate or certificates for the number of shares of Warrant Stock issuable pursuant to
the terms of this Warrant upon conversion. Such certificate or certificates shall be deemed to have been issued and any person so
designated to be named therein shall be deemed to have become a holder of record of such Warrant Stock as of the date of the surrender of
this Warrant, and the duly completed and executed Election, and payment of the Exchange Price in the case of an Exercise or conversion
of this Warrant through Exchange; provided, that if the date of surrender of this Warrant and payment of the Exchange Price is not a
business day, the certificates for the Warrant Stock shall be deemed to have been issued as of the next business day (whether before or
after the Expiration Date). If this Warrant is converted in part, a new warrant of the same tenor and for the number of shares of Warrant
Stock not converted shall be executed by the Company and delivered to Holder.
1 . 4 Fractional Interests. The Company shall not be required to issue fractions of shares of Warrant Stock upon the
conversion of this Warrant. If any fraction of a share of Warrant Stock would be issuable upon the exchange of this Warrant (or any portion
thereof), the Company shall purchase such fraction for an amount in cash equal to the Fair Market Value of the Warrant Stock.
1 . 5 Automatic Put or Exchange on Expiration Date. In the event that, by the Expiration Date, this Warrant has not been
fully converted or put to the Company under Section 1.7, then this Warrant shall be deemed put to the Company under Section 1.7 and the
Company shall promptly pay the Exchange Put Price; provided, however, if an Exchange at such time under Section 1.3 would yield a
greater value to Holder than exercise of its rights under Section 1.7, then this Warrant shall automatically be deemed on and as of such date
to be Exchanged pursuant to Section 1.3 as to all Warrant Stock (or such other securities) for which it shall not previously have been
converted, and the Company shall promptly deliver a certificate representing the Warrant Stock (or such other securities) issued upon such
conversion to the Holder.
3
1.6 Treatment of Warrant Upon Acquisition of Company.
(a) “Acquisition”. For the purpose of this Warrant, “Acquisition” means any sale or other disposition of all or
substantially all of the assets of the Company in whatever form, or any reorganization, consolidation, or merger of the Company (whether
in a single transaction or multiple related transactions) where the holders of the Company’s securities before the transaction beneficially
own less than 50% of the outstanding voting securities of the surviving entity after the transaction(s).
(b) Treatment of Warrant at Acquisition . Upon the closing of any Acquisition, at Holder’s option: (i) if the surviving
entity (if applicable in such Acquisition) is willing assume the obligations of the Company under this Warrant, then if Holder so elects this
Warrant shall be convertible into the same securities as would be payable for the Warrant Stock issuable upon conversion of the
unconverted portion of this Warrant as if such Warrant Stock were outstanding on the record date for the Acquisition (and the Warrant
Price and/or number of shares of Warrant Stock shall be adjusted accordingly); or (ii) Holder may exercise its rights under Section 1.7 and
put the Warrant to the Company (or the surviving entity as a condition to the Acquisition) for cash; or (iii) the Company or other surviving
entity in such Acquisition shall, upon initial closing of such Acquisition purchase this Warrant at its “Fair Value” (the “Purchase Price”).
For purposes hereof, “Fair Value” means that value determined by the parties using a Black-Scholes Option-Pricing Model (the “ Black-
Scholes Calculation”) with the following assumptions: (A) a risk-free interest rate equal to the risk-free interest rate at the time of the
closing of the Acquisition (or as close thereto as practicable), (B) a contractual life of the Warrant equal to the remaining term of this
Warrant as of the date of the announcement of the Acquisition, (C) an annual dividend yield equal to dividends declared on the underlying
Warrant Stock (including securities into which the Warrant Stock may be convertible) during the term of this Warrant (calculated on an
annual basis), and (D) a volatility factor of the expected market price of the Company’s Common Stock comprised of: (1) if the Company
is publicly traded on a national securities exchange, its volatility over the one year period ending on the day prior to the announcement of
the Acquisition, (2) if the Common Stock is traded over-the-counter, its volatility over the one year period ending on the day prior to the
announcement of the Acquisition, or (3) if the Company is a non-public company, the volatility, over the one year period prior to the
Acquisition, of an average of publicly-traded companies in the same or similar industry to the Company with such companies having
similar revenues. The Purchase Price determined in accordance with the above shall be paid upon the initial closing of the Acquisition and
shall not be subject to any post-Acquisition closing contingencies or adjustments; provided, however, the parties may take such post-
Acquisition closing contingencies or adjustments into account in determining the Purchase Price, and if the parties take any post-
Acquisition closing contingencies or adjustments into account, then upon the partial or complete removal of those post-Acquisition closing
contingencies or adjustments, a new Black-Scholes Calculation would be made using all of the same inputs except for the value of the
Company’s Common Stock (as determined under subclause (D)), and any increase in Fair Value (and, correspondingly, Purchase Price),
including, without limitation, as a result of any earn-out or escrowed consideration, would be paid in full to Holder immediately after those
post-Acquisition closing contingencies or adjustments can be determined or achieved.
4
1 . 7 Immediately Exchangeable and Conditionally Exchangeable Warrant Stock. Notwithstanding the Issue Date of this
Warrant or any provision in this Warrant to the contrary, this Warrant is immediately convertible into up to 156,000 shares of Warrant
Stock and, in the event the Company borrows under Tranche 3 of the Loan Agreement, shall (as from the date of such borrowing) be
convertible into up to an additional 24,000 shares of Warrant Stock (the “Tranche 3 Warrant Stock”).
1 . 8 Warrant Put. Notwithstanding anything to the contrary set forth in this Warrant, in the event of (i) any Acquisition or
other change in control of the Company, (ii) any initial public offering or other listing of Company securities, (iii) any liquidation or the
Company or event treated as a liquidation under the Articles of Incorporation of the Company, and (iv) upon expiry of this Warrant,
Holder shall have the right (but not the obligation) to exchange this Warrant for the cash sum of $150,000 (the “ Exchange Put Price”);
provided, however, if Tranche 3 of the Loan Agreement is not drawn by the Company in whole or in part, the Exchange Put Price shall be
reduced by $19,800 to $130,200. Holder shall exercise such right by written notice as provided in this Warrant and, upon receipt by the
Company of such notice, the Expiration Date of this Warrant shall be deemed extended until such time as the Company has paid the
Exchange Put Price to Holder. The Company shall promptly (and in no event later than (five) 5 business days of Holder’s notice to the
Company) pay the Exchange Put Price to Holder.
1.9 Adjustment in Number of Shares. Holder’s right to convert this Warrant with respect to 30,000 Shares of Warrant Stock
may be terminated if the Company earns at least (i) $18,000,000 in Revenues and (ii) $1,000,000 in Net Income, in each case for its fiscal
year ending March 31, 2015. Without duplication for the foregoing reduction (i.e., the maximum reduction in Number of Shares under this
Section 1.9 is 30,000 shares), If the Tranche 3 Warrant Stock does not become convertible under Section 1.7 (i.e., the Company does not
borrower Tranche 3), Holder’s right to convert this Warrant for 22,500 Shares of Warrant Stock may be terminated if the Company
achieves the same foregoing performance thresholds. For purposes of this Section, “Revenues” means revenues required to be recognized
as such under GAAP, and “Net Income” means, as calculated on a consolidated basis for the Company and its Subsidiaries for any period
as at any date of determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a
single accounting period. If the Company should consummate an acquisition of the assets or stock of another Person after the Issue Date,
the parties shall equitably adjust the foregoing Revenues and Net Income thresholds to preserve the intention of the parties in challenging
the Company to achieve its projections for Revenues and Net Income.
Section 2. Exchange and Transfer of Warrant.
(a) This Warrant may be transferred, in whole or in part, without restriction, subject to (i) Holder’s compliance with
applicable securities laws (including, without limitation, the delivery of investment representation letters and legal opinions in legally
sufficient and customary form), and (ii) the transferee holder of the new Warrant assuming in writing the obligations of the Holder and
making the representations and warranties set forth in this Warrant. Notwithstanding and without the necessity of delivering an opinion of
counsel, Holder may at any time transfer this Warrant in whole or in part to any affiliate. By its acceptance of this Warrant, each such
affiliate transferee will be deemed to have made to the Company each of the representations and warranties set forth in Section 7 hereof
and agrees to be bound by all of the terms and conditions of this Warrant as if the original Holder hereof. A transfer may be registered with
the Company by submission to it of this Warrant, together with the Assignment Form attached hereto as Exhibit B duly completed and
executed. After the Company’s receipt of this Warrant and the Assignment Form so completed and executed, the Company will issue and
deliver to the transferee a new warrant (representing the portion of this Warrant so transferred) at the same Exchange Price per share and
otherwise having the same terms and provisions as this Warrant, which the Company will register in the new holder’s name. In the event
of a partial transfer of this Warrant, the Company shall concurrently issue and deliver to the transferring holder a new warrant that entitles
the transferring holder to purchase the balance of this Warrant not so transferred and that otherwise is upon the same terms and conditions
as this Warrant. Upon the due delivery of this Warrant for transfer, the transferee holder shall be deemed for all purposes to have become
the holder of the new warrant issued for the portion of this Warrant so transferred, effective immediately prior to the close of business on
the date of such delivery, irrespective of the date of actual delivery of the new warrant representing the portion of this Warrant so
transferred. Notwithstanding any contrary provision herein, at all times prior to the IPO, Holder may not, without the Company’s prior
written consent, transfer this Warrant or any portion hereof, or any shares issued upon any exercise hereof to any person or entity who
directly competes with the Company, except in connection with an Acquisition of the Company by such a direct competitor.
5
(b) In the event of the loss, theft or destruction of this Warrant, the Company shall execute and deliver an identical
new warrant to the Holder in substitution therefor upon the Company’s receipt of (i) evidence reasonably satisfactory to the Company of
such event and (ii) if requested by the Company, an indemnity agreement reasonably satisfactory in form and substance to the Company.
In the event of the mutilation of or other damage to the Warrant, the Company shall execute and deliver an identical new warrant to the
Holder in substitution therefor upon the Company’s receipt of the mutilated or damaged warrant.
(c) The Company shall pay all reasonable costs and expenses incurred in connection with any conversion (by Exercise
or Exchange), transfer or replacement of this Warrant, including, without limitation, the costs of preparation, execution and delivery of a
new warrant and of share certificates representing all Warrant Stock.
Section 3. Certain Covenants.
(a) The Company shall at all times reserve for issuance and keep available out of its authorized and unissued Common
Stock, solely for the purpose of providing for the exchange of this Warrant, such number of shares of Common Stock as shall from time to
time be sufficient therefor.
6
(b) The Company will not, by amendment or restatement of its Certificate of Incorporation or Bylaws or through
reorganization, consolidation, merger, amalgamation, sale of assets or otherwise, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant. Without limiting the foregoing, the Company will not increase the par value of any Warrant Stock
receivable upon the exchange of this Warrant above the amount payable therefor upon such exchange.
(c) So long as Holder holds this Warrant, the Company shall deliver to Holder such reports as it provides to its
common stockholders generally, as and when delivered to such stockholders. Notwithstanding the foregoing, the Company shall provide
Holder quarterly and annual financial statements upon request, if such statements are not publicly available. The parties shall not treat the
Warrant or the Warrant Stock as being granted or issued as property transferred in connection with the performance of services or
otherwise as compensation for services rendered.
Section 4.
Adjustments to Exchange Price and Number of Shares of Warrant Stock.
4 . 1 Adjustments. The Exchange Price shall be subject to adjustment from time to time in accordance with this Section 4.
Upon each adjustment of the Exchange Price pursuant to this Section 4, the Holder shall thereafter be entitled to acquire upon conversion,
at the Exchange Price resulting from such adjustment, the number of shares of Warrant Stock obtainable by multiplying the Exchange
Price in effect immediately prior to such adjustment by the number of shares of Warrant Stock acquirable immediately prior to such
adjustment and dividing the product thereof by the new Exchange Price resulting from such adjustment.
4.2 Subdivisions, Combinations and Stock Dividends. If the Company shall at any time subdivide by split-up or otherwise,
its outstanding Common Stock into a greater number of shares, or issue additional Common Stock as a dividend or otherwise with respect
to any Common Stock, the Exchange Price in effect immediately prior to such subdivision or share dividend shall be proportionately
reduced and the number of shares acquirable upon Exercise or Exchange hereunder shall be proportionately increased. Conversely, in case
the outstanding Common Stock of the Company shall be combined into a smaller number of shares, the Exchange Price in effect
immediately prior to such combination shall be proportionately increased and the number of shares acquirable upon Exercise or Exchange
hereunder shall be proportionately reduced.
4 . 3 Reclassification, Exchange, Substitutions, Etc. Upon any reclassification, exchange, substitution, or other event that
results in a change of the number and/or class of the securities issuable upon conversion of this Warrant, Holder shall be entitled to receive
and the Company shall promptly issue an amended warrant for the number and kind of securities and property that Holder would have
received for the Warrant Stock if this Warrant had been converted immediately before such reclassification, exchange, substitution, or
other event. The amendment to this Warrant shall provide for adjustments (as determined in good faith by the Board) which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this Section 4.3, without limitation, adjustments to the Warrant
Price and to the number of securities or property issuable upon conversion of the new Warrant. The provisions of this Section 4.3 shall
similarly apply to successive reclassifications, exchanges, substitutions, or other similar events.
7
4.4. Notices of Record Date, Etc . In the event that the Company shall:
(1) declare any dividend upon its Common Stock, whether payable in cash, property, stock or other securities and whether or
not a regular cash dividend, or
(2) offer for sale to (but not necessarily exclusively to) its existing securityholders any additional shares of any class or series
of the Company’s stock or securities exchangeable for or convertible into such stock in any transaction that would give rise (regardless of
waivers thereof) to pre-emptive rights of any class or series of stockholders, or
(3) effect or approve (by stockholder vote or otherwise) any reclassification, exchange, substitution or recapitalization of the
capital stock of the Company, including any subdivision or combination of its outstanding capital stock, or consolidation or merger of the
Company with, or sale of all or substantially all of its assets to, another corporation, or to liquidate, dissolve or wind up (including an
assignment for the benefit of creditors), or
(4) offer holders of registration rights the opportunity to participate in any public offering of the Company’s securities,
then, in connection with such event, the Company shall give to Holder:
(i) at least ten (10) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for
such a dividend or offer in respect of the matters referred to in (1) or (2) above;
(ii) in the case of the matters referred to in (3) above, at least ten (10) days prior written notice of the date when the same shall take
place; and
(iii) in the case of the matter referred to in (4) above, the same notice as is given or required to be given to the holders of such
registration rights.
Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such dividend, the date on which the holders
of capital stock shall be entitled thereto and the terms of such dividend, and such notice in accordance with clause (2) shall also specify the
date on which the holders of capital stock shall be entitled to exchange their capital stock for securities or other property deliverable upon
such reorganization, reclassification, exchange, substitution, consolidation, merger or sale, as the case may be, and the terms of such
exchange. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the
address of Holder.
8
4.5 Adjustment by Board. If any event occurs as to which, in the opinion of the Board, the provisions of this Section 4 are not
strictly applicable or if strictly applicable would not fairly protect the rights of the Holder in accordance with the essential intent and
principles of such provisions, then the Board shall make an adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights, but in no event shall any adjustment have the effect of increasing the Exchange
Price as otherwise determined pursuant to any of the provisions of this Section 4, except in the case of a combination of shares of a type
contemplated in Section 4.2 and then in no event to an amount larger than the Exchange Price as adjusted pursuant to Section 4.2.
4.6 Officers’ Statement as to Adjustments . Whenever the Exchange Price and/or number of shares of Warrant Stock subject to
the Warrant is required to be adjusted as provided in this Section 4, the Company shall forthwith file at its principal office with a copy to
the Holder notice parties set forth in Section 9 hereof a statement, signed by the Chief Executive Officer or Chief Financial Officer of the
Company, showing in reasonable detail the facts requiring such adjustment, the Exchange Price and number of issuable shares that will be
effective after such adjustment; provided, however, such statement shall not be required to the extent the information otherwise required
by this Section 4.7 is available through the Company’s current reports filed with the Securities and Exchange Commission.
4.7 Issue of Securities other than Common Stock. In the event that at any time, as a result of any adjustment made pursuant to
this Section 4, Holder thereafter shall become entitled to receive any securities of the Company, other than Common Stock, the number of
such other shares so receivable upon Exercise or Exchange of this Warrant shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section 4.
Section 5. Rights and Obligations of the Warrant Holder.
Except as otherwise specified in this Warrant, this Warrant shall not entitle the Holder to any rights of a holder of Common
Stock in the Company until such time as this Warrant is exchanged or exercised.
Section 6. Representations, Warranties and Covenants of the Company . The Company represents and warrants to, and covenants
with, Holder that:
6 . 1 Corporate Power; Authorization . The Company has all requisite corporate power and has taken all requisite corporate
action to execute and deliver this Warrant, to sell and issue the Warrant and Warrant Stock and to carry out and perform all of its
obligations hereunder. This Warrant has been duly authorized, executed and delivered on behalf of the Company by the person executing
this Warrant and constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights
generally and (ii) as limited by equitable principles generally.
9
6 . 2 Validity of Securities. The issuance and delivery of the Warrant is not subject to preemptive or any similar rights of the
stockholders of the Company (which have not been duly waived) or any liens or encumbrances except for restrictions on transfer provided
for herein or under applicable federal and state securities laws; and when the Warrant Stock is issued upon conversion by Exercise or
Exchange in accordance with the terms hereof, and this Warrant is converted into Warrant Stock, such securities will be, at each such
issuance, validly issued, fully paid and nonassessable, in compliance with all applicable securities laws and free of any liens or
encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.
6 . 3 Capitalization. The authorized capital of the Company consists of 40,000,000 common shares, of which 5,181,247 are
issued and outstanding, 1,000,000 Preferred Shares, no par value per share, of which 18,533.51 are issued and outstanding, of which (i)
250,000 are designated as Series A Preferred Shares and none are issued and outstanding, (ii) 10,000 are designated as Series B Preferred
Shares and 9,997 are issued and outstanding, (iii) 3,500 are designated as Series C Preferred Shares and 3,424.65 are issued and
outstanding (iv) 6,000 are designated as Series D Preferred Shares and 5,111.86 are issued and outstanding. Each share of preferred stock
can convert into 100 shares of common. Common stock warrants totaling 1,017,405 have been granted in association with the Preferred
Share purchases. As of the date hereof, the Company has reserved a total of 2,250,000 shares of its Common Stock for issuance under its
2005 Plan, of which 1,397,250 shares (including 121,500 shares of restricted stock) are reserved for issuance upon exercise of outstanding
options. Under the old 2000 Plan 190,000 options are still outstanding, but no additional shares can be granted under the 2000 Plan. The
Company has also issued 285,000 common stock options outside of the 2005 and 2000 Plans that are outstanding. A true, correct and
current copy of the Company’s current Restated Articles of Incorporation is appended as Exhibit C hereto. Except as specified in this
Agreement, there are no other options, warrants, conversion privileges or other contractual rights presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities. Exhibit D hereto sets forth a
capitalization table of the Company which is true, correct accurate and complete as of the date hereof.
6 . 4 No Conflict. The execution and delivery of this Warrant do not, and the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate
of Incorporation or Bylaws of the Company or any mortgage, indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, in
each case, the effect of which would have a material adverse effect on the Company or materially impair or restrict its power to perform its
obligations as contemplated hereby.
10
6 . 5 Governmental and other Consents. No consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any governmental authority or other person or entity is required on the part of the Company in
connection with the issuance, sale and delivery of the Warrant and the Warrant Stock, except such filings pursuant to the United States
Securities Act of 1933, as amended (the “ Securities Act”) and applicable state securities laws, which have been made or will be made in a
timely manner. All stockholder consents required in connection with issuance of the Warrant and Warrant Stock have either been obtained
by Company or no such consents are required.
6.6 Exempt from Registration. Assuming the accuracy of the representations and warranties of Holder in Section 7 hereof, the
offer, sale and issuance of the Warrant and the Warrant Stock will be exempt from the registration requirements of the Securities Act
pursuant to 506 of Regulation D under the Securities Act and from the registration and qualification requirements of applicable state
securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will
offer to sell all or any part of such securities to any person or persons so as to bring the offer, sale and issuance of the Warrant or the
Warrant Stock by the Company within the registration provisions of the Securities Act.
6 . 7 Delivery of Information; Accuracy . The Company acknowledges its delivery of certain Representations and Warranties
dated as of the date hereof (the “Representations Letter”) to Holder, which Representations and Warranties form the basis for Holder
purchasing the Warrant. The information contained therein and in all documents, instruments and other information delivered to Holder in
connection therewith are true, correct, accurate and complete in all material respects as of the Issue Date.
6.11 Legends. The Company shall remove any restrictive securities legends on Warrant Stock resulting from conversion of this
Warrant as soon as permitted by applicable law.
Section 7. Representations and Warranties of Holder . Holder hereby represents and warrants to the Company as of the
Closing Date as follows:
7 . 1 Investment Experience. Holder is an “accredited investor” within the meaning of Rule 501 under the Securities Act, and
was not organized for the specific purpose of acquiring the Securities. Holder is aware of the Company’s business affairs and financial
condition and has received or has had full access to all the information it considers necessary or appropriate to make an informed
investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to
ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying
securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access. Holder has such
business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the
Securities.
11
7.2 Investment Intent. Holder is purchasing the Warrant for investment for its own account only and not with a view to, or for
resale in connection with, any “distribution” thereof within the meaning of the Securities Act. Holder understands that the Warrant has not
been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions
therefrom, which exemptions may depend upon, among other things, the bona fide nature of Holder's investment intent as expressed
herein.
7.3 Authorization. Holder has all requisite power and has taken all requisite action required of it to carry out and perform all of
its obligations hereunder. The execution and delivery of this Warrant has been duly authorized, executed and delivered on behalf of Holder
and constitutes the valid and binding agreement of Holder, enforceable in accordance with its terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and (ii) as
limited by equitable principles generally. The consummation of the transactions contemplated herein and the fulfillment of the terms
herein will not result in a breach of any of the terms or provisions of Holder's constitutional documents or instruments.
7 . 4 The Act. Holder understands that this Warrant and the Warrant Stock issuable upon exercise hereof have not been
registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona
fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Warrant Stock issued upon
any exercise hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities
laws, or unless exemption from such registration and qualification are otherwise available. Holder is aware of the provisions of Rule 144
promulgated under the Act.
7.5 No Voting Rights. Holder, as a Holder of this Warrant, will not have any voting rights until the conversion in whole or in
part of this Warrant.
Section 8. Restricted Stock Legend.
This Warrant and the Warrant Stock have not been registered under any securities laws. Accordingly, any share certificates issued
pursuant to the conversion of this Warrant shall (until receipt of an opinion of counsel in customary form that such legend is no longer
necessary) bear the following legend:
THIS WARRANT AND THE WARRANT STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”), AND HAVE BEEN ACQUIRED FOR INVESTMENT
AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE OFFER, SALE, PLEDGE, TRANSFER OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN CUSTOMARY FORM THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.
12
Section 9. Notices.
Any notice or other communication required or permitted to be given here shall be in writing and shall be effective (a) upon hand
delivery or delivery by e-mail or facsimile at the address or number designated below (if delivered on a business day during normal
business hours where such notice is to be received) or the first business day following such delivery (if delivered other than on a business
day during normal business hours where such notice is to be received), or (b) on the third business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communication shall be:
if to Holder, at
Partners for Growth IV, L.P.
150 Pacific Avenue
San Francisco, California 94111
Attention: Chief Financial Officer
Fax: (415) 781-0510
Email: notices@pfgrowth.com
with a copy (not constituting notice) to
Greenspan Law Office
Attn: Benjamin Greenspan, Esq.
620 Laguna Road
Mill Valley, CA 94941
Fax: (415) 738-5371
Email: ben@greenspan-law.com
with the original of this Warrant and any replacement, restatement or reissue of this Warrant to be delivered to:
Robert W. Baird & Co., Inc.
555 California Street, Suite 4900
San Francisco, CA 94104
ATTN: John Fitzgibbons
Phone # 415-627-3225
Email: JFitzgibbons@rwbaird.com
13
or
if to the Company, at
Giga-tronics Incorporated
4650 Norris Canyon Road
San Ramon CA, 94583
Title: CFO
Name: Steve Lance
Email: slance@gigatronics.com
Fax: 925-328-4789
with a copy (not constituting notice) to:
Bingham McCutchen LLP
Three Embarcadero Center
San Francisco, CA 94111-4067
Fax: 415-262-9227
Attn: Thomas Reddy
Email: Thomas.reddy@bingham.com
Each party hereto may from time to time change its address for notices under this Section 9 by giving at least 10 calendar days’ notice of
such changes address to the other party hereto.
Section 10. Amendments and Waivers.
This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by
the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant may only be amended by an
instrument in writing signed by both parties.
Section 11. Applicable Law; Severability.
This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. If any one or
more of the provisions contained in this Warrant, or any application of any provision thereof, shall be invalid, illegal, or unenforceable in
any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications of any
provision thereof shall not in any way be affected or impaired thereby.
14
Section 12. Construction; Headings.
The terms “Exercise” and “Exchange” may be used interchangeably from time to time in this Warrant, the only substantive
difference being that the exercise of rights under this Warrant by Exercise will require payment of cash consideration per share equal to the
Exchange Price. The headings used in this Warrant are for the convenience of the parties only and shall not be used in construing the
provisions hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
IN WITNESS WHEREOF, the Company has caused this Amended and Restated Warrant to be duly executed on the day and year
first above written.
COMPANY:
ACKNOWLEDGED AND AGREED:
Giga-tronics Incorporated
HOLDER:
By: ____________________________
Name: __________________________
Title: ___________________________
By: ____________________________
Name: __________________________
Title: ___________________________
Partners for Growth IV, L.P.
By: _______________________
___________________, Manager of
Partners for Growth IV, LLC,
Its General Partner
16
Warrant (A&R) Signature Page
To:
Exhibit A
ELECTION TO EXCHANGE OR EXERCISE
1. The undersigned hereby exercises its right to Exchange its Warrant for _________________ fully paid, validly issued and
nonassessable shares of Warrant Stock in accordance with the terms thereof.
1. The undersigned hereby elects to Exercise the attached Warrant for fully paid, validly issued and nonassessable shares of Warrant
Stock by payment of $__________ as specified in the attached Warrant. This right is exercised with respect to ___________ of shares.
[Strike the paragraph above that does not apply.]
The undersigned requests that certificates for such shares be issued in the name of, and delivered to:
______________________
______________________
______________________
2. By its execution below and for the benefit of the Company, the undersigned hereby restates each of the representations and
warranties in Section 7 of the Warrant as of the date hereof.
Date: _____________________
[Holder]
By
Name:
Title:
17
Exhibit B
ASSIGNMENT FORM
To:
The undersigned hereby assigns and transfers this Warrant to
__________________________________________________
(Insert assignee’s social security or tax identification number)
____________________________________________________________________
(Print or type assignee’s name, address and postal code)
____________________________________________________________________
____________________________________________________________________
and irrevocably appoints _______________________________________ to transfer this Warrant on the books of the Company.
Date: __________________
Partners for Growth IV, L.P.
By __________________________
Name: _______________, Manager of
Partners for Growth IV, LLC, Its General Partner
Exhibit C
Articles of Incorporation
Exhibit D
Capitalization Table
Giga-Tronics
Fully Diluted Shares
Common - Issued and Outstanding
Common - Restricted Shares
Common Stock Options Outstanding - Average price $1.53
Common Warrants - PFG at $1.42
Common Warrants - Alara at $1.43
Alara Series B Preferred - As converted, liquidation preference of $2.30
Alara Series C Preferred - As converted, liquidation preference of $1.46
Alara Series D Preferred - As converted, liquidation preference of $1.43
5,059,747
121,500
1,738,750
180,000
1,017,405
999,700
342,465
511,186
51%
1%
17%
2%
10%
10%
3%
5%
Fully Diluted
9,970,753
100%
EXHIBIT 10.7
AMENDED AND RESTATED WARRANT
THIS AMENDED AND RESTATED WARRANT ("WARRANT") WAS ORIGINALLY SOLD ON THE ISSUE DATE IN A PRIVATE
TRANSACTION AND IS AMENDED AND RESTATED AS OF THE RESTATEMENT DATE, WITHOUT REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE, AND
MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT AND SUCH LAWS OR IF AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH LAWS IS AVAILABLE.
Company / Issuer:
Number of Shares:
Class of Shares:
Exchange Price:
Issue Date:
Restatement Date:
Expiration Date:
Giga-tronics Incorporated, a California corporation
105,600 shares, subject to adjustment
Common Stock, no par value / share
$1.42 per share
March 13, 2014
June 16, 2014
March 13, 2019
The term “Holder” shall initially refer to SVB Financial Group (by assignment on the Issue Date from its Affiliate, Silicon Valley
Bank, a California corporation), which is the initial holder of this Warrant and shall further refer to any subsequent permitted holder of this
Warrant from time to time.
Giga-tronics Incorporated, a California corporation (the “Company”) does hereby certify and agree that for good and valuable
consideration, Holder, or its permitted successors and assigns, hereby is entitled to Exercise or Exchange this Warrant (each as defined
below) in the Company for up to One Hundred Five Thousand Six Hundred (105,600) duly authorized, validly issued, fully paid and non-
assessable shares of its Common Stock, no par value per share (the “Common Stock”) upon the terms and subject to the provisions of this
Warrant. The Common Stock issuable upon Exercise or Exchange of this Warrant is referred to herein as the “Warrant Stock”. Capitalized
terms used but not defined in this Warrant have their meanings as set forth in that certain Loan and Security Agreement of even date
herewith between the Company and Partners for Growth IV, L.P. (the “Loan Agreement”), regardless of whether the Loan Agreement is
then in effect. When the term “convert” or “conversion” in relation to the Warrant is used herein, it includes an Exchange and an Exercise,
each as defined below, as applicable.
Section 1 Term, Price, Exercise and Exchange of Warrant.
1.1 Term of Warrant. This Warrant shall be convertible from the Issue Date until the Expiration Date.
1 . 2 Exchange Price. The price per share at which the Warrant Stock is issuable upon conversion of this Warrant shall be
$1.42 per share (the “Exchange Price”).
1
1.3 Exercise of Warrant; Exchange of Warrant.
(a) This Warrant may be Exercised (as defined below) in whole or in part, upon surrender of this Warrant to the
Company at its then principal offices in the United States, together with the form of election to Exchange or Exercise attached hereto as
Exhibit A (the “Election”) duly completed and executed with “Exercise” selected as the mode of conversion, and upon payment to the
Company of the Exchange Price for the number of shares of Warrant Stock in respect of which this Warrant is then being converted (an
“Exercise”). In lieu of an Exercise, Holder may exchange this Warrant in whole or in part on a cashless basis by indicating so in the
Election and proceeding in accordance with the remainder of this Section 1.3 (an “Exchange”).
(b) Upon an Exchange, the Holder shall receive Warrant Stock such that, without the payment of any funds, the
Holder shall surrender this Warrant in exchange for the number of shares of Warrant Stock equal to “X” (as defined below), computed
using the following formula:
Y * (A-B)
X = _______________
A
Where
X = the number of shares of Warrant Stock to be issued to Holder
Y = the number of shares of Warrant Stock to be convertedunder this Warrant
A = the Fair Market Value of one share of Warrant Stock
B = the Exchange Price (as adjusted to the date of suchcalculations)
* = multiplied by
(c) For purposes of this Warrant, the “Fair Market Value” of one share of Warrant Stock shall be (i) if the Company’s
Common Stock is becomes listed on a national stock exchange, the highest sale price reported on such exchange over the 90-day period
prior to the date Holder delivers its Election to the Company, or (ii) if the Common Stock is traded over-the-counter, the highest average
of the bid and ask price for Common Stock over the 90-day period prior to the date Holder delivers its Election to the Company. If another
class or series of Company securities is listed or traded as aforesaid, the Fair Market Value shall be adjusted based on the ratio that the
Warrant Stock converts into such other class or series or such other class or series converts into Warrant Stock, as appropriate. If the
Common Stock is not traded as contemplated in clauses (i) or (ii), above, the Fair Market Value of the Company’s Warrant Stock shall be
the price per share of Warrant Stock which the Company could obtain from a willing buyer of Warrant Stock sold by the Company from its
authorized but unissued shares, initially as the Board of Directors of the Company (“Board”) shall determine in its reasonable good faith
judgment, but in no event less than the price per share at which Common Stock (or options for Common Stock) are then issuable to
Company employees based on a valuation compliant with Section 409A of the United States Internal Revenue Code; provided, however, if
Holder disagrees the Fair Market Value of Warrant Stock as determined by the Board, the parties shall jointly engage a valuation expert to
value the Warrant Stock based on a valuation of the Company as a going concern using standard valuation methodologies for the Warrant
Stock. If the Warrant is to be converted in connection with an Acquisition, the Fair Market Value of a share of Warrant Stock shall be
based on the enterprise value specified or implied in such Acquisition and shall be the greater of (A) the value attributable to the Warrant
Stock and (B) the value attributable to the Company securities into which the Warrant Stock is (or may be) convertible (but subject to
Holder’s conversion directly into such other Company securities).
2
(d) Upon surrender of this Warrant, and the duly completed and executed Election, and payment of the Exchange Price
(if an Exercise) or conversion of this Warrant through Exchange, the Company shall promptly issue and deliver to the Holder or such other
person as the Holder may designate in writing a certificate or certificates for the number of shares of Warrant Stock issuable pursuant to
the terms of this Warrant upon conversion. Such certificate or certificates shall be deemed to have been issued and any person so
designated to be named therein shall be deemed to have become a holder of record of such Warrant Stock as of the date of the surrender of
this Warrant, and the duly completed and executed Election, and payment of the Exchange Price in the case of an Exercise or conversion
of this Warrant through Exchange; provided, that if the date of surrender of this Warrant and payment of the Exchange Price is not a
business day, the certificates for the Warrant Stock shall be deemed to have been issued as of the next business day (whether before or
after the Expiration Date). If this Warrant is converted in part, a new warrant of the same tenor and for the number of shares of Warrant
Stock not converted shall be executed by the Company and delivered to Holder.
1 . 4 Fractional Interests. The Company shall not be required to issue fractions of shares of Warrant Stock upon the
conversion of this Warrant. If any fraction of a share of Warrant Stock would be issuable upon the exchange of this Warrant (or any portion
thereof), the Company shall purchase such fraction for an amount in cash equal to the Fair Market Value of the Warrant Stock.
1 . 5 Automatic Put or Exchange on Expiration Date. In the event that, by the Expiration Date, this Warrant has not been
fully converted or put to the Company under Section 1.7, then this Warrant shall be deemed put to the Company under Section 1.7 and the
Company shall promptly pay the Exchange Put Price; provided, however, if an Exchange at such time under Section 1.3 would yield a
greater value to Holder than exercise of its rights under Section 1.7, then this Warrant shall automatically be deemed on and as of such date
to be Exchanged pursuant to Section 1.3 as to all Warrant Stock (or such other securities) for which it shall not previously have been
converted, and the Company shall promptly deliver a certificate representing the Warrant Stock (or such other securities) issued upon such
conversion to the Holder.
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1.6 Treatment of Warrant Upon Acquisition of Company.
(a) “Acquisition”. For the purpose of this Warrant, “Acquisition” means any sale or other disposition of all or
substantially all of the assets of the Company in whatever form, or any reorganization, consolidation, or merger of the Company (whether
in a single transaction or multiple related transactions) where the holders of the Company’s securities before the transaction beneficially
own less than 50% of the outstanding voting securities of the surviving entity after the transaction(s).
(b) Treatment of Warrant at Acquisition . Upon the closing of any Acquisition, at Holder’s option: (i) if the surviving
entity (if applicable in such Acquisition) is willing assume the obligations of the Company under this Warrant, then if Holder so elects this
Warrant shall be convertible into the same securities as would be payable for the Warrant Stock issuable upon conversion of the
unconverted portion of this Warrant as if such Warrant Stock were outstanding on the record date for the Acquisition (and the Warrant
Price and/or number of shares of Warrant Stock shall be adjusted accordingly); or (ii) Holder may exercise its rights under Section 1.7 and
put the Warrant to the Company (or the surviving entity as a condition to the Acquisition) for cash; or (iii) the Company or other surviving
entity in such Acquisition shall, upon initial closing of such Acquisition purchase this Warrant at its “Fair Value” (the “Purchase Price”).
For purposes hereof, “Fair Value” means that value determined by the parties using a Black-Scholes Option-Pricing Model (the “ Black-
Scholes Calculation”) with the following assumptions: (A) a risk-free interest rate equal to the risk-free interest rate at the time of the
closing of the Acquisition (or as close thereto as practicable), (B) a contractual life of the Warrant equal to the remaining term of this
Warrant as of the date of the announcement of the Acquisition, (C) an annual dividend yield equal to dividends declared on the underlying
Warrant Stock (including securities into which the Warrant Stock may be convertible) during the term of this Warrant (calculated on an
annual basis), and (D) a volatility factor of the expected market price of the Company’s Common Stock comprised of: (1) if the Company
is publicly traded on a national securities exchange, its volatility over the one year period ending on the day prior to the announcement of
the Acquisition, (2) if the Common Stock is traded over-the-counter, its volatility over the one year period ending on the day prior to the
announcement of the Acquisition, or (3) if the Company is a non-public company, the volatility, over the one year period prior to the
Acquisition, of an average of publicly-traded companies in the same or similar industry to the Company with such companies having
similar revenues. The Purchase Price determined in accordance with the above shall be paid upon the initial closing of the Acquisition and
shall not be subject to any post-Acquisition closing contingencies or adjustments; provided, however, the parties may take such post-
Acquisition closing contingencies or adjustments into account in determining the Purchase Price, and if the parties take any post-
Acquisition closing contingencies or adjustments into account, then upon the partial or complete removal of those post-Acquisition closing
contingencies or adjustments, a new Black-Scholes Calculation would be made using all of the same inputs except for the value of the
Company’s Common Stock (as determined under subclause (D)), and any increase in Fair Value (and, correspondingly, Purchase Price),
including, without limitation, as a result of any earn-out or escrowed consideration, would be paid in full to Holder immediately after those
post-Acquisition closing contingencies or adjustments can be determined or achieved.
4
1 . 7 Immediately Exchangeable and Conditionally Exchangeable Warrant Stock. Notwithstanding the Issue Date of this
Warrant or any provision in this Warrant to the contrary, this Warrant is immediately convertible into up to 91,520 shares of Warrant Stock
and, in the event the Company borrows under Tranche 3 of the Loan Agreement, shall (as from the date of such borrowing) be convertible
into up to an additional 14,080 shares of Warrant Stock (the “Tranche 3 Warrant Stock”).
1 . 8 Warrant Put. Notwithstanding anything to the contrary set forth in this Warrant, in the event of (i) any Acquisition or
other change in control of the Company, (ii) any initial public offering or other listing of Company securities, (iii) any liquidation or the
Company or event treated as a liquidation under the Articles of Incorporation of the Company, and (iv) upon expiry of this Warrant,
Holder shall have the right (but not the obligation) to exchange this Warrant for the cash sum of $88,000 (the “ Exchange Put Price”);
provided, however, if Tranche 3 of the Loan Agreement is not drawn by the Company in whole or in part, the Exchange Put Price shall be
reduced by $11,616 to $76,384. Holder shall exercise such right by written notice as provided in this Warrant and, upon receipt by the
Company of such notice, the Expiration Date of this Warrant shall be deemed extended until such time as the Company has paid the
Exchange Put Price to Holder. The Company shall promptly (and in no event later than (five) 5 business days of Holder’s notice to the
Company) pay the Exchange Put Price to Holder.
1.9 Adjustment in Number of Shares. Holder’s right to convert this Warrant with respect to 17,600 Shares of Warrant Stock
may be terminated if the Company earns at least (i) $18,000,000 in Revenues and (ii) $1,000,000 in Net Income, in each case for its fiscal
year ending March 31, 2015. Without duplication for the foregoing reduction (i.e., the maximum reduction in Number of Shares under this
Section 1.9 is 17,600 shares), if the Tranche 3 Warrant Stock does not become convertible under Section 1.7 (i.e., the Company does not
borrower Tranche 3), Holder’s right to convert this Warrant for 13,200 Shares of Warrant Stock may be terminated if the Company
achieves the same foregoing performance thresholds. For purposes of this Section, “Revenues” means revenues required to be recognized
as such under GAAP, and “Net Income” means, as calculated on a consolidated basis for the Company and its Subsidiaries for any period
as at any date of determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a
single accounting period. If the Company should consummate an acquisition of the assets or stock of another Person after the Issue Date,
the parties shall equitably adjust the foregoing Revenues and Net Income thresholds to preserve the intention of the parties in challenging
the Company to achieve its projections for Revenues and Net Income.
5
Section 2. Exchange and Transfer of Warrant.
(a) This Warrant may be transferred, in whole or in part, without restriction, subject to (i) Holder’s compliance with
applicable securities laws (including, without limitation, the delivery of investment representation letters and legal opinions in legally
sufficient and customary form), and (ii) the transferee holder of the new Warrant assuming in writing the obligations of the Holder and
making the representations and warranties set forth in this Warrant. Notwithstanding and without the necessity of delivering an opinion of
counsel, Holder may at any time transfer this Warrant in whole or in part to any affiliate. By its acceptance of this Warrant, each such
affiliate transferee will be deemed to have made to the Company each of the representations and warranties set forth in Section 7 hereof
and agrees to be bound by all of the terms and conditions of this Warrant as if the original Holder hereof. A transfer may be registered with
the Company by submission to it of this Warrant, together with the Assignment Form attached hereto as Exhibit B duly completed and
executed. After the Company’s receipt of this Warrant and the Assignment Form so completed and executed, the Company will issue and
deliver to the transferee a new warrant (representing the portion of this Warrant so transferred) at the same Exchange Price per share and
otherwise having the same terms and provisions as this Warrant, which the Company will register in the new holder’s name. In the event
of a partial transfer of this Warrant, the Company shall concurrently issue and deliver to the transferring holder a new warrant that entitles
the transferring holder to purchase the balance of this Warrant not so transferred and that otherwise is upon the same terms and conditions
as this Warrant. Upon the due delivery of this Warrant for transfer, the transferee holder shall be deemed for all purposes to have become
the holder of the new warrant issued for the portion of this Warrant so transferred, effective immediately prior to the close of business on
the date of such delivery, irrespective of the date of actual delivery of the new warrant representing the portion of this Warrant so
transferred. Notwithstanding any contrary provision herein, at all times prior to the IPO, Holder may not, without the Company’s prior
written consent, transfer this Warrant or any portion hereof, or any shares issued upon any exercise hereof to any person or entity who
directly competes with the Company, except in connection with an Acquisition of the Company by such a direct competitor.
(b) In the event of the loss, theft or destruction of this Warrant, the Company shall execute and deliver an identical
new warrant to the Holder in substitution therefor upon the Company’s receipt of (i) evidence reasonably satisfactory to the Company of
such event and (ii) if requested by the Company, an indemnity agreement reasonably satisfactory in form and substance to the Company.
In the event of the mutilation of or other damage to the Warrant, the Company shall execute and deliver an identical new warrant to the
Holder in substitution therefor upon the Company’s receipt of the mutilated or damaged warrant.
(c) The Company shall pay all reasonable costs and expenses incurred in connection with any conversion (by Exercise
or Exchange), transfer or replacement of this Warrant, including, without limitation, the costs of preparation, execution and delivery of a
new warrant and of share certificates representing all Warrant Stock.
Section 3. Certain Covenants.
(a) The Company shall at all times reserve for issuance and keep available out of its authorized and unissued Common
Stock, solely for the purpose of providing for the exchange of this Warrant, such number of shares of Common Stock as shall from time to
time be sufficient therefor.
6
(b) The Company will not, by amendment or restatement of its Certificate of Incorporation or Bylaws or through
reorganization, consolidation, merger, amalgamation, sale of assets or otherwise, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant. Without limiting the foregoing, the Company will not increase the par value of any Warrant Stock
receivable upon the exchange of this Warrant above the amount payable therefor upon such exchange.
(c) So long as Holder holds this Warrant, the Company shall deliver to Holder such reports as it provides to its
common stockholders generally, as and when delivered to such stockholders. Notwithstanding the foregoing, the Company shall provide
Holder quarterly and annual financial statements upon request, if such statements are not publicly available. The parties shall not treat the
Warrant or the Warrant Stock as being granted or issued as property transferred in connection with the performance of services or
otherwise as compensation for services rendered.
Section 4.
Adjustments to Exchange Price and Number of Shares of Warrant Stock.
4 . 1 Adjustments. The Exchange Price shall be subject to adjustment from time to time in accordance with this Section 4.
Upon each adjustment of the Exchange Price pursuant to this Section 4, the Holder shall thereafter be entitled to acquire upon conversion,
at the Exchange Price resulting from such adjustment, the number of shares of Warrant Stock obtainable by multiplying the Exchange
Price in effect immediately prior to such adjustment by the number of shares of Warrant Stock acquirable immediately prior to such
adjustment and dividing the product thereof by the new Exchange Price resulting from such adjustment.
4 . 2 Subdivisions, Combinations and Stock Dividends. If the Company shall at any time subdivide by split-up or otherwise,
its outstanding Common Stock into a greater number of shares, or issue additional Common Stock as a dividend or otherwise with respect
to any Common Stock, the Exchange Price in effect immediately prior to such subdivision or share dividend shall be proportionately
reduced and the number of shares acquirable upon Exercise or Exchange hereunder shall be proportionately increased. Conversely, in case
the outstanding Common Stock of the Company shall be combined into a smaller number of shares, the Exchange Price in effect
immediately prior to such combination shall be proportionately increased and the number of shares acquirable upon Exercise or Exchange
hereunder shall be proportionately reduced.
4 . 3 Reclassification, Exchange, Substitutions, Etc. Upon any reclassification, exchange, substitution, or other event that
results in a change of the number and/or class of the securities issuable upon conversion of this Warrant, Holder shall be entitled to receive
and the Company shall promptly issue an amended warrant for the number and kind of securities and property that Holder would have
received for the Warrant Stock if this Warrant had been converted immediately before such reclassification, exchange, substitution, or
other event. The amendment to this Warrant shall provide for adjustments (as determined in good faith by the Board) which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this Section 4.3, without limitation, adjustments to the Warrant
Price and to the number of securities or property issuable upon conversion of the new Warrant. The provisions of this Section 4.3 shall
similarly apply to successive reclassifications, exchanges, substitutions, or other similar events.
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4.4. Notices of Record Date, Etc . In the event that the Company shall:
(1) declare any dividend upon its Common Stock, whether payable in cash, property, stock or other securities and whether or
not a regular cash dividend, or
(2) offer for sale to (but not necessarily exclusively to) its existing securityholders any additional shares of any class or series
of the Company’s stock or securities exchangeable for or convertible into such stock in any transaction that would give rise (regardless of
waivers thereof) to pre-emptive rights of any class or series of stockholders, or
(3) effect or approve (by stockholder vote or otherwise) any reclassification, exchange, substitution or recapitalization of the
capital stock of the Company, including any subdivision or combination of its outstanding capital stock, or consolidation or merger of the
Company with, or sale of all or substantially all of its assets to, another corporation, or to liquidate, dissolve or wind up (including an
assignment for the benefit of creditors), or
(4) offer holders of registration rights the opportunity to participate in any public offering of the Company’s securities,
then, in connection with such event, the Company shall give to Holder:
(i) at least ten (10) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for
such a dividend or offer in respect of the matters referred to in (1) or (2) above;
(ii) in the case of the matters referred to in (3) above, at least ten (10) days prior written notice of the date when the same shall take
place; and
(iii) in the case of the matter referred to in (4) above, the same notice as is given or required to be given to the holders of such
registration rights.
Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such dividend, the date on which the holders
of capital stock shall be entitled thereto and the terms of such dividend, and such notice in accordance with clause (2) shall also specify the
date on which the holders of capital stock shall be entitled to exchange their capital stock for securities or other property deliverable upon
such reorganization, reclassification, exchange, substitution, consolidation, merger or sale, as the case may be, and the terms of such
exchange. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the
address of Holder.
8
4 . 5 Adjustment by Board. If any event occurs as to which, in the opinion of the Board, the provisions of this Section 4 are
not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder in accordance with the essential intent and
principles of such provisions, then the Board shall make an adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights, but in no event shall any adjustment have the effect of increasing the Exchange
Price as otherwise determined pursuant to any of the provisions of this Section 4, except in the case of a combination of shares of a type
contemplated in Section 4.2 and then in no event to an amount larger than the Exchange Price as adjusted pursuant to Section 4.2.
4.6 Officers’ Statement as to Adjustments . Whenever the Exchange Price and/or number of shares of Warrant Stock subject
to the Warrant is required to be adjusted as provided in this Section 4, the Company shall forthwith file at its principal office with a copy to
the Holder notice parties set forth in Section 9 hereof a statement, signed by the Chief Executive Officer or Chief Financial Officer of the
Company, showing in reasonable detail the facts requiring such adjustment, the Exchange Price and number of issuable shares that will be
effective after such adjustment; provided, however, such statement shall not be required to the extent the information otherwise required
by this Section 4.7 is available through the Company’s current reports filed with the Securities and Exchange Commission.
4.7 Issue of Securities other than Common Stock. In the event that at any time, as a result of any adjustment made pursuant
to this Section 4, Holder thereafter shall become entitled to receive any securities of the Company, other than Common Stock, the number
of such other shares so receivable upon Exercise or Exchange of this Warrant shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section 4.
Section 5. Rights and Obligations of the Warrant Holder.
Except as otherwise specified in this Warrant, this Warrant shall not entitle the Holder to any rights of a holder of Common
Stock in the Company until such time as this Warrant is exchanged or exercised.
Section 6. Representations, Warranties and Covenants of the Company . The Company represents and warrants to, and
covenants with, Holder that:
6 . 1 Corporate Power; Authorization . The Company has all requisite corporate power and has taken all requisite corporate
action to execute and deliver this Warrant, to sell and issue the Warrant and Warrant Stock and to carry out and perform all of its
obligations hereunder. This Warrant has been duly authorized, executed and delivered on behalf of the Company by the person executing
this Warrant and constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights
generally and (ii) as limited by equitable principles generally.
9
6.2 Validity of Securities. The issuance and delivery of the Warrant is not subject to preemptive or any similar rights of the
stockholders of the Company (which have not been duly waived) or any liens or encumbrances except for restrictions on transfer provided
for herein or under applicable federal and state securities laws; and when the Warrant Stock is issued upon conversion by Exercise or
Exchange in accordance with the terms hereof, and this Warrant is converted into Warrant Stock, such securities will be, at each such
issuance, validly issued, fully paid and nonassessable, in compliance with all applicable securities laws and free of any liens or
encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.
6 . 3 Capitalization. The authorized capital of the Company consists of 40,000,000 common shares, of which 5,181,247 are
issued and outstanding, 1,000,000 Preferred Shares, no par value per share, of which 18,533.51 are issued and outstanding, of which (i)
250,000 are designated as Series A Preferred Shares and none are issued and outstanding, (ii) 10,000 are designated as Series B Preferred
Shares and 9,997 are issued and outstanding, (iii) 3,500 are designated as Series C Preferred Shares and 3,424.65 are issued and
outstanding (iv) 6,000 are designated as Series D Preferred Shares and 5,111.86 are issued and outstanding. Each share of preferred stock
can convert into 100 shares of common. Common stock warrants totaling 1,017,405 have been granted in association with the Preferred
Share purchases. As of the date hereof, the Company has reserved a total of 2,250,000 shares of its Common Stock for issuance under its
2005 Plan, of which 1,397,250 shares (including 121,500 shares of restricted stock) are reserved for issuance upon exercise of outstanding
options. Under the old 2000 Plan 190,000 options are still outstanding, but no additional shares can be granted under the 2000 Plan. The
Company has also issued 285,000 common stock options outside of the 2005 and 2000 Plans that are outstanding. A true, correct and
current copy of the Company’s current Restated Articles of Incorporation is appended as Exhibit C hereto. Except as specified in this
Agreement, there are no other options, warrants, conversion privileges or other contractual rights presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities. Exhibit D hereto sets forth a
capitalization table of the Company which is true, correct accurate and complete as of the date hereof.
6.4 No Conflict. The execution and delivery of this Warrant do not, and the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate
of Incorporation or Bylaws of the Company or any mortgage, indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, in
each case, the effect of which would have a material adverse effect on the Company or materially impair or restrict its power to perform its
obligations as contemplated hereby.
10
6 . 5 Governmental and other Consents. No consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any governmental authority or other person or entity is required on the part of the Company in
connection with the issuance, sale and delivery of the Warrant and the Warrant Stock, except such filings pursuant to the United States
Securities Act of 1933, as amended (the “ Securities Act”) and applicable state securities laws, which have been made or will be made in a
timely manner. All stockholder consents required in connection with issuance of the Warrant and Warrant Stock have either been obtained
by Company or no such consents are required.
6 . 6 Exempt from Registration. Assuming the accuracy of the representations and warranties of Holder in Section 7 hereof,
the offer, sale and issuance of the Warrant and the Warrant Stock will be exempt from the registration requirements of the Securities Act
pursuant to 506 of Regulation D under the Securities Act and from the registration and qualification requirements of applicable state
securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will
offer to sell all or any part of such securities to any person or persons so as to bring the offer, sale and issuance of the Warrant or the
Warrant Stock by the Company within the registration provisions of the Securities Act.
6.7 Delivery of Information; Accuracy. The Company acknowledges its delivery of certain Representations and Warranties
dated as of the date hereof (the “Representations Letter”) to Holder, which Representations and Warranties form the basis for Holder
purchasing the Warrant. The information contained therein and in all documents, instruments and other information delivered to Holder in
connection therewith are true, correct, accurate and complete in all material respects as of the Issue Date.
6 . 1 1 Legends. The Company shall remove any restrictive securities legends on Warrant Stock resulting from conversion of
this Warrant as soon as permitted by applicable law.
Section 7. Representations and Warranties of Holder . Holder hereby represents and warrants to the Company as of the
Closing Date as follows:
7.1 Investment Experience. Holder is an “accredited investor” within the meaning of Rule 501 under the Securities Act, and
was not organized for the specific purpose of acquiring the Securities. Holder is aware of the Company’s business affairs and financial
condition and has received or has had full access to all the information it considers necessary or appropriate to make an informed
investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to
ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying
securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access. Holder has such
business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the
Securities.
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7 . 2 Investment Intent. Holder is purchasing the Warrant for investment for its own account only and not with a view to, or
for resale in connection with, any “distribution” thereof within the meaning of the Securities Act. Holder understands that the Warrant has
not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions
therefrom, which exemptions may depend upon, among other things, the bona fide nature of Holder's investment intent as expressed
herein.
7.3 Authorization. Holder has all requisite power and has taken all requisite action required of it to carry out and perform all
of its obligations hereunder. The execution and delivery of this Warrant has been duly authorized, executed and delivered on behalf of
Holder and constitutes the valid and binding agreement of Holder, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and
(ii) as limited by equitable principles generally. The consummation of the transactions contemplated herein and the fulfillment of the
terms herein will not result in a breach of any of the terms or provisions of Holder's constitutional documents or instruments.
7 . 4 The Act. Holder understands that this Warrant and the Warrant Stock issuable upon exercise hereof have not been
registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona
fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Warrant Stock issued upon
any exercise hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities
laws, or unless exemption from such registration and qualification are otherwise available. Holder is aware of the provisions of Rule 144
promulgated under the Act.
7.5 No Voting Rights. Holder, as a Holder of this Warrant, will not have any voting rights until the conversion in whole or
in part of this Warrant.
Section 8. Restricted Stock Legend.
This Warrant and the Warrant Stock have not been registered under any securities laws. Accordingly, any share certificates issued
pursuant to the conversion of this Warrant shall (until receipt of an opinion of counsel in customary form that such legend is no longer
necessary) bear the following legend:
THIS WARRANT AND THE WARRANT STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”), AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE OFFER, SALE, PLEDGE,
TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN CUSTOMARY FORM THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.
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Section 9. Notices.
Any notice or other communication required or permitted to be given here shall be in writing and shall be effective (a) upon hand
delivery or delivery by e-mail or facsimile at the address or number designated below (if delivered on a business day during normal
business hours where such notice is to be received) or the first business day following such delivery (if delivered other than on a business
day during normal business hours where such notice is to be received), or (b) on the third business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communication shall be:
if to Holder, at
SVB Financial Group
Attn: Treasury - Derivatives Group
3003 Tasman Drive, HC215
Santa Clara, CA 95054
Telephone: 408-654-7400
Facsimile: 408-354-3085
warradmi@svb.com
with a copy (not constituting notice) to
Greenspan Law Office
Attn: Benjamin Greenspan, Esq.
620 Laguna Road
Mill Valley, CA 94941
Fax: (415) 738-5371
Email: ben@greenspan-law.com
or
if to the Company, at
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Giga-tronics Incorporated
4650 Norris Canyon Road
San Ramon CA, 94583
Title: CFO
Name: Steve Lance
Email: slance@gigatronics.com
Fax: 925-328-4789
with a copy (not constituting notice) to:
Bingham McCutchen LLP
Three Embarcadero Center
San Francisco, CA 94111-4067
Fax: 415-262-9227
Attn: Thomas Reddy
Email: Thomas.reddy@bingham.com
Each party hereto may from time to time change its address for notices under this Section 9 by giving at least 10 calendar days’ notice of
such changes address to the other party hereto.
Section 10. Amendments and Waivers.
This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by
the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant may only be amended by an
instrument in writing signed by both parties.
Section 11. Applicable Law; Severability.
This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. If any one or
more of the provisions contained in this Warrant, or any application of any provision thereof, shall be invalid, illegal, or unenforceable in
any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications of any
provision thereof shall not in any way be affected or impaired thereby.
Section 12. Construction; Headings.
The terms “Exercise” and “Exchange” may be used interchangeably from time to time in this Warrant, the only substantive
difference being that the exercise of rights under this Warrant by Exercise will require payment of cash consideration per share equal to the
Exchange Price. The headings used in this Warrant are for the convenience of the parties only and shall not be used in construing the
provisions hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
14
IN WITNESS WHEREOF, the Company has caused this Amended and Restated Warrant to be duly executed on the day and year
first above written.
COMPANY:
Giga-tronics Incorporated
ACKNOWLEDGED AND AGREED:
HOLDER:
SVB Financial Group
By: ____________________________
By: ____________________________
Name: __________________________
Name: _________________________
Title: ___________________________
Title: __________________________
By: ____________________________
Name: __________________________
Title: ___________________________
Warrant (A&R) Signature Page
To:
Exhibit A
ELECTION TO EXCHANGE OR EXERCISE
1. The undersigned hereby exercises its right to Exchange its Warrant for _________________ fully paid, validly issued and
nonassessable shares of Warrant Stock in accordance with the terms thereof.
1. The undersigned hereby elects to Exercise the attached Warrant for fully paid, validly issued and nonassessable shares of Warrant
Stock by payment of $__________ as specified in the attached Warrant. This right is exercised with respect to ___________ of shares.
[Strike the paragraph above that does not apply.]
The undersigned requests that certificates for such shares be issued in the name of, and delivered to:
______________________
______________________
______________________
2. By its execution below and for the benefit of the Company, the undersigned hereby restates each of the representations and
warranties in Section 7 of the Warrant as of the date hereof.
Date: _____________________
[Holder]
By
Name:
Title:
Exhibit B
ASSIGNMENT FORM
To:
The undersigned hereby assigns and transfers this Warrant to
__________________________________________________
(Insert assignee’s social security or tax identification number)
____________________________________________________________________
(Print or type assignee’s name, address and postal code)
____________________________________________________________________
____________________________________________________________________
and irrevocably appoints _______________________________________ to transfer this Warrant on the books of the Company.
Date: __________________
SVB Financial Group
By: ____________________________
Name: _________________________
Title: __________________________
Exhibit C
Articles of Incorporation
Exhibit D
Capitalization Table
Giga-Tronics
Fully Diluted Shares
Common - Issued and Outstanding
Common - Restricted Shares
Common Stock Options Outstanding - Average price $1.53
Common Warrants - PFG at $1.42
Common Warrants - Alara at $1.43
Alara Series B Preferred - As converted, liquidation preference of $2.30
Alara Series C Preferred - As converted, liquidation preference of $1.46
Alara Series D Preferred - As converted, liquidation preference of $1.43
5,059,747
121,500
1,738,750
180,000
1,017,405
999,700
342,465
511,186
51%
1%
17%
2%
10%
10%
3%
5%
Fully Diluted
9,970,753
100%
EXHIBIT 10.8
AMENDED AND RESTATED WARRANT
THIS AMENDED AND RESTATED WARRANT ("WARRANT") WAS ORIGINALLY SOLD ON THE ISSUE DATE IN A PRIVATE
TRANSACTION AND IS AMENDED AND RESTATED AS OF THE RESTATEMENT DATE, WITHOUT REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS OF ANY STATE, AND
MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER THE SECURITIES ACT AND SUCH LAWS OR IF AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH LAWS IS AVAILABLE.
Company / Issuer:
Number of Shares:
Class of Shares:
Exchange Price:
Issue Date:
Restatement Date:
Expiration Date:
Giga-tronics Incorporated, a California corporation
14,400 shares, subject to adjustment
Common Stock, no par value / share
$1.42 per share
March 13, 2014
June 16, 2014
March 13, 2019
The term “Holder” shall initially refer to PFG Equity Investors, LLC, a Delaware limited liability company, which is the initial
holder of this Warrant and shall further refer to any subsequent permitted holder of this Warrant from time to time.
Giga-tronics Incorporated, a California corporation (the “Company”) does hereby certify and agree that, for the sum of $232 paid
by Holder on the Issue Date, which the parties agree is fair consideration for this Warrant, Holder, or its permitted successors and assigns,
hereby is entitled to Exercise or Exchange this Warrant (each as defined below) in the Company for up to Fourteen Thousand Four
Hundred (14,400) duly authorized, validly issued, fully paid and non-assessable shares of its Common Stock, no par value per share (the
“Common Stock”) upon the terms and subject to the provisions of this Warrant. The Common Stock issuable upon Exercise or Exchange
of this Warrant is referred to herein as the “Warrant Stock”. Capitalized terms used but not defined in this Warrant have their meanings as
set forth in that certain Loan and Security Agreement of even date herewith between the Company and Partners for Growth IV, L.P., an
affiliate of Holder (as amended, the “Loan Agreement”), regardless of whether the Loan Agreement is then in effect. When the term
“convert” or “conversion” in relation to the Warrant is used herein, it includes an Exchange and an Exercise, each as defined below, as
applicable.
Section 1 Term, Price, Exercise and Exchange of Warrant.
1.1 Term of Warrant. This Warrant shall be convertible from the Issue Date until the Expiration Date.
1 . 2 Exchange Price. The price per share at which the Warrant Stock is issuable upon conversion of this Warrant shall be
$1.42 per share (the “Exchange Price”).
1.3 Exercise of Warrant; Exchange of Warrant.
(a) This Warrant may be Exercised (as defined below) in whole or in part, upon surrender of this Warrant to the
Company at its then principal offices in the United States, together with the form of election to Exchange or Exercise attached hereto as
Exhibit A (the “Election”) duly completed and executed with “Exercise” selected as the mode of conversion, and upon payment to the
Company of the Exchange Price for the number of shares of Warrant Stock in respect of which this Warrant is then being converted (an
“Exercise”). In lieu of an Exercise, Holder may exchange this Warrant in whole or in part on a cashless basis by indicating so in the
Election and proceeding in accordance with the remainder of this Section 1.3 (an “Exchange”).
(b) Upon an Exchange, the Holder shall receive Warrant Stock such that, without the payment of any funds, the
Holder shall surrender this Warrant in exchange for the number of shares of Warrant Stock equal to “X” (as defined below), computed
using the following formula:
Y * (A-B)
X = _______________
A
Where
X = the number of shares of Warrant Stock to be issued to Holder
Y = the number of shares of Warrant Stock to be converted under this Warrant
A = the Fair Market Value of one share of Warrant Stock
B = the Exchange Price (as adjusted to the date of such calculations)
* = multiplied by
(c) For purposes of this Warrant, the “Fair Market Value” of one share of Warrant Stock shall be (i) if the Company’s
Common Stock is becomes listed on a national stock exchange, the highest sale price reported on such exchange over the 90-day period
prior to the date Holder delivers its Election to the Company, or (ii) if the Common Stock is traded over-the-counter, the highest average
of the bid and ask price for Common Stock over the 90-day period prior to the date Holder delivers its Election to the Company. If another
class or series of Company securities is listed or traded as aforesaid, the Fair Market Value shall be adjusted based on the ratio that the
Warrant Stock converts into such other class or series or such other class or series converts into Warrant Stock, as appropriate. If the
Common Stock is not traded as contemplated in clauses (i) or (ii), above, the Fair Market Value of the Company’s Warrant Stock shall be
the price per share of Warrant Stock which the Company could obtain from a willing buyer of Warrant Stock sold by the Company from its
authorized but unissued shares, initially as the Board of Directors of the Company (“Board”) shall determine in its reasonable good faith
judgment, but in no event less than the price per share at which Common Stock (or options for Common Stock) are then issuable to
Company employees based on a valuation compliant with Section 409A of the United States Internal Revenue Code; provided, however, if
Holder disagrees the Fair Market Value of Warrant Stock as determined by the Board, the parties shall jointly engage a valuation expert to
value the Warrant Stock based on a valuation of the Company as a going concern using standard valuation methodologies for the Warrant
Stock. If the Warrant is to be converted in connection with an Acquisition, the Fair Market Value of a share of Warrant Stock shall be
based on the enterprise value specified or implied in such Acquisition and shall be the greater of (A) the value attributable to the Warrant
Stock and (B) the value attributable to the Company securities into which the Warrant Stock is (or may be) convertible (but subject to
Holder’s conversion directly into such other Company securities).
2
(d) Upon surrender of this Warrant, and the duly completed and executed Election, and payment of the Exchange Price
(if an Exercise) or conversion of this Warrant through Exchange, the Company shall promptly issue and deliver to the Holder or such other
person as the Holder may designate in writing a certificate or certificates for the number of shares of Warrant Stock issuable pursuant to
the terms of this Warrant upon conversion. Such certificate or certificates shall be deemed to have been issued and any person so
designated to be named therein shall be deemed to have become a holder of record of such Warrant Stock as of the date of the surrender of
this Warrant, and the duly completed and executed Election, and payment of the Exchange Price in the case of an Exercise or conversion
of this Warrant through Exchange; provided, that if the date of surrender of this Warrant and payment of the Exchange Price is not a
business day, the certificates for the Warrant Stock shall be deemed to have been issued as of the next business day (whether before or
after the Expiration Date). If this Warrant is converted in part, a new warrant of the same tenor and for the number of shares of Warrant
Stock not converted shall be executed by the Company and delivered to Holder.
1 . 4 Fractional Interests. The Company shall not be required to issue fractions of shares of Warrant Stock upon the
conversion of this Warrant. If any fraction of a share of Warrant Stock would be issuable upon the exchange of this Warrant (or any portion
thereof), the Company shall purchase such fraction for an amount in cash equal to the Fair Market Value of the Warrant Stock.
1 . 5 Automatic Put or Exchange on Expiration Date. In the event that, by the Expiration Date, this Warrant has not been
fully converted or put to the Company under Section 1.7, then this Warrant shall be deemed put to the Company under Section 1.7 and the
Company shall promptly pay the Exchange Put Price; provided, however, if an Exchange at such time under Section 1.3 would yield a
greater value to Holder than exercise of its rights under Section 1.7, then this Warrant shall automatically be deemed on and as of such date
to be Exchanged pursuant to Section 1.3 as to all Warrant Stock (or such other securities) for which it shall not previously have been
converted, and the Company shall promptly deliver a certificate representing the Warrant Stock (or such other securities) issued upon such
conversion to the Holder.
3
1.6 Treatment of Warrant Upon Acquisition of Company.
(a) “Acquisition”. For the purpose of this Warrant, “Acquisition” means any sale or other disposition of all or
substantially all of the assets of the Company in whatever form, or any reorganization, consolidation, or merger of the Company (whether
in a single transaction or multiple related transactions) where the holders of the Company’s securities before the transaction beneficially
own less than 50% of the outstanding voting securities of the surviving entity after the transaction(s).
(b) Treatment of Warrant at Acquisition . Upon the closing of any Acquisition, at Holder’s option: (i) if the surviving
entity (if applicable in such Acquisition) is willing assume the obligations of the Company under this Warrant, then if Holder so elects this
Warrant shall be convertible into the same securities as would be payable for the Warrant Stock issuable upon conversion of the
unconverted portion of this Warrant as if such Warrant Stock were outstanding on the record date for the Acquisition (and the Warrant
Price and/or number of shares of Warrant Stock shall be adjusted accordingly); or (ii) Holder may exercise its rights under Section 1.7 and
put the Warrant to the Company (or the surviving entity as a condition to the Acquisition) for cash; or (iii) the Company or other surviving
entity in such Acquisition shall, upon initial closing of such Acquisition purchase this Warrant at its “Fair Value” (the “Purchase Price”).
For purposes hereof, “Fair Value” means that value determined by the parties using a Black-Scholes Option-Pricing Model (the “ Black-
Scholes Calculation”) with the following assumptions: (A) a risk-free interest rate equal to the risk-free interest rate at the time of the
closing of the Acquisition (or as close thereto as practicable), (B) a contractual life of the Warrant equal to the remaining term of this
Warrant as of the date of the announcement of the Acquisition, (C) an annual dividend yield equal to dividends declared on the underlying
Warrant Stock (including securities into which the Warrant Stock may be convertible) during the term of this Warrant (calculated on an
annual basis), and (D) a volatility factor of the expected market price of the Company’s Common Stock comprised of: (1) if the Company
is publicly traded on a national securities exchange, its volatility over the one year period ending on the day prior to the announcement of
the Acquisition, (2) if the Common Stock is traded over-the-counter, its volatility over the one year period ending on the day prior to the
announcement of the Acquisition, or (3) if the Company is a non-public company, the volatility, over the one year period prior to the
Acquisition, of an average of publicly-traded companies in the same or similar industry to the Company with such companies having
similar revenues. The Purchase Price determined in accordance with the above shall be paid upon the initial closing of the Acquisition and
shall not be subject to any post-Acquisition closing contingencies or adjustments; provided, however, the parties may take such post-
Acquisition closing contingencies or adjustments into account in determining the Purchase Price, and if the parties take any post-
Acquisition closing contingencies or adjustments into account, then upon the partial or complete removal of those post-Acquisition closing
contingencies or adjustments, a new Black-Scholes Calculation would be made using all of the same inputs except for the value of the
Company’s Common Stock (as determined under subclause (D)), and any increase in Fair Value (and, correspondingly, Purchase Price),
including, without limitation, as a result of any earn-out or escrowed consideration, would be paid in full to Holder immediately after those
post-Acquisition closing contingencies or adjustments can be determined or achieved.
4
1 . 7 Immediately Exchangeable and Conditionally Exchangeable Warrant Stock. Notwithstanding the Issue Date of this
Warrant or any provision in this Warrant to the contrary, this Warrant is immediately convertible into up to 12,480 shares of Warrant Stock
and, in the event the Company borrows under Tranche 3 of the Loan Agreement, shall (as from the date of such borrowing) be convertible
into up to an additional 1,920 shares of Warrant Stock (the “Tranche 3 Warrant Stock”).
1 . 8 Warrant Put. Notwithstanding anything to the contrary set forth in this Warrant, in the event of (i) any Acquisition or
other change in control of the Company, (ii) any initial public offering or other listing of Company securities, (iii) any liquidation or the
Company or event treated as a liquidation under the Articles of Incorporation of the Company, and (iv) upon expiry of this Warrant,
Holder shall have the right (but not the obligation) to exchange this Warrant for the cash sum of $12,000 (the “ Exchange Put Price”);
provided, however, if Tranche 3 of the Loan Agreement is not drawn by the Company in whole or in part, the Exchange Put Price shall be
reduced by $1,584 to $10,416. Holder shall exercise such right by written notice as provided in this Warrant and, upon receipt by the
Company of such notice, the Expiration Date of this Warrant shall be deemed extended until such time as the Company has paid the
Exchange Put Price to Holder. The Company shall promptly (and in no event later than (five) 5 business days of Holder’s notice to the
Company) pay the Exchange Put Price to Holder.
1 . 9 Adjustment in Number of Shares. Holder’s right to convert this Warrant with respect to 2,400 Shares of Warrant Stock
may be terminated if the Company earns at least (i) $18,000,000 in Revenues and (ii) $1,000,000 in Net Income, in each case for its fiscal
year ending March 31, 2015. Without duplication for the foregoing reduction (i.e., the maximum reduction in Number of Shares under this
Section 1.9 is 2,400 shares), if the Tranche 3 Warrant Stock does not become convertible under Section 1.7 (i.e., the Company does not
borrower Tranche 3), Holder’s right to convert this Warrant for 1,800 Shares of Warrant Stock may be terminated if the Company achieves
the same foregoing performance thresholds. For purposes of this Section, “Revenues” means revenues required to be recognized as such
under GAAP, and “Net Income” means, as calculated on a consolidated basis for the Company and its Subsidiaries for any period as at
any date of determination, the net profit (or loss), after provision for taxes, of Borrower and its Subsidiaries for such period taken as a
single accounting period. If the Company should consummate an acquisition of the assets or stock of another Person after the Issue Date,
the parties shall equitably adjust the foregoing Revenues and Net Income thresholds to preserve the intention of the parties in challenging
the Company to achieve its projections for Revenues and Net Income.
5
Section 2. Exchange and Transfer of Warrant.
(a) This Warrant may be transferred, in whole or in part, without restriction, subject to (i) Holder’s compliance with
applicable securities laws (including, without limitation, the delivery of investment representation letters and legal opinions in legally
sufficient and customary form), and (ii) the transferee holder of the new Warrant assuming in writing the obligations of the Holder and
making the representations and warranties set forth in this Warrant. Notwithstanding and without the necessity of delivering an opinion of
counsel, Holder may at any time transfer this Warrant in whole or in part to any affiliate. By its acceptance of this Warrant, each such
affiliate transferee will be deemed to have made to the Company each of the representations and warranties set forth in Section 7 hereof
and agrees to be bound by all of the terms and conditions of this Warrant as if the original Holder hereof. A transfer may be registered with
the Company by submission to it of this Warrant, together with the Assignment Form attached hereto as Exhibit B duly completed and
executed. After the Company’s receipt of this Warrant and the Assignment Form so completed and executed, the Company will issue and
deliver to the transferee a new warrant (representing the portion of this Warrant so transferred) at the same Exchange Price per share and
otherwise having the same terms and provisions as this Warrant, which the Company will register in the new holder’s name. In the event
of a partial transfer of this Warrant, the Company shall concurrently issue and deliver to the transferring holder a new warrant that entitles
the transferring holder to purchase the balance of this Warrant not so transferred and that otherwise is upon the same terms and conditions
as this Warrant. Upon the due delivery of this Warrant for transfer, the transferee holder shall be deemed for all purposes to have become
the holder of the new warrant issued for the portion of this Warrant so transferred, effective immediately prior to the close of business on
the date of such delivery, irrespective of the date of actual delivery of the new warrant representing the portion of this Warrant so
transferred. Notwithstanding any contrary provision herein, at all times prior to the IPO, Holder may not, without the Company’s prior
written consent, transfer this Warrant or any portion hereof, or any shares issued upon any exercise hereof to any person or entity who
directly competes with the Company, except in connection with an Acquisition of the Company by such a direct competitor.
(b) In the event of the loss, theft or destruction of this Warrant, the Company shall execute and deliver an identical
new warrant to the Holder in substitution therefor upon the Company’s receipt of (i) evidence reasonably satisfactory to the Company of
such event and (ii) if requested by the Company, an indemnity agreement reasonably satisfactory in form and substance to the Company.
In the event of the mutilation of or other damage to the Warrant, the Company shall execute and deliver an identical new warrant to the
Holder in substitution therefor upon the Company’s receipt of the mutilated or damaged warrant.
(c) The Company shall pay all reasonable costs and expenses incurred in connection with any conversion (by Exercise
or Exchange), transfer or replacement of this Warrant, including, without limitation, the costs of preparation, execution and delivery of a
new warrant and of share certificates representing all Warrant Stock.
Section 3. Certain Covenants.
(a) The Company shall at all times reserve for issuance and keep available out of its authorized and unissued Common
Stock, solely for the purpose of providing for the exchange of this Warrant, such number of shares of Common Stock as shall from time to
time be sufficient therefor.
6
(b) The Company will not, by amendment or restatement of its Certificate of Incorporation or Bylaws or through
reorganization, consolidation, merger, amalgamation, sale of assets or otherwise, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant. Without limiting the foregoing, the Company will not increase the par value of any Warrant Stock
receivable upon the exchange of this Warrant above the amount payable therefor upon such exchange.
(c) So long as Holder holds this Warrant, the Company shall deliver to Holder such reports as it provides to its
common stockholders generally, as and when delivered to such stockholders. Notwithstanding the foregoing, the Company shall provide
Holder quarterly and annual financial statements upon request, if such statements are not publicly available. The parties shall not treat the
Warrant or the Warrant Stock as being granted or issued as property transferred in connection with the performance of services or
otherwise as compensation for services rendered.
Section 4.
Adjustments to Exchange Price and Number of Shares of Warrant Stock.
4 . 1 Adjustments. The Exchange Price shall be subject to adjustment from time to time in accordance with this Section 4.
Upon each adjustment of the Exchange Price pursuant to this Section 4, the Holder shall thereafter be entitled to acquire upon conversion,
at the Exchange Price resulting from such adjustment, the number of shares of Warrant Stock obtainable by multiplying the Exchange
Price in effect immediately prior to such adjustment by the number of shares of Warrant Stock acquirable immediately prior to such
adjustment and dividing the product thereof by the new Exchange Price resulting from such adjustment.
4.2 Subdivisions, Combinations and Stock Dividends. If the Company shall at any time subdivide by split-up or otherwise,
its outstanding Common Stock into a greater number of shares, or issue additional Common Stock as a dividend or otherwise with respect
to any Common Stock, the Exchange Price in effect immediately prior to such subdivision or share dividend shall be proportionately
reduced and the number of shares acquirable upon Exercise or Exchange hereunder shall be proportionately increased. Conversely, in case
the outstanding Common Stock of the Company shall be combined into a smaller number of shares, the Exchange Price in effect
immediately prior to such combination shall be proportionately increased and the number of shares acquirable upon Exercise or Exchange
hereunder shall be proportionately reduced.
4 . 3 Reclassification, Exchange, Substitutions, Etc. Upon any reclassification, exchange, substitution, or other event that
results in a change of the number and/or class of the securities issuable upon conversion of this Warrant, Holder shall be entitled to receive
and the Company shall promptly issue an amended warrant for the number and kind of securities and property that Holder would have
received for the Warrant Stock if this Warrant had been converted immediately before such reclassification, exchange, substitution, or
other event. The amendment to this Warrant shall provide for adjustments (as determined in good faith by the Board) which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this Section 4.3, without limitation, adjustments to the Warrant
Price and to the number of securities or property issuable upon conversion of the new Warrant. The provisions of this Section 4.3 shall
similarly apply to successive reclassifications, exchanges, substitutions, or other similar events.
7
4.4. Notices of Record Date, Etc . In the event that the Company shall:
(1) declare any dividend upon its Common Stock, whether payable in cash, property, stock or other securities and whether or
not a regular cash dividend, or
(2) offer for sale to (but not necessarily exclusively to) its existing securityholders any additional shares of any class or series
of the Company’s stock or securities exchangeable for or convertible into such stock in any transaction that would give rise (regardless of
waivers thereof) to pre-emptive rights of any class or series of stockholders, or
(3) effect or approve (by stockholder vote or otherwise) any reclassification, exchange, substitution or recapitalization of the
capital stock of the Company, including any subdivision or combination of its outstanding capital stock, or consolidation or merger of the
Company with, or sale of all or substantially all of its assets to, another corporation, or to liquidate, dissolve or wind up (including an
assignment for the benefit of creditors), or
(4) offer holders of registration rights the opportunity to participate in any public offering of the Company’s securities,
then, in connection with such event, the Company shall give to Holder:
(i) at least ten (10) days prior written notice of the date on which the books of the Company shall close or a record shall be taken for
such a dividend or offer in respect of the matters referred to in (1) or (2) above;
(ii) in the case of the matters referred to in (3) above, at least ten (10) days prior written notice of the date when the same shall take
place; and
(iii) in the case of the matter referred to in (4) above, the same notice as is given or required to be given to the holders of such
registration rights.
Such notice in accordance with the foregoing clause (1) shall also specify, in the case of any such dividend, the date on which the holders
of capital stock shall be entitled thereto and the terms of such dividend, and such notice in accordance with clause (2) shall also specify the
date on which the holders of capital stock shall be entitled to exchange their capital stock for securities or other property deliverable upon
such reorganization, reclassification, exchange, substitution, consolidation, merger or sale, as the case may be, and the terms of such
exchange. Each such written notice shall be given by first class mail, postage prepaid, addressed to the holder of this Warrant at the
address of Holder.
8
4 . 5 Adjustment by Board. If any event occurs as to which, in the opinion of the Board, the provisions of this Section 4 are
not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder in accordance with the essential intent and
principles of such provisions, then the Board shall make an adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights, but in no event shall any adjustment have the effect of increasing the Exchange
Price as otherwise determined pursuant to any of the provisions of this Section 4, except in the case of a combination of shares of a type
contemplated in Section 4.2 and then in no event to an amount larger than the Exchange Price as adjusted pursuant to Section 4.2.
4.6 Officers’ Statement as to Adjustments. Whenever the Exchange Price and/or number of shares of Warrant Stock subject
to the Warrant is required to be adjusted as provided in this Section 4, the Company shall forthwith file at its principal office with a copy to
the Holder notice parties set forth in Section 9 hereof a statement, signed by the Chief Executive Officer or Chief Financial Officer of the
Company, showing in reasonable detail the facts requiring such adjustment, the Exchange Price and number of issuable shares that will be
effective after such adjustment; provided, however, such statement shall not be required to the extent the information otherwise required
by this Section 4.7 is available through the Company’s current reports filed with the Securities and Exchange Commission.
4.7 Issue of Securities other than Common Stock. In the event that at any time, as a result of any adjustment made pursuant
to this Section 4, Holder thereafter shall become entitled to receive any securities of the Company, other than Common Stock, the number
of such other shares so receivable upon Exercise or Exchange of this Warrant shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section 4.
Section 5. Rights and Obligations of the Warrant Holder.
Except as otherwise specified in this Warrant, this Warrant shall not entitle the Holder to any rights of a holder of Common
Stock in the Company until such time as this Warrant is exchanged or exercised.
Section 6. Representations, Warranties and Covenants of the Company . The Company represents and warrants to, and
covenants with, Holder that:
6 . 1 Corporate Power; Authorization. The Company has all requisite corporate power and has taken all requisite corporate
action to execute and deliver this Warrant, to sell and issue the Warrant and Warrant Stock and to carry out and perform all of its
obligations hereunder. This Warrant has been duly authorized, executed and delivered on behalf of the Company by the person executing
this Warrant and constitutes the valid and binding agreement of the Company, enforceable in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights
generally and (ii) as limited by equitable principles generally.
9
6.2 Validity of Securities. The issuance and delivery of the Warrant is not subject to preemptive or any similar rights of the
stockholders of the Company (which have not been duly waived) or any liens or encumbrances except for restrictions on transfer provided
for herein or under applicable federal and state securities laws; and when the Warrant Stock is issued upon conversion by Exercise or
Exchange in accordance with the terms hereof, and this Warrant is converted into Warrant Stock, such securities will be, at each such
issuance, validly issued, fully paid and nonassessable, in compliance with all applicable securities laws and free of any liens or
encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws.
6 . 3 Capitalization. The authorized capital of the Company consists of 40,000,000 common shares, of which 5,181,247 are
issued and outstanding, 1,000,000 Preferred Shares, no par value per share, of which 18,533.51 are issued and outstanding, of which (i)
250,000 are designated as Series A Preferred Shares and none are issued and outstanding, (ii) 10,000 are designated as Series B Preferred
Shares and 9,997 are issued and outstanding, (iii) 3,500 are designated as Series C Preferred Shares and 3,424.65 are issued and
outstanding (iv) 6,000 are designated as Series D Preferred Shares and 5,111.86 are issued and outstanding. Each share of preferred stock
can convert into 100 shares of common. Common stock warrants totaling 1,017,405 have been granted in association with the Preferred
Share purchases. As of the date hereof, the Company has reserved a total of 2,250,000 shares of its Common Stock for issuance under its
2005 Plan, of which 1,397,250 shares (including 121,500 shares of restricted stock) are reserved for issuance upon exercise of outstanding
options. Under the old 2000 Plan 190,000 options are still outstanding, but no additional shares can be granted under the 2000 Plan. The
Company has also issued 285,000 common stock options outside of the 2005 and 2000 Plans that are outstanding. A true, correct and
current copy of the Company’s current Restated Articles of Incorporation is appended as Exhibit C hereto. Except as specified in this
Agreement, there are no other options, warrants, conversion privileges or other contractual rights presently outstanding to purchase or
otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities. Exhibit D hereto sets forth a
capitalization table of the Company which is true, correct accurate and complete as of the date hereof.
6.4 No Conflict. The execution and delivery of this Warrant do not, and the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a
right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate
of Incorporation or Bylaws of the Company or any mortgage, indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets, in
each case, the effect of which would have a material adverse effect on the Company or materially impair or restrict its power to perform its
obligations as contemplated hereby.
10
6 . 5 Governmental and other Consents. No consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any governmental authority or other person or entity is required on the part of the Company in
connection with the issuance, sale and delivery of the Warrant and the Warrant Stock, except such filings pursuant to the United States
Securities Act of 1933, as amended (the “ Securities Act”) and applicable state securities laws, which have been made or will be made in a
timely manner. All stockholder consents required in connection with issuance of the Warrant and Warrant Stock have either been obtained
by Company or no such consents are required.
6 . 6 Exempt from Registration. Assuming the accuracy of the representations and warranties of Holder in Section 7 hereof,
the offer, sale and issuance of the Warrant and the Warrant Stock will be exempt from the registration requirements of the Securities Act
pursuant to 506 of Regulation D under the Securities Act and from the registration and qualification requirements of applicable state
securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will
offer to sell all or any part of such securities to any person or persons so as to bring the offer, sale and issuance of the Warrant or the
Warrant Stock by the Company within the registration provisions of the Securities Act.
6.7 Delivery of Information; Accuracy. The Company acknowledges its delivery of certain Representations and Warranties
dated as of the date hereof (the “Representations Letter”) to Holder, which Representations and Warranties form the basis for Holder
purchasing the Warrant. The information contained therein and in all documents, instruments and other information delivered to Holder in
connection therewith are true, correct, accurate and complete in all material respects as of the Issue Date.
6.11 Legends. The Company shall remove any restrictive securities legends on Warrant Stock resulting from conversion of
this Warrant as soon as permitted by applicable law.
Section 7. Representations and Warranties of Holder. Holder hereby represents and warrants to the Company as of the Closing
Date as follows:
7.1 Investment Experience. Holder is an “accredited investor” within the meaning of Rule 501 under the Securities Act, and
was not organized for the specific purpose of acquiring the Securities. Holder is aware of the Company’s business affairs and financial
condition and has received or has had full access to all the information it considers necessary or appropriate to make an informed
investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to
ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying
securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access. Holder has such
business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the
Securities.
11
7 . 2 Investment Intent. Holder is purchasing the Warrant for investment for its own account only and not with a view to, or
for resale in connection with, any “distribution” thereof within the meaning of the Securities Act. Holder understands that the Warrant has
not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions
therefrom, which exemptions may depend upon, among other things, the bona fide nature of Holder's investment intent as expressed
herein.
7.3 Authorization. Holder has all requisite power and has taken all requisite action required of it to carry out and perform all
of its obligations hereunder. The execution and delivery of this Warrant has been duly authorized, executed and delivered on behalf of
Holder and constitutes the valid and binding agreement of Holder, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization or similar laws relating to or affecting the enforcement of creditors' rights generally and
(ii) as limited by equitable principles generally. The consummation of the transactions contemplated herein and the fulfillment of the
terms herein will not result in a breach of any of the terms or provisions of Holder's constitutional documents or instruments.
7 . 4 The Act. Holder understands that this Warrant and the Warrant Stock issuable upon exercise hereof have not been
registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona
fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Warrant Stock issued upon
any exercise hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities
laws, or unless exemption from such registration and qualification are otherwise available. Holder is aware of the provisions of Rule 144
promulgated under the Act.
7.5 No Voting Rights. Holder, as a Holder of this Warrant, will not have any voting rights until the conversion in whole or
in part of this Warrant.
Section 8. Restricted Stock Legend.
This Warrant and the Warrant Stock have not been registered under any securities laws. Accordingly, any share certificates issued
pursuant to the conversion of this Warrant shall (until receipt of an opinion of counsel in customary form that such legend is no longer
necessary) bear the following legend:
THIS WARRANT AND THE WARRANT STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”), AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE OFFER, SALE, PLEDGE,
TRANSFER OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN CUSTOMARY FORM THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT.
12
Section 9. Notices.
Any notice or other communication required or permitted to be given here shall be in writing and shall be effective (a) upon hand
delivery or delivery by e-mail or facsimile at the address or number designated below (if delivered on a business day during normal
business hours where such notice is to be received) or the first business day following such delivery (if delivered other than on a business
day during normal business hours where such notice is to be received), or (b) on the third business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communication shall be:
if to Holder, at
Partners for Growth IV, L.P.
150 Pacific Avenue
San Francisco, California 94111
Attention: Chief Financial Officer
Fax: (415) 781-0510
Email: notices@pfgrowth.com
with a copy (not constituting notice) to
Greenspan Law Office
Attn: Benjamin Greenspan, Esq.
620 Laguna Road
Mill Valley, CA 94941
Fax: (415) 738-5371
Email: ben@greenspan-law.com
with the original of this Warrant and any replacement, restatement or reissue of this Warrant to be delivered to:
Robert W. Baird & Co., Inc.
555 California Street, Suite 4900
San Francisco, CA 94104
ATTN: John Fitzgibbons
Phone # 415-627-3225
Email: JFitzgibbons@rwbaird.com
13
or
if to the Company, at
Giga-tronics Incorporated
4650 Norris Canyon Road
San Ramon CA, 94583
Title: CFO
Name: Steve Lance
Email: slance@gigatronics.com
Fax: 925-328-4789
with a copy (not constituting notice) to:
Bingham McCutchen LLP
Three Embarcadero Center
San Francisco, CA 94111-4067
Fax: 415-262-9227
Attn: Thomas Reddy
Email: Thomas.reddy@bingham.com
Each party hereto may from time to time change its address for notices under this Section 9 by giving at least 10 calendar days’ notice of
such changes address to the other party hereto.
Section 10. Amendments and Waivers.
This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by
the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant may only be amended by an
instrument in writing signed by both parties.
Section 11. Applicable Law; Severability.
This Warrant shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. If any one or
more of the provisions contained in this Warrant, or any application of any provision thereof, shall be invalid, illegal, or unenforceable in
any respect, the validity, legality and enforceability of the remaining provisions contained herein and all other applications of any
provision thereof shall not in any way be affected or impaired thereby.
14
Section 12. Construction; Headings.
The terms “Exercise” and “Exchange” may be used interchangeably from time to time in this Warrant, the only substantive
difference being that the exercise of rights under this Warrant by Exercise will require payment of cash consideration per share equal to the
Exchange Price. The headings used in this Warrant are for the convenience of the parties only and shall not be used in construing the
provisions hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
IN WITNESS WHEREOF, the Company has caused this Amended and Restated Warrant to be duly executed on the day and year
first above written.
COMPANY:
ACKNOWLEDGED AND AGREED:
Giga-tronics Incorporated
HOLDER:
By: ____________________________
Name: __________________________
Title: ___________________________
By: ____________________________
Name: __________________________
Title: ___________________________
Partners for Growth IV, L.P.
By: _______________________
___________________, Manager of
Partners for Growth IV, LLC,
Its General Partner
Warrant (A&R) Signature Page
To:
Exhibit A
ELECTION TO EXCHANGE OR EXERCISE
1. The undersigned hereby exercises its right to Exchange its Warrant for _________________ fully paid, validly issued and
nonassessable shares of Warrant Stock in accordance with the terms thereof.
1. The undersigned hereby elects to Exercise the attached Warrant for fully paid, validly issued and nonassessable shares of Warrant
Stock by payment of $__________ as specified in the attached Warrant. This right is exercised with respect to ___________ of shares.
[Strike the paragraph above that does not apply.]
The undersigned requests that certificates for such shares be issued in the name of, and delivered to:
______________________
______________________
______________________
2. By its execution below and for the benefit of the Company, the undersigned hereby restates each of the representations and
warranties in Section 7 of the Warrant as of the date hereof.
Date: _____________________
[Holder]
By
Name:
Title:
Exhibit B
ASSIGNMENT FORM
To:
The undersigned hereby assigns and transfers this Warrant to
__________________________________________________
(Insert assignee’s social security or tax identification number)
____________________________________________________________________
(Print or type assignee’s name, address and postal code)
____________________________________________________________________
____________________________________________________________________
and irrevocably appoints _______________________________________ to transfer this Warrant on the books of the Company.
Date: __________________
Partners for Growth IV, L.P.
By __________________________
Name: _______________, Manager of
Partners for Growth IV, LLC, Its General Partner
Exhibit C
Articles of Incorporation
Exhibit D
Capitalization Table
Giga-Tronics
Fully Diluted Shares
Common - Issued and Outstanding
Common - Restricted Shares
Common Stock Options Outstanding - Average price $1.53
Common Warrants - PFG at $1.42
Common Warrants - Alara at $1.43
Alara Series B Preferred - As converted, liquidation preference of $2.30
Alara Series C Preferred - As converted, liquidation preference of $1.46
Alara Series D Preferred - As converted, liquidation preference of $1.43
5,059,747
121,500
1,738,750
180,000
1,017,405
999,700
342,465
511,186
51%
1%
17%
2%
10%
10%
3%
5%
Fully Diluted
9,970,753
100%
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES
Name
Microsource, Inc.
Jurisdiction of incorporation
California
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (Nos. 333-45476, 333-34719, 333-48889, 333-39403, 333-69688
and 333-135578) on Form S-8 of Giga-tronics Incorporated of our report dated June 24, 2014 relating to the consolidated financial
statements, appearing in this Annual Report on Form 10-K.
San Francisco, California
June 24, 2014
/s/ Crowe Horwath LLP
EXHIBIT 31.1
CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Regazzi, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Giga-tronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
(a)
(b)
Date: 06/24/2014
/s/ JOHN R. REGAZZI
John R. Regazzi
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven D. Lance, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Giga-tronics, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
(a)
(b)
Date: 06/24/2014
/s/ STEVEN D. LANCE
Steven D. Lance
Vice President of Finance/
Chief Financial Officer & Secretary
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Giga-tronics Incorporated (the "Company") on Form 10-K for the period ending March 29, 2014,
as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Regazzi, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
(1)
(2)
Date: 06/24/2014
/s/ JOHN R. REGAZZI
John R. Regazzi
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Giga-tronics Incorporated (the "Company") on Form 10-K for the period ending March 29, 2014,
as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven D. Lance, Vice President of Finance,
Chief Financial Officer and Secretary, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
(1)
(2)
Date: 06/24/2014
/s/ STEVEN D. LANCE
Steven D. Lance
Vice President of Finance,
Chief Financial Officer & Secretary