Exhibit 10.1
THIRD BUSINESS FINANCING MODIFICATION AGREEMENT
This Third Business Financing Modification Agreement is entered into as ofJanuary 31, 2018, byand betweenSocket Mobile, Inc., aDelaware corporation (“Borrower”), and Western Alliance Bank, an Arizona corporation, successor in interest to Bridge Bank, National Association (“Lender”).
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among otherindebtedness which may be owing byBorrower to Lender, Borrower is indebted to Lender pursuantto, among other documents, aBusiness Financing Agreement, datedFebruary 27, 2014, byand betweenBorrower and Lender, as amended bythat certain Business Financing Modification Agreement, datedas ofFebruary 26, 2016,and that certain Business Financing Modification Agreement, datedas ofMarch 20, 2017 (asso amended, the “Business Financing Agreement”). Capitalized terms usedwithout definition hereinshall havethe meanings assigned to them in the Business Financing Agreement.
Hereinafter, all indebtedness owing byBorrower to Lender shall be referredto as the “Indebtedness” and the Business Financing Agreement and any and all other documentsexecuted byBorrower in favor ofLender shall be referredto as the “Existing Documents.”
2. | DESCRIPTION OF CHANGE IN TERMS. |
A. | Modifications to Business Financing Agreement: |
(i) Section 1.7 ofthe Business Financing Agreement is herebyamended in its entirety as follows:
1.7Recourse; Maturity. Advances and the otherObligations shall bewith full recourseagainst Borrower. On the Maturity Date, the Borrower will payall then outstandingAdvances and otherObligations (otherthan the Term Advance and all accrued but unpaidFinance Charges thereon which are due onthe Term Advance Maturity Date) to the Lender orsuch earlier dateas shall be herein provided.
(ii) Section 1.9 of the Business Financing Agreement is hereby amended in its entirety as follows:
1.9 | Reserved. |
(iii) New Sections 1.12and 1.13are herebyadded to the Business Financing Agreement immediately followingSection 1.11thereof as follows:
1.12 | Term Advance. |
(a) Subject to the terms and conditions ofthis Agreement, duringthe Term Advance Draw Period, uponwrittenrequest fromBorrower, Lender will make aterm loan ("Term Advance") to Borrower in an amount specified byBorrower in such written request but notto exceed $4,000,000,theproceeds ofwhich shall be usedsolelyfor repurchasing outstandingcapital stock ofBorrower;providedthat (i)all oftherepresentationsand warranties set forthin Section 3are true and correct onthedate of the Term Advance as though made at and as ofeach such date,and(ii) noDefault has occurredand is continuing,orwould result fromthe Term Advance.
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(b) Borrower shall paymonthly principal reduction payments onthe Term Advance, each in an amount equal to 1/45th ofthe original principalamount ofthe Term Advance. Each such paymentshall be dueand payable onthe first day ofeach month, commencing May 1, 2018.
(c) Borrower shall also payto Lender 25% ofthe Excess Cash Flow earned duringeach and every fiscal quarter duringthe fiscal yearending December 31, 2018,commencing with respectto the fiscal quarterending March 31, 2018.Each such payment ofExcess Cash Flow shall be dueconcurrent with Borrower’s delivery ofits monthly financialstatements forthe months ending March 31, 2018,June 30, 2018,September 30, 2018and December 31, 2018 pursuantto Section 4.8(b) butin noevent later than 30 daysafter the end ofeach fiscal quarter,and shall be based uponthe Excess Cash Flow forthe applicable fiscal quarterended onsuch dates.Lender shall apply such Excess Cash Flow toward principal payments owing onthe Term Advance in accordance with Section 1.12(b)in inverse order ofmaturity.
(d) On the Term Advance Maturity Date, Borrower shall payto Lender the entire unpaid principal balance ofthe Term Advance together with all accrued but unpaidFinance Charges thereon. Borrower may prepaythe Term Advance at any time in whole orin partwithout penalty or premium,except as otherwise providedin Section 2.2(i).All such principalamounts repaid or prepaidmay not be reborrowed.All prepaymentsshall beapplied toward scheduled principal reductions payments owing underSection1.12(b) in inverse order ofmaturity.
1.13Business Credit Card. Borrower may useavailability hereunder upto the Credit Card Limit forissuance byLender of businesscredit cards forBorrower. The entire Credit Card Limit will betreated as an Advance for purposes of determiningavailability underthe Credit Limit and shall decrease, on a dollar-for-dollar basis,the amount available for otherAdvances. All credit cards issued underthe Credit Card Limit shall besubject to additional terms set forthin applicable credit card agreements. Upon the Maturity Date, the amount owingto Lender onaccount ofcredit cards issued to Borrower shall besecured by unencumberedcash onterms acceptable to Lender if the term ofthis Agreement is notextended byLender.
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(iv) Clauses (a)and (b) ofSection 2.2 ofthe Business Financing Agreement are herebyamended in their entirety as follows:
(a) | Domestic Facility Fee. Borrower shall paythe Domestic Facility Fee to Lender promptly uponthe execution ofthe Second Amendment and each anniversary thereof thereafter. |
(b) | EXIM Facility Fee. Borrower shall paythe EXIM Facility Fee to Lender promptly uponthe execution ofthe Second Amendment and each anniversary thereof thereafter. |
(v) Clauses (d), (e)and (f) ofSection 2.2 ofthe Business Financing Agreement are herebyamended in their entirety as follows:
(d) | Fee in Lieu ofWarrant. Borrower shall paythe Fee in Lieu ofWarrant to Lender promptly uponthe execution ofthe Second Amendment. |
(e) | Cash Management, Business Credit Cards,andFX Forward Contract Fees. Borrower shall payto Lender feesin connection with the Cash Management Services, businesscredit cards, and the FX Forward Contracts as determinedin accordance with Lender’s standard feesand charges then in effect forsuch activity. |
(f) | Due Diligence Fee. Borrower shall paythe Due Diligence Fee to Lender promptly uponthe execution ofthe Second Amendment and each anniversary thereof thereafter. |
(vi) New clauses (g)and (h)are herebyadded to Section 2.2 ofthe Business Financing Agreement immediately followingclause (f)thereof as follows:
(g) | Term Advance Facility Fee. Borrower shall paythe Term Advance Facility Fee to Lender promptly uponthe execution ofthe Second Amendment. |
(h) | Term Advance Termination Fee. Inthe event the Term Advance is prepaidin full priorto January 31, 2020 by alender otherthan Lender, Borrower shall paythe Term Advance Termination Fee to Lender. |
(vii) Subsections 4.8(h)and (i) ofthe Business Financing Agreement are herebyamended in their entirety as follows:
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(h) | Within 10 daysafter the end ofeach calendar month, (i) a detailedaging ofBorrower’s domestic receivables byinvoice date,together with payableaging byinvoice date,and (ii) a detailedaging ofBorrower’s EXIM domestic receivables by due date,together with a payableaging by due date. |
(i) | Within10 daysafter the end ofeach calendar month, (i) distributorsell-through reports,in formand substance acceptable to Lender, |
(ii) a deferred revenue report, (iii)sales journal and cash receiptsjournal, and (iv)such othermatters as Lender may request.
(viii) Subsection 4.12(a) ofthe Business Financing Agreement is herebyamended to readas follows:
(a) | Asset Coverage Ratio notat any time less than the ratioindicated in the table below oppositethe applicable periodin which the test date occurs,to betested at the end ofeach month: |
Period: | Minimum Asset Coverage Ratio | ||
DateofSecond Amendment –June29, 2018 | 0.75 to 1.00 | ||
June 30, 2018 –September 29, 2018 | 1.00 to 1.00 | ||
September 30, 2018 –December 30, 2018 | 1.10 to 1.00 | ||
December31, 2018and thereafter | 1.25 to 1.00 |
(ix) New Subsections 4.12(b)and (c)are herebyadded to the Business Financing Agreement immediately followingsubsection 4.12(a)thereof as follows:
(b) | Fixed Charge Coverage Ratio notat any time less than 1.75to 1.00,to betested at the end ofeach fiscal quarter. |
(c) | Total Funded Debt to EBITDA Ratio notat any time greaterthan 1.75to 1.00,to betested at the end ofeach month. |
(x) New Sections 4.13, 4.14and 4.15are herebyadded to the Business Financing Agreement immediately followingSection 4.12thereof as follows:
4.14 Not make any investment inorto any Person, otherthan investments existing as ofthe date ofthe Second Amendment and specifically disclosed on aschedule to this Agreement.
4.15 Not payany dividends ormake any distributions or paymentwith respectto Borrower’s capital stock or redeem, retire or purchaseany ofBorrower’s capital stock.
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4.16 Not directly orindirectly enter into or permitto exist any material transaction with any Affiliate ofBorrower except fortransactions that are in the ordinarycourse ofBorrower’s business, upon fairand reasonableterms that are noless favorableto Borrower than would be obtainedin an arm’s length transaction with a non-affiliatedPerson.
(xi) The following definedterms in Section 12.1 ofthe Business Financing Agreement are herebyamended oradded as follows:
“Advance” means an advance made byLender to Borrower underthis Agreement, including the Term Advance.
“Advance Rate” means (i) upto 80%in the case ofDomestic Eligible Receivables, and (ii) upto 80%in the case ofEXIM Eligible Receivables, orin each case, such greater orlesser percentageas Lender may fromtime to time establish in its sole discretion upon noticeto Borrower.
“Capital Expenditures” means expenditures made in cash, or financedwith long term debt, byany Person forthe acquisition ofany fixedassets orimprovements, replacements,substitutions, oradditions thereto that have a usefullife ofmore than 1 year,including the direct orindirect acquisition ofsuch assets byway ofincreased product orservice charges, offsetitems, or otherwise,and the principal portion of paymentswith respectto Capital Lease Obligations, calculated in accordance with GAAP.
“Capital Lease” means any lease ofan asset by aPerson as lessee which would, in conformity with GAAP, be requiredto beaccounted foras an asset and corresponding liability onthe balancesheet ofthat Person.
“Capital Lease Obligations” of aPerson means the amount ofthe obligations ofsuch Person underall Capital Leases which would beshown as aliability on a balancesheet ofsuch Person preparedin accordance with GAAP.
“Cash Flow” means net profit beforetax plusinterest expense, depreciationexpense and amortization expense, minus distributions, plus non-cashstock-based expenses (tothe extent deducted from net profit),minus cash tax payments,and minus Non-Financed Capital Expenditures, calculated in accordance with GAAP.
“Credit Card Limit” means the lesserof (a)the credit limit stated in the applicable credit card agreements for businesscredit cards issued byLender forthe account ofBorrower, or (b) $150,000.
“Credit Limit” means the sum ofDomestic Credit Limit plusthe EXIM Credit Limit plusthe Credit Card Limit, which is intended to bethe maximum amount ofAdvances (including deemedAdvances underthe Credit Card Limit) at any time outstanding.
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“Domestic Facility Fee” means a feeequal to0.50% ofthe Domestic Credit Limit due uponthe date ofthe Second Amendment and each anniversary thereof so long as any Advances are outstanding oravailable hereunder.
“Domestic Overadvance” means at any time an amount equal to the greater of (a)the amount (ifany) bywhich the total amountofthe outstandingAdvances with respectto Domestic Eligible Receivables (including deemedAdvances with respectto the FX Sublimit and the Credit Card Limit exceeds the lesser ofthe Domestic Credit Limit orthe Domestic Borrowing Base, or (b)the amounts (ifany)bywhich the total amount ofthe outstanding deemedAdvances with respectto the FX Sublimit orthe Credit Card Limitexceeds the Subfacility Maximum.
“Due Diligence Fee” means a payment ofan annual feeequal to $900 due uponthe date ofthe Second Amendment and uponeach anniversary thereof so long as any Advance is outstanding oravailable hereunder.
“EBITDA” means netincome beforetax plusinterest expense, depreciationexpense and amortization expense, plus non-cashimpairment expense, plus non-cash stock compensation (tothe extent deducted from netincome),calculated in accordance with GAAP.
“Excess Cash Flow” means, with respectto the applicable fiscal quarter,Cash Flow forsuch fiscal quarterminus scheduled principal payments due onthe Term Advance pursuantto Section 1.12(b) duringsuch fiscal quarterminus the Finance Charge due forsuch fiscal quarter.
“Fee in Lieu ofWarrant” means a payment of a feeequal to $20,000, due uponthe date ofthe Second Amendment.
“Finance Charge” means an interest amount equal to the sum of (a)the Finance Charge Percentage ofthe ending dailyAccount Balance forthe relevant period, plus (b)the Finance Charge Percentage ofthe average principal balance ofthe Term Advance outstanding forthe relevant period.
“Finance Charge Percentage” means (a)with respectto Advances (otherthan the Term Advance, a rate per yearequal to the Prime Rate plus 0.75 percentage points plusan additional 5.00 percentage points duringany periodthat an Event ofDefault has occurredand is continuing, and (b)with respectto the Term Advance, a rate per yearequal to the Prime Rate plus 1.75 percentage points plusan additional 5.00 percentage points duringany periodthat an Event ofDefault has occurredand is continuing.
“Fixed Charge Coverage Ratio” means the ratio of (a)Cash Flow forthe fiscal quarterended onthe date of determination,to (b)all cash payments of principaland interest onBorrower’s debt duringsuch period,including the principaland interest portion ofall Capital Lease Obligations.
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“GAAP” means generallyaccepted accounting principlesin the United States ofAmerica, consistently applied, which are in effect as ofthe date ofthe Second Amendment Agreement. Ifany changes in accounting principles fromthose in effect onthe date ofthe Second Amendment are hereafter occasioned by promulgation of rules, regulations, pronouncements or opinions by orare otherwise required bythe Financial Accounting Standards Board orthe American Institute ofCertified Public Accountants (orsuccessors thereto oragencies with similar functions),and any ofsuch changes resultsin achange in the method ofcalculation of, oraffects the results ofsuch calculation of,any ofthe financialcovenants, standards orterms found herein,then the parties heretoagree to enter into and diligently pursue negotiationsin orderto amend such financialcovenants, standards orterms so as to equitably reflectsuch changes, with the desired resultthat the criteria forevaluating financialcondition and results of operations ofBorrower and its subsidiaries shall bethe same after such changes as if such changes had not beenmade.
“Maturity Date” means (i) forAdvances underthe Domestic Line ofCredit, January 31, 2020, (ii) forAdvances underthe EXIM Line ofCredit, January 31, 2020,and (iii) forthe Term Advance, the Term Advance Maturity Date, or,in each case, such earlier dateas Lender shall have declaredthe Obligations immediately dueand payable pursuantto Section 7.2.
“Non-Financed Capital Expenditures” means, forany period, (a)Capital Expenditures minus (b)the portion ofCapital Expenditures financed underCapital Leases or other debt (excludingAdvances).
“Prime Rate” means the greater of 4.25% per year orthe Prime Rate publishedin the Money Rates section ofthe Western EditionofThe Wall Street Journal, orsuchother rate ofinterest publiclyannouncedfromtime to time byLender as itsPrime Rate. Lender may priceloans to its customers at, above, or belowthe Prime Rate. Any change in the Prime Rate shall take effect at the opening of business onthedayspecified in the publicannouncementof achange in the Prime Rate.
“Second Amendment” means that certain Second Business Financing Modification Agreement, datedas ofJanuary 25, 2018, betweenthe Borrower and the Lender, amending this Agreement.
“Term Advance” is definedin Section 1.12.
“Term Advance Draw Period” means the periodcommencing uponthe effectiveness ofthe Second Amendment through and including the April 30, 2018.
“Term Advance Facility Fee” means a payment of a feeequal to $20,000, due uponthe date ofthe Second Amendment.
“Term Advance Maturity Date” means January 31, 2022, orsuch earlier dateas Lender shall have declaredthe Obligations immediately dueand payable pursuantto Section 7.2.
“Term Advance Termination Fee” means (a) $80,000if the Term Advance is prepaidin full on or beforeJanuary 31, 2019,and (b) $40,000if the Term Advance is prepaidin full on orafter February 1, 2019 but on or beforeJanuary 31, 2020.
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“Third Amendment” means that certain Third Business Financing Modification Agreement, datedasofJanuary 31, 2018, betweenthe Borrower and the Lender, amending this Agreement.
“Total Funded Debt to EBITDA Ratio” means, as ofthe date of determination,the ratio of (a)the sum ofthe Obligations, Subordinated Debt, and Borrower’s Capital Lease Obligations, to (b)EBITDA forthe trailing 12month periodended onthe date of determination.
(xii) The definition of “Cash Management Sublimit” set forth in Section 12.1 of the Business Financing Agreement is hereby deleted.
(xiii) Exhibit Aattached to the Business Financing Agreement is hereby replacedwithExhibit Aattached hereto.
3. CONSISTENT CHANGES. The Existing Documents are each herebyamended wherever necessaryto reflectthe changes describedabove.
4. PAYMENT OF FEES. Upon executionhereof,Borrower shall payLender the Domestic Facility Fee in the amount of $10,000,the EXIM Facility Fee in the amount of $5,000,the Term Advance Facility Fee in the amount of $20,000,the Fee in Lieu ofWarrant in the amount of $20,000,the EXIM Application Fee in the amount of $100,and the Due Diligence Fee in the amount of $900, plusall out-of-pocketexpenses.
5. NO DEFENSES OF BORROWER/GENERAL RELEASE. Borrower agrees that, as ofthis date,ithas no defenses against the obligationstopayany amounts underthe Indebtedness.Each ofBorrower and Guarantor (each, a“Releasing Party”) acknowledges that Lender would notenter into this Business Financing Modification Agreement without Releasing Party’s assurance that it has noclaims against Lender orany ofLender’sofficers, directors, employees oragents. Except fortheobligationsarising hereafter underthis Business Financing Modification Agreement, each Releasing Party releasesLender, and each ofLender’s and entity’s officers, directorsand employees fromany known or unknownclaims that Releasing Party now hasagainst Lender ofanynature,including any claims that Releasing Party, its successors, counsel, and advisors may in the future discoverthey would have now hadif they had known facts not now knownto them, whether foundedin contract, in tort or pursuantto any othertheoryofliability, including but notlimited to any claims arising out of or relatedto the Agreement orthe transactions contemplated thereby. Releasing Party waives the provisions ofCalifornia Civil Code section 1542,which states:
AGENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST INHIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IFKNOWN BY HIM OR HER, MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.
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The provisions,waivers and releasesset forthin this section are binding uponeach Releasing Party and its shareholders, agents, employees, assigns and successors in interest. The provisions,waivers and releases ofthis section shall inure to the benefit ofLender and its agents, employees, officers, directors,assigns and successors in interest. The provisions ofthis section shall survive paymentin full ofthe Obligations, full performance ofall the terms ofthis Business Financing Modification Agreement and the Agreement, and/or Lender’s actions to exercise any remedyavailable underthe Agreement or otherwise.
6. CONTINUING VALIDITY. Borrower understandsand agrees that in modifying the existing Indebtedness,Lender is relying uponBorrower’s representations,warranties, and agreements, as set forthin the Existing Documents. Except as expressly modified pursuantto this Business Financing Modification Agreement, the terms ofthe Existing Documents remain unchangedand in full forceand effect. Lender’s agreement to modifications to the existing Indebtedness pursuantto this Business Financing Modification Agreement in noway shall obligateLender to make any futuremodifications to the Indebtedness.Nothing in this Business Financing Modification Agreement shall constitute asatisfaction ofthe Indebtedness. Itis the intention ofLender and Borrower to retainas liable partiesall makers and endorsers ofExisting Documents, unlessthe partyis expressly released byLender in writing. No maker, endorser, or guarantorwill be released by virtue ofthis Business Financing Modification Agreement. The terms ofthis paragraphapply not onlyto this Business Financing Modification Agreement, butalso to any subsequent Business Financing modification agreements.
7. CONDITIONS.The effectiveness ofthis Business Financing Modification Agreement is conditioned upon payment ofthe feesand expenses set forthin Section 4above and the execution hereof byLender and Borrower.
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8. NOTICE OF FINAL AGREEMENT. BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT: (A)THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES, (B)THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND(C)THIS WRITTEN AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES.
BORROWER: | LENDER: |
SOCKET MOBILE, INC. | WESTERN ALLIANCE BANK, |
By/s/ David W. Dunlap |
By/s/ Lisa Chang |
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Exhibit A
Form ofCompliance Certificate
COMPLIANCE CERTIFICATE
TO: WESTERN ALLIANCE BANK, an Arizona corporation (the “Lender”)
FROM: SOCKET MOBILE, INC., a Delaware corporation (the “Borrower”)
The undersigned authorized officer of Borrower hereby certifies that in accordance with the terms and conditions of the Business Financing Agreement between Borrower and Lender (the “Agreement”), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under “Complies” column.
Reporting Covenant | Required | Complies | |||
Audited annual financial statements | 120 days after FYE | Yes | No | ||
Monthly financial statements | 30 days after month end | Yes | No | ||
Copies of management letters to or from Borrower’s auditors | Promptly upon sending or receipt | Yes | No | ||
Form 10-K Annual Report, Form 10-Q Quarterly Report and Form 8-K | concurrent with the date of filing with the Securities and Exchange Commission | Yes | No | ||
Annual financial projections | 30 days of FYE | Yes | No | ||
Compliance Certificate | 30 days after month end | Yes | No | ||
Domestic and EXIM Borrowing Base Certificates | 10 days after month end | Yes | No | ||
Domestic A/R and A/P agings by invoice date | 10 days after month end | Yes | No | ||
EXIM A/R and A/P agings by due date | 10 days after month end | Yes | No | ||
Sell through reports | 10 days after month end | Yes | No | ||
CPA prepared business tax returns | Within 5 days of filing | Yes | No | ||
Financial Covenant | Required | Actual | Complies | ||
Asset Coverage Ratio | Period: | Minimum Asset Coverage Ratio | ___ to 1.00 | Yes | No |
Date of Second Amendment - June 29, 2018
| 0.75 to 1.00 | ||||
June 30, 2018 - September 29, 2018
| 1.00 to 1.00 | ||||
September 30, 2018 - December 30, 2018
| 1.10 to 1.00 | ||||
December 31, 2018 and thereafter
| 1.25 to 1.00 | ||||
Fixed Charge Coverage Ratio | Not less than 1.75 to 1.00 | ___ to 1.00 | Yes | No | |
Total Funded Debt to EBITDA Ratio | Not greater than 1.75 to 1.00 | ___ to 1.00 | Yes | No | |
Deposits
| |||||
Deposits held at Bridge Bank: $______________________ | |||||
Deposits held outside of Bridge Bank: $________________ | |||||
Comments Regarding Exceptions: See Attached. | BANK USE ONLY | ||||
Received by: ________________________________________ | |||||
Sincerely, | AUTHORIZED SIGNER | ||||
Date: ______________________________________________ | |||||
___________________________________________ | Verified: ___________________________________________ | ||||
SIGNATURE | AUTHORIZED SIGNER | ||||
___________________________________________ | Date: ______________________________________________ | ||||
TITLE | |||||
Compliance Status | Yes | No | |||
___________________________________________ | |||||
DATE | |||||