Exhibit 10.3
 
WAIVER AND MODIFICATION TO LOAN AND SECURITY AGREEMENT

This Waiver and Modification to Loan and Security Agreement (“Modification”) is
executed on March __, 2014 but effective as of February 28, 2014 (the
“Modification Effective Date”), by and among Partners for Growth III, L.P., a
Delaware limited partnership corporation (“PFG”) with its principal place of
business at 150 Pacific Avenue, San Francisco, California 94111, and each of
Advanced Photonix, Inc., a Delaware corporation (“API”) and Picometrix, LLC, a
Delaware limited liability company (“Picometrix”), each with its principal place
of business at 2925 Boardwalk, Ann Arbor, MI 48104 (individually and
collectively, jointly and severally, “Borrower”).

RECITALS
 
A.           PFG and Borrower have entered into that certain Loan and Security
Agreement, dated as of February 8, 2013 (as the same may from time to time be
amended, modified, supplemented or restated, the “Loan Agreement”), pursuant to
which PFG has made available to Borrower, among other credit accommodations, a
term loan in the original principal amount of Two Million Five Hundred Thousand
Dollars ($2,500,000) (the “Loan”).
 
B.           PFG and Borrower entered into that certain Forbearance Agreement
dated as of February 10, 2014 (the “Forbearance”) to address a Borrower default
under Section 5 of the Schedule to the Loan Agreement for failing to comply with
the minimum EBITDA financial covenant for the month ending December 31, 2013
(the “December Event of Default”), and the Forbearance Period under the
Forbearance expired on the Modification Effective Date.
 
C.           Borrower is also in default under Section 5 of the Schedule to the
Loan Agreement for the reporting period ending January 31, 2014 for failing to
comply with the minimum EBITDA and required Liquidity Ratio financial covenants
(the “January Event of Default”).
 
D.           Borrower’s failure to comply with the minimum EBITDA financial
covenant for the fiscal months ending December 27, 2013 and January 31, 2014 and
minimum Liquidity Ratio financial covenant for the fiscal month ending January
31, 2014 under its (i) Loan and Security Agreement dated January 31, 2012 by and
among API, Picometrix and Advanced Photonix Canada, Inc. (“APC”) and Silicon
Valley Bank (“SVB”); and (ii) Loan and Security Agreement (Ex-IM Loan Facility)
dated January 31, 2012 by and among API, Picometrix, APC and SVB also resulted
in Borrower’s default under Section 6.1(f) of the Loan Agreement for the months
ended December 31, 2013 and January 31, 2014 (the “Cross-Defaults” and together
with the December Event of Default and the January Event of Default, the
“Existing Events of Default”) and Borrower has requested that PFG (i) modify the
EBITDA financial covenant thresholds so that Borrower may be in compliance on a
prospective basis and (ii) waive the Existing Events of Default.
 
E.           PFG is willing to reset the EBITDA and Liquidity Ratio financial
covenant thresholds and to waive the Existing Events of Default upon the terms
and conditions set forth herein;
 
 
 

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NOW THEREFORE, in consideration of the agreements and covenants contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:

1.           DESCRIPTION OF EXISTING INDEBTEDNESS:  Among other Obligations and
indebtedness which may be owing by Borrower to PFG, Borrower is indebted to PFG
pursuant to, among other documents, the Loan Agreement.  The Loan Agreement
provides for a term loan in the principal amount of $2,500,000, of which
$1,795,714 is outstanding on the date hereof.  Defined terms used but not
otherwise defined herein shall have the same meanings set forth in the Loan
Agreement.

2.           DESCRIPTION OF COLLATERAL. Repayment of Obligations is secured by
the Collateral, as described in the Loan Agreement and in the Intellectual
Property Security Agreement and Collateral Agreements and Notices of even date
with the Loan Agreement (the “IP Security Agreements”). Hereinafter, the
above-described Loan Agreement, IP Security Agreements, Cross Corporate
Continuing Guaranty and Security Agreement and Representations and Warranties,
together with all other documents securing repayment of the Indebtedness or
otherwise executed in connection with the Loan Agreement shall be referred to as
the "Existing Loan Documents".

3.           MODIFICATIONS TO LOAN AGREEMENT.

3.1           Minimum EBITDA. The Minimum EBITDA financial covenant set forth in
Section 5 of the Schedule to the Loan Agreement which read, prior to the
Modification Effective Date as follows:
 
“     Minimum EBITDA:
 
 Borrower shall maintain EBITDA measured monthly on a rolling (trailing)
three-month basis for the month ending the date set forth below and each of the
immediately prior two months ending on the last day of each such month, of not
less than the amounts set forth in the table below for the each of the monthly
periods specified with the date ranges below:

 
Month Ending
Min EBITDA
February 28, 2013 through fiscal month ending June 30, 2013
($750,000
July 31, 2013 through fiscal month ending October 31, 2013
($300,000)
November 30, 2013 through fiscal month ending February 28, 2014
$1.00
March 31, 2014 through the fiscal month ending April 30, 2014
$100,000
May 31, 2014 through the Maturity Date
To be agreed upon by Borrowers and Bank, based on Board approved plan, but no
rolling 3 month period to be set lower than $100,000

 
 
 

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“EBITDA” shall mean (a) Net Income, plus (b) Interest Expense, plus (c) to the
extent deducted in the calculation of Net Income, depreciation expense and
amortization expense, plus (d) non-cash stock compensation, plus (e) income tax
expense, plus (f) other non-cash items including intangible asset write-offs,
plus (g) non-cash warrant liability expenses, in each case to the extent such
items have been deducted from the calculation of Net Income or less non-cash
warrant liability income to the extent added to the calculation of Net Income.”
 
shall be amended to read as from the Modification Effective Date as follows:
 
     Minimum EBITDA:
 Borrower shall maintain EBITDA measured monthly on a rolling (trailing)
three-month basis for the month ending the date set forth below and each of the
immediately prior two months ending on the last day of each such month, of not
less than the amounts set forth in the table below for the each of the monthly
periods specified with the date ranges below:

 
Month Ending
Min EBITDA
February 28, 2014
($1,200,000)
March 31, 2014
($800,000)
April 30, 2014
($600,000)
May 31, 2014
$1.00
June 30, 2014 through the Maturity Date
 
To be agreed upon by Borrowers and PFG, based on Board approved plan, but no
rolling 3 month period to be set lower than levels set with the Senior Lender,
assuming the Senior Lender extends its line of credit beyond maturity date
specified in the Senior Loan Documents as at February 28, 2014.

 
“EBITDA” shall mean (a) Net Income, plus (b) Interest Expense, plus (c) to the
extent deducted in the calculation of Net Income, depreciation expense and
amortization expense, plus (d) non-cash stock compensation, plus (e) income tax
expense, plus (f) other non-cash items including intangible asset write-offs,
plus (g) non-cash warrant liability expenses, plus (h) the sum of Loan
Modification Fees (only) charged by PFG and Lender in connection with the loan
modifications consummated on or about the Modification Effective Date, in each
case to the extent such items have been deducted from the calculation of Net
Income or less non-cash warrant liability income to the extent added to the
calculation of Net Income.”
 
 
 

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3.2           Liquidity. The required Liquidity Ratio set forth in Section 5 of
the Schedule to the Loan Agreement which, prior to the Modification Effective
Date was “2.25 to 1.00” is amended as from the Modification Effective Date to
read: “1.30 to 1.00 for the month of February 2014, 2.25 to 1.00 for the months
of March 2014 through May 2014 and, thereafter, such thresholds as shall be
agreed upon by Borrowers and PFG, based on Board approved plan, but no monthly
threshold to be set lower than levels specified in the Senior Loan Documents,
assuming the Senior Lender extends its line of credit beyond the maturity date
in effect on February 28, 2014.”
 
         3.3           New Compliance Certificate. Until otherwise notified by
PFG, the Compliance Certificate required under the Loan Agreement is amended to
read in its entirety as set forth in Exhibit A.
 
4.           ACKNOWLEDGMENT OF EXISTING EVENTS OF DEFAULT; WAIVER.  Borrower
acknowledges that it is currently in default under the Loan Agreement due to the
Existing Events of Default.  If no Default or Event of Default has occurred and
is continuing under the Loan Agreement, other than the Existing Events of
Default, and Borrower timely satisfies the conditions set forth in Section 10,
PFG shall be deemed to have waived the Existing Events of Default. Borrower
hereby acknowledges and agrees that except as specifically provided herein,
nothing in this Section or anywhere in this Modification shall be deemed or
otherwise construed as a waiver by PFG of any of its rights and remedies
pursuant to the Existing Loan Documents, applicable law or otherwise. The waiver
of Existing Events of Default set forth in this Modification shall be limited
precisely as written and shall not be deemed (a) to be a forbearance, waiver or
modification of any other term or condition of the Loan Agreement or of any
other instrument or agreement referred to therein or to prejudice any right or
remedy which PFG may now have or may have in the future under or in connection
with the Loan Agreement or any instrument or agreement referred to therein; (b)
to be a consent to any future amendment or modification, forbearance or waiver
to any instrument or agreement the execution and delivery of which is consented
to hereby, or to any waiver of any of the provisions thereof; or (c) to limit or
impair PFG’s right to demand strict performance of all terms and covenants as of
any date, subject to this Modification. The Loan Agreement, as amended, shall
continue in full force and effect. PFG acknowledges that, without having
conducted any audit, inspection or other special review, it is not aware of any
Default or Event of Default other than the Existing Events of Default.
 
5.           PAYMENT OF FEES AND EXPENSES.  Borrower shall pay to PFG its
reasonable out-of-pocket fees and expenses in connection with this Modification.

6.           RATIFICATION OF EXISTING LOAN DOCUMENTS.  Borrower hereby ratifies,
confirms and reaffirms, all and singular, the terms and conditions of each of
the Existing Loan Documents, as amended, to which it is a party.
 
 
 

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7.           REPRESENTATIONS AND WARRANTIES.  Borrower represents and warrants
that:
 
(a)           immediately upon execution of this Modification and assuming
Borrower's satisfaction of the conditions set forth in Section 10 hereof (i) the
representations and warranties contained in the Existing Loan Documents are
true, accurate and complete in all material respects as of the date hereof
(except to the extent such representations and warranties relate to an earlier
date, in which case they are true and correct as of such date), and (ii) no
Default or Event of Default (other than the Existing Events of Default) has
occurred and is continuing or would result from the performance of the Existing
Loan Documents as modified hereby;
 
(b)           Borrower has the corporate power and authority to execute and
deliver this Modification and to perform its Obligations under the Existing Loan
Documents, as amended by this Modification, and the person(s) executing this
Modification on behalf of Borrower are duly empowered to do so;
 
(c)           the articles of incorporation and other formation and
organizational documents of Borrower provided to PFG on the date of the Loan
Agreement remain true, accurate and complete and have not been amended,
supplemented or restated and are and continue to be in full force and effect or,
if any such documents have been amended, supplemented or restated or are no
longer true, accurate and complete, Borrower shall provide true, complete,
correct and current versions of such documents as additional conditions to this
Modification under Section 10;
 
(d)           the execution and delivery by Borrower of this Modification and
the performance by Borrower of its Obligations under the Loan Agreement have
been duly authorized by all necessary corporate action on the part of Borrower;
 
(e)           this Modification has been duly executed and delivered by Borrower
and (i) constitutes the binding obligation of Borrower, enforceable against
Borrower in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws of general application and equitable principles relating to
or affecting creditors’ rights; and (ii) does not conflict with any law or
regulation or judgment or the organizational documents of Borrower, or any
agreement or document to which Borrower is a party or which is binding upon it
or any of this assets; and (iii) does not require any authorization, approval,
consent, licence or registration in any jurisdiction for its execution,
performance, validity or enforceability;
 
(f)           Borrower acknowledges that PFG has acted in good faith and has
conducted in a commercially reasonable manner its relationship with Borrower in
connection with this Modification and in connection with the Existing Loan
Documents;
 
(g)           the IP Security Agreements disclose an accurate, complete and
current listing of all Collateral that consists of Intellectual Property (as
defined in said IP Security Agreement) or Borrower has included revised and
updated Intellectual Property schedules as part of an update to the
Representations required in Section 10.3 of this Modification; and
 
 
 

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(h)           Borrower hereby ratifies, confirms and reaffirms, all and
singular, the terms and disclosures contained in the Representations as last
delivered to PFG, and acknowledges, confirms and agrees the disclosures and
information contained therein have not changed in any Non-Trivial respect as of
the date hereof, or, if the Representations require additional disclosure in
order to be true, accurate and complete in all Non-Trivial respects as of the
date hereof, Borrower shall have provided the update to the Representations
required in Section 10.3.
 
Borrower understands and acknowledges that PFG is entering into this
Modification in reliance upon, and in partial consideration for, the above
representations and warranties, and agrees that such reliance is reasonable and
appropriate.
 
8.           NO DEFENSES.  Borrower agrees that, as of the date hereof, it has
no defenses against its  legal obligation to pay any and all Obligations.

9.           CONTINUING VALIDITY.  Borrower understands and agrees that in
modifying the Loan Agreement, PFG is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents,
including as to its proper authorization and execution by Borrower.  Except as
expressly modified pursuant to this Modification, the terms of the Existing Loan
Documents remain unchanged and in full force and effect.  PFG's agreement to
modify the Loan Agreement pursuant to this Modification in no way shall obligate
PFG to make any future consents, waivers or modifications to the
Obligations.  Nothing in this Modification shall constitute a satisfaction of
the Obligations or a waiver of any default under the Existing Loan Documents
other than the Existing Events of Default.  It is the intention of PFG and
Borrower to retain as liable parties all makers and guarantors of Obligations
under the Existing Loan Documents.  Unless expressly released herein, no maker,
endorser, or guarantor will be released by virtue of this Modification other
than with respect to the Existing Events of Default.  The terms of this
paragraph apply not only to this Modification, but also to all subsequent loan
modification agreements.

10.           CONDITIONS.  The effectiveness of this Modification is conditioned
the following (whether satisfied on or before the Modification Effective Date or
thereafter, if performance is specified to occur after the Modification
Effective Date:

10.1           Execution and Delivery.  Borrower and Guarantor shall have duly
executed and delivered a counterpart of this Modification to PFG on or before
March 6, 2014.
 
10.2           Payment of PFG Expenses.  Borrower shall pay upon invoice all PFG
Expenses (including all reasonable attorneys’ fees and expenses) incurred in
connection with this Modification.
 
10.3           Updates to Borrower Information. If required to render the
Representations as last delivered to PFG true, correct, accurate and complete as
of the date hereof, Borrower shall have delivered to PFG true and current
information and versions of such documents.
 
10.4           Loan Modification Fee. Borrower shall have paid PFG a fee equal
to $10,000 on or before the Modification Effective Date.
 
 
 

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               10.5           Constitutional and Authority Documents. To the
extent the same may have been modified or superseded or are no longer accurate
since the date of the Loan Agreement, PFG shall have received copies, certified
by a duly authorized officer of each Borrower, to be true and complete as of the
date hereof, of each of (i) the governing documents of each Borrower as in
effect on the date hereof, (ii) any necessary resolutions of each Borrower
authorizing the execution and delivery of this Modification, the other documents
executed in connection herewith and each Borrower’s performance of all of the
transactions contemplated hereby, and (iii) an incumbency certificate giving the
name and bearing a specimen signature of each individual who shall be so
authorized on behalf of each Borrower.

For the avoidance of doubt, the failure of any of the conditions set forth in
this Section 10, unless waived by PFG in its sole discretion, shall constitute
an Event of Default.
 
11.           ADDITIONAL FEE.  In addition, Borrower shall pay a cash fee to PFG
no later than the earlier to occur of (i) May 31, 2014 or (ii) the date that all
outstanding amounts become due under the Loan Agreement in such amount as PFG
may determine, but in no event shall such additional fee exceed $75,000. For the
avoidance of doubt, Borrower’s failure to pay PFG the Additional Fee in
accordance with this Section 11, unless waived by PFG in its sole discretion,
shall constitute an Event of Default.
 
12.           RELEASE.  Each Borrower and each Guarantor (each, a “Releasor”)
hereby forever relieves, releases, and discharges PFG and each of its present or
former employees, officers, directors, agents, representatives, attorneys (the
“Indemnitees”), from any and all possible claims, debts, liabilities, demands,
obligations, promises, acts, agreements, costs and expenses, actions and causes
of action, of every type, kind, nature, description or character, whether known
or unknown, suspected or unsuspected, absolute or contingent, arising out of or
in any manner connected with or related to facts, circumstances, issues,
controversies or claims existing or arising from the beginning of time through
and including the date of execution of this Modification, which any Releasor or
any of their respective partners, members, officers, agents or employees may now
or hereafter have against the Indemnitees, if any, and irrespective of whether
any of the foregoing arise out of contract, tort, violation of laws or
regulations or otherwise, breach of fiduciary duty, breach of any duty of fair
dealing, breach of confidence, breach of funding commitment, undue influence,
duress, economic coercion, violation of any federal or state securities or Blue
Sky laws or regulations, conflict of interest, negligence, bad faith,
malpractice, violations of the racketeer Influenced and Corrupt Organizations
Act, intentional or negligent infliction of mental distress, tortious
interference with contractual relations, tortuous interference with corporate
governance or prospective business advantage, deceptive trade practices, libel,
slander, conspiracy or any claim relating to the Existing Loan Documents or the
transactions contemplated therein (collectively “Released Claims”). Without
limiting the foregoing, the Released Claims shall include any and all
liabilities or claims arising out of or in any manner connected with or related
to the Existing Loan Documents, the Recitals hereto, any instruments, agreements
or documents executed in connection with any of the foregoing or the
origination, negotiation, administration, servicing and/or enforcement of any of
the foregoing.  In furtherance of this release, each Releasor expressly
acknowledges and waives any and all rights under Section 1542 of the California
Civil Code, which provides as follows: “A general release does not extend to
claims which the creditor does not know or expect to exist in his or her favor
at the time of executing the release, which if known by him or her must have
materially affected his or her settlement with the debtor.” By entering into
this release, each Releasor recognizes that no facts or representations are ever
absolutely certain and it may hereafter discover facts in addition to or
different from those which it presently knows or believes to be true, but that
it is the intention of each Releasor hereby to fully, finally and forever settle
and release all matters, disputes and differences, known or unknown, suspected
or unsuspected; accordingly, if any Releasor should subsequently discover that
any fact that it relied upon in entering into this release was untrue, or that
any understanding of the facts was incorrect, no Releasor shall be entitled to
set aside this release by reason thereof, regardless of any claim of mistake of
fact or law or any other circumstances. Each Releasor acknowledges that it is
not relying upon and has not relied upon any representation or statement made by
PFG with respect to the facts underlying this release or with regard to any of
such party’s rights or asserted rights. This release may be pleaded as a full
and complete defense and/or as a cross-complaint or counterclaim against any
action, suit, or other proceeding that may be instituted, prosecuted or
attempted in breach of this release. Each Releasor acknowledges that the release
contained herein constitutes a material inducement to PFG to enter into this
Modification, and that PFG would not have done so but for PFG’s expectation that
such release is valid and enforceable in all events.  Each Releasor hereby
represents and warrants to PFG, and PFG is relying thereon, as follows: (i)
except as expressly stated in this Modification , neither PFG nor any agent,
employee or representative of PFG has made any statement or representation to
any Releasor regarding any fact relied upon by any Releasor in entering into
this Modification ; (ii) each Releasor has made such investigation of the facts
pertaining to this Modification and all of the matters appertaining thereto, as
it deems necessary; (iii) the terms of this Modification are contractual and not
a mere recital; (iv) this Modification has been carefully read by each Releasor,
the contents hereof are known and understood by each Releasor, and this
Modification is signed freely, and without duress, by each Releasor; (v) each
Releasor represents and warrants that it is the sole and lawful owner of all
right, title and interest in and to every claim and every other matter which it
releases herein, and that it has not heretofore assigned or transferred, or
purported to assign or transfer, to any person, firm or entity any claims or
other matters herein released. Borrower shall indemnify PFG, defend and hold it
harmless from and against all claims based upon or arising in connection with
prior assignments or purported assignments or transfers of any claims or matters
released herein.
 
 
 

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13.           MISCELLANEOUS.  The quotation marks around modified clauses set
forth herein and any differing font styles, if any, in which such clauses are
presented herein are for ease of reading only and shall be ignored for purposes
of construing and interpreting this Modification. The Recitals to this
Modification are expressly incorporated by reference herein.

14.           INTEGRATION; CONSTRUCTION.  This Modification, the Forbearance and
the Loan Documents and any documents executed in connection herewith or
therewith or pursuant hereto or thereto contain the entire agreement between the
parties with respect to the subject matter hereof and supersede all prior
agreements, understandings, offers and negotiations, oral or written, with
respect thereto and no extrinsic evidence whatsoever may be introduced in any
judicial or arbitration proceeding, if any, involving this Modification; except
that any financing statements or other agreements or instruments filed by PFG
with respect to Borrower shall remain in full force and effect. The title of
this Modification, section headings and quotation marks around amended
provisions are for the readers’ convenience only and shall be ignored for
purposes of integration into the Loan Agreement. This Modification shall be
deemed effective as against any and all Borrower parties that execute and
deliver this Forbearance, and the failure of any such Borrower to so execute and
deliver shall not affect the enforceability of this Modification against each
Borrower party that does.

15.           INCORPORATION OF PROVISIONS. The provisions of Section 8 of the
Loan Agreement are incorporated by reference herein and made applicable to this
Modification.

[Signature Page Follows]

 
 

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IN WITNESS WHEREOF, the parties have caused this Modification to be executed and
delivered as of the Modification Effective Date.

Borrower:
 
ADVANCED PHOTONIX, INC.
 
 
By_______________________________
President or Vice President
 
By_______________________________
Secretary or Ass't Secretary
PFG:
 
PARTNERS FOR GROWTH III, L.P.
 
 
By_______________________________
 
Name:  ___________________________
 
Title: Manager, Partners for Growth III, LLC
Its General Partner
   
Borrower:
 
PICOMETRIX, LLC
 
 
By_______________________________
President
Name ____________________________
 

Richard D. Kurtz
 
 
 

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Exhibit A

Compliance Certificate