Exhibit 10.1 

 

THIRD BUSINESS FINANCING MODIFICATION AGREEMENT

 

This Third Business Financing Modification Agreement is entered into as of
January 31, 2018, by and between Socket Mobile, Inc., a Delaware corporation
(“Borrower”), and Western Alliance Bank, an Arizona corporation, successor in
interest to Bridge Bank, National Association (“Lender”).

 

1.                  DESCRIPTION OF EXISTING INDEBTEDNESS: Among other
indebtedness which may be owing by Borrower to Lender, Borrower is indebted to
Lender pursuant to, among other documents, a Business Financing Agreement, dated
February 27, 2014, by and between Borrower and Lender, as amended by that
certain Business Financing Modification Agreement, dated as of February 26,
2016, and that certain Business Financing Modification Agreement, dated as of
March 20, 2017 (as so amended, the “Business Financing Agreement”). Capitalized
terms used without definition herein shall have the meanings assigned to them in
the Business Financing Agreement.

 

Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the “Indebtedness” and the Business Financing Agreement and any and all other
documents executed by Borrower in favor of Lender shall be referred to as the
“Existing Documents.”

 

2.DESCRIPTION OF CHANGE IN TERMS.

 

A.Modifications to Business Financing Agreement:

 

(i)                   Section 1.7 of the Business Financing Agreement is hereby
amended in its entirety as follows:

 

1.7 Recourse; Maturity. Advances and the other Obligations shall be with full
recourse against Borrower. On the Maturity Date, the Borrower will pay all then
outstanding Advances and other Obligations (other than the Term Advance and all
accrued but unpaid Finance Charges thereon which are due on the Term Advance
Maturity Date) to the Lender or such earlier date as shall be herein provided.

 

(ii)                 Section 1.9 of the Business Financing Agreement is hereby
amended in its entirety as follows:

 

1.9Reserved.

 

(iii)                 New Sections 1.12 and 1.13 are hereby added to the
Business Financing Agreement immediately following Section 1.11 thereof as
follows:

 

1.12Term Advance.

 

(a)                 Subject to the terms and conditions of this Agreement,
during the Term Advance Draw Period, upon written request from Borrower, Lender
will make a term loan ("Term Advance") to Borrower in an amount specified by
Borrower in such written request but not to exceed $4,000,000, the proceeds of
which shall be used solely for repurchasing outstanding capital stock of
Borrower; provided that (i) all of the representations and warranties set forth
in Section 3 are true and correct on the date of the Term Advance as though made
at and as of each such date, and (ii)     no Default has occurred and is
continuing, or would result from the Term Advance.

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(b)                 Borrower shall pay monthly principal reduction payments on
the Term Advance, each in an amount equal to 1/45th of the original principal
amount of the Term Advance. Each such payment shall be due and payable on the
first day of each month, commencing May 1, 2018.

 

(c)                 Borrower shall also pay to Lender 25% of the Excess Cash
Flow earned during each and every fiscal quarter during the fiscal year ending
December 31, 2018, commencing with respect to the fiscal quarter ending March
31, 2018. Each such payment of Excess Cash Flow shall be due concurrent with
Borrower’s delivery of its monthly financial statements for the months ending
March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018 pursuant
to Section 4.8(b) but in no event later than 30 days after the end of each
fiscal quarter, and shall be based upon the Excess Cash Flow for the applicable
fiscal quarter ended on such dates. Lender shall apply such Excess Cash Flow
toward principal payments owing on the Term Advance in accordance with Section
1.12(b) in inverse order of maturity.

 

(d)                 On the Term Advance Maturity Date, Borrower shall pay to
Lender the entire unpaid principal balance of the Term Advance together with all
accrued but unpaid Finance Charges thereon. Borrower may prepay the Term Advance
at any time in whole or in part without penalty or premium, except as otherwise
provided in Section 2.2(i). All such principal amounts repaid or prepaid may not
be reborrowed. All prepayments shall be applied toward scheduled principal
reductions payments owing under Section1.12(b) in inverse order of maturity.

 

1.13 Business Credit Card. Borrower may use availability hereunder up to the
Credit Card Limit for issuance by Lender of business credit cards for Borrower.
The entire Credit Card Limit will be treated as an Advance for purposes of
determining availability under the Credit Limit and shall decrease, on a
dollar-for-dollar basis, the amount available for other Advances. All credit
cards issued under the Credit Card Limit shall be subject to additional terms
set forth in applicable credit card agreements. Upon the Maturity Date, the
amount owing to Lender on account of credit cards issued to Borrower shall be
secured by unencumbered cash on terms acceptable to Lender if the term of this
Agreement is not extended by Lender.

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(iv)                Clauses (a) and (b) of Section 2.2 of the Business Financing
Agreement are hereby amended in their entirety as follows:

 

(a)Domestic Facility Fee. Borrower shall pay the Domestic Facility Fee to Lender
promptly upon the execution of the Second Amendment and each anniversary thereof
thereafter.

 

(b)EXIM Facility Fee. Borrower shall pay the EXIM Facility Fee to Lender
promptly upon the execution of the Second Amendment and each anniversary thereof
thereafter.

 

(v)                Clauses (d), (e) and (f) of Section 2.2 of the Business
Financing Agreement are hereby amended in their entirety as follows:

 

(d)Fee in Lieu of Warrant. Borrower shall pay the Fee in Lieu of Warrant to
Lender promptly upon the execution of the Second Amendment.

 

(e)Cash Management, Business Credit Cards, and FX Forward Contract Fees.
Borrower shall pay to Lender fees in connection with the Cash Management
Services, business credit cards, and the FX Forward Contracts as determined in
accordance with Lender’s standard fees and charges then in effect for such
activity.

 

(f)Due Diligence Fee. Borrower shall pay the Due Diligence Fee to Lender
promptly upon the execution of the Second Amendment and each anniversary thereof
thereafter.

 

(vi)                 New clauses (g) and (h) are hereby added to Section 2.2 of
the Business Financing Agreement immediately following clause (f) thereof as
follows:

 

(g)Term Advance Facility Fee. Borrower shall pay the Term Advance Facility Fee
to Lender promptly upon the execution of the Second Amendment.

 

(h)Term Advance Termination Fee. In the event the Term Advance is prepaid in
full prior to January 31, 2020 by a lender other than Lender, Borrower shall pay
the Term Advance Termination Fee to Lender.

 

(vii)                Subsections 4.8(h) and (i) of the Business Financing
Agreement are hereby amended in their entirety as follows:

 

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(h)Within 10 days after the end of each calendar month, (i) a detailed aging of
Borrower’s domestic receivables by invoice date, together with payable aging by
invoice date, and (ii) a detailed aging of Borrower’s EXIM domestic receivables
by due date, together with a payable aging by due date.

 

(i)Within 10 days after the end of each calendar month, (i) distributor
sell-through reports, in form and substance acceptable to Lender,

(ii) a deferred revenue report, (iii) sales journal and cash receipts journal,
and (iv) such other matters as Lender may request.

 

(viii)              Subsection 4.12(a) of the Business Financing Agreement is
hereby amended to read as follows:

 

(a)Asset Coverage Ratio not at any time less than the ratio indicated in the
table below opposite the applicable period in which the test date occurs, to be
tested at the end of each month:

 

 Period:  Minimum Asset Coverage Ratio  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

 

(ix)             New Subsections 4.12(b) and (c) are hereby added to the
Business Financing Agreement immediately following subsection 4.12(a) thereof as
follows:

 

(b)Fixed Charge Coverage Ratio not at any time less than 1.75 to 1.00, to be
tested at the end of each fiscal quarter.

 

(c)Total Funded Debt to EBITDA Ratio not at any time greater than 1.75 to 1.00,
to be tested at the end of each month.

 

(x)                New Sections 4.13, 4.14 and 4.15 are hereby added to the
Business Financing Agreement immediately following Section 4.12 thereof as
follows:

 

4.14    Not make any investment in or to any Person, other than investments
existing as of the date of the Second Amendment and specifically disclosed on a
schedule to this Agreement.

 

4.15      Not pay any dividends or make any distributions or payment with
respect to Borrower’s capital stock or redeem, retire or purchase any of
Borrower’s capital stock.

 

 

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4.16      Not directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of Borrower except for transactions that are in
the ordinary course of Borrower’s business, upon fair and reasonable terms that
are no less favorable to Borrower than would be obtained in an arm’s length
transaction with a non-affiliated Person.

 

(xi)                 The following defined terms in Section 12.1 of the Business
Financing Agreement are hereby amended or added as follows:

 

“Advance” means an advance made by Lender to Borrower under this Agreement,
including the Term Advance.

 

“Advance Rate” means (i) up to 80% in the case of Domestic Eligible Receivables,
and (ii) up to 80% in the case of EXIM Eligible Receivables, or in each case,
such greater or lesser percentage as Lender may from time to time establish in
its sole discretion upon notice to Borrower.

 

“Capital Expenditures” means expenditures made in cash, or financed with long
term debt, by any Person for the acquisition of any fixed assets or
improvements, replacements, substitutions, or additions thereto that have a
useful life of more than 1 year, including the direct or indirect acquisition of
such assets by way of increased product or service charges, offset items, or
otherwise, and the principal portion of payments with respect to Capital Lease
Obligations, calculated in accordance with GAAP.

 

“Capital Lease” means any lease of an asset by a Person as lessee which would,
in conformity with GAAP, be required to be accounted for as an asset and
corresponding liability on the balance sheet of that Person.

 

“Capital Lease Obligations” of a Person means the amount of the obligations of
such Person under all Capital Leases which would be shown as a liability on a
balance sheet of such Person prepared in accordance with GAAP.

 

“Cash Flow” means net profit before tax plus interest expense, depreciation
expense and amortization expense, minus distributions, plus non-cash stock-based
expenses (to the 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 lesser of (a) the credit limit stated in the
applicable credit card agreements for business credit cards issued by Lender for
the account of Borrower, or (b) $150,000.

 

“Credit Limit” means the sum of Domestic Credit Limit plus the EXIM Credit Limit
plus the Credit Card Limit, which is intended to be the maximum amount of
Advances (including deemed Advances under the Credit Card Limit) at any time
outstanding.

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“Domestic Facility Fee” means a fee equal to 0.50% of the Domestic Credit Limit
due upon the date of the Second Amendment and each anniversary thereof so long
as any Advances are outstanding or available hereunder.

 

“Domestic Overadvance” means at any time an amount equal to the greater of (a)
the amount (if any) by which the total amount of the outstanding Advances with
respect to Domestic Eligible Receivables (including deemed Advances with respect
to the FX Sublimit and the Credit Card Limit exceeds the lesser of the Domestic
Credit Limit or the Domestic Borrowing Base, or (b) the amounts (if any) by
which the total amount of the outstanding deemed Advances with respect to the FX
Sublimit or the Credit Card Limit exceeds the Subfacility Maximum.

 

“Due Diligence Fee” means a payment of an annual fee equal to $900 due upon the
date of the Second Amendment and upon each anniversary thereof so long as any
Advance is outstanding or available hereunder.

 

“EBITDA” means net income before tax plus interest expense, depreciation expense
and amortization expense, plus non-cash impairment expense, plus non- cash stock
compensation (to the extent deducted from net income), calculated in accordance
with GAAP.

 

“Excess Cash Flow” means, with respect to the applicable fiscal quarter, Cash
Flow for such fiscal quarter minus scheduled principal payments due on the Term
Advance pursuant to Section 1.12(b) during such fiscal quarter minus the Finance
Charge due for such fiscal quarter.

 

“Fee in Lieu of Warrant” means a payment of a fee equal to $20,000, due upon the
date of the Second Amendment.

 

“Finance Charge” means an interest amount equal to the sum of (a) the Finance
Charge Percentage of the ending daily Account Balance for the relevant period,
plus (b) the Finance Charge Percentage of the average principal balance of the
Term Advance outstanding for the relevant period.

 

“Finance Charge Percentage” means (a) with respect to Advances (other than the
Term Advance, a rate per year equal to the Prime Rate plus 0.75 percentage
points plus an additional 5.00 percentage points during any period that an Event
of Default has occurred and is continuing, and (b) with respect to the Term
Advance, a rate per year equal to the Prime Rate plus 1.75 percentage points
plus an additional 5.00 percentage points during any period that an Event of
Default has occurred and is continuing.

 

“Fixed Charge Coverage Ratio” means the ratio of (a) Cash Flow for the fiscal
quarter ended on the date of determination, to (b) all cash payments of
principal and interest on Borrower’s debt during such period, including the
principal and interest portion of all Capital Lease Obligations.

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“GAAP” means generally accepted accounting principles in the United States of
America, consistently applied, which are in effect as of the date of the Second
Amendment Agreement. If any changes in accounting principles from those in
effect on the date of the Second Amendment are hereafter occasioned by
promulgation of rules, regulations, pronouncements or opinions by or are
otherwise required by the Financial Accounting Standards Board or the American
Institute of Certified Public Accountants (or successors thereto or agencies
with similar functions), and any of such changes results in a change in the
method of calculation of, or affects the results of such calculation of, any of
the financial covenants, standards or terms found herein, then the parties
hereto agree to enter into and diligently pursue negotiations in order to amend
such financial covenants, standards or terms so as to equitably reflect such
changes, with the desired result that the criteria for evaluating financial
condition and results of operations of Borrower and its subsidiaries shall be
the same after such changes as if such changes had not been made.

 

“Maturity Date” means (i) for Advances under the Domestic Line of Credit,
January 31, 2020, (ii) for Advances under the EXIM Line of Credit, January 31,
2020, and (iii) for the Term Advance, the Term Advance Maturity Date, or, in
each case, such earlier date as Lender shall have declared the Obligations
immediately due and payable pursuant to Section 7.2.

 

“Non-Financed Capital Expenditures” means, for any period, (a) Capital
Expenditures minus (b) the portion of Capital Expenditures financed under
Capital Leases or other debt (excluding Advances).

 

“Prime Rate” means the greater of 4.25% per year or the Prime Rate published in
the Money Rates section of the Western Edition of The Wall Street Journal, or
such other rate of interest publicly announced from time to time by Lender as
its Prime Rate. Lender may price loans to its customers at, above, or below the
Prime Rate. Any change in the Prime Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in the
Prime Rate.

 

“Second Amendment” means that certain Second Business Financing Modification
Agreement, dated as of January 25, 2018, between the Borrower and the Lender,
amending this Agreement.

 

“Term Advance” is defined in Section 1.12.

 

“Term Advance Draw Period” means the period commencing upon the effectiveness of
the Second Amendment through and including the April 30, 2018.

 

“Term Advance Facility Fee” means a payment of a fee equal to $20,000, due upon
the date of the Second Amendment.

 

“Term Advance Maturity Date” means January 31, 2022, or such earlier date as
Lender shall have declared the Obligations immediately due and payable pursuant
to Section 7.2.

 

“Term Advance Termination Fee” means (a) $80,000 if the Term Advance is prepaid
in full on or before January 31, 2019, and (b) $40,000 if the Term Advance is
prepaid in full on or after February 1, 2019 but on or before January 31, 2020.

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“Third Amendment” means that certain Third Business Financing Modification
Agreement, dated as of January 31, 2018, between the Borrower and the Lender,
amending this Agreement. 

 

“Total Funded Debt to EBITDA Ratio” means, as of the date of determination, the
ratio of (a) the sum of the Obligations, Subordinated Debt, and Borrower’s
Capital Lease Obligations, to (b) EBITDA for the trailing 12 month period ended
on the 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 A attached to the Business Financing Agreement is
hereby replaced with Exhibit A attached hereto.

 

 

3.                  CONSISTENT CHANGES. The Existing Documents are each hereby
amended wherever necessary to reflect the changes described above.

 

4.                  PAYMENT OF FEES. Upon execution hereof, Borrower shall pay
Lender 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 of Warrant 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, plus all
out-of-pocket expenses.

 

5.                  NO DEFENSES OF BORROWER/GENERAL RELEASE. Borrower agrees
that, as of this date, it has no defenses against the obligations to pay any
amounts under the Indebtedness. Each of Borrower and Guarantor (each, a
“Releasing Party”) acknowledges that Lender would not enter into this Business
Financing Modification Agreement without Releasing Party’s assurance that it has
no claims against Lender or any of Lender’s officers, directors, employees or
agents. Except for the obligations arising hereafter under this Business
Financing Modification Agreement, each Releasing Party releases Lender, and each
of Lender’s and entity’s officers, directors and employees from any known or
unknown claims that Releasing Party now has against Lender of any nature,
including any claims that Releasing Party, its successors, counsel, and advisors
may in the future discover they would have now had if they had known facts not
now known to them, whether founded in contract, in tort or pursuant to any other
theory of liability, including but not limited to any claims arising out of or
related to the Agreement or the transactions contemplated thereby. Releasing
Party waives the provisions of California Civil Code section 1542, which states:

 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT 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.

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The provisions, waivers and releases set forth in this section are binding upon
each Releasing Party and its shareholders, agents, employees, assigns and
successors in interest. The provisions, waivers and releases of this section
shall inure to the benefit of Lender and its agents, employees, officers,
directors, assigns and successors in interest. The provisions of this section
shall survive payment in full of the Obligations, full performance of all the
terms of this Business Financing Modification Agreement and the Agreement,
and/or Lender’s actions to exercise any remedy available under the Agreement or
otherwise.

 

6.                  CONTINUING VALIDITY. Borrower understands and agrees that in
modifying the existing Indebtedness, Lender is relying upon Borrower’s
representations, warranties, and agreements, as set forth in the Existing
Documents. Except as expressly modified pursuant to this Business Financing
Modification Agreement, the terms of the Existing Documents remain unchanged and
in full force and effect. Lender’s agreement to modifications to the existing
Indebtedness pursuant to this Business Financing Modification Agreement in no
way shall obligate Lender to make any future modifications to the Indebtedness.
Nothing in this Business Financing Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Lender and Borrower to
retain as liable parties all makers and endorsers of Existing Documents, unless
the party is expressly released by Lender in writing. No maker, endorser, or
guarantor will be released by virtue of this Business Financing Modification
Agreement. The terms of this paragraph apply not only to this Business Financing
Modification Agreement, but also to any subsequent Business Financing
modification agreements.

 

7.                  CONDITIONS. The effectiveness of this Business Financing
Modification Agreement is conditioned upon payment of the fees and expenses set
forth in Section 4 above and the execution hereof by Lender 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,
an Arizona corporation

 

By /s/ David W. Dunlap
Name: David W. Dunlap
Title: CFO

 

By /s/ Lisa Chang
Name: Lisa Chang
Title: Vice President, Relationship Manager

 

 

 

 

 

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Exhibit A

Form of Compliance 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