Exhibit 10.3

 

MODIFICATION NO. 5 TO LOAN AND SECURITY AGREEMENT

 

This Modification No. 5 to Loan and Security Agreement (“Fifth Modification”) is
executed as of February 5, 2015 (the “Fifth 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).

 

B.     PFG and Borrower entered into that certain Forbearance Agreement dated as
of February 10, 2014 (the “Forbearance”) to address a Borrower financial
covenant default under Section 5 of the Schedule to the Loan Agreement, and the
Forbearance Period under the Forbearance expired on the First Modification
Effective Date (as defined below).

 

C.     PFG and Borrower entered into that certain Waiver and Modification dated
March 5, 2014 (the “First Modification Effective Date” and such Waiver and
Modification, the “First Modification”) to permit a waiver of past defaults and
to temporally reset financial covenants.

 

D.     PFG and Borrower entered into that certain Modification No. 2 to Loan and
Security Agreement dated April 30, 2014 (the “Second Modification Effective
Date” and such Waiver and Modification, the “Second Modification”) to make
certain modifications to the financial covenants set forth in Section 5 of the
Schedule.

 

E.     PFG and Borrower entered into that certain Modification No. 3 to Loan and
Security Agreement dated June 20, 2014 (the “Third Modification Effective Date”
and such Waiver and Modification, the “Third Modification”) to make certain
modifications to the financial covenants set forth in Section 5 of the Schedule.

 

F.     PFG and Borrower entered into that certain Modification No. 4 to Loan and
Security Agreement dated November 10, 2014 (the “Fourth Modification Effective
Date” and such Modification, the “Fourth Modification”).

 

 
 

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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
$1,071,429 in principal amount (the “Loan”) 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     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.

 

3.2     EBITDA. The Minimum EBITDA financial covenant thresholds set forth in
Section 5 of the Schedule to the Loan Agreement which read, prior to the Fifth
Modification Effective Date (based on modifications made in the Second
Modification) as follows:

 

“ Minimum EBITDA:

Commencing with the month ending June 30, 2014, Borrower shall maintain EBITDA
measured monthly on a rolling (trailing) six-month basis (i.e., aggregate EBITDA
for the month ending the date set forth below and each of the immediately prior
five (5) 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

June 30, 2014

$(850,000)

July 31, 2014 – September 30, 2014

$(300,000)

October 31, 2014

$1.00

November 30, 2014 - March 31, 2015

($800,000)

April 30, 2015 – June 30, 2015

($300,000)

July 31, 2015 – Maturity Date

$100,000

 

“EBITDA” shall mean Borrowers’ (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, (e)
income tax expense, plus (f) other non-cash items including intangible asset
write-offs, plus (g) non-cash warrant liability expenses to the extent deducted
from the calculation of Net Income or less non-cash warrant liability income to
the extent added to the calculation of Net Income plus (h) modification and
success fees associated with the Sixth Amendment to Loan and Security Agreement
and Waiver, the Seventh Amendment to Loan and Security Agreement, and the
corresponding amendments to the credit facility between Borrowers and PFG.

 

 
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“Net Income” means, as calculated on a consolidated basis for Borrowers and
their Subsidiaries, if any, for any period as at any date of determination, the
net profit (or loss), after provision for taxes for such period taken as a
single accounting period.

 

If at any time there is no Senior Lender, as defined, PFG will work with
Borrower and provide new Financial Covenants that are in substance roughly
equivalent to the aforesaid.”

 

shall be amended to read as from the Fifth Modification Effective Date as
follows:

 

“ Minimum EBITDA:

Commencing with the month ending January 31, 2015, Borrower shall maintain
EBITDA measured monthly on a rolling (trailing) six-month basis (i.e., aggregate
EBITDA for the month ending the date set forth below and each of the immediately
prior five (5) months ending on the last day of each such month) of not less
than the amounts set forth in the table below for each of the monthly periods
specified with the date ranges below:

 

Month Ending

Min EBITDA

January 2015 through June 30, 2015

$(1,250,000)

July 2015

$1.00

August 2015 through Maturity Date

$100,000

 

“EBITDA” shall mean Borrowers’ (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, (e)
income tax expense, plus (f) other non-cash items including intangible asset
write-offs, plus (g) non-cash warrant liability expenses to the extent deducted
from the calculation of Net Income or less non-cash warrant liability income to
the extent added to the calculation of Net Income plus (h) modification and
success fees associated with Modification No. 5 to Loan and Security Agreement
between Borrower and PFG, plus (i) up to $150,000 in costs actually incurred in
connection with a Merger pending on the Fifth Modification Effective Date.

 

“Net Income” means, as calculated on a consolidated basis for Borrowers and
their Subsidiaries, if any, for any period as at any date of determination, the
net profit (or loss), after provision for taxes for such period taken as a
single accounting period.

 

 
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If at any time there is no Senior Lender, as defined, PFG will work with
Borrower and provide new Financial Covenants that are in substance roughly
equivalent to the aforesaid.”

 

 

3.3      Liquidity. As from the Fifth Modification Effective Date, the required
Liquidity Ratio set forth in Section 5 of the Schedule to the Loan Agreement
shall be “1.30 to 1.00”.

 

3.4     Maturity Date. Section 4 of the Schedule is amended to read in its
entirety as from the Fifth Modification Effective Date as follows:

 

“4. Maturity Date

(Section 5.1):      

The earliest of (i) August 8, 2016, (ii) initial consummation of the Merger and
(iii) the date the Obligations become due, whether by acceleration or
otherwise.”

 

3.5     Definitions. The following definition is added to Section 7 of the Loan
Agreement:

 

“Merger” means, in any single transaction or series of related transactions: (i)
any sale or other disposition (including exclusive license) of all or
substantially all of the assets of Borrower (or any of them) in whatever form
and however consummated, or (ii) any reorganization, consolidation, merger or
acquisition of Borrower whether or not constituting a Change in Control,
including that certain transaction between Borrower and Luna Innovations
Incorporated disclosed to PFG.”

 

4.     PAYMENT OF FEES AND EXPENSES. Borrower shall pay to PFG its reasonable
out-of-pocket fees and expenses in connection with this Fifth Modification.

 

5.     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.

 

6.     REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that:

 

(a)     immediately upon execution of this Fifth Modification and assuming
Borrower's satisfaction of the conditions set forth in Section 9 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 has occurred and is continuing or would result from
the performance of the Existing Loan Documents as modified hereby;

 

 
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(b)     Borrower has the corporate power and authority to execute and deliver
this Fifth Modification and to perform its Obligations under the Existing Loan
Documents, as amended by this Fifth Modification, and the person(s) executing
this Fifth 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, except with respect to Borrower Advanced
Photonix, Inc.’s Amended By-Laws, amended on January 28, 2015, 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 Fifth Modification under Section 9;

 

(d)     the execution and delivery by Borrower of this Fifth 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 Fifth 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, license 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 Fifth 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 9.3 of this Fifth Modification; and

 

(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 9.3.

 

 
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Borrower understands and acknowledges that PFG is entering into this Fifth
Modification in reliance upon, and in partial consideration for, the above
representations and warranties, and agrees that such reliance is reasonable and
appropriate.

 

7.     NO DEFENSES. Borrower agrees that, as of the date hereof, it has no
defenses against its legal obligation to pay any and all Obligations.

 

8.     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 Fifth 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 Fifth Modification in no way shall obligate PFG
to make any future consents, waivers or modifications to the Obligations.
Nothing in this Fifth Modification shall constitute a satisfaction of the
Obligations or a waiver of any default under the Existing Loan Documents. 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 Fifth Modification. The terms of this paragraph apply not only to this
Fifth Modification, but also to all subsequent loan modification agreements.

 

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

 

9.1     Execution and Delivery. Borrower and Guarantor shall have duly executed
and delivered a counterpart of this Fifth Modification to PFG on or before
February 5, 2015.

 

9.2     Payment of PFG Expenses. Borrower shall pay upon invoice all PFG
Expenses (including all reasonable attorneys’ fees and expenses) incurred in
connection with this Fifth Modification.

 

9.3     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.

 

9.4     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 Fifth 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.

 

 
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9.5     Modification Fees. Borrower shall have paid a fee in consideration of
this Fifth Modification in the sum of $25,000, deemed earned in full on the
Fifth Modification Effective Date and payable: (i) $10,000 upon the Fifth
Modification Effective Date, and (ii) $15,000 on the Maturity Date set forth in
Section 4 of the Schedule, or such earlier date at which Obligations become due
by acceleration or otherwise.

 

For the avoidance of doubt, the failure of any of the conditions set forth in
this Section 9, unless waived by PFG in its sole discretion, shall constitute an
Event of Default.

 

10.     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 Fifth 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
Fifth 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 Fifth 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 Fifth Modification; (ii) each Releasor has made such
investigation of the facts pertaining to this Fifth Modification and all of the
matters appertaining thereto, as it deems necessary; (iii) the terms of this
Fifth Modification are contractual and not a mere recital; (iv) this Fifth
Modification has been carefully read by each Releasor, the contents hereof are
known and understood by each Releasor, and this Fifth 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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11.     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 Fifth Modification. The Recitals to this
Fifth Modification are expressly incorporated by reference herein.

 

12.     Integration; Construction. This Fifth Modification, the Fourth
Modification, the Third Modification, the Second Modification, the First
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
Fifth 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 Fifth 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 Fifth
Modification against each Borrower party that does. Each party hereto has been
represented by counsel of their choosing and any claim, defense or rule of
construction to the effect that this Fifth Modification or any other Loan
Document should be construed against any party shall not apply and is expressly
disclaimed.

 

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

 

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

 

 

 

Borrower:

 

PFG:

         

ADVANCED PHOTONIX, INC.

 

PARTNERS FOR GROWTH III, L.P.

   

 

 

 

 

 

            By:  

 

By:

 

 

 

President or Vice President

              Name:     By:

 

 

 

  Secretary or Ass't Secretary   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