NINTH MODIFICATION TO LOAN AND SECURITY AGREEMENT

 
This Ninth Modification to Loan and Security Agreement (this “Modification”) is
entered into by and between Spy Optic Inc., a(n) California corporation
(“Borrower”) and BFI Business Finance, a California corporation (“Lender”) as of
this 29th day of January, 2014, at Campbell, California.
 
RECITALS
 
A. Lender and Borrower have previously entered into or are concurrently herewith
entering into a Loan and Security Agreement (the “Agreement”) dated February 26,
2007.
 
B. Lender and Borrower may have previously executed one or more Modifications to
Loan and Security Agreement (the "Previous Modification(s)").
 
C. Borrower has requested, and Lender has agreed, to modify the Agreement as set
forth below.
 
AGREEMENT
 
For good and valuable consideration, the parties agree as set forth below:
 
1. Incorporation by Reference.  The Agreement and the Previous Modification(s),
if any, as modified hereby and the Recitals are incorporated herein by this
reference.
 
2. Effective Date.  The terms of this Modification shall be in full force and
effect as of January 29, 2014.
 
3. Modification to Agreement.  The Agreement is hereby modified as follows:
 
a. The following definition(s) as set forth in “Section 1.1 Definitions.”
is(are) hereby amended and restated in its(their) entirety as set forth below:
 
““Maximum Inventory Advance” means the lesser of Two Million Five Hundred
Thousand and 00/100 Dollars ($2,500,000.00) or Fifty percent (50%) of the A R
Borrowing Base.”
 
b. The following definition(s) as set forth in “Section 1.1 Definitions.”
is(are) hereby partially amended and restated as set forth below (with the
remainder of such definition(s) to remain unchanged):
 
““Borrowing Base” (b) Fifty percent (50%) of the Current Market Cost of raw
materials that constitute Eligible Inventory; plus Fifty percent (50%) of the
Current Market Cost of finished goods that constitute Eligible Inventory, but in
any event not in an aggregate amount in excess of the Maximum Inventory Advance
(the “Inventory Borrowing Base”).”
 
 
 
 

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““Prime Accounts”
 
(o) are not Accounts with respect to which the Account Debtor is a resident of a
country other than i) the United States of America unless (1) Borrower has
obtained foreign credit insurance insuring the Accounts of such an applicable
foreign Account Debtor (the “Foreign Accounts”), with BFI to be named as a loss
payee under such foreign credit insurance, and with the insurer and the form and
content of the insurance policy and the loss payee endorsement in favor of BFI
to be acceptable to BFI, (2) all other criteria set forth in this definition of
“Prime Accounts” have been met, (3) such Foreign Accounts are remitted to Lender
in U.S. Dollars and (4) Advances against such Foreign Accounts shall not exceed
the aggregate amount of Four Hundred Thousand and 00/100 Dollars ($400,000.00)
at any given time; or ii) Canada (Accounts with respect to Account Debtors
residing in Canada being referred to collectively as the “Canadian Accounts”),
which shall be considered Prime Accounts providing: (1) such Canadian Accounts
otherwise qualify as Prime Accounts; (2) Such Canadian Accounts are payable and
paid in Canadian Dollars but remitted to Lender in U.S. Dollars; (3) Advances
against such Canadian Accounts shall not exceed the aggregate amount of One
Million and 00/100 Dollars ($1,000,000.00) at any given time; and (4)  Borrower
shall, on the first working day of each consecutive week, sweep to Lender all
payments received by the Canadian Accounts during the prior week.”
 
(w) Borrower has advised Lender of two (2) seasonal dating programs. The Snow
Program (the “Snow Program”) consists of i) invoices issued in the months of
August and September, all with due dates of January 15th; and ii) invoices
issued in the months of October, November, and December, all with due dates of
February 15th.  The March Madness Program (the “March Program”) consists of
invoices issued in March, all with due dates on or after July 1st.  Lender shall
deem such invoices under the Snow Program and the March Program to be Prime
Accounts under the following terms: the period of time from the date of each
invoice through and including fifteen (15) days beyond the due date shall be
considered the “Billing Period.”  Invoices shall be considered consigned during
the period of time from the date of the invoice up to but not including the
final ninety (90) days (the “Final Ninety Days”) of the Billing Period (the
“Consigned Period”). Provided that the invoices are in all other respects Prime
Accounts, Lender shall make such sums available to Borrower at the following
advance rates: (i) seventy percent (70%) of the face amount of each invoice
during the Consigned Period; and (ii) eighty percent (80%) of the face amount of
each invoice during the Final Ninety Days.

 
c. The following Sub-Section as set forth in Section 2.2 is hereby amended and
restated in its entirety as set forth below:
 
2.2.1.                 Interest Rates.
 
(a)  On Advances Against Accounts.  All Advances against Accounts hereunder
shall bear interest, on the Average Daily Balance, at a per annum rate of One
and three quarters percent (1.75%) in excess of  (1) the Prime Rate; or (2) the
Deemed Prime Rate, whichever is higher.
 
(b)  On Advances Against Inventory.  All Advances against Inventory hereunder
shall bear interest, on the Average Daily Balance, at a per annum rate of One
and three quarters percent (1.75%) in excess of  (1) the Prime Rate; or (2) the
Deemed Prime Rate, whichever is higher.
 
4. Consent to Payments of Subordinated Debt.  Borrower has certain indebtedness
owing to Costa Brava Partnership III, L.P. (“Costa Brava”) and Harlingwood
(Alpha) LLC (“Harlingwood”) (the “Subordinated Creditors”), which debt has been
subordinated to Lender (the “Subordinated Debt”) pursuant to those certain
subordination agreements entered into by and between the Subordinated Creditors
and Lender (as amended the “Subordination Agreements”) .  Borrower has requested
that Lender consent to Borrower making principal and interest payments (each a
“Payment” and collectively “Payments”) against the Subordinated Debt as follows:
(a) to Costa Brava pursuant to the following notes: (i) Fourth Amended and
Restated Promissory Note dated May 8, 2013, by Borrower in favor of Costa Brava
in the original principal amount of $9,000,000 and (b) Third Amended and
Restated Promissory Note dated May 8, 2013, by Borrower in favor of Costa Brava
in the original principal amount of $7,000,000 (collectively the "Modified Costa
Brava Notes"); and (b) to Harlingwood pursuant to the following notes: (i)
Promissory Note dated September 6, 2012, by Borrower in favor of Harlingwood in
the original principal amount of $1,000,000; and (ii) Promissory Note 2 dated
December 18, 2012 by Borrower in favor of Harlingwood in the original principal
amount of $500,000 (collectively, the “Harlingwood Notes”).  Lender hereby
consents to Borrower making such Payments against the Subordinated Debt,
provided: (a) there is no Event of Default; and (b) Borrower has sufficient cash
flow and availability under the Allowable Amount (as defined in the Agreement)
to cover such Payment(s), plus a minimum availability of $500,000 at the time
each Payment is made.
 
 
 

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5. Fee.  On February 27, 2014, annually (every twelve (12) months) thereafter,
and while any Obligations remain outstanding to Lender, Borrower agrees to pay
Lender a loan fee equal to One percent (1.00%) of the Maximum Amount (the “Loan
Fee”).
 
6. Legal Effect.  Except as specifically set forth in this Modification, all of
the terms and conditions of the Agreement remain in full force and effect.
 
7. Counterparts.  This Modification may be executed in any number of
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute a single original.
 
8. Electronic Signature.  This Modification, or a signature page thereto
intended to be attached to a copy of this Modification, signed and transmitted
by facsimile machine, telecopier or other electronic means (including via
transmittal of a “pdf” file) shall be deemed and treated as an original
document.  The signature of any person thereon, for purposes hereof, is to be
considered as an original signature, and the document transmitted is to be
considered to have the same binding effect as an original signature on an
original document.  At the request of any party hereto, any facsimile, telecopy
or other electronic document is to be re-executed in original form by the
persons who executed the facsimile, telecopy of other electronic document.  No
party hereto may raise the use of a facsimile machine, telecopier or other
electronic means or the fact that any signature was transmitted through the use
of a facsimile machine, telecopier or other electronic means as a defense to the
enforcement of this Modification.
 
9. Integration.  This is an integrated Modification and supersedes all prior
negotiations and agreements regarding the subject matter hereof.  All amendments
hereto must be in writing and signed by the parties.
 
IN WITNESS WHEREOF, the parties have executed this Ninth Modification to Loan
and Security Agreement as of the date first set forth above.
 
BFI Business Finance
 
/s/ Stephen P. Darlington
 
Spy Optic Inc.
 
/s/ James McGinty
By:      Stephen P. Darlington
Its:      Vice President
 
By:    James McGinty
Its:     CFO