Unassociated Document


    
      
        

      


      FIRST
        AMENDMENT TO

      LOAN
        AND SECURITY AGREEMENTS

      


      This
        First Amendment to Loan and Security Agreements (this "Amendment")
        is
        made as of January 25, 2006, by and among M-WAVE, INC., a Delaware
        corporation ("M-Wave"),
        M-WAVE DBS, an Illinois corporation ("DBS"
        and,
        together with M-Wave, each a "Borrower"
        and
        collectively the "Borrowers"),
        and
        MERCATOR MOMENTUM FUND III, L.P., a California limited partnership
        ("Lender").

      


      Factual
        Background

      


      A.   Pursuant
        to that certain Silicon Valley Bank Loan and Security Agreement (including
        the
        Schedule thereto) dated June 28, 2004 (as amended from time to time, the
        "2004
        Loan Agreement"),
        among
        M-Wave, Poly Circuits, Inc., an Illinois corporation ("Poly
        Circuits"),
        and
        Silicon Valley Bank ("SVB"),
        as
        amended by (1) that certain Amendment to Loan Documents dated June 28,
        2004, among M-Wave, Poly Circuits and SVB, (2) that certain Amendment to
        Loan Documents dated December 17, 2004, among M-Wave, Poly Circuits and
        SVB, (3) that certain Assumption Agreement and Amendment to Loan Documents
        dated April 11, 2005, among M-Wave, DBS and SVB, (4) that certain
        Amendment to Loan Agreement and Release dated September 2, 2005, among
        M-Wave, DBS and SVB, (5) that certain Limited Forbearance Agreement dated
        October 17, 2005, among M-Wave, DBS and SVB, and (6) that certain
        Extension Agreement dated October 24, 2005, among M-Wave, DBS and SVB, SVB
        made loans (collectively, the "2004
        Loans")
        to the
        Borrowers.

      


      B.   The
        2004
        Loans and all of the other Obligations (as that term is defined in the 2004
        Loan
        Agreement) (collectively, the "2004
        Obligations"),
        are
        secured by first priority perfected security interests in all of the Collateral
        (as that term is defined in the 2004 Loan Agreement). The 2004 Obligations
        are
        also secured by first priority perfected security interests in all of the
        Intellectual Property Collateral (as that term is defined in (1) that
        certain Intellectual Property Security Agreement dated as of April 11,
        2005, between M-Wave, as grantor, and SVB, as secured party, and (2) that
        certain Intellectual Property Security Agreement dated as of April 11,
        2005, between DBS, as grantor, and SVB, as secured party (collectively, the
        "Intellectual
        Property Security Agreements").

      


      C.   Pursuant
        to that certain Silicon Valley Bank Loan and Security Agreement dated as
        of
        April 11, 2005 (as amended from time to time, the "2005
        Loan Agreement"),
        among
        M-Wave, DBS and SVB, as amended by (1) that certain Amendment to Silicon
        Valley Bank Loan Agreement dated September 2, 2005, among the M-Wave, DBS
        and SVB, SVB made loans (collectively, the "2005
        Loans")
        to the
        Borrowers.

      


      D.   The
        2005
        Loans and all of the other Obligations (as that term is defined in the 2005
        Loan
        Agreement) (collectively, the "2005
        Obligations"),
        are
        secured by first priority perfected security interests in all of the Collateral
        (as that term is defined in the 2005 Loan Agreement and Exhibit A attached
        thereto). The 2005 Obligations are also secured by first priority perfected
        security interests in all of the Intellectual Property Collateral (as that
        term
        is defined in the Intellectual Property Security Agreements.


      
        
          
          

        

        
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      E.   Pursuant
        to the 2004 Loan Agreement and the 2005 Loan Agreement (collectively, the
        "Loan
        Agreements"),
        SVB
        made the 2004 Loans and the 2005 Loans (collectively, the "Loans")
        to the
        Borrowers in an aggregate principal amount equal to $1,805,000 (the
        "Initial
        Loan Amount").

      


      F.   SVB
        assigned all of its right, title and interest in and to (1) the Loans and
        (2) the Loan Agreements, the Intellectual Property Security Agreements and
        all other documents evidencing or securing the Loans (collectively, the
        "Loan
        Documents")
        to
        Monarch Pointe Fund Ltd. ("Monarch")
        pursuant to a Loan Document Purchase Agreement dated November 9, 2005, and
        Monarch has assigned all of its right, title and interest in and to the Loans
        and the Loan Documents to Lender. Lender is currently the owner of all right,
        title and interest in and to the Loans and the Loan Documents.

      


      G.   As
        of the
        date of this Amendment, (i) the outstanding principal amount of the 2004
        Loan is $1,280,721.51 and the outstanding principal amount of the 2005 Loan
        is
        $318,485.76, for a total of $1,599,207.27, and (ii) the accrued and unpaid
        interest on the 2004 Loan for the period from November 9, 2005 (the date on
        which Monarch acquired the Loans from SVB) through and including
        December 31, 2005 is $16,498.18 and the accrued and unpaid interest on the
        2005 Loan for the period from November 9, 2005 through and including
        December 31, 2005 is $4,102.71, for a total of $20,600.89.

      


      H.   The
        Borrowers and Lender now wish to modify the Loan Documents as set forth
        below.

      


      Agreement

      


      Therefore,
        each of the Borrowers and Lender agree as follows:

      


      1.    
Recitals.
        The
        recitals set forth above in the Factual Background are true, accurate and
        correct.

      


      2.    
Reaffirmation
        of the Loans and the Loan Documents.
        Each of
        the Borrowers reaffirms all of its obligations under each of the Loan Documents
        to which it is a party, and each of the Borrowers acknowledges that it has
        no
        claims, offsets or defenses with respect to the payment of sums due under
        the
        2004 Loan Agreement, the 2005 Loan Agreement or any of the other Loan
        Documents.

      


      3.    
Modification
        of the Loan Documents.
        The
        Loan Documents are hereby amended as follows:

      


      3.1   Amendments
        to the 2004 Loan Agreement.
        The
        2004 Loan Agreement is amended as follows:

      


      (a)    References.
        All
        references to "Silicon Valley Bank" or "Silicon" in the 2004 Loan Agreement
        shall be deemed to refer to Lender, and the Borrowers acknowledge and agree
        that
        Lender has all of the rights and remedies of SVB under the 2004 Loan Agreement
        and each of the other Loan Documents that relate thereto.


      
        
          
          

        

        
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      (b)    Term
        Loan.
        As of
        the date of this Amendment, the 2004 Loan, and the sum of (i) all principal
        amounts outstanding under the 2004 Loan Agreement and (ii) the accrued and
        unpaid interest on the 2004 Loan for the period from November 9, 2005 (the
        date on which Monarch acquired the Loans from SVB) through and including
        December 31, 2005, shall constitute a term loan having a principal amount
        equal to the sum of the outstanding principal amount of the 2004 Loan on
        the
        date of this Amendment and the accrued and unpaid interest on the 2004 Loan
        through December 31, 2005. Notwithstanding any contrary provision of the
        2004 Loan Agreement or any other Loan Document, the Borrowers shall not have
        the
        right to repay and reborrow any principal outstanding on the 2004
        Loan.

      


      (c)    Interest
        and Repayment of the Term Loan.
        Interest shall accrue (commencing January 1, 2006) on the sum of
        (i) the outstanding principal amount of the 2004 Loan from time to time and
        (ii) the accrued and unpaid interest on the 2004 Loan for the period from
        November 9, 2005, through and including December 31, 2005, at the
        interest rate, and shall be payable in cash monthly in arrears at the times
        and
        in the manner, specified in Section 2
        (entitled "Interest") of the Schedule attached to the 2004 Loan Agreement,
        except that the term "Prime Rate" shall mean the "prime rate" reported by
        the
        Wall Street Journal under "Money Rates," and the interest rate applicable
        to the
        2004 Loan shall change on each date that there is a change in such "prime
        rate"
        reported by the Wall Street Journal. Unless earlier accelerated upon the
        occurrence of an Event of Default, all principal and unpaid interest outstanding
        on the 2004 Loan shall be due and payable on June 28, 2006, which is the
        Maturity Date (as that term is defined in the 2004 Loan Agreement).

      


      (d)    Deletion
        of Certain Provisions.
        All of
Section 1
        (entitled "Loans") other than Section 1.2
        (entitled "Interest") and all of Section 4
        (entitled "Accounts") of the 2004 Loan Agreement, and all of Section 1
        (entitled "Credit Limit"), Section 3
        (entitled "Fees"), Section 5
        (entitled "Financial Covenants") and paragraph (1) (entitled "Banking
        Relationship") of Section 8
        (entitled "Additional Provisions") of the Schedule attached to the 2004 Loan
        Agreement, are hereby deleted in their entirety.

      


      (e)    Early
        Termination.
        The
        proviso in the second sentence of Section 6.2
        of the
        2004 Loan Agreement (most recently amended by Paragraph 1 of the Amendment
        to Loan Agreement and Release dated September 2, 2005) is hereby deleted in
        its entirety.

      


      3.2   Amendments
        to the 2005 Loan Agreement.
        The
        2005 Loan Agreement is amended as follows:

      


      (a)    References.
        All
        references to "Silicon Valley Bank" or "Silicon" in the 2005 Loan Agreement
        shall be deemed to refer to Lender, and the Borrowers acknowledge and agree
        that
        Lender has all of the rights and remedies of SVB under the 2005 Loan Agreement
        and each of the other Loan Documents that relate thereto.


      
        
          
          

        

        
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      (b)    Term
        Loan.
        As of
        the date of this Amendment, the 2005 Loan, and the sum of (i) all principal
        amounts outstanding under the 2005 Loan Agreement and (ii) the accrued and
        unpaid interest on the 2005 Loan for the period from November 9, 2005 (the
        date on which Monarch acquired the Loans from SVB) through and including
        December 31, 2005, shall constitute a term loan having a principal amount
        equal to the sum of the outstanding principal amount of the 2005 Loan on
        the
        date of this Amendment and the accrued and unpaid interest on the 2005 Loan
        through December 31, 2005. Notwithstanding any contrary provision of the
        2005 Loan Agreement or any other Loan Document, the Borrowers shall not have
        the
        right to repay and reborrow any principal outstanding on the 2005
        Loan.

      


      (c)    Interest
        and Repayment of the Term Loan.
        Notwithstanding any contrary provision of the 2005 Loan Agreement, interest
        shall accrue (commencing January 1, 2006) on the sum of (i) the
        outstanding principal amount of the 2005 Loan from time to time and
        (ii) the accrued and unpaid interest on the 2005 Loan for the period from
        November 9, 2005, through and including December 31, 2005, at the
        interest rate, and shall be payable in cash monthly in arrears at the times
        and
        in the manner, specified in Section 2
        (entitled "Interest") of the Schedule attached to the 2004 Loan Agreement,
        except that the term "Prime Rate" shall mean the "prime rate" reported by
        the
        Wall Street Journal under "Money Rates," and the interest rate applicable
        to the
        2005 Loan shall change on each date that there is a change in such "prime
        rate"
        reported by the Wall Street Journal. Unless earlier accelerated upon the
        occurrence of an Event of Default, all principal and unpaid interest outstanding
        on the 2005 Loan shall be due and payable on June 28, 2006, which is the
        Maturity Date (as that term is defined in the 2005 Loan Agreement).

      


      (d)    Deletion
        of Certain Provisions.
        All of
Section 2.1.1
        (entitled "Financing of Accounts") other than paragraph (f) thereof
        (entitled "Maturity"), all of Section 2.2
        (entitled "Collections, Finance Charges, Remittances and Fees"), all of
Section 2.3
        (entitled "Repayment of Obligations; Adjustments") and all of Section 3
        (entitled
        "Conditions of Loans") of the 2005 Loan Agreement are hereby deleted in their
        entirety.

      


      3.3   Additional
        Credit.
        Subject
        to the conditions set forth in Section 3.4,
        below,
        Lender agrees to make additional advances to M-Wave from time to time during
        the
        period prior to June 28, 2006, in an aggregate principal amount not to
        exceed Nine Hundred Seventy-Four Thousand Dollars ($974,000.00) (the
        "Additional
        Credit"),
        in
        accordance with the budget attached as Exhibit A
        to this
        Amendment and made a part hereof (the "Budget").
        Interest shall accrue on the principal amount of Additional Credit outstanding
        from time to time (commencing with the date on which such Additional Credit
        is
        advanced) at the interest rate, and shall be payable in cash monthly in arrears
        at the times and in the manner, specified in Section 2
        (entitled "Interest") of the Schedule attached to the 2004 Loan Agreement,
        except that the term "Prime Rate" shall mean the "prime rate" reported by
        the
        Wall Street Journal under "Money Rates," and the interest rate applicable
        to the
        Additional Credit shall change on each date that there is a change in such
        "prime rate" reported by the Wall Street Journal. Unless earlier accelerated
        upon the occurrence of an Event of Default (as that term is defined in the
        Loan
        Agreements), all principal and unpaid interest outstanding on the Additional
        Credit shall be due and payable on June 28, 2006.


      
        
          
          

        

        
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      3.4   Conditions
        to the Advance of Additional Credit.
        Lender's obligation to make an advance of Additional Credit to M-Wave shall
        be
        subject to all of the following conditions precedent:

      


      3.4.1    M-Wave
        shall have submitted to Lender a written request for an advance of Additional
        Credit in form satisfactory to Lender specifying the requested amount and
        use of
        such advance pursuant to the Budget, which written request shall be accompanied
        by such supporting information (including invoices or other evidence of the
        proper use of such advance) as Lender may require;

      


      3.4.2    No
        Default or Event of Default (as those terms are defined in the Loan Agreements)
        shall have occurred and be continuing; and

      


      3.4.3    Each
        of
        the representations and warranties set forth in the Loan Agreements shall
        be
        true on the date of M-Wave's written request for an advance of Additional
        Credit
        and on the effective date of such advance. Each advance is M-Wave's
        representation and warranty on that date that the representations and warranties
        set forth in the Loan Agreements remain true.

      


      3.5   Mandatory
        Repayments and Reduction of Additional Credit.
        Except
        for sales of inventory in the ordinary course of business, the net sale proceeds
        (which, in the case of the sale of any assets of DBS, includes trade payables
        attributable to DBS) of the sale of any assets of either Borrower shall be
        paid
        to Lender for application to the outstanding principal amount of the Loans
        or
        the Additional Credit (and shall be applied to the Additional Credit and
        the
        Loans in any order Lender may choose).

      


      3.6   Cross-Default.
        Any
        Event of Default under the 2004 Loan Agreement or the 2005 Loan Agreement
        shall
        constitute a default under each other loan or other obligation (other than
        the
        2004 Loan, the 2005 Loan or the Additional Credit) at any time owing from
        either
        of the Borrowers to either Lender or Monarch, and any default or event of
        default (subject to any applicable notice and cure rights) under and as defined
        in any agreement (other than the 2004 Loan Agreement or the 2005 Loan Agreement)
        between either of the Borrowers, on the one hand, and either Lender or Monarch,
        on the other, shall constitute an Event of Default under each of the 2004
        Loan
        Agreement and the 2005 Loan Agreement.

      


      4.    
Waiver
        of Existing Defaults.
        In
        consideration of the waiver fee described below, upon this Amendment's becoming
        effective Lender waives all outstanding Events of Default on the Loans that
        arise from acts, omissions or circumstances (or, with notice or the passage
        of
        time or both, would arise from acts, omissions or circumstances) that occurred
        or arose prior to the date of this Amendment. The Borrowers shall pay to
        Lender
        a waiver fee of Ten Thousand Dollars ($10,000.00), $5,000.00 of which is
        allocated to each of the 2004 Loan and the 2005 Loan and added to the
        outstanding principal amount thereof as of the date of this Agreement. Interest
        shall accrue on the unpaid amount of such fee from and after the effective
        date
        of this Amendment, and such fee shall be due and payable to Lender on
        June 28, 2006. Except as expressly waived by this Section 4,
        Lender
        reserves all of its rights and remedies under the Loan
        Documents.


      
        
          
          

        

        
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      5.    
Conditions
        Precedent.
        This
        Amendment shall become effective upon Lender's receipt of fully executed
        and,
        where appropriate, acknowledged originals of this Amendment and any other
        documents that Lender may require or request in accordance with this Amendment
        or the other Loan Documents.

      


      6.    
The
        Borrowers' Representations and Warranties.
        Each of
        the Borrowers represents and warrants to Lender as follows:

      


      (a)   Loan
        Documents.
        All
        representations and warranties made and given by such Borrower in the Loan
        Documents are true, accurate and correct.

      


      (b)   No
        Default.
        Subject
        to the effectiveness of the waiver set forth in Section 4,
        above,
        no Event of Default has occurred and is continuing, and no event has occurred
        and is continuing which, with notice or the passage of time or both, would
        be an
        Event of Default.

      


      (c)   Borrowing
        Entity.
        M-Wave
        is a corporation that is duly organized and validly existing under the laws
        of
        the State of Delaware, and is qualified to do business in each jurisdiction
        in
        which its ownership of assets or the conduct of its business requires such
        qualification. There have been no changes in the organization, ownership
        structure or formation documents of M-Wave that have not been disclosed to
        Lender. DBS is a corporation that is duly organized and validly existing
        under
        the laws of the State of Illinois, and is qualified to do business in each
        jurisdiction in which its ownership of assets or the conduct of its business
        requires such qualification. There have been no changes in the organization,
        ownership structure or formation documents of DBS that have not been disclosed
        to Lender. DBS is the sole subsidiary of M-Wave.

      


      7.    
Incorporation.
        Upon
        its effective date, this Amendment shall constitute a Loan Document and shall
        form a part of each Loan Document, and all references to a given Loan Document
        shall mean that document as hereby modified.

      


      8.    
No
        Prejudice; Reservation of Rights.
        This
        Amendment shall not prejudice any rights or remedies of Lender under the
        Loan
        Documents. Lender reserves, without limitation, all rights that it has against
        any indemnitor, guarantor or other person or entity from time to time liable
        under any of the Loan Documents.

      


      9.     No
        Impairment.
        Except
        as specifically hereby amended, the Loan Documents shall each remain unaffected
        by this Amendment, and all such documents shall remain in full force and
        effect.

      


      10.   Expenses.
        The
        Borrowers shall reimburse Lender on demand, in immediately available funds,
        for
        all costs and expenses incurred by Lender in connection with this Amendment,
        including legal fees and expenses of Lender's counsel.


      
        
          
          

        

        
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      11.   Purpose
        and Effect of Approvals.
        Approval of any matter in connection with the Loans by Lender shall be for
        the
        sole purpose of protecting the security and rights of Lender. No such approval
        shall result in a waiver of any default by a Borrower. In no event shall
        any
        approval of Lender constitute a representation of any kind with regard to
        the
        matter being approved.

      


      12.   Integration.
        The
        Loan Documents, including this Amendment: (a) integrate all the terms and
        conditions mentioned in or incidental to the Loan Documents; (b) supersede
        all oral negotiations and prior and other writings with respect to their
        subject
        matter; and (c) are intended by the parties as the final expression of
        their agreement with respect to the terms and conditions set forth in those
        documents and as the complete and exclusive statement of the terms agreed
        to by
        the parties. If there is any conflict between the terms, conditions and
        provisions of this Amendment and those of any other agreement or instrument,
        including any of the other Loan Documents, the terms, conditions and provisions
        of this Amendment shall prevail.

      


      13.   Miscellaneous.
        The
        obligations of the Borrowers under this Amendment and each of the other Loan
        Documents are joint and several. This Amendment may be executed in counterparts,
        and all counterparts shall constitute but one and the same document. If any
        court of competent jurisdiction determines any provision of this Amendment
        or
        any of the other Loan Documents to be invalid, illegal or unenforceable,
        that
        portion shall be deemed severed from the rest, which shall remain in full
        force
        and effect as though the invalid, illegal or unenforceable portion had never
        been a part of the Loan Documents. This Amendment shall be governed by the
        laws
        of the State of California, without regard to the choice of law rules of
        that
        State. As used here, the word "include(s)" means "includes(s), without
        limitation," and the word "including" means "including, but not limited
        to."


      
        
          
          

        

        
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      IN
        WITNESS WHEREOF, the parties have executed this Amendment as of the date
        first
        set forth above.

      


      
        	 	
                "Borrowers"

              
	 	 	 	 
	 	
                M-WAVE,
                  INC., 

              
	 	
                a
                  Delaware corporation

              
	 	 	 	 
	 	 	 	 
	 	
                By

              	/s/Jim
                Mayer
	 	 	 	 
	 	 	Interim
                Chief Executive Officer
	 	 	 	 
	 	 	 	 
	 	
                M-WAVE
                  DBS, INC., 

              
	 	
                an
                  Illinois corporation

              
	 	 	 	 
	 	
                By

              	/s/Jim
                Mayer
	 	 	 	 
	 	 	Interim
                Chief Executive Officer
	 	 	 	 
	 	
                "Lender"

              
	 	 	 	 
	 	
                MERCATOR
                  MOMENTUM FUND III, L.P., a California limited
                  partnership

              
	 	 	 	 
	 	
                By:

              	M.A.G.
                CAPITAL, LLC,
	 	 	
                a
                  California limited liability  company, its General
                  Partner

              
	 	 	 	 
	 	 	 	 
	 	 	
                By

              	
                /s/David
                  Firestone

              
	 	 	 	
                Managing
                  Member

              


      


      
        
          
          

        

        
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      CONSENT
        OF SUBORDINATED CREDITORS

      


      Each
        of
        the undersigned hereby consents to the foregoing First Amendment to Loan
        and
        Security Agreements, and reaffirms its obligations to Mercator Momentum Fund
        III, L.P., as successor to Silicon Valley Bank as Lender, under the
        Subordination Agreement for the benefit of Lender to which it is a party,
        and
        agrees that it is and remains bound by such Subordination
        Agreement.

      


      Dated
        as
        of January 25, 2006

      
         

        
          	 	
                  MERCATOR
                    MOMENTUM FUND, L.P., a California limited partnership

                
	 	 
	 	
                  By:

                	
                  M.A.G.
                    CAPITAL, LLC, a California limited liability company, its General
                    Partner

                
	 	 	 
	 	 	 
	 	 	
                  By
                    

                	
                  /s/David
                    Firestone

                
	 	 	 	
                  Managing
                    Member

                
	 	 	 
	 	
                  MONARCH
                    POINTE FUND, LTD.

                
	 	 	 
	 	 	 
	 	
                  By
                    

                	
                  /s/David
                    Firestone

                
	 	 	
                  Managing
                    Member

                


        

      

       

      
        
          
          

        

        
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      EXHIBIT
        A

      


      BUDGET
        FOR USE OF ADDITIONAL CREDIT

       

       

       A-1