Item 1.01 Entry into a Material Definitive Agreement
On December 27, 2021, Giga-tronics Incorporated (the “Company”) entered into a Share Exchange Agreement (the “Agreement”) with BitNile Holdings, Inc., a Delaware Corporation (“BitNile”) and Gresham Worldwide, Inc., a Delaware corporation (“Gresham”), which is a wholly-owned subsidiary of BitNile.
The Agreement provides that the Company will acquire all of the outstanding shares of capital stock of Gresham in exchange for issuing to BitNile 2,920,085 shares of the Company’s common stock and 514.8 shares of a new series of preferred stock that are convertible into an aggregate of 3,960,043 shares of the Company’s common stock, subject to potential adjustments, and the assumption of Gresham’s outstanding equity awards representing, on an as-assumed basis, 249,875 shares of the Company’s common stock (the “Exchange Transaction”). Completion of the Exchange Transaction is subject to the approval of the Company’s shareholders and other customary closing conditions.
Immediately following the completion of the Exchange Transaction, Gresham will be a wholly-owned subsidiary of the Company. Outstanding shares of the Company’s common stock will remain outstanding and unaffected upon completion of the Exchange Transaction, as will outstanding warrants and options to purchase the Company’s common stock. The Company’s common stock will continue to be registered under the Securities Exchange Act of 1934, as amended, immediately following the Exchange Transaction.
In addition, the Agreement further provides that, BitNile will loan the Company $4.25 million upon the closing of the Exchange Transaction and following the closing of the Exchange Transaction, the Company will repurchase or redeem the currently outstanding shares of its Series B, Series C, Series D and Series E preferred stock (the “Outstanding Preferred”).
Assuming the repurchase of the Outstanding Preferred, and based on 2,725,010 currently outstanding shares of the Company’s common stock, following the issuance to BitNile of the shares of the Company’s common stock and preferred stock in the Exchange Transaction, BitNile would hold approximately 68% of the outstanding voting power and capital stock of the Company’s and existing holders of the Company’s common stock would hold approximately 32%.
In addition to seeking shareholder approval for the Exchange Transaction, the Company has also agreed to seek shareholder approval to (1) increase the number of shares of common stock that it is authorized to issue to 100 million shares, (2) to complete a reverse split of its common stock and (3) to change its charter from that of a California corporation to that of a Delaware corporation.
The Agreement contains certain termination rights for each of the parties, including if (i) the Exchange Transaction is not consummated by June 30, 2022, (ii) the approval of the Company’s shareholders is not obtained, or (iii) there has been a breach by a non-terminating party that is not cured such that the applicable closing conditions are not satisfied. In addition, in certain circumstances, BitNile may terminate the Agreement prior to the Company’s shareholder approval of the Exchange Transaction in the event that (A) the Company materially breaches its non-solicitation obligations relating to alternative business combination transactions, (B) the Company’s board withdraws or adversely modifies its recommendation to shareholders with respect to the Exchange Transaction or fails to affirm its recommendation within the required time period after an alternate acquisition proposal is made, (C) the Company’s board recommends a tender offer or exchange offer or fails to recommend against such a tender offer or exhange offer within ten business days after commencement. In addition, the Company may terminate the Agreement to pursue an alternative acquisition transaction. The Agreement also provides that the Company will be obligated to pay a termination fee of $1.0 million to Gresham if the Agreement (i) is terminated by BitNile in the circumstances described in the preceding sentence or (ii) (A) if an acquisition proposal is made to the Company or to its shareholders publicly, (B) the Agreement is terminated for failure to consummate the Exchange Transaction by the End Date for failure to obtain the approval of the Company’s shareholders and (C) the Company enters into a definitive agreement with respect to or consummates certain acquisition proposals within 12 months of termination of the Agreement or (iii) the Company terminates the Agreement in order to enter into a definitive agreement with respect to an alternate acquisition proposal. In addition, the Company would be required to immediately repay a $500,000 loan made by an affiliate of BitNile in November 2021 that otherwise matures in November 2022.
Planned Underwritten Public Offering
The Agreement further provides that following the Exchange Transaction, the Company will pursue an underwritten public offering of $25 million of its common stock. BitNile has agreed to purchase up to $10 million of common stock in the offering, which amount would include the conversion of the $4.25 million to be loaned to the Company upon the closing of the Exchange Transaction under the Agreement.
Governance and Management
The Agreement provides that upon the completion of the Exchange Transaction, the Company’s board of directors will be comprised of seven directors, four of who shall be designated by BitNile and three of whom shall be current directors of the Company designated by the Company.
The parties have agreed that upon the closing of the Exchange Transaction, the Company’s Chief Executive Officer will be Jonathan Read, who is currently Gresham’s Chief Executive Officer; the Company’s Chief Operating Officer will be Timothy Long, who is currently the Gresham’s Chief Operating Officer and the Company’s Chief Financial Officer (chief accounting and financial officer) will be Lutz P. Henckels, who is currently the Company’s Chief Financial and Chief Operating Officer.
The Preferred Stock
The preferred stock that will be issued to BitNile in the Exchange Transaction will have an aggregate liquidation preference of $12,870,140, is convertible into the Company’s common stock at the holder’s option at conversion price of $3.25 per share, subject to potential adjustment; entitles the holders to elect four of the Company’s directors; and entitles the holders to vote with the Company’s common stock on an as-converted basis. In addition, for so long as BitNile consolidates the Company as a subsidiary for financial reporting purposes, the prior approval of the holders of the preferred stock would be required for the Company to incur indebtedness in excess of $1.0 million per individual transaction or $2.5 million the aggregate (excluding indebtedness outstanding at the time of the preferred stock issue first issues) or complete a merger, acquisition or purchase of assets where the aggregate consideration is valued at more than $1.0 million. The terms of the preferred stock that will be issued to BitNile in the Exchange Transaction are set forth in a Certificate of Determination, the form of which is attached as exhibit to the Agreement.
Employment Matters
In connection with the Company’s entry into the Agreement, each of John Regazzi, President and Chief Executive Officer; Lutz Henckels, Executive Vice President, Chief Financial Officer and Chief Operating Officer; Armand Pantalone, Chief Technology Officer and Daniel Kirby, Chief Customer Officer, has agreed to waive his right to receive severance benefits under his existing Severance Agreement with the Company as a result of a change in his title or responsibilities or reporting structure. In exchange for the waivers, on December 24, 2021, the Company has agreed to grant each of Mr. Regazzi and Mr. Henckels 10 restricted shares of the Company’s common stock and each of Mr. Pantalone and Mr. Kirby 10,000 restricted shares of the Company’s common stock, all of which will vest in one year.
In addition, the Company adopted a Management Change in Control Cash Incentive Opportunity pursuant to which each of the foregoing executives would be entitled to receive an incentive/retention bonus equal to $100,000 or more if the fair market value of the Company’s common stock upon the completion of a change in control transaction (such as the Exchange Transaction) is $4.00 or greater (as may be adjusted for any reverse stock split).
This summary of the Agreement, the Exchange Transaction, BitNile’s loan to the Company, the terms of the preferred stock that the Company will issue and the Management Change in Control Cash Incentive Opportunity are qualified by the actual terms of the agreements and documents filed as exhibits to this Form 8-K. The representations, warranties and covenants contained in the Agreement were made only for purposes of the Agreement and as of specified dates, were solely for the benefit of the parties to the Agreement, and may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with the execution of the Agreement. Investors should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of the Company, Gresham or BitNile. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Agreement, which subsequent information may or may not be fully reflected in public disclosures.