Alphatec Spine, Inc.
Alphatec Holdings, Inc. (Form: 10-Q, Received: 05/12/2008 15:19:27)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission file number 000-52024

ALPHATEC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-2463898
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

2051 Palomar Airport Road, Suite 100

Carlsbad, CA 92011

(Address of principal executive offices, including zip code)

(760) 431-9286

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ¨     Accelerated filer   x     Non-accelerated filer   ¨     Small reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes   ¨     No   x

As of April 28, 2008, there were 47,402,516 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2008

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (unaudited)

   3
  

Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007

   3
  

Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007

   4
  

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007

   5
  

Notes to Unaudited Condensed Consolidated Financial Statements

   7

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   18

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   27

Item 4.

  

Controls and Procedures

   28

PART II—OTHER INFORMATION

   28

Item 1.

  

Legal Proceedings

   28

Item 1A.

  

Risk Factors

   29

Item 6.

  

Exhibits

   29

SIGNATURES

   30

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for par value data)

 

     March 31, 2008     December 31, 2007  
     (unaudited)        
Assets     

Current assets:

    

Cash and cash equivalents

   $ 26,904     $ 25,843  

Restricted cash

     —         2,000  

Accounts receivable, net

     14,183       13,035  

Inventories, net

     21,658       20,092  

Prepaid expenses and other current assets

     1,752       1,968  

Deferred income tax asset

     706       937  
                

Total current assets

     65,203       63,875  

Property and equipment, net

     13,884       12,229  

Goodwill

     60,183       60,003  

Intangibles, net

     8,738       9,634  

Other assets

     2,314       1,499  
                

Total assets

   $ 150,322     $ 147,240  
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable

   $ 6,382     $ 5,948  

Accrued expenses

     9,576       11,146  

Accrued litigation

     13,222       2,222  

Lines of credit

     9,366       2,546  

Current portion of long-term debt

     2,084       2,211  
                

Total current liabilities

     40,630       24,073  

Long-term debt, less current portion

     1,568       1,954  

Other long-term liabilities

     1,518       1,478  

Deferred income tax liabilities

     1,068       1,273  

New Redeemable preferred stock, $0.0001 par value; 20,000 authorized; 3,320 shares issued and outstanding at March 31, 2008 and December 31, 2007

     23,608       23,612  

Stockholders’ equity:

    

Stock subscription

     1,011       —    

Common stock, $0.0001 par value; 200,000 authorized; 47,179 and 47,169 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively

     5       5  

Additional paid-in capital

     154,473       153,394  

Accumulated other comprehensive income

     1,103       334  

Accumulated deficit

     (74,662 )     (58,883 )
                

Total stockholders’ equity

     81,930       94,850  
                

Total liabilities and stockholders’ equity

   $ 150,322     $ 147,240  
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Three Months Ended March 31,  
     2008     2007  
     (unaudited and in thousands,
except per share data)
 

Revenues

   $ 23,197     $ 19,550  

Cost of revenues

     7,887       6,881  
                

Gross profit

     15,310       12,669  

Operating expenses:

    

Research and development

     3,204       1,465  

In-process research and development

     1,300       —    

Sales and marketing

     9,139       7,909  

General and administrative

     6,528       5,907  

Litigation settlement

     11,000       —    
                

Total operating expenses

     31,171       15,281  
                

Operating loss

     (15,861 )     (2,612 )

Other income (expense):

    

Interest income

     201       187  

Interest expense

     (178 )     (338 )

Other income, net

     151       90  
                

Total other income (expense)

     174       (61 )
                

Loss before taxes

     (15,687 )     (2,673 )

Income tax provision

     92       1  
                

Net loss

   $ (15,779 )   $ (2,674 )
                

Net loss per common share:

    

Basic and diluted

   $ (0.34 )   $ (0.08 )
                

Weighted average shares used in computing net loss per share:

    

Basic and diluted

     46,001       33,493  
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Three Months Ended March 31,  
     2008     2007  
     (unaudited and in thousands)  

Operating activities:

    

Net loss

   $ (15,779 )   $ (2,674 )

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     2,035       2,410  

Stock-based compensation

     769       251  

Interest expense related to amortization of debt discount and revaluation of put right

     —         91  

In-process research and development paid in stock

     650       —    

Provision for doubtful accounts

     45       (43 )

Provision for excess and obsolete inventory

     517       236  

Deferred income taxes

     294       26  

Changes in operating assets and liabilities:

    

Accounts receivable

     (719 )     (1,252 )

Inventories

     (1,731 )     (1,127 )

Prepaid expenses and other current assets

     493       308  

Income taxes receivable

     —         9  

Other assets

     (400 )     12  

Accounts payable

     190       (2,666 )

Accrued litigation settlement

     11,000       35  

Accrued expenses and other

     (1,688 )     (547 )
                

Net cash used in operating activities

     (4,324 )     (4,931 )

Investing activities:

    

Purchases of instruments, property and equipment

     (2,515 )     (421 )

Purchase of intangible assets

     —         (2,627 )

Investment in certificate of deposit

     —         (2,000 )

Sale of certificate of deposit

     2,000       —    
                

Net cash used in investing activities

     (515 )     (5,048 )

Financing activities:

    

Net proceeds from issuance of common stock

     —         1,119  

Borrowings under lines of credit

     8,500       —    

Repayments under lines of credit

     (1,869 )     (560 )

Escrow proceeds

     —         952  

Principal payments on capital lease obligations

     (137 )     (122 )

Proceeds from issuance of notes payable

     —         584  

Principal payments on notes payable

     (497 )     (778 )

Other

     22       —    
                

Net cash provided by financing activities

     6,019       1,195  

Effect of exchange rate changes on cash and cash equivalents

     (119 )     (69 )
                

Net increase (decrease) in cash and cash equivalents

     1,061       (8,853 )

Cash and cash equivalents at beginning of period

     25,843       16,943  
                

Cash and cash equivalents at end of period

   $ 26,904     $ 8,090  
                

See accompanying notes to unaudited condensed consolidated financial statements.

 

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ALPHATEC HOLDINGS, INC.

STATEMENTS OF CASH FLOWS – (continued)

 

     Three Months Ended March 31,
     2008    2007
     (unaudited and in thousands)

Supplemental disclosure of cash flow information:

     

Cash paid for interest

   $ 173    $ 224
             

Cash paid for income taxes

   $ 278    $ 63
             

Revaluation of put right (Minority interest)

   $ —      $ 91
             

See accompanying notes to unaudited condensed consolidated financial statements.

 

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Alphatec Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. The Company

Alphatec Holdings, Inc. (“Alphatec,” “Alphatec Holdings” or the “Company”) was incorporated in the state of Delaware in March 2005 in order to acquire 100% of the outstanding capital stock of Alphatec Spine, Inc. (“Alphatec Spine”) on March 18, 2005. Alphatec Spine, formerly known as Alphatec Manufacturing, Inc., is a California corporation that was incorporated in May 1990 and is engaged in the development, manufacturing and sale of medical devices for use in orthopedic spinal surgeries. Alphatec Holdings principal operating activities are conducted through Alphatec Spine and its consolidated subsidiaries, Nexmed, Inc. (“Nexmed”), a California corporation, Alphatec Pacific, Inc. (“Alphatec Pacific”), a Japanese corporation, and Milverton Limited (“Milverton”), a Hong Kong corporation.

2. Basis of Presentation

The consolidated financial statements include the accounts of Alphatec and Alphatec Spine and its wholly owned subsidiaries, Nexmed, Alphatec Pacific and Milverton.

Intercompany balances and transactions have been eliminated in consolidation.

These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in Alphatec Holdings’ Annual Report on Form 10-K and Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission (“SEC”) on March 17, 2008 and April 29, 2008, respectively.

3. Unaudited Interim Results

The accompanying interim consolidated balance sheet as of March 31, 2008, the related statements of operations and cash flows for the three months ended March 31, 2008 and 2007 are unaudited. The unaudited consolidated financial statements have been prepared according to the rules and regulations of the SEC and, therefore, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted.

In the opinion of management, the accompanying unaudited consolidated financial statements for the periods presented reflect all adjustments, which are normal and recurring, necessary to fairly state the financial position, results of operations and cash flows. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K and Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC on March 17, 2008 and April 29, 2008, respectively.

Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for any other interim period or for the fiscal year ending December 31, 2008.

4. Change in Instrument Useful Lives

During the first quarter of 2008, Alphatec completed a review of the estimated useful lives of its spinal disorder product instrumentation. After reviewing internal plans, analyzing and testing the historical useful life of instrumentation, forecasting product life cycles and demand expectations, the useful life was extended from two to four years. The extension of depreciable lives qualifies as a change in accounting estimate and was made on a prospective basis effective January 1, 2008. For the three months ended March 31, 2008, depreciation expense was $0.7 million less than it would have been had the depreciable lives not been extended. The effect of this change on basic and diluted earnings per shares for the three months ended March 31, 2008 was $0.01.

5. Stock-Based Compensation

Adoption of SFAS 123(R)

The Company accounts for stock based compensation under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). Compensation costs related to all equity instruments granted after January 1, 2006 is recognized at grant-date fair value of the awards in accordance with the provisions of SFAS No. 123(R). Additionally, under the provisions of SFAS No. 123(R), the Company is required to include an estimate of the number of the awards that will be forfeited in calculating compensation costs, which is recognized over the requisite service period of the awards on a straight-line basis.

 

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Valuation of Stock Option Awards

The weighted average grant-date fair value of stock options granted during the three months ended March 31, 2008 was $2.43. The assumptions used to compute the share-based compensation costs for the stock options granted during the three months ended March 31, 2008 and 2007 are as follows:

 

     Three Months Ended March 31,  
     2008     2007  

Employee Stock Options

    

Risk-free interest rate

   2.67 %   4.49 %

Expected dividend yield

   —   %   —   %

Weighted average expected life (years)

   6.3     6.5  

Volatility

   46 %   62 %

Forfeiture rate

   10 %   15 %

The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future. The weighted average expected life of options was calculated using the simplified method as prescribed by the SEC’s Staff Accounting Bulletin (“SAB”) No. 110, Share-Based Payment (“SAB No. 110”). This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. In addition, due to the Company’s limited historical data, the estimated volatility also reflects the application of SAB No. 110, incorporating the historical volatility of comparable companies whose share prices are publicly available.

Compensation Costs

The compensation cost that has been included in the Company’s consolidated statements of operations for all stock-based compensation arrangements is detailed as follows (in thousands, except per share amounts):

 

     Three Months Ended March 31,  
     2008     2007  

Cost of revenues

   $ 68     $ 77  

Research and development

     231       60  

Sales and marketing

     159       75  

General and administrative

     311       39  
                

Total

   $ 769     $ 251  
                

Effect on basic and diluted net loss per share

   $ (0.02 )   $ (0.01 )
                

As of March 31, 2008, there was $7.4 million of unrecognized compensation expense for stock options and awards which is expected to be recognized over a weighted average period of approximately 3.06 years. The total intrinsic value of options exercised was immaterial for the three months ended March 31, 2008 and 2007.

6. Litigation Settlement

On June 26, 2006, Biedermann Motech GmbH and DePuy Spine, Inc. (“DePuy”) filed suits for patent infringement against a number of companies selling pedicle screws, including Alphatec Spine. The complaint against Alphatec Spine was filed in the U.S. District Court for the District of Massachusetts and alleged infringement of U.S. Patent No. 5,207,678 (“678 Patent”) owned by

 

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Biedermann Motech and exclusively licensed to DePuy in the U.S. In May 2008, Alphatec Spine and DePuy entered into a settlement and release agreement, or the settlement agreement, pursuant to which Alphatec Spine obtained a license to the intellectual property rights contained in the 678 Patent. The settlement agreement resolves the lawsuit between Alphatec and DePuy and grants Alphatec the right to continue to manufacture, market and sell its Zodiac and Solanas products. Terms of the agreements include a one-time payment of $11.0 million and an ongoing royalty payable upon future net sales of licensed products.

7. Net Loss Per Share

The Company calculates net loss per share in accordance with SFAS No. 128, Earnings per Share . Basic earnings per share (“EPS”) is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period, excluding common stock equivalents. Diluted EPS is computed by dividing the net loss by the weighted average number of common shares outstanding for the period plus the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company and options are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

 

     Three Months Ended March 31,  
     2008     2007  
     (In thousands, except per share amounts)  

Numerator:

    

Net loss

   $ (15,779 )   $ (2,674 )
                

Denominator:

    

Weighted average common shares outstanding

     47,177       34,769  

Weighted average unvested common shares subject to repurchase

     (1,176 )     (1,276 )
                

Weighted average common shares outstanding - basic

     46,001       33,493  

Effect of dilutive securities:

    

Options

     —         —    
                

Weighted average common shares outstanding - diluted

     46,001       33,493  
                

Net loss per common share:

    

Basic and diluted

   $ (0.34 )   $ (0.08 )
                

As of the end of March 31 for their respective years, historical outstanding anti-dilutive securities not included in the diluted net loss per common share calculation:

 

     March 31, 2008    March 31, 2007
     (In thousands)

Options to purchase common stock

   1,363    709

Unvested restricted share awards

   1,176    1,276
         
   2,539    1,985
         

8. Segment and Geographical Information

The Company applies the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131’). SFAS No. 131 requires public companies to report financial and descriptive information about their reportable operating segments. The Company identifies its operating segments based on how management internally evaluates separate financial information, business activities and management responsibility. The Company believes it operates in a single business segment.

 

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During the three months ended March 31, 2008 and 2007, the Company operated in two geographic locations, the United States and Asia. Revenues, attributed to the geographic location of the customer, were as follows (in thousands):

 

     Three Months Ended March 31,
     2008    2007

United States

   $ 18,647    $ 16,647

Asia

     4,550      2,903
             

Total consolidated revenues

   $ 23,197    $ 19,550
             

Total assets by region were as follows (in thousands):

 

     March 31, 2008    December 31, 2007

United States

   $ 137,258    $ 134,721

Asia

     13,064      12,519
             

Total consolidated assets

   $ 150,322    $ 147,240
             

9. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements An amendment of ARB No. 51 (“ARB No. 51” ) , which requires an entity to clearly identify and report ownership interests in subsidiaries held by parties other than the parent in the consolidated statement of financial position within equity but separate from the parent’s equity. SFAS No. 160 also requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be identified and presented on the face of the consolidated income statement; that changes in a parent’s ownership interest be accounted for as equity transactions; and that when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation be measured at fair value. SFAS No. 160 is effective for fiscal years beginning after December 31, 2008. The Company does not anticipate that SFAS No. 160 will have a material effect on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS No. 141 ”), which requires an acquirer to recognize the assets acquired, the liabilities assumed, contractual contingencies, and contingent consideration at their fair values as of the acquisition date. SFAS No. 141 also requires acquisition costs to be expensed as incurred, restructuring costs to be expensed in the period subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date to impact tax expense. SFAS No. 141 also requires the acquirer in an acquisition implemented in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. SFAS No. 141 is effective for business combinations with an acquisition date after December 31, 2008.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which offers entities the option to measure eligible financial instruments and certain other items at fair value and record unrealized gains and losses in earnings. SFAS No. 159 also establishes presentation and disclosure requirements for items reported at fair value in the financial statements. SFAS No. 159 is effective for fiscal years beginning after December 31, 2007. SFAS No. 159 did not have a material effect on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in Generally Accepted Accounting Principles (“GAAP”) and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements, but may change current practice for some entities. The adoption of SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 did not have a material effect on the Company’s consolidated financial statements.

 

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The following table shows the fair value measurement for this financial asset at March 31, 2008 and fair value hierarchy level, as defined in SFAS No. 157:

 

          Fair Value Measurements (In thousands)

Description

   Asset
Total
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)

Cash equivalents

   $ 23,500    $ 23,500    $ —      $ —  

Asset classes that fall within Level 1 fair value hierarchy are those assets whose value assumptions are based on market data obtained from sources independent of the Company (observable inputs). Level 1 observable inputs are quoted prices for identical items in active markets that the Company has access to at the measurement date.

Asset classes that fall within the Level 2 fair value hierarchy are those assets whose fair value assumptions are also based on independent market data. Level 2 observable inputs are quoted prices for similar items in active markets or quoted prices for identical or similar items in inactive markets. An inactive market is one where there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or where little information is released publicly.

Asset classes that fall within the Level 3 fair value hierarchy are those assets whose fair value assumptions are based upon the Company’s own information.

10. Acquisition and Investment

Japan Ortho Medical (formerly Blues Medica Japan)

On May 1, 2007, Alphatec Pacific acquired all of the outstanding capital stock of Blues Medica Japan (the “JOM Predecessor”), a spinal and orthopedic implant distributor. The results of operations of Japan Ortho Medical have been included in these consolidated financial statements from the date of acquisition. The total cost of the acquisition was as follows (in thousands):

 

Cash paid for common stock

   $ 292

Debt assumed as a result of acquisition

     1,143

Common stock issued

     995

Direct costs

     15
      

Total purchase price

   $ 2,445
      

The purchase price allocation is shown below (in thousands):

 

Cash and cash equivalents

   $ 505  

Accounts receivable

     478  

Inventories

     202  

Prepaid expenses and other current assets

     184  

Property and equipment, net

     718  

Other assets

     231  

Accounts payable

     (316 )

Accrued and other expenses

     (838 )
        

Net tangible assets

     1,164  

Goodwill

     635  

Distribution rights

     646  
        

Total purchase price

   $ 2,445  
        

 

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The fair value of the acquired tangible assets and assumed liabilities was equal to the JOM Predecessor’s carrying value on May 1, 2007, the date of acquisition. The purchase agreement includes two contingent payments to the former owner of the JOM Predecessor based upon a percentage of the 2007 and 2008 revenues. This contingency is recorded in accrued expenses in the purchase price allocation and is based upon projected revenue. The Company performed a valuation of the distribution rights in order to allocate the purchase price in accordance with SFAS No. 141 between identifiable intangibles and goodwill in the fourth quarter of 2007. The distribution rights will be amortized on a straight-line basis over three years. The enhancement of the Company’s Japanese distribution network was the primary factor that contributed to a purchase price resulting in the recognition of goodwill.

11. Balance Sheet Details

Accounts Receivable

Accounts receivable, net consist of the following (in thousands):

 

     March 31, 2008     December 31, 2007  

Accounts receivable

   $ 14,411     $ 13,220  

Allowance for doubtful accounts

     (228 )     (185 )
                

Accounts receivables, net

   $ 14,183     $ 13,035  
                

Inventories

Inventories, net consist of the following (in thousands):

 

     March 31, 2008    December 31, 2007
     Gross    Reserve
for excess
and
obsolete
    Net    Gross    Reserve
for excess
and
obsolete
    Net

Raw materials

   $ 2,002    $ (123 )   $ 1,879    $ 2,271    $ (45 )   $ 2,226

Work-in-process

     938      —         938      1,117      —         1,117

Finished goods

     29,574      (10,733 )     18,841      26,812      (10,063 )     16,749
                                           

Inventories, net

   $ 32,514    $ (10,856 )   $ 21,658    $ 30,200    $ (10,108 )   $ 20,092
                                           

The Company recorded charges related to the excess and obsolete reserve to cost of revenues of $0.5 million and $0.3 million for the three months ended March 31, 2008 and 2007, respectively.

Acquired Intangibles

Acquired intangibles consist of the following (in thousands):

 

     Useful lives
(in years)
   March 31, 2008     December 31, 2007  

Developed product technology

   5    $ 13,700     $ 13,700  

Distribution rights

   3      3,094       2,735  

Scient’x license agreement

   8      2,603       2,603  

Supply agreement

   10      225       225  
                   
        19,622       19,263  

Less accumulated amortization

        (10,884 )     (9,629 )
                   

Intangible, net

      $ 8,738     $ 9,634  
                   

Aggregate amortization expense was $1.0 million for each of the three months ended March 31, 2008 and 2007.

 

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The future expected amortization expense related to intangible assets as of March 31, 2008 is as follows (in thousands):

 

Year ending December 31,

    

2008

   $ 2,626

2009

     3,022

2010

     794

2011

     22

2012

     22

Thereafter

     41
      

Total Intangibles, net

   $ 6,527
      

In April 2008, Alphatec Spine and Scient’x mutually agreed to terminate the license agreements between the two companies. The terms of the termination include a repayment of the initial $2.6 million license fee originally paid to Scient’x and a full repayment of saleable inventory that Alphatec Spine returns to Scient’x. In the second quarter of fiscal year 2008, the Company will reverse $0.4 million in previously recognized amortization expense. The future expected amortization expense table does not include the Scient’x net intangible asset, which was valued at $2.2 million.

12. Licenses and In-Process Research and Development

In-Process Research and Development

In-process research and development (“IPR&D”) consists of acquired research and development assets that were not currently technologically feasible on the date the Company acquired them and had no alternative future use at that date. The Company expects all acquired IPR&D will reach technological feasibility, but there can be no assurance that the commercial viability of these products will actually be achieved. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing, developing and testing products in order to obtain regulatory approvals. The risks associated with achieving commercialization include, but are not limited to, delay or failure to obtain regulatory approvals to conduct clinical trials, delay or failure to obtain required market clearances, and patent issuance, validity and litigation, if any. If commercial viability were not achieved, the Company would likely look to other alternatives to provide these products.

Agreements with Scient’x S.A.

In April 2008, Alphatec Spine and Scient’x mutually agreed to terminate the license agreements between the two companies. The terms of the termination include a repayment of the initial $2.6 million license fee originally paid to Scient’x and a full repayment of saleable inventory that Alphatec Spine returns to Scient’x. In the second quarter of fiscal year 2008, the Company will reverse $0.4 million in previously recognized amortization expense.

Expandable VBR License Agreement and Consulting Agreement

On March 10, 2008, the Company, Alphatec Spine and Stout Medical Group LP (“Stout”) entered into a License Agreement (the “Expandable VBR License Agreement”) that provides Alphatec Spine with a worldwide license to develop and commercialize Stout’s proprietary intellectual property related to an expandable interbody/vertebral body replacement device (the “Expandable VBR Technology”). The financial terms of the Expandable VBR License Agreement include: (i) a $0.5 million cash payment payable following the execution of the Expandable VBR License Agreement; (ii) the issuance of $0.5 million of shares of the Company’s common stock following the execution of the Expandable VBR License Agreement; (iii) development and sales milestone payments in cash and the Company’s common stock that could begin to be achieved and paid in 2008; and (iv) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in 2009. The Company recorded an IPR&D charge of $1.0 million in the first quarter of fiscal 2008 for the initial payment, as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed and no alternative future use exists.

On March 10, 2008, the parties to the Expandable VBR License Agreement entered into a Consulting Development Agreement (the “Consulting Agreement”) related to Stout’s development of certain technology to be used in conjunction with the Expandable VBR Technology. The financial terms of the Consulting Agreement include: (i) a $0.5 million cash payment payable in ten equal monthly installments, with the first payment being payable following the execution of the Consulting Agreement; (ii) the issuance of $0.5 million in restricted shares of the Company’s common stock, with such shares only vesting to Stout if certain development

 

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milestones are achieved; and (iii) a royalty payment based on net sales of products for which a royalty is not due pursuant to the Expandable VBR License Agreement. In the event that Stout is unable to achieve certain development milestones Stout must repay the cash payment described above to Alphatec Spine, together with interest. The Company has recorded the liability related to the obligation and has recorded the value as a deferred research and development expense. The Company is recognizing this expense over the life of the term of the agreement. The shares granted will be revalued at the end of each reporting period in accordance with Emerging Issues Task Force (“EITF”) 96-18 Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring or in Conjunction with Selling, Goods or Services . In March 2008, one month of expense was recorded.

Dynamic Anterior Cervical Plate License Agreement

In February 2008, the Company and Alphatec Spine entered into an exclusive license agreement (the “Dynamic Anterior Cervical Plate License Agreement”) from Progressive Spinal Technologies LLC, or (“PST”), that provides Alphatec Spine with an exclusive worldwide license to commercialize PST’s dynamic anterior cervical plate technologies. The technologies incorporate a unique self ratcheting mechanism that enables the dynamic anterior cervical plate to allow for axial settling in order to increase load sharing with the graft and thereby improve fusion rates. The financial terms of the Dynamic Anterior Cervical Plate License Agreement include: (i) a $150,000 cash payment; (ii) the issuance of $150,000 shares of the Company’s common stock; (iii) testing, design, regulatory and sales milestone payments that could begin to be achieved and paid by Alphatec to PST in 2008; and (iv) a royalty payment based upon net sales of licensed products, with minimum annual royalties beginning in 2009. The Company recorded an IPR&D charge of $0.3 million in the first quarter of fiscal 2008 for the initial payment, as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed and no alternative future use exists.

OsseoScrew License Agreement

In December 2007, Alphatec Spine entered into an exclusive license agreement (the “OsseoScrew License Agreement”) with PST, that provides Alphatec Spine with an exclusive worldwide license to develop and commercialize PST’s technology related to a pedicle screw designed to be used for patients that have osteoporosis or poor bone density. The technology consists of an expandable titanium pedicle screw that is designed to be implanted into the pedicle and then expanded in order to achieve increased purchase within the pedicle. This solution is designed for patients who are not viable candidates for procedures that use the current standard of pedicle screw. The financial terms of the OsseoScrew License Agreement include: (i) a cash payment payable following the execution of the agreement; (ii) development and sales milestone payments in cash and the Company’s common stock that could begin to be achieved and paid in 2008; and (iii) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in 2009. The Company recorded an IPR&D charge of $2.0 million in the fourth quarter of fiscal year 2007 for the initial payment, as the technological feasibility associated with the IPR&D since the final prototype of the device had not been established and no alternative future use exists.

13. Related Party Transactions

For the three months ended March 31, 2008 and 2007, the Company incurred costs of $0 and $0.2 million respectively, to Foster Management Company for travel expenses, including the use of Foster Management Company’s airplane. Foster Management Company is an entity owned by John Foster, a member of the Company’s board of directors. John Foster is a significant equity holder of HealthpointCapital, LLC, an affiliate of HealthpointCapital Partners, L.P. (“HealthpointCapital”), our principal stockholder.

14. Supply Agreements

In July 2006, Alphatec Spine entered into a 30-month agreement to sell the products of a third party under Alphatec Spine’s private label. As of March 31, 2008, we have a minimum purchase commitment of $6.0 million over the remaining life of the contract.

In February 2006, Alphatec Spine entered into a three-year agreement to sell the products of third party under Alphatec Spine’s private label. The total minimum purchase commitment over the remaining life of the contract is $0.5 million.

15. Commitments and Contingencies

Debt

On October 2, 2007, the Company, Alphatec Spine, Nexmed, Inc. ( the “Borrowers”) and Merrill Lynch Business Financial Services, Inc. (“Merrill Lynch”) entered into a Credit and Security Agreement (the “Credit Agreement”) that provides for an aggregate $20.0 million commitment. The Credit Agreement consists of a $20.0 million note that bears interest at the rate of LIBOR plus 2.75% per annum. The amount available to be drawn under the note is limited to 85% of the net collectible value of eligible

 

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accounts receivable plus 75% of eligible inventory. In the first quarter of fiscal year 2008, the Company borrowed $8.5 million on the Credit Agreement. As of March 31, 2008, the Borrowers had approximately $6.3 million available under the note. The note is secured by a pledge of substantially all currently existing and after-acquired property of the Borrowers. The Credit Agreement excludes from the collateral any intellectual property rights, including copyrights, patents, trademarks and inbound licenses relating to any of the copyrights, patents or trademarks, and any claims for damages relating to infringement of the intellectual property. While these items are excluded from collateral, the Credit Agreement contains a covenant in which the Borrowers have agreed not to place any lien on such assets without Merrill Lynch’s consent. In the first quarter of fiscal 2008, GE Capital acquired Merrill Lynch.

The Credit Agreement contains customary covenants, which, among other things, prohibit the Borrowers from assuming further debt obligations and any liens, unless otherwise permitted under the Credit Agreement. The entire outstanding principal amount of the note and any accrued but unpaid interest may be declared immediately due and payable in the event of the occurrence of an event of default as defined in the Credit Agreement, which includes the failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, or the occurrence of an event or change which could have a material adverse effect on the Borrowers.

Alphatec Pacific has a $0.9 million credit facility with a Japanese bank, under which $0.9 million was outstanding at March 31, 2008. Under the terms of the credit facility, borrowings are due nine months from the date of borrowing and bear interest at 3.5%, with monthly interest payments required. The credit facility is secured by standby letters of credit issued through Merrill Lynch.

Leases

The Company leases certain equipment under capital leases that expire on various dates through 2010. The Company also leases its buildings, certain equipment and vehicles under operating leases that expire on various dates through 2017. Future minimum annual lease payments under such leases as of March 31, 2008 are as follows (in thousands):

 

Year ending December 31,

   Operating    Capital  

2008

   $ 1,374    $ 373  

2009

     2,468      340  

2010

     2,638      13  

2011

     2,573      —    

2012

     2,557      —    

Thereafter

     7,691      —    
               
   $ 19,301      726  
         

Less: amount representing interest

        (39 )
           

Present value of minimum lease payments

        687  

Current portion of capital leases

        (444 )
           

Capital leases, less current portion

      $ 243  
           

Rent expense under operating leases for the three months ended March 31, 2008 and 2007 was $0.5 million and $0.4 million, respectively.

Real Property Leases

On February 28, 2008, the Company entered into a sublease agreement (the “Sublease”) for 76,693 square feet of office, engineering, research and development and warehouse and distribution space (“Building 1”). The term of the Sublease commences upon delivery of the Building 1 premises (currently scheduled for May 1, 2008) and ends on January 31, 2016. The Company is obligated under the Sublease to pay base rent and certain operating costs and taxes for Building 1. Monthly base rent payable by the Company is approximately $80,500 during the first year of the Sublease, increasing annually at a fixed annual rate of 2.5% to approximately $93,500 per month in the final year of the Sublease. The Company’s rent is abated for months one through seven of the Sublease. Under the Sublease, the Company is required to provide the sublessor with a security deposit in the amount of approximately $93,500.

On March 4, 2008, the Company entered into another lease agreement (the “Lease”) for 73,480 square feet of office, engineering, research and development and warehouse and distribution space (“Building 2”). The Lease term is scheduled to commence on December 1, 2008 and ends on January 31, 2017. The Company is obligated under the Lease to pay base rent and certain operating costs and taxes for Building 2. The monthly base rent payable for Building 2 is approximately $73,500 during the first year of the Lease, increasing annually at a fixed annual rate of 3.0% to approximately $93,000 per month in the final year of the Lease. The Company’s rent shall be abated for the months two through eight of the term of the Lease in the amount of $38,480.

 

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Under the Lease, the Company is required to provide the lessor with a security deposit in the amount of $293,200, consisting of cash and/or one or more letters of credit. Following the Company’s achievement of certain financial milestones, the lessor is obligated to return a portion of the security deposit to the Company.

16. Stock Options and Restricted Shares

Stock Options

A summary of the Company’s stock options outstanding under the Amended and Restated 2005 Employee, Director and Consultant Stock Plan as of March 31, 2008 and related information is as follows:

 

     Shares     Weighted
average
exercise
price
   Weighted
average
remaining
contractual
term (in years)
   Aggregate
intrinsic
value
     (In thousands, except per share amounts)

Options outstanding at December 31, 2007

   1,211     $ 3.78    9.19    $ 1,611

Options granted

   165     $ 5.03      

Options exercised

   —       $ —        

Options forfeited

   (13 )   $ 4.87      
                  

Options outstanding at March 31, 2008

   1,363     $ 3.95    9.10    $ 1,549
                        

Options vested and exercisable at March 31, 2008

   115     $ 3.41    8.23    $ 202
                        

Options expected to vest at March 31, 2008

   1,051     $ 3.94    9.09    $ 1,197
                        

The weighted average fair value of options granted in the first quarter of 2008 is $2.43 per share. The aggregate intrinsic value of the granted outstanding options at March 31, 2008 is based on the Company’s closing stock price on March 31, 2008 of $5.02 per share.

The following table summarizes information about stock options outstanding and exercisable at March 31, 2008:

 

Options outstanding    Options exercisable
Range of exercise prices    Number
outstanding
   Weighted
average
remaining
contractual
life (in years)
   Weighted
average
exercise
price
   Number
exercisable
   Weighted
average
exercise
price
(In thousands, except for per share amounts)
$ 0.001    $ 0.001    54    7.38    $ 0.001    20    $ 0.001
$ 3.21    $ 3.21    50    8.60    $ 3.210    10    $ 3.210
$ 3.51    $ 3.77    355    8.88    $ 3.491    44    $ 3.380
$ 3.93    $ 3.93    447    9.39    $ 3.930    —      $ —  
$ 3.95    $ 4.99    274    9.12    $ 4.450    28    $ 4.583
$ 5.89    $ 8.07    183    9.38    $ 5.490    13    $ 6.344
                     
$ 0.001    $ 8.07    1,363    9.10    $ 3.948    115    $ 3.412
                     

 

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Restricted Stock Awards

The following table summarizes information about the restricted stock award activity as of March 31, 2008:

 

     Shares     Weighted average
grant date fair
value
   Weighted
average
remaining
contractual
life (in years)
   Aggregate
intrinsic
value
     (In thousands, except per share data)          

Outstanding at December 31, 2007

   1,242     $ 6.79    3.09    $ 8,435

Awarded

   10     $ 4.88      

Released

   (43 )   $ 3.72      

Forfeited

   (43 )   $ 9.66      
              

Outstanding at March 31, 2008

   1,166     $ 6.78    2.85    $ 7,910
              

The weighted average fair value of awards granted during the three months ended March 31, 2008 was $4.88 per share.

17. Income Taxes

The Company’s unrecognized tax benefits decreased by $0.1 million to $1.5 million during the quarter ended March 31, 2008. This decrease consisted of an adjustment to goodwill. The Company does not anticipate any significant increases or decreases to its unrecognized tax benefits within 12 months of March 31, 2008.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors, such as those set forth in Item 1A “Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ending December 31, 2007.

Overview

We are a medical technology company focused on the design, development, manufacturing and marketing of products for the surgical treatment of spine disorders. Our broad product portfolio and pipeline includes a variety of spinal disorder products and systems focused on solutions addressing the cervical, thoracolumbar, intervertebral, minimally invasive, vertebral compression fracture, and osteoporotic bone markets. Our principal product offerings are focused on the global market for orthopedic spinal disorder implants, which is estimated to be more than $7.0 billion in revenue in 2007 and is expected to grow at approximately 15% annually over the next three years. Our “surgeons’ culture” emphasizes collaboration with spinal surgeons to conceptualize, design and co-develop a broad range of products. We have a state-of-the-art in-house manufacturing facility that provides us with a unique competitive advantage, and enables us to rapidly deliver solutions to meet surgeons’ and patients’ critical needs. Our products and systems are made of titanium, titanium alloy, stainless steel and a strong, heat resistant, radiolucent, biocompatible plastic called polyetheretherketone, or PEEK. We also sell products made of allograft, a precision-milled and processed human bone that surgeons can use in place of metal and synthetic materials. We also sell bone-grafting products that are comprised of both tissue-based and synthetic materials. We believe that our products and systems have enhanced features and benefits that make them attractive to surgeons and that our broad portfolio of products and systems provide a comprehensive solution for the safe and successful surgical treatment of spine disorders. All of our currently marketed implants have been cleared by the U.S. Food and Drug Administration, or the FDA, and these products have been used in over 7,500 and 8,600 spine disorder surgeries in 2006 and 2007, respectively. In addition to our U.S. operations, we also market a range of spine and orthopedic products in Japan through our subsidiary, Alphatec Pacific, Inc., or Alphatec Pacific, and in 2008 we plan to begin selling our products in Europe.

On March 18, 2005, we acquired all of the outstanding capital stock of Alphatec Spine, Inc., or Alphatec Spine, formerly Alphatec Manufacturing, Inc., a company that was engaged in the development, manufacturing and sale of medical devices for use in spinal surgeries.

Although our products generally are purchased by hospitals and surgical centers, orders are typically placed at the request of surgeons who then use our products in a surgical procedure. During the three months ended March 31, 2008 and 2007, no single surgeon, hospital or surgical center represented greater than 10% of our consolidated revenues. Additionally, we sell a broad array of products, which diminishes our reliance on any single product.

In 2007, as part of our product development strategy, we began entering into license agreements with third parties that we believe will enable us to rapidly develop and commercialize unique products for the treatment of spinal disorders. Through March 31, 2008, we licensed approximately 33 patent or patent applications from third parties.

To assist us in evaluating our product development strategy, we regularly monitor long-term technology trends in the spinal implant industry. Additionally, we consider the information obtained from discussions with the surgeon community in connection with the demand for our products, including potential new product launches. We also use this information to help determine our competitive position in the spinal implant industry and the capacity requirements of our manufacturing facility.

 

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Results of Operations

The table below sets forth certain statements of operations data expressed as a percentage of revenues for the periods indicated. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

 

     Three Months Ended March 31,  
     2008     2007  

Revenue

   100.0 %   100.0 %

Cost of revenues

   34.0     35.2  
            

Gross profit

   66.0     64.8  

Operating expenses:

    

Research and development

   13.8     7.5  

In-process research and development

   5.6     —    

Sales and marketing

   39.4     40.5  

General and administrative

   28.2     30.2  

Litigation settlement

   47.4     —    
            

Total operating expenses

   134.4     78.2  
            

Operating loss

   (68.4 )   (13.4 )
            

Other income (expense):

    

Interest income

   0.9     0.9  

Interest expense

   (0.8 )   (1.7 )

Other income, net

   0.7     0.5  
            

Total other income (expense)

   0.8     (0.3 )
            

Loss before taxes

   (67.6 )   (13.7 )

Income tax provision

   0.4     —    
            

Net loss

   (68.0 )%   (13.7 )%
            

Revenues and Expense Components

The following is a description of the primary components of our revenues and expenses:

Revenues. We derive our revenues primarily from the sale of spinal surgery implants used in the treatment of spine disorders. Spinal implant products include spine screws, spinal spacers, rods and plates. Our revenues are generated by our direct sales force and independent distributors. Our products are ordered directly by surgeons and shipped and billed to hospitals or surgical centers. In Japan, where orthopedic trauma surgeons also perform spine surgeries, we have sold and will continue to sell orthopedic trauma products in order to introduce our spine products.

Cost of revenues. Cost of revenues consists of direct product costs, royalties, and the amortization of purchased intangibles. We manufacture substantially all of the products that we sell. Our product costs consist primarily of direct labor, manufacturing overhead, raw materials and components, and depreciation of our surgical instruments. Allograft product costs include the cost of procurement and processing of human tissue. We incur royalties related to technology we license from others and products developed in part by surgeons with whom we collaborate in the product development process. The majority of our royalties relate to payments under our license agreement with Biomet, Inc. This license agreement relates to our pedicle screw and provides for a fixed-rate charge based on the number of products sold that incorporate this technology. Amortization of purchased intangibles consists of amortization of developed product technology that we purchased when we acquired Alphatec Spine and entered into certain of the Scient’x license agreements.

Research and development. Research and development expense consists of costs associated with the design, development, testing, and enhancement of our products. Research and development costs also include salaries and related employee benefits, research-related overhead expenses, fees paid to external service providers, and costs associated with our Scientific Advisory Board.

 

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In-process research and development. In-process research and development (“IPR&D”) consists of acquired research and development assets that were not technologically feasible on the date we acquired worldwide licenses for technology related to the dynamic cervical plate and the expandable interbody products and had no alternative future use at that date. At the time of acquisition, we expect all acquired IPR&D will reach technological feasibility, but there can be no assurance that the commercial viability of a product will actually be achieved. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing, and obtaining regulatory clearances. The risks associated with achieving commercialization include, but are not limited to delays or failures during the development process, delays or failures to obtain regulatory clearances, and intellectual property rights of third parties. If commercial viability were not achieved, we would likely look to other alternatives to provide these products.

Sales and marketing. Our sales and marketing expense consists primarily of salaries and related employee benefits, sales commissions and support costs, professional services and fees paid for external service providers, and travel, medical education, trade show and marketing costs.

General and administrative. Our general and administrative expense consists primarily of salaries and related employee benefits, professional services and fees paid for external service providers, and travel, legal, and other public company costs.

Litigation settlement. Our litigation settlement expense consists primarily of settlements for litigation lawsuits. On June 26, 2006, Biedermann Motech GmbH and DePuy Spine, Inc., or DePuy, filed suits for patent infringement against a number of companies selling pedicle screws, including Alphatec Spine. The complaint against Alphatec Spine was filed in the U.S. District Court for the District of Massachusetts and alleged infringement of U.S. Patent No. 5,207,678, or the 678 Patent, owned by Biedermann Motech and exclusively licensed to DePuy in the U.S. In May 2008, Alphatec Spine and DePuy entered into a settlement and release agreement, or the settlement agreement, pursuant to which Alphatec Spine obtained a license to the intellectual property rights contained in the 678 Patent. The settlement agreement resolves the lawsuit between Alphatec and DePuy and grants Alphatec the right to continue to manufacture, market and sell its Zodiac and Solanas products. Terms of the agreements include a one-time payment of $11.0 million and an ongoing royalty payable upon future net sales of licensed products. As of March 31, 2008, the Company accrued for the total $11.0 million settlement.

Total other income (expense). Total other income (expense) includes interest income, interest expense, which in 2007 included the change in the put value of the put right related to the stock purchase agreement in place with Alphatec Pacific’s former Chairman, President and Chief Executive Officer, and other income (expense).

Income tax provision. The income tax expense for fiscal year 2008 consisted primarily of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax goodwill.

Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007

Revenues. Revenues increased $3.6 million, or 18.7%, to $23.2 million for the three months ended March 31, 2008 from $19.6 million for same period in 2007. U.S. revenues increased $2.0 million primarily due to increased sales of our Trestle and Novel product lines. Asia revenues increased $1.6 million primarily due to $1.7 million related to the Japan Ortho Medical acquisition in May 2007 and increased spine revenue of $0.3 million, offset by a planned reduction in non-spine revenue of $0.4 million.

Cost of revenues . Cost of revenues increased $1.0 million, or 14.6%, to $7.9 million for the three months ended March 31, 2008 from $6.9 million for same period in 2007. The increase in cost of revenues was due to the increased sales volume of $1.7 million, higher royalties of $0.4 million, and higher excess and obsolete provisions of $0.5 million. The cost increases were partially offset by a $0.5 million decrease in instrument amortization that was driven by the change in useful life from two to four years and favorable production variances of $1.1 million.

Gross profit . Gross profit increased $2.6 million, or 20.8%, to $15.3 million for the three months ended March 31, 2008 from $12.7 million for the same period in 2007. Gross profit of 66.0% of revenues for the three months ended March 31, 2008 increased 1.2 percentage points for the same period in 2007. The 1.2 percentage point increase was primarily due to an improvement in production variances of 6.4 percentage points, reduced instrument depreciation of 2.6 percentage points, and intangible amortization of 0.5 percentage points, offset by lower product margins of 5.2 percentage points primarily driven by increased Asia revenue, excess and obsolete inventory charges of 2.2 percentage points and an increase in royalty expenses of 0.9 percentage points.

Research and development. Research and development expenses increased $1.7 million to $3.2 million for the three months ended March 31, 2008, from $1.5 million for the three months ended March 31, 2007. The expense increases were primarily due to increases in compensation expenses of $0.4 million due to increased headcount, an increase in project materials and prototype expenses of $0.8 million to support new development, recruiting and relocation expenses of $0.2 million and other miscellaneous spending of $0.3 million. As a percentage of revenues, research and development increased to 13.8% for the three months ended March 31, 2008, from 7.5% for the three months ended March 31, 2007.

 

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In-process research and development. In-process research and development expenses increased $1.3 million to $1.3 million for the three months ended March 31, 2008 from $0 for the three months ended March 31, 2007. This increase was due to the acquisition costs of licenses for the technology related to the expandable interbody license of $1.0 million and the dynamic cervical plate of $0.3 million. Pursuant to the expandable interbody license agreement, we issued 101,944 shares of our common stock and paid $0.5 million in cash to the licensor. Pursuant to the dynamic cervical plate license agreement, we issued 25,815 shares of our common stock and paid $0.2 million in cash to the licensor. Since these products are still in development, the cash and stock payments were expensed for $1.3 million.

Sales and marketing . Sales and marketing expenses increased $1.2 million to $9.1 million for the three months ended March 31, 2008, from $7.9 million for the three months ended March 31, 2007. The increase was due to higher commission expense due to the higher sales of $0.9 million and increased marketing expenses of $0.3 million.

General and administrative . General and administrative expenses increased $0.6 million to $6.5 million for the three months ended March 31, 2008 from $5.9 million for the three months ended March 31, 2007. The increase was due to the Japan Ortho Medical acquisition in May 2007 of $0.5 million, legal expenses of $0.3 million and stock based compensation of $0.3 million, offset by a reduction in compensation expenses of $0.5 million.

Litigation settlement. Litigation expenses increased $11.0 million to $11.0 million for the three months ended March 31, 2008, from $0 for the three months ended March 31, 2007. The increase was due to a settlement agreement we entered into in May 2008 with DePuy Spine, Inc., as described in Part II, Item 1 of this Quarterly Report on Form 10-Q. This settlement will be paid in May 2008.

Other income (expense), net. Other income (expense), net increased $0.2 million to $0.2 million for the three months ended March 31, 2008 from $0 for the three months ended March 31, 2007. The increase was due to interest income generated by the secondary public offering completed in September 2007.

Income tax provision. We recorded $0.1 million of income tax expense for the three months ended March 31, 2008, compared to $0 for the three months ended March 31, 2007. The provision for the three months ended March 31, 2008 primarily consists of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax goodwill.

Liquidity and Capital Resources

Our principal sources of cash have included the issuance of equity and bank borrowings. Principal uses of cash have included cash used in operations, acquisitions, acquisition of intellectual property rights, capital expenditures and working capital. We expect that our principal uses of cash in the future will be for operations, working capital, capital expenditures, and potential acquisitions. We expect that, as our revenues grow, our sales and marketing and research and development expenses will continue to grow and, as a result, we will need to generate significant net revenues to achieve profitability. We believe that our current cash and cash equivalents, revenues from our operations, and Alphatec Spine’s ability to draw down on secured credit facilities will be sufficient to fund our projected operating requirements for at least through March 31, 2009. If we believe it is in our interest to raise additional funds, we may seek to sell additional equity or debt securities or borrow additional money. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. If additional funds are raised through the issuance of equity or debt securities, these securities could have rights senior to those associated with our common stock and could contain covenants that would restrict our operations. Any additional financing may not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and marketing efforts.

Operating activities

We used net cash of $4.3 million in operating activities for the three months ended March 31, 2008. During this period, net cash used in operating activities primarily consisted of a net loss of $15.8 million, a decrease in working capital and other assets of $7.2 million, primarily due an increase in accrued litigation of $11.0 million offset by a reduction in accrued expenses related to a $2.0 million in-process research and development payment that was accrued in 2007, but paid in 2008 and increases in accounts receivable and inventory in support of the higher sales volume, offset by $4.3 million of non-cash costs including amortization, depreciation, deferred income taxes, stock-based compensation, and in-process research and development that was purchased using our common stock.

We used net cash of $4.9 million in operating activities for the three months ended March 31, 2007. During this period, net cash used in operating activities primarily consisted of an increase in working capital and other assets of $5.0 million, primarily due to a pay down of accounts payable and increases in accounts receivable and inventory in support of the higher sales volume. The net loss offset by non-cash costs including amortization, depreciation, stock-based compensation, and interest expense related to the revaluation of the put right generated $0.1 million of cash.

 

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Investing activities

We used net cash of $0.5 million in investing activities for the three months ended March 31, 2008, primarily for the purchase of $2.5 million in instruments, computer equipment, leasehold improvements and manufacturing equipment, offset by the $2.0 million settlement of a certificate of deposit that was used as collateral for a standby letter of credit issued to secure a line of credit for Alphatec Pacific with Resona Bank.

We used net cash of $5.0 million in investing activities for the three months ended March 31, 2007 primarily for a $2.6 million up-front payment related to a license agreement, $2.0 million investment in a certificate of deposit as collateral for standby letters of credit issued to secure the lines of credit for Alphatec Pacific in Japan and $0.4 million to purchase instruments and equipment.

Financing activities

We generated net cash of $6.0 million from financing activities for the three months ended March 31, 2008 primarily due to $8.5 million borrowing under our United States line of credit, offset by a $1.9 million pay down of our Japan line of credit, pay down of notes payable of $0.5 million and pay down our capital leases of $0.1 million.

We generated net cash of $1.2 million from financing activities for the three months ended March 31, 2007. $2.1 million was generated as a result of the settlement of our indemnification claims in connection with our acquisition of Alphatec Spine. In connection with a private placement that closed on April 1, 2007, we received $1.0 million and certain shareholders of Alphatec Spine involved in this settlement agreed to use all or a portion of the proceeds from returned escrow funds to purchase an aggregate of $1.1 million of our common stock in a private placement. Cash used in financing activities was for retiring notes payable of $0.9 million and paying off our line of credit in the United States of $0.6 million, offset by new borrowings of $0.6 million.

Debt and credit facilities

In October 2007, we and certain of our subsidiaries including Alphatec Spine, entered into a three-year credit agreement with Merrill Lynch, or the Merrill Lynch Credit Agreement, to support our working capital needs. The Merrill Lynch Credit Agreement consists of a revolving note in the amount of $20.0 million, or the Loan. The Loan bears interest at the rate of LIBOR plus 2.75% per annum. The amount available to be drawn under the Loan is limited to 85% of the net collectible value of eligible accounts receivable of Alphatec Spine plus 75% of the eligible inventory of the Alphatec Spine.

The Loan is secured by a pledge of substantially all currently existing and after-acquired property of Alphatec Spine and us, including all proceeds and products therefrom. The Merrill Lynch Credit Agreement excludes from the collateral (i) any intellectual property rights, including copyrights, patents, trademarks and inbound licenses relating to any of the copyrights, patents or trademarks, and (ii) any claims for damages relating to infringement of the intellectual property. While these items are excluded from collateral, the Merrill Lynch Credit Agreement contains a covenant in which both Alphatec Spine and we have agreed not to place any lien on such assets without Merrill Lynch’s consent. In the first quarter of fiscal 2008, GE Capital acquired Merrill Lynch. On March 31, 2008, there was $8.5 million in borrowings under this Loan.

We have entered into various capital lease arrangements through December 31, 2007. The leases bear interest at rates ranging from 0% to 16.44%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have maturity dates ranging from October 2006 to March 2010. We did not enter into any capital leases in the quarter ended March 31, 2008.

During the second quarter of 2006, Alphatec Spine entered into term loans with General Electric Capital Corporation, or GECC, for approximately $2.7 million in order to finance certain previously purchased machinery and office equipment. The loans are for a term of three years, bearing interest from 11.23% to 11.42%, are secured by certain assets of Alphatec Spine, may not be prepaid without the consent of the lender and are guaranteed by us. Under the terms of these loans, Alphatec Spine is required to make 36 equal monthly principal and interest payments of $0.1 million and is subject to certain covenants that are defined in the Merill Lynch Credit Agreement. If Alphatec Spine fails to satisfy these covenants and fails to cure any breach of these covenants within a specified number of days after receipt of notice, or fails to pay interest or principal under the loan when due, GECC could accelerate the entire amount borrowed, which would also trigger a default under Alphatec Spine’s credit facility.

During the fourth quarter of 2006, Alphatec Spine entered into an additional term loan with GECC for approximately $1.0 million in order to finance certain previously purchased machinery and office equipment. The loan is for a term of three years, bearing interest of 10.55% and Alphatec Spine is required to make 36 equal monthly principal and interest payments of $0.3 million. The term loan has similar requirements as the term loans executed in the second quarter of 2006.

 

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Contractual obligations and commercial commitments

Total contractual obligations and commercial commitments are summarized in the following table (in thousands):

 

     Payment Due by Period
     Total    2008    2009    2010    2011    2012    Beyond
          (9 months)                         

Line of credit - Alphatec Pacific

   $ 866    $ 866    $ —      $ —      $ —      $ —      $ —  

Line of credit - Alphatec Spine

     8,500      —        —        8,500      —        —        —  

Notes payable to Cananwill Inc - Insurance

     39      39      —        —        —        —        —  

Notes payable to GE Capital

     1,898      985      913      —        —        —        —  

Litigation settlement

     11,000      11,000      —        —        —        —        —  

Notes payable to Japanese banks

     1,029      232      346      173      157      71      50

Capital lease obligations

     686      345      328      13      —        —        —  

Operating lease obligations

     19,301      1,374      2,468      2,638      2,573      2,557      7,691

Supply agreements

     9,849      9,849      —        —        —        —        —  
                                                

Total

   $ 53,168    $ 24,690    $ 4,055    $ 11,324    $ 2,730    $ 2,628    $ 7,741
                                                

Real Property Leases

On February 28, 2008, we entered into a sublease agreement, or the Sublease, for 76,693 square feet of office, engineering, research and development and warehouse and distribution space, or Building 1. The term of the Sublease commences upon delivery of the Building 1 premises (currently scheduled for May 1, 2008) and ends on January 31, 2016. The Company is obligated under the Sublease to pay base rent and certain operating costs and taxes for Building 1. Monthly base rent payable by us Company is approximately $80,500 during the first year of the Sublease, increasing annually at a fixed annual rate of 2.5% to approximately $93,500 per month in the final year of the Sublease. Our rent is abated for months one through seven of the Sublease. Under the Sublease, we are required to provide the sublessor with a security deposit in the amount of approximately $93,500.

On March 4, 2008, we entered into another lease agreement, or the Lease, for 73,480 square feet of office, engineering, research and development and warehouse and distribution space, or Building 2. The Lease term is scheduled to commence on December 1, 2008 and ends on January 31, 2017. We are obligated under the Lease to pay base rent and certain operating costs and taxes for Building 2. The monthly base rent payable for Building 2 is approximately $73,500 during the first year of the Lease, increasing annually at a fixed annual rate of 3.0% to approximately $93,000 per month in the final year of the Lease. Our rent shall be abated for the months two through eight of the term of the Lease in the amount of $38,480. Under the Lease, we are required to provide the lessor with a security deposit in the amount of $293,200, consisting of cash and/or one or more letters of credit. Following our achievement of certain financial milestones, the lessor is obligated to return a portion of the security deposit to us.

Agreements with Scient’x S.A.

In April 2008, Alphatec Spine and Scient’x mutually agreed to terminate the license agreements between the two companies. Our majority shareholder, HealthpointCapital, owns a majority interest in Scient’x. In addition, members of our Board of Directors Mortimer Berkowitz III, John H. Foster and R. Ian Molson are members of the Board of Directors of either Scient’x or an affiliate of Scient’x. The terms of the termination include a repayment of the initial $2.6 million license fee originally paid to Scient’x and a full repayment of saleable inventory that Alphatec Spine returns to Scient’x. In the second quarter of fiscal year 2008, we will reverse $0.4 million in previously recognized amortization expense.

Expandable VBR License Agreement and Consulting Agreement

On March 10, 2008, we and Alphatec Spine and Stout Medical Group LP (“Stout”) entered into a License Agreement (the “Expandable VBR License Agreement”) that provides Alphatec Spine with a worldwide license to develop and commercialize Stout’s proprietary intellectual property related to an expandable interbody/vertebral body replacement device (the “Expandable VBR Technology”). The financial terms of the Expandable VBR License Agreement include: (i) a $0.5 million cash payment payable following the execution of the Expandable VBR License Agreement; (ii) the issuance of $0.5 million of shares of our common stock following the execution of the Expandable License Agreement; (iii) development and sales milestone payments in cash and our common stock that could begin to be achieved and paid in 2008; and (iv) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in 2009. We recorded an IPR&D charge of $1.0 million in the first quarter of fiscal 2008 for the initial payment, as the technological feasibility associated with the IPR&D since the final prototype of the device had not been established and no alternative future use exists.

 

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On March 10, 2008, the parties to the Expandable VBR License Agreement entered into a Consulting Development Agreement (the “Consulting Agreement”) related to Stout’s development of certain technology to be used in conjunction with the Expandable VBR Technology. The financial terms of the Consulting Agreement include: (i) a $0.5 million cash payment payable in ten equal monthly installments, with the first payment being payable following the execution of the Consulting Agreement; (ii) the issuance of $0.5 million in restricted shares of our common stock, with such shares only vesting to Stout if certain development milestones are achieved; and (iii) a royalty payment based on net sales of products for which a royalty is not due pursuant to the Expandable VBR License Agreement. In the event that Stout is unable to achieve certain development milestones Stout must repay the cash payment described above to Alphatec Spine, together with interest. We capitalized the cash payment and the restricted shares issued to an asset account. We are recognizing this expense over the life of the contract, which is 30 months. In March 2008, we recognized the first month of expense.

Dynamic Anterior Cervical Plate License Agreement

In February 2008, we and Alphatec Spine entered into an exclusive license agreement (the “Dynamic Anterior Cervical Plate License Agreement”) from Progressive Spinal Technologies LLC, or (“PST”), that provides Alphatec Spine with an exclusive worldwide license the right to commercialize PST’s dynamic anterior cervical plate technologies. The technologies incorporate a unique self ratcheting mechanism that enables the dynamic anterior cervical plate to allow for axial settling in order to increase load sharing with the graft and thereby improve fusion rates. The financial terms of the Dynamic Anterior Cervical Plate License Agreement include: (i) a $150,000 cash payment; (ii) the issuance of $150,000 of shares of our common stock; (iii) testing, design, regulatory and sales milestone payments that could begin to be achieved and paid by Alphatec to PST in 2008; and (iv) a royalty payment based upon net sales of licensed products, with minimum annual royalties beginning in 2009. We recorded an IPR&D charge of $0.3 million in the first quarter of fiscal 2008 for the initial payment, as the technological feasibility associated with the IPR&D since the final prototype of the device had not been established and no alternative future use exists.

OsseoScrew License Agreement

In December 2007, we and Alphatec Spine entered into an exclusive license agreement (the “OsseoScrew License Agreement”) with PST, that provides Alphatec Spine with an exclusive worldwide license to develop and commercialize PST’s technology related to a pedicle screw designed to be used for patients that have osteoporosis or poor bone density. The technology consists of an expandable titanium pedicle screw that is designed to be implanted into the pedicle and then expanded in order to achieve increased purchase within the pedicle. This solution is designed for patients who are not viable candidates for procedures that use the current standard of pedicle screw. The financial terms of the OsseoScrew License Agreement include: (i) a cash payment payable following the execution of the agreement; (ii) development and sales milestone payments in cash and our common stock that could begin to be achieved and paid in 2008; and (iii) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in 2009. We recorded an IPR&D charge of $2.0 million in the fourth quarter of fiscal 2007 for the initial payment, as the technological feasibility associated with the IPR&D since the final prototype of the device had not been established and no alternative future use exists.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to inventories, bad debts and intangibles. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured. In addition, we follow the provisions of the SEC’s Staff Accounting Bulletin No. 104, Revenue Recognition,

 

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which sets forth guidelines for the timing of revenue recognition based upon factors such as passage of title, installation, payment and customer acceptance. Determination of criteria (iii) and (iv) listed above are based on management’s judgment regarding the fixed nature of the fee charged for products delivered and the collectibility of those fees. Specifically, our revenue from sales of medical devices is recognized upon receipt of written acknowledgement that the product has been used in a surgical procedure or upon shipment to third-party customers who immediately accept title and the related risks and rewards that go with it. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenues recognized for any reporting period could be adversely impacted.

In Japan, we have several contracts for which we follow the provisions of Emerging Issues Task Force (“EITF”) No. 99-19 Reporting Revenue Gross as a Principal vs. Net as an Agent. After applying the indicators and facts, we have concluded that revenue from these transactions should be reported based on the gross amount billed to the customer.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are presented net of allowance for doubtful accounts. We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and the overall quality and age of those invoices not specifically reviewed. In determining the provision for invoices not specifically reviewed, we analyze historical collection experience and current economic trends. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect our future ability to collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required.

Inventories

Inventories are stated at the lower of average cost or market. Production costs are applied to inventory based on our estimated average cost. We maintain valuation reserves for the differences between our actual and estimated costs. We are continually striving to improve our production processes and reduce costs. We will monitor the adequacy of the valuation reserves; however, depending on our success in controlling and reducing costs, a significant change in our reserves may be required.

We review the components of inventory on a periodic basis for excess, obsolete and impaired inventory, and record a reserve for the identified items. We calculate an inventory reserve for estimated excess and obsolete inventory based upon historical turnover and assumptions about future demand for our products and market conditions. Our biologic implant inventories have a five-year shelf life and are subject to demand fluctuations based on the availability and demand for alternative implant products. Our estimates and assumptions for excess and obsolete inventory are subject to uncertainty as we are a high growth company, and we are continually reviewing our existing products and introducing new products. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing. Future product introductions and related inventories may require additional reserves based upon changes in market demand or introduction of competing technologies. Increases in the reserve for excess and obsolete inventory result in a corresponding increase to cost of revenues.

Valuation of Goodwill and Intangible Assets

We are required to periodically assess the impairment of our goodwill and intangible assets, which requires us to make assumptions and judgments regarding the carrying value of these assets. These assets are considered to be impaired if we determine that their carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances:

 

   

a determination that the carrying value of such assets can not be recovered through undiscounted cash flows;

 

   

loss of legal ownership or title to the assets;

 

   

significant changes in our strategic business objectives and utilization of the assets; or

 

   

the impact of significant negative industry or economic trends.

If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and the related amortization expense on our estimate of the useful life of the assets. Due to the numerous variables associated with our judgments and assumptions relating to the carrying value of our goodwill and intangible assets and the effects of changes in circumstances affecting these valuations, both the precision and reliability of the resulting estimates are subject to uncertainty, and as additional information becomes known, we may change our estimate, in which case the likelihood of a material change in our reported results would increase.

 

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Stock-Based Compensation

We account for stock-based compensation under the provisions of SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period.

Under SFAS No. 123(R), we calculated the fair value of stock option grants using the Black-Scholes option-pricing model. The weighted average assumptions used in the Black-Scholes model were 6.3 years for the expected term, 46% for the expected volatility, 2.7% for the risk-free interest rates, 10% for the forfeiture rates and 0% for dividend yield for the three month period ended March 31, 2008. Future expense amounts for any particular quarterly or annual period could be affected by changes in our assumptions or changes in market conditions.

Income Taxes

We account for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”) and FASB Interpretation Number (“FIN”) No. 48 , Accounting for Uncertainty in Income Taxes . SFAS No. 109 requires an asset and liability approach which requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. In making such determination, a review of all available positive and negative evidence must be considered, including scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.

Forward Looking Statements

This Quarterly Report on Form 10-Q and, in particular, the “Risk Factors” set forth in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as amended and our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 herein contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including but not limited to, statements regarding:

 

   

our ability to market, commercialize and achieve market acceptance of any of our products or any product candidates that we are developing or may develop in the future;

 

   

our estimates of market sizes and anticipated uses of our products, including without limitation the market size of the aging spine market and our ability to successfully penetrate such market;

 

   

our business strategy and our underlying assumptions about market data, demographic trends, reimbursement trends, pricing trends, and trends in the treatment of spine disorders, including without limitation the aging spine market;

 

   

our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, liquidity and our potential need to raise additional financing;

 

   

our ability to control our costs, achieve profitability and the potential need to raise additional funding;

 

   

our ability to successfully develop, commercialize and introduce new products into the market, and the acceptance of such products;

 

   

our ability to maintain an adequate sales network for our products, including to attract and retain independent distributors;

 

   

our ability to enhance our Japanese and European sales networks and obtain and maintain the necessary approvals to sell our products in Japan and Europe;

 

   

our ability to attract and retain a qualified management team, as well as other qualified personnel and advisors;

 

   

our ability to enter into licensing and business combination agreements with third parties and to successfully integrate the acquired technology and/or businesses;

 

   

our management team’s ability to accommodate growth and manage a larger organization;

 

   

our ability to protect our intellectual property, and to not infringe upon the intellectual property of third parties;

 

   

our ability to conclude that we have effective disclosure controls and procedures; and

 

   

our ability to establish the industry standard in clinical and legal compliance and corporate governance programs.

 

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Any or all of our forward-looking statements in this Quarterly Report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Quarterly Report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.

We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in Item 1A of our Annual Report on Form 10-K, as amended. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed there could also adversely affect us.

Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. There are a number of factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements, many of which are beyond our control, including the factors set forth in Item 1A “Risk Factors.” In addition, the forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

In October 2007, Alphatec Spine and we entered into a credit agreement with Merrill Lynch to support our working capital needs. The Merrill Lynch Credit Agreement consists of a revolving note in the amount of $20.0 million. The note bears interest at the rate of LIBOR plus 2.75% per annum. The amount available to be drawn under the note is limited to 85% of the net collectible value of eligible accounts receivable of Alphatec Spine plus 75% of the eligible inventory of the Alphatec Spine. As of March 31, 2008, Alphatec Spine has $8.5 million in borrowings under this credit facility. In the first quarter of fiscal 2008, GE Capital acquired Merrill Lynch. Alphatec Spine’s borrowings under its credit facility expose us to market risk related to changes in interest rates. If applicable interest rates were to increase by 100 basis points, then for every $1.0 million outstanding on our line of credit, our income before taxes would be reduced by approximately $10,000 per year. We are not party to any material derivative financial instruments. Other outstanding debt consisted of fixed rate instruments, primarily in the form of capital leases and notes payable.

Foreign Currency Risk

While a majority of our business is denominated in U.S. dollars, we maintain operations in foreign countries, primarily Japan, that require payments in the local currency. For the three months ended March 31, 2008, our revenues denominated in foreign currencies were $4.6 million. Substantially all of such revenues were denominated in Japanese Yen. Payments received from customers for goods sold in these countries are typically in the local currency. Consequently, fluctuations in the rate of exchange between the U.S. dollar and certain other currencies may affect our results of operations and period-to-period comparisons of our operating results. For example, if the value of the U.S. dollar were to increase relative to the Japanese Yen, the principal foreign currency in which most of our revenues outside the U.S. are currently denominated, then our reported revenues would decrease when we convert the lower valued foreign currency into U.S. dollars. We do not currently engage in hedging or similar transactions to reduce these risks. The operational expenses of our foreign subsidiaries reduce the currency exposure we have because our foreign currency revenues are offset in part by expenses payable in foreign currencies. As such, we do not believe we have a material exposure to foreign currency rate fluctuations at this time.

Commodity Price Risk

We purchase raw materials that are processed from commodities, such as titanium and stainless steel. These purchases expose us to fluctuations in commodity prices. Given the historical volatility of certain commodity prices, this exposure can impact our product costs. However, because our raw material prices comprise a small portion of our cost of revenues, we have not experienced any material impact on our results of operations from changes in commodity prices. A 10% change in commodity prices would have an immaterial impact on our results of operations for the three months ended March 31, 2008.

 

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Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were: (1) designed to ensure that material information relating to us is made known to our Chief Executive Officer and Chief Financial Officer by others within our company, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting.

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

(a)  Evaluation of Disclosure Controls and Procedures . Our principal executive officer and principal financial and accounting officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)  Changes in Internal Controls . There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

As of March 31, 2008, we had a reserve for litigation costs of $13.2 million, for which the accrual amounts are based on either a settlement offer from the plaintiff or the agreed upon settlement, or in some cases, an estimation, based upon what our management believes is the low-range of potential liability.

On June 26, 2006, Biedermann Motech GmbH and DePuy Spine, Inc., or DePuy, filed suits for patent infringement against a number of companies selling pedicle screws, including Alphatec Spine. The complaint against Alphatec Spine was filed in the U.S. District Court for the District of Massachusetts and alleged infringement of U.S. Patent No. 5,207,678, or the 678 Patent, owned by Biedermann Motech and exclusively licensed to DePuy in the U.S. In May 2008, Alphatec Spine and DePuy entered into a settlement and release agreement, or the settlement agreement, pursuant to which Alphatec Spine obtained a license to the intellectual property rights contained in the 678 Patent. The settlement agreement resolves the lawsuit between Alphatec and DePuy and grants Alphatec the right to continue to manufacture, market and sell its Zodiac and Solanas products. Terms of the settlement agreement and corresponding license agreement include a one-time payment of $11.0 million and an ongoing royalty payable upon future net sales of licensed products.

On April 12, 2006, Alphatec Spine and HealthpointCapital, our majority stockholder, and its affiliate, HealthpointCapital, LLC, were served with a complaint by Drs. Darryl Brodke, Alan Hilibrand, Richard Ozuna and Jeffrey Wang, or the “claimant surgeons,” in the Superior Court of California in the County of Orange, claiming, among other things, that, pursuant to certain contractual arrangements Alphatec Spine allegedly entered into with the claimant surgeons in 2001, it was required to pay the claimant surgeons quarterly royalties in an aggregate amount of 6% of the net sales of polyaxial screws, which the claimant surgeons allege were developed with their assistance prior to the cessation of such development activities in March 2002. Alphatec Spine first began to sell

polyaxial screws in 2003 and has continued to sell them through the date of this quarterly report. In October of 2006, the parties to

 

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Table of Contents

this litigation initiated a mediation session in an attempt to mediate a resolution to this matter, but were unsuccessful in doing so. Alphatec Spine brought a motion to compel arbitration of the claimant surgeons’ claims and is currently appealing the Court’s denial of the motion and the appellate courts affirmation of such denial. Alphatec Spine does not believe that any of the claimant surgeons are entitled to any royalty amounts and intends to vigorously defend itself against this complaint; however, Alphatec Spine cannot predict the outcome to this matter or the impact on our financial statements, if any.

 

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk, and you should carefully consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as amended. If any of the risks set forth therein actually occurs, our business, financial condition or results of operations would likely suffer, possibly materially. In that case, the trading price of our common stock could fall.

 

Item 6. Exhibits.

 

10.1    Sublease Agreement by and between Alphatec Holdings, Inc. and K2, Inc., dated as of February 28, 2008.
10.2    Lease Agreement by and between Alphatec Holdings, Inc. and H.G. Fenton Property Company, dated as of March 4, 2008.
10.3†    License Agreement by and between Alphatec Spine, Inc. and Stout Medical Group, LP, dated as of March 10, 2008.
10.4†    Consulting Development Agreement by and between Alphatec Spine, Inc. and Stout Medical Group, LP, dated as of March 10, 2008.
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   Confidential treatment has been requested with respect to portions of this document.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

Signature

  

Title

 

Date

/s/ Dirk Kuyper

Dirk Kuyper

  

President and Chief Executive Officer

(principal executive officer)

  May 12, 2008

/s/ Steven M. Yasbek

Steven M. Yasbek

   Chief Financial Officer,
Vice President and Treasurer
(principal financial and accounting officer)
  May 12, 2008

 

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Table of Contents

Exhibit Index

 

No.

    
10.1    Sublease Agreement by and between Alphatec Holdings, Inc. and K2, Inc., dated as of February 28, 2008.
10.2    Lease Agreement by and between Alphatec Holdings, Inc. and H.G. Fenton Property Company, dated as of March 4, 2008.
10.3†    License Agreement by and between Alphatec Spine, Inc. and Stout Medical Group, LP, dated as of March 10, 2008.
10.4†    Consulting Development Agreement by and between Alphatec Spine, Inc. and Stout Medical Group, LP, dated as of March 10, 2008.
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   Confidential treatment has been requested with respect to portions of this document.

 

31

Exhibit 10.1

SUBLEASE AGREEMENT

This SUBLEASE AGREEMENT (“ Sublease ”) is entered into this 28th day of February, 2008, by and between K2 INC., a Delaware corporation (“ Sublessor ”) whose address is 555 Theodore Fremd Avenue, Rye, NY 10580 and ALPHATEC HOLDINGS, INC., a Delaware corporation (“ Sublessee ”) whose address is 2051 Palomar Airport Road, Suite 100, Carlsbad, CA 92011 (the “ Premises ”).

RECITALS

A. H.G. Fenton Company, a California corporation, as landlord, and Sublessor, as tenant, entered into a lease dated August 9, 2004 (“ Master Lease ”), with regard to the Premises. A copy of the Master Lease is attached hereto as Exhibit “A” .

B. Sublessor wishes to sublease to Sublessee, and Sublessee wishes to sublease from Sublessor, the entire Premises, along with certain furniture, fixtures and equipment currently located therein, in accordance with the terms and conditions set forth herein.

C. Sublessor has notified H.G. Fenton Property Company, a California corporation (“ Landlord ”), successor-in-interest to H.G. Fenton Company as landlord under the Master Lease, in writing of the termination of Sublessor’s lease between Sublessor and Landlord with respect to the premises located at 5830 El Camino Real, Carlsbad, CA, 92008 (“ Building 2 ”), effective as of July 23, 2008 (“ Building 2 Lease ”) and Sublessee has entered into a lease with Landlord for Building 2, effective as of the date hereof.

NOW, THEREFORE, Sublessor and Sublessee agree as follows:

AGREEMENT

1. Sublease . Sublessor subleases the Premises to Sublessee, and Sublessee subleases the Premises from Sublessor, according to the terms and conditions of this Sublease. The term “Premises” for purposes of this Sublease shall include any and all existing permanent improvements (“ Improvements ”) in the Premises and the FF&E (as defined in Section 14 below), and failure to deliver the Improvements and FF&E on the Commencement Date set forth in Section 2 below, shall delay the Commencement Date in accordance with Section 8 below. The provisions of the Master Lease (except Paragraphs 1.3, 1.4, 1.5, 1.7(a) - (e), 1.10(a) - (b), 3.2, 3.3, 3.4, 4.1, 4.3, 5, 15, the First Sentence of Paragraph 17 of the Master Lease, and Exhibit B and Paragraphs 1, 3, 4 and 5 of Exhibit “E” to the Master Lease) are incorporated herein as though Sublessor was landlord under the Master Lease and Sublessee was tenant under the Master Lease, except that the rights and duties of the Lessor under Paragraphs 2.7, 2.8, 2.9, 2.10, 4.2, 7.2, 7.4(a) – (b), 8.1, 8.3, 9.1, 9.2, 9.3, 9.5, 10.2, 10.4, 11, 14, 16, 20 and 30 of the Master Lease, and Exhibit “C” , Exhibit “D” and Paragraphs 2 and 6 of Exhibit “E” to the Master Lease are reserved solely to Landlord and not to Sublessor. Paragraph 22 of the Master Lease as

 

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incorporated herein shall be qualified by the contemporaneous termination of the Building 2 Lease and Landlord and Sublessee entering into a new lease of Building 2, and Landlord, Sublessor and Sublessee entering into the written consent to this Sublease as described in Paragraph 18 below (the “ Consent ”). As a material inducement to Sublessee’s agreement to enter into this Sublease, Sublessor hereby waives its right to extend the term of the Master Lease pursuant to the provisions of Paragraph 5 of Exhibit “E” to the Master Lease, and hereby agrees that Sublessor shall not interfere with any right granted to Sublessee by Landlord to enter into a direct lease of the Premises following the expiration of this Sublease, as long as Sublessor’s liability to Landlord under the Master Lease and for the Premises terminates upon the effectiveness of such new lease. All capitalized terms not defined in this Sublease shall have the meanings given to them in the Master Lease.

2. Term . The term (“ Term ”) of this Sublease will begin on May 1, 2008 (the “ Commencement Date ”) and will end on January 31, 2016, inclusive, unless sooner terminated in accordance with the provisions hereof; provided, however, that the Commencement Date shall be subject to extension as provided in Section 8 below.

3. Use . The Premises may be used for office, engineering, research and development, light manufacturing, distribution and any other use permitted under either the Master Lease, the Consent or, after the date of this Sublease, any use consented to in writing by the Landlord and Sublessor (Sublessor’s consent not to be unreasonably conditioned, withheld or delayed).

4. Rent .

(a) Monthly Base Rent . Sublessee will pay Sublessor as rent (“ Rent ”) for the Premises the amounts set forth below, in each case, in advance, without notice, demand, offset, or counterclaim, on the first day of each month prior to the month such Rent shall be applicable to (e.g. Rent for February 2009 shall be payable January 2009), minus the Monthly Abatement Credit (as defined below) for the first seven (7) months of the Term. Rent and any other sums due to Sublessor from Sublessee under this Sublease will be paid at the following address (unless written notice provided of a change of address): 555 Theodore Fremd Avenue, Rye, NY 10580. If the Term of this Sublease begins on a day other than the first day of a month or ends on a day other than the last day of a month, Rent will be prorated on a per diem basis.

(a) Base Rent Schedule .

 

Months

   Rate/RSF    Monthly Rate  

1 – 12*

   $ 1.05    $ 80,527.65 *

13 – 24

   $ 1.08    $ 82,828.44  

25 – 36

   $ 1.10    $ 84,362.30  

37 – 48

   $ 1.13    $ 86,663.09  

49 – 60

   $ 1.16    $ 88,963.88  

61 – 72

   $ 1.19    $ 91,264.67  

72 – 84

   $ 1.22    $ 93,565.46  

85 – 93

   $ 1.25    $ 95,866.25  

 

* Reduced by the Monthly Abatement Credit.

 

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(b) Rental Abatement . In an effort to offset Sublessee’s relocation and tenant improvement costs, Base Rent shall be conditionally abated for months one (1) through seven (7) of the Term (the “ Monthly Abatement Credit ”); provided , however , Rent for month eight (8) of the Term in the amount of Eighty Thousand Five Hundred Twenty-Seven and 65/100 Dollars ($80,527.65) shall be due and payable within five (5) days following Sublessee’s receipt of the fully executed Consent. Notwithstanding the foregoing, (a) Sublessee’s seven (7) month rent abatement period shall run from the later of the Commencement Date or the date possession of the Premises is tendered to Sublessee in the condition required for the Commencement Date to occur, and (b) if the Commencement Date occurs on a date other than the first day of a calendar month, then Rent for month eight (8) of the Term shall be reduced so that the Base Rent is abated for the same number of days in month eight (8) of the Term as the number of days preceding the Commencement Date in the calendar month in which the Commencement Date occurs, and any excess prepaid rent shall be applied to Base Rent for month nine (9) of the Term. In the event of premature termination of the Term of this Sublease due to Sublesee’s default, there shall be immediately due and payable from Sublesee, the unamortized portion of the Monthly Abatement Credit actually realized by Sublesee. For purposes of this Section 4(b), the unamortized portion of the Monthly Abatement Credit shall be determined by multiplying the total Monthly Abatement Credit actually realized by Sublessee by a fraction, the numerator of which is the number of months remaining in the Term following premature termination in which unabated Rent would have been payable to Sublessor pursuant to the Sublease, and the denominator of which is the total number of months in the Term, both before and after the premature termination, in which unabated Rent was paid or would have been payable to Sublessor had the Sublease not been terminated. Notwithstanding anything to the contrary in this Section 4(b), the amount of repayment made by the Sublessee pursuant to this Section 4(b) shall not exceed $281,846.78. Any amounts due to Sublessor in accordance with this Section 4(b) shall be in addition to any sums otherwise recoverable pursuant to this Sublease.

5. Security Deposit . Within five (5) days following Sublessee’s receipt of the fully executed Consent, Sublessee shall deposit with Sublessor the sum of Ninety Three Thousand Five Hundred Sixty-Five and 46/100 Dollars ($93,565.46) that Sublessor will hold, and may apply some or all of said deposit, in accordance with terms and conditions of Paragraph 5 of the Master Lease (this sum will be held through the Term under this Sublease), and shall return any unused portion thereof in accordance with the applicable terms and conditions of said Paragraph 5 following the expiration or earlier termination of this Sublease, within the applicable time period set forth therein.

6. Acceptance of the Premises . Sublessor, at its sole expense, shall cause the Premises to be delivered to Sublessee, for Sublessee’s exclusive use and occupancy, on or before May 1, 2008 with the following “Delivery Conditions” satisfied: (a) all prior occupants of the Premises and their personal property (other than the FF&E, as defined in Section 14 below) shall have been removed

 

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from the Premises, and all of Sublessor’s signage shall have been removed from the Premises (including, without limitation, all exterior signage), and the Premises shall otherwise be delivered to Sublessee in a broom clean condition with all damage to the Premises resulting from Sublessor’s vacating the Premises repaired (excluding small nail holes and other repairs normally associated with repainting and re-carpeting second generation space), (b) all plumbing, electrical, HVAC, mechanical, lighting, fire and life safety (other than the fire suppression system(s)(FM 200)) systems of the Premises shall be in good working order, and (c) the Premises shall comply with all Americans with Disabilities Act requirements then applicable to the Premises. Other than as set forth in the previous sentence, Sublessee shall accept the Premises in its present “as is” condition when possession of the Premises is effectively delivered to Sublessee, and Sublessor makes no representation or warranty as to its fitness for Sublessee’s intended use. Other than as set forth in the first sentence of this section, Sublessor will not be obligated to make any alterations or improvements to the Premises on account of this Sublease. Sublessor shall provide Sublessee with at least five (5) days advance written notice that the Delivery Conditions have been satisfied and the Premises are ready for delivery to Sublessee. Within the 5-day period following Sublessee’s receipt of such notice, Sublessee and Sublessor shall perform a walk-through inspection to confirm the Delivery Conditions, and any Delivery Conditions that do not materially impair Sublessee’s ability to occupy the space shall be included on a punchlist of items to be completed by Sublessor after the Commencement Date, and Sublessor shall remedy all such punchlist items within thirty (30) days following the Commencement Date. The surrender provisions of Paragraph 7.4(c) of the Master Lease notwithstanding, Sublessee shall only be responsible for surrendering the Premises to Sublessor in the “as is” condition received from Sublessor on the Commencement Date, subject to normal wear and tear, and without obligation to remove any of the Improvements or the FF&E from the Premises; provided, however, that if Sublessee exercises its option to purchase the FF&E, the Sublessee shall remove such FF&E from the Premises at the end of the Term; and further provided that Sublessor shall not require removal of any of Sublessee’s improvements, alterations, trade fixtures or equipment from the Premises at the expiration of the Term unless Landlord shall require removal of same. Sublesssee shall indemnify and hold harmless Sublessor from and against any damages, injuries, claims and expenses (including reasonable attorneys’ fees) incurred by Sublessor arising out of Sublessee’s failure to vacate the Premises and remove Sublessee’s improvements, alterations (as may be required under the Maser Lease or this Sublease), trade fixtures or equipment from the Premises, on or before expiration of the Term.

7. Possession and Access . Sublessee shall be given possession of the entire Premises on the Commencement Date. At Sublessee’s own risk, Sublessor shall reasonably coordinate with Sublessee to provide prior reasonable access to the Premises in advance of the Commencement Date for planning of design and construction, free of any Rent or Operating Expenses. Sublessee shall indemnify and hold harmless Sublessor from and against any damages, injuries, claims and expenses (including reasonable attorneys’ fees) incurred by Sublessor arising out of claims based on personal injuries, including death at any time therefrom, and/or damage to property, from any cause whatsoever, arising out of, incidental to, or in connection with such access and/or caused by the negligence or willful misconduct of Sublessee, its employees or agents.

 

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8. Failure to Deliver . In the event Sublessor fails to tender possession, due to no fault of Sublessee, of the entire Premises to Sublessee by May 1, 2008, in the condition required by Section 6 of this Sublease above, Sublessor and Sublessee agree that a liquidated damages payment of Six Thousand and 00/100 Dollars ($6,000) shall be paid by Sublessor to Sublessee for every full or partial day after the Commencement Date in which Sublessor fails to tender possession of the entire Premises to Sublessee; provided that such damages shall not exceed Three Hundred Sixty Thousand and 00/100 Dollars ($360,000) (60 days); and provided further that such liquidated damages shall not constitute a waiver of any rights of Sublessee at law or in equity in the event possession of the Premises does not occur by the Commencement Date.

9. Sublessee’s Holdover Costs . Sublessor agrees to compensate Sublessee for holdover rent from March 1, 2008 through June 30, 2008 related to Sublessee extending its existing Carlsbad sublease and lease, irrespective of the term of such sublease or lease, for the following location: 2051 Palomar Airport Rd., Suite 100 and Suite 400 (the “ Holdover Location ”). Such holdover costs, if any, shall be computed based on the increased rent that Sublessee is required to pay in the Holdover Location above the monthly rent for the Holdover Location after February 29, 2008. Such total cost obligation of Sublessor shall not exceed Twenty Thousand and 00/100 Dollars ($20,000.00) per month. Provided that the Sublessor tenders possession of the Premises in the condition required in Section 6 of this Sublease above on or before May 1, 2008, Sublessor shall not be obligated to pay holdover costs with respect to the Holdover Location for any time period that begins on May 1, 2008 and ends on the date Sublessee accepts tender of the Premises from Sublessor. If Sublessor fails to make prompt payment to Sublessee of the holdover costs due Sublessee under this Section 9, then in addition to Sublessee’s other remedies, Sublessee shall have the right to offset the amount of such holdover costs against Sublessee’s rent obligations under this Sublease.

10. Other Charges . During the Term of this Sublease, Sublessee will pay to Sublessor “Lessee’s Share” (as such term is defined in the Master Lease) of any Common Area Operating Expenses payable by Sublessor pursuant to the Master Lease. Such payments will be made as and when due under the Master Lease. Subject to the Master Lease, Sublessee shall separately contract and pay directly for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services to supply the Premises, together with any taxes thereon. Sublessee shall also pay for all janitorial services. Sublessor agrees to cause Landlord to deliver the Landlord’s annual reconciliation statement directly to Sublessee (or provide such statement to Sublessee within ten (10) business days after receiving such statement from Landlord) and to reasonably cooperate with Sublessee in Sublessee’s efforts to review Landlord’s books and records relating to Common Area Operating Expenses as permitted under Paragraph 4.2(d) of the Sublease, and hereby appoints Sublessee as the Sublessor’s agent for the purpose of performing such review in accordance with the terms and conditions of Paragraph 4.2(d) of the Master Lease. Any refund or credit received by Sublessor as a result of an overpayment of Common Area Operating Expenses by Sublessee shall be credited against Sublessee’s rent obligations next coming due under this Sublease.

 

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11. Parking . Sublessor agrees that during the Term of this Sublease, Sublessee shall be entitled to use Two Hundred Ninety-Eight (298) unreserved vehicle parking spaces and zero (0) reserved vehicle parking spaces on those portions of the Common Areas designated from time to time by Landlord for parking. Such use shall be subject only to the terms and provisions set forth in the Master Lease regarding Sublessor’s parking rights. Upon any assignment or subletting of all or a potion of the Premises permitted under this Sublease, some or all of Sublessee’s parking rights may be assigned to such assignee or subtenant.

12. Signage . Sublessee shall have all signage on identical terms as those granted to Sublessor under the Master Lease pursuant to the approval of Landlord. All fabrication, installation, and removal costs and expenses relating to Sublessee’s signage shall be the sole responsibility of Sublessee. Subject only to Landlord’s consent to such signage, upon any assignment or subletting of all or a potion of the Premises permitted under this Sublease, some or all of Sublessee’s signage rights may be assigned to such assignee or subtenant.

13. Services . Sublessor will not be obligated to provide any services to Sublessee. Sublessee’s sole source of such services is Landlord, pursuant to the Master Lease. Sublessor makes no representation about the availability or adequacy of such services; provided, however, that Sublessor shall be obligated to use commercially reasonable efforts to enforce Landlord’s obligation to provide such services in accordance with the Master Lease, but shall not be obligated to bring a legal action to enforce such obligation unless such action is requested in writing by Sublessee, who agrees to pay all costs and expenses to institute such legal action against Landlord (subject to the prevailing party reimbursement provisions of the Master Lease), unless such action relates to the breach of or enforcement of the covenant of quiet enjoyment, then in such event all costs and expenses of instituting legal action including, without limitation, reasonable, actual and documented attorneys’ fees and costs shall be borne by Sublessor.

14. Furniture, Fixtures and Equipment . Sublessor agrees that during the Term of this Sublease, Sublessee shall have the exclusive use of the certain furniture, fixtures and equipment set forth on Schedule 1 to this Sublease (“ FF&E ”). Upon the end of the Term, provided Sublessee is not in default of this Sublease or the Master Lease, Sublessee shall have the option to purchase the FF&E for One and 00/100 Dollar ($1.00) in its current “as-is” condition and Sublessor will provide no additional warranties, other than warranties with respect to Sublessor’s right to sell such FF&E free and clear of all liens and encumbrances. Sublessee shall have no obligation to replace any of the FF&E that is damaged or becomes inoperable as a result of normal wear and tear.

15. Estoppel Certificates . Within no more than ten (10) business days after written request by Sublessee or Sublessor, as the case may be, the requested counterparty will execute, acknowledge and deliver to the requesting party a certificate stating (to the extent accurate):

(a) that this Sublease is unmodified and in full force and effect, or, if the Sublease is modified, the way in which it is modified accompanied by a copy of the modification agreement;

(b) the date to which rental and other sums payable under this Sublease have been paid;

 

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(c) that no notice of any default has been received by the requested party which has not been cured, or, if the default has not been cured, what such requested party intends to do in order to effect the cure, and when it will do so;

(d) that Sublessee has accepted and occupied the Premises; and

(e) other matters as may be reasonably requested by the requesting party. Notwithstanding the generality of this subsection (e), Sublessor agrees to execute, at Sublessee’s sole cost and expense, waiver forms substantially in the form attached hereto as Exhibit “B” .

16. The Master Lease . This Sublease is subject to the Master Lease. Sublessor represents that the Master Lease attached hereto as Exhibit “A” is a true, correct and complete copy of the Master Lease, that the Master Lease is in full force and effect, that there are not now, and that on the Effective Date, there shall not be any uncured defaults on Sublessor’s part under the Master Lease or any events or conditions that are then continuing which, with the passage of time, will become a default. The provisions of the Master Lease are applicable to this Sublease as though landlord under the Master Lease were the Sublessor under this Sublease and tenant under the Master Lease were Sublessee under this Sublease. Sublessee shall have the right to make directly demands and requests of Landlord relating to the enforcement of the tenant’s rights and the performance of the landlord’s obligations that relate to the conditions of the Premises under the Master Lease, provided that Sublessee delivers contemporaneous notice of such requests and demands to Sublessor. With respect to all communications between the Sublessee and Landlord that do not relate to the conditions of the Premises, all communications between Sublessee and Landlord shall be through Sublessor. Sublessee has received a copy of the Master Lease. Neither Sublessee nor Sublessor will do, nor allow to be done by anyone under their respective control, anything that would constitute a default under the Master Lease or that would cause the Master Lease to be terminated or forfeited by virtue of any rights reserved by or vested in Landlord, nor shall Sublessor agree to terminate nor exercise any right to terminate the Master Lease without the prior written consent of Sublessee as long as Sublessee is not in Default under this Sublease. Sublessee will indemnify Sublessor against any loss, liability, and expenses (including reasonable attorneys’ fees and costs) arising out of any default under the Master Lease caused by Sublessee, and Sublessor will indemnify Sublessee against any loss, liability, and expenses (including reasonable attorneys’ fees and costs) arising out of any default under the Master Lease caused by Sublessor, or arising out of any termination of the Master Lease by Sublessor without Sublessee’s consent (provided Sublessee is not in Default under this Sublease at the time of such termination). Pursuant to Paragraph 12.3(b) of the Master Lease, if Sublessee receives a written notice from Landlord that the Sublessor is in breach of the Master Lease, then Sublessee shall pay the Base Rent and Operating Expenses due under this Sublease directly to or as directed by the Landlord, which payments shall be credited against any payments due to Sublessor under this Sublease.

 

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17. Sublessee Right to Cure Sublessor Defaults . Sublessor shall provide Sublessee with any notice of default by Sublessor under the Master Lease, and if such default is monetary in nature (i.e. can be cured by the payment of money), and is not cured within a time period equal to one-half of the time period afforded to the tenant under the Master Lease, Sublessee shall have the right to pay the amount required to cure such default in order to protect its interest in the Premises, and any amount so paid, which is not reimbursed to Sublessee within twenty (20) days after written request from Sublessee (provided that such default is cured by Sublessee’s payment), shall be subject to Sublessee’s right to offset such amount against Sublessee’s rent obligations accruing under this Sublease after the expiration of such 20-day period. If Sublessor shall be in default under this Sublease, Sublessee shall have the rights of the tenant under Section 13.6(b) of the Master Lease to invoke the remedies of tenant permitted under the Master Lease, including the right to offset Rent payments as, and to the extent, permitted under Section 13.6(b) of the Master Lease.

18. Consent of Landlord . Pursuant to the Master Lease Sublessor is required to obtain the consent of Landlord to any subletting of the Premises by Sublessor. Therefore, this Sublease shall not be effective unless, within fifteen (15) days of the date hereof, Landlord consents to this Sublease in writing in the form of Consent attached hereto as Exhibit “C” .

19. Subsequent Subleases, Assignments and Modifications . Sublessee shall not further sublet the Premises or any portion thereof, nor assign, amend or modify this Sublease, without the express prior written consent of Sublessor, which consent shall not be unreasonably withheld conditioned or delayed. The provisions of Paragraph 12 of the Master Lease shall apply to subletting and assignment of the Premises by Sublessee as if such provisions were set forth in this Sublease. Any attempted further subletting of the Premises or assignment (other than an assignment by operation of law as permitted under the Master Lease), amendment or modification of this Sublease without the express prior written consent of Sublessor shall be void ab initio and shall constitute a material default by Sublessee under this Sublease.

20. Attorneys’ Fees . In the event suit is brought to enforce or interpret any part of this Agreement, the prevailing party shall be entitled to recover as an element of his costs of suit, and not as damages, reasonable attorneys’ fees to be fixed by the court.

21. Authority . Each person executing this Sublease on behalf of the Sublessee and Sublessor represents and warrants that he or she is authorized and empowered to do so and to thereby bind the Sublessee and Sublessor, respectively.

22. Real Estate Broker . Sublessee and Sublessor each represents that except for Cushman & Wakefield and Irving Hughes (the “ Brokers ”), it has dealt with no real estate broker, agent, finder or other person acting as such in connection with this transaction. Sublessor shall pay the leasing commissions of Brokers in accordance with a separate written agreement between Sublessor and Brokers. Each party shall indemnify and hold the other harmless from and against any and all claims, judgments, suits, costs,

 

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reasonable attorney’s fees and other expenses which the other may incur by reason of claims of any person, firm or corporation for a brokerage commission, finder’s fee or equivalent compensation alleged to be owing on account of the indemnifying party’s dealings with any real estate broker or agent other than Brokers in connection with the Premises or this Sublease. Each party’s obligations under this section shall survive the expiration or sooner termination of this Sublease.

23. Notices . In the event that Sublessee or Sublessor shall receive any notice or other communication with respect to the Premises or the use and occupancy thereof from Landlord, such recipient shall promptly furnish same to the other party. Any notice or other communication which either party shall desire or be required to give to the other shall be deemed sufficiently given if in writing and sent by registered or certified mail or recognized overnight carrier addressed to the other party, as follows: to Sublessor at the address set forth in the first paragraph of this Sublease; and to Sublessee at the address set forth in the first paragraph of this Sublease until the Commencement Date, and thereafter at the Premises, to the attention of both Sublessee’s Chief Financial Officer and its General Counsel.

24. Executed Counterparts . This Agreement may be executed in one or more counterparts, all of which together shall constitute a single agreement and each of which shall be an original for all purposes.

IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be duly executed as of the day and year first above written.

 

SUBLESSOR     SUBLESSEE

K2 INC.,

a Delaware corporation

   

ALPHATEC HOLDINGS, INC.,

a Delaware corporation

By:   /s/ Mark Rosebrock     By:   /s/ Steven Yasbek
 

Name: Mark Rosebrock

Title:   Associate General Counsel

     

Name: Steven Yasbek

Title: CFO and Vice President

 

9


SCHEDULE 1

FF&E

(Attach copy of FF&E Schedule)

 

10


EXHIBIT “A”

MASTER LEASE

(Attach copy of Master Lease)

 

11


EXHIBIT “B”

FORM OF WAIVER

(Attach copy of Waiver Form)

 

12


EXHIBIT “C”

LANDLORD’S CONSENT TO SUBLEASE

 

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Exhibit 10.2

STANDARD INDUSTRIAL LEASE

(N ET )

CARLSBAD CORPORATE CENTER

H.G. FENTON PROPERTY COMPANY,

a California corporation

“Landlord”

and

ALPHATEC HOLDINGS, INC.,

a Delaware corporation

“Tenant”

The parties acknowledge that double underlined text and lined-through text are intentional changes in language and incorporated as a part of this Lease.


TABLE OF CONTENTS

 

SECTION

       PAGE
1.   BASIC LEASE PROVISIONS    1
2.   DEFINITIONS    2
3.   PREMISES    5
4.   TERM; DELIVERY OF PREMISES    6
5.   RENT    7
6.   SECURITY DEPOSIT    8
7.   USE    8
8.   MAINTENANCE, REPAIRS AND ALTERATIONS    9
9.   TAXES    11
10.   UTILITIES    11
11.   INSURANCE    12
12.   WAIVER AND INDEMNITY    13
13.   DAMAGE AND DESTRUCTION    13
14.   CONDEMNATION    14
15.   ASSIGNMENT AND SUBLETTING    15
16.   DEFAULT BY TENANT; REMEDIES    17
17.   TENANT’S INSOLVENCY    18
18.   DEFAULT BY LANDLORD    19
19.   SUBORDINATION AND ESTOPPEL    19
20.   HAZARDOUS MATERIALS    20
21.   NOTICE    21
22.   OTHER TERMS AND CONDITIONS    21
23.   GENERAL PROVISIONS    22
24.   ADDENDUM    26

EXHIBITS

A        Site Plan

B        Premises and Improvements to Premises

C        Rules and Regulations

D        Signage Criteria

E        Environmental Questionnaire

F        Guaranty Agreement (INTENTIONALLY OMITTED)


STANDARD INDUSTRIAL LEASE - NET

THIS STANDARD INDUSTRIAL LEASE - NET ( “Lease” ), dated for reference purposes only January 30, 2008, is made at San Diego, California, between H. G. FENTON PROPERTY COMPANY, a California corporation ( “Landlord” ), and ALPHATEC HOLDINGS, INC., a Delaware corporation ( “Tenant” ).

1. BASIC LEASE PROVISIONS . The words and figures set forth in this Section 1 are used as defined terms in this Lease.

1.1 Premises : The real property and improvements which are the subject of this Lease. The Premises consist of approximately 73,480 rentable square feet (rsf) as depicted on Exhibit A. The address for the Premises is 5830 El Camino Real, Carlsbad, California 92008.

1.2 Building : The single-story building addressed at 5830 El Camino Real, Carlsbad, California 92008.

1.3 Project : The two (2) Buildings in Phase 1 of the Business Park, including all appurtenances and common area thereto, located at 5818 and 5830 El Camino Real, Carlsbad, California, 92008, consisting of approximately 150,173 rsf.

1.4 Business Park : The planned industrial development of which the Project is a part. The Business Park consists of Parcel C of Minor Subdivision No. 98-11 in the City of Carlsbad, County of San Diego, State of California according to Parcel Map thereof No. 18416, filed in the Office of the County Recorder of San Diego County, on January 26, 2000 as File No. 2000-39031 of official records.

 

1.5 Term :

 

1.6 Commencement and Expiration Dates :

 

  Ninety-eight (98) full calendar months
(a) Commencement Date:   December 1, 2008 (estimated, but not less than 120 days following the Delivery of the Premises)
(b) Expiration Date:   January 31, 2017
(c) Delivery of the Premises:   August 1, 2008 (estimated, subject to the Provisions of Section 4.5)
1.7 Extension Option Period:   Subject to the Provisions of Section 26
1.8 Initial Full Monthly Base Rent (NNN):   $73,480.00 ($1.00 per rsf x 73,480 rsf)
1.9 Prepaid Base Rent:   $73,480.00
1.10 Periodic Increase In Base Rent (NNN):  

 

Months of Term

  

Base Rent

2 – 8*    $35,000.00 (Reflects Abatement, subject to the Provisions of Section 25)
9 - 12    $73,480.00
13 - 24    $75,684.00
25 - 36    $77,954.53
37 - 48    $80,293.17
49 - 60    $82,701.96
61 - 72    $85,183.02
73 - 84    $87,738.51
85 - 96    $90,370.67
97 – Expiration Date    $93,081.79

 

* Plus any partial month at the beginning of the Term following the Commencement Date

 

1.11 Security Deposit Amount:   $293,920.00 (consisting of $93,081.79 to be held throughout the Term of Lease, subject to the Provisions of Section 27)
1.12 Tenant Improvement Allowance:   $1,102,200.00 (subject to the Provisions of Exhibit B)

 

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1.13 Tenant’s Share of Operating Expenses :

 

(a) Real Property Taxes:   48.93%
(b) Other Operating Expenses:   48.93%

1.14 Permitted Use : The premises shall be used and occupied as corporate offices, general offices, engineering, research and development, warehousing and distribution, and light manufacturing. Research and development use may include demonstrative surgical activities associated with the Tenant’s spinal and orthopedic surgical products, and for the storage and use of medical, biological and other materials incidental to such activities.

 

1.15 Tenant’s Guarantor(s):   None
1.16 Broker(s):  

Irving Hughes (Tenant)

Grubb & Ellis/BRE (Landlord)

1.17 Parking:   One hundred and eighty four (184) unreserved spaces
1.18 Landlord’s Address for Notice:  

H. G. Fenton Company

7577 Mission Valley Road, Suite 200

San Diego, California 92108

Tel: (619) 400-0120

Fax: (619) 400-0111

Attention: Property Manager

1.19 Tenant’s Address for Notice:  

Alphatec Spine

5830 El Camino Real

Carlsbad, California 92008

Attention: General Counsel

1.20 Addendum:   Sections 24, 25, 26, 27 and 28

2. DEFINITIONS . The captions appearing in this Section 2 are used as defined terms in this Lease.

2.1 Additional Rent . All sums payable by Tenant hereunder other than Base Rent, including without limitation: Tenant’s Share of Operating Expenses; late charges; interest on past due amounts; attorneys’ fees; and reimbursements to Landlord of sums advanced by Landlord to cure any default or discharge any obligation of Tenant hereunder.

2.2 Base Rent . The basic monthly rent payable by Tenant for the use and occupancy of the Premises, in accordance with Section 5 of this Lease.

2.3 Business Day . Any weekday, Monday through Friday, except holidays on which United States post offices are closed.

2.4 Commencement Date . The first day of the Term, as determined in accordance with Section 4.1 below.

2.5 Common Areas . All areas and facilities outside the Premises and within the Building and Project that Tenant is permitted to use, as provided and designated by the Landlord from time to time for the general non-exclusive use of Landlord, Tenant and other tenants of the Building and Project and their respective employees, suppliers, shippers, customers, invitees, licensees or other visitors, including without limitation hallways, entryways, common rest rooms on multi-tenant floors, elevators, stairways, common pipes, conduits, wires and appurtenant equipment serving the Premises, parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas; provided that Common Areas shall not include any portion of the Project currently leased or available for lease, which rentable areas shall be either maintained by the tenants thereof in accordance with maintenance obligations consistent with Section 8.1 of this Lease, or maintained by Landlord at its sole cost and expense and not as an Operating Expense of the Project.

2.6 Declaration . The recorded Declaration of Covenants, Conditions and Restrictions for the Business Park, as the same may be amended from time to time. A copy of the Declaration, if any, is available for review at the Landlord’s Office, and a copy will be provided to Tenant upon request.

2.7 Delivery of the Premises . The date of the inspection and acceptance (or deemed acceptance) of the Premises by Tenant, which shall not be less than ten (10) days following Landlord’s advance written notice to Tenant, accurately indicating that Landlord’s Work will be substantially completed on such date in accordance with Exhibit B attached hereto.

2.8 Hazardous Materials . Any and all materials or substances which have been determined to be a nuisance or dangerous, toxic or hazardous or a pollutant or contaminant, including but not limited to any hydrocarbon material, flammable explosives, asbestos, urea formaldehyde, radioactive materials or waste, or other hazardous, toxic, contaminating or polluting materials, substances or wastes, including, without limitation, any “hazardous substances”, “hazardous wastes”, “hazardous materials” or “toxic substances” under any Hazardous Materials Laws.

2.9 Hazardous Materials Laws . All federal, state and local laws, ordinances and regulations, including, but not limited to, the Federal Water Pollution Control Act (33 U.S.C. §1251, et seq.), Resource Conservation & Recovery Act (42 U.S.C. §6901, et seq.), Safe Drinking Water Act (42 U.S.C. §3000f, et seq.), Toxic Substances Control Act (15 U.S.C. §2601, et seq.), the Clean Air Act (42

 

2


U.S.C. §7401, et seq.), Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. §9601, et seq.), California H EALTH  & S AFETY C ODE (§25100, et seq., §39000, et seq.), California Safe Drinking Water & Toxic Enforcement Act of 1986 (California H EALTH  & S AFETY C ODE §25249.5, et seq.), California W ATER C ODE (§13000, et seq.), and other comparable federal, state or local law, regulation or interpretation thereof, whether currently in force or enacted in the future, together with any licenses, permits, plans or approvals generated pursuant to or as a result of any such law, which regulates or proscribes the use, storage, disposal, cleanup, transportation, release or threatened release into the environment or presence of Hazardous Materials.

2.10 Lease Year . A period of twelve consecutive full calendar months. The first Lease Year shall begin on the Commencement Date if the Commencement Date is the first day of a calendar month; otherwise, the first Lease Year shall begin on the first day of the first full calendar month after the month in which the Commencement Date occurs. Each succeeding Lease Year shall begin on the anniversary of the beginning of the first Lease Year. If Tenant should extend the Term pursuant to any extension option granted herein, the first day of the Extension Term shall also be deemed to be the first day of a Lease Year for all purposes of this Lease.

2.11 Tenant’s Work . The improvements and other work, if any, to be accomplished by Tenant in accordance with Exhibit B.

2.12 Landlord’s Delivery Work . All items of Landlord’s Work except those which Landlord reasonably cannot complete prior to the Commencement Date, e.g., Landlord’s Work that cannot be performed by Landlord until Tenant (i) provides Landlord with plans and specifications therefor, or (ii) obtains a building permit, or (iii) completes those items of Tenant’s Work that are necessarily completed prior to a particular item of Landlord’s Work.

2.13 Landlord’s Work . The improvements and other work, if any, to be accomplished by Landlord in accordance with Exhibit B.

2.14 Mortgage . Any mortgage, trust deed or other encumbrance, and all renewals, extensions or replacements thereof, now or hereafter imposed by Landlord upon the real property which includes the Premises.

2.15 Mortgagee . The holder of a Mortgage.

2.16 Operating Expenses . All costs incurred by Landlord, if any, for any of the following:

(a) The operation, repair and maintenance, in neat, clean and good order and condition of (i) the Common Areas of the Project, including without limitation all parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, and irrigation systems, common area lighting facilities, and fences and gates, consistent with other first class industrial/office projects in the Northern Coastal Market of San Diego County; (ii) fire detection in the Project, including sprinkler system maintenance and repair; and (iii) unless allocated directly to Tenant pursuant to Section 8.1(b), the Building’s heating, ventilation and air conditioning ( “HVAC” ) systems.

(b) To the extent any of the following services are provided for the Project, such as trash disposal (provided, however that Tenant pay for trash disposal specific to its use of the Premises if such use results in a disproportionately heavy use of the trash facilities for the Project), janitorial service, security services, gardening, painting, plumbing, electrical, carpentry, window washing, Project identification and traffic signage and equipment rental expenses, and any other service to be provided by Landlord that is elsewhere in the Lease stated to be an item of Operating Expenses.

(c) Any deductible portion of an insured loss concerning any of the items or matters described in this Section.

(d) Premiums for any insurance policies maintained by Landlord pursuant to Section 11 below.

(e) Real Property Taxes to be paid by Landlord.

(f) Utilities not separately metered to Tenant or other tenants of the Project.

(g) Independent contractors for services (excluding capital improvements), and compensation (including employment taxes and fringe benefits) of all persons who perform regular and recurring duties connected with day-to-day operation, maintenance and repair of the Project, provided such compensation is commercially reasonable and if such persons provide services to the Project in addition to other building(s), such compensation shall be equitably allocated based on the amount of time such persons spend providing services to the Project and the other building(s).

(h) Maintenance and repair of roofs, building walls, foundations, and all sewer and water facilities, subject to the exclusion of capital improvements, repairs and replacements from Operating Expenses as provided below.

(i) A property management fee in the amount of fifteen percent (15%) of the preceding items of Operating Expenses.

(j) Dues and assessments payable to the Project’s property owners association (if any).

(k) Upon completion of the future common areas of the Business Park, the costs and expenses of operation and maintenance thereof.

The inclusion of the improvements, facilities and services set forth in the foregoing definition shall not be deemed Landlord’s representation that such improvements or facilities exist, nor shall it impose on Landlord any obligation either to have those improvements or facilities or to provide those services, unless the improvements or facilities already exist in the Project or Landlord

 

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already provides the services as of the Commencement Date, or unless Landlord has agreed to do so elsewhere in the Lease. Capital improvements, repairs and replacements, as defined by Generally Accepted Accounting Practice (GAAP), are not included in Operating Expenses, except (i) as otherwise provided in this Lease, or (ii) for those that directly reduce other Operating Expenses set forth in the following paragraph.

Notwithstanding anything to the contrary contained in this Section 2.16, the following items shall be excluded from the term “Operating Expenses”: (i) expenditures for capital improvements, repairs or replacements, as defined by generally accepted accounting principles (GAAP), made to the Premises or Project, except (a) as otherwise provided in this Lease, (b) for those that (and only to the extent that they) directly reduce other Operating Expenses as defined in this Section 2.16, (c) for replacements made during the Term of this Lease, but only to the extent required for normal maintenance and repair (specifically excluding structural replacements, required as a result of any casualty, replacements covered by warranty or required to repair any defect in the design or construction of the Premises or Project), and (d) those required to be made pursuant to any applicable law adopted after the date of Landlord’s Delivery of the Premises (provided, however, that the cost of any such capital expenditure shall be amortized on a straight-line basis over its useful life in accordance with GAAP); (ii) repairs or other work occasioned by fire, windstorm or other casualty for which Landlord is obligated to maintain insurance or as to which Landlord receives reimbursement from third parties (in each case to the extent of the reimbursed amounts actually received by Landlord pursuant to its diligent efforts to obtain reimbursement to which Landlord is contractually entitled); (iii) any expense for any other building or property owned by Landlord; (iv) costs incurred in renovating or otherwise improving or decorating or redecorating space for tenants in, or other occupants of, the Project, except as such relates to reasonable improvements, repair and/or maintenance of the Common Areas; (v) depreciation of any kind; (vi) except as otherwise provided in this Lease, costs incurred due to the violation by Landlord or any tenant (other than Tenant) of the terms and conditions of any lease pertaining to the Project or of any valid and applicable building code, regulation or law or incurred due to the Premises or any part of the Project being in violation of any such code, regulation or law (subject to the provisions of Section 7.3 of the Lease); (vii) except for the property management fee described in Section 2.16 (i) above, overhead and profit increments paid to subsidiaries or Affiliates (as defined below) of Landlord for services rendered with respect to the Project to the extent that the costs of such services materially exceed competitive costs for similar services rendered by persons or entities of similar skill, competence and experience, other than a subsidiary or Affiliate of Landlord (as used herein “Affiliate” means a person or entity controlling, controlled by, or under common control with Landlord, and “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such controlled person or entity); (viii) interest on debt or amortization payments on any Mortgage to which Landlord is a party which affects the Project, and rental under any ground or underlying lease or leases (except to the extent the same may be made to pay or reimburse, or may be measured by, Real Property Taxes), and Landlord’s points, fees and legal costs and expenses associated with any such Mortgage or underlying lease; (ix) costs of Landlord’s or its agent’s general corporate or partnership overhead and general administrative expenses which are generally not chargeable as Operating Expenses by owners of similar properties located in the Carlsbad industrial submarket under comparable leases to similar tenants; (x) any compensation paid to clerks, attendants or other persons in commercial concessions, if any, operated by Landlord at the Project; (xi) without limiting anything contained in clause (i) above, rentals and other related expenses, if any, incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except equipment which is used in providing janitorial, repair or maintenance services which is not affixed to the Project; (xii) expenses legal or otherwise, incident to enforcement by Landlord of the terms of any other lease or occupancy agreement for the Project or in performing the obligation of any other tenant under its lease in the Project; (xiii) to the extent Landlord is actually reimbursed (but subject to Landlord’s diligent efforts to obtain reimbursement to which Landlord is contractually entitled at Landlord’s sole cost and expense), any expense for which Landlord is otherwise entitled to be or is actually reimbursed or indemnified (including reimbursement or indemnification by an insurer, warrantor or condemner); (xiv) any costs or expenses that are expressly designated as a Landlord’s cost or Landlord’s expense elsewhere in this Lease; (xv) any costs, expenses, fees or penalties relating to Landlord’s compliance or noncompliance with any Hazardous Materials Laws, rules, ordinances or regulations, now or hereinafter in force or effect, including but not limited to any laws, rules, ordinances or regulations relating to the disposal, handling or clean-up of Hazardous Materials or remedial or restoration work.; and (xvi) costs incurred in advertising, promotional and leasing activities for the Project, and costs and expenses incurred pursuant to any lease, sublease, sale or other conveyance of any interest of Landlord in the Project. Landlord shall use commercially reasonable efforts to make payments for goods and services in a timely manner to obtain the maximum possible discount. In the calculation of items constituting Operating Expenses, it is understood that no item shall be charged more than once.

2.17 Real Property Taxes . All general property and improvement taxes and all forms of assessment, special assessment or reassessment, license fee, license tax, business license tax, commercial rental tax, in lieu tax, levy, charge, penalty (to the extent not imposed as a result of Landlord’s negligence) or similar imposition, imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, or any agency or public body, as against any legal or equitable interest of Landlord in the Premises and all improvements thereon and thereto as they presently exist or as they may be expanded, developed, constructed or altered from time to time, including but not limited to: (a) any tax on Landlord’s rent, right to rent or other income from the Premises or all or any portion of the Project or as against Landlord’s business of leasing the Premises, but specifically excluding Landlord’s federal, state or city income, franchise, corporate, personal property, stock transfer, revenues, inheritance or estate taxes; (b) any assessments, taxes, fees, levies or charges in addition to, or in substitution, partially or totally, for any assessment, tax, fee, levy or charge previously included within the definition of real property tax before adoption of Proposition 13 by the voters of the State of California in the June 1978 election, it being acknowledged by Tenant and Landlord that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services that were before Proposition 13 provided without charge to property owners or occupants; and (c) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party which is imposed on the creation or transfer of an interest or an estate in the Premises. It is the intention of Tenant and Landlord that all new and increased assessments, taxes, fees, levies and charges, and all similar assessments, taxes, fees, levies and charges be included within the definition of Real Property Taxes for the purposes of this Lease. Real Property Taxes for the first year of the Term shall be calculated as if the Premises

 

4


and related improvements were fully assessed. If at any time during the Term the laws concerning the methods of real property taxation prevailing at the commencement of the Lease Term are changed so that a tax or excise on rents or any other tax, however described, is levied or assessed against Landlord as a substitution in whole or in part for any real property taxes, then Real Property Taxes shall include, but not be limited to, any such assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any gross income tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof. With respect to any assessments that may be levied against or upon the Premises, the Building or all or any portion of the Project and that under the laws then in force may be evidenced by improvement or other bonds, or may be paid in annual installments, there shall be included within the definition of Real Property Taxes with respect to any tax fiscal year only the amount currently payable on such tax, bond or assessment, including interest, for such tax fiscal year or the current annual installment for such tax fiscal year. Notwithstanding anything to the contrary set forth in this Lease, “Real Property Taxes” shall not include (i) any excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance or succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord’s general or net income (as opposed to rents or receipts), (ii) taxes on tenant improvements in any space in the Project based upon an assessed level in excess of the assessed level for which Tenant is directly responsible under this Lease, or (iii) penalties incurred as a result of Landlord’s negligence, inability or unwillingness to make payments of, and/or to file any tax or informational returns with respect to, any real property taxes, when due. In the event Landlord receives a refund or other return of Taxes (including any award received as a result of Landlord’s successful protest of the amount of Taxes) for which Tenant previously paid, then such refunded amount (plus any interest corresponding to such amount to the extent received from the taxing authority, less Landlord’s costs incurred in procuring such refund) shall be applied to reduce the amount of Taxes for the Lease Year in which such refunded amount is received prior to calculating the actual Taxes for such Lease Year, or if received after the expiration or earlier termination of this Lease shall be refunded to Tenant within thirty (30) days following receipt of such refund from the taxing authority.

3. PREMISES .

3.1 Lease of Premises . In consideration of the rent and covenants set forth below, Landlord hereby leases the Premises to Tenant, and Tenant hires the Premises from Landlord, for the term, at the rental, and upon all of the conditions set forth herein. Except as otherwise provided herein, this Lease is subject to: (i) all covenants, conditions, restrictions, easements, mortgages, deeds of trust, rights of way, reciprocal easement agreements to which Landlord is a party which affect the Project and all other matters now or hereafter affecting the Project or the Premises; and (ii) all zoning laws, ordinances and building codes now or hereafter affecting the Project or the Premises. Landlord represents and warrants that no part of the Project or the Premises is subject to a leasehold interest.

3.2 Landlord’s Reserved Rights . Landlord reserves to itself the absolute rights, without interfering with Tenant’s quiet enjoyment of the Premises: (i) to the use of the roof, the exterior-surfaces of exterior walls and subterranean areas beneath the Premises, and (ii) to install, use, maintain and replace equipment, machinery, pipes, conduits and wiring located within the Premises which serve other parts of the Project, in a manner and in locations that do not unreasonably interfere with Tenant’s use of the Premises.

3.3 Condition of Premises . Tenant acknowledges that except to the extent expressly set forth in this Lease or in a written addendum or amendment hereto, neither Landlord nor its agents have made (i) any promise to alter, remodel or otherwise improve, or (ii) any representation or warranty with respect to the condition of, the Premises, the Building or any part of the Project or improvements thereon or therein. Tenant’s taking possession of the Premises shall be deemed acceptance of the Premises by Tenant, and shall be deemed conclusively to establish that the Premises are in good and satisfactory condition as of the date Tenant takes possession. Subject to the completion of any Landlord’s Work, Tenant accepts possession of the Premises in their current, “as is”, condition, and acknowledges that it has inspected the Premises before signing this Lease and is fully aware of the condition of the Premises. Notwithstanding the foregoing, and prior to Landlord’s Delivery of the Premises, Landlord shall inspect any existing HVAC system (consisting of any air distribution duct work, compressors and any other related components or equipment); electrical system (consisting of wall and floor outlets, fluorescent lighting and distribution panel[s]); and plumbing system (consisting of water supply, sinks, drains, restroom facilities, water heater[s] and sprinkler system, if any) collectively “Existing Utility Systems” located in or on the Premises to ensure that each Existing Utility System and any related components are in proper working order and condition. If one or more Existing Utility System does not have a remaining useful life of at least the initial Term of this Lease, each such system shall be replaced by Landlord prior to the Delivery of the Premises at landlord’s sole cost and expense and not as part of the initial Tenant improvements costs. In addition Landlord shall ensure that the Premises are thoroughly cleaned and free of all prior occupants and their personal property by the date of Delivery of the Premises.

3.4 Rights in Common Areas . Landlord grants to Tenant and to Tenant’s employees, invitees and licensees a non-exclusive license during the Term to use the Common Areas, subject to the terms and conditions of this Lease. Tenant acknowledges that others, including without limitation Landlord and other tenants of the Building and Project, and their respective employees, invitees and visitors, and other persons authorized by Landlord, will also be entitled to use the Common Areas. Without advance notice to Tenant and without any liability to Tenant in any respect, Landlord shall have the right to:

(a) Establish and enforce reasonable rules and regulations concerning the maintenance, management, use and operation of the Common Areas.

(b) Close off any of the Common Areas to the extent reasonably required in the opinion of Landlord and its counsel to prevent a dedication of any of the Common Areas or the accrual of any rights by any person or the public to the Common Areas, provided such closure does not deprive Tenant of the substantial benefit and enjoyment of the Premises, its parking rights and reasonable access to the Premises.

(c) Temporarily close any of the Common Areas for maintenance, alteration or improvement purposes.

 

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(d) Select, appoint or contract with any person for the purpose of operating and maintaining the Common Areas, subject to such terms and at such rates as Landlord deems reasonable and proper.

(e) Change the size, use, shape or nature of any portions of the Common Areas, provided such change does not deprive Tenant of the reasonable benefit and enjoyment of the Premises, its parking rights or reasonable access to the Premises. So long as Tenant is not thus deprived of the reasonable use and benefit of the Premises, Landlord will also have the right at any time to change the arrangement or location of, or both, or to regulate or eliminate the use of, any concourse, parking spaces, garage, or any elevators, stairs, toilets or other public conveniences in the Project, without incurring any liability to Tenant or entitling Tenant to any abatement of rent, and such action will not constitute an actual or constructive eviction of Tenant.

(f) Erect one or more additional buildings on the Common Areas, expand the existing buildings or other buildings to cover a portion of the Common Areas, convert Common Areas to a portion of the Building or other buildings, or convert any portion of such other buildings to Common Areas, provided that such conversion does not result in the reduction of Tenant’s parking rights or alter access to the Premises. Upon erection of any additional buildings or change in the Common Areas, the portion of the Project upon which buildings or structures have been erected will no longer be deemed to be a part of the Common Areas. In the event of any such changes in the size or use of the Common Areas of the Project, Landlord shall make an appropriate adjustment in the Building’s or any other buildings’ pro rata share of exterior Common Areas of the Project as appropriate, and a corresponding adjustment to Tenant’s Share of Operating Expenses.

3.5 Measurement of Premises . Landlord hereby represents and warrants that, absent any improvement or addition to the Premises during the Term or any extension thereto, the rentable area set forth in Section 1.1 above shall not increase during the term or any extension thereto.

4. TERM; DELIVERY OF PREMISES .

4.1 Term . The Term shall be for the number of months set forth at Section 1.5 above, beginning on the Commencement Date and ending on the Expiration Date. Notwithstanding the foregoing, if Delivery of the Premises has not occurred by the estimated date set forth in Section 1.6(c) above, then the Delivery of the Premises shall occur on the date that Landlord’s delivery obligations set forth in Section 3.3 above are satisfied. Landlord shall not be liable for any damage incurred by Tenant as a result of any delay in Delivery of the Premises, and this Lease shall not thereby become void or voidable during such period; provided, however that the Commencement Date shall be delayed as required for Tenant to have at least one hundred twenty (120) days to perform Tenant’s Work between the Delivery of the Premises and the Commencement Date.

4.2 Delivery of the Premises . Upon completion of Landlord’s Work, the parties shall jointly inspect the Premises. If any defects in Landlord’s Work exist at the time of such inspection, Tenant shall notify Landlord thereof in writing of such defects in accordance with the Punchlist Items list below; provided, however, that Delivery of the Premises to Tenant shall be delayed only if the existence of any such defects would materially adversely affect Tenant’s occupancy of the Premises, in which case the date of Delivery of the Premises shall be the date upon which Landlord notifies Tenant that such defects have been substantially corrected. Tenant shall notify Landlord of any defects in the condition of the Premises which are inconsistent with landlord’s delivery obligations (“Punchlist Items”) that do not impair Tenant’s ability to utilize the Premises for the purposes permitted hereunder within thirty (30) days after Tenant takes possession of the Premises, which Punchlist Items shall be repaired or corrected by Landlord, at Landlord’s sole cost and expense, no later than thirty (30) days after notice thereof (with the Commencement Date delayed day-for-day for any repairs or corrections that exceed such 30-day period). Landlord makes no representation or warranty as to the nature, quality, or suitability for Tenant’s business of the Tenant Improvements, the Project, the Building, or the Premises, and Tenant shall have no rights against Landlord by reason of such matters or any claimed deficiencies therein. Notwithstanding the foregoing or anything to the contrary contained herein, Landlord shall, at its sole cost and expense (and as not part of Operating Expenses, other than as set forth in Section 8.4 herein) and throughout the initial Term and any option term (if applicable), repair any structural and/or latent design or construction defects in the original construction of the Project of which Landlord has notice or that Landlord discovers. If Tenant shall fail to provide Landlord with a list of Punchlist Items within the period set forth above, Landlord’s compliance with its delivery obligations shall be deemed to have been satisfied on the date the Delivery of the Premises shall have occurred.

4.3 Termination for Non-Commencement . Notwithstanding the foregoing, in the event that Delivery of the Premises has not occurred within six months after the Commencement Date set forth in Section 1.6(a), then for a period of thirty (30) days after the expiration of such six month period either party not in default hereunder may cancel and terminate this Lease, without any liability to the other party, upon written notice to the other party; provided, however, that if such written notice of termination is not delivered by either party within the 30-day period, the foregoing right to terminate this Lease shall itself terminate and be of no further force or effect.

4.4 Memorandum of Commencement Date . Following the Commencement Date, Landlord shall prepare and forward to Tenant two copies of a written Memorandum of Commencement Date, signed by Landlord, confirming the Commencement Date. Within ten (10) business days after receipt thereof, Tenant shall sign and return one copy of the Memorandum of Commencement Date, indicating either Tenant’s agreement with the matters set forth therein or any areas of disagreement. Tenant’s failure to return a copy of the Memorandum of Commencement Date within such ten-business day period shall be conclusively deemed Tenant’s agreement with all matters set forth therein. Any dispute or disagreement on Tenant’s part as to the Commencement Date set forth in such memorandum shall, at the election of either party, be submitted to final, binding arbitration in San Diego, California under the Commercial Arbitration Rules of the American Arbitration Association.

4.5 Early Access . For the purpose of Tenant completing Tenant’s Work, as set forth in Exhibit B, and subject to the terms and conditions of this Section 4.5, Landlord agrees to grant Tenant (or Tenant’s designated contractor or service person) access to the Premises prior to the Delivery of the Premises as long as such access does not interfere with or delay the performance of Landlord’s work required to satisfy the requirements for the Delivery of the Premises (the “Early Access Period”). Any delays in the

 

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completion of the Landlord’s work required for the satisfaction of the Delivery of the Premises conditions set forth in Section 3.3 above attributable to Tenant’s activities in the Premises during the Early Access Period shall accelerate the Delivery of the Premises and the Commencement Date by one day for each day of such Tenant delays. Unless Landlord otherwise agrees thereto in writing, Tenant shall have no right to occupy all or any part of the Premises prior to Delivery of the Premises. Such Early Access Period shall not advance the Commencement Date or the Expiration Date, but such access shall be subject to all provisions of this Lease, excluding payment of monthly Base Rent, Tenant’s Share of Operating Expenses and Tenant’s payment of any applicable utility charges for such Early Access Period preceding the Delivery of the Premises. From the Delivery of the Premises until the Commencement Date (the “Early Occupancy Period”), Tenant shall have unrestricted access to the Premises in order to perform Tenant’s Work. Tenant shall have no right to occupy all or any part of the Premises during the Early Occupancy Period other than to perform the Tenant’s Work. Such Early Occupancy Period shall not advance the Commencement Date or the Expiration Date; but such access shall be subject to all provisions of this Lease, excluding payment of monthly Base Rent, Tenant’s Share of Operating Expenses (but subject to Tenant’s payment of any applicable utility charges for such Early Occupancy Period preceding the Commencement Date). Tenant’s early access to and occupancy of the Premises shall also be subject to the following terms and conditions:

(a) Prior to any such access, Tenant shall have delivered to Landlord a certificate(s) of insurance for all insurance required to be maintained by Tenant hereunder, as further described in Section 11.

(b) Tenant’s access to the Premises during the Early Access Period shall not interfere with the completion of Landlord’s Work (if any).

(c) Without limiting anything contained herein, Tenant’s access and completion of Tenant’s Work and any occupancy of the Premises prior to the Commencement Date shall be subject to Tenant’s indemnification obligations set forth in Sections 8.6(b), 12.2, 20.3, 23.19 and elsewhere herein.

5. RENT .

5.1 General . From and after the Commencement Date, Tenant agrees to pay Landlord, in advance, on the first day of each and every calendar month during the Term, Base Rent and Additional Rent as specified in this Section. Payment of all such rent shall be without offset or demand, shall be in lawful money of the United States of America and shall be made at the address set forth for Landlord herein or at such other place as Landlord may direct.

5.2 Base Rent . Base Rent shall initially be in the amount per month set forth in Section 1.8, subject to abatement of a portion thereof as provided in Section 25 below.

5.3 Annual Adjustment to Base Rent . Base Rent shall be increased each Lease Year during the Term in accordance with the schedule set forth in Section 1.10.

5.4 Operating Expenses . The parties intend that, subject only to the specific exceptions set forth herein, this Lease be absolutely net to Landlord. Accordingly, in addition to Base Rent and subject to the provisions of this Section, Tenant shall pay, as Additional Rent, Tenant’s Share of Operating Expenses incurred by Landlord during each calendar year of the Term, pursuant to the following terms and conditions:

(a) Landlord shall provide to Tenant, at or before the Commencement Date, a good faith estimate of Tenant’s Share of Operating Expenses that Landlord anticipates will actually be incurred for the calendar year in which the Commencement Date occurs. Landlord shall also provide to Tenant, as soon as possible following the first day of each succeeding calendar year, a good faith estimate of Tenant’s Share of Operating Expenses with respect to such succeeding calendar year of the Term.

(b) Each annual estimate of Tenant’s Share of Operating Expenses determined by Landlord pursuant to this Section shall be divided into twelve (12) equal monthly installments. Tenant shall pay to Landlord such monthly installment of Tenant’s Share of Operating Expenses with each monthly payment of Base Rent. In the event the estimated amount of Tenant’s Share of Operating Expenses has not yet been determined for any calendar year, Tenant shall pay the monthly installment in the estimated amount determined for the preceding calendar year until the estimate for the current calendar year has been provided to Tenant, at which time Tenant shall pay any shortfall for the preceding months of the calendar year and shall thereafter make the monthly installment payment in accordance with the current estimate.

(c) Within sixty (60) days following the end of each calendar year of the Term, and within sixty (60) days following the Expiration Date, Landlord shall determine and provide to Tenant a statement setting forth the amount of Operating Expenses actually incurred with respect to such calendar year (or portion of the calendar year occurring prior to the Expiration Date). In the event that Tenant’s Share of such actual Operating Expenses exceeds the sum of the monthly installments actually paid by Tenant for such calendar year, Tenant shall pay the difference to Landlord, within thirty (30) days following receipt of such statement. In the event the sum of such installments exceeds Tenant’s Share of such Operating Expenses actually incurred, the difference shall be applied as a credit to future installments of Tenant’s Share of Operating Expenses, except that the amount of any overpayment for that portion of the calendar year preceding the Expiration Date shall be delivered to Tenant along with such statement.

(d) Upon written request of Tenant, Landlord shall provide an accounting of the Operating Expenses for the preceding calendar year. Landlord shall keep at its home office in the County of San Diego, full, accurate and separate books of account with backup documentation of Operating Expenses for a period of three full years after the end of each calendar year, which Tenant shall have the right to examine and copy at no expense to Landlord, at reasonable times and upon reasonable notice. Tenant shall have the right, upon twenty (20) days’ prior notice to Landlord, not more frequently than annually and at Tenant’s sole cost and expense, to conduct an audit of Landlord’s books and records regarding such Operating Expenses to confirm the accuracy of Landlord’s accounting; provided, however, that such audit shall not unreasonably interfere with the conduct of Landlord’s business.

 

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5.5 Late Charges . Tenant acknowledges that late payment by Tenant to Landlord of Base Rent or Additional Rent due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which is extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Landlord by the terms of any mortgage or deed of trust covering the Premises. Therefore, if any payment of Base Rent or Additional Rent is not paid within five (5) days after the date due, Tenant shall pay to Landlord ten percent (10%) of the amount due or Two Hundred Fifty Dollars ($250.00), whichever is greater; provided that upon the first such failure in any Lease Year such late charge shall not accrue until five (5) days after Tenant’s receipt of notice that the overdue payment was not received when due and a statement that a late charge will be due five (5) days from the delivery of such notice if the overdue amount is not paid. The parties agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of the late payment by Tenant. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord’s other rights and remedies hereunder or at law and shall not be construed as limiting Landlord’s remedies in any manner.

6. SECURITY DEPOSIT . Subject to Tenant’s right to deliver one or more Letters of Credit to Landlord in accordance with Section 27 below, Tenant shall pay to Landlord, within five business days of the date that the Premises is delivered to the Tenant, a security deposit in the amount (or if a security deposit is currently held by Landlord, then any additional amount as the case may be) set forth at Section 1.11 ( “Security Deposit” ). Subject to the provisions of Section 27, the Security Deposit shall be held by Landlord as security for the faithful performance by Tenant of all of the terms, covenants and conditions of this Lease to be kept and performed by Tenant. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent, Landlord may (but shall not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any rent or any other sum in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant’s default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant’s default. If any portion of the Security Deposit is so used or applied, Tenant shall, upon demand therefor, deliver cash to Landlord in an amount sufficient to restore the Security Deposit to its original amount, and Tenant’s failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest thereon. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord’s option, to the last assignee of Tenant’s interests hereunder) at the expiration of the Term, provided that Landlord may retain the Security Deposit until such time as any amount due from Tenant under this Lease has been determined and paid in full.

7. USE .

7.1 Permitted Use . The Premises shall be used and occupied only for the purposes and activities set forth in Section 1.14 above, and for no other uses or purposes whatsoever. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant’s business or other activity carried on in the Premises, or if a failure to procure such a license or permit might or would in any way affect Landlord or the Project, then Tenant, at Tenant’s expense, shall (i) duly procure and thereafter maintain such license or permit and submit the same for inspection by Landlord, (ii) install and pay for any improvements, changes or alterations in the Premises, required by any governmental authority, as a result of its proposed use of the Premises or its manner of operation, and (iii) at all times, comply with the requirements of each such license or permit. Tenant warrants that it has investigated whether its proposed use of the Premises and its proposed manner of operation will comply with, and Tenant assumes the risk that its proposed use of the Premises and its proposed manner of operation are and will continue to be in compliance with, all applicable governmental land use approvals, laws and regulations, including without limitation all zoning laws regulating the use of and enjoyment of the Premises. Tenant agrees that under no circumstances shall Tenant be released in whole or in part from any of its obligations under this Lease as a result of any governmental authority’s disallowing or limiting Tenant’s proposed use of the Premises or its manner of operation.

7.2 Condition of Premises . Landlord warrants to Tenant, but without regard either to any Tenant’s Work or to the use for which Tenant will use the Premises, that as of the date of Delivery of the Premises, neither the Premises nor Tenant’s manufacturing, storage and distribution of medical devices from the Premises violates the Declaration or, any other covenants or restrictions of record in effect on the date of this Lease, or the laws, rules or regulations enforced by any governmental authority. In the event it should be determined that this warranty has been violated, then after written notice from Tenant, Landlord shall promptly, at its sole cost and expense, rectify any such violation. In the event Tenant does not give Landlord any such written notice of violation within three (3) months after the date that Tenant has been notified by a governmental authority that the Premises is not in compliance with an applicable law rule or regulation, the correction of such violation shall thereafter be Tenant’s obligation, to be performed at Tenant’s sole cost and expense. The foregoing warranty shall be of no force or effect if, prior to the date of this Lease, Tenant was the owner or occupant of the Premises, in which event Tenant shall correct any such violation, whenever determined to exist, at Tenant’s sole cost and expense.

7.3 Compliance With Requirements . Subject to Section 7.2 above, Tenant shall, at Tenant’s expense, promptly comply with all applicable statutes, ordinances, rules, regulations, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect during the Term, whether or not they reflect a change in policy from that now existing, relating in any manner to the Premises and the occupation and use by Tenant of the Premises. Tenant shall not use or permit the use of the Premises in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Project. Without limiting the generality of the foregoing, Tenant shall, at its sole cost and expense, comply promptly with all Hazardous Materials Laws and with all environmental laws and ordinances applicable to the conduct of Tenant’s business, including all air quality and air pollution regulations of the regional air pollution control district. If at any time it reasonably appears to Landlord that Tenant is not fulfilling its obligations under this Section, Landlord may cause to be performed, at Tenant’s sole cost, an audit or inspection of the Premises to evaluate Tenant’s compliance herewith.

 

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7.4 Compliance With Americans With Disabilities Act . The parties acknowledge that the design and construction of certain areas of the Building and/or the Common Areas and Premises may not presently be in compliance with Title III of the Americans With Disabilities Act ( “ADA” ) and other applicable laws and regulations that relate to access by the disabled or handicapped. For any non-compliance that exists prior to the Commencement Date, Landlord shall be responsible, at its sole expense, for any necessary alterations or improvements to the Building or the Common Areas to the extent necessary to correct any such non-compliance. Landlord agrees that no cost or expense related to such alterations or improvements shall be included in Operating Expenses. After the Commencement Date, Tenant shall be responsible for compliance with the ADA and related statutes with respect to any alterations or improvements to the Premises made by Tenant and the operation of any businesses conducted from the Premises; provided, however, that any design and construction items that were not in compliance with ADA and other applicable laws and regulations as of the Commencement Date shall continue to be Landlord’s responsibility. In the event of any changes to the ADA or other applicable statutes, or any rules or regulations promulgated pursuant thereto, that become effective after the Commencement Date of this Lease, Tenant shall be responsible, at its sole expense, for any necessary alterations or improvements to the Premises, and Landlord shall be responsible for any necessary alterations or improvements to the Building or any Common Areas; provided, however, that Landlord’s costs and expenses incurred in connection with any such alterations or improvements shall be conclusively deemed to be Operating Expenses, notwithstanding the classification of such costs and expenses as capital items and shall be amortized in accordance with generally accepted accounting practice; provided, however, that Landlord shall not include in Operating Expenses amortization of any ADA cost incurred solely for improvements to the leased premises of another tenant in the Project.

7.5 Rules and Regulations . Tenant shall at all times comply with the Declaration and with the rules and regulations for the Project. A copy of the rules and regulations in existence on the date of this Lease is attached hereto as Exhibit C, but Landlord reserves the right to reasonably amend the rules and regulations at any time by giving notice of amendment to Tenant, if Landlord determines such amendments to be to the best interests of the Building and its tenants. Tenant shall not be bound by any such amended rules and regulations until Tenant has received a written copy thereof. Landlord agrees that the rules and regulations shall be enforced in a uniform and non-discriminatory manner; provided, however, that Landlord shall not be liable to Tenant for Landlord’s failure to enforce the rules and regulations against any other tenants of the Project.

8. MAINTENANCE, REPAIRS AND ALTERATIONS .

8.1 Tenant’s Obligations .

(a) Tenant shall keep and maintain in good, sanitary order, condition, and repair (including replacement of parts and equipment if necessary) the non-structural portions of the Premises and every part thereof and any and all appurtenances thereto wherever located, including, without limitation, the interior surfaces of the exterior wall, the exterior and interior portion of all doors, door frames, door checks, windows (including window sashes, casements and frames), plate glass, storefront, Tenant’s signs, all plumbing and sewage facilities within the Premises (including free flow up to the main sewer line), fixtures, heating and air conditioning, and electrical systems exclusively serving the Premises (whether or not located in the Premises), fire sprinkler system, walls, floor and ceilings, and all other repairs, replacements (exclusive of replacements of capital items), renewals and restorations, interior and exterior, ordinary and extraordinary, foreseen and unforeseen, and all other work performed, and additions, alterations, and improvements installed by or on behalf of Tenant. Any glass in the Premises broken during the Term shall promptly be replaced by Tenant with glass of the same quality, size and kind. Subject to force majeure delays, if Tenant shall fail to replace same within seventy-two (72) hours after such glass is broken, Landlord shall have the right, but shall not be obligated, to replace such glass, in which event Tenant shall, promptly upon demand therefor by Landlord, reimburse Landlord for expenses incurred by Landlord in connection therewith.

(b) Landlord shall maintain the HVAC system of the Premises through a maintenance contract which will be procured by Landlord, and shall be subject to (i.e. not duplicative of) the manufacturer’s standard warranty for the HVAC system. Tenant hereby covenants and agrees that if, in accordance with Section 3.3, Landlord installs new heating, ventilating and air conditioning units as part of Landlord’s Work which have a warranty for not less than five (5) years on such HVAC system from the manufacturer thereof and assigns such warranty to Tenant (or agrees to enforce same for the benefit of Tenant), Tenant shall reimburse Landlord, upon demand and as Additional Rent, for Landlord’s costs of the HVAC maintenance contract (or Tenant’s equitable share of such costs, if such maintenance contract covers HVAC system(s) not serving the Premises). The parties acknowledge that throughout the initial Term and any Extension Term, subject to warranty coverage of such parts and components, which shall be promptly submitted and diligently asserted by Landlord, Tenant shall be responsible for payment to Landlord within thirty (30) days following Landlord written request and an invoice providing reasonable detail of the repair and part or component affected, as Additional Rent, of any part or component that may need repair or replacement for the HVAC System(s) which serve only the Premises.

(c) Tenant shall, at Tenant’s sole cost and expense, comply with all laws, rules, orders, ordinances, directions, regulations and legal requirements of federal, state, county or municipal governmental authorities now or hereafter affecting or applying to the Premises, including, without limitation, the Americans With Disabilities Act.

8.2 Condition on Termination . On the last day of the Term, or on any sooner termination, Tenant shall surrender the Premises to Landlord in the same condition as received, subject to ordinary wear and tear, damage due to casualty, loss or alteration due to casualty, and any alterations to the Premises made by Landlord pursuant to its rights under Section 3 above, or alterations made as part of Tenant’s Work, as required to comply with applicable laws or otherwise not required to be removed by landlord in accordance with Section 8.6 below, “warehouse clean” and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices. Tenant shall repair any damage to the Premises occasioned by the installation or removal of Tenant’s trade fixtures, alterations, furnishings and equipment, and shall leave all air lines, power panels, electrical distribution systems, lighting fixtures, HVAC systems, plumbing and fencing in good operating condition.

 

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8.3 Landlord’s Rights . If Tenant fails to perform Tenant’s obligations under Section 8.1 or 8.2 or under any other provision of this Lease, Landlord may enter the Premises after five (5) business days’ prior written notice to Tenant (except in the case of emergency, in which case no notice shall be required) and perform such obligations on Tenant’s behalf and put the Premises in good order, condition and repair, and the cost thereof together with interest thereon from the date incurred at the maximum rate then allowed by law shall be due and payable as Additional Rent to Landlord together with Tenant’s next Base Rent installment; provided that if Tenant is reasonably attempting to perform such obligations and such performance cannot be completed in a commercially-reasonable manner during such five-business day period, Tenant shall have such additional time as is reasonably required to perform such obligations.

8.4 Landlord’s Obligations . Except for any Landlord’s Work set forth in Exhibit B and Sections 13 and 14 relating to damage and condemnation, the parties intend that Landlord shall have no obligation whatsoever to repair and maintain the non-structural components of the Premises or the equipment therein. Notwithstanding the foregoing, Landlord shall keep in good condition and repair the foundations, exterior walls, structural condition of interior bearing walls, and roof of the Building (and to keep all of the foregoing watertight at all times), as well as operate, maintain and repair all Common Areas of the Project in a first class manner comparable to other Class A industrial/office projects in the Carlsbad market, and all costs and expenses incurred by Landlord in connection therewith shall be included within Operating Expenses, subject to the exclusions contained in Section 2.16 above. Landlord shall have no obligation to make repairs under this Section until a reasonable time after receipt of written notice from Tenant of the need for such repairs.

8.5 Waiver; Self Help . Subject to Tenant’s self help rights expressly provided in this Section 8.5, Tenant expressly waives all rights to make repairs at the expense of Landlord or deduct any amounts from rent as provided in any statute or law in effect during the Term of this Lease, including its rights under the provisions of §1941 and §1942 of the C IVIL C ODE of the State of California. Notwithstanding any provision in this Lease to the contrary, if Landlord shall fail to commence any repair obligations required under Section 8.4 above within thirty (30) days following Tenant’s written request for such repairs and thereafter complete such repairs with commercially reasonable due diligence, then Tenant may elect to make such repairs by complying with the following provisions of this 8.5. Before making any such repair, and following the expiration of the applicable period set forth above, Tenant shall deliver to Landlord a notice for the need for such repair (“Self Help Notice”), which notice shall specifically advise Landlord that Tenant intends to exercise its self-help rights hereunder. Should Landlord fail, within five (5) business days following receipt of the Self-Help Notice (or within two (2) business days following written notice in the event of necessary emergency repairs), to commence the necessary repair (or to make other reasonable arrangements), then Tenant shall have the right to make such repair on behalf of Landlord so long as such repair is performed in strict compliance with all applicable laws and restrictions of record and the total cost of such repair does not exceed an amount equal to two (2) months of Tenant’s then-current Base Rent. Any sums expended by Tenant pursuant to the provisions of this Paragraph 8.5 without Landlord’s express written prior consent shall be at Tenant’s risk. Landlord agrees that Tenant will have access to areas of the Building outside the Premises to the extent necessary to perform the work contemplated by this Section 8.5. In the event Tenant properly takes such action in accordance with this Section 8.5, Tenant may utilize the services of any qualified contractor which normally and regularly performs similar work in comparable buildings in the area of the Project. Tenant shall provide Landlord with a reasonably detailed invoice together with reasonable supporting evidence of the costs reasonably and actually incurred in performing such repairs. Landlord shall either reimburse Tenant for the reasonable costs of such repairs plus a fifteen percent (15%) administration fee within thirty (30) days following receipt of Tenant’s invoice for such costs or deliver a written objection stating with specificity the reasons Landlord disputes Tenant’s actions or the costs incurred. If Landlord delivers to Tenant, within such thirty (30) day period, a written objection to the payment of such invoice, setting forth Landlord’s reasons for its claim that such action did not have to be taken by Landlord pursuant to the terms of this Lease or that the charges are excessive (in which case Landlord shall pay the amount it contends would not have been excessive if the only objection is to the costs incurred), then Tenant shall not be entitled to offset any amount from rent, but as Tenant’s sole remedy, the dispute shall be resolved by arbitration in accordance with Section 28 of this Lease. Tenant shall be responsible for obtaining any necessary governmental permits before commencing the repair work. Tenant shall be liable for any damage, loss or injury resulting from said work.

8.6 Alterations and Additions .

(a) Except as provided in paragraph 8.6(d) below, Tenant shall not, without Landlord’s prior written consent which shall not be unreasonably withheld, make any alterations, improvements, additions, or Utility Installations in, to or about the Premises. Tenant shall make no change or alteration to the exterior of the Building without Landlord’s prior written consent, which consent may be withheld for any reason in Landlord’s sole discretion and which may at Landlord’s discretion be conditioned upon Tenant’s providing Landlord, at Tenant’s sole cost and expense, a lien and completion bond in an amount equal to one and one-half (1  1 / 2 ) times the cost of the work. As used in this Section, the term “Utility Installations” shall mean carpeting, window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing. Landlord may require at the time of giving its consent to any alterations, improvements, additions or Utility Installations to the Premises requested by Tenant that Tenant remove, prior to the expiration of the Term, any or all of such requested alterations, improvements, additions or Utility Installations (provided that Tenant shall not be required to remove any alterations, improvements, additions or Utility Installations that are made by Tenant as part of the original Tenant Improvements), and following such removal Tenant shall repair any damage to the Premises or the Common Areas caused by such removal. With the exception of Cosmetic Alterations (as defined in Section 8.6(d) below), should Tenant make any alterations, improvements, additions or Utility Installations without the prior approval of Landlord, Landlord may, at any time during the Term of this lease, require that Tenant remove any or all of the same.

(b) Except for improvements to be accomplished by Landlord at its expense, if any, Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Building or any interest therein. Tenant shall give Landlord not less than ten days’ notice prior to the commencement of any work in the Premises, and Landlord shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Tenant shall, in good faith, contest the validity of any such lien, claim or demand, then Tenant shall, at its sole expense, defend itself and Landlord against the same and shall pay and satisfy any adverse judgment that may be rendered thereon before the enforcement thereof against the Landlord or the Building, upon the

 

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condition that if Landlord shall require, Tenant shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to one and one-half (1  1 / 2 ) times the amount of such contested lien, claim or demand, indemnifying Landlord against liability for such claim or lien and for all costs of defense thereof, of obtaining the release of any lien, and of making the Building free from the effect of such lien or claim. In addition, Landlord may require Tenant to pay Landlord’s attorneys’ fees and costs in participating in such action if Landlord shall decide it is in Landlord’s best interest to do so. In any event, Landlord may pay the lien claim prior to the enforcement thereof, in which event Tenant shall reimburse Landlord in full, including attorneys’ fees for any such expense, as Additional Rent, with the next due rents.

(c) All alterations, improvements, additions and Utility Installations (exclusive of all trade fixtures of Tenant) which may be made on the Premises, shall be the property of Landlord and shall remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Landlord requires their removal as a condition contained in Landlord’s written consent. Notwithstanding the provisions of this Section 8.6, Tenant’s machinery and equipment (other than Utility Installations), other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Section 8.2.

(d) Notwithstanding anything to the contrary contained herein, Tenant may make changes to the Premises (the “Pre-Approved Alterations”) without Landlord’s consent, provided that the aggregate cost of any such Pre-Approved Alterations does not exceed (i) Twenty-Five Thousand and No/100 Dollars ($25,000.00) per work of alteration, or (ii) Seventy-Five Thousand and No/100 Dollars ($75,000.00) in the aggregate in any twelve (12) month period, and further provided that such Pre-Approved Alterations do not (i) require any structural or other substantial modifications to the Premises, (ii) require any changes to, nor adversely affect, the systems and equipment of the Building, and (iii) affect the exterior appearance of the Building. Tenant shall give Landlord at least ten (10) business days prior notice of such Pre-Approved Alterations, which notice shall be accompanied by reasonably adequate evidence that such changes meet the criteria contained in this paragraph 8.6(d). Unless Tenant requests Landlord’s determination of whether such Pre-Approved Alterations be removed upon Tenant’s surrender of the Premises at the time such alterations are made, and Landlord waives the requirement for their removal at the time such request is made, such Pre-Approved Alterations shall be removed as part of Tenant’s surrender obligations.

9. TAXES .

9.1 Real Property Taxes . Landlord shall pay all Real Property Taxes with respect to the Building and the Project, which shall be included in Operating Expenses. If the Premises are separately assessed, or included within an assessor’s parcel that does not encompass the entire Project, Landlord shall adjust Tenant’s Share of Operating Expenses as it relates to Real Property Taxes, to reflect the proportion between the area of the Premises and the total area of the assessor’s parcel encompassing the Premises. Tenant may, upon the receipt of prior written approval of Landlord, such approval not to be unreasonably withheld, contest any Real Estate Taxes against the Project and attempt to obtain a reduction in the assessed valuation of the Project for the purpose of reducing any such tax assessment. In the event Landlord approves, and upon the request of Tenant, but without expense or liability to Landlord, Landlord shall cooperate with Tenant and execute any document which may be reasonably necessary and proper for any proceeding. If a tax reduction is obtained, there shall be a subsequent reduction in Tenant’s Real Estate Taxes for such year, and any excess payments by Tenant shall be refunded by Landlord, without interest, when all refunds to which Landlord is entitled from the taxing authority with respect to such year have been received by Landlord. In the event Landlord desires to contest any Real Estate Taxes, Tenant agrees to cooperate with Landlord and execute any document which may be reasonably necessary and proper for any proceeding, at no cost to Tenant. Tenant shall not be liable for increases in Real Estate Taxes attributable to additional improvements to expand the rentable area of the Project.

9.2 Personal Property Taxes . Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises or elsewhere. When possible, Tenant shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant’s said personal property shall be assessed with Landlord’s real property, Tenant shall pay to Landlord the taxes attributable to Tenant within ten days after a receipt of a written statement setting forth the taxes applicable to Tenant’s property.

10. UTILITIES . Landlord represents that the Premises is improved with separately metered connections for the distribution of water, gas and electricity to the Premises, and such systems and the sanitary sewer systems of the Premises are in good working order. Tenant shall be solely responsible for, and shall arrange for, any costs associated with Tenant’s required upgrades to the existing utilities systems of the Premises and Tenant shall promptly pay all charges for any utility used upon or furnished to the Premises. In the event any such utility is not separately metered from Common Area utilities, Tenant shall pay its share of the cost thereof, as equitably determined by Landlord, as Additional Rent, as part of Operating Expenses. In this regard, Tenant acknowledges and agrees that if Tenant’s use of the Premises results in a disproportionately heavy use of water or other commonly metered utilities, then Landlord, at Landlord’s discretion, and in a reasonable and equitable manner, may adjust Tenant’s Share of Operating Expenses to reflect such disproportionately heavy use. Landlord does not warrant that any services Landlord supplies will not be interrupted, e.g., because of accidents, repairs, alterations, improvements or any reason beyond the reasonable control of Landlord, and no such interruption (unless attributable to Landlord’s sole active negligence or willful misconduct) shall: (i) be considered an eviction or disturbance of Tenant’s use and possession of the Premises; (ii) entitle Tenant to terminate this Lease; (iii) make Landlord liable to Tenant for damages; (iv) abate Base Rent, Additional Rent or any other sums due hereunder; or (v) relieve Tenant from performing its obligations hereunder.

 

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11. INSURANCE .

11.1 Liability Insurance–Tenant . Prior to the earlier of the Commencement Date or Tenant’s occupancy of the Premises, Tenant, at its own expense, shall obtain from and shall thereafter keep in force commercial general liability insurance applying to the use and occupancy of the Premises, or any areas adjacent thereto, and the business operated by Tenant or any other occupant on the Premises. Such insurance shall:

(a) be with a good and solvent insurance company authorized to do business in the State of California, having a minimum rating of A-:X in Best’s Insurance Guide;

(b) include broad form contractual liability coverage specifically insuring all of Tenant’s indemnity obligations under this Lease;

(c) have a minimum combined single limit of at least $1,000,000 for any one occurrence and $2,000,000 aggregate;

(d) be written to apply to all bodily injury, property damage, personal injury and other covered loss, however occasioned, occurring during the policy term, and afford coverage for all claims based on acts, omissions, injury and damage, which claims occurred or arose (or the onset of which occurred or arose) in whole or in part during the policy period;

(e) provide for severability of interests or a cross-liability provision or endorsement;

(f) be evidenced by a certificate of insurance naming Landlord as additional insured and provide that coverage is primary and non-contributing with any insurance carried by Landlord; and

(g) be endorsed to delete any liquor liability exclusion if Tenant will sell liquor on the Premises.

(h) include an endorsement stating that the policy limits apply “per location” if Tenant has more than one location;

(i) be endorsed to provide that it shall not be canceled without thirty (30) days prior written notice to Landlord.

(j) In addition, Tenant shall maintain automobile liability insurance with limits of not less than $1,000,000 per occurrence for any owned, non-owned or hired automobile exposures of the Tenant, if applicable.

Such insurance may be furnished by Tenant under a blanket policy, provided that such blanket policy references the Premises and guarantees that a minimum limit equal to the insurance amounts required by this Lease will be available specifically for the Premises. Deductible amounts under Tenant’s insurance policies shall be and remain the obligation of the Tenant, and Tenant agrees to use commercially reasonable efforts to ensure that no policy of insurance under this Section 11.1 shall provide for a deductible in excess of Ten Thousand Dollars ($10,000). The policy limits herein specified shall be increased from time to time upon written demand from Landlord, if circumstances reasonably justify such increases. Tenant shall furnish Landlord with a certificate of such insurance prior to the first to occur of the Commencement Date or Tenant’s Occupancy of the Premises, and, whenever requested, shall satisfy Landlord that such policy is in full force and effect. In the event Tenant fails to provide or keep in force any of the insurance required pursuant to this Section 11, then Landlord, in its discretion and without waiving any of its rights under this Lease, may provide such insurance, in which event the cost thereof shall be payable by Tenant to Landlord as Additional Rent on the first day of the calendar month immediately following demand therefor from Landlord.

11.2 Liability Insurance–Landlord . Landlord shall obtain and keep in force during the Term commercial general liability insurance, insuring against liability for injury to or death of persons and loss of or damage to property occurring in or on the Common Areas. Landlord’s liability insurance shall be in amount of not less than $2,000,000 combined single limit per occurrence for bodily and personal injury and property damage.

11.3 Property Insurance–Landlord .

(a) Landlord shall maintain in full force and effect at all times a standard policy or policies insuring against “all risk” perils (also known as “special perils”) covering the Building and other improvements owned by Landlord in the Project in an amount at least sufficient to avoid the effects of coinsurance provisions of the policy or policies ( i.e. , not less than ninety percent [90%] of the actual replacement cost of the Building and other improvements, without deduction for depreciation and excluding foundations, excavation costs and the cost of underground flues, pipes and drains, if such costs are properly excludable under coinsurance requirements). Such insurance shall be subject to commercially-reasonable deductible amounts, and shall include (i) a standard form of lender’s loss payable endorsement, issued to the holder or holders of a mortgage or deed of trust secured in whole or in part by the Building and the other property on which the insured improvements are located; (ii) at Landlord’s sole option, coverage for flood or earthquake or both; and (iii) rental income insurance equal to Base Rent and Operating Expenses for up to one year. In addition, Landlord shall obtain and keep in force during the Term such other insurance as Landlord deems advisable.

(b) Tenant shall pay for any increase in the property insurance of the Building or such other building or buildings if the increase is caused by Tenant’s acts, omissions, use or occupancy of the Premises. Tenant shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Section 11.3. If Tenant does or permits anyone under Tenant’s control to do anything in the Premises or about the Project in violation of this Lease, or if Tenant’s unusual activities or occupancy requirements in the Premises, and any such activities increase the cost of the insurance policies referred to in this Section 11.3, then Tenant shall within thirty (30) days after demand therefor by Landlord reimburse Landlord for any additional premiums attributable to any act or omission or operation of Tenant causing such increase in the cost of insurance. Landlord shall deliver to Tenant a written statement setting forth the amount of any such insurance cost increase and showing in reasonable detail the manner in which it has been computed.

 

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11.4 Property Insurance–Tenant . Tenant shall pay for and shall maintain in full force and effect at all times, a standard policy insuring against “all risk” perils (also known as “special perils”), covering all exterior glass, whether plate or otherwise, and all interior glass, stock in trade, merchandise, trade fixtures, equipment and other personal property located in the Premises and used by Tenant in connection with its business. Tenant shall furnish Landlord with a duly executed certificate evidencing such coverage at the commencement of the Term and not less than thirty (30) days before the expiration of the term of such coverage.

11.5 Waiver of Subrogation . Each party hereby waives any and all rights of recovery against the other party hereto and its officers, agents, employees, or representatives, and Tenant hereby waives any rights it may have against any trust deed holder, for the loss, damage, or injury to property arising from any event which is covered by insurance against fire, vandalism, malicious mischief, and extended coverage, and such other perils as are from time to time included in the “all risk” insurance policy(ies) carried by Landlord and Tenant pursuant to this Section 11, provided that such waiver shall apply only to the extent of any recovery by the injured party under such insurance. In the event the other party is a self-insurer (as may be permitted herein), such waiver shall be to the limit of that insurance required to be carried hereunder. Each party hereto, on behalf of its respective insurance companies hereby waives, to the extent of any recovery under any such insurance policies, any right of subrogation that one may have against the other, and Tenant, on behalf of its insurance companies, hereby waives any right of subrogation which such insurer may have against any trust deed holder. Each party hereto shall cause its respective insurance policies to contain endorsements evidencing such waivers of subrogation. The foregoing releases and waivers of subrogation shall be operative only so long as same shall neither preclude the obtaining of insurance nor diminish, reduce or impair the liability of any insurer. In the event that a waiver of subrogation cannot be obtained, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved.

12. WAIVER AND INDEMNITY .

12.1 Waiver and Exemption of Landlord From Liability . Tenant hereby agrees that except for damage or injury resulting from Landlord’s sole active negligence or willful misconduct, Landlord shall not be liable for injury to Tenant’s business or any loss of income, including damage to the goods, wares, merchandise or other property of Tenant or of Tenant’s employees, invitees, customers, or any other person in or about the Premises, or the Common Areas. Landlord shall not be liable, except when the damage or injury is a result of Landlord’s sole active negligence or willful misconduct, for injury to the person of Tenant, Tenant’s employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures or from any other cause, whether said damage or injury results from conditions arising upon the Premises, or the Common Areas or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, occupant or use of the Project or from the failure of Landlord to enforce the provisions of any other lease in the Project. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property of Tenant or injury to persons, in, upon or about the Premises and elsewhere arising from the above or any other causes (except to the extent arising from Landlord’s sole active negligence or willful misconduct), and Tenant hereby waives all claims in respect thereof against Landlord.

12.2 Tenant’s Indemnity . Tenant shall indemnify, protect, defend, and hold Landlord and Landlord’s officers, directors, employees and agents (collectively, “representatives” ) harmless from and against any and all claims, actions, demands, proceedings, losses, damages, costs of any kind or character (including reasonable attorneys’ fees and court costs), expenses, liabilities, judgments, fines, penalties, or interest (collectively, “Losses” ), arising from or out of Tenant’s use of the Premises, or from the conduct of Tenant’s business or from any activity, work or things done, permitted or suffered by Tenant in or about the Premises or elsewhere in the Project. Tenant shall also indemnify, protect, defend, and hold Landlord and Landlord’s representatives harmless from and against any and all Losses arising from any breach or default in the performance of any obligation on Tenant’s part to be performed under the terms of this Lease, or arising from any act or omission of Tenant, or any of Tenant’s agents, contractors, or employees, and from and against all costs, attorneys’ fees, expenses and liabilities reasonably incurred in the defense of any such claim or any action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord or any of Landlord’s representatives by reason of any such claim, Tenant upon notice from Landlord shall defend the same at Tenant’s expense by counsel reasonably satisfactory to Landlord and Landlord shall cooperate with Tenant in such defense. Neither termination of this Lease nor completion of the acts to be performed under this Lease shall release Tenant from its obligations to defend or indemnify Landlord as required hereunder so long as the event upon which any such Loss is predicated shall have occurred prior to the effective date of any such termination or completion.

12.3 Landlord’s Indemnity . Landlord shall defend, indemnify and hold Tenant and Tenant’s representatives harmless from and against any and all Losses arising in any way from (i) the sole active negligence or willful misconduct of Landlord; or (ii) any breach or default in the performance of any obligation on Landlord’s part to be performed under this Lease. Landlord upon notice from Tenant shall defend the same at Landlord’s expense by counsel reasonably satisfactory to Tenant and Tenant shall cooperate with Landlord in such defense. Neither termination of this Lease nor completion of the acts to be performed under this Lease shall release Landlord from its obligations to defend or indemnify Tenant as required hereunder so long as the event upon which any such Loss is predicated shall have occurred prior to the effective date of any such termination or completion.

13. DAMAGE AND DESTRUCTION .

13.1 Definitions .

(a) “Partial Damage” shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is less than fifty percent (50%) of the then replacement cost of the Premises, and the reasonably-estimated period between the event of damage or destruction and completion of repairs is less than or equal to two hundred ten (210) days.

 

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(b) “Total Destruction” shall mean if the Premises are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then replacement cost of the Premises, or the reasonably-estimated period between the event of damage or destruction and completion of repairs is longer than two hundred ten (210) days.

(c) “Insured Loss” shall mean damage or destruction which was covered by an event required to be covered by the insurance described in Section 11.3. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss.

(d) “Replacement Cost” shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by tenants.

13.2 Partial Damage .

(a) Insured Loss: Subject to the provisions of Sections 13.4 and 13.5, if at any time during the Term there is damage which is an Insured Loss and which falls into the classification of Partial Damage, then Landlord shall, at Landlord’s expense, repair such damage to the Premises, but not Tenant’s fixtures or equipment, as soon as reasonably possible and this Lease shall continue in full force and effect. In no event, however, shall Landlord be obligated to spend for such repairs more than the amount of available insurance proceeds, plus the amount of any deductible elected by Landlord.

(b) Uninsured Loss: Subject to the provisions of Sections 13.4 and 13.5, if at any time during the Term there is damage which is not an Insured Loss and which falls within the classification of Partial Damage, unless caused by a negligent or willful act of Tenant (in which event Tenant shall make the repairs at Tenant’s expense), which damage causes substantial interference with the normal conduct of Tenant’s business, Landlord may at Landlord’s option either (i) repair such damage as soon as reasonably possible at Landlord’s expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Tenant within thirty days after the date of the occurrence of such damage of Landlord’s intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event Landlord elects to give such notice of Landlord’s intention to cancel and terminate this Lease, Tenant shall have the right within ten days after the receipt of such notice to give written notice to Landlord of Tenant’s intention to repair such damage at Tenant’s expense, without reimbursement from Landlord, in which event this Lease shall continue in full force and effect, and Tenant shall proceed to make such repairs as soon as reasonably possible. If Tenant does not give such notice within such ten-day period this Lease shall be canceled and terminated as of the date of the occurrence of such damage.

13.3 Total Destruction . Subject to the provisions of Sections 13.4 and 13.5, if at any time during the Term there is damage, whether or not it is an Insured Loss, which falls into the classification of Total Destruction, then Landlord may at Landlord’s option by written notice to Tenant given within thirty (30) days following the event of Total Destruction either (i) notify Tenant in writing of the reasonably estimated duration of Landlord’s repairs, and repair such damage or destruction, but not Tenant’s fixtures, equipment or tenant improvements (except for tenant improvements owned by Landlord), as soon as reasonably possible at Landlord’s expense, and this Lease shall continue in full force and effect, or (ii) notify Tenant of Landlord’s intention to cancel and terminate this Lease, in which case this Lease shall be canceled and terminated as of the date of the occurrence of such damage. Notwithstanding clause (i) of the preceding sentence, if Landlord’s reasonable estimate of the duration of repairs is that such repairs shall not be completed within two hundred ten (210) days of the occurrence of the event of Total Destruction, the Tenant may within thirty days following receipt of Landlord’s notice terminate this Lease effective as of the date of Total Destruction.

13.4 Damage Near End of Term . Subject to the following sentence, if at any time during the last year of the Term of this Lease as extended from time to time there is substantial damage, whether or not an Insured Loss, which falls within the classification of Partial Damage, either Landlord or Tenant may at its option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to the other party to this Lease of such election within thirty days after the date of occurrence of such damage. Notwithstanding the foregoing, in the event that Tenant has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Tenant may only exercise such option, if it is to be exercised at all, no later than thirty days after the occurrence of an Insured Loss falling within the classification of Partial Damage during the last year of the Term. If Tenant duly exercises such option during the thirty day period, Landlord shall, at Landlord’s expense, repair such damage, but not Tenant’s fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that in no event shall Landlord be obligated to spend for such repairs more than the amount of available insurance proceeds, plus the amount of any deductible elected by Landlord. If Tenant fails to exercise such option during the thirty day period, then Landlord may at Landlord’s option terminate and cancel this Lease as of the date of the occurrence of such damage.

13.5 Abatement of Rent . In the event Landlord repairs or restores the Premises pursuant to the provisions of this Section 13, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Tenant’s normal and customary use of the Premises is impaired. Except for abatement of rent, if any, Tenant shall have no claim against Landlord for any damage suffered by reason of any such damage, destruction, repair or restoration, except to the extent caused by Landlord’s sole active negligence or willful misconduct.

13.6 Waiver . Landlord and Tenant waive the provisions of any statutes which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease.

14. CONDEMNATION .

14.1 Total Condemnation of Premises . If the whole of the Premises shall be taken by any public authority under condemnation, the power of eminent domain, or by a sale in lieu thereof under threat of condemnation (collectively “taking” or “taken” as the case

 

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may be), or if as a result of any taking of a portion of the Premises or the Common Areas, the Tenant’s use of the Premises (or the balance of the Premises) for the purposes for which they were leased is substantially impaired, then the Term shall cease as of the day of possession pursuant to such taking, and the Rent shall be paid up to that day. Landlord shall refund such rent as may have been paid in advance for the period subsequent to the date of such possession.

14.2 Partial Condemnation .

(a) If less than the whole but more than twenty percent (20%) of the Premises shall be taken, Tenant shall have the right to terminate this Lease or, subject to Landlord’s right of termination as set forth in Section 14.2(b), to continue in possession of the remainder of the Premises and shall notify Landlord in writing within ten (10) days after notice of such taking of Tenant’s intention. If twenty percent (20%) or less of the Premises shall be so taken, the Term shall cease with respect to the part so taken as of the day possession shall be taken, and Tenant shall pay rent up to that day for the part so taken.

(b) If more than twenty percent (20%) of the Building or more than twenty percent (20%) of the Premises shall be taken, Landlord may, by notice to Tenant delivered on or before the date surrendering possession, terminate this Lease.

(c) In the event this Lease is not so terminated, Tenant shall remain in the portion of the Premises not so taken, and all of the terms, provisions, covenants, conditions, and agreements contained herein shall continue in effect with respect to the portion not so taken, except that Base Rent shall be reduced in proportion to the amount of the Premises taken, and Landlord shall, to the extent of severance damages received by Landlord in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Tenant has been reimbursed therefor by the condemning authority. Tenant shall pay any amount in excess of such severance damages required to complete such repair.

14.3 Landlord’s and Tenant’s Damages . Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Tenant shall be entitled to any award for loss of or damage to Tenant’s trade fixtures, moving costs and removable personal property to the extent separately awarded. Without limiting the foregoing, provided the same are the subject of a separate award to Tenant, Tenant shall have the right to any award which compensates Tenant for (i) any of Tenant’s own personal property, tenant fixtures or tenant improvements so taken or acquired, (ii) Tenant’s status as a “displaced person” pursuant to California G OVERNMENT C ODE §7262, and (iii) any loss of goodwill as the owner of a business pursuant to California C ODE OF C IVIL P ROCEDURE §1263.510. Tenant shall have the right to negotiate its award separately with the condemning authority; provided, however, that Tenant’s right to pursue its claim shall be subordinate to the right of Landlord’s first lien mortgagee to the extent required to discharge the first lien mortgage after application of Landlord’s award.

14.4 Waiver . This Article 14 is in lieu of, and Tenant hereby expressly waives any rights it may have under, any statute governing the condemnation of the Premises, including §1932 and §1933 of the California C IVIL C ODE and §1265.130 of the California C ODE OF C IVIL P ROCEDURE .

15. ASSIGNMENT AND SUBLETTING .

15.1 Landlord’s Consent Required . With the exception of the Permitted Transfers described in Section 15.8 below, Tenant shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Tenant’s interest in the Lease or in the Premises, without Landlord’s prior written consent, which shall not be unreasonably withheld. Any attempted assignment, transfer, mortgage, encumbrance or sublease without such consent shall be void, and shall constitute a breach of this Lease without the need for notice to Tenant. The sale or transfer of more than 25% of the ownership of Tenant (unless Tenant is a publicly traded corporation) shall be deemed an assignment for purposes of this provision. None of the foregoing shall be interpreted to preclude Tenant permitting the use or occupancy of the Premises by representatives or employees of any entity which is then performing services related to Tenant’s business as long as the use or occupancy of the Premises by such representatives or employees is not otherwise a subterfuge to avoid Tenant’s assignment and subletting obligations under this Section 15, including, but not limited to vendors providing outsourced services, such as warehouse management services on or at the Premises.

15.2 Procedure . In the event Tenant wishes to sublet or assign the Premises, or any portion thereof, requiring Landlord’s consent, Tenant shall submit in writing to Landlord (i) the name of the proposed sublessee or assignee, (ii) a statement describing the nature of the business to be carried on in the Premises, (iii) a copy of the proposed sublease or assignment, including all terms and conditions thereof, (iv) Landlord’s lease application form, completed by the proposed assignee or sublessee, (v) financial statements for the proposed assignee or sublessee, which shall include, at a minimum, prior year and year to date (current to within six months) balance sheets, income and expense statements and sources and uses of cash statements, and (vi) such other financial information regarding such sublessee or assignee as Landlord shall reasonably request. Tenant shall also submit an application fee of five hundred dollars ($500.00) toward handling administrative costs in reviewing and processing the requested transfer. Landlord shall consent or object to any proposed assignment or sublease within fifteen (15) days of receipt of items (i) through (v) above. Landlord’s failure to respond within such thirty (30) day period shall be deemed Landlord’s consent hereunder.

15.3 Provisions Applicable to Both Assignment and Subletting .

(a) No sublessee or assignee shall further assign or sublet all or any part of the Premises without Landlord’s prior written consent.

 

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(b) The consent by Landlord to any assignment or sublease shall not constitute a consent to any subsequent assignment or sublease by Tenant or to any assignment or sublease by the sublessee. However, Landlord may consent to subsequent subleases and assignments of the sublease or any amendments or modifications thereto, provided Landlord notifies Tenant or anyone else liable on the Lease or sublease and Landlord shall obtain their consent thereto.

(c) If Tenant subleases the Premises or any part of it or assigns any of its rights under this Lease in and to the Premises, fifty percent (50%) of all rents paid by the sublessee or assignee which are in excess of (i) the amount of Base Rent and Additional Rent then payable by Tenant under this Lease, and (ii) any reasonable costs actually incurred by the Tenant to sublease or assign the Premises shall be the property of and shall be paid to Landlord. Any sublease or assignment which does not provide for the payment of fifty percent (50%) of such excess rent (less the costs described above) to Landlord shall be deemed to be null and void. The parties acknowledge that the provisions of this Section are a material inducement for Landlord’s execution of this Lease and that Tenant has represented and warranted that its sole purpose for entering into this Lease is to obtain possession of the Premises and not to generate revenues from the leasing or subleasing of any portion of the Premises.

(d) In the event of any default under this Lease, Landlord may proceed directly against Tenant without first exhausting Landlord’s remedies against any other person or entity responsible therefor to Landlord, or any security held by Landlord or Tenant.

15.4 Provisions Applicable to Subletting . Regardless of Landlord’s consent, the following terms and conditions shall apply to any sublease by Tenant of all or any part of the Premises and shall be included in subleases.

(a) Tenant hereby assigns and transfers to Landlord all of Tenant’s interest in all rentals and income arising from any sublease made by Tenant, and Landlord may collect such rent and income and apply the same toward Tenant’s obligations under this Lease; provided, however, that until a default shall occur in the performance of Tenant’s obligations under this Lease, Tenant may receive, collect and enjoy the rents accruing under such sublease. Landlord shall not, by reason of any assignment of such sublease to Landlord or by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Tenant to perform and comply with any of Tenant’s obligations to such sublessee under such sublease. Tenant hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Landlord stating that a default exists in the performance of Tenant’s obligations under this Lease, to pay to Landlord the rents due and to become due under the sublease. Tenant agrees that such sublessee shall have the right to rely upon any such statement and request from Landlord, and that such sublessee shall pay such rents to Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Tenant to the contrary. Tenant shall have no right or claim against such sublessee or Landlord for any such rents so paid by said sublessee to Landlord.

(b) With the exception of the Permitted Transfers, no sublease entered into by Tenant shall be effective unless and until it has been approved in writing by Landlord. By entering into a sublease, any sublessee shall be deemed, for the benefit of Landlord, to have assumed and agreed to comply with all of Tenant’s obligation hereunder, except to the extent such obligations are contrary to or inconsistent with provisions contained in a sublease to which Landlord has expressly consented in writing.

(c) Landlord’s written consent to any sublease of the Premises by Tenant shall not constitute an acknowledgment that no default then exists under this Lease of the obligations to be performed by Tenant nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Landlord at the time in writing.

(d) With respect to any sublease to which Landlord has consented, Landlord agrees to deliver a copy of any notice of default by Tenant to the sublessee. Such sublessee shall have the right to cure a default of Tenant within ten days after service of said notice of default upon such sublessee, and the sublessee shall have a right of reimbursement and offset from and against Tenant for any such defaults cured by the sublessee.

(e) If Tenant’s obligations under this Lease have been guaranteed by third parties, then a sublease, and Landlord’s consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof.

(f) The consent by Landlord to any sublease shall not release Tenant from its obligations or alter the primary liability of Tenant to pay the rent and perform and comply with all of the obligations of Tenant to be performed under this Lease.

(g) In the event Tenant shall default in the performance of its obligations under this Lease, Landlord, at its option and without any obligation to do so, may require any sublessee to attorn to Landlord, in which event Landlord shall undertake the obligations of Tenant under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Landlord shall not be liable for any prepaid rents or security deposit paid by such sublessee to Tenant or for any other prior defaults of Tenant under such sublease.

(h) Each and every consent required of Tenant under a sublease shall also require the consent of Landlord.

15.5 Attorneys’ Fees . In the event Tenant shall assign or sublet the Premises or request the consent of Landlord to any assignment or sublease or if Tenant shall request the consent of Landlord for any act Tenant proposes to do (for which Landlord actually incurs attorneys’ fees), then Tenant shall pay Landlord’s reasonable attorneys’ fees incurred in connection therewith, such attorneys’ fees not to exceed $500.00 for each such request.

15.6 Continuing Liability of Tenant . No transfer permitted by this Section shall release Tenant or change Tenant’s primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord’s acceptance of rent from any other person is not a waiver of any provision of this Section. Consent to one transfer is not a consent to any subsequent transfer. If Tenant’s transferee defaults under this Lease, Landlord may proceed directly against Tenant without pursuing remedies against the transferee. Landlord may consent to subsequent assignments or modifications of this Lease by Tenant’s transferee, without notifying Tenant or obtaining its consent. Such action shall not relieve Tenant of its liability under this Lease.

 

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15.7 Effect of Termination . In the event of Tenant’s surrender of this Lease or the termination of this Lease in any other manner, Landlord may, at its option, either terminate any or all subtenancies or succeed to the interest of Tenant as sublessor thereunder. No merger shall result from Tenant’s sublease of the Premises under this Section, Tenant’s surrender of this Lease or the termination of this Lease in any other manner.

15.8 Permitted Transfers . Notwithstanding anything to the contrary in this Section 15, Tenant may assign this Lease or sublet the Premises, or any portion thereof (each, a “ Permitted Transfer ”), without Landlord’s consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all or substantially all of the assets of Tenant’s business (or all or substantially all of the equity interests in Tenant) as a going concern (each, a “ Permitted Transferee ”). “Control,” as used in this Section 15.8, shall mean the possession of the power to direct or cause the direction of the management or policies of an entity, whether through ownership or voting securities, or by contract or otherwise. In addition to the Permitted Transfers described above, provided that Tenant is not in Default at the time of entering into any such subleases and upon written notice to Landlord, but without Landlord’s consent, Tenant may, during the first two (2) Lease Years, sublet up to twenty-five thousand (25,000) rentable square feet of the Premises in the aggregate, to no more than two (2) subtenants at any one time, for a sublease term not to exceed five (5) years (the “ Special Subletting(s) ”), provided that any alterations to accommodate such Special Sublettings shall require Landlord’s approval (which shall not be unreasonably withheld, conditioned or delayed), and the business operated by such subtenant(s) is consistent with the quality of the Project as a first class industrial/office project. In addition, Landlord agrees that such Special Subletting by Tenant will constitute a “Permitted Transfer” of Tenant’s interest in the Premises for the purposes of this Section 15.

15.9 Tenant’s Lenders . Tenant shall have the right from time to time to grant and assign a mortgage or other security interest in all of Tenant’s furnishings, furniture, equipment, machinery, and other personal property located in or at the Premises or the Adjacent Premises (as defined below), and Landlord agrees to promptly execute, at Tenant’s sole cost and expense, waiver forms substantially in the form attached hereto as Exhibit F , for each of the Premises and the Adjacent Premises releasing liens in favor of any line of credit lienholder, or any purchase money seller, lessor or lender who has financed or may finance in the future such items.

16. DEFAULT BY TENANT; REMEDIES .

16.1 Events of Default . The occurrence of any of the following (each, a “Default” ) shall constitute a material breach or default by Tenant of its obligations hereunder:

(a) Failure by Tenant to pay rent when due if the failure continues for three (3) days after notice has been given to Tenant that the rent is delinquent.

(b) Failure by Tenant to perform any provision of this Lease required of it other than clause (a) above if the failure is not cured within ten (10) business days after notice has been given to Tenant. If, however, the failure cannot reasonably be cured within the cure period, Tenant shall not be in default of this Lease if Tenant commences to cure the failure within the cure period and diligently and in good faith continues to cure the failure.

(c) To the extent permitted by law, a general assignment by Tenant or any Guarantor of the Lease for the benefit of creditors, or the filing by or against Tenant or any Guarantor of any proceeding under any insolvency or bankruptcy law, unless in the case of a proceeding filed against Tenant or any Guarantor the same is dismissed within sixty (60) days, or the appointment of a trustee or receiver to take possession of all or substantially all of the assets of Tenant or any Guarantor, unless possession is restored to Tenant or such Guarantor within thirty (30) days, or any execution or other judicially authorized seizure of all or substantially all of Tenant’s assets located upon the Premises or of Tenant’s interest in this Lease, unless such seizure is discharged within thirty days (each, an “Insolvency Event” ).

16.2 Default Notices . Notices given under this Section will specify the alleged failure or breach and the applicable Lease provisions; and shall demand that Tenant perform the provisions of this Lease or pay the rent that is delinquent, as the case may be, within the applicable period of time or quit the Premises. No such notice shall be deemed a forfeiture or a termination of this Lease unless Landlord so elects in the notice. The purpose of the notice requirements in this Section is to extend the notice requirements of the unlawful detainer statutes. Such notice shall, however, be in lieu of and not in addition to any notice required under the unlawful detainer statutes.

16.3 Landlord’s Remedies . Landlord shall have the below listed remedies if Tenant commits a default. These remedies are not exclusive; they are cumulative to any remedies now or later allowed by law.

(a) Landlord may terminate Tenant’s right to possession of the Premises at any time. No act by Landlord other than giving notice of termination to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Landlord’s initiative to protect Landlord’s interest under this Lease shall not constitute a termination of Tenant’s right to possession. On termination, Landlord shall have the right to recover from Tenant:

(i) The worth at the time of the award of the unpaid rent that had been earned at the time of termination of this Lease;

(ii) The worth at the time of the award of the amount by which the unpaid rent that would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided;

(iii) The worth at the time of the award of the amount by which unpaid rent for the balance of the Term after the time of award exceeds the amount of the loss of rent that Tenant proves could have been reasonably avoided; and (iv) Any other amount,

 

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including reasonable attorneys’ fees and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant’s default or which in the ordinary course of things would be likely to result therefrom.

The phrase “worth at the time of the award” as used in clauses (i) and (ii) above is to be computed by allowing interest at the rate of twelve percent (12%) per annum, but not to exceed the then legal rate of interest. The same phrase as used in clause (iii) above is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%).

(b) Landlord may exercise the remedy provided in California C IVIL C ODE §1951.4, that is, Landlord may continue this Lease in full force and effect, and collect Base Rent and Operating Expenses as they become due, so long as Landlord does not terminate Tenant’s right to possession pursuant to Section 16.3(a) above. During the period that Tenant is in default, Landlord may enter the Premises and relet them or any part of them, to third parties for Tenant’s account, for a shorter or longer term than the Term of this Lease, and for such rental and on such other terms as Landlord, in its sole discretion, shall deem advisable and Tenant shall be immediately liable to Landlord for all costs which Landlord incurs in reletting the Premises, including, without limitation, broker’s commissions, advertising expenses, the cost of remodeling the Premises which may be required for reletting, and all such similar costs. No act by Landlord pursuant to this Section shall terminate this Lease unless Landlord shall notify Tenant that it elects to terminate this Lease. After Tenant’s default and for as long as Landlord does not terminate Tenant’s right to possession of the Premises, Tenant shall have the right to assign its interest in the Lease upon the reasonable prior consent of Landlord; provided, however, that Tenant shall not be released from any liability under this Lease as a result of such assignment.

(c) Landlord may, after expiration of any applicable cure period, unless there is an emergency (in which case Landlord need not wait), correct or remedy any failure of Tenant not timely cured. The reasonable cost paid by Landlord to correct or remedy any such default will immediately become due and payable to Landlord as additional rent.

(d) Nothing contained in this Lease shall limit Landlord to the remedies specifically set forth in this Section 16.3. Upon Tenant’s default or breach, Landlord shall be entitled to exercise any right or remedy then provided by law, including without limitation the right to obtain injunctive relief and the right to recover all damages caused by Tenant’s default or breach in the performance of any of its obligations under this Lease.

16.4 Interest . Any amount owed to Landlord under the terms and provisions of this Lease which is not paid when due shall bear interest at the highest rate allowed by applicable law from the date the same becomes due and payable by the terms and provisions of this Lease until paid, unless otherwise specifically provided in this Lease.

16.5 Mitigation . Efforts by Landlord to mitigate damages caused by Tenant’s breach shall not be construed as a waiver of Landlord’s right to recover damages.

16.6 Right of Landlord to Re-Enter . In the event of any termination of this Lease, Landlord shall have the immediate right to enter upon and repossess the Premises, and any personal property of Tenant may be removed from the Premises and stored in any public warehouse at the risk and expense of Tenant.

16.7 Recapturable Expenses . Tenant acknowledges that Landlord has undertaken or may undertake certain expenses in connection with the Lease, which shall consist of the following: brokerage commissions and abated rent (“Recapturable Expenses”). Notwithstanding any provision or implication to the contrary in this Lease, in the event of premature termination of the Term of this Lease pursuant to Section 16.3(a) following Tenant’s default, there shall be immediately due and payable from Tenant, as Additional Rent which has been fully earned at the time of termination, the unamortized portion of the Recapturable Expenses actually incurred by Landlord. For purposes of this Section, the unamortized portion of the Recapturable Expenses shall be determined by multiplying the total Recapturable Expenses actually incurred by Landlord by a fraction, the numerator of which is the number of months remaining in the Term following premature termination in which unabated Base Rent would have been payable to Landlord pursuant to the Lease, and the denominator of which is the total number of months in the Term, both before and after the premature termination, in which unabated Base Rent was paid or would have been payable to Landlord had the Lease not been terminated. Notwithstanding anything to the contrary in this Section 16.7, the amount of Recapturable expenses shall not exceed $600,000. Any Recapturable Expenses due to Landlord in accordance with this Section shall be in addition to any sums otherwise recoverable pursuant to Section 16.3(a) of this Lease.

17. TENANT’S INSOLVENCY .

17.1 Applicability of Section . In addition to any rights or remedies of Landlord under the terms of this Lease, the following provisions shall specifically apply upon the occurrence of an Insolvency Event (as defined in Section 16.1(c) above).

17.2 Assumption Or Rejection Of Lease .

(a) Notwithstanding anything to the contrary contained herein, Tenant as debtor in possession and any receiver or trustee in bankruptcy for Tenant (collectively, “Tenant’s Trustee” ) shall either assume or reject this Lease within sixty (60) days following the entry of an order for relief or within such earlier time as may be provided by applicable law.

(b) Notwithstanding anything to the contrary contained herein, in the event that this Lease is attempted to be assumed under the Bankruptcy Code by Tenant’s Trustee during the existence of any Default by Tenant, no such attempted assumption shall be effective unless and until Tenant’s Trustee: (i) cures, or provides adequate assurance that it will promptly cure, such Default; and (ii) compensates, or provides adequate assurance that it will promptly compensate, Landlord for any actual pecuniary loss

 

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to Landlord resulting from such Default; and (iii) provides adequate assurance of future performance of Tenant’s obligations and covenants under this Lease. Landlord shall be entitled to reimbursement from the estate of Tenant for all actual costs incurred by Landlord in considering any proposed assignee of the Lease pursuant to this Section 17.

(c) Tenant’s Trustee may assign this Lease pursuant to the provisions of the Bankruptcy Code only if: (A) Tenant’s Trustee assumes the Lease in accordance with the above provisions of this Section 17.2; and (B) the assignee of Tenant’s Trustee assumes all of the obligations arising under this Lease and provides adequate assurance of its future performance of Tenant’s obligations and covenants under this Lease (whether or not a Default has occurred under the Lease). Any such assignee shall, upon demand, execute and deliver to Landlord, an instrument confirming such assumption.

(d) For purposes of Section 17.2(b) and (c), the term “adequate assurance of future performance” shall include, without limitation, at least the following:

(i) Any proposed assignee must have, as demonstrated to Landlord’s satisfaction, a net worth (as defined in accordance with generally accepted accounting principles consistently applied) in an amount sufficient to assure that the proposed assignee will have the resources to meet the financial responsibilities under this Lease, including the payment of all rent. The financial condition and resources of Tenant and any Guarantor(s) are material inducements to Landlord entering into this Lease.

(ii) In entering into this Lease, Landlord considered extensively Tenant’s permitted use and determined that such permitted business would add substantially to the tenant balance in the Project, and were it not for Tenant’s agreement to operate only Tenant’s permitted business on the Premises, Landlord would not have entered into this Lease. Landlord’s anticipated benefits from the lease of the Premises may be materially impaired if a trustee in bankruptcy or any assignee of this Lease operates any business other than Tenant’s permitted business.

(iii) Any assumption of this Lease by a proposed assignee shall not adversely affect Landlord’s relationship with any of the remaining tenants in the Premises, taking into consideration any and all other “use” clauses and/or “exclusivity” clauses which may then exist under their leases with Landlord.

(iv) Any proposed assignee must not be engaged in any business or activity which it will conduct on the Premises and which will subject the Premises to contamination by any Hazardous Materials.

(v) The percentage rent, if any, due under this Lease shall not decline substantially.

(vi) Any assumption or assignment of this Lease shall not breach substantially any

provision in any other lease, financing agreement, or master agreement relating to the Project;

(vii) Any assumption or assignment of this Lease shall not alter or affect materially any other obligation or duty of Tenant nor be used to circumvent the remainder of the provisions of this Lease.

18. DEFAULT BY LANDLORD .

18.1 Landlord’s Default . Landlord shall be in default if Landlord fails to perform any provision of this Lease required of it and the failure is not cured within thirty (30) business days after notice has been given to Landlord. If, however, the failure cannot reasonably be cured within the cure period, Landlord shall not be in default of this Lease if Landlord commences to cure the failure within the cure period and diligently and in good faith continues to cure the failure. Notices given under this Section shall specify the alleged breach and the applicable Lease provisions. If Landlord shall at any time default beyond the applicable notice and cure period, Tenant shall have the right to cure such default on Landlord’s behalf. Any sums expended by Tenant in doing so, and all reasonably necessary incidental costs and expenses incurred in connection therewith, shall be payable by Landlord to Tenant within thirty days following demand therefor by Tenant; provided, however, that Tenant shall not be entitled to any deduction or setoff against any rent otherwise payable to Landlord under this Lease.

18.2 Notice to Mortgagee(s) . Whenever Tenant serves notice on Landlord of Landlord’s default, written notice shall also be served at the same time upon the Mortgagee under any first- or second-priority Mortgage; provided, however, that Tenant shall have no obligation to provide such notice unless and until Tenant has received written notice of the Mortgagee’s existence and address. Such Mortgagee shall have the periods of time within which to cure Landlord’s defaults as are provided in Section 18.1, which periods shall commence to run thirty (30) days after the commencement of the periods within which Landlord must cure its defaults under Section 18.1. In this connection, any representative of the Mortgagee shall have the right to enter upon the Premises for the purpose of curing Landlord’s default. Such Mortgagee shall notify Landlord and Tenant of the address of such Mortgagee to which such notice shall be sent, and the agreements of Tenant under this Section are subject to prior receipt of such notice. If the nature of the default is such that the Mortgagee’s possession is required to cure the default, then Tenant will not terminate the Lease so long as such Mortgagee commences proceedings to obtain possession of the Premises within the period of time afforded to the Mortgagee to cure such default, and once the Mortgagee has obtained possession, diligently proceeds to cure the default. Nothing contained in this Lease shall be construed to impose any obligation on any Mortgagee to cure any default by Landlord under the Lease.

19. SUBORDINATION AND ESTOPPEL .

19.1 Subordination . Subject to the provisions of this Section 19, at the option and upon written declaration of Landlord, this Lease and the leasehold estate created hereby shall be subject, subordinate and inferior to the lien and charge of any Mortgage; provided, however, that this Lease shall not be subordinate to any Mortgage arising after the date of this Lease, or any renewal, extension or replacement thereof, unless and until Landlord provides Tenant with an agreement from the Mortgagee of the type normally provided

 

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by commercial lenders in southern California ( “Non-Disturbance Agreement” ), setting forth that so long as Tenant is not in Default hereunder, Landlord’s and Tenant’s rights and obligations hereunder shall remain in force and Tenant’s right to possession shall be upheld. Subject to the foregoing condition, (i) Landlord hereby expressly reserves the right, at its option and declaration, to place Mortgages upon and against the Premises and/or any part thereof, superior in lien and effect to this Lease and the estate created hereby, and (ii) Landlord shall be entitled to sign, acknowledge and record in the Office of the County Recorder of the County in which the Premises are situated, a declaration that this Lease and leasehold estate are subject, subordinate and inferior to any Mortgage placed or to be placed by Landlord upon or against the Premises and/or any part thereof (in favor of any Mortgagee, trustee or title insurance company insuring the interest of any such Mortgagee), recordation of which shall, of and by itself and without further notice to or act or agreement of Tenant, make this Lease and the estate created hereby subject, subordinate and inferior thereto. Notwithstanding the foregoing, Tenant shall, promptly following a request by Landlord and after receipt of the Non-Disturbance Agreement, execute and acknowledge any subordination agreement or other documents required to establish of record the priority of any such Mortgage over this Lease, so long as such agreement does not otherwise increase Tenant’s obligations or diminish Tenant’s rights hereunder.

19.2 Attornment . In the event of foreclosure of any Mortgage, whether superior or subordinate to this Lease, then (a) this Lease shall continue in force; (b) Tenant’s quiet possession shall not be disturbed if Tenant is not in Default hereunder; (c) Tenant shall attorn to and recognize the Mortgagee or purchaser at foreclosure sale ( “New Owner” ) as Tenant’s landlord for the remaining term of this Lease; and (d) the New Owner shall not be bound by (i) any payment of rent for more than one month in advance, (ii) any amendment, modification or ending of this Lease without the New Owner’s consent after the New Owner’s name is given to Tenant, unless the amendment, modification or ending is specifically authorized by the original Lease and does not require Landlord’s prior agreement or consent, or (iii) any liability for any act or omission of a prior Landlord. At the request of the New Owner, Tenant shall execute a new lease for the Premises, setting forth all of the provisions of this Lease except that the term of the new lease shall be for the balance of the Term; provided that Landlord shall reimburse the legal fees and costs incurred by Tenant in confirming the contents of the proposed replacement lease.

19.3 Estoppel Certificate . Tenant shall execute and deliver to Landlord, within ten days after receipt of Landlord’s request, any estoppel certificate or other statement to be furnished to any prospective purchaser of or any lender against the Premises. Such estoppel certificate shall acknowledge and certify each of the following matters, to the extent each may be true: that the Lease is in effect and not subject to any rental offsets, claims or defenses to its enforcement; the commencement and termination dates of the Term; that Tenant is paying rent on a current basis; that any Landlord’s Work required to be furnished under the Lease has been completed in all respects; that the Lease constitutes the entire agreement between Tenant and Landlord relating to the Premises; that Tenant has accepted the Premises and is in possession thereof; that the Lease has not been modified, altered or amended except in specified respects by specified instruments; and that Tenant has no notice of any prior assignment, hypothecation or pledge of rents or the Lease. Tenant shall also, upon request of Landlord, certify and agree for the benefit of any Mortgagee against the Premises or the Building that Tenant will not look to such Mortgagee: as being liable for any act or omission of Landlord; as being obligated to cure any defaults of Landlord under the Lease which occurred prior to the time Mortgagee, its successors or assigns, acquired Landlord’s interest in the Premises by foreclosure or otherwise; as being bound by any payment of Base Rent or Additional Rent by Tenant to Landlord for more than one month in advance; or as being bound by Landlord to any amendment or modification of the Lease without Mortgagee’s written consent.

19.4 Remedies . Failure of the Tenant to sign any statement or instrument delivered by Landlord or Mortgagee to effectuate the provisions of this Section 19 within ten (10) days after request to do so by Landlord shall constitute a material breach of this Lease.

20. HAZARDOUS MATERIALS .

20.1 Tenant’s Environmental Questionnaire . Tenant warrants and represents, and acknowledges that this Lease was entered into by Landlord in material reliance upon, the information set forth in the environmental questionnaire, in the form attached as Exhibit E, which was previously delivered by Tenant to Landlord.

 

20.2 Tenant’s Obligations .

(a) Tenant shall at all times and in all respects comply with all Hazardous Materials Laws, and shall, at its own expense, procure, maintain in effect and comply with all conditions of any and all permits, licenses, and other governmental and regulatory approvals required for Tenant’s use of the Premises, including, without limitation, discharge of (appropriately treated) materials or wastes into or through any sanitary sewer serving the Premises. Except as discharged into the sanitary sewer in strict accordance and conformity with all applicable Hazardous Materials Laws, Tenant shall cause any and all Hazardous Materials removed from the Premises to be removed and transported solely by duly licensed haulers to duly licensed facilities for final disposal of such materials and wastes. Tenant shall in all respects handle, treat, deal with and manage any and all Hazardous Materials in, on, under or about the Premises in total conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding management of such Hazardous Materials.

(b) Upon expiration or earlier termination of the Term, Tenant shall cause all Hazardous Materials to be removed from the Premises and transported for use, storage or disposal in accordance with and compliance with all applicable Hazardous Materials Laws.

(c) Except in the event of an emergency, Tenant shall not take any remedial action in response to the presence of any Hazardous Materials in or about the Premises, nor enter into any settlement agreement, consent decree or other compromise in respect to any claims relating to any Hazardous Materials in any way connected with the Premises, without first notifying Landlord of Tenant’s intention to do so and affording Landlord ample opportunity to appear, intervene or otherwise appropriately assert and protect Landlord’s interest with respect thereto.

 

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(d) Tenant shall immediately notify Landlord in writing of: (i) any enforcement, cleanup, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (ii) any claim made or threatened by any person against Tenant or the Premises relating to damage, contribution, cost recovery compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; and (iii) any reports made to any environmental agency arising out of or in connection with any Hazardous Materials in or removed from the Premises, including any complaints, notices, warnings or asserted violations in connection therewith. Tenant shall also supply to Landlord as promptly as possible, and in any event within five business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations, relating in any way to the Premises or Tenant’s use thereof. Tenant shall promptly deliver to Landlord copies of hazardous waste manifests reflecting the legal and proper disposal of all Hazardous Materials removed from the Premises.

20.3 Indemnity . With respect to Tenant’s use and occupancy of the Premises and Common Areas, Tenant shall indemnify, defend (by counsel reasonably acceptable to Landlord), protect, and hold Landlord and each of Landlord’s officers, directors, shareholders, employees, agents, attorneys, successors and assigns (the “ Landlord Parties ”), free and harmless from and against any and all claims, liabilities, penalties, forfeitures, losses or expenses (including attorneys’ fees), for death of or injury to any person or damage to any property whatsoever, arising from or caused in whole or in part, directly or indirectly, by (a) the presence in, on, under or about the Premises, or discharge in or from the Premises, of any Hazardous Materials excluding Hazardous Materials used, released or discharged by Landlord or any of the Landlord Parties or by any previous tenant of the Premises during Tenant’s occupancy thereof; (b) Tenant’s use, analysis, storage, transportation, disposal, release, threatened release, discharge or generation of Hazardous Materials to, in, on, under, about or from the Premises; or (c) Tenant’s failure to comply with any Hazardous Materials Law. Tenant’s obligations hereunder shall include, without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary repair, cleanup or detoxification or decontamination of the Premises, or the preparation and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration or earlier termination of the Term. For purposes of the release and indemnity provisions hereof, any acts or omissions of Tenant, or by employees, agents, assignees, subtenants, contractors or subcontractors of Tenant or others acting for or on behalf of Tenant (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Tenant.

21. NOTICE . All notices, demands or requests from one party to the other shall be in writing. Notices may be personally delivered, sent by Federal Express or other reputable express delivery service, sent by telecopier with first-class mail backup, or sent by certified mail, postage prepaid, to the addresses set forth at Section 1.18 or 1.19, as applicable. Notices shall be deemed received upon actual delivery to the addressee with respect to personal or express delivery service or telecopier, and three (3) days after deposit in the mails with respect to mailing. Each party shall have the right, from time to time, to designate a different address by notice given in conformity with this Section to the other party.

22. OTHER TERMS AND CONDITIONS .

22.1 Signage . Tenant shall have the exclusive right to all exterior signage on the Building, subject to Landlord’s right of prior approval that such exterior signage is in compliance with the Landlord’s signage plan attached as Exhibit D. Tenant shall have the right to install (a) Building top signage on the exterior of the Premises in a location selected by Tenant and subject to reasonable approval by Landlord, (b) signage on the exterior of the Premises adjacent to the Tenant Building main entrance, and (C) monument signage in the Common Areas at the driveway serving the Building, all at Tenant’s sole cost and expense and in compliance with applicable laws. Tenant shall not otherwise place or permit to be placed, any sign, advertisement, notice or other similar matter on the doors, windows, exterior walls, roof or other areas of the Premises which are open to the view of persons outside the Premises, except in accordance with Landlord’s signage plan which is attached as Exhibit D.

22.2 Parking . In connection with its use and occupancy of the Premises, Tenant shall have the right to park in the parking area of the Project, at no additional charge and on a non-reserved basis and on terms and conditions to be established by the Landlord from time to time during the Term, no more than the number of vehicles set forth in Section 1.17. The parking authorized by this Section shall be for personal transportation to and from the Premises, and not for long-term storage of automobiles or for short- or long-term storage of boats, trailers or recreational vehicles; provided, however, that Tenant shall have the right to park trucks and trailers within the designated shipping areas and at any loading docks of the Premises. Landlord reserves the right to designate certain parking areas in the Project as being for the exclusive use of other tenants of the Project as long as such exclusive spaces do not result in any reduction of Tenant’s parking rights under this Lease.

22.3 Site Plan . The site plan attached hereto as Exhibit A shows the approximate location of the Premises within the Project.

22.4 Easements . Landlord reserves to itself the right, from time to time, to grant such easements, rights and dedications as Landlord deems necessary or desirable, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not (a) unreasonably interfere with Tenant’s normal conduct of its business on the Premises, (b) materially increase the costs associated with Tenant’s occupancy of the Premises, or (c) materially alter any rights of Tenant set forth elsewhere in this Lease. Tenant shall sign any of the aforementioned documents upon request of Landlord and failure to do so shall constitute a material default of this Lease by Tenant without the need for further notice to Tenant.

22.5 No Light, Air or View Easements . No diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building shall in any way affect this Lease or impose any liability on Landlord.

22.6 Security Measures . Tenant acknowledges that Landlord does not intend to provide guard service or other security measures for the benefit of the Premises. Tenant assumes all responsibility for the protection of Tenant, its agents, and invitees and the property of Tenant and of Tenant’s agents and invitees from acts of third parties, and assumes all risk in connection with any failure to provide or lack of such security measures. Tenant hereby waives any and all claims for damages to persons or property sustained by Tenant,

 

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or by any other person or entity, arising from, out of or in connection with, or alleged to arise from, out of or in connection with, Landlord’s not providing any security measure for the Premises or Project. Nothing herein contained shall prevent Landlord, at Landlord’s sole option, from providing security protection for the Project, in which event the costs thereof shall be included within Operating Expenses.

22.7 Holding Over By Tenant . Tenant agrees upon the expiration or termination of this Lease, immediately and peaceably to yield up and surrender the Premises; notice to quit or vacate is hereby expressly waived. Tenant shall be liable to Landlord for any and all damages incurred by Landlord as the result of any failure by Tenant to timely surrender possession of the Premises as required herein. If Tenant shall hold over after the expiration of this Lease for any cause, such holding over shall be deemed a tenancy at sufferance or, at the sole discretion of Landlord, a tenancy from month-to-month, in which event such month-to-month tenancy shall be upon the same terms, conditions and provisions set forth in this Lease, except that the monthly Base Rent shall be increased to an amount equal to one hundred twenty-five percent (125%) of the monthly Base Rent payable during the last full month immediately preceding such holding over for the first three (3) months, and thereafter one hundred fifty percent (150%) of the monthly Base Rent payable during the last full month preceding the holdover occupancy.

22.8 Landlord’s Right of Entry . Subject to Tenant’s reasonable security and safety requirements, Landlord and Landlord’s agents may enter upon the Premises at any reasonable time and upon at least 24 hours’ advance telephonic notice (except no notice shall be required in an emergency) to make such repairs, additions or improvements as Landlord shall deem necessary; to post such notices as Landlord may deem necessary to exempt Landlord and Landlord’s interest in the Building and Premises from responsibility on account of any work or repairs done by Tenant upon or in connection with the Premises; to inspect and examine the Premises and see that the covenants hereof are being kept and performed; or to exhibit the Premises to prospective purchasers, or within the last eighteen (18) months of the Term, prospective tenants.

 

22.9 Intentionally Omitted.

22.10 Furnishing of Financial Statements . Tenant acknowledges that Landlord entered into this Lease in reliance upon receiving current and periodic financial reports documenting the progress of Tenant’s business operations. Accordingly, if requested by Landlord or Landlord’s Mortgagee or prospective Mortgagees for purposes of financing the Project, Tenant shall deliver to Landlord, within ten (10) days after request therefor, financial statements reflecting Tenant’s current financial condition and financial statements for each of the two (2) years prior to the then-current fiscal year statement. Such statements shall be prepared in accordance with generally accepted accounting principles and certified by an officer or owner of Tenant, or, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant; provided that as long as Tenant is publicly-traded, and Tenant’s quarterly financial statements are available to the public at Tenant’s web-site, or at the SEC’s Edgar website, the availability of such public reports via internet shall satisfy the foregoing delivery requirements. Landlord shall keep all such financial statements and the information contained therein confidential.

22.11 Auctions . Tenant shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises, without first having obtained Landlord’s prior written consent. Notwithstanding anything to the contrary in this Lease, Landlord shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent.

22.12 Keys . Landlord shall be supplied with keys to each lock of the Premises. Tenant agrees, at the termination of the tenancy, to return all keys to all doors of the Premises.

22.13 Other Tenancies . Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord, in the exercise of its sole business judgment, shall determine to promote the best interest thereof. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenants shall, during the Term of this Lease, occupy any space in the Project.

22.14 Brokers’ Fees . Landlord has agreed to pay a fee for brokerage services rendered in this transaction to the broker(s) identified in Section 1.16. Such brokerage commission shall be payable in accordance with the separate written agreement between Landlord and such broker(s), which alone shall govern such brokers’ entitlement to any commission. Landlord and Tenant each represent and warrant to the other that no broker, agent or finder, licensed or otherwise, has been engaged by it, respectively, in connection with the transaction contemplated by this Agreement, other than the broker(s) named above. In the event of any other claim for broker’s, agent’s or finder’s fee or commission in connection with this transaction, the party upon whose alleged statement, representation or agreement such claim or liability arises shall indemnify, save, hold harmless and defend the other party from and against such claim and liability.

23. GENERAL PROVISIONS .

23.1 Exculpation . The obligations of Landlord under this Lease do not constitute personal obligations of Landlord’s directors, officers, shareholders or employees, and Tenant shall look solely to the Landlord for satisfaction of any liability with respect to this Lease, and agrees not to seek recourse against the directors, officers, shareholders or employees of Landlord, nor against any of their personal assets, for such satisfaction.

23.2 Conveyance By Landlord . Landlord shall be free at all times, without need of consent or approval by Tenant, to assign its interest in this Lease and/or to convey fee title to the Premises. Each conveyance by Landlord of Landlord’s interest in the Lease or the Premises prior to expiration or termination hereof shall be subject to this Lease and shall relieve the grantor of any further obligations or liability as Landlord, and Tenant shall look solely to Landlord’s successor in interest for all future obligations of Landlord. Tenant hereby agrees to attorn to Landlord’s successors in interest, whether such interest is acquired by sale, transfer, foreclosure, deed in lieu of foreclosure or otherwise. The term “Landlord” as used in this Lease, so far as covenants and obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner at the time in question of the fee title of the Premises. Without further agreement, the transferee of such title shall be deemed to have assumed and agreed to observe and perform any and all obligations of Landlord hereunder during its ownership of the Premises.

 

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23.3 Quiet Enjoyment . Landlord agrees that so long as Tenant is not in Default hereunder Tenant shall have the quiet enjoyment of the Premises without hindrance on the part of Landlord. Landlord further agrees that Landlord will warrant and defend Tenant in the peaceful and quiet enjoyment of the Premises against the lawful claims of all persons claiming by, through or under Landlord.

23.4 No Accord and Satisfaction . No payment by Tenant or receipt by Landlord of a lesser amount than the rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord shall accept such check or payment without prejudice to Landlord’s right to recover the balance of such rent or pursue any other remedy in this Lease provided.

23.5 Waiver . No delay or omission in the exercise of any right or remedy of Landlord for any Default by Tenant hereunder shall impair such right or remedy or be construed as a waiver thereof. One or more waivers of any covenant or condition by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant or condition, and the consent or approval by Landlord to or of any act by Tenant requiring Landlord’s consent or approval shall not be deemed to render unnecessary Landlord’s consent or approval to or of any subsequent similar act by Tenant. No breach of a covenant or condition of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord. The acceptance of any rent or other charges hereunder shall not be deemed a waiver of any breach or Default hereunder other than the payment of the amount accepted by Landlord.

23.6 Cumulative Rights . The various rights, options, elections, powers and remedies contained in this Lease shall be construed as cumulative and no one of them shall be exclusive of any of the others, or of any other legal or equitable remedy which either party might otherwise have in the event of breach or default in the terms hereof, and the exercise of one right or remedy by such party shall not impair its right to any other right or remedy until all obligations imposed upon the other party have been fully performed.

23.7 Independent Covenants . This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent, and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord’s expense or to any setoff of the rent or other amounts owing hereunder against Landlord; provided, however, the foregoing shall in no way impair the right of Tenant to commence a separate action against Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any Mortgagee (of whose address Tenant has theretofore been notified) and an opportunity is granted to Landlord and such holder to correct such violation as provided above.

23.8 Relationship of the Parties . Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent, nor any other provision contained herein, nor any acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than the relationship of landlord and tenant.

23.9 Force Majeure . If either party is delayed in the performance of any covenant of this Lease because of any of the following causes, then such performance shall be excused for the period of the delay and the period for such performance shall be extended for a period equivalent to the period of such delay: acts of the other party; action of the elements; war, riot or civil insurrection; building moratoria, trip generation restrictions or other similar action by the City of Carlsbad or other governmental agency or entity; labor disputes; inability to procure or a general shortage of labor or materials in the normal channels of trade; delay in transportation; delay in inspections; or any other cause beyond the reasonable control of the party so obligated, whether similar or dissimilar to the foregoing, financial inability excepted; provided, however, that except as specifically set forth elsewhere in this Lease, no such events shall affect Tenant’s obligation to pay Base Rent, Additional Rent or any other amount payable under this Lease, nor shall such events affect the length of the Term (except to the extent expressly provided herein).

23.10 Consents . With respect to any provision of this Lease which either provides or is held to provide that Landlord shall not unreasonably withhold or unreasonably delay any consent or approval, Tenant shall not be entitled to make any claim for, and Tenant hereby expressly waives, any claim for damages, it being understood and agreed that Tenant’s sole remedy therefor shall be an action for specific performance.

23.11 Counterparts . This Lease may be executed in two or more counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument.

23.12 Authority . Landlord and Tenant each represent and warrant to one another that the individuals executing this Lease on their behalf are duly authorized to execute and deliver this Lease on behalf of the Landlord and Tenant, respectively. Upon the request of the other party, any such party shall, at the time of the execution of this Lease, deliver to the other party evidence of such authority satisfactory to the other party.

23.13 Recording . Tenant shall not record this Lease or any short form or memorandum version hereof without the prior written consent of Landlord, which may be withheld at Landlord’s sole discretion.

23.14 Interpretation and Use of Pronouns . Wherever herein the singular number is used, the same shall include the plural, and the masculine gender shall include the feminine and the neuter genders. All conditions contained herein shall be deemed covenants. The words “breach” or “default” are used interchangeably herein and each shall be deemed to include the other.

23.15 Captions and Interpretations . Section titles or captions contained in this Lease are inserted as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Lease or any provision hereof. No provision in this Lease is to be interpreted for or against either party because that party or its legal representative drafted such provision.

 

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23.16 Severability . If any term, covenant, condition or provision of this Lease is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

23.17 Applicable Law . This Lease shall be governed by, and construed in accordance with, the laws of the State of California, notwithstanding the fact that Landlord or Tenant may be located in another State or that this Lease may be executed in another State. If any provision of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and each provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. Any action brought to enforce or nullify this Lease or the provisions hereof shall be brought in San Diego County, California, and in no other forum.

23.18 Waiver of Right of Redemption . Tenant hereby waives for Tenant and for all those claiming under Tenant all right now or hereafter existing to redeem, by statute or by order or judgment of any court or by any legal process or writ, Tenant’s right of occupancy of the Premises after any termination of this Lease. Tenant hereby waives its rights under California C ODE OF C IVIL P ROCEDURE §1179.

23.19 Attorneys’ Fees . In case suit shall be brought for any unlawful detainer of the Premises, for the recovery of any rent due under the provisions of this Lease, or because of the breach or alleged breach of any other covenant herein contained, the prevailing party shall recover from the non-prevailing party, all costs and expenses incurred therein, including reasonable attorneys’ fees and expenses incurred in enforcing any judgment. If Landlord, through no fault of its own, is made a party to any litigation relating to the subject matter covered by this Lease instituted by or against Tenant, then Tenant shall defend, indemnify and hold Landlord harmless from and against all costs and expenses, including reasonable attorneys’ fees, incurred by Landlord in connection therewith. In addition thereto, Tenant agrees to pay Landlord’s costs, expenses and reasonable attorneys’ fees with respect to: (i) each request to Landlord for permission or consent to assign or sublet the Premises, as provided in Section 15.5 above; (ii) each request made by Tenant to modify, amend or supplement this Lease; and (iii) any request by Tenant which causes Landlord to actually incur attorney fees; provided that prior to such fees being incurred, the Landlord shall notify the Tenant of the need to reimburse such fees. Landlord shall notify Tenant of the amount of such attorneys’ fees, and Tenant shall pay the same (as Additional Rent) within fifteen (15) days after such notice.

23.20 Joint and Several Obligations . If there shall be more than one Tenant, they shall all be bound jointly and severally by the terms, provisions, covenants, conditions, and agreements herein. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord in writing as required hereunder.

23.21 Successors and Assigns . The covenants and conditions herein contained shall, subject to the provisions as to assignments, apply to and bind the heirs, successors, executors, administrators and assigns of the respective parties hereof. If this Lease is signed by more than one person as Tenant, their obligation shall be joint and several.

23.22 Time of the Essence . Time is expressly declared to be of the essence of this Lease, and of all covenants and conditions herein contained.

23.23 No Third-Party Beneficiaries . The provisions of this Lease are solely for the benefit of the parties hereto, and no broker or other third party shall be entitled to any benefits hereof or hereunder.

23.24 Entire Agreement . This Lease and the exhibits, and the Addendum, if any, attached hereto and forming a part hereof, set forth all the terms, provisions, covenants, conditions, promises, agreements and understandings between Landlord and Tenant concerning the Premises. There are no warranties, representations, covenants, promises, agreements, conditions or understandings, either oral or written, between them other than set forth herein. No alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by each party.

23.25 No Option By Landlord . Preparation of this Lease by Landlord or Landlord’s agent and submission of same to Tenant shall not be deemed an option or offer to lease the Premises on the terms and conditions contained herein or a reservation of the Premises in favor of Tenant. This Lease shall become binding upon Landlord only upon Landlord’s execution and delivery of this Lease to Tenant. The receipt (which shall include the cashing, deposit or other negotiation of checks, money orders and the like) of any moneys by Landlord which are tendered by Tenant along with a Tenant-executed copy of this Lease, or at any time prior to Landlord’s delivery of a fully executed copy of this Lease to Tenant, shall not constitute an acceptance of Tenant’s offer to lease as contained herein. Tenant acknowledges that Landlord will not deliver a fully executed copy of this Lease until Landlord has received both any Guaranties required hereunder, and such corporate resolutions or other information as reasonably satisfies Landlord as to the incumbency and authority to sign of each individual signing this Lease or any Guaranty. Tenant also acknowledges that the fully executed Lease will not be delivered by Landlord to Tenant unless and until approved by Landlord’s lender, and that in determining whether to approve, Landlord’s lender will consider Tenant’s lease application, credit information, biographical data on Tenant’s key officers or principals, and financial statements relating to Tenant’s business. Notwithstanding the foregoing, delivery of this Lease by Tenant to Landlord after signature by Tenant shall constitute an option which can be accepted by Landlord at any time until two (2) weeks after delivery of the signed Lease by Tenant.

 

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23.26 Exhibits . All exhibits described herein, if any, are part of this Lease and by this reference are expressly incorporated herein. This Lease contains the following Exhibits:

Exhibit A        Project Site Plan

Exhibit B        Premises and Improvements to Premises

Exhibit C        Rules and Regulations

Exhibit D        Signage Criteria

Exhibit E        Environmental Questionnaire

Exhibit F        Guaranty Agreement (INTENTIONALLY OMITTED)

23.27 Addendum . The attached Addendum, if any, is specified in Section 1.20 above, is part of this Lease and by this reference is expressly incorporated herein.

IN WITNESS WHEREOF, the parties hereto have executed this Lease on the date(s) set forth by their respective signatures.

 

Landlord:            
Date: March 4, 2008       H. G. FENTON PROPERTY COMPANY, a California corporation
      By:   H. G. FENTON COMPANY
        Authorized Agent
          By  

/s/ Kevin D. Hill

            Kevin D. Hill, Vice President, Leasing
          By  

/s/ Michael P. Neal

            Michael P. Neal, President/CEO
Tenant:            
Date: March 4, 2008         ALPHATEC HOLDINGS, INC., a Delaware corporation
          By  

/s/ Dirk Kuyper

            Dirk Kuyper, President and CEO
          By  

/s/ Ebun Garner

            Ebun Garner, General Counsel and Vice President
          [TWO (2) AUTHORIZED SIGNATURES REQUIRED]

 

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ADDENDUM TO LEASE

The following additional provisions are a part of, and incorporated in, the Lease to which this Addendum is attached. In the event of any conflict between the provisions of this Addendum and the body of the Lease, this Addendum shall control.

24. TERMINATION OF EXISTING LEASE WITH K2, INC. and PLANET EARTH, INC. Landlord [formerly known as H.G. FENTON COMPANY, a California corporation] entered into that certain lease dated August 20, 2003 with K2, INC., a Delaware corporation and PLANET EARTH, INC., a Delaware corporation jointly and severally (the “Existing Tenant”) in which Landlord leased to Existing Tenant the Premises commonly known as 5830 El Camino Real, Carlsbad, California 92008 (the “ Existing Lease ”). The Existing Lease is scheduled to expire on April 30, 2009. The parties acknowledge that in addition to the provisions expressly set forth in Section 23.25, this Lease shall be contingent upon Landlord executing an agreement with the Existing Tenant (the “ Termination Agreemen t”) on or before March 15, 2008, which allows for the vacation of the Premises on or before the Commencement Date of this Lease.

25. CONDITIONAL ABATEMENT OF MONTHLY BASE RENT . As long as Tenant shall not be in Default of any material provision of this Lease during the period of abatement, the obligation of Tenant to pay monthly Base Rent pursuant to Section 2.2 of the Lease shall be conditionally abated for the Second (2 nd ) through the Eighth (8 th ) full calendar months in the amount of $38,480.00 each month. The conditional abatement of Base Rent shall not include abatement of any Additional Rent, as such term is defined in Section 2.1 of the Lease.

26. OPTION TO EXTEND . Subject to satisfaction of the conditions precedent set forth below, Tenant shall have two options to extend the Term (each, an “Extension Option” ) for sixty (60) full calendar months ( “Extension Term” ) each time, on the following terms and conditions:

26.1 Tenant’s Extension Option shall be subject to satisfaction of each of the following conditions precedent, which are solely for the benefit of, and may be waived unilaterally by, Landlord:

(a) The Extension Option shall be exercised by written notice delivered by Tenant to Landlord not later than eight (8) months prior to the end of the Term or the prior Extension Term, as applicable; and

(b) The Lease shall be in effect and Tenant shall not be in Default of any material provision thereof both on the day such written notice is delivered to Landlord and on the last day of the Term.

26.2 In the event the Term shall be extended following exercise by Tenant of the Extension Option, then all of the terms, covenants and conditions of this Lease shall remain in full force and effect during the Extension Term, except that the initial monthly Base Rent (including subsequent annual increases in Base Rent) during the Extension Term shall be adjusted to the then effective market rate for new leases to tenants having a credit history and net worth similar to that of Tenant at the time of exercising such option for comparable space in the Carlsbad market, taking into account all relevant factors for such comparable space (“ Fair Market Rental Value ”), provided, however, that in no event shall the Base Rent payable for any Lease Year be less than the Base Rent payable for the immediately preceding Lease Year.

26.3 Landlord shall notify Tenant in writing regarding the determination made pursuant to Section 26.2 within ten (10) Business Days after Landlord’s receipt of Tenant’s election to exercise the Extension Option. In the event Tenant rejects Landlord’s determination, Tenant shall give Landlord written notice of such rejection (“ Rejection Notice ”) within ten (10) Business Days after receipt of the determination. Tenant’s failure to timely deliver the Rejection Notice shall be deemed Tenant’s approval of the Landlord-determined Fair Market Rental Value. The Rejection Notice shall state whether Tenant shall rescind its exercise of the Extension Option or if Tenant seeks to have a third-party evaluation of the Fair Market Value. If Tenant timely delivers the Rejection Notice, and such Rejection Notice states that the Tenant is rescinding the Extension Option, the Extension Option shall become null and void. If Tenant timely delivers the Rejection Notice, and such Rejection Notice states that Tenant seeks to have a third-party evaluation of the Fair Market Value, then the following terms and conditions shall apply:

(a) Within fifteen (15) days after Tenant’s delivery of the Rejection Notice, each party, at its own cost and by giving written notice to the other party, shall appoint a MAI real estate appraiser, with at least ten (10) years’ full-time commercial appraisal experience in the area where the Premises are located, to appraise and determine the Fair Market Rental Value. If, in the time provided, only one (1) party shall give written notice of appointment of an appraiser, then the single appraiser appointed shall determine the Fair Market Rental Value. If two (2) appraisers are appointed by the parties, then the two (2) appraisers shall each independently, and without consultation, prepare an appraisal of the Fair Market Rental Value within thirty (30) days after their appointment. Each appraiser shall seal its respective appraisal after completion. After both appraisals are completed, the resulting appraisals of the Fair Market Rental Value shall be opened and compared. If the values of the appraisals differ by no more than ten percent (10%) of the value of the higher appraisal, then the Fair Market Rental Value shall be the average of the two (2) appraisals.

(b) If the values of the appraisals differ by more than ten percent (10%) of the value of the higher appraisal, then within ten (10) days after the date the appraisals are compared, the two (2) appraisers selected by the parties shall appoint a third similarly qualified appraiser. If the two (2) appraisers fail to so select a third appraiser, then a third similarly qualified appraiser shall be appointed at the request of either Landlord or Tenant by the then Presiding Judge of the Superior Court of the State of California for the County of San Diego. The two (2) appraisers shall each then submit his or her independent appraisal in simple letter form to the third appraiser stating his or her determination of the Fair Market Rental Value (which determination may not be changed from that which was set forth in such appraiser’s sealed appraisal). The sole responsibility of the third appraiser shall be to determine which of the determinations made by the first two (2) appraisers is most accurate. The third appraiser shall have no right to propose a

 

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middle ground or any modification of either of the determinations made by the first two (2) appraisers. The third appraiser’s choice shall be submitted to Landlord and Tenant within fifteen (15) days after the third appraiser has received the written determination from each of the first two (2) appraisers. The Fair Market Rental Value shall be determined by the selection made by the third appraiser from the determinations submitted by the first two (2) appraisers.

(c) Each party shall pay the fees and expenses of its own appraiser, and fifty percent (50%) of the fees and expenses of, and the cost of appointing, the third appraiser.

(d) The appraisers shall use their best efforts to fairly and reasonably appraise and determine the Fair Market Rental Value in accordance with the terms of this Lease, and shall not act as advocates for either Landlord or Tenant.

(e) The appraisers shall have no power to modify the provisions of this Lease, and their sole function shall be to determine the Fair Market Rental Value in accordance with the definition thereof set forth in Section 26.2 and the provisions of this Section 26.3.

If (a) Landlord or an affiliate of Landlord is the owner of those premises subleased by Tenant from Existing Tenant and located at 5818 El Camino Real, Carlsbad, California (the “ Adjacent Premises ,” which are currently owned by Landlord and leased to Existing Tenant pursuant to that certain lease dated August 9, 2004, which is herein referred to as the “ Existing Adjacent Lease ”), and (b) Tenant occupies all or substantially all of the Adjacent Premises on that date of the exercise of the Adjacent Building Extension Option (as defined below), and (c) Tenant is not in Default under this Lease on that date of the exercise of the Adjacent Building Extension Option, and (d) the Existing Adjacent Lease has not been terminated by Landlord prior to the date of the exercise of the Adjacent Building Extension Option, then Tenant shall be entitled to extend its occupancy of the Adjacent Premises in accordance with Section 5 of Exhibit E of the Existing Adjacent Lease (the “ Adjacent Building Extension Option ”).

27. OTHER MATTERS OF AGREEMENT REGARDING SECURITY DEPOSIT AND LETTER OF CREDIT . Without limiting anything contained in Sections 1.11 and 6 of the Lease, Tenant at Tenant’s discretion, may in lieu of all or a portion of the cash Security Deposit or in substitution of all or a portion of the Security Deposit provided concurrently with Tenant’s executed copy of this Lease (such amount the “ L/C Portion of the Security Deposit ”), with one or more irrevocable, clean sight draft standby letters of credit for the benefit of Landlord in the amount of $293,920.00, up to $440,880.00 (to the extent that the Tenants elects to utilize the Reimbursable Tenant Improvement Allowance), in form and substance and issued by a United States financial institution reasonably acceptable to Landlord (individually and collectively, a “ Letter of Credit ”). If the Letter of Credit is provided in substitution of any portion of the cash Security Deposit previously delivered to Landlord, then within ten (10) days following Landlord’s receipt of such substitution, Landlord shall return the L/C Portion of the Security Deposit to Tenant. The Letter of Credit shall constitute additional security for the faithful performance by Tenant of all of the terms, covenants and conditions of the Lease to be kept and performed by Tenant. If Tenant defaults with respect to any provision of the Lease, including, but not limited to the provisions relating to the payment of rent, Landlord may (but shall not be required to) draw on the Letter of Credit and use, apply or retain all or part of the proceeds thereof for the payment of any rent or any other sum in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant’s default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant’s default. If Landlord draws on all or any portion of the Letter of Credit, Tenant shall, within two (2) Business Days after Landlord’s demand therefore, cause a replacement Letter of Credit, in the amount of the L/C Portion of the Security Deposit to be issued for the benefit of and delivered to Landlord, and Tenant’s failure to do so shall be a material breach of the Lease; provided, however, that upon receipt of such replacement Letter of Credit any amount of the Letter of Credit that was drawn on by Landlord but not so applied shall be immediately reimbursed to Tenant. Provided that Tenant is not then in Default under the Lease, Landlord agrees that, as requested by Tenant in writing, Landlord shall either i) return the sum of one month’s then current Base Rent from the cash Security Deposit to Tenant, or, ii) if the Letter of Credit shall then be in place, to release the Letter of Credit in the same amounts, in either case, within ten (10) days following Landlord’s receipt of such written request accompanied by proof (as evidenced by Tenant’s quarterly public filings or by financial statements certified by Tenant’s accountant) from Tenant that Tenant has achieved positive EBITDA for any period of two (2) consecutive quarters [or positive “Adjusted EBITDA” for a period of four (4) consecutive quarters] (the date of each such reduction, a “ Release Date ”); provided that the Security Deposit shall not be reduced below the last month’s Base Rent at any timed during the Term. By way of example only, the Security Deposit shall be reduced to an amount equal to two (2) months’ Base Rent after four (4) consecutive quarter of positive EBITDA, and shall be further reduced to one (1) month’s Base Rent after eight (8) consecutive quarters of positive EBITDA. Subject to the foregoing, Tenant shall cause the Letter of Credit to be renewed during the Term through the Release Date, and, if applicable, shall deliver written notice (and shall cause the issuing financial institution to deliver written notice) to Landlord of each such renewal at least thirty (30) days prior to the initial and any successive expiration date. If the Letter of Credit must be renewed, the failure of the issuing financial institution to renew the Letter of Credit at least thirty (30) days prior to the initial or any successive expiration date of such Letter of Credit shall constitute a default by Tenant hereunder. In addition, if Tenant is obligated, but fails, to renew the Letter of Credit within such thirty day (30) period, Landlord may, without prejudice to any other remedy it has, draw on all of the Letter of Credit. If Landlord transfers its interest in the Premises, Landlord shall transfer or assign the Letter of Credit to Landlord’s transferee at Landlord’s sole cost and expense and thereupon be relieved of further responsibility with respect to the Letter of Credit. Tenant shall not assign, mortgage or encumber the Letter of Credit, and any attempt to do so shall be void and shall not be binding on Landlord. Tenant shall pay all expenses and fees associated with obtaining, maintaining, renewing and replacing the Letter of Credit, excluding the costs of transferring the Letter of Credit upon a transfer of Landlord’s interest in the Premises. The rights of Landlord with respect to the Letter of Credit are in addition to the rights of Landlord under the Lease with respect to the Security Deposit. Landlord’s receipt of the Landlord approved Letter of Credit shall constitute a condition precedent to the effectiveness of the Lease. For purposes of this Section 27, “ Adjusted EBIDTA ” shall have the same meaning as such term used for the purpose of reporting Tenant’s quarterly economic results, as disclosed by the Tenant in its quarterly results calls

 

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28. ARBITRATION .

28.1 In the event of a dispute with respect to the issues set forth in Section 28.2 below or in any other case where this Lease expressly provides for submission of a dispute or matter (other than the determination of fair market rent for any Extension Term which shall be governed by Section 26 hereof) to arbitration (but not otherwise), the parties shall waive their rights to a jury or bench trial, and shall submit the dispute to binding arbitration in accordance with the rules of the American Arbitration Association, or pursuant to rules selected by an arbitrator mutually acceptable to the parties. In the event that parties are unable to agree on an arbitrator, then each shall select one independent individual who shall meet to select one independent arbitrator whose decision shall be final. The arbitrator shall, in reaching its decision, also determine the prevailing party, and shall award the prevailing party its legal fees according to the prevailing party clause shown above.

28.2 A dispute between Landlord and Tenant with respect to any of the following matters shall be submitted to arbitration pursuant to Section 28.1 hereof: (a) Landlord’s approval of Tenant’s plans for Tenant’s Work; (b) Landlord’s approval of the location of Tenant’s signage on the Building; and (c) the performance of Tenant’s Work or Landlord’s Delivery Work pursuant to Exhibit B.

[Signatures Follow]

 

Date: March 4, 2008       H. G. FENTON PROPERTY COMPANY, a California corporation
      By:   H. G. FENTON COMPANY
        Authorized Agent
          By  

/s/ Kevin D. Hill

           

Kevin D. Hill,

Vice President, Leasing

          By  

/s/ Michael P. Neal

            Michael P. Neal, President/CEO
Tenant:            
Date: March 4, 2008         ALPHATEC HOLDINGS, INC., a Delaware corporation
          By  

/s/ Dirk Kuyper

            Dirk Kuyper, President and CEO
          By  

/s/ Ebun Garner

            Ebun Garner, General Counsel and Vice President
          [TWO (2) AUTHORIZED SIGNATURES REQUIRED]

 

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EXHIBIT A

SITE PLAN

(TO BE ATTACHED WITH FINAL LEASE)

 

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EXHIBIT B

PREMISES AND IMPROVEMENTS TO PREMISES

Floor Plan of the Building and Premises

Design and Construction of Additional Improvements (“Work Letter Agreement”)

Landlord and Tenant agree that certain improvements to the Premises shall be constructed as set forth in this Exhibit B:

1. DESCRIPTION OF IMPROVEMENTS

The Premises to be provided by Landlord shall consist of all improvements currently existing in the Premises which shall include but not be limited to, a concrete floor, exterior building walls, and service points from which electrical and telephone service to the Premises can be made. In addition, Landlord shall complete the items as set forth in Section 3.3 and Section 7.2. Tenant acknowledges that except for Landlord’s Work (if any) and except to the extent expressly set forth in this Lease (including without limitation Sections 3.3 [Condition of Premises], 4.2 [Delivery of the Premises], 7.4 [ADA] and 8.4 [Landlord’s Obligations]) Tenant’s taking possession of the Premises shall be deemed acceptance of the Premises by Tenant, and shall be deemed conclusively to establish that the Premises are in good and satisfactory condition as of the date Tenant takes possession. Subject to the foregoing (“Landlord’s Work”), Tenant accepts possession of the Premises in their current, “as is” condition, and acknowledges that it has inspected the Premises and is fully aware of all patent conditions of the Premises.

2. PLANS AND SPECIFICATIONS

(a) Tenant’s Work shall be constructed pursuant to plans and specifications prepared in accordance with Section 2(b) by Tenant’s contractor, using Landlord’s “Building standard” materials and finishes to the extent that specifications have been supplied by the Landlord.

(b) Landlord shall provide Tenant with all existing floor plans of the Premises in Landlord’s possession or control, including, but not limited to, any CAD drawings in the possession of Landlord’s architect. Without liability of Landlord for the accuracy of such Premises floor plans and drawings provided to Tenant, Tenant shall prepare and furnish all electrical, mechanical, plumbing, engineering and fire and life safety plans and working drawings and all other architectural plans and working drawings (collectively, “Working Drawings”) necessary to construct Tenant’s Work. The Working Drawings shall include complete detailed plans and specifications, and identify all aspects of Tenant’s Work necessary and sufficient for submission to the City of Carlsbad to obtain permits for Tenant’s Work. The Working Drawings shall be submitted by Tenant for Landlord’s reasonable written approval within sixty (60) days after Tenant’s execution of this Lease. The Working Drawings may be submitted to Landlord in phases in order to expedite the permitting and construction of the Tenant Improvements.

(c) Following Landlord’s written approval of the Working Drawings, Tenant shall neither cause nor permit any material deviations therefrom without Landlord’s prior written consent, which shall not be unreasonably withheld or delayed.

(d) Following completion of Tenant’s Work, Tenant shall cause to be prepared a set of as-built plans and specifications of Tenant’s Work.

3. CONSTRUCTION OF TENANT’S WORK

(a) Tenant shall be responsible for construction of Tenant’s Work, pursuant to this Exhibit B. Prior to the start of construction, Tenant shall prepare and submit to Landlord a detailed schedule (“Construction Schedule”) identifying the major stages and anticipated completion dates of each phase of construction. Tenant shall, during the course of construction, periodically update the Construction Schedule, providing copies of the updated schedule to Landlord. Construction shall be performed under Tenant’s supervision by Tenant’s contractor, whose selection shall be reasonably approved by Landlord. Selection of all subcontractors shall also be subject to Landlord’s approval, which approval shall not be unreasonably withheld or delayed. Landlord shall not receive any management fee from Tenant associated with any of Landlord’s Work or Tenant’s Work. Tenant warrants and represents that it will receive no rebates or kickbacks from any of the subcontractors, and that such subcontractors have been specified solely because of their knowledge of the Building and the quality of their work. Tenant shall supervise the contractor’s work to expedite the completion of Tenant’s Work and to assure their construction in conformity with the approved plans and specifications.

(b) Landlord shall be permitted, during the course of construction, to inspect the progress of the work at its own cost and expense and, upon written notice to Tenant, to cause Tenant to repair any material defects or deficiencies.

(c) Landlord shall have no contractual relationship with Tenant’s contractor or any subcontractors.

(d) Tenant and Tenant’s contractor shall coordinate with Landlord’s property manager regarding delivery and storage of building materials, so as to minimize disruption of the Project’s other tenants.

(e) Tenant shall notify Landlord upon substantial completion of Tenant’s Work, whereupon the parties shall jointly inspect the Premises and prepare a punch list of corrective action to be taken by Tenant. Tenant shall use reasonable efforts to complete the punch list within sixty (60) days after the joint inspection.

 

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4. PAYMENT OF COST OF CONSTRUCTION

(a) Tenant shall initially fund the cost of all Tenant’s Work made to the Premises, including the costs for M&E Plans, and all costs for professional services retained by Landlord (if any) to review plans for code compliance.

(b) Landlord shall reimburse Tenant for the Tenant’s Work in an amount not to exceed the amount set forth in Section 1.12 (“Tenant Improvement Allowance”). Landlord shall make disbursements of the Tenant Improvement Allowance for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant as follows:

(i) Upon the completion of fifty percent (50%) of the Tenant Improvements, Tenant shall deliver to Landlord: (A) a request for payment of the general contractor” in the “50% Disbursement Amount” (as defined below), approved by Tenant, on a form of request to be provided by Landlord (the “50% Tenant Request”), detailing the work completed and the portion not completed; (B) invoices from all of Tenant’s subcontractors for labor rendered and materials delivered to the Premises for which payment is requested pursuant to the 50% Tenant Request; (C) executed mechanic’s lien releases from Tenant’s general contractor and all of Tenant’s major trade subcontractors which shall comply with the appropriate provisions, as reasonably determined by Landlord, of California Civil Code Section 3262(d), and (D) proof of actual payment (in a form reasonably acceptable to the Landlord) of the amounts set forth in the 50% Tenant Request. Upon the completion of one-hundred percent (100%) of the Tenant Improvements, Tenant shall deliver to Landlord: (A) a request for payment of the general contractor” in the “100% Disbursement Amount” (as defined below), approved by Tenant, on a form of request to be provided by Landlord (the “100% Tenant Request”), detailing the work completed and the portion not completed; (B) invoices from all of Tenant’s subcontractors for labor rendered and materials delivered to the Premises for which payment is requested pursuant to the 100% Tenant Request; (C) executed mechanic’s lien releases from Tenant’s general contractor and all of Tenant’s major trade subcontractors which shall comply with the appropriate provisions, as reasonably determined by Landlord, of California Civil Code Section 3262(d), and (D) proof of actual payment (in a form reasonably acceptable to the Landlord) of the amounts set forth in the 100% Tenant Request. Tenant’s request for payment shall be deemed Tenant’s acceptance and approval of the work furnished and/or the materials supplied as set forth in the 50% Tenant Request or the 100% Tenant Request, as the case may be. On or before the thirtieth (30 th ) day following Tenant’s delivery of the 50% Tenant Request or the 100% Tenant Request, as the case may be, Landlord shall deliver a check to Tenant to reimburse Tenant in an amount (the “Disbursement Amount”) of the lesser of (A) the amounts so requested by Tenant, less a ten percent (10%) retention (the aggregate amount of such retentions to be known as the “Final Retention”) and (B) the balance of any remaining available portion of the Tenant Improvements Allowance (not including the Final Retention) Landlord’s payment of such amounts shall not be deemed Landlord’s approval or acceptance of the work furnished or materials supplied as set forth in the Tenant Request.

(ii) Within thirty-five (35) days after the recordation of the Notice of Completion for the Tenant’s Work, delivery of unconditional mechanic’s lien releases from Tenant’s general contractor and all of Tenant’s subcontractors and delivery to Landlord of the as-built drawings required pursuant to Section 2(d) above, a check for the Final Retention shall be delivered by Landlord to Tenant, provided that Landlord has determined that no substandard work exists which adversely affects the mechanical, electrical, plumbing, heating, ventilating and air conditioning, life-safety or other systems of the Building, the structure or the exterior appearance of the Building.

(c) Any cost for Tenant’s Work in excess of the Tenant Improvement Allowance shall be paid by Tenant.

(d) Subject to the terms and conditions of this Section, Landlord shall, make available to Tenant, in addition to the Tenant Improvement Allowance, additional funds up to a maximum amount of $367,400.00 (the “Reimbursable Tenant Improvement Allowance ”), to offset some or all of the costs of constructing the Tenant Improvements or the costs incurred by Tenant in constructing any Tenant’s Work, subject to Tenant’s obligation to repay all such funds as “Tenant Improvement Rent” in accordance with Section (b) below. Any part of the Reimbursable Tenant Improvement Allowance not expended for Tenant’s Work shall not be available for disbursement to or use by Tenant. All items purchased with the Tenant Improvement Allowance (or the Reimbursable Tenant Improvement Allowance), or the construction or installation of which was financed by the Tenant Improvement Allowance (or the Reimbursable Tenant Improvement Allowance), shall be and remain the property of Landlord, regardless of such items’ classification as fixtures, furnishings, equipment or otherwise.

(e) In consideration of the additional payments described below ( “Tenant Improvement Rent ”), Landlord shall make available to Tenant the funds representing the Reimbursable Tenant Improvement Allowance, subject to the terms and conditions of this Section (d). In the event Tenant does elect to have Landlord advance any funds representing the Reimbursable Tenant Improvement Allowance for the purposes permitted herein, Tenant shall pay to Landlord each month, as Additional Rent, Tenant Improvement Rent in an amount equal to the Reimbursable Tenant Improvement Allowance actually advanced by Landlord multiplied by 0.016, as a constant based on a ninety-eight (98) month amortization period at the rate of twelve percent (12%) per annum. To illustrate, if Tenant should elect to have Landlord advance the full amount of the Reimbursable Tenant Improvement Allowance (or $367,400.00) then Tenant Improvement Rent of the same amount would be payable at the rate of $5,898.62 per month. Tenant Improvement Rent shall be payable at the same time and in the same manner as Base Rent, beginning on the Commencement Date, and continuing on the first day of each month thereafter throughout the Term. Upon any expenditure of the Reimbursable Tenant Improvement Allowance, Tenant Improvement Rent in the same amount shall become due and payable by Tenant as provided herein and shall be deemed to have been fully earned by Landlord at the time of such expenditure. When the aggregate amount of Tenant Improvement Rent has been determined, the parties shall execute and attach to this Lease a written statement specifying such amount, and the Security Deposit shall be increased to the amount of four (4) months of monthly Base Rent and four (4) months of monthly installments of Tenant Improvement Rent. All unpaid Tenant Improvement Rent shall be immediately due and payable in full upon the earlier of (i) the last day of the Term or (ii) the occurrence of any default by Tenant under the Lease and the failure to cure the same within the applicable cure period (if any).

 

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(f) If Landlord fails to make a disbursement under this Section 4 within sixty (60) days of the date that Landlord is obligated to make such disbursement, Tenant shall not be entitled to offset any amount from rent, but as Tenant’s sole remedy, the dispute shall be resolved by arbitration in accordance with Section 28 of this Lease.

5. INDEMNITY AND WARRANTIES

(a) Tenant warrants to Landlord that (i) Tenant’s Work will be constructed free from all liens or other claims in connection with such construction; (ii) all materials utilized in Tenant’s Work will be new; and (iii) Tenant’s Work will be completed in a workmanlike and first-class manner, be free from defects and deficiencies, and in conformance with all plans and specifications.

(b) Tenant shall endeavor to obtain from each contractor, subcontractor and materialman providing labor or materials with respect to Tenant’s Work a written agreement providing (i) that all such labor or materials are warranted to be free from faults and defects for a period of not less than one year following completion (as evidenced by recordation of a valid Notice of Completion) of Tenant’s Work; and (ii) that Landlord and all Landlord’s agents, employees, officers, directors, partners and contractors are indemnified, for a period of not less than one (1) year following substantial completion of Tenant’s Work, from and against any and all liabilities, claims, damages, losses and expenses, including, but not limited to, attorney’s fees, arising from or relating to any defects in workmanship or materials with respect to such labor and materials.

(c) Tenant indemnifies and holds harmless Landlord and all of Landlord’s agents, employees, officers, directors, partners and contractors from and against any and all liabilities, claims, damages, losses and expenses, including, but not limited to, attorney’s fees, arising from or relating to (i) any mechanic’s lien or stop notice claims arising from the construction of Tenant’s Work; or (ii) any defects in workmanship or materials with respect to Tenant’s Work for one (1) year following substantial completion thereof.

(d) In the event any contractor or subcontractor retained by Tenant to construct Tenant’s Work fails to perform as required, Tenant shall be obligated to pursue any claims against such contractor to remedy such failure or, at the discretion of Landlord, shall assign such claims to Landlord, in which event, Landlord may pursue such claims directly against such contractor.

(e) At Landlord’s request from time to time, Tenant shall promptly provide to Landlord (i) evidence of progress and final payments to and lien waivers and releases by Tenant’s contractors and subcontractors in connection with Tenant’s Work, and (ii) copies of any asserted mechanic’s lien or stop notice claims arising from the construction of Tenant’s Work if, and when received by Tenant.

6. ESTIMATED COMPLETION DATE

(a) The estimated substantial completion of Tenant’s Work shall be within one hundred and twenty (120) days after Delivery of the Premises (“Estimated Completion Date”). Each party shall use its reasonable best efforts to comply with or improve upon the time periods specified herein, so that Tenant’s Work can be completed by such date or as soon thereafter as possible.

(b) Subject to the provisions of Section 4.1, if Tenant’s Work has not been completed on or before the Estimated Completion Date, (i) Landlord shall not be liable for any damage incurred by Tenant as a result thereof, (ii) the Lease shall not thereby become void or voidable, (iii) Tenant shall not be entitled to any abatement of rent, and (iv) the Commencement Date shall not be delayed but shall be the date specified in Section 1.6(a) of the Lease.

 

Date: March 4, 2008       H. G. FENTON PROPERTY COMPANY, a California corporation
      By:   H. G. FENTON COMPANY
        Authorized Agent
          By  

/s/ Kevin D. Hill

           

Kevin D. Hill,

Vice President, Leasing

          By  

/s/ Michael P. Neal

            Michael P. Neal, President/CEO
Tenant:            
Date: March 4, 2008         ALPHATEC HOLDINGS, INC., a Delaware corporation
          By  

/s/ Dirk Kuyper

            Dirk Kuyper, President and CEO
          By  

/s/ Ebun Garner

            Ebun Garner, General Counsel and Vice President
          [TWO (2) AUTHORIZED SIGNATURES REQUIRED]

 

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EXHIBIT C

RULES AND REGULATIONS

Tenant and its employees, agents, licensees and visitors will at all times observe faithfully, and comply strictly with, the Rules and Regulations set forth on this Exhibit C. Landlord may from time to time reasonably amend, delete or modify existing rules and regulations, or adopt reasonable new rules and regulations for the use, safety, cleanliness and care of the Premises, the Building and the Project, and the comfort, quiet and convenience of occupants of the Project. Modifications or additions to the Rules and Regulations will be effective upon notice to Tenant from Landlord. In the event of any breach of any rules or regulations or any amendments or additions to such Rules and Regulations, Landlord will have all remedies which this Lease provides for default by Tenant, and will, in addition, have any remedies available at law or in equity, including the right to enjoin any breach of such Rules and Regulations. Landlord will not be liable to Tenant for violation of such Rules and Regulations by any other tenant, its employees, agents, visitors or licensees, or any other person; provided that Landlord shall enforce the rules and regulations in a non-discriminatory manner. In the event of any conflict between the provisions of this Lease and the Rules and Regulations, the provisions of the Lease will govern. Tenant shall not be in default until written notice of a violation of one or more of the Rules and Regulations is given to Tenant.

A. The plumbing facilities shall not be used for any purpose other than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage or damage resulting from a violation of this provision shall be borne by Tenant who shall, or whose employees, agents and invitees shall, have caused it.

B. Except as to Tenant’s customary improvements, Tenant shall not deface wall, ceilings, glass, partitions, floors, doors, wood, paint, stone or metal work of the Premises or the Project by marking, nailing, drilling or otherwise defacing.

C. Tenant shall not use, keep or permit to be used or kept, any foul or obnoxious gas or substance in the Premises or permit or suffer the Premises to be used or occupied in any manner offensive or objectionable to Landlord or other occupants of the Building or Project by reason of any noise, odors and/or vibrations.

D. Tenant, or its agents, shall not play any musical instrument or make or permit any improper noises in the Project.

E. Tenant, or its employees, shall not loiter in the entrance or corridors of the Building or Project, or in any way obstruct the sidewalks, hallways and stairways and shall use the same only as a means of access to and from the Premises.

F. Landlord may limit weight, size and position of all safes, fixtures and other equipment used in the Premises. In the event Tenant shall require extra heavy equipment, Tenant shall notify Landlord of such fact and shall pay the cost of structural bracing to accommodate same. All damage done to the Premises or the Project by putting in, or taking out, or maintaining extra heavy equipment shall be repaired at the expense of Tenant.

G. Tenant shall not do anything in the Premises, or bring or keep anything therein, which will in any way increase or tend to increase the risk of fire or the rate of fire insurance or which shall conflict with the regulations of the Fire Department or the law or with any insurance policy on the Premises or any part thereof, or with any rules or regulations established by any administrative body or official having jurisdiction, and it shall not use any machinery therein, even though its installation may have been permitted, which may cause any unreasonable noise, or jar or tremor to the floor or walls, or which by its weight might injure the floors of the Premises.

H. Keys for the Premises shall be provided to Landlord upon termination of the Lease. Tenant shall not change locks or install other locks on doors of the Premises without providing Landlord with appropriate keys for such locks.

I. No personnel shall enter or remain in the Project while intoxicated or under the influence of liquor or drugs. Landlord shall have the right to exclude or expel any person who, in the absolute discretion of Landlord, is under the influence of liquor or drugs.

J. Tenant and its agents and employees shall not bring into nor keep within the premises any animal or bird, however; this rule does not apply to dogs trained to assist individuals with a disability. Tenant and its agents and employees shall not throw refuse or other substances or litter of any kind in or about the Project, except in receptacles placed therein for such purposes by Landlord or governmental authorities.

K. Tenant shall not install any form of window covering or ventilators or similar devices visible from the outside of the Premises without the prior written consent of Landlord.

L. No aerial, antenna or dish shall be erected on the roof or exterior walls of the Premises or on the grounds, without in each instance the written consent of Landlord. Any aerial, antenna or dish so installed without such written consent shall be subject to removal without notice at any time.

M. Tenant shall not burn any trash or garbage at any time in or about the Project.

N. Tenant shall use, at its cost, such pest extermination at such intervals as Landlord may reasonably require.

O. No waiver of any rule or regulation by Landlord shall be effective unless expressed in writing and signed by Landlord or its authorized agent.

 

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P. Tenant shall abide by any additional rules or regulations which are ordered or requested by any governmental or military authority.

Q. In the event of any conflict between these Rules and Regulations or any further or modified rules and regulations from time to time issued by Landlord and the Lease, the Lease shall govern and control.

R. All signs installed by Tenant shall be in accordance with Landlord’s sign plan.

S. Tenant shall not clean, wash, repair or otherwise perform any maintenance or service on any vehicle owned or utilized by Tenant in any of the Common Areas of the Project or any other area in plain view of the public.

 

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EXHIBIT D

SIGNAGE CRITERIA

(TO BE ATTACHED WITH FINAL LEASE)

 

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EXHIBIT E

ENVIRONMENTAL QUESTIONNAIRE

 

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EXHIBIT F

TENANT LENDER’S ESTOPPEL

 

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Exhibit 10.3

LICENSE AGREEMENT

This License Agreement (this “Agreement”) is made effective as of March 3, 2008 (the “Effective Date”) by and among Alphatec Spine, Inc., a Delaware corporation with a principal place of business at 2051 Palomar Airport Road, Suite 100, Carlsbad, California 92008 (“Licensee”), Stout Medical Group LP, a limited partnership company organized under the laws of the state of Delaware, and having a place of business at 410 East Walnut Street, Suite #8, Perkasie, Pennsylvania 18944 (“Licensor”) and for purposes of Section 7.2 and Section 11.15 hereof only Alphatec Holdings, Inc., a Delaware corporation with a principal place of business at 2051 Palomar Airport Road, Suite 100, Carlsbad, California 92008 (“Holdings”). Licensee and Licensor are each hereafter referred to individually as a “Party” and together as the “Parties”.

WHEREAS, Licensor is the owner of or otherwise controls certain proprietary Licensed Patents and Licensed Technology (as defined below); and

WHEREAS, Licensee desires to obtain a license from Licensor under such Licensed Patents and Licensed Technology to develop and commercialize Licensed Products (as defined below); and

WHEREAS, Licensor desires to grant such license to Licensee on the terms and subject to the conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties hereby agree as follows.

1. DEFINITIONS

Whenever used in the Agreement with an initial capital letter, the terms defined in this Article 1 shall have the meanings specified.

1.1 “ Affiliate ” shall mean any company, corporation, partnership, limited liability company, trust, or other business entity that directly or indirectly controls, is controlled by, or is under common control with a designated person or entity, and for such purpose “control” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the entity, whether through the ownership of voting securities, by contract or otherwise.

1.2 “ Common Stock ” shall mean the common stock of Holdings, and any securities into which such common stock may hereafter be reclassified, converted or exchanged.

1.3 “ Confidential Information ” shall mean with respect to a Party (the “Receiving Party”), all information which is disclosed by the other Party (the “Disclosing Party”) to the Receiving Party hereunder or to any of its employees, consultants, Affiliates, licensees or sublicensees, except to the extent that the Receiving Party can demonstrate by written record or other suitable physical evidence that such information, (a) as of the date of disclosure is demonstrably known to the Receiving Party or its Affiliates other than by virtue of a prior confidential disclosure to such Party or its Affiliates; (b) as of the date of

 

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disclosure is in, or subsequently enters, the public domain, through no fault or omission of the Receiving Party; (c) is obtained from a Third Party having a lawful right to make such disclosure free from any obligation of confidentiality to the Disclosing Party; or (d) is independently developed by or for the Receiving Party without reference to or reliance upon any Confidential Information of the Disclosing Party. Any information in relation to the subject matter of this Agreement disclosed by a Party under that certain Mutual Confidentiality Agreement between the parties dated the 2nd day of July 2007 shall, subject to the foregoing exceptions, be considered Confidential Information for purpose of this Agreement.

1.4 “ Exclusive Design ” shall mean those aspects of the final design of the Licensed Product, which embody the concepts set forth on Schedule C , attached hereto, as modified pursuant to Article 3.

1.5 “ First Commercial Sale ” shall mean the date of the first transaction, transfer or disposition for value by or on behalf of Licensee or any Affiliate or Sublicensee of Licensee to a Third Party of a Licensed Product in the United States following the applicable regulatory clearance by the FDA (as defined below).

1.6 “ FDA ” shall mean the United States Food and Drug Administration and any successor agency or authority thereto.

1.7 “ Guarantee and Agreement ” shall mean the guarantee and agreement of Holdings set forth in Section 11.15 hereof.

1.8 “ Joint Inventions ” shall have the meaning given in Section 3.3.

1.9 “ Licensor Indemnitees ” and “ Licensee Indemnitees ” (each individually an “ Indemnitee ”) shall have the meaning given in Section 8.1.

1.10 Licensed Field ” shall mean: [***]

1.11 “ Licensed Patent Rights ” shall mean any of the patent applications described in Schedule A attached hereto, and any divisional, continuation, continuation-in-part (to the extent that the continuation-in-part is entitled to the priority date of an initial patent or patent application which is the subject of this Agreement), reissue, reexamination, registration, renewal, or extension, or any patent issuing therefrom or any supplementary protection certificates related thereto, and any foreign counterparts to any of the foregoing.

1.12 “ Licensed Product ” shall mean any product sold by Licensee, its Affiliates or Sublicensees that embodies or uses any aspect of the Licensed Patent Rights and/or the Licensed Technology.

1.13 “ Licensed Technology ” shall mean all Technology which:

1.13.1 Licensor controls as of the Effective Date and which (i) is described in or related to any patent or patent application included in the Licensed Patent Rights and (ii) is necessary or useful for Licensee to practice the license granted to it hereunder;

 

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1.13.2 is developed by Licensor as a part of its efforts contemplated by Section 3.2;

1.13.3 Licensor controls after the Effective Date but during the Term and which (i) it has the right to disclose and license without the payment of royalties or other consideration to any Third Party and (ii) constitutes an improvement to the subject matter of the Licensed Patent Rights or Licensed Technology as it exists on the date of determination, including Licensor’s interest in any Joint Inventions; and/or

1.13.4 Licensee controls after the Effective Date but during the Term and which constitutes an improvement to the subject matter of the Licensed Patent Rights or Licensed Technology as it exists on the date of determination.

1.14 “ Market Launch ” shall mean the first national commercial launch of any Licensed Product.

1.15 “ Net Sales ” shall mean the gross amount invoiced by or otherwise payable to Licensee, any of its Affiliates or any Sublicensee on account of sales or other transfers of a Licensed Product anywhere in the Territory during a designated period (and for the avoidance of doubt if such Licensed Product is sold in kitted form, such gross amount invoiced shall include the amount invoiced for the entire kit and/or each component thereof), less to the extent otherwise then or previously included in amounts invoiced for such Licensed Products and in respect of which no previous deduction was taken:

1.15.1 trade, cash and quantity discounts or rebates actually allowed or taken on Licensed Products, including discounts or rebates to governmental or managed care organizations;

1.15.2 credits or allowances actually given or made for rejection of, and for uncollectible amounts (except to the extent later collected) on, or return of previously sold Licensed Products;

1.15.3 any charges for insurance, freight, and other transportation costs directly related to the delivery of Licensed Product to the extent included in the gross invoiced sales price;

1.15.4 any tax, tariff, duty or governmental charge levied on the sales, transfer, transportation or delivery of a Licensed Product (including any tax such as a value added or similar tax or government charge), other than franchise or income tax of any kind whatsoever; and

1.15.5 any import or export duties or their equivalent borne.

In addition, should Licensee be required, in order to lawfully exercise its rights as to a Licensed Product, obtain additional rights in a country to patents of any Third Parties which are not Affiliates of Licensee, which patents are (i) pending or issued on the Effective Date, and (ii) required for Licensee to practice the inventions described in the Licensed Patent Rights or Licensed Technology or

 

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exercise the license granted under this Agreement for reasons not attributable to a design selection made by Licensee for which alternative design selections not requiring such additional rights are available, then Licensee may also deduct from Net Sales with respect to a designated period the amount of the royalty Licensee is required to pay to such Third Party or Parties for such necessary rights to such patents with respect to such Licensed Product; provided that in no event (i) shall the amount of Net Sales for any designated period be reduced by more than [***] on account of royalties paid to Third Parties, and any amount so disallowed shall be lost and not carried forward and (ii) no such reduction shall be permitted with respect to additional rights obtained more than [***] after the First Commercial Sale in such country. “Net Sales” shall not include amounts invoiced by or otherwise payable to Licensee, any of its Affiliates and/or any Sublicensees for Licensed Products sold or otherwise transferred to Licensee or any of its Affiliates and/or its Sublicensees, unless the Licensed Product is consumed by the invoiced entity.

1.16 “ Shares ” shall have the meaning set forth in Paragraph 4.4.1(a) hereof.

1.17 “ Sublicensee ” shall mean any Third Party to whom Licensee grants a sublicense of some or all of the rights granted to Licensee under this Agreement.

1.18 “ Technology ” shall mean all of the following intangible legal rights, whether or not filed, perfected, registered or recorded, applicable to the Licensed Field: (i) inventions, patents, patent disclosures, patent rights, including any and all continuations, continuations-in-part, divisionals, reissues, reexaminations, utility models, industrial designs and design patents or any extensions thereof, (ii) rights associated with works of authorship, including without limitation, copyrights, copyright applications and copyright registrations and (iii) any and all proprietary ideas, inventions, discoveries, Confidential Information, data, results, formulae, designs, specifications, methods, processes, techniques, ideas, know-how, technical information (including, without limitation, structural and functional information), process information, pre-clinical information, clinical information, and any and all proprietary control and manufacturing data and materials, whether or not patentable.

1.19 “ Term ” shall have the meaning given in Section 9.1.

1.20 “ Territory ” shall mean all countries and jurisdictions of the world.

1.21 “ Third Party ” shall mean any person or entity other than Licensee, Licensor and their respective Affiliates.

2. GRANT OF RIGHTS

2.1 License to Licensee .

2.1.1 Grant of Non-Exclusive License . Licensor hereby grants to Licensee a non-exclusive, royalty-bearing license, including the right to grant sublicenses in accordance with Subsection 2.1.3, under the Licensed Patent Rights and Licensed Technology: (i) to conduct research and development in support of the licensed uses described in clause (ii) of this Subsection, and (ii) to make, have made, import, export, use, offer for sale or sell Licensed Products in the Licensed Field, subject to the terms and conditions of this Agreement.

 

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2.1.2 Grant of Exclusive License . Licensor hereby grants to Licensee an exclusive (even as to the Licensor and its Affiliates), royalty-bearing license, including the right to grant sublicenses in accordance with Subsection 2.1.3: (i) to conduct research and development in support of the licensed uses describe in clause (ii) of this Subsection, and (ii) to make, have made, import, export, use, offer for sale or sell Licensed Products in the Licensed Field to the extent embodying the Exclusive Design, subject to the terms and conditions of this Agreement.

2.1.3 Right to Sublicense . Licensee shall have the right to grant sublicenses, subject to the terms of this Agreement, to all or any portion of its rights under the license granted pursuant to this Subsection.

2.2 Right of First Discussion in Relation to Sales of Licensed Patent Rights or Licensed Technology . In the event that Licensor decides to sell any of the Licensed Patent Rights or Licensed Technology (subject, of course, to this Agreement), it shall give prompt notice thereof to the Licensee. Such notice shall include a description of the Licensed Patent Rights or Licensed Technology to be sold. Thereafter, Licensee shall have sixty (60) days to notify Licensor whether Licensee is interested in commencing negotiations to obtain a fully-paid license to such Licensed Patent Rights or Licensed Technology in the Licensed Field. If Licensee does not give such notice within such sixty (60) day period, Licensor shall be entitled to sell such Licensed Patent Rights or Licensed Technology as it sees fit. If Licensee gives such written notice within such sixty (60) days, the parties shall for a further sixty (60) days from the giving of such notice, or such longer time period as upon which the Parties mutually agree in writing, negotiate in good faith as to the terms of such fully-paid license in the Licensed Field, and Licensor shall not be entitled to commence negotiations with any Third Party with respect to the sale of such Licensed Patent Rights or Licensed Technology, or sell such Licensed Patent Rights or Licensed Technology, until the end of such sixty (60) day or longer agreed-upon period, after which it shall be free to negotiate or sell such intellectual property as it sees fit.

2.3 Right of First Discussion as to New In-Field License . If, at any time during the term of the Agreement, Licensor acquires or develops intellectual property in respect of uses or applications within the Licensed Field (a “New In-Field Use”) which is not included in the Licensed Technology and which Licensor has the right to disclose and license without the payment of royalties or other consideration to any Third Party, it shall give prompt notice thereof to the Licensee. Such notice shall include a description of the intellectual property which Licensor has acquired or developed. Thereafter, Licensee shall have sixty (60) days to notify Licensor whether Licensee is interested in commencing negotiations to obtain a license to such rights (the “New In -Field License”). If Licensee does not give such notice within such sixty (60) day period, Licensor shall be entitled to license such intellectual property as it sees fit. If Licensee gives such written notice within such sixty (60) days, the parties shall for a further sixty (60) days from the giving of such notice, or such longer time period as upon which the Parties mutually agree in writing, negotiate in good faith as to the terms of such New In-Field License, and Licensor shall not be entitled to commence negotiations with any Third Party in respect to a license of such intellectual property, or license such intellectual property, within the Licensed Field until the end of such sixty (60) day or longer agreed-upon period, after which it shall be free to negotiate or license such intellectual property as it sees fit. For the sake of clarity, this Section 2.2 does not apply to any intellectual property that is included in Licensed Technology and, as such, is subject to the license grant under Section 2.1.

 

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3. DEVELOPMENT AND COMMERCIALIZATION OF LICENSED PRODUCTS.

3.1 Commercialization .

3.1.1 From and after the Effective Date, Licensee shall have full control and authority over the development and commercialization of Licensed Products in the Licensed Field in the Territory. Without prejudice to Section 3.3 hereof, Licensee shall own all Technology resulting solely from the efforts of its agents, Affiliates and employees as a part of such development and commercialization, but for such purposes (or any other purpose of this Agreement) Licensor shall not be considered an agent of Licensee. All activities relating to development and commercialization under this Agreement shall be undertaken at Licensee’s sole cost and expense.

3.1.2 Diligence . After the Effective Date, Licensee will exercise commercially reasonable efforts to develop a Licensed Product which will pass Required Testing, and thereafter cause the Market Launch of the first Licensed Product as soon as practicable, such commercially reasonable efforts to take into account the competitiveness of the marketplace, the proprietary position of the Licensed Product, the relative potential safety and efficacy of the Licensed Product, the cost of goods and availability of capacity to manufacture and supply the Licensed Product at commercial scale, the profitability of the applicable Licensed Product, and other relevant factors including, without limitation, technical, legal, scientific or medical factors.

3.2 Licensor Assistance . Prior to the Market Launch of a Licensed Product, Licensor agrees that it shall provide commercially reasonable assistance to the Licensee in connection with the development and commercialization of a Licensed Product as described in Schedule B hereto in exchange for the compensation also described in Schedule B . Licensor shall own all Technology resulting solely from the efforts of the agents, Affiliates and employees of Licensor as a part of such development and commercialization, (but for such purposes (or any other purpose of this Agreement) Licensee shall not be considered an agent of Licensor), but such Technology shall be deemed included in the Licensed Technology.

3.3 Joint Inventions . Technology conceived, developed or reduced to practice jointly by employees or consultants of Licensor and Licensee during the term hereof shall be jointly owned by them (“Joint Inventions”). For purposes of this Section 3.3 Technology that is the subject of a patent application shall be deemed to have been developed jointly by employees or consultants of Licensee and Licensor, and thus be a Joint Invention, if at least one employee or consultant of each of Licensee and Licensor is required to be named as an inventor in such application in order for such patent to be valid, and a comparable concept shall apply to Technology not the subject of a patent application. Subject to its right of abandonment or other forfeiture, Licensee shall be responsible, at its costs, for preparing, filing and, prosecuting patent applications which are available with respect to Joint Inventions in the United States, Japan, Germany, the United Kingdom, France, Spain and Italy (and elsewhere as

 

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it may elect), using patent counsel reasonably chosen by Licensee, and for maintaining any patents obtained thereon. Licensee shall keep Licensor reasonably appraised as to the prosecution of each such patent application. Licensee agrees to send Licensor copies of all file histories and prosecution documents for each of the patent applications of the Licensed Patent Rights, within thirty (30) days of receipt by Licensor. Licensee shall have the right in its discretion to abandon or otherwise cause or allow to be forfeited, any patents or applications therefore as to Joint Inventions. Licensee shall give Licensor at least sixty (60) days written notice prior to abandonment or other forfeiture so as to permit, but not obligate, Licensor, to file, in the name of Licensor, for protection as to such patent or application, at its cost and expense, and Licensee shall have no interest in such patent or applications or underlying Joint Inventions (which shall thereupon cease to be Joint Inventions by shall rather be Confidential Information of Licensor). In any event each Party will, and will cause its employees and consultants to, provide any assistance and executed agreements and instruments as are reasonably requested by a Party which is seeking to obtain in accordance herewith patents or other protection with respect to any Joint Inventions.

3.4 Licensee License Grant . Licensee hereby grants to Licensor:

3.4.1 Non-exclusive License . a non-exclusive, fully-paid and royalty-free, perpetual license, including the right to grant sublicenses, under all Technology owned by Licensee as a result of the activities set forth in Section 3.1: (i) to conduct research and development in support of the licensed uses describe in clause (ii) of this Subsection, and (ii) to make, have made, import, export, use, offer for sale or sell any component or product for indications outside of the treatment of spinal disorders, subject to the terms and conditions of this Agreement; and

3.4.2 Exclusive License . an exclusive, fully-paid and royalty-free, perpetual license, including the right to grant sublicenses, under its interest in all Joint Inventions: (i) to conduct research and development in support of the licensed uses describe in clause (ii) of this Subsection, (ii) to make, have made, import, export, use, offer for sale or sell any component or product for indications outside of the treatment of spinal disorders, subject to the terms and conditions of this Agreement, and (iii) to prosecute at Licensor’s sole cost and for its sole benefit infringements of Joint Inventions within the scope of the licenses granted in clauses (i) and (ii) of this Subsection 3.4.2.

4. PAYMENTS AND ROYALTIES

4.1 Initial Payment; Milestone Payments, Payment of Royalties; Royalty Rates; and Minimum Royalties;

4.1.1 Initial Payment . Licensee shall pay Licensor a lump-sum, payment of (i) five-hundred thousand dollars ($500,000), and (ii) five-hundred thousand dollars ($500,000) in shares of Common Stock, with a price per share of Common Stock for such purpose equal to the average per share NASDAQ Close/NASDAQ Official Closing Price (as defined by NASDAQ) or a defined successor closing price (designated by NASDAQ) on the fifteen (15) trading days prior to the date of issuance; provided that if on any such trading day the Common Stock shall not be listed on the NASDAQ national exchange or a similar national securities exchange, then

 

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Licensor shall receive [***] in cash in lieu of such shares of Common Stock (collectively the “Initial Payment”), with the cash portion of the Initial Payment being due and payable within ten (10) business days of the Effective Date, and the Common Stock portion of the Initial Payment being due and payable within thirty (30) business days of the Effective Date. The Initial Payment shall be fully-earned and non-refundable.

4.1.2 Initial Milestone Payments . Licensee shall pay milestone payments (or in the case of the Common Stock cause the issuance thereof by Holdings) to Licensor (each such payment or issuance a “Milestone Payment”) as specified below no more than thirty (30) days after the occurrence of the corresponding event designated below, unless this Agreement has been terminated prior to such due date. No Milestone Payments described in this Subsection 4.1.2 shall be credited against or otherwise reduce any other amounts payable hereunder.

 

Event

  

Milestone Payment

[***]

   [***]

[***]

   [***]

[***]

   [***]

4.1.3 Royalty Payments . During the Term, Licensee shall pay to Licensor within thirty (30) days of the end of each calendar quarter earned royalties of [***] of Net Sales during such calendar quarter. Each royalty payment shall (i) be accompanied by a report specifying: the Net Sales (including an accounting of deductions taken in the calculation of Net Sales) and (ii) state the applicable exchange rate used in conversion from any foreign country’s currency to United States Dollars (which conversion shall be determined in accordance with Subsection 4.2.2). Earned royalties described in this Subsection 4.1.4 shall only be credited against minimum royalties which would otherwise be due as contemplated by Subsection 4.1.5 and shall not be credited against or otherwise reduce any other amounts payable hereunder.

4.1.4 Minimum Royalties . Licensee shall pay Licensor the following minimum annual royalty amounts in each calendar year listed next to such amount. No minimum annual royalty described in this Subsection 4.1.5 shall be credited against or otherwise reduce any other amounts payable hereunder. For a particular calendar year, in the event that the sum of the earned royalties on Net Sales timely paid in accordance with Subsection 4.1.4 above with respect to the four calendar quarters of such calendar year are less than the minimum annual royalty for such year designated below, the obligation to pay the difference to Licensor shall accrue on the last day of such calendar year and be payable by Licensee no later than forty-five (45) days following the end of such calendar year:

 

Twelve (12) Months Ending

  

Minimum Annual Royalty

[***]

   [***]

[***]

   [***]

[***]

   [***]

 

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By way of illustration, if Licensee pays to Licensor during calendar year [***] a running royalty of [***], then not later than [***], Licensee shall pay to Licensor [***] to avoid being in breach of this Agreement.

4.1.5 One Royalty . Only one royalty shall be payable to Licensor hereunder for each sale of a Licensed Product, notwithstanding that more than one patent or patent claim reads upon such Licensed Product and/or such Licensed Product embodies or was made using one or more aspects of Licensed Technology.

4.2 Payment, Conversion and Withholding .

4.2.1 Payment . All payments hereunder shall originate in the United States and be made in United States dollars. Licensor hereby directs that all payments, save payments for services and expense reimbursement as contemplated by Section 3.2, be divided as follows and paid by wire transfer or other means reasonably selected by the payee to the following persons or as they shall direct from time to time:

 

[***]

   [***]

[***]

   [***]

4.2.2 Conversion . Conversion of foreign currency to United States dollars shall be made at the conversion rate existing in the United States (as reported in The Wall Street Journal ) on the last business day of the quarter immediately preceding the applicable calendar quarter. If The Wall Street Journal ceases to be published, then the rate of exchange to be used shall be that reported in such other business publication of national circulation in the United States as the Parties reasonably agree.

4.2.3 Tax Withholding; Restrictions on Payment . All taxes, assessments and fees of any nature levied or incurred on account of any payments from Licensee to Licensor accruing under this Agreement, by national, state or local governments, will be assumed and paid by Licensee, except taxes levied thereon as income to Licensor and if such taxes are required by applicable law to be withheld by Licensee they will be deducted from payments due to Licensor and will be timely paid by Licensee to the proper taxing authority for the account of Licensor, a receipt or other proof of payment therefore secured and sent to Licensor as soon as practicable. Licensee shall remit all payments to Licensor hereunder from within the United States.

4.3 Records Retention; Review .

4.3.1 Royalties . Licensee shall keep accurate books and accounts of the computation of the number of Licensed Products sold and the Net Sales of Licensee, its Affiliates and Sublicensees of Licensed Products, and shall cause such Affiliates and Sublicensees to keep such records of their respective sales of Licensed Products and Net Sales of Licensed Products, in sufficient detail to permit accurate determination of all figures necessary for verification of payments required to be paid hereunder, which books and accounts shall be maintained for at least three (3) years from the end of the calendar year to which they pertain.

 

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4.3.2 Review . At the request of Licensor, which shall not be made more frequently than once per calendar year during the Term, on a business day designated by Licensor upon at least thirty (30) days’ prior written notice to Licensee, Licensee shall permit, under confidentiality obligations with terms substantially the same as those hereunder, an independent certified public accountant reasonably selected by Licensor and reasonably acceptable to Licensee to inspect (during regular business hours) the relevant records required to be maintained by Licensee under Subsection 4.3.1. In the event such inspection reveals an underpayment, such underpayment shall be due and payable by Licensee within thirty (30) days of the date of such inspection, together with interest thereon from the date the amount due but unpaid was first due until the date paid, at the lower of 12% per annum or the maximum rate permitted by applicable law. Such inspection shall be at the expense of Licensor unless there is an underpayment that differs by greater than five percent (5%) from the amount that was otherwise due, in which event Licensee shall also pay the reasonable costs of the inspection. The foregoing is without prejudice to the right of Licensee to dispute the conclusion of the accountant, but such dispute shall not relieve Licensee of its obligation to pay interest and, under the circumstances described, costs of inspection as to amount actually due.

4.4 Matters Related to the Issuance of Common Stock.

4.4.1 Representations, Warranties and Certain Covenants of the Licensee . The Licensee represents, warrants and covenants that:

(a) Assuming the covenant of Licensor contained in Subsection 4.4.2 of this Agreement is complied with, the issuance to Licensor of each share of Common Stock (all shares so issued the “Shares”) will be in compliance with all applicable federal and state securities laws in connection with the offer, issuance and sale of the securities.

(b) The execution, delivery and performance of this Agreement by Holdings, the issuance and sale of the Shares and the consummation by Holdings of the other transactions by it contemplated hereby do not and will not on the date of the issuance and sale of the Shares(i) conflict with or violate any provision of Holdings’ or any of its subsidiaries certificates or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any lien or encumbrance upon any of the properties or assets of Holdings or any of its subsidiaries, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument or other understanding to which Holdings or any of its subsidiaries is a party or by which any property or asset of Holdings or any such subsidiary is bound or affected, in each case with respect to this Subsection (ii), to a degree that would have a material adverse effect on the assets or results of operations of Holdings or its subsidiaries when considered as a whole (a “Material Adverse Effect”), or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which Holdings or any such subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of Holdings or any such subsidiary is bound or affected, in each case with respect to this Subsection (iii), to a degree that would have a Material Adverse Effect.

 

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(c) Prior to the issuance of the Shares, Holdings shall obtain all consents, approvals, orders, authorizations or registrations, qualifications, designations, declarations, and make all filings or registrations with any court or other federal, state, local or other governmental authority or other person that is required in order to issue the Shares.

(d) The Shares, when issued in accordance herewith, will be (i) duly authorized, (ii) duly and validly issued, (iii) fully paid and nonassessable, and (iv) free and clear of all liens imposed by Holdings, other than restrictions on transfer provided for herein.

(e) At all times prior to the second anniversary of the last issuance of the Shares during which there are Shares outstanding which have not been previously (i) sold or transferred to or through a broker or dealer or underwriter in a public distribution, or (ii) sold or transferred in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the “Securities Act”), in the case of either Subsection (i) or Subsection (ii) in such a manner that, upon the consummation of such sale or transfer, all transfer restrictions and restrictive legends with respect to such Shares are removed upon the consummation of such sale or transfer, Holdings shall use its commercially reasonable efforts to: (1) comply with the requirements of Rule 144(c) under the Securities Act with respect to current public information about Holdings, and (2) furnish to the Licensor such non-publicly available reports and documents of Holdings as Licensor may reasonably request to avail itself of Rule 144 of the Securities Act, or any similar rule or regulation of the United States Securities Exchange Commission allowing Licensor to sell the Shares without registration.

4.4.2 Representations and Warranties of the Licensor . The Licensor represents and warrants that (i) it is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D of the Securities Act; (ii) it is acquiring the Shares for investment for the Licensor’s own account and not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, without prejudice, however, to Licensor’s right to at all times to sell or otherwise dispose of any or all of the Shares so issued in compliance with applicable federal and state securities laws and (iii) it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of such Shares.

4.4.3 Restrictions on the Shares . Licensor understands and agrees that the Shares may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Shares or any available exemption from registration under the Securities Act, the Shares must be held indefinitely. The Licensor agrees and acknowledges that the following legend will be placed on the back of any certificate evidencing the Shares:

“THE SECURITIES REPRESENTED HEREBY HAVE NOT

BEEN REGISTERED UNDER THE SECURITIES ACT OF

1933, AS AMENDED, AND MAY NOT BE SOLD,

TRANSFERRED, ASSIGNED OR HYPOTHECATED

UNLESS THERE IS AN EFFECTIVE REGISTRATION

STATEMENT UNDER SUCH ACT COVERING SUCH

SECURITIES, THE SALE IS MADE IN ACCORDANCE

 

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WITH RULE 144 UNDER THE ACT, OR THE

CORPORATION RECEIVES AN OPINION OF COUNSEL

FOR THE HOLDER OF THESE SECURITIES

REASONABLY SATISFACTORY TO THE

CORPORATION, STATING THAT SUCH SALE,

TRANSFER, ASSIGNMENT OR HYPOTHECATION IS

EXEMPT FROM THE REGISTRATION AND

PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.”

4.4.4 Limitation on the Number of Shares Issued . Notwithstanding anything to the contrary in this Agreement, in no event shall the aggregate number of Shares issued pursuant to this Agreement be greater than 19.9% of the number of shares of Common Stock outstanding on the Effective Date. In the event that an issuance of Shares pursuant to this Agreement would cause an aggregate issuance of Shares that is more than 19.9% of the number of shares Common Stock outstanding on the Effective Date, the Licensee shall make a cash payment to the Licensor equal to the difference between cash value of the Shares that were scheduled to be issued pursuant to this Agreement, and the value of the Shares that were actually issued after giving effect to the limitation set forth in this Section 4.4.4.

5. TREATMENT OF CONFIDENTIAL INFORMATION

5.1 Confidential Obligations . Licensor and Licensee each recognize that the other Party’s Confidential Information constitutes highly valuable and proprietary confidential information. Licensor and Licensee each agree that during the Term and for [***] thereafter, it will keep confidential, and will cause its employees, consultants, Affiliates and sublicensees to keep confidential, all Confidential Information of the other Party. Neither Licensor nor Licensee nor any of their respective employees, consultants, Affiliates or sublicensees shall use Confidential Information of the other Party for any purpose whatsoever other than exercising any rights granted to it or reserved by it hereunder. Without limiting the foregoing, each Party may disclose information to the extent such disclosure is reasonably necessary to (a) file, prosecute or defend litigation in accordance with the provisions of this Agreement or (b) comply with applicable laws, regulations (including those of the United States Securities Exchange Commission) or court orders; provided, however, that if a Party is required to make any such disclosure of the other Party’s Confidential Information in connection with any of the foregoing, it will give reasonable advance notice to the other Party of such disclosure requirement and will use reasonable efforts to cooperate with such other Party in efforts to secure confidential treatment of such information required to be disclosed. Each Party agrees that any Confidential Information disclosed by a Party under that certain Mutual Confidentiality Agreement between the Parties dated the 2nd day of July 2007 shall be protected by the obligations set forth therein through the date hereof and from and after the date hereof shall be protected by the obligations as to Confidential Information set forth herein so as to be continuously protected.

5.2 Limited Disclosure and Use . Licensor and Licensee each agree that any disclosure of the other Party’s Confidential Information to any officer, employee, consultant or agent of the other Party or any of its Affiliates or Sublicensees shall be made

 

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only if and to the extent necessary to carry out its rights and responsibilities under this Agreement, shall be limited to the maximum extent possible consistent with such rights and responsibilities and shall only be made to the extent any such persons are bound by written confidentiality obligations to maintain the confidentiality thereof and not to use such Confidential Information except as expressly permitted by this Agreement. Licensor and Licensee each further agree not to disclose or transfer the other Party’s Confidential Information to any Third Parties under any circumstance without the prior written approval from the other Party (such approval not to be unreasonably withheld), except as otherwise required by law, and except as otherwise expressly permitted by this Agreement. Each Party shall take such action, and shall cause its Affiliates or Sublicensees to take such action, to preserve the confidentiality of each other’s Confidential Information as it would customarily take to preserve the confidentiality of its own Confidential Information, using, in all such circumstances, not less than reasonable care. Each Party, upon the request of the other Party, will return all the Confidential Information disclosed or transferred to it by the other Party pursuant to this Agreement, including all copies and extracts of documents and all manifestations in whatever form, within sixty (60) days of such request or, if earlier, the termination or expiration of this Agreement; provided however, that a Party may retain (i) any Confidential Information of the other Party relating to any license which expressly survives such termination, and (ii) one (1) copy of all other Confidential Information in inactive archives in legal counsel’s files solely for the purpose of establishing the contents thereof.

5.3 Publicity . Neither Party may publicly disclose the existence or terms or any other matter of fact regarding this Agreement without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed; provided, however, that either Party may make such a disclosure (i) to the extent required by law or by the requirements of any nationally recognized securities exchange, quotation system or over-the-counter market on which such Party has its securities listed or traded, or (ii) with respect to Licensee, to any prospective Sublicensees, or to investors, prospective investors, lenders and other potential financing sources, who are obligated to keep such information confidential. The Parties, upon the execution of this Agreement, will mutually agree to a press release with respect to this transaction for publication. Once such press release or any other written statement is approved for disclosure by both Parties, neither Party may make subsequent public disclosure of the contents of such statement without the further approval of the other Party.

5.4 Use of Name . Neither Party shall employ or use the name of the other Party in any promotional materials or advertising without the prior express written permission of the other Party.

6. PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF PATENT RIGHTS

6.1 Patent Filing, Prosecution and Maintenance as to Licensed Patent Rights . Subject to its right of abandonment or other forfeiture, Licensor shall be responsible, at its cost, for preparing, filing and prosecuting the patent applications listed in Schedule A , and available foreign counterparts to such patent applications in [***] using patent counsel reasonably chosen by Licensor (which in any event includes Levine Bagade Han LLP), and for maintaining any patents obtained thereon. Licensor shall keep Licensee reasonably appraised as to the preparation, filing, prosecution and maintenance (collectively, the

 

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“Prosecution”) of each such patent application. Licensor agrees to send Licensee copies of all file histories and Prosecution documents for each of the patent applications of the Licensed Patent Rights, within thirty (30) days of receipt by Licensor. Licensor shall have the right in its discretion to abandon or otherwise cause or allow to be forfeited, any Licensed Patent Rights (each a “Discontinued Patent”). Licensor shall give Licensee at least sixty (60) days written notice (a “Discontinuation Notice”) prior to abandonment or other forfeiture of any such Discontinued Patent (the “Discontinuation Notice Period”) so as to permit Licensee to exercise its rights under Section 6.3.

6.2 Requests for Other Patent Filing, Prosecution and Maintenance . Licensee may reasonably request that Licensor seek patent protection of the Licensed Patent Rights and/or Licensed Technology in addition to that contemplated by Section 6.1 by written notice to Licensor.

6.3 Right to Effect Other Patent Filing, Prosecution and Maintenance . Subject to any right of another licensee with respect to all or part of the Licensed Patent Rights or Licensed Technology existing as of the Effective Date, as to any Discontinued Patent or as to any patent with respect to which Licensor refuses in its discretion to seek such additional patent protection in response to a request from Licensee in accordance with Section 6.2 (a “Refused Patent”), Licensee shall have the right, but not the obligation, to give Licensor notice of its intent to continue the Prosecution of such Discontinued Patent or Refused Patent. Subject to any right of another licensee with respect to all or part of the Licensed Patent Rights or Licensed Technology existing as of the Effective Date, if Licensee gives such notice to Licensor, Licensor shall continue to Prosecute the Discontinued Patent or Refused Patent at the reasonable direction of Licensee. Licensee shall pay to Licensor its pro rata share of Prosecution costs (based on the number of licensees after the Effective Date, including the Licensee and any licensees that acquire rights to the Licensed Patent Rights and Licensed Technology after the Effective Date, but specifically not including any licensee of the Licensed Patent Rights and Licensed Technology prior to the Effective Date, or any licensee that opts out of making its pro-rata payment to Prosecute a Discontinued Patent or Refused Patent), which will be divided equally between Licensee and all such non-excluded licensees that have acquired rights to exploit such Discontinued Patent or Refused Patent and have not opted out. Other than with respect to any licensee of the Licensed Patents right that has entered into a license agreement prior to the Effective Date, if any licensee to the Discontinued Patent or Refused Patent, including Licensee, opts not to support continued Prosecution or does not pay its pro rata share of the costs of Prosecution (based on the number of licensees after the Effective Date, including the Licensee and any licensees that acquire rights to the Licensed Patent Rights and Licensed Technology after the Effective Date, but specifically not including any licensee of the Licensed Patent Rights and Licensed Technology prior to the Effective Date, or any licensee that opts out of making its pro-rata payment to Prosecute a Discontinued Patent or Refused Patent), such licensee shall have no further rights or licenses to exploit the Discontinued Patent or Refused Patent. The Licensor shall covenant that any licenses granted to exploit the Licensed Patent Rights after the Effective Date shall contain language regarding Discontinued Patents or Refused Patents that is materially identical to the foregoing language set forth in this Section 6.3. Licensee shall have the right to deduct from Net Sales, on a country-by-country basis, [***] of the

 

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amount of such costs paid to Licensor by Licensee to Prosecute each such Discontinued Patents and Refused Patents that Licensee has filed in such country in the name of Licensor. All such Discontinued Patents or Refused Patents filed by Licensee in the name of Licensor shall be included in the Licensed Technology. Nothing in this Section 6.3 shall be deemed to limit Licensor’s right to file, Prosecute or maintain patent applications at its own expense in any country.

6.4 Notice of Infringement or Claims . If, during the Term, either Party learns of any (i) actual, alleged or threatened infringement by a Third Party of any Licensed Patent Rights or Licensed Technology, (ii) attack on the enforceability or validity of any Licensed Patent Rights or Licensed Technology, or (iii) claim by a Third Party alleging that the development or commercialization of a Licensed Product infringes or otherwise violates the intellectual property rights of such Third Party, then such Party shall promptly notify the other Party of the same and shall provide such other Party with available details as to and evidence of such infringement, suit or claim.

6.5 Infringement . Licensor shall have the exclusive right but not the obligation to claim and take legal action against, in its own name to the extent permissible by law, third parties for infringement or misappropriation of any Licensed Patent Rights or Licensed Technology. If Licensee is requested by Licensor to join a lawsuit under this subparagraph, whether or not Licensee is considered to be an indispensable party, it shall so join.

6.6 Certain Patent Filing, Prosecution and Maintenance as to Exclusive Design . Subject to its right of abandonment or other forfeiture, Licensor shall be responsible, at its cost, for preparing, filing and Prosecuting the patent applications as it determines, after consultation with Licensee, is commercially reasonable in relation to technology associated with the Exclusive Design using patent counsel reasonably chosen by Licensor (which in any event includes Levine Bagade Han LLP), and for maintaining any patents obtained thereon (each a “Design Patents ”). Licensor shall keep Licensee reasonably apprised as to the prosecution of each such patent application. Licensor agrees to send Licensee copies of all file histories and prosecution documents for each of the patent applications of the Design Patents, within thirty (30) days of receipt by Licensor. Licensor shall have the right in its discretion to abandon or otherwise cause or allow to be forfeited, any patent or application therefore in relation to technology associated with the Exclusive Design (each a “ Design Discontinued Patent ”). Licensor shall give Licensee at least sixty (60) days written notice prior to abandonment or other forfeiture of any such Design Discontinued Patent so as to permit Licensee to exercise its rights under Section 6.8.

6.7 Requests for Other Patent Filing, Prosecution and Maintenance . Licensee may reasonably request that Licensor seek patent protection as to the Exclusive Design in addition to that contemplated by Section 6.6 by written notice to Licensor.

6.8 Right to Effect Other Patent Filing, Prosecution and Maintenance . As to any Design Discontinued Patent or as to any patent with respect to which Licensor refuses in its discretion to seek such additional patent protection in response to a request from Licensee in accordance with Section 6.7 (a “Design Refused Patent”), Licensee shall have the right, but not the

 

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obligation, to file, in the name of Licensor, for protection as to such Design Discontinued Patent or Design Refused Patent. Licensee shall bear all costs associated with the preparation, filing, Prosecuting and maintenance of all such Design Discontinued Patents and Design Refused Patents; provided that Licensee shall have the right to deduct from Net Sales, on a country-by-country basis, [***] of the amount of such costs borne by Licensee with respect to each such Design Discontinued Patents and Design Refused Patents that Licensee has filed in such country in the name of Licensor. All such Design Discontinued Patents or Design Refused Patents filed by Licensee in the name of Licensor shall be included in the Licensed Technology. Nothing in this Section 6.8 shall be deemed to limit Licensor’s right to file, prosecute or maintain patent applications at its own expense in any country.

6.9 Notice of Infringement or Claims . If, during the Term, either Party learns of any (i) actual, alleged or threatened infringement by a Third Party of any Design Patent, (ii) attack on the enforceability or validity of any Design Patent, or (iii) claim by a Third Party alleging that the development or commercialization of a Licensed Product embodying the Exclusive Design infringes or otherwise violates the intellectual property rights of such Third Party, then such Party shall promptly notify the other Party of the same and shall provide such other Party with available details as to and evidence of such infringement, suit or claim.

6.10 Infringement of Design Patents . Licensee shall have the first right (but not the obligation), at its own expense and with legal counsel of its own choice, to bring suit (or take other appropriate legal action) against any actual, alleged or threatened infringement of any Design Patent in the Licensed Field. Such right includes the right to settle the infringement claim, provided that such settlement may not encompass matters beyond the scope of the license grant set forth in Section 2.1.2 and if such settlement would include Licensee’s agreement to the invalidity or unenforceability of any claim within any Design Patent, Licensor must first approve in writing such settlement, which approval shall not be unreasonably withheld. Any damages, monetary awards or other amounts recovered, whether by judgment or settlement, pursuant to any suit, proceeding or other legal action taken by Licensee under this Section 6.10, shall applied as follows:

(a) first, to reimburse the cost of Licensee for its reasonable costs and expenses (including reasonable attorneys’ fees and costs) incurred in prosecuting such enforcement action;

(b) second, to reimburse the costs of Licensor for its reasonable costs and expenses (including reasonable attorneys’ fees and costs) incurred in such enforcement action;

(c) third, to Licensee in reimbursement for lost sales associated with Licensed Products and to Licensor in reimbursement for lost royalties, it being agreed that for such purpose such lost sales shall equate to Net Sales; and

(d) fourth, any amounts remaining shall be allocated to each Party on a pro rata basis based on each Party’s losses attributable to the infringement.

 

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If Licensee brings any such action or proceeding hereunder, Licensor agrees to be joined as party plaintiff if necessary to prosecute such action or proceeding, and to give Licensee reasonable assistance and authority to file and prosecute the suit. Licensee shall bear Licensor’s costs, including costs of responding to discovery, arising from involvement in such action or proceeding as and when incurred, subject to clause (a) of this Section 6.10; provided that in the event Licensor elects to actively participate in such action by counsel of Licensor’s own choice, the incremental expense thereof shall be Licensor’s, subject to clause (b) of this Section 6.10. In no event shall Licensor being a party to or represented in any such action by Licensee affect the right of Licensee to control the suit as described in the first sentence of this Section 6.10. If Licensee fails to take any action it is permitted to take by this Section 6.10 to obtain a discontinuance of such infringement or to bring suit against the infringer within four (4) months of having knowledge of such infringement, Licensor shall have the right but not the obligation to enforce the Design Patents at its expense and for its sole benefit. For the avoidance of doubt, neither Licensee’s nor Licensor’s failure to enforce any Design Patent in any way affects the rights granted to or responsibilities of Licensee under the Agreement.

7. REPRESENTATIONS AND WARRANTIES

7.1 Representations and Warranties of Licensor . As of the Effective Date, Licensor represents and warrants to Licensee as follows:

7.1.1 it owns and controls the Licensed Patents Rights and Licensed Technology and has the right to grant the non-exclusive licenses within the Licensed Field free and clear of all encumbrances, and no Third Party has notified Licensor that the Third Party is claiming any ownership of or right to the Licensed Patents Rights or Licensed Technology;

7.1.2 it has not received any notice of invalidity or infringement of any of the Licensed Patent Rights or Licensed Technology; and

7.1.3 it is not a party to any agreements which would be inconsistent with the licenses granted herein or the exercise of the license granted under this Agreement.

7.2 Representations and Warranties of each Party and Holdings . As of the Effective Date, each Party and Holdings represents and warrants as follows:

7.2.1 the execution, delivery and performance of this Agreement will not constitute a violation, be in conflict with, or result in a breach of any agreement or contract to which it is bound;

7.2.2 it is a corporation or entity duly organized and validly existing under the laws of the state or other jurisdiction of incorporation or formation;

7.2.3 the execution, delivery and performance of this Agreement by it has been duly authorized by all requisite corporate action and do not require any shareholder action or approval;

7.2.4 it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and

7.2.5 it shall at all times comply with all applicable material laws and regulations relating to its activities under the Agreement

 

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7.3 No Warranties . Nothing in this Agreement is or shall be construed as a warranty or representation that anything made, used, sold or otherwise disposed of under any license granted pursuant to this Agreement is or will be free from infringement of patents, copyrights, and other rights of Third Parties. EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 7, EACH PARTY EXCLUDES ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING AMONG SUCH EXCLUDED REPRESENTATIONS AND WARRANTIES ANY AND ALL REPRESENTATIONS OR WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

8. INDEMNIFICATION

8.1 Indemnification .

8.1.1 Licensee Indemnity . Licensee shall indemnify, defend and hold harmless Licensor, its Affiliates and their respective directors, officers, employees, stockholders and agents and their respective successors, heirs and assigns (the “Licensor Indemnitees”) from and against any claims, liability, damage, loss or expense (including reasonable attorneys’ fees and expenses of litigation) incurred by or imposed upon such Licensor Indemnitee, or any of them, in connection with any Third Party claims, suits, actions, demands or judgments to the extent arising out of or related to (i) the design, development, testing, production, manufacture, supply, promotion, marketing, importation, sale, use or instructions for use of any Licensed Product (or any component thereof) manufactured or sold by Licensee or any Affiliate or Sublicensee under this Agreement, including without limitation any claims that (a) the design of any Licensed Product by Licensee infringed the intellectual property right of any Third Party or (b) any Licensed Product manufactured or sold by Licensee or any Affiliate or Sublicensee under this Agreement caused the death of any person or any injury to any person or property, (ii) any material breach of any representation or warranty by Licensee in Article 7 of this Agreement.

8.1.2 Licensor Indemnity . Licensor shall indemnify, defend and hold harmless Licensee, its Affiliates and their respective directors, officers, employees, stockholders and agents and their respective successors, heirs and assigns (the “Licensee Indemnitees”) from and against any claims, liability, damage, loss or expense (including reasonable attorneys’ fees and expenses of litigation) incurred by or imposed upon such Licensee Indemnitee, or any of them, in connection with any Third Party claims, suits, actions, demands or judgments to the extent arising out of any material breach of any representation or warranty by Licensor in Article 7 of this Agreement.

8.2 Indemnification Procedures . In the event that any Indemnitee is seeking indemnification under Section 8.1 above from a Party (the “Indemnifying Party”), the Indemnitee shall notify the Indemnifying Party of such claim with respect to such Indemnitee as soon as reasonably practicable after the Indemnitee receives notice of the claim, and the Party seeking indemnification, on behalf of itself and such Indemnitee, shall permit the Indemnifying Party to assume direction and control of the defense of the claim (including the right to settle the claim solely for monetary consideration) and shall cooperate as requested (at the expense of the Indemnifying Party) in the defense of the claim. The indemnification obligations under

 

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Article 8 shall not apply to any harm suffered as a direct result of any delay in notice to the Indemnifying Party hereunder or to amounts paid in settlement of any claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnifying Party, which consent shall not be withheld or delayed unreasonably. The Indemnitee, its employees and agents, shall reasonably cooperate with the Indemnifying Party and its legal representatives in the investigation of any claim, demand, action or other proceeding covered by Section 8.1.

9. TERM AND TERMINATION

9.1 Expiration . The term of this Agreement shall commence on the Effective Date and expire twenty (20) years after the First Commercial Sale (the “Term”). Following the Term, Licensee shall have a fully paid-up, irrevocable, freely transferable and sublicensable license in the Territory under the Licensed Patent Rights and Licensed Technology, to develop, have developed, make, have made, use, have used, sell, have sold, offer for sale, import and have imported any and all Licensed Products in the Licensed Field.

9.2 Termination Rights for Breach and Voluntary Termination .

9.2.1 Termination for Breach . Subject to the other terms of this Agreement, this Agreement and the rights granted herein may be terminated by either Party upon any material breach by the other Party of any material obligation or condition, effective ninety (90) days after giving written notice to the breaching Party of such termination, which notice shall describe such breach in reasonable detail. The foregoing notwithstanding, if such material breach is cured or remedied or shown to be non-existent or not to be material within the aforesaid ninety (90) day period, the notice shall be automatically withdrawn and of no effect.

9.2.2 Voluntary Termination . Licensee shall have the right to terminate this Agreement effective as of the first day of any calendar year upon not less than ninety (90) days prior written notice to Licensor.

9.3 Effects of Termination .

9.3.1 Certain Effects of Termination . Upon any termination of this Agreement: (i) as of the effective date of such termination all relevant licenses and sublicenses granted by Licensor to Licensee hereunder, and any sublicense granted by Licensee to any Sublicensee, shall terminate automatically, (ii) all payment or other rights or obligations accrued hereunder prior to termination shall survive the expiration or termination of the Term; (iii) except in respect of a termination by Licensor under Subsection 9.2.1, Licensee and its Affiliates and Sublicensees shall have the right, for nine (9) months or such longer time period as upon which the Parties mutually agree in writing, to sell or otherwise dispose of all finished Licensed Products then on hand, with royalties to be paid to Licensor on all Net Sales of such Licensed Products as provided for in this Agreement; and (iv) by Licensor under Subsection 9.2.1 or by Licensee under Subsection 9.2.2 (other than because Licensee shall have reasonably concluded that notwithstanding its commercially reasonable efforts, no commercially viable Licensed Product is developable and marketable) Licensee shall not, nor shall it permit its Affiliates to, for a period of [***] following such termination in the event such termination is effective prior to the First Commercial

 

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Sale and for a period of [***] following such termination in the event such termination is effective on or after the First Commercial Sale, engage in any business anywhere in the Territory, whether as a sole proprietor, partner, shareholder, consultant, agent, independent contractor, trustee or otherwise, to hold any beneficial interest in any business, incorporated or otherwise, which designs, develops, tests, produces, manufactures, supplies, promotes, markets, imports or sells any product in the Licensed Field that are similar to the Exclusive Design (a “Competing Business”), derive any income from any interest in a Competing Business, or provide any service or assistance to a Competing Business; provided that the foregoing will not restrict Licensee from owning a passive interest of less than five percent (5.0%) of the outstanding stock of a corporation engaged in a Competing Business.

9.4 Remedies . Except as otherwise expressly set forth in this Agreement, the termination provisions of this Article 9 are in addition to any other relief and remedies available to either Party at law.

9.5 Surviving Provisions . Notwithstanding any provision herein to the contrary, the rights and obligations of the Parties set forth in Subsections 3.1.1 (with respect to Licensee’s ownership of Technology), Sections 3.3, 3.4, 4.3, 7.3, 9.3, 9.4, 9.5 and Articles 5, 8, 10, and 11 (to the extent relevant) shall survive the expiration or termination of this Agreement.

10. DISPUTES

10.1 Negotiation . The Parties recognize that a bona fide dispute as to certain matters may from time to time arise during the term of this Agreement that relates to either Party’s rights and/or obligations hereunder. In the event of the occurrence of such a dispute, either Party may, by written notice to the other Party, have such dispute referred to their respective senior officials designated below or their successors, for attempted resolution by good faith negotiations within sixty (60) days after such notice is received. Said designated senior officials are as follows:

For Licensee: President and Chief Executive Officer

For Licensor: Chief Executive Officer

In the event the designated senior officials are not able to resolve such dispute within the sixty (60) day period, either Party may invoke the provisions of Section 10.2.

10.2 Arbitration . Subject to Section 10.1, any dispute, controversy or claim initiated by either Party arising out of, resulting from or relating to this Agreement, or the performance by either Party of its obligations under this Agreement (other than bona fide Third Party actions or proceedings filed or instituted in an action or proceeding by a Third Party against a Party), whether before or after termination of this Agreement, shall be finally resolved by binding arbitration. Whenever a Party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other Party. Any such arbitration shall be conducted under the Commercial Arbitration Rules of the American Arbitration Association by one arbitrator appointed in accordance with such rules. Any such arbitration shall be held in New York, New York. The method and manner of discovery in any such arbitration proceeding shall be governed by the laws of the State of New York. The arbitrator shall have the authority

 

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to grant injunctions and/or specific performance and to allocate between the parties the costs of arbitration in such equitable manner as they determine. Judgment upon the award so rendered may be entered in any court having jurisdiction or application may be made to such court for judicial acceptance of any award and an order of enforcement, as the case may be. In no event shall a demand for arbitration be made after the date when institution of a legal or equitable proceeding based upon such claim, dispute or other matter in question would be barred by the applicable statute of limitations. Notwithstanding the foregoing, either Party shall have the right, without waiving any right or remedy available to such Party under this Agreement or otherwise, to seek and obtain from any court of competent jurisdiction any interim or provisional relief that is necessary or desirable to protect the rights or property of such Party, pending the selection of the arbitrators hereunder or pending the arbitrators’ determination of any dispute, controversy or claim hereunder.

11. MISCELLANEOUS

11.1 Notification . All notices, requests and other communications hereunder shall be in writing, shall be addressed to the receiving Party’s address set forth below or to such other address as a Party may designate by notice hereunder, and shall be either (i) delivered by hand, (ii) sent by nationally-recognized overnight courier service providing evidence of receipt, or (iii) sent by registered or certified mail, return receipt requested, postage prepaid. The addresses and other contact information for the parties are as follows:

 

If to Licensor:   

Stout Medical Group LP

410 East Walnut Street, Suite #8,

Perkasie, Pennsylvania 18944

(215) 450-8860 (ext. 102)

Attn: Chief Executive Officer

With a copy to:    [***]
With a copy to:   

Oppenheimer Wolff & Donnelly

Plaza VII Building, Suite 3300

45 South Seventh Street

Minneapolis, Minnesota 55402

(612) 607-7397

Attn: Dennis P. Whelpley

If to Licensee:   

Alphatec Spine, Inc.

2051 Palomar Airport Road, Suite 100

Carlsbad, CA 92011

(760) 431-9286 (ext. 169)

Attn: President and CEO

With a copy to:   

Heller Ehrman LLP

Times Square Tower

7 Times Square

New York, New York 10036

 

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Attention: Blaine Templeman

Telephone: (212) 847-8572

Fax: (212) 763-7600

Email: blaine.templeman@hellerehrman.com

All notices, requests and other communications hereunder shall be deemed to have been given either (i) if by hand, at the time of the delivery thereof to the receiving Party at the address of such Party set forth above, (ii) if made by telecopy or facsimile transmission, at the time that receipt thereof has been acknowledged by the recipient, (iii) if sent by nationally-recognized overnight courier, on the day such notice is delivered to the recipient, or (iv) if sent by registered or certified mail, on the fifth (5 th ) business day following the day such mailing is made.

11.2 Governing Law . This Agreement will be construed and interpreted in accordance with the laws of the State of New York.

11.3 Limitations . Except as expressly set forth in this Agreement, neither Party grants to the other Party any right or license to any of its intellectual property.

11.4 Entire Agreement . This is the entire Agreement between the Parties with respect to the subject matter hereof and supersedes all prior representations, understandings and agreements between the Parties with respect to the subject matter hereof. No modification shall be effective unless in writing with specific reference to this Agreement and signed by the Parties. No modification shall be effective unless in writing with specific reference to this Agreement and signed by the Parties. No modification shall be effective unless in writing with specific reference to this Agreement and signed by the Parties; provided that no modification to this Agreement may be made without the prior written consent of Hawk Healthcare, LLC if such modification both: (i) will materially and adversely affect the stream of payments made directly to Hawk Healthcare, LLC under Subsection 4.1 hereof and (ii) does not proportionately effect the parallel payments made to Licensor under such Subsection.

11.5 Waiver . The terms or conditions of this Agreement may be waived only by a written instrument executed by the Party waiving compliance. The failure of either Party at any time or times to require performance of any provision hereof shall in no manner affect its rights at a later time to enforce the same. No waiver by either Party of any condition or term shall be deemed as a continuing waiver of such condition or term or of another condition or term.

11.6 Headings . Section, Subsection and Paragraph headings are inserted for convenience of reference only and do not form part of this Agreement.

11.7 Assignment . Neither this Agreement nor any right or obligation hereunder may be assigned, delegated or otherwise transferred, in whole or part, by either Party without the prior express written consent of the other Party; provided that a Party may freely assign this Agreement, including all rights and obligations hereunder, at any time to any entity acquiring in the same transaction substantially all of such Party’s business and assets, including those to which this Agreement relates, whether by way of sale, merger, consolidation or other transaction without the prior written consent of the other Party. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Any purported assignment in violation of this Section 11.7

 

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shall be void. The terms and conditions of this Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of the parties.

11.8 Force Majeure . Neither Party shall be liable for failure of or delay in performing obligations set forth in this Agreement, and neither shall be deemed in breach of its obligations, for so long as and to the extent that such failure or delay is due to natural disasters or any causes beyond the reasonable control of such Party. In event of such force majeure, the Party affected thereby shall use reasonable efforts to cure or overcome the same and resume performance of its obligations hereunder.

11.9 Construction . The Parties hereto acknowledge and agree that: (i) each Party and its counsel reviewed and negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting Party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all Parties hereto and not in favor of or against any Party, regardless of which Party was generally responsible for the preparation of this Agreement.

11.10 Severability . If any provision(s) of this Agreement are or become invalid, are ruled illegal by any court of competent jurisdiction or are deemed unenforceable under then current applicable law from time to time in effect during the Term hereof, it is the intention of the Parties that the remainder of this Agreement shall not be affected thereby provided that a Party’s rights under this Agreement are not thereby materially diminished. The Parties hereto covenant and agree to renegotiate any such term, covenant or application thereof in good faith in order to provide a reasonably acceptable alternative to the term, covenant or condition of this Agreement or the application thereof that is invalid, illegal or unenforceable, it being the intent of the Parties that the basic purposes of this Agreement are to be effectuated.

11.11 Status . Nothing in this Agreement is intended or shall be deemed to constitute a partner, agency, employer-employee, or joint venture relationship between the Parties.

11.12 Section 365(n) . All licenses granted under this Agreement are deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to “intellectual property” as defined in Section 101 of such Code. The Parties agree that Licensee may fully exercise all of its rights and elections under the U.S. Bankruptcy Code, regardless of whether either Party files for bankruptcy in the United States or other jurisdiction.

11.13 Further Assurances . Each Party agrees to execute, acknowledge and deliver such further instructions, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement.

11.14 Counterparts . This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

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11.15 Guarantee and Agreement of Alphatec Holding, Inc. By its signature below, Holdings hereby guarantees the full and timely payment and performance of all obligations of Licensee under this Agreement and agrees to issue shares to Licensor consistent with the terms of this Agreement, including without limitation Section 4.4 hereof.

[remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the Parties and Holdings have caused this Agreement to be executed by their duly authorized representative.

 

ALPHATEC SPINE, INC.   STOUT MEDICAL GROUP, LP:
  By: Stout Medical Group, Inc.
  Its: General Partner
By:   /s/ Dirk Kuyper     By:   /s/ Tom Molz
  Name:   Dirk Kuyper       Name:   Tom Molz
  Title:   President and CEO       Title:   President and CEO

 

ALPHATEC HOLDINGS, INC.
By:   /s/ Dirk Kuyper
  Name:   Dirk Kuyper
  Title:   President and CEO

 

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Schedule A

Licensed Patent Rights

 

[***]

   [***]   [***]   [***]   [***]   [***]

[***]

   [***]   [***]   [***]   [***]   [***]

[***]

   [***]   [***]   [***]   [***]   [***]

[***]

   [***]   [***]   [***]   [***]   [***]

[***]

   [***]   [***]   [***]   [***]   [***]

[***]

   [***]   [***]   [***]   [***]   [***]

[***]

   [***]   [***]   [***]   [***]   [***]

 

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Schedule B

Licensor Assistance and Compensation

[***]

 

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Schedule C

Exclusive Design Concepts

[***]

 

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Exhibit 10.4

DEVELOPMENTAL CONSULTING AGREEMENT

This Developmental Consulting Agreement (the “Agreement”) is entered into as of March 3, 2007 (the “Effective Date”), by and among Alphatec Spine, Inc., a Delaware corporation with a principal place of business at 2051 Palomar Airport Road, Suite 100, Carlsbad, California 92011 (the “Company”), Stout Medical Group LP, a limited partnership company organized under the laws of the state of Delaware, and having a place of business at 410 East Walnut Street, Suite #8, Perkasie, Pennsylvania 18944 (“Service Provider”) and for purposes of Sections 3.2, 3.3, 11.14 and Article 7 hereof only Alphatec Holdings, Inc., a Delaware corporation with a principal place of business at 2051 Palomar Airport Road, Suite 100, Carlsbad, California 92008 (“Holdings”). Company and Service Provider are each hereafter referred to individually as a “Party” and together as the “Parties”.

WHEREAS, the Company desires to retain the Service Provider to render certain professional services to the Company and the Service Provider desires to be so retained by the Company and to perform the services specified herein, all in accordance with the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the premises, conditions and representations set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby mutually acknowledged, the Company and the Service Provider agree as follows:

1. DEFINITIONS

Whenever used in the Agreement with an initial capital letter, the terms defined in this Article 1 shall have the meanings specified.

1.1. “Affiliate” shall mean any company, corporation, partnership, limited liability company, trust, or other business entity that directly or indirectly controls, is controlled by, or is under common control with a designated person or entity, and for such purpose “control” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the entity, whether through the ownership of voting securities, by contract or otherwise.

1.2. “Common Stock” shall mean the common stock of Holdings, and any securities into which such common stock may hereafter be reclassified, converted or exchanged.

1.3. “Company Indemnitees” and “Service Provider Indemnitees” (each individually an “Indemnitee”) shall have the meaning given in Article 8.

1.4. “Confidential Information” shall mean with respect to a Party (the “Receiving Party”), all information which is disclosed by the other Party (the “Disclosing Party”) to the Receiving Party hereunder or to any of its employees, consultants, Affiliates, licensees or sublicensees, except to the extent that the Receiving Party can demonstrate by written record or other suitable physical evidence that such information, (a) as of the date of disclosure is demonstrably known to the Receiving Party or its Affiliates other than by virtue of a prior confidential disclosure to such Party or its Affiliates; (b) as of the date of disclosure is in, or subsequently enters, the public domain, through no fault or omission of the Receiving Party; (c) is obtained from a Third Party having a lawful right to make

 

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such disclosure free from any obligation of confidentiality to the Disclosing Party; or (d) is independently developed by or for the Receiving Party without reference to or reliance upon any Confidential Information of the Disclosing Party. Any information in relation to the subject matter of this Agreement disclosed by a Party under that certain Mutual Confidentiality Agreement between the parties dated the 2nd day of July, 2007 shall, subject to the foregoing exceptions, be considered Confidential Information for purpose of this Agreement.

1.5. “Existing FA Technology” shall have the meaning given in Subsection 5.2(a).

1.6. “FDA” shall mean the United States Food and Drug Administration and any successor agency or authority thereto.

1.7. “Filling Agent” shall mean a bioactive filling agent (either cadaveric or synthetic) designed to strengthen the Licensed Product.

1.8. “Guarantee and Agreement” shall mean the guarantee and agreement of Holdings set forth in Section 11.14 hereof.

1.9. “In-Field Products” shall have the meaning given in Section 5.3.

1.10. “Joint Inventions” shall have the meaning given in Section 5.3.

1.11. “License Agreement” shall mean that certain License Agreement as of even date herewith between the Parties relating to Company’s license of Technology in the Licensed Field from the Service Provider.

1.12. “Licensed Field” shall mean: (i) spinal interbody or intrabody body fusion using an expandable metallic interbody device; or (ii) spinal vertebral body replacement using an expandable metallic interbody device.

1.13. “Licensed Product” shall mean any product sold by Company, its Affiliates or Sublicensees that embodies or uses any aspect of the Licensed Patent Rights and/or the Licensed Technology (as such terms are defined in the License Agreement).

1.14. “Net Sales” shall mean the gross amount invoiced by or otherwise payable to the Company, any of its Affiliates or any Sublicensee on account of sales or other transfers of an In-Field Products anywhere in the Territory during a designated period (and for the avoidance of doubt if such In-Field Product is sold in kitted form, such gross amount invoiced shall include the amount invoiced for the entire kit and/or each component thereof), less to the extent otherwise then or previously included in amounts invoiced for such In-Field Product and in respect of which no previous deduction was taken:

1.13.1 trade, cash and quantity discounts or rebates actually allowed or taken on In-Field Products, including discounts or rebates to governmental or managed care organizations;

 

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1.13.2 credits or allowances actually given or made for rejection of, and for uncollectible amounts (except to the extent later collected) on, or return of previously sold In-Field Products;

1.13.3 any charges for insurance, freight, and other transportation costs directly related to the delivery of In-Field Products to the extent included in the gross invoiced sales price;

1.13.4 any tax, tariff, duty or governmental charge levied on the sales, transfer, transportation or delivery of an In-Field Products (including any tax such as a value added or similar tax or government charge), other than franchise or income tax of any kind whatsoever; and

1.13.5 any import or export duties or their equivalent borne.

“Net Sales” shall not include amounts invoiced by or otherwise payable to the Company, any of its Affiliates and/or any Sublicensees for In-Field Products sold or otherwise transferred to the Company or any of its Affiliates and/or its Sublicensees, unless the In-Field Products is consumed by the invoiced entity.

1.15. “Patent Analysis” shall have the meaning set forth in Exhibit B hereof.

1.16. “Restricted Stock Agreement” shall have the meaning set forth in Section 3.2 hereof.

1.17. “Services” shall have the meaning set forth in Section 2.1 hereof.

1.18. “Shares” shall have the meaning set forth in Paragraph. 3.4.1(a) hereof.

1.19. “Statement of Work” shall have the meaning set forth in Section 2.1 hereof.

1.20. “Sublicensee” shall mean any Third Party to whom Company grants a sublicense of some or all of the rights granted to Company under this Agreement.

1.21. “Technology” shall mean all of the following intangible legal rights, whether or not filed, perfected, registered or recorded, applicable to the Licensed Field: (i) inventions, patents, patent disclosures, patent rights, including any and all continuations, continuations-in-part, divisionals, reissues, reexaminations, utility models, industrial designs and design patents or any extensions thereof, (ii) rights associated with works of authorship, including without limitation, copyrights, copyright applications and copyright registrations and (iii) any and all proprietary ideas, inventions, discoveries, Confidential Information, data, results, formulae, designs, specifications, methods, processes, techniques, ideas, know-how, technical information (including, without limitation, structural and functional information), process information, pre-clinical information, clinical information, and any and all proprietary control and manufacturing data and materials, whether or not patentable.

1.22. “Term” shall have the meaning given in Section 9.1.

 

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1.23. “Territory” shall mean all countries and jurisdictions of the world.

1.24. “Third Party” shall mean any person or entity other than Company, Service Provider and their respective Affiliates.

1.25. “Triggering Event” shall mean FDA clearance of Licensed Product for marketing, irrespective of whether such Licensed Product employs a Filling Agent.

2. PROFESSIONAL SERVICES

2.1. Statement of Work . The Company hereby engages the Service Provider to provide professional services (the “Services”) set forth on Schedule A attached hereto (the “Statement of Work”), and the Service Provider hereby accepts such engagement. The Service Provider agrees to perform for the Company the Services, and to provide to the Company the work product set forth in Schedule A attached hereto. Schedule A may only be amended by mutual written agreement of the Parties.

2.2. Location and Access . Except as otherwise stated in the Statement of Work, the Service Provider shall perform the Services at the Service Provider’s premises or such other premises that the Company and the Service Provider may agree in writing.

2.3. Records and Reports . The Service Provider shall keep accurate written records of its activities under this Agreement and shall make such records available to the Company upon request. Unless otherwise stated in the Statement of Work, the Service Provider shall provide the Company with periodic written reports on such activities. The Service Provider shall also provide the Company with such other reports that the Company may periodically request during the term of this Agreement.

3. PAYMENTS TO THE SERVICE PROVIDER

3.1. Cash Remuneration . The Company shall pay the Service Provider five-hundred thousand dollars ($500,000) in cash in ten (10) monthly payments of fifty thousand dollars ($50,000) each (with the first such first retainer payment due thirty (30) days after the Effective Date, and each subsequent retainer payment due thirty (30) days thereafter) (the “Cash Retainer”); provided however, that in the event that a Triggering Event occurs prior to the date that all such ten monthly payments shall have been made, all then unpaid amounts of the Cash Retainer shall become due and payable within ten (10) business days. In the event that a Triggering Event has not occurred on or before [***] from the Effective Date, the Service Provider shall remit to the Company the aggregate amount of the Cash Retainer actually paid to the Service Provider plus three percent (3.0%) per annum of such amount.

3.2. Restricted Common Stock . Within thirty (30) days of the Effective Date Holdings shall issue five-hundred thousand dollars ($500,000) in shares of restricted Common Stock, with a price per share of Common Stock for such purpose equal to the average per share NASDAQ Close/NASDAQ Official Closing Price (as defined by NASDAQ) or a defined successor closing price (designated by NASDAQ) on the fifteen (15) trading days prior to the date of issuance; provided that if on any such trading day the Common Stock shall not be listed on the NASDAQ national exchange or a similar national securities exchange, then Service Provider shall receive [***] in cash in lieu of such shares of restricted Common Stock. The Common Stock shall be subject to a restricted stock agreement in substantially the form of Schedule B (the “Restricted Stock Agreement”) which each Party agrees it shall execute concurrently with the issuance of such Common Stock and which Agreement shall be dated as of the date of such issuance.

 

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3.3. Matters Related to the Issuance of Common Stock .

3.3.1. Representations, Warranties and Certain Covenants of the Company . The Company represents, warrants and covenants that:

(a) Assuming the covenant of Service Provider contained in Subsection 3.3.2 of this Agreement is complied with, the issuance to Service Provider of each share of Common Stock (all shares so issued the “Shares”) will be in compliance with all applicable federal and state securities laws in connection with the offer, issuance and sale of the securities.

(b) The execution, delivery and performance of this Agreement by Holdings, the issuance and sale of the Shares and the consummation by Holdings of the other transactions by it contemplated hereby do not and will not on the date of the issuance and sale of the Shares(i) conflict with or violate any provision of Holdings’ or any of its subsidiaries certificates or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any lien or encumbrance upon any of the properties or assets of Holdings or any of its subsidiaries, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument or other understanding to which Holdings or any of its subsidiaries is a party or by which any property or asset of Holdings or any such subsidiary is bound or affected, in each case with respect to this Subsection (ii), to a degree that would have a material adverse effect on the assets or results of operations of Holdings or its subsidiaries when considered as a whole (a “Material Adverse Effect”), or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which Holdings or any such subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of Holdings or any such subsidiary is bound or affected, in each case with respect to this Subsection (iii), to a degree that would have a Material Adverse Effect.

(c) Prior to the issuance of the Shares, Holdings shall obtain all consents, approvals, orders, authorizations or registrations, qualifications, designations, declarations, and make all filings or registrations with any court or other federal, state, local or other governmental authority or other person that is required in order to issue the Shares.

(d) The Shares, when issued in accordance herewith, will be (i) duly authorized, (ii) duly and validly issued, (iii) fully paid and nonassessable, and (iv) free and clear of all liens imposed by Holdings, other than restrictions on transfer provided for herein.

(e) At all times prior to the second anniversary of the issuance of the Shares during which there are Shares outstanding which have not been previously (i) sold or transferred to or through a broker or dealer or underwriter in a public distribution, or (ii) sold or transferred in a transaction exempt from the registration and prospectus delivery requirements of the

 

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Securities Act of 1933, as amended (the “Securities Act”), in the case of either Subsection (i) or Subsection (ii) in such a manner that, upon the consummation of such sale or transfer, all transfer restrictions and restrictive legends with respect to such Shares are removed upon the consummation of such sale or transfer, Holdings shall use its commercially reasonable efforts to: (1) comply with the requirements of Rule 144(c) under the Securities Act with respect to current public information about Holdings, and (2) furnish to the Service Provider such non-publicly available reports and documents of Holdings as Service Provider may reasonably request to avail itself of Rule 144 of the Securities Act, or any similar rule or regulation of the United States Securities Exchange Commission allowing Service Provider to sell the Shares without registration.

3.3.2. Representations and Warranties of the Service Provider . The Service Provider represents and warrants that (i) it is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D of the Securities Act; (ii) it is acquiring the Shares for investment for the Service Provider’s own account and not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, without prejudice, however, to Service Provider’s right to at all times to sell or otherwise dispose of any or all of the Shares so issued in compliance with applicable federal and state securities laws and (iii) it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of such Shares.

3.3.3. Restrictions on the Shares. Service Provider understands and agrees that the Shares may not be sold, transferred, or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Shares or any available exemption from registration under the Securities Act, the Shares must be held indefinitely. The Service Provider agrees and acknowledges that the following legend will be placed on the back of any certificate evidencing the Shares:

“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE CORPORATION, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.

THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS SET FORTH IN A RESTRICTED STOCK AGREEMENT WITH THIS CORPORATION, A COPY OF WHICH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE CORPORATION OR WILL BE MADE AVAILABLE UPON REQUEST.”

 

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3.3.4. Limitation on the Number of Shares Issued . Notwithstanding anything to the contrary in this Agreement, in no event shall the aggregate number of Shares issued pursuant to this Agreement be greater than nineteen and nine-tenths percent (19.9%) of the number of shares of Common Stock outstanding on the Effective Date. In the event that an issuance of Shares pursuant to this Agreement would cause an aggregate issuance of Shares that is more than nineteen and nine-tenths percent (19.9%) of the number of shares of Common Stock outstanding on the Effective Date, the Company shall make a cash payment to the Service Provider equal to the difference between cash value of the Shares that were scheduled to be issued pursuant to this Agreement, and the value of the Shares that were actually issued after giving effect to the limitation set forth in this Section 3.3.4.

3.4. Service Provider Expenses . Company will also pay all out-of-pocket costs incurred by the Service Provider in connection with the provision of the Services, including costs of any materials utilized [***]. Company and Service Provider shall equally split any travel costs incurred by Service Provider in connection with any development meetings that occur in the Carlsbad, CA area; provided that prior to such meeting the Company and Service Provider shall mutually agree on which representatives of the Service Provider shall attend such meetings. Company shall reimburse the Service Provider for all travel costs incurred at the request of the Company, provided that such travel is requested by the Company. The foregoing sentence shall specifically exclude all development meetings in the Carlsbad, CA area. All reimbursement described in this Section 3.4 will be invoiced monthly by the Service Provider and invoices and are payable net 45 days.

4. PROTECTED INFORMATION

4.1. Confidential Information . Each Party recognizes that the other Party’s Confidential Information constitutes highly valuable and proprietary confidential information. Each Party agrees that during the Term and for [***] years thereafter, it will keep confidential, and will cause its employees, consultants, Affiliates and sublicensees to keep confidential, all Confidential Information of the other Party. Neither Party nor any of their respective employees, consultants, Affiliates or sublicensees shall use Confidential Information of the other Party for any purpose whatsoever other than exercising any rights granted to it or reserved by it hereunder. Without limiting the foregoing, each Party may disclose information to the extent such disclosure is reasonably necessary to (a) file, prosecute or defend litigation in accordance with the provisions of this Agreement or (b) comply with applicable laws, regulations (including those of the United States Securities Exchange Commission) or court orders; provided, however, that if a Party is required to make any such disclosure of the other Party’s Confidential Information in connection with any of the foregoing, it will give reasonable advance notice to the other Party of such disclosure requirement and will use reasonable efforts to cooperate with such other Party in efforts to secure confidential treatment of such information required to be disclosed. Each Party agrees that any Confidential Information disclosed by a Party under that certain Mutual Confidentiality Agreement between the Parties dated the 2nd day of July 2007 shall be protected by the obligations set forth therein through the date hereof and from and after the date hereof shall be protected by the obligations as to Confidential Information set forth herein so as to be continuously protected.

 

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4.2. Limited Disclosure and Use . Each Party agrees that any disclosure of the other Party’s Confidential Information to any officer, employee, consultant or agent of the other Party or any of its Affiliates or Sublicensees shall be made only if and to the extent necessary to carry out its rights and responsibilities under this Agreement, shall be limited to the maximum extent possible consistent with such rights and responsibilities and shall only be made to the extent any such persons are bound by written confidentiality obligations to maintain the confidentiality thereof and not to use such Confidential Information except as expressly permitted by this Agreement. Each Party further agrees not to disclose or transfer the other Party’s Confidential Information to any Third Parties under any circumstance without the prior written approval from the other Party (such approval not to be unreasonably withheld), except as otherwise required by law, and except as otherwise expressly permitted by this Agreement. Each Party shall take such action, and shall cause its Affiliates or Sublicensees to take such action, to preserve the confidentiality of each other’s Confidential Information as it would customarily take to preserve the confidentiality of its own Confidential Information, using, in all such circumstances, not less than reasonable care. Each Party, upon the request of the other Party, will return all the Confidential Information disclosed or transferred to it by the other Party pursuant to this Agreement, including all copies and extracts of documents and all manifestations in whatever form, within sixty (60) days of such request or, if earlier, the termination or expiration of this Agreement; provided however, that a Party may retain (i) any Confidential Information of the other Party relating to any license which expressly survives such termination, and (ii) one (1) copy of all other Confidential Information in inactive archives in legal counsel’s files solely for the purpose of establishing the contents thereof.

4.3. Publicity . Neither Party may publicly disclose the existence or terms or any other matter of fact regarding this Agreement without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed; provided, however, that either Party may make such a disclosure (i) to the extent required by law or by the requirements of any nationally recognized securities exchange, quotation system or over-the-counter market on which such Party has its securities listed or traded, or (ii) with respect to Company, to any prospective Sublicensees, or to investors, prospective investors, lenders and other potential financing sources, who are obligated to keep such information confidential. The Parties, upon the execution of this Agreement, will mutually agree to a press release with respect to this transaction for publication. Once such press release or any other written statement is approved for disclosure by both Parties, neither Party may make subsequent public disclosure of the contents of such statement without the further approval of the other Party.

4.4. Use of Name . Neither Party shall employ or use the name of the other Party in any promotional materials or advertising without the prior express written permission of the other Party.

5. OWNERSHIP OF IDEAS, COPYRIGHTS AND PATENTS

5.1. Company Inventions . All Technology, whether patentable, copyrightable or not, which is solely conceived, reduced to practice or developed by the Company, its employees, agents (it being agreed to by the Parties that the Service Provider shall not be deemed to be an agent of the Company with respect to this Section 5.1) or its Affiliates (the “Company Inventions”) is the sole and exclusive property of the Company, and the Service Provider shall not exploit any of the Company Inventions.

 

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5.2. Service Provider Inventions . All Technology, whether patentable, copyrightable or not, which is solely conceived, reduced to practice or developed by the Service Provider, its Affiliates or any of their employees, agents (it being agreed to by the Parties that the Company shall not be deemed to be an agent of the Company or any if its Affiliates with respect to this Section 5.2) is the sole and exclusive property of the Service Provider. With respect to Technology described in the preceding sentence which is: (i) owned or controlled by Service Provider on the Effective Date and is directed toward a Filling Agent (which Technology Service Provider advises [***]) (herein “Existing FA Technology”) or (ii) developed in the course of performance of the Services (such developed Technology collectively with Existing FA Technology “Service Provider Inventions”), the Service Provider hereby grants to the Company, subject to the terms and conditions of this Agreement, an exclusive (even as to Service Provider and its Affiliates), worldwide, license, including the right to grant sublicenses, under such Service Provider Inventions: (a) to conduct research and development in support of the licensed uses describe in clause (b) of this Section, and (b) to make, have made, import, export, use, offer for sale or sell Licensed Products which embody such Service Provider Inventions. The foregoing license shall be granted without an obligation to pay royalties to Service Provider, except as provided in the License Agreement.

5.3. Joint Inventions . All Technology conceived, developed or reduced to practice jointly by employees or consultants of both Parties in connection with the Services shall be jointly owned by them (“Joint Inventions”). For purposes of this Section 5.3 Technology that is the subject of a patent application shall be deemed to have been developed jointly by employees or consultants of Company and Service Provider, and thus be a Joint Invention, if at least one employee or consultant of each of Company and Service Provider is required to be named as an inventor in such application in order for such patent to be valid, and a comparable concept shall apply to Technology not the subject of a patent application. Service Provider hereby grants to the Company, subject to the terms and conditions of this Agreement, an exclusive (even as to Service Provider and its Affiliates), worldwide, license, including the right to grant sublicenses, under Joint Inventions: (i) (a) to conduct research and development in support of the licensed uses describe in subclause (b) of this clause (i), and (b) to make, have made, import, export, use, offer for sale or sell Licensed Products which embody such Joint Inventions, all without obligations to pay royalties to Service Provider except as provided in the License Agreement and (ii) (a) to conduct research and development in support of the licensed uses describe in subclause (b) of this clause (ii), and (b) to make, have made, import, export, use, offer for sale or sell products, other than Licensed Products, that are within in the Licensed Field and which embody such Joint Inventions (the “In-Field Products”), subject to the royalty payment obligations as set forth herein. The Company hereby grants to Service Provider, subject to the terms and conditions of this Agreement, an exclusive (even as to the Company and its Affiliates), worldwide, royalty-free, fully paid-up, license, including the right to grant sublicenses, under Joint Inventions: (y) to conduct research and development in support of the licensed uses describe in clause (z) of this Section, and (z) to make, have made, import, export, use, offer for sale or sell products other than products for the treatment of spinal disorders.

 

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5.4. Exploitation as to Treatment of Spinal Disorders Outside of Licensed Field . The Parties agree neither Party may practice, sell, license or otherwise grant rights to or exploit Joint Inventions with respect to the treatment of spinal disorders outside of the Licensed Field without the prior written consent of the other Party, which consent may not be unreasonably withheld. It is agreed that it shall not be unreasonable for a Party to refuse its consent to any such practice, sale, license or other grant of rights or exploitation if the other Party does not propose to equally share the economic benefits of such practice, sale, license or other grant of rights or exploitation with the Party whose consent is required. Notwithstanding anything to the contrary in this Section 5.4, if no applicable license then remains in effect under Section 5.3, then the obligations of the Parties set forth in the foregoing shall apply to the treatment of spinal disorders both within the Licensed Field and outside of the Licensed Field.

5.5 Royalties . The Company shall pay to Service Provider within thirty (30) days of the end of each calendar quarter earned royalties of [***] of Net Sales during such calendar quarter. Each royalty payment shall (i) be accompanied by a report specifying: the Net Sales (including an accounting of deductions taken in the calculation of Net Sales) and (ii) state the applicable exchange rate used in conversion from any foreign country’s currency to United States Dollars (which conversion shall be determined in accordance with Section 5.6). All payments hereunder shall originate in the United States and be made in United States dollars.

5.6 Conversion . Conversion of foreign currency to United States dollars shall be made at the conversion rate existing in the United States (as reported in The Wall Street Journal ) on the last business day of the quarter immediately preceding the applicable calendar quarter. If The Wall Street Journal ceases to be published, then the rate of exchange to be used shall be that reported in such other business publication of national circulation in the United States as the Parties reasonably agree.

5.7 Tax Withholding; Restrictions on Payment . All taxes, assessments and fees of any nature levied or incurred on account of any payments from the Company to Service Provider accruing under this Agreement, by national, state or local governments, will be assumed and paid by the Company, except taxes levied thereon as income to Service Provider and if such taxes are required by applicable law to be withheld by the Company they will be deducted from payments due to Service Provider and will be timely paid by the Company to the proper taxing authority for the account of Service Provider, a receipt or other proof of payment therefore secured and sent to Service Provider as soon as practicable. The Company shall remit all payments to Service Provider hereunder from within the United States.

5.8 Records . The Company shall keep accurate books and accounts of the computation of the number of In-Field Products sold and the Net Sales of the Company, its Affiliates and Sublicensees of In-Field Products, and shall cause such Affiliates and Sublicensees to keep such records of their respective sales of In-Field Products and Net Sales, in sufficient detail to permit accurate determination of all figures necessary for verification of payments required to be paid hereunder, which books and accounts shall be maintained for at least three (3) years from the end of the calendar year to which they pertain.

5.9 Review . At the request of Service Provider, which shall not be made more frequently than once per calendar year during the Term, on a business day designated by Service Provider upon at least thirty (30) days’ prior written notice to the Company, the

 

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Company shall permit, under confidentiality obligations with terms substantially the same as those hereunder, an independent certified public accountant reasonably selected by Service Provider and reasonably acceptable to the Company to inspect (during regular business hours) the relevant records required to be maintained by the Company under Section 5.8. In the event such inspection reveals an underpayment, such underpayment shall be due and payable by the Company within thirty (30) days of the date of such inspection, together with interest thereon from the date the amount due but unpaid was first due until the date paid, at the lower of 12% per annum or the maximum rate permitted by applicable law. Such inspection shall be at the expense of Service Provider unless there is an underpayment that differs by greater than five percent (5%) from the amount that was otherwise due, in which event the Company shall also pay the reasonable costs of the inspection. The foregoing is without prejudice to the right of the Company to dispute the conclusion of the accountant, but such dispute shall not relieve the Company of its obligation to pay interest and, under the circumstances described, costs of inspection as to amount actually due.

5.10 Prosecution of Patents as to Service Provider Inventions and Joint Inventions . Service Provider shall be responsible for, and shall use reasonable efforts in, preparing, applying for and filing, prosecuting, obtaining and maintaining (“Prosecuting”, with “Prosecution” having a corresponding meaning) in the name of Service Provider any patents that may be available with respect to Service Provider Inventions and in the name of the Parties any patents that may be available with respect to Joint Inventions in the [***] (and elsewhere as it may elect), using patent counsel reasonably chosen by Service Provider (which in any event includes Levine Bagade Han LLP), and for maintaining any patents obtained thereon. Company shall reimburse Service Provider against invoices issued no more often than monthly for reasonable costs, including attorney’s fees, incurred by Service Provider in all such Prosecution. Service Provider shall keep the Company reasonably appraised as to the Prosecution of each such patent application. Service Provider agrees to send Company copies of all file histories and prosecution documents for each of the patent applications related to the Service Provider Inventions within thirty (30) days of receipt by Service Provider.

5.11 Requests for Prosecuting Other Patents as to Service Provider Inventions and Joint Inventions . Company may reasonably request that Service Provider at Company’s expense seek patent protection of the Service Provider Inventions or Joint Inventions in addition to that contemplated by Section 5.10 by written notice to Service Provider. Service Provider shall have the right in its discretion to refuse to seek any additional patent protection in response to a request from Service Provider in accordance with this Section 5.11 (a “Refused Patent”) by giving prompt written notice to Company. Company shall be permitted, but not obligated, to assume Prosecution, in its name, as to any Refused SP Patent, at its cost and expense, and Service Provider shall have no license to such Refused SP Patents.

5.12 Abandonment, Refusal and Rights as to Prosecuting Other Patents as to Service Provider Inventions and Joint Inventions . Company shall have the right in its discretion to cease to pay for the Prosecution of patent protection as to any Service Provider Inventions or Joint Inventions then being paid for by it as contemplated by Section 5.10 or 5.11 by giving written notice to Service Provider at least sixty (60) days prior to ceasing such payment (“Discontinued Patents”), and in such event need not pay for expenses of Prosecution incurred after the end of such sixty (60) day period. Service Provider shall be permitted, but not obligated, to assume

 

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Prosecution as to any Discontinued Patent, at its cost and expense, and Company shall have no license to such Discontinued Patents and as to Discontinued Patents with respect to Joint Inventions all interests of the Company therein shall be and hereby are assigned to Service Provider effective as of the end of such sixty (60) day notice period.

5.13 Cooperation . In any event each Party will, and will cause its employees and consultants to, provide any assistance and executed agreements and instruments as are reasonably requested by a Party which is seeking to obtain in accordance herewith patents or other protection with respect to any Service Provider Inventions or Joint Inventions or otherwise to give effect to the terms of this Agreement.

5.14 Notice of Infringement or Claims . If, during the Term, either Party learns of any (i) actual, alleged or threatened infringement by a Third Party of any Service Provider Inventions and Joint Inventions or (ii) attack on the enforceability or validity of any to Service Provider Inventions and Joint Inventions, then such Party shall promptly notify the other Party of the same and shall provide such other Party with available details as to and evidence of such infringement, suit or claim.

5.15 Service Provider Inventions and Joint Invention Intellectual Property Enforcement Corresponding to Company Licenses . Company shall have the first right (but not the obligation), at its own expense and with legal counsel of its own choice, to bring suit (or take other appropriate legal action) against any actual, alleged or threatened infringement of Service Provider Inventions and/or Joint Inventions to the extent an applicable exclusive license under Sections 5.2 or 5.3 with respect to such Service Provider Inventions and/or Joint Inventions then remains in effect (and if no such license remains in effect as to a Service Provider Invention this Section shall not apply thereto rather Section 5.17 shall apply thereto and if no such license remains in effect as to a Joint Invention this Section shall not apply thereto rather Section 5.16 shall apply thereto). Such right includes the right to settle the infringement claim, provided that if such settlement would include Company’s agreement to the invalidity or unenforceability of any claim within such intellectual property rights, Service Provider must first approve in writing such settlement, which approval shall not be unreasonably withheld. Any damages, monetary awards or other amounts recovered, whether by judgment or settlement, pursuant to any suit, proceeding or other legal action taken by Company under this Section 5.15, shall be applied as follows:

(a) first, to reimburse the cost of the Company for its reasonable costs and expenses (including reasonable attorneys’ fees and costs) incurred in prosecuting such enforcement action;

(b) second, to reimburse the costs of Service Provider for its reasonable costs and expenses (including reasonable attorneys’ fees and costs) incurred in such enforcement action;

(c) third, to the Company in reimbursement for lost sales associated with Licensed Products and to Service Provider in reimbursement for lost royalties, it being agreed that for such purpose such lost sales shall equate to Net Sales; and

 

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(d) fourth, any amounts remaining shall be allocated to each Party on a pro rata basis based on each Party’s losses attributable to the infringement.

If Company brings any such action or proceeding hereunder, Service Provider agrees to be joined as party plaintiff if necessary to prosecute such action or proceeding, and to give Company reasonable assistance and authority to file and prosecute the suit. In no event shall Service Provider being a party to or represented in any such action by Company affect the right of Company to control the suit as described in the first sentence of this Section 5.15. If Company fails to take any action it is permitted to take by this Section 5.15 to obtain a discontinuance of such infringement or to bring suit against the infringer within four (4) months of having knowledge of such infringement, Service Provider shall have the right but not the obligation to enforce such Service Provider Inventions and/or Joint Inventions at its expense and for its sole benefit. For the avoidance of doubt, neither Company’s nor Service Provider’s failure to enforce the rights set forth in this Section 5.15 in any way affects the rights granted to or responsibilities of either Party under the Agreement.

5.16 Joint Invention Intellectual Property Enforcement With Respect to Treatment of Spinal Disorders outside of the Licensed Field . Service Provider shall have the first right (but not the obligation), at its own expense and with legal counsel of its own choice, to bring suit (or take other appropriate legal action) against any actual, alleged or threatened infringement of Joint Inventions in relation to infringement by products for the treatment of spinal disorders outside of the Licensed Field, but if no applicable license then remains in effect under Section 5.3, then this Section shall also apply to all infringements of Joint Invention in relation to infringement by products for the treatment of spinal disorders both within the Licensed Field and outside of the Licensed Field. Such right includes the right to settle the infringement claim in accordance with this Section 5.16, provided that if such settlement would include Service Provider’s agreement to the invalidity or unenforceability of any claim within such intellectual property rights, Company must first approve in writing such settlement, which approval shall not be unreasonably withheld. Any damages, monetary awards or other amounts recovered, whether by judgment or settlement, pursuant to any suit, proceeding or other legal action taken by Service Provider under this Section 5.16, shall be applied as follows:

(a) first, to reimburse the cost of Service Provider for its reasonable costs and expenses (including reasonable attorneys’ fees and costs) incurred in prosecuting such enforcement action;

(b) second, to reimburse the costs of the Company for its reasonable costs and expenses (including reasonable attorneys’ fees and costs) incurred in such enforcement action; and

(c) third, equally between the Parties.

If Service Provider brings any such action or proceeding hereunder, the Company agrees to be joined as party plaintiff if necessary to prosecute such action or proceeding, and to give Service Provider reasonable assistance and authority to file and prosecute the suit. In no event shall the Company being a party to or represented in any such action by Service Provider affect the right of Service Provider to control the suit as described in the first sentence of this Section 5.16. If Service Provider fails to take any action it is permitted to

 

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take by this Section 5.16 to obtain a discontinuance of such infringement or to bring suit against the infringer within four (4) months of having knowledge of such infringement, the Company shall have the right but not the obligation to enforce such Joint Inventions at its expense and for its sole benefit. With respect to any settlement of a claim of infringement that is based upon a Joint Invention, for which the right to bring suit arose pursuant to this Section 5.16, neither Party shall grant any licenses which would cure any such infringement without the prior written consent of the other Party, which consent may not be unreasonably withheld. It is agreed that it shall not be unreasonable for a Party to refuse its consent to any such license or other grant of rights or exploitation if the other Party does not propose to equally share the economic benefits of such practice, sale, license or other grant of rights or exploitation with the Party whose consent is required. For the avoidance of doubt, neither Company’s nor Service Provider’s failure to enforce the rights set forth in this Section 5.16 in any way affects the rights granted to or responsibilities of either Party under this Agreement.

5.17 Other Service Provider Inventions and Joint Inventions Enforcement . Except to the extent that either Party has the right to bring suit (or take other appropriate legal action, including the right to enter into settlements or grant licenses) against any actual, alleged or threatened infringement of Service Provider Inventions or Joint Inventions pursuant to Sections 5.15 and 5.16, Service Provider shall have the sole right (but not the obligation), at its own expense and with legal counsel of its own choice, to bring suit (or take other appropriate legal action) against any actual, alleged or threatened infringement of any intellectual property rights that are based on Service Provider Inventions or Joint Inventions. Such right includes the right to settle the infringement claim, provided that if such settlement would include Company’s agreement to the invalidity or unenforceability of any claim within such intellectual property rights, Company must first approve in writing such settlement, which approval shall not be unreasonably withheld.

6. REPRESENTATIONS AND WARRANTIES OF SERVICE PROVIDER . As of the Effective Date, Service Provider represents and warrants to Company as follows:

6.1. it owns and controls the Existing FA Technology, and has the right to grant the license thereto set forth herein free and clear of all encumbrances; no Third Party has any trade secret rights in any Existing FA Technology, and no Third Party has notified Service Provider that the Third Party is claiming any ownership of or right to Existing FA Technology; and

6.2. it is not a party to any agreements which would prevent the performance of the obligations of the Service Provider contained in this Agreement.

7. REPRESENTATIONS AND WARRANTIES OF EACH PARTY AND HOLDINGS . As of the Effective Date, each Party and Holdings represents and warrants as follows:

7.1. the execution, delivery and performance of this Agreement will not constitute a violation, be in conflict with, or result in a breach of any agreement or contract to which it is bound;

 

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7.2. it is a corporation or entity duly organized and validly existing under the laws of the state or other jurisdiction of incorporation or formation;

7.3. the execution, delivery and performance of this Agreement by it has been duly authorized by all requisite corporate action and do not require any shareholder action or approval;

7.4. it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and

7.5. it shall at all times comply with all applicable material laws and regulations relating to its activities under the Agreement.

8. INDEMNITY

8.1. Company Indemnity . Company shall indemnify, defend and hold harmless Service Provider, its Affiliates and their respective directors, officers, employees, stockholders and agents and their respective successors, heirs and assigns (the “Service Provider Indemnitees”) from and against any claims, liability, damage, loss or expense (including reasonable attorneys’ fees and expenses of litigation) incurred by or imposed upon such Service Provider Indemnitee, or any of them, in connection with any Third Party claims, suits, actions, demands or judgments to the extent arising out of or related to (i) the design, development, testing, production, manufacture, supply, promotion, marketing, importation, sale, use or instructions for use of any Licensed Product or In-Field Products (or any